Further to our previous commentary on the cessation of LIBOR (London interbank offered rate) and the anticipated transition by many UK lenders and borrowers to the new “risk-free rate” SONIA (sterling overnight index average) available here and here, we summarise below the latest regulatory news on the transition.
Quarter 4 Milestones:
The last month has been a busy one regarding LIBOR transition, leading to some very important Q4 milestones coming into effect for both the sterling and US loan markets.
According to the UK Working Group on Sterling Risk-Free Reference Rates, all lenders should now be in a position to offer borrowers non-GBP LIBOR linked products, and should be working with borrowers to include clear contractual arrangements in all new and refinanced LIBOR loan documentation to facilitate the transition to SONIA or another alternative rate.
On 16 October 2020, the Financial Stability Board published a press release and global transition roadmap (the “Roadmap”) for LIBOR, timetabling key actions and steps that both financial and non-financial firms should be taking from now until the end of 2021. This is to enable a smooth transition to alternative rates. This can be done either by giving borrowers a choice now of which reference rate underlies their loans or through agreeing to include language for conversion by end-2021 for any new or refinanced LIBOR referencing loan. We are seeing both approaches in the market currently.
The Roadmap provides particular emphasis on steps the FSB considers prudent for market participants with exposure to LIBOR benchmarks to take in order to mitigate their risk and ensure a smooth transition. Such steps include:
- Firms identifying and accessing all current LIBOR exposures and agreeing on a project plan for transition ahead of the end of 2021.
- Before or by the effective date of the ISDA Fallbacks Protocol, the FSB strongly encourages that firms should adhere to the protocol. Specifically firms should be in a position to offer non-LIBOR linked loans to their customers as set out above.
- By mid-2021 firms should have in place formalised plans to amend legacy contracts where possible and have processes in place to facilitate transition to alternative rates.
- Firms should be completely prepared for the cessation of LIBOR by end-2021.
“Tough legacy” contracts update:
Further to our previous commentary on “tough legacy” issues (see in full here), on 21 October 2020 the UK government introduced the new Financial Services Bill to Parliament. This bill introduces significant new powers to allow the FCA to manage an orderly transition away from LIBOR including giving the FCA powers to direct a change in the methodology of a critical benchmark and to compel the relevant benchmark administrator to extend its publication for a limited time period in order to benefit “tough legacy” contracts.
UK Finance and Lending Standards Board (LSB) best practice guidance:
On 28 October 2020, the LSB, being the UK’s only self-regulatory body for small to medium sized enterprise (“SME”) lending, published its best practice guidance for firms working on transitions of SME customers to non-LIBOR linked products. The guidance outlines the importance of firms ensuring they communicate clearly with SME customers and help minimise any effect of the transition away from LIBOR particularly in light of the COVID-19 pandemic, which is placing higher than normal levels of strain on many SME customers.
Jonathan Porteous, head of banking and finance at Stevens & Bolton LLP comments:
“Lenders and borrowers are now starting to engage with bolting in SONIA and transition to SONIA wording into loan documentation. In some cases, the results are not pretty because even though the concept itself is simple enough to understand, the drafting can be quite complex.
We hope that lenders and borrowers will work together to make the transition to SONIA as smooth as possible, and that lawyers and other professionals play their part alongside lenders and borrowers to help ensure that all parties have a practical understanding of the changes required and sensible and clear documentation to reflect the new methodology.”