Asian firms say there has been minimal engagement from dealers about the transition of their investments, debt and hedges off the Libor family of benchmarks.
“There has been just a handful of banks that have approached us about advising us on the developments in Libor transition,” said Vincent Chow, group treasurer of the Hong Kong Electric Company, which has just under $2 billion worth of debt linked to Libor, or about 15% of its total debt stock.
“Transition for us has to be in conjunction with the cash market. I haven’t seen any lending bank talking to me about this transition.”
Thijs Aaten, chief finance and risk officer at APG Asset Management Asia, also said he has had minimal contact with banks on the issue.
“We have not been approached very actively on changing our legacy position towards the new rates,” said Aaten.
The two were speaking on a panel at the International Swaps and Derivatives Association/Bloomberg Benchmark Regulation and Migration Conference in Hong Kong on May 30.
Libor is embedded in an estimated $400 trillion worth of contracts, from the most sophisticated derivatives contracts to retail mortgages. In July 2017, the UK Financial Conduct Authority said it would give up its power to compel banks to submit quotes to Libor panels from the end of 2021. From that point, there is a risk that the Libor rate could cease.
We have not been approached very actively on changing our legacy position towards the new ratesThijs Aaten, APG Asset Management Asia
This means legacy Libor-referencing products have to insert so-called fallback language allowing them to move off Libor and onto alternative risk-free rates (RFRs) such Sonia and the US secured overnight financing rate if Libor should cease, for example. While an industry-wide protocol could help swaps users move off the benchmark and onto RFRs, no such solution is available for bonds and loans, which means they will have to be tackled individually.
While markets such as the US and UK have seen swap trading in their RFRs slowly increase, the markets still lack liquidity. Floating rate note issuances linked to the RFRs have been on the rise, but the loan market is still yet to embrace the change.
Justin Chan, co-head of global markets at HSBC, said the uncertainty around Libor-linked products means it’s hard to engage clients on the topic at present.
“When I reach out to a customer, I need to provide him with a solution,” said Chan, also speaking on the panel.
“If Libor will not exist beyond 2021 what will be the new benchmark? What are the instruments that I can switch myself into? Only when we see the alternative benchmark and a basis market evolve for the switchover, we can approach the customer.”
When banks start to engage, Aaten warned, the level of interest from clients may be determined by how changes to the contracts will affect their value. For instance, if the fallback language for a client’s floating rate receiver interest rate swap would result in the contract ultimately moving onto a higher floating rate if Libor ceased, they would be more likely to engage.
“Ultimately, my counterparty is my counterparty, not my friendly adviser. It very much depends on the fallback scenario that is now available to put in your legacy position. Is it in-the-money for me or for my counterparty? That is influencing my move,” said Aaten.
The size of a company’s legacy position will also play a role, he said, as the transition for a firm that houses billions of euros of notionals is going to be a tougher task compared to a smaller firm.