On 16 January 2020, the Working Group on Sterling Risk-Free Reference Rates (RFRWG) published a statement entitled “Progress on the transition of LIBOR – referencing legacy bonds to SONIA by way of consent solicitation“. In the statement, the RFRWG welcomes the consent solicitations that have already taken place or are underway to transition legacy bond contracts from LIBOR to SONIA. It encourages all participants in the sterling bond market (including sterling floating rate notes, covered bonds and securitisations) to consider the use of consent solicitations to amend legacy bonds to transition from LIBOR to SONIA before LIBOR is permanently discontinued or is declared no longer representative. The statement makes the following observations:
- eight consent solicitations with a total nominal value of £4.2 billion have been announced publicly as successful in transitioning English law legacy bond contracts from LIBOR to SONIA;
- in each of the consent solicitations which have already taken place, the interest rate provisions in the conditions of bonds have been amended to replace references to LIBOR with SONIA compounded daily in arrear over the relevant interest period plus a fixed spread adjustment;
- the announcement of finalised arrangements for calculating a spread adjustment in contractual fallbacks in derivatives contracts may further increase market participants’ confidence in using market prices to price transitions to SONIA; and
- market participants may wish to consider whether current levels of liquidity in both the LIBOR and SONIA markets are conducive to completing transitions to SONIA in the months ahead based on this methodology.
The statement acknowledges that consent solicitations may not be suitable in all cases. With this in mind, the statement sets out considerations for the conduct of consent solicitations to transition English law legacy bond contracts from LIBOR to SONIA noting that, among other things, consent solicitations undertaken for this purpose have not typically involved the payment of consent fees.