ICMA, Bloomberg Publish APAC Guide on Tough Legacy Bonds

Up to 80% of tough legacy bonds in APAC have inadequate fallbacks in place, or no fallbacks at all, ICMA and Bloomberg say in a new report.

ICMA and Bloomberg have published a new report on tough legacy bonds, urging a significant acceleration of transition efforts to mitigate potential disruptions in APAC bond markets as a result of the transition from LIBOR to risk free rates (RFRs).

The report defines ‘tough legacy bonds’ as debt securities which are linked to LIBOR in any currency, and due to mature after the cessation of LIBOR in that currency.

Globally, tough legacy bonds comprise USD 854 billion equivalent across 4,998 issuances, according to Bloomberg data.

In APAC, they comprise USD 190 billion equivalent across 560 bonds, mostly in Japan, China and Australia, which together account for approximately 95 percent of the total APAC volume.

The report says 74 percent of this is primarily concentrated among financial issuers.

According to Bloomberg data, only 55 percent of APAC tough legacy bonds had fallback language in place as of 1 February 2021. However, most of these only have a ‘market disruption event’ trigger, which would not contemplate the permanent cessation of LIBOR.

The report says the best way to minimise LIBOR transition risks is not to issue new bonds linked to LIBOR. If LIBOR-linked issuance is unavoidable, robust fallbacks to RFRs should be in place.

In Asia, the issuance of new LIBOR-linked bonds has been continuing, in some cases without the recommended fallbacks in place. From 2019-2020, USD 12 billion of new issuances had no fallback language, the report says.

The report sets out proposed solutions for addressing the risks of tough legacy.

The full report is available here.

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