Asian firms ready debt deals under new benchmark rate rules

Hong Kong

ASIA'S financial companies are gearing up to issue their first debt using a new global benchmark interest rate that will replace the contentious Libor (London Interbank Offered Rate) as the region catches up to the rest of the world, according to bankers and advisers.

Britain's financial regulators last week called a formal halt to nearly all Libor rates from the end of this year, piling pressure on markets to quicken a switch in interest rates used in US$260 trillion of contracts globally.

Libor is being replaced with rates compiled by central banks after lenders were fined billions of dollars for trying to rig the reference rate for their own gain in 2012.

The US dollar Libor will be replaced by the Secured Overnight Financing Rate (SOFR), which is published by the New York Federal Reserve to use as a reference point for US dollar derivative and debt transactions.

The deadline is likely to expedite the number of debt transactions in Asia using SOFR to meet the regulator's timetable and set the borrowers' costs of funds, after the Covid-19 pandemic resulted in a slow take-up rate in the region.

"The first wave of deals using the new benchmarks will be initiated by banks, financial institutions and asset managers due to the push by regulators on them to lead the way," said Jean Woo, partner at law firm Ashurst.

Korea Development Bank (KDB), a state-owned policy bank, last week raised US$300 million in a three-year floating rate note - the first issuance in Asia sold globally using SOFR as the reference rate.

Some US$2.25 billion worth of SOFR bonds have been issued in Asia in the past 12 months compared to the global total of US$160.8 billion, according to Refinitiv data. US companies have issued US$124.9 billion worth of SOFR linked deals in that time.

"The whole world is moving towards it, people cannot be closed to the fact there is a change and issuers need to be making steps towards moving to the transitions," said Amy Tan, head of DCM origination Asia ex-Japan at JPMorgan.

Joseph Pepping, head of debt capital markets syndicate for the Asia-Pacific region at Bank of America, said the switch away from Libor had not been a high priority for Asian borrowers in 2020 but he expected that to change. "We expect... for more Asian issuers to elevate this on their priority list," he added. REUTERS