December 2, 2019 - Readers may be forgiven for having thought that the deadline to switch away from LIBOR was December 31, 2021. In fact, for some jurisdictions, it is more than a year earlier.

In a November 21, 2019 speech, the UK Financial Conduct Authority (FCA) publicly drew a line in the sand, stating that  while “LIBOR continues to be common in corporate lending, including in syndicated loans…” the “sterling RFR [risk free rate] Working Group has set a target of Q3 2020 to stop new lending using LIBOR”. In other words, they do not want to see new sterling LIBOR loans after that date.

What does this mean for the syndicated loan market? First, Refinitiv LPC has tracked $100 billion of UK based syndicated loans in the first three quarters of 2019. To be fair, these probably are not all comprised of sterling LIBOR based loans. But there are a lot of sterling LIBOR loans, and, beginning late 2020, any new ones may need to be fixed rate, based off the Bank rate or SONIA.

Is this feasible? According to the FCA, “[t]he main IT system providers in this area have described to the Working Group their planned product releases. One of the largest providers plans to make available its SONIA loans product on 29 November.”

And what does this mean for the U.S. LIBOR/SOFR market? It might be an accelerant, which isn’t necessarily a bad thing. Obviously, U.S. transactions that have either a sterling tranche or a sterling multicurrency facility will need to shift that financing to fixed, Bank rate or SONIA. But, there are implications for SOFR as well. The same loan systems that support sterling LIBOR (and will have to support SONIA) also support USD LIBOR (and will have to support SOFR). Thus, the near-term deadline for SONIA may actually make SOFR loans more executable more quickly. And, the more loans that can be originated on SOFR, the fewer loans that may need to fallback from LIBOR to SOFR upon LIBOR cessation. This could reduce the risk of a disorderly transition to SOFR upon LIBOR cessation.

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