SYDNEY, Nov 7 (Reuters) - Australia’s Commonwealth Bank is planning to sell A$1 billion ($687.20 million) worth of residential mortgage bonds in the country’s first public deal that will not use the local LIBOR-equivalent benchmark, the bank bill swap (BBSW) rate.
Bond coupons, or interest rates around world financial markets are priced relative to surveyed inter-bank lending rates such as the London Interbank Offered Rate (Libor), a benchmark embedded in as much as $340 trillion financial contracts worldwide.
But given Libor is due to be decommissioned by the end of 2021, bankers and investors are starting to switch to other benchmarks, including those more closely linked to government or risk-free rates.
The Australian corporate regulator in 2014 implemented changes to the BBSW methodology that require it to be based on actual transactions and not a survey.
However, regulators still expect a local transition into alternative benchmarks such as the Australian Overnight Index Average (AONIA) which is based on the central bank’s official cash rate, which is currently at 0.75%.
The top-rated portion of Commonwealth Bank’s deal, called Medallion, is expected to pay 125 basis points over the compounded daily AONIA rate, according to a statement by the bank.
British bus operator National Express in June became the first company to take out a loan based on Sonia, an overnight sterling-denominated interest rate benchmark compiled by the central bank.
“It is widely accepted that the end of LIBOR is approaching,” said Martin Jacques, Westpac’s Head of Securitisation strategy.
“We have seen an increasing volume of transactions in offshore jurisdictions moving away from IBOR referenced rates towards risk free rates such as Sonia in the UK and SOFR (the dollar Secured Overnight Fundraising Rate) in the USA, so this deal - being the first public AONIA linked RMBS transaction that we have seen in Australia - is an important milestone for the securitisation market.”
Commonwealth Bank, Citigroup, Deutsche Bank and Macquarie Group will handle the securitised bond sale.
In Asia, bankers are also readying clients to issue more bonds linked to the new interest rate benchmarks replacing Libor after Bank of China sold the first such private sector deal in the region last month. [nL3N26Z070 ($1 = 1.4552 Australian dollars) (Reporting by Paulina Duran in Sydney; Editing by Simon Cameron-Moore)