Asia-Pacific to tackle $ 190 billion in tough legacy bonds as LIBOR transition looms

  • Bloomberg-ICMA reports that the total outstanding issues of difficult traditional bonds among issuers in the APAC region[1] equates to $ 190 billion out of 560 issues[2], Japan, China and Australia representing 95%
  • In the APAC region, issuance of new LIBOR-linked bonds continues, in some cases without a downturn
  • The number of tough legacy bonds in the APAC region that show inadequate pullbacks or no pullbacks is 447 out of 560, or 80% of the total stock of traditional tough bond issues among Asia-Pacific issuers.
  • Accelerated action required by issuers as transition from LIBOR to risk-free rates looms

A report by Bloomberg and the International Capital Market Association (ICMA) on tough legacy bonds in the APAC region found that work will need to accelerate significantly to mitigate the potential for disruption in APAC bond markets due to the LIBOR transition at risk-free rates (RFR)).

The announcements made by the Financial Conduct Authority on the future termination and loss of representativeness of the LIBOR benchmarks on March 5, 2021[3] mark an important final step in the successful transition away from LIBOR, and overall there is now a better understanding of the end of the game for LIBOR, including the dates of its cessation in different jurisdictions.

Strong and Outstanding Legacy Bonds in the APAC Region

“Tough legacy bonds”, as further defined in the report, are debt securities linked to LIBOR of any currency, which will mature after the termination of LIBOR in the relevant currency.

According to Bloomberg data, global legacy bonds are worth the equivalent of $ 854 billion out of 4,998 issues. In the APAC region, they represent the equivalent of US $ 190 billion spread over 560 bonds, mainly in Japan, China and Australia, which together represent about 95% of the total volume of the APAC region. 74% of this amount is mainly concentrated among financial issuers.

According to Bloomberg data, as of February 1, 2021, 309 of those 560 bonds (55% of traditional tough issues) had fallback language. Of these, 196 bonds (35% of difficult legacy issues) have only one market disruption event ?? trigger, which would not contemplate the permanent cessation of LIBOR. 251 other bonds (45% of old difficult issues) have no fallback language at all. Taken together, that figure of 447 (or 80% of difficult legacy issues) becomes quite significant.

• Prior to our report, publicly available data was generally based on individual national markets or submarkets, and difficult to aggregate or reconcile. We hope that this new in-depth analysis will help market players and supervisors develop more effective strategies to address the difficult issue of legacy bonds in the APAC region, ?? said Bing Li, head of APAC, Bloomberg.

Mushtaq Kapasi, Senior Representative, Asia-Pacific, ICMA said, “The difficult issue of legacy bonds in Asia-Pacific is not insignificant, with 80% of difficult legacy bonds having inadequate fallbacks or no fallbacks. The move away from LIBOR will require issuers and investors to review their existing documentation on LIBOR-linked bonds to assess what kind of pullback they contain and to think about what action to take. ??

New LIBOR Obligations

The report noted that the best way to minimize LIBOR transition risks is not to issue new LIBOR-linked bonds, and the GBP and USD market responded to this by using the relevant RFRs extensively for new bond issues. and securitizations. But if the LIBOR-linked issue is unavoidable fallbacks for new issues of LIBOR USD and LIBOR JPY were recommended. However, the issuance of new LIBOR bonds continues in the APAC region, in some cases without the recommended fallback measures. From 2019 to 2020, $ 12 billion in new issues had no fallback language.

New RFRs

The methodologies and conventions to support the new RFRs keep pace, and the publication of the RFR indices can facilitate the use by market players of the various RFR composition methodologies. And while the underlying systems and infrastructure may need to be upgraded, issuers and bondholders are largely able to adjust to new rates, including their arrears methodologies and conventions. associated.

Bing Li added: ??It is essential that market players have the right systems and infrastructure to manage the LIBOR transition, not only for a difficult legacy, but also for new issues and investments related to RFRs, as there are important fundamental differences. between IBORs and RFRs. The new calculation methods and their associated conventions will have to be facilitated, while the trading and liquidity risks will have to be duly taken into account.. ??

Solutions

In summary, the report found that 80% of legacy APAC bonds have inadequate or no fallbacks in place at all, and transactions in the APAC region continue to benchmark LIBOR without adequate recourse in place.

The report also presented proposed solutions to deal with the risks of difficult inheritance, including the feasibility of soliciting consent in different legal systems, the application of certain legislative interventions to the inherited obligations of APAC under the laws of New York, Japan and English and the potential to maintain Synthetic JPY LIBOR for an additional year after the end of 2021.

To view the full report, please click here.

About Bloomberg
Bloomberg, the global leader in business and financial information and news, gives influential decision-makers a critical edge by connecting them to a dynamic network of information, people and ideas. The strength of the company ?? deliver data, news and analysis through innovative technology, quickly and accurately ?? is at the heart of the Bloomberg terminal. Bloomberg’s business solutions are built on the foundational strength of the business: leveraging technology to enable customers to access, integrate, distribute and manage data and information across organizations. more effectively and efficiently. For more information visit Bloomberg.com/company or request a demo.

About ICMA
ICMA promotes well-functioning cross-border capital markets, which are essential to finance sustainable economic growth. It is a non-profit association with offices in Zurich, London, Paris, Brussels and Hong Kong, serving approximately 600 member firms in 60 countries. Its members include private and official sector issuers, banks, brokers, asset managers, pension funds, insurance companies, market infrastructure providers, central banks and investment firms. ‘lawyers. It provides industry-focused standards and recommendations, prioritizing four main areas of the fixed income market: primary, secondary, repo and collateral, and sustainable finance. ICMA works with regulatory and government authorities, helping to ensure that financial regulation supports stable and efficient capital markets. www.icmagroup.org

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[1] Defined by the jurisdiction of the issuer’s country of risk

[2] This includes bonds with type 1, type 2 and type 3 folds, all as defined and described in the report. [3] FCA announcement on future termination and loss of representativeness of LIBOR benchmarks [4] Reform of the main benchmark interest rates: 2020 progress report (fsb.org)

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About Myra R.

Myra R.

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