As investors on behalf of savers and institutions in the UK and beyond, investment managers have a keen interest in encouraging active transition away from LIBOR by issuers of LIBOR-linked instruments. Regulators around the world have made it clear that from the end of 2021 LIBOR will be phased out and that it is on all of us, as market participants, to ensure that this is achieved.
However, with less than 6 months to go, there still remains a large number of outstanding LIBOR-referencing bonds which have not yet transitioned to a new rate. This is a matter of serious concern not only for the buy-side but also the financial industry more widely. The potential impact of these bonds not being transitioned to the new rate in time is severe, with the risk of significant market disruption and harm to investors if bonds continue to reference a non-representative rate. Ultimately this will harm the end-client – the ordinary people who are hoping to save for the future.
To address this, the Investment Association recently published a document setting out the ways market participants can work together to encourage this transition. The key message for issuers is that they should now be actively transitioning their outstanding LIBOR-linked bonds through consent solicitations or other methods, and clearly communicating their plans to their investors, and in a timely manner.
Investment managers are aware that some issuers have been reluctant to launch proposals for fear of not gathering sufficient support, and would like to make it clear that investors are fully supportive of the transition process. To this end, the IA's report also includes a list of the key features LIBOR-transition consent solicitations should have in order to maximise the chance of success - these features include strong engagement, awareness of existing regulator and industry body announcements and recommendations, and a clear focus on LIBOR transition as opposed to other matters.
Importantly, issuers should not rely on the FCA's proposed synthetic LIBOR rate as a 'get out clause' - the FCA has made it clear that this rate will only be applied in exceptional circumstances, and that its use is subject to regular review.
Achieving transition of as many LIBOR-linked bonds as possible requires all market participants to collaborate. The IA and its members stand ready to engage with companies looking to transition, so that a positive outcome for all can be achieved.
