The Bank of England’s Libor-Killer Gets Second Big Test

(Bloomberg) -- Lloyds Banking Group Plc is set to become the first commercial lender to issue bonds tied to Sonia, the Bank of England’s replacement for scandal-hit Libor.

“It’s exciting to be the first bank to be looking at this type of transaction,” Peter Green, Lloyds’ head of public senior funding and covered bonds, said in an interview. The sale will probably take place this week.

The offering marks a key step in the industry’s shift away from the London Interbank Offered Rate, or Libor, following the first significant-sized Sonia bond sale by European Investment Bank in June. Lloyds will replicate EIB’s bond structure, which took banks a year to prepare due to complexities with Sonia that required the development of new systems.

“That trade worked well so it makes sense to continue to keep that structure,” Green said. The EIB deal is “certainly a forerunner” to Lloyds’ offering, he said.

Lloyds has issued a mandate for a three-year sterling benchmark floating rate covered bond tied to the Sterling Overnight Index Average, according to a person familiar with the situation who asked not to be identified because the matter is private.

EIB drew 1.55 billion pounds ($2 billion) of orders for its 1 billion pound five-year floating rate Sonia note. Interest on Sonia securities will be compounded daily. The benchmark tracks the rates of actual overnight funding deals.

Regulators worldwide are ditching Libor because of a scandal related to bankers rigging the gauge. In the U.S., the industry is switching to the Secured Overnight Financing Rate, which is calculated based on overnight loans collateralized by U.S. government debt. Life insurer MetLife Inc. became the first issuer to sell to SOFR notes last week.

Officials said last year they’ll stop compelling banks to submit Libor quotes after 2021.

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