Moody's warns bondholders that uncertainty surrounding Libor phase-out will be credit negative

 
Lucy White
Barclays Bank Fined Over Libor Investigations
Barclays was one bank which was fined in Libor investigations (Source: Getty)

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.

Read more: The path to a post-Libor City: Bank of England takes control of substitute benchmark

“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.

Read more: FCA head Andrew Bailey urges industry to solve the "big unanswered question" on Libor

Related articles