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Unilever, JP Morgan entered into $500 mln corporate swap linked to new SOFR benchmark

Tue, 13th Oct 2020 16:25

By Dhara Ranasinghe

LONDON, Oct 13 (Reuters) - Unilever and J.P. Morgan
entered into a $500 million interest rate swap agreement
at the end of September using the new SOFR benchmark interest
rate, in one of the first major long-dated corporate SOFR swap
transactions, according to the U.S. bank.

The Secured Overnight Financing Rate (SOFR) is published by
the New York Federal Reserve. Regulators want it used to back
dollar-based derivatives and loans to replace the Libor
benchmark rate.

The London Interbank Offered Rate (Libor) is being scrapped
after banks were fined billions of dollars for trying to rig the
benchmark, which is used for contracts from home loans to
derivatives and credit cards worth trillions of dollars
globally.

Regulators are putting pressure on market participants to
change references from Libor to alternative rates such as those
compiled by central banks by the end of 2021.

While SOFR has been used by banks and financial
institutions, it has so far yet to be adopted more broadly by
corporates in the use of their funding needs.

But at the end of September Unilever entered into a $500
million 10-year SOFR interest rate swap with J.P. Morgan,
swapping from fixed to floating to hedge the September 2030
bond, according to a press release seen by Reuters ahead of
publication.

According to the U.S. investment bank, this is one of the
first major long-dated, non-financial new issuance SOFR swaps
globally and is a sign that companies are becoming more
comfortable in using new benchmark interest rates.

"For the first time we are seeing a corporate enter into a
significant size of a long-dated SOFR-linked swap as opposed to
using Libor as a reference rate," said Johannes Banner, head of
corporate FX and rates sales for Europe at J.P. Morgan in
London.

"So the real economy is starting to use SOFR in a
considerable size and that is the start of a very significant
trend."

He added that some European corporates with exposure to euro
interest rates could soon start using the European Central Bank
compiled ESTR short-term rate in swap transactions to replace
the Eonia rate that is being discontinued at the end of next
year.
(Reporting by Dhara Ranasinghe; Editing by Huw Jones and Jane
Merriman)

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