Singapore: a case study for Libor transition
Singapore has been a front-runner when it comes to moving away from Libor to a new benchmark, with its regulators, borrowers and banks playing an active role in preparing the market. The rest of Asia’s loan market should pay attention.
There is only just over a year to go before banks have to adapt to the end of Libor, the global benchmark dollar interest rate that will be phased out at the end of 2021. But there is still shockingly little progress being made in Asia’s loan market to move to a new benchmark.
There is one outlier. Singapore has already had a few deals linked to the Singapore overnight rate average (Sora), its new benchmark rate, which will replace the Singapore dollar swap offer rate (Sor) and the Singapore Interbank Offered Rate (Sibor) once Libor is discontinued at the end of 2021.
Additionally, the Monetary Authority of Singapore (MAS) sold a S$500m six month floating rate note in August, with its margin priced over compounded Sora — the first step in its plan to issue Sora-based FRNs on a monthly basis. The regulator aims to provide a pricing reference, and increase hedging activity through the Sora derivatives market.
The deals are a culmination of plenty of work behind the scenes to set the stage for the use of a new interest rate benchmark in the country. The Association of Banks in Singapore and the Singapore Foreign Exchange Market Committee, for instance, conducted transition testing from July 2019 to June 2020.
It’s a different story when it comes to the rest of Asia, however, with very few dollar loans or bonds being benchmarked against the secured overnight financing rate (Sofr), the replacement for dollar Libor.
Bank of China is an exception, with its Macau branch selling a $960m bond last October, with one tranche referencing Sofr. The bank said at the time that it had also priced commercial paper, a corporate loan and a deposit from a private banking client using Sofr.
But for a region that sees billions of dollars raised annually in dollars using loans or bonds, there is very little clear progress otherwise.
Some preparation is being done, of course. Many Taiwanese banks have set up task forces and started reviewing their existing transactions, while some others have been arranging webinars to educate borrowers and investors about the new benchmark. Loan documents are also increasingly including some fallback language for when a replacement rate to Libor is needed.
However, those efforts are far from enough given the looming deadline of end of 2021. Banks, companies and regulators should learn from Singapore and step up their game.
First, more focus should be put on the calculation method of the average rate.
As it has become clear that Sofr, Sonia and Honia will be Libor replacements for US dollar, sterling and Hong Kong dollar, respectively, uncertainty around a term rate has been cited as one of the main reasons for the slow progress from companies and banks to embrace the new benchmarks. However, the Asia Pacific Loan Market Association warned in July that a forward-looking term rate is unlikely to be ready before the deadline.
This shouldn’t be a deterrent for Asia’s borrowers and bankers operating in the region.
The MAS chose to circumvent that roadblock by adopting a five business day backward-shifted observation period approach for calculating the compounded Sora rate — the approach used for the bilateral loans by both CapitaLand and Wilmar. This can offer a template for Asia’s borrowers too.
Additionally, CapitaLand and Wilmar are both well recognised names in Singapore, making them obvious choices to kick off Sora-linked loans in the country.
Other Asian countries should also look to push out marquee borrowers to pioneer these deals. Policy banks and state-owned corporations can be the first movers, and will help offer other potential borrowers a template to execute their deals.
Sure, borrowers and banks are still navigating the impact of Covid-19 on their businesses, putting Libor transitioning on the backburner this year. But the APLMA reaffirmed earlier this year that Libor with definitely be discontinued by the end of 2021 — if not sooner. The deadline will be upon banks and borrowers before they know it.
Singapore has shown that the loan market needs to take it a step at a time when it comes to moving away from the standard benchmark rates. But starting soon is important — as it will give regulators, borrowers and banks time to iron out any concerns that may arise once the first widely syndicated deals using new benchmarks emerge.
Asia’s loan market participants need to jump into action.