Last week, the Loan Market Association (LMA) hosted another seminar focused on the transition from LIBOR to alternative interest rates. The seminar included speakers from the Financial Conduct Authority (FCA) and Clifford Chance, followed by a discussion moderated by the LMA among a panel representing banks and borrowers. LIBOR transition remains a hot topic and a real concern for banks and borrowers alike, along with their professional advisers and third party agents.
A key message, in particular from the FCA, was that borrowers and lenders should not wait for a SONIA term rate to be produced. Overnight SONIA compounded in arrears is here now and participants in the loan market should be focused on adopting it, with limited exceptions. Even those segments of the market thought unsuited to a backward looking rate were discouraged from holding out for forward looking term rates and encouraged to consider fixed rates or using the Bank of England’s base rate as the floating component of composite interest rates.
Compounded SONIA is being adopted, especially in the sterling floating rate note (FRN) market, but it has been incorporated into only a few loan agreements. The view of the LMA and the panel is that more pioneers are needed who are willing to test how SONIA will work in practice – to help develop and firm-up market conventions. The borrower representatives on the panel were early adopters of SONIA-based loans, but they wanted their lenders to be proactive in formulating and bringing more SONIA-based products to their, and the wider market’s, attention.
A major barrier preventing lenders from making the switch to SONIA is the inadequacy of currently available systems. These are based on LIBOR and, more generally, the existence of a forward looking term rate. This is not unique to the lender side, as the borrowers on the panel admitted that they too will need to acquire and develop new systems to cope with borrowing using overnight SONIA compounded in arrears. So too will third party agents. Ad hoc measures, such as separate spreadsheets to calculate compounded SONIA, will not be suitable as SONIA-based products become more widespread. The availability of ‘official’ SONIA indices and other tools could significantly ease the calculation burden. Indications that the Bank of England will offer these were widely welcomed.
The transition from LIBOR continues to make progress, with increased market focus on how to adopt and calculate new rates, creation and uptake of new products utilising those rates and development of systems (lender, borrower and agent) that will work with those products. 2020 is the key year to get these products and systems operational.
The LMA continues to assert that the time to act is now. Our combining of legal expertise and AI technology can help lenders and borrowers review documents, establish the extent of their exposure and manage the process of transition.
For background and more information, we have recently written on the official sector’s attempts to accelerate the transition and the implications for credit fund lendersand considered the landscape in more depth at this crucial juncture for intersecting financial markets in Jamie Macpherson's article on Leaving LIBOR: Lenders in transition.