The world has changed since the NHF’s update last December on the end of the LIBOR benchmark rate.
Following that update and pre-lockdown, the Bank of England and Financial Conduct Authority had increased pressure on the financial sector to implement the transition from LIBOR to risk free rates (RFRs), long before LIBOR will no longer be available.
In their latest announcements, there is some recognition that the pandemic will have an impact on the timing of aspects of the transition away from LIBOR, particularly in some segments of the UK market. However, for the time being, at least, the December 2021 deadline is being maintained.
The NHF is actively looking after the sector’s interests as a whole and has encouraged housing associations to consider the impact of LIBOR’s replacement upon them. That is worth doing as soon as is practical even while the country emerges from lockdown (and the first bilateral loan referencing an RFR (SONIA) in the social housing sector has already been issued). Existing agreements don’t cater for the permanent end of LIBOR, so new terms will have to be agreed.
This provides an opportunity for housing associations to engage with lenders to achieve the best outcome for them – all the more important in the current environment. The December update mentions two steps that need to be agreed before housing associations can move to a SONIA rate that reflects three-month LIBOR in existing contracts: first, whether a term rate or a compounded in arrears rate should be applied, and second, what a credit adjustment spread should be based on.
These points arise because:
With these points in mind, housing associations should prepare for negotiations by:
Only when the impact of LIBOR’s demise is fully understood can housing associations properly negotiate a replacement rate.
Join us at the Treasury in Housing virtual conference on Tuesday 14 July where we’ll delve deeper into the transition from LIBOR to SONIA and how you can be more prepared.