In March this year, ICE Benchmark Administration and the UK’s Financial Conduct Authority formally confirmed the dates that panel-bank submissions for all LIBOR settings will cease, after which representative LIBOR rates will no longer be available. The majority of LIBOR panels will expire at the end of 2021, with a handful of exceptions.

There is a growing sense of urgency about the process of transitioning away from LIBOR by the end of 2021. In July this year, the Financial Stability Board published its Progress Report to the G20 on LIBOR Transition Issues that highlighted areas of concern.

“For transition to occur in time for the imminent cessation, market participants must now be aiming to use robust alternative reference rates [ARRs] to LIBOR in new contracts wherever possible,” the report noted. A particular area of concern continues to be loan markets, with much new lending still linked to LIBOR, increasing the stock of contracts affected by its discontinuation.

One of the challenges of LIBOR transition has been that too many market participants have taken a wait-and-see approach, effectively delegating the process of developing and road testing ARRs to others. Supranational, sovereign and agency (SSA) issuers have stepped up to the plate, in some cases explicitly because their mandates include capital-market development.

World Bank issued the first secured overnight financing rate (SOFR)-linked bond from an SSA borrower – and the second-ever in the market – in August 2018. Since then, it has printed more than US$11 billion in SOFR format, steadily building out its ARR curve from the two-year duration of its first transaction.

In February this year, World Bank printed the longest SOFR-linked transaction, at 10-year tenor, extending its own record from the previous seven years.

Andrea Dore, head of funding at World Bank in Washington, says the number of investors participating in its SOFR deals has steadily increased over time as regulators have stepped up the pressure to be ready for LIBOR cessation.

She says: “Of the approximately US$40 billion issued by SSAs via SOFR-linked deals since the first transaction in 2018, almost half has been done just this year. It is quite clear that activity has picked up.”
Earlier in the year, meanwhile, International Finance Corporation printed a Kangaroo deal that it swapped back to SOFR instead of LIBOR – the first time it swapped a non-ARR rate to SOFR.

A number of SSAs have printed inaugural ARR-based transactions this year. KfW Bankengruppe added to its toolkit with floating-rate note transactions linked to SOFR and sterling overnight index average (SONIA) in H1 2021, while European Investment Bank printed the first benchmark deal referencing the new SONIA compounded index in August last year.

Nordic Investment Bank (NIB) also issued its inaugural SOFR-linked transaction, in May. Jens Hellerup, head of funding and investor relations at NIB, says the bank will continue to be active in the SOFR market as it fits well with the typical size of the issuer’s US dollar benchmarks, which are typically US$1-1.5 billion. He adds that NIB would like to be active in the euro short-term rate market but pricing is yet to work.

BNG Bank, on the other hand, has not yet issued in any ARRs. Bart van Dooren, head of funding and investor relations at BNG Bank, explains that the bank’s debt issuance programme is ready to issue in SOFR and other ARR formats. But the issue is the market for issuing ARRs is currently in the shorter end of the curve – where issuance is competing with the European Central Bank’s targeted longer-term refinancing operations funds.

Challenges remain for some aspects of LIBOR transition, including adjusting legacy portfolios on the lending side and cross-currency swaps from a non-ARR directly to an ARR.