One month after Fannie Mae became the first issuer to sell debt linked to the Libor alternative, Barclays became the first commercial bank to issue commercial paper tied to the benchmark which regulators hope will replace the scandal-plagued London Interbank Offered Rate, the so-called secured overnight financing rate, or SOFR.
According to Bloomberg, on Friday the British bank sold $525 million of the short-term debt, linked to SOFR, Bloomberg reported and added that the borrowings took place via its flagship asset-backed commercial paper conduit, Sheffield Receivables Corp.
"Investor response was immediate, and fairly broad across different types of investors," Joe Muscari, head of securitized portfolio management at Barclays, said about the bank’s commercial paper deal. "Our support of SOFR with these issuances is just a recognition that this is the direction the industry is headed."
Commenting on the new bond issues, Barclays managing directors Chris Conetta told Bloomberg that "you should expect to see additional SOFR-linked deals across a broad spectrum of issuers. These will likely include bank issuers as well as other types of borrowers in the short-term debt markets. Both issuers and investors have a vested interest in seeing SOFR become an established and liquid market."
SOFR, which was launched in April by the New York Fed as a dollar-market alternative to LIBOR, has gained traction recently with financial institutions. In addition to Fannie and Barclays, Credit Suisse and the World Bank have all sold other types of SOFR-linked debt, Bloomberg reports. In this case, the SOFR-linked debt was commercial paper, which typically matures in 270 days or less and is used to fund everyday activities such as rent and salaries.
SOFR was set at 1.95% for Friday, up 1bp from the previous day, and up 15bps from its inaugural rate of 1.80% set in early April. It overnight dollar Libor peer for the same day was 1.91888%.
The main difference between the two rates is that whereas Libor is derived from a once daily survey of several large banks that estimate how much it would cost to borrow unsecured from each other without putting up collateral - a process which it emerged had been rigged and manipulated by a cartel of traders for years - SOFR is calculated based on overnight loans collateralized by U.S. government debt, and is therefore virtually impossible to manipulate.