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Covid-19: LIBOR transition update

Posted: 07/05/2020

Following our earlier article in March regarding the impact of the coronavirus pandemic on the UK financial market’s transition from LIBOR to SONIA, the Working Group on Sterling Risk-Free Reference Rates (RFRWG) has updated its guidance for lenders on the timelines for issuing LIBOR-based products.

The anticipated cut-off point of the end of 2021 for the discontinuation of LIBOR publication remains the same and firms are still being encouraged to work on the transition to alternatives with this deadline in mind. The latest updates highlight that good progress has been made in the sterling bond market where transition to SONIA has already been largely completed.

However, for those operating in the loan markets, the economic and social effects of the pandemic have added significant operational pressures on lenders and their customers, making the fast approaching target of Q3 2020 for ending the issue of new LIBOR-based facilities even more difficult to achieve. In light of this, the RFRWG has updated its recommendations to lenders:

  • By the end of Q3 2020 lenders should be in a position to offer non-LIBOR linked products to their customers.
  • After the end of Q3 2020, lenders, working with their borrowers, should include clear contractual arrangements in all new and re-financed LIBOR-referencing loan products to facilitate conversion ahead of the end of 2021, through pre-agreed conversion terms or an agreed process for renegotiation, to SONIA or other alternatives.
  • All new issuance of sterling LIBOR-referencing loan products that expire after the end of 2021 should cease by the end of Q1 2021.

The key takeaway for lenders is that, in effect, the target for ending the issue of new sterling LIBOR-referencing facilities has been pushed back by six months. However, the RFRWG, FCA, and Bank of England are clear that lenders should continue to work on making alternatives available by Q3 2020 and actively work with borrowers to agree the conversion of existing LIBOR-referencing facilities to SONIA, or other suitable alternatives.

In the meantime, the RFRWG, FCA and Bank of England are continuing their work on the transition process. We expect further updates and guidance in due course on how to deal with the conversion of legacy contracts and calculating credit spread adjustments, which still remain some of the key obstacles on the road from LIBOR to SONIA.

This article was co-authored with Ellis van der Voss, an associate in our corporate team.

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