The next significant milestone on the journey to a world without IBORs will occur at the end of March in the sterling markets (not just in the UK), and it’s a big one for corporates.
The Working Group on Sterling Risk-Free Reference Rates (RFRWG), which is made up of buy side and sell side market participants with the official sector (the Financial Conduct Authority and the Bank of England) as ex-officio members, published a road map for 2021.
Its top-level priorities are set out (with ACT emphasis) as:
1. Be fully prepared for the end of GBP LIBOR, by the end of 2021;
2. Continue to enable and promote widespread use of SONIA compounded in arrears throughout wholesale sterling markets;
3. By end-Q1 2021, cease initiation of new GBP LIBOR-linked loans, bonds, securitisations and linear derivatives* that expire after the end of 2021;
4. By end-Q1 2021, complete identification of all legacy GBP LIBOR contracts expiring after end 2021 that can be actively converted, and progress active conversion where viable through to completion by end-Q3 2021; and
Take steps to enable a shift of volumes from GBP LIBOR to SONIA in non-linear derivative markets:
a) by end-Q2 2021, cease initiation of new GBP LIBOR-linked non-linear derivatives* that expire after the end of 2021; and
b) by end-Q3 2021, complete active conversion where viable.
* Except for risk management of existing positions
Focusing on the third of these, if you are planning to raise debt this year, unless you complete the transaction before the end of Q1, the reference benchmark should not be LIBOR, but either SONIA or an alternative reference benchmark such as bank base.
And, if you do complete before the end of Q1, but the transaction matures after the end of 2021, it will need to include some sort of conversion methodology away from LIBOR – preferably using an automatic switch mechanism. In practice, all new transactions should look to reference something other than LIBOR from here on.
One might argue this is just a target and it doesn’t matter if it’s missed. But – and it’s a very big ‘but’ – for regulated market participants (the banks), the regulators have made it very clear that they expect these deadlines to be hit. Any ‘misses’ will need to be explained to the regulator. The RFRWG has published a set of Q&As in response to the Q1 deadline, which broadly speaking reiterate that all market participants need to be ready to transact away from LIBOR from 1 April. They go so far as to state that lenders who cannot achieve this within a syndicate group will have to step away from the transaction… (and, yes, the potential unintended consequences of such a step for the borrower have been explained to the regulator).
The overarching message coming from UK regulators is that the financial institutions need to be ready for a post-LIBOR world by 1 April. Expect a busy few weeks as banks scramble to hit the deadlines imposed by regulators and (not for the first time) expect their clients to be ready to move at short notice.
In a more helpful move, the RFRWG has also published a Best Practice Guide that sets out the market conventions one should expect to see in transactions going forwards. This is intended to remove some of the confusion that has resulted in delays in adoption.
Nevertheless, if you are considering raising debt in the near term and are not already in discussion with your lenders about what form this might take, allow plenty of time.
Revisiting the RFRWG 2021 priorities, the other target for the end of Q1 is:
To be candid, other than in the bond market where the consent solicitation work rumbles slowly on, all focus is currently on new transactions rather than active transition of legacy deals, but: plan ahead. This will come up fast once the initial teething problems related to new transactions have been resolved.
One final thought: this briefing note has very much focused on the lending market, as for the majority of borrowers, this is what will determine any activity in the derivatives market. For those who execute standalone swaps, these too will be based on SONIA exclusively from 1 April.
Sarah Boyce is associate director, policy and technical, at the Association of Corporate Treasurers