FRONT STORY STRUCTURED FINANCE
Sonia uncertainties remain
Bank of England encourages term Sonia
The rapid uptake in Sonia ABS masks a raft
of thorny issues facing the market’s
participants – involving legal, operational
and market risks – and even the chance that
the daily compounding Sonia rate may be
transformed into a forward-looking
calculation.
Two months after Nationwide brought
THEûlRSTûPUBLICû3ONIA
LINKEDûSECURITISATION û
the compounded daily Sonia rate has rapidly
established itself in the UK ABS market.
But despite the recent burst of Sonia-
linked bonds, the Bank of England – which
ordered the market to move away from
Libor by the end of 2021 – continues to work
on a different, term Sonia rate.
The market is also looking to the Bank for
guidance on switching existing
securitisations from Libor to Sonia.
“There are no easy answers to the
question of legacy deals,” said Richard
(OPKIN ûHEADûOFûlXEDûINCOMEûATû!&-%
h)FûYOUûDOûNOTHING ûYOURû&2.ûTURNSûINTOûAû
lXED
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solicitation approach but it’s not
straightforward – there’s no guarantee that
investors will agree, and you have to work
out an adjustment spread.”
Securitisations usually need 75% of senior
bondholders to vote in favour of material
changes to deal documentation.
“The third option is some kind of
continuation of Libor, but that also has
major challenges and I can’t imagine the
authorities would be keen on that,” Hopkin
said.
There are still two and a half years before
Libor ends but the different parties and
structural features of securitisations mean
the market is likely to take longer to fully
adjust than vanilla issuers.
“The later you leave this, the more of a
mess it will be,” said one UK bank treasury
OFlCIAL
h&ORûANûASSETûMANAGERûLIKEû0IMCOûORû
BlackRock, think about the amount of
bonds they hold and the amount of consents
they’ll be looking at. If everyone’s doing
asset liability management in the last three
months, how are they going to turn up to
meetings, how are they going to vote?”TERM RATE
And there is the chance that the current
compounded Sonia benchmark could itself
be supplanted by a term rate incorporating
the forward-looking feature of Libor. Some
investors worry that if that happens, any
bonds they buy linked to the compounded
rate will become illiquid.
“So what are originators going to ask
noteholders to consent to?” said the treasury
OFlCIALûh7HYûBEûTHEûEARLYûBIRDûANDûCHANGEû
to compounded Sonia) and then get egg on
your face in a year’s time when everyone
says let’s start using term Sonia instead?
“It would help everyone if the regulator
just came out and said that this –
compounded Sonia – is the way it’s going to
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Sonia, it’s not going to work, no one’s going
to do it, so stop talking about it.”
But that is the opposite of the Bank of
England’s position, which continues to
encourage the development of a term Sonia
despite the recent success of the
compounded rate.
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Russell, ICE Benchmark Administration and
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a term Sonia reference rate.
The group is also working on standardised
language that could be used for originators
seeking bondholder consent to switch
existing bonds from Libor to Sonia.
“If people go off on this [consent
solicitation] on a very random basis, there’s
going to be chaos in the market,” said a
SECONDûTREASURYûOFlCIAL
h7EûDONTûWANTûTOûGETûINûAûPLACEûWHEREûû
issuers are going out individually to
noteholders, launching consents at the same
time, at various spreads and conversion
rates, holding bondholder meetings, putting
big documents in front of investors.”)NSTEAD ûTHEû2&27'ûWANTSûTOûBUILDû
market consensus and provide guidance
about possible adjustment rates between
Libor and Sonia.REPLACEMENT LANGUAGE
Libor replacement language had already
become a feature of recent issuance running
up to the implantation of Sonia, with
negative-consent language permitting a
change to Sonia as long as no more than 10%
of investors object.
And many earlier securitisations sold
before that feature was introduced will have
paid down before the end of 2021.
-EANWHILE ûSIMILARûNEGATIVE
CONSENTû
language, but around a switch from
compounded Sonia to term Sonia, is starting
to feature in recent Sonia-linked new issues.
On the asset side, losing Libor could be a
particular problem for specialist lenders
WHOûnûTOûMATCHû,IBORû2-"3ûLIABILITIESûnûHAVEû
typically originated mortgages that revert to
,IBORûPLUSûAûMARGINûAFTERûTHEIRûlXED
RATEû
periods end.
“It’s not very well thought through,” said
+RISû'OZRA ûDIRECTORûOFûTREASURYûATûNON
BANKû
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3ONIAûTRENDûBYûSELLINGûAûBUY
TO
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-AYûTHATûISûLINKEDûTOû,IBORûANDûWILLûNOTûHITû
its call date until mid-2022.
“The regulator is putting pressure on
investors to buy Sonia bonds, but there’s
been a lack of advice on the mortgage side of
it, about how if you go down the Sonia route
you can marry up what’s happening with
your bonds to what’s happening with your
MORTGAGES vû'OZRAûSAID
“The big banks may have an exposure
that serves as a natural Sonia offset, but it’s
DIFFERENTûFORûAûlRMûLIKEû0ARATUSûWITHûAû
relatively simple business model: mortgages
on one side and bonds on the other.”
Lenders are able to switch reversion rates to
base rate, but with a historical basis between
Libor and Sonia of around 15bp–25bp, that
means losing money unless the margin is
increased to make up the difference.
But arbitrarily tacking on an extra 25bp to
borrowers’ repayments could provoke
compensation claims. “At the moment, we’re
going to have to suck it up,” said one originator.
Chris MooreBONDS
SSAR 25 Corporates 27 FIG 31 High-Yield 35 Structured Finance 37“The later you leave this,
the more of a mess it will be”