As the end of 2020 beckons, we take a look at what progress the Sterling market has made in its preparations for the end of the London Interbank Offered Rate (LIBOR) on 31 December 2021.

We also take a look to what further work (and challenges) lie ahead in 2021 for what Andrew Bailey (Governor of the Bank of England) and others have dubbed the LIBOR ‘end game.’

If you would like more practical information on what you can do to be prepared for the transition please do register here for our 'Transition from LIBOR to SONIA - top ten tips for transition'​ webinar on 25 November 2020 that we will be hosting with treasury advisers consulting.

From as early as November 2017, the UK’s Working Group on Sterling Risk Free Rates (WGSRFR) has focused its attention on the Sterling Overnight Indexed Average (SONIA) as an alternative to LIBOR and we can now be confident that SONIA will be the risk-free rate of choice for the Sterling market once LIBOR ceases on 31 December 2021. SONIA is a (nearly) risk-free rate due to the fact that it minimises term bank credit risk or liquidity premium.

The WGSRFR’s preferred method of calculating SONIA (and one which is expected to be operationally achievable for up to 90% of the LIBOR loan market) is SONIA compounded in arrears.

The shift to SONIA
It is widely accepted that the Sterling market is a front runner in preparing for the end of LIBOR. At the time of writing we can point to the following achievements in the Sterling market:

  • The market for SONIA linked derivatives is now well established;
  • Volumes in LIBOR linked options are decreasing and there are promising signs of a SONIA options and a SONIA futures market developing;
  • There is now a fully functioning SONIA linked bond market; and
  • The Bank of England began publishing the SONIA compounded index in August 2020.

The Sterling market has also started to see (in increasing numbers) the completion of SONIA-linked loans, including Riverside Group’s well-publicised £100,000,000 revolving credit facility indexed exclusively on a SONIA basis. At the time of writing ACS has advised a number of housing association borrowers on SONIA-linked loans and on transition (switch) wording within loan agreements.

What happens next?
At the time of writing all lenders should now:

  • Be offering non-LIBOR products; and
  • Be working with their borrowers to revisit existing loan documentation to ensure that all LIBOR loans include clear contractual arrangements to facilitate conversion from LIBOR to SONIA ahead of 31 December 2021.

These contractual arrangements should take the form of: (a) conversion terms or (b) a renegotiation process for said conversion. In either scenario, the contractual arrangements need to identify the date on which the switch from LIBOR to SONIA is going to take place or the relevant trigger event.

By the end of Q1 2021, no new Sterling LIBOR loans that would expire after 31 December 2021 should be issued. The end of LIBOR is nigh.

The challenges
As lenders begin to reach out to borrowers to discuss the conversion of LIBOR loans to SONIA the following challenges persist:

  1. All market participants need to review (and in some cases implement new) finance and/or treasury management systems to ensure that their systems and processes can accommodate SONIA. This has the potential to be a significant, lengthy and costly exercise for certain market participants.
  2. At the time of writing the Loan Market Association has published an exposure draft which incorporates rate switch provisions and a revised replacement of screen rate clause. Whilst these template provisions/clauses provide a useful steer for how the conversion from LIBOR to SONIA can be documented, there remains no market standard approach and it looks unlikely that such an approach will be agreed any time soon.

What should borrowers be doing?
The message from the Bank of England and the FCA is clear.

  1. All borrowers need to review their existing loan documentation to determine how each loan arrangement approaches the LIBOR transition.
  2. All borrowers need to engage with their lenders to understand how they intend to facilitate a transition from LIBOR to SONIA (and how such arrangements are to be documented).
  3. All borrowers need to seek independent financial (and where appropriate legal) advice to understand what the LIBOR transition (and any approaches proposed by lenders) means for them.

Time is now of the essence for borrowers and lenders alike.

What has Anthony Collins Solicitors been doing?
ACS has been following the LIBOR transition process from the very beginning and is already advising clients on what the transition means for them. In addition to advising borrowers on some of the earliest SONIA-linked loan facilities, we have also been engaging with other law firms in order to discuss key issues arising from the transition and to agree on a standardised approach to documentation that could be implemented. This work is very much ongoing.

For more information

As mentioned at the start of this article we are also hosting a webinar with treasury advisers consulting on the LIBOR transition so please do reserve your space if you would like to know more.

If you would like to discuss any points in relation to the LIBOR transition or anything else to do with your loan arrangements, please contact our finance and funding team.