Lloyds Bank on Thursday won final approval to amend its outstanding fixed rate soft bullet sterling benchmark covered bonds to reflect the transition to Sonia, as the Bank of England announced a new index for the risk free rate and increasing haircuts for Libor-linked collateral.

The UK issuer launched consent solicitations in relation to four outstanding sterling benchmarks on 6 January and on 6 February gained approval to convert the basis for the coupon on the soft bullet extension period from Libor to Sonia on one of these, a £1.24bn (€1.44bn) March 2027 issue, with 99.98% of votes in favour.

However, the quorums required in respect of the other three issues were not met and adjourned meetings were scheduled for last Thursday (27 February), with the required quorum reduced from representatives of two-thirds of the outstanding principal amount of each issue to one-third.

The conversion resolutions were then successfully passed with 100% of votes in favour at the second attempt for Lloyds’ £500m March 2022 (XS1212747361), £1.25bn March 2025 (XS0737747211) and £1.25bn February 2029 (XS0589945459) issues.

The consent solicitations are just the latest step in sterling market initiatives to manage the transition from Libor to Sonia, whereby UK covered bond issuers have previously adopted Sonia for floating rate note issuance and subsequently converted the coupons of outstanding floating rate notes before tackling soft bullet fixed rate issuance.

The Bank of England (BoE) has been encouraging market participants to take the initiative in the transition, but, in a speech last Wednesday, Andrew Hauser, its executive director for markets, announced two initiatives he said are aimed at “turbo-charging” the transition to Sonia: the launch of a compounded Sonia index in July, and progressively higher haircuts for Libor-linked collateral.

Under the latter measure, haircuts will be increased progressively from the third quarter of this year such that existing Libor-linked collateral will be ineligible at the end of 2021, while any new Libor-linked collateral issued after October 2020 will be ineligible for use at the bank.

According to the International Capital Market Association (ICMA), the planned BoE’s planned Sonia index is consistent with a new “shift” approach to calculating Sonia interest used by the European Bank for Reconstruction & Development (EBRD) in a new issue on 19 February that varied from a “lag” or “lookback” method that had previously been the market standard.