Ahead of next week's SFHA Finance Conference one of the common queries I have received is what is to happen post 2021 when LIBOR is no longer available as a reference rate?
The first point to note is that there is no certainty that LIBOR will not continue to be published post 2021, but given that banks will no longer to obliged to provide reference rates, there is a general consensus that an alternative reference rate will need to be adopted.
Currently there is an assumption that there will be a transition to an overnight risk-free rate such as SONIA (Sterling Overnight Index Average), which is the effective overnight interest rate paid by banks for unsecured transactions in the British sterling market.
There are however some fundamental differences between LIBOR and SONIA. First, LIBOR is a term rate, whereas SONIA is overnight. Secondly, LIBOR is forward looking whereas SONIA is backward looking. What this means in practice is that a borrower using SONIA as a reference rate would not know how much interest it would need to pay until the end of the relevant interest period, with obvious cash-flow/liquidity issues.
To address this, the industry has been working to development a forward looking rate based on SONIA, and the latest indication is that this may be available during the second half of 2019. The fine details need to be developed but this would result in a risk-free benchmark rate that would serve a very similar purpose to LIBOR.
So, work is continuing to create a suitable alternative to LIBOR. Once this has been done, it is likely that facility agreements will need to be amended in line with what has previously occurred in relation to, for example, FRS102 adoption, to accommodate the new market terms. In the interim, it may be prudent to check what fall-back wording is included within existing documents to address what would happen should LIBOR cease to be available.