Corporates should be proactively driving LIBOR transition on loans
September 21, 2020
Earlier this month, the Working Group on Sterling Risk-Free Rates (RFRWG) continued to beat the drum on the cash market and published guidance on the transition of GBP LIBOR referencing loans. The paper is directed at all wholesale loan market participants, including lenders and investors. More interestingly, and perhaps for the first time, borrowers are emphasised as key drivers of their LIBOR transition journeys and encouraged to take a proactive approach. All the way from the largest multinational corporates to the smallest local lenders and businesses.
Therefore, no surprise, the RFRWG strongly suggests transitioning business loans on a pre-emptive basis, rather than relying on contractual fallback language to switch the reference rate at the time of LIBOR’s cessation at the end of 2021. Specifically for borrowers, the guidance provides a starting point for an informed discussion with lenders on possible contract amendments.
Borrowers, as well as other market participants, are encouraged to:
- Review fallback and other contractual amendment provisions in outstanding GBP LIBOR loans
- Identify an alternative reference rate to be used for each loan, taking into account the WG’s recommendation of SONIA (Sterling Overnight Index Average) as alternative to GBP LIBOR
- Familiarise themselves with the methodological and economic differences between GBP LIBOR and SONIA
- Analyse systems and operations capabilities and readiness to accommodate alternatives
Large corporates should look to transition legacy LIBOR-based loans proactively, especially if they hedge their exposures with derivatives. Given the differences in conventions, potential timing differences of when certain fallback provisions are triggered and the possible downstream effects on corporate cash flows, operations or even hedge accounting, corporates that wait might find it increasingly difficult to mitigate the associated risks.
The RFRWG is also actively encouraging borrowers transitioning to SONIA or other appropriate alternative references rates to consider disclosing, where possible, the fact that they have executed transactions referencing alternative reference rates (together with any disclosable information around the transition mechanisms) in order to help drive momentum, transparency and the development of conventions in the loan market.
The RFRWG’s effort to directly address borrowers is only the beginning of increased efforts to grow awareness and involve corporates in transition efforts to a greater extent. The speed of the overall transition is determined by the slowest movers. A proactive transition will require active participation from all parties. Through an active approach to transition, borrowers will be able to take some control over the impact of the inevitable transition on such loans. And you won’t be at the back of the phone queue behind all the other businesses at the end of next year.