This update summarises the impact of the move away from LIBOR-style reference rates to the new SONIA reference, and what this means for housing associations.
20 August 2018
Following the LIBOR rigging scandal in 2012, international authorities are moving towards using alternative risk-free reference rates instead of LIBOR-style reference rates. This is relevant to housing associations because LIBOR is used for calculating the interest rate that is applied on variable rate loans and associated derivative contracts.
The expectation is that LIBOR will be phased out by 2021, by which point alternatives will have evolved. In the UK, a working group was set up by the Bank of England to oversee this change, and in April 2017 the group voted to approve Sterling Overnight Index Average (SONIA) as the UK’s preferred short-term interest rate benchmark.
After 2021 LIBOR will no longer be available and contracts will need to reference SONIA instead. Housing associations tend to have longer-term debt which is likely to last into the 2030s and 2040s, so unlike many other organisations, you will need to translate substantial ongoing LIBOR facilities into SONIA.
This speech last month by Andrew Bailey, Chief Executive of the FCA, clearly lays out the rationale for the change, the urgency of engaging with it, and the issues you will need to consider.
What we have done so far
We submitted a response to the Bank of England’s working group consultation on the new risk free rate last year.
Since then, we have:
- met with working group staff
- joined meetings of one of the technical sub-committees
- organised a briefing and Q&A session for housing association treasury managers and Bank of England staff. Notes from this meeting are available to members.
We have highlighted the particular issues facing housing associations, as well as informing wider work on the issues which will affect all organisations that currently rely on LIBOR.
We will continue to keep you up to date with developments, and will represent our members throughout the transition.
What do you need to do?
You will need to familiarise yourself with the proposed changes and analyse the likely impact this might have on your existing loans and derivative contracts, and any new contracts you are entering into.
We’d also urge you to respond to the consultation exercises highlighted in the notes of the Bank of England meeting, to help inform the process of transitioning from LIBOR to SONIA from a housing association perspective.
- The working group consultation on term SONIA reference rates, closing on 30 September
- The International Swaps and Derivatives Association (ISDA) consultation on fallbacks for derivatives referencing LIBOR etc.
- A Cash Markets consultation is yet to be announced.
Where to find more information
As well as Andrew Bailey’s speech, and the notes from the Bank of England briefing (both referenced above), we suggest looking at the working group’s webpage which is updated regularly.
Please contact Will Jeffwitz to find out more or if you would like to get involved in this work.