Corporate Bond Sale Boosts Campaign to Kill off LIBOR

A Canadian energy firm became the world’s first nonfinancial issuer to sell debt linked to the main LIBOR alternative, a boost for policymakers in their struggle to encourage market adoption of the new financial benchmark.

Enbridge Inc., which operates oil and gas pipelines as well as other energy infrastructure, sold floating-rate notes on Tuesday pegged to the Secured Overnight Financing Rate, or SOFR, a U.S. replacement for LIBOR. Analysts predict more companies may now follow suit as regulators continue their multiyear battle to phase out the London interbank offered rate (LIBOR) following global manipulation scandals.

LIBOR remains entrenched in the financial system, even as key tenors are likely to retire at year-end. Only a fraction of the $200 trillion derivatives market has moved over to SOFR, making it harder to build a forward-looking term structure.

The Enbridge bond sale “represents an important milestone,” said Tom Wipf, vice chairman of institutional securities at Morgan Stanley and chairman of the Alternative Reference Rates Committee (ARRC), the Federal Reserve-backed body guiding the transition. “As market participants move away from LIBOR, we can expect a deterioration in LIBOR liquidity, and so we encourage everyone to prepare for the inevitable by moving to SOFR now.”

Enbridge saw big demand. The order book was nearly six times oversubscribed, significant for a floating-rate deal. A representative for Enbridge did not immediately respond to a request for comment.

“It’s absolutely a significant event,” said Marcus Burnett, director of SOFR Academy, which runs classes for banks and investors. “We know we can’t have a successful and broad-based transition unless nonfinancial corporates take part.”

Investor appetite for floating-rate notes is picking up. Traders like interest payments that increase in line with the market, especially if inflation rises. The supply of floating-rate notes reached $10 billion in January, more than double the monthly average for 2020, according to data compiled by analysts at JPMorgan Chase & Co.

What Bloomberg Intelligence says:

“Eventually every firm will have to issue SOFR-linked debt, or use another index for its floating-rate debt. This is likely only the beginning as the transition away from LIBOR toward SOFR accelerates throughout 2021.”

—Ira F Jersey, Chief U.S. Interest-Rate Strategist

Investors are now watching for the U.S. Treasury to issue its first notes pinned to SOFR, which could provide an official seal of approval and set a wider market standard. The Treasury Borrowing Advisory Committee urged the department to get involved earlier this month, saying a SOFR-linked bond would increase liquidity.

“We need the nonfinance sector to embrace SOFR—that will be critical for it to go mainstream,” said Priya Misra, head of global rates strategy at TD Securities in New York. “Nonfinancials have been reluctant and have been waiting for term SOFR. This is a sign that it can be done without.”

While Tuesday’s issuance marks progress, there’s still very little SOFR-linked debt that exists. Recent high-grade deals from the banking sector include a $1 billion note from UBS Group AG and another from Credit Suisse Group AG.

“I still feel banks will keep using LIBOR for long-dated contracts,” said Rajul Sood, senior director and head of commercial lending at Acuity Knowledge Partners, a financial research firm. “There’s still a lot of apprehension in accepting SOFR.”

—With assistance from Boris Korby.

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