National Express has become the first company to take a loan priced using the reformed interest rate benchmark Sonia, as financial markets turn to the huge task of moving their biggest contracts off Libor, the tainted lending rate benchmark.
The transport company has arranged a new revolving credit facility from NatWest, the bank is set to announce on Monday. The size of the loan has not been disclosed but is in the tens of millions of pounds, according to a person involved in the transaction.
Its move comes as banks begin to step up preparations to abandon Libor in the coming years.
In recent weeks global regulators have reiterated their determination that markets move off Libor by the end of 2021, and instead price thousands of loans, mortgages and derivatives contracts on overnight lending rates, which are based on thousands of daily transactions.
Last week Andrew Hauser, executive director for markets at the Bank of England, described the Libor rate as “past its sell-by date”. Modern markets offer better ways to raise funds, borrow money and manage risk, he argued.
Libor, which is compiled mainly from estimates by banks, remains embedded in more than $300tn of deals. UK regulators have preferred the market uses a rate known as Sonia for deals priced in sterling.
Many banks and companies have only belatedly realised the extent of the change, with switching facing a range of hurdles from pricing, technology upgrades and extensive contract updates. Bankers and lawyers have also worried whether the new rates provide a close enough match to manage banks’ longer-term liabilities and assets.
National Express’s loan is the first in a pilot scheme NatWest is running with a series of its customers. The bank also helped arrange Associated British Ports’ switch from Libor to Sonia for £65m of floating-rate debt in May, which had been seen as a test case for other companies that need approval for a wide range of bondholders.
Development of a Sonia-based market “not only requires financial institutions to develop their products accordingly, but also requires corporates to be innovative in their approach,” said Simon Jenkins, senior director, corporate coverage at NatWest.
NatWest will price the loan by applying a daily compounded rate, with a five-day reset lag, which has been the main convention the market has used to date.
Mr Hauser confirmed that the BoE will also stop hedging the UK government’s foreign exchange reserves on deals that close after 2021, and use Sonia-linked contracts.
“In sterling markets, we have already seen how quickly specific instruments can switch away from Libor when the necessary foundations have been laid and first-line business teams then put their shoulder to the wheel,” he said.
Until recently most big developments in the use of Sonia, such as bonds, have been issued by supranational institutions such as the European Investment Bank.
Regulators have also been keen to see derivatives markets, such as swaps and futures, develop to help price other contracts and instruments. Ashurst acted as legal adviser on the National Express deal.
