Uncertainty surrounding the phasing-out of Libor, the out-of-favour method of calculating the inter-bank lending rate, could have an effect on bondholders, ratings agency Moody’s has warned.
The transition of financial contracts to new, still to be fully defined reference rates will be broadly credit negative, Moody’s said.
However it added that there was only a “low chance” that the move to a new rate would lead to defaults on individual instruments.
“Ending Libor will have uncertain consequences for creditors holding existing Libor-linked floating rate bonds, some of which may effectively become fixed rate,” said Moody’s senior vice president Simon Ainsworth.
“The essential issue for financial market participants is that creditors will hold contracts that no longer ‘work’ as expected when Libor is retired.”
Libor, or the London Inter-bank Offered Rate, is being phased out after it was revealed to be widely manipulated by banks.