Following investigations of misconduct in setting of LIBOR (and some criminal convictions relating to that misconduct), a working group on sterling alternative near risk-free rates (“Sterling Working Group”) was set up by the Bank of England in 2015. In April 2017, the Sterling Working Group recommended the Sterling Overnight Index Average (“SONIA”) as its preferred alternative rate for use in sterling derivatives and other financial contracts as an alternative to LIBOR (SONIA was originally introduced in March 1997 and has been administered by the Bank of England since April 2016).
In July 2017, the Financial Conduct Authority (FCA) announced that it would no longer compel panel banks to submit rates to enable the calculation of LIBOR but the current LIBOR panel banks had agreed to support the LIBOR benchmark and to remain as submitters until the end of 2021. The FCA did not rule out the prospect of a voluntary arrangement to sustain LIBOR after the end of 2021 but the continued publication of LIBOR post-2021 will depend on the voluntary support of panel banks. The FCA concluded that the best option for market participants is actively to transition to the alternative near risk-free rates.
The Sterling Working Group aims to establish SONIA as the primary sterling interest rate benchmark by the end of 2021.
In the light of the above proposal, parties to loan agreements (with the loan term expiring after 2021) should consider reviewing their existing facility agreements to check:
- The fallbacks that would apply if LIBOR ceases to be produced, or if a replacement rate begins to be used, and then consider whether these could be used on a long-term basis.
- The procedure for amending existing facility agreements to change the interest provisions in respect of the fallback method for calculating interest on a long-term basis. Key issues to check include:
- The level of lender involvement required in syndicated loans (i.e. unanimous consent or majority lender consent).
- Whether intercreditor arrangements contain any restrictions in respect of amending facility documents.
- Who selects the replacement rate (for example, borrower and agent, agent only or agent after consulting the borrower)?
- Whether there are any safeguards in the provisions relating to selection of a new rate?
- Whether, if amendment flexibility has been included, it applies to all necessary changes.
Parties entering into new facility agreements (or amending existing facility agreements) will need to consider:
- Including the revised version of the “replacement of screen rate” clause published by the LMA on 25 May 2018.
- Staying up-to-date with how documentation is developing to cater for transition to a new rate.
- Whether any new procedures need to be put in place, or operational changes made, to cater for the replacement rate so that interest can be calculated and paid in accordance with documentation.