Nationwide Building Society opened a new front on the Libor to Sonia transition on Wednesday with the announcement of the first consent solicitation targeting a coupon switch on the soft bullet extension period of a fixed rate benchmark, a £750m 5.625% January 2026 issue from 2011.

Lloyds last week won overwhelming backing to switch the coupon on a £1bn (€1.16bn) March 2023 FRN from being Libor to Sonia-based in the first such consent solicitation for a covered bond. The move comes alongside similar transitions in the ABS market and other asset classes, as sterling market participants prepare for Libor calculations to cease at the end of 2021, with the Bank of England also pushing them to do so.

Like Lloyds, Nationwide is targeting one of its floating rate covered bonds, a £1bn April 2023 issue paying Libor plus 26bp, and announced that it is “exploring the potential transition” to Sonia of its remaining Libor-linked covered bonds, namely three bonds totalling £250m.

However, the UK building society has raised the prospect of a greater range of sterling issuance being subject to such exercises by deciding to seek to switch the coupon and associated documentation and agreements for the soft bullet extension period of a fixed rate bond, should it not be redeemed at its expected maturity.

The bondholder meetings for both the fixed and floating rate issues are on 7 November. The quorum is holders of two-thirds of the bond, and one-third for an adjourned meeting, with 75% in favour necessary to pass the extraordinary resolution.

As with Lloyds, there is no consent fee available for bondholders. A factor in 99.84% of votes being in favour of Lloyds’ switch was deemed to be investor interest in ensuring that the FRN did not potentially fall foul of possible changes to the Bank of England’s collateral framework that could penalise Libor-based instruments in future, something that has already seen Libor-based FRNs trading at a discount to their Sonia counterparts.

While this is not yet an issue faced by fixed rate sterling covered bond benchmarks, a banker said bondholders should appreciate Nationwide’s diligence.

“The Bank of England has called into question the repo eligibility of bonds without adequate fallback provisions, which could extend to these extension provisions and threaten the eligibility of this 2026 bond,” he said. “Most – if not all – of the buyers of this bond will be insurance companies who will be indifferent to repo eligibility in an immediate sense. However, as the bond rolls down in maturity, repo eligibility will be important for market value.

“And from a credit perspective, don’t you want your bond’s provisions to work? The old Libor fallback provisions set the coupon using the previous period’s Libor fixing if a new Libor rate is not available. However, if you do your first fixing in 2026 and Libor hasn’t been published in four years, what do you do? It doesn’t work. So I would hope that an investor would appreciate the issuer’s effort to fix the provisions for their benefit.”