LIBOR will be phased out by the end of this year. The cessation of LIBOR as a benchmark for GBP interest rates should have been communicated by now to all borrowers. It is important that borrowers act now to agree the transition process with their banks but what is the optimal approach? Lenders and borrowers’ transition processes are moving at different speeds and although some progress has been made, discussions on the transition to SONIA remain fragmented.
A common concern is that more progress has been made in the derivatives market in comparison to the debt market. Therefore how can borrowers ensure that there is no mismatch between their loan(s) and hedges? This can have wider implications for those who apply hedge accounting in the form of added scrutiny from external auditors and the potential for hedge accounting ineffectiveness. ISDA has already published its protocol which governs derivative products but nothing similar has yet been published to govern the loan markets.
With only a few months to go until the cessation of LIBOR, the level of preparedness for SONIA is not consistent across banks. Only some are able to offer loans/hedges referencing a replacement RFR. Some lenders are offering Base Rate loans or Fixed Rate Loans, however this is not an option offered to all borrowers. With banks offering a wider range of options to some borrowers but not to others, there could be adverse outcomes for those with a limited choice or different outcomes for different loans with different lenders for the same borrower.
Ultimately what is our advice? Get ahead of the curve! Every bank and borrower will need to do something before 31/12/21. The first step is to identify where you have Libor exposures and decide your best case outcome. Be involved and shape your LIBOR transition otherwise it will be shaped by others. There could easily be a stampede for the exit as the deadline approaches which may impact the transition process. Importantly, there will be a spread adjustment made to any replacement RFR so be sure to avoid any unintended transfer of value (by understanding how the spread is being calculated, SONIA conventions and the presence of “zero” floors in the loan). Engage with your lenders now, and seek commercial (not just legal) advice on the implications of this for you.
