Unilever ULVR.L and J.P. Morgan JPM.N 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 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.