SONIA clauses coming to town

Market Insight
Thomas Akrigg, Senior Associate - Centrus

A race against time this Christmas as the GBP LIBOR cessation date approaches

The writing has been on the wall for LIBOR since 2017 when Andrew Bailey as head of the FCA declared that it would cease to be published and the market should transition to other more robust reference interest rates. However, some corporate treasurers and their relationship banks are now in a race to ensure certainty for their legacy LIBOR-referencing loan and derivative facilities ahead of the GBP LIBOR cessation date on 31st December 2021.

Facilities with GBP LIBOR fixings after 31st December face an uncertain future. The FCA has introduced “synthetic LIBOR” to be used in many of these facilities until 31st December 2022 to prevent widespread market disruption caused by LIBOR cessation. However, relying on this quick fix may not be in a borrower’s interest and the position for these facilities beyond 2022 is unknown.

Our own experience working with clients is that the volume of work has presented issues for many of the banks. However, the majority of lenders do now have a clear strategy and set of documentation which is capable of being entered into with no or very limited negotiation, so the remaining issues are very much practical rather than strategic.

How do you ensure certainty for legacy LIBOR-referencing loan and derivative facilities?

Treasurers can mitigate this uncertainty by actively transitioning their facilities to reference another interest rate, such as SONIA, or by ensuring their documents have robust fallbacks. Centrus has worked with many corporates and investors to actively transition their portfolios ahead of the cessation date.

For many clients that has involved a limited number of counterparties and facility agreements, frequently fewer than half a dozen and limited to cash products (loans). But to give an example of a larger portfolio, we recently supported Mitchells & Butlers plc with the transition of its £1.6bn whole business securitisation platform and related derivatives.

This process included the consent solicitation for all noteholders across the structure and resulted in the successful transition of its GBP and USD Floating Rate Notes to SONIA and SOFR respectively.

In addition, we are working with other corporates across the regulated utilities, economic infrastructure and real estate sectors to transition their facilities at an operating entity level, including a vast portfolio of project companies managed by Equitix Limited.

If you are finding LIBOR transition to be the Nightmare Before Christmas, don’t hesitate to contact the Centrus team to see how we can support you and ensure that you have a Wonderful Christmastime.