The end of LIBOR and the arrival of SONIA

We update on the move from LIBOR to SONIA, which will affect housing associations that borrow from banks or other financial institutions.

Housing associations have borrowed in excess of £70bn from banks and other financial institutions in the last 30 years to build homes and deliver thriving communities. Around one third of this debt is variable, benchmarked to the London Inter-Bank Offered Rate (LIBOR), and the majority have terms in excess of 10 years. However, at the end of 2021 the banks will stop reporting their LIBOR information and LIBOR, in its existing form, will cease to exist.  

Because of this, the Bank of England has decided that a different benchmark rate, the Sterling Overnight Index Average (SONIA), will replace overnight LIBOR. New debt is now being written that benchmarks to SONIA, but not, as far as we know, within our sector.

However, housing associations’ variable rate debt typically references predictive (e.g. 90 day) LIBOR, and SONIA is an overnight risk-free rate. There is therefore a mismatch between the benchmark that is referenced in associations’ current loan agreement documents and SONIA.

A term rate should be developed, probably by the end of 2019, by an administrator working for the Bank of England. However, this single-term rate will not exactly align with the various LIBOR terms (30 day, 60 day, 90 day etc) and an adjustment margin will need to be agreed beyond this.

In terms of derivatives, the International Swap Dealers Association (ISDA) is more advanced than the Bank of England and has developed its own approach to replacing LIBOR.

The Federation’s work on this

The Federation has engaged with the Bank, the Financial Conduct Authority (FCA) and the Social Housing Regulator on this issue. We are organising a meeting that includes the Bank, the Financial Conduct Authority, the regulator and lenders’ lawyers. We’ll invite lenders to the meeting to discuss the transition to SONIA and to consider how we can work together to ensure there are no winners or losers in any necessary future renegotiations.

Housing association work

We’re advising all housing associations to include the transition to SONIA on your risk registers and asking you to understand what happens to your loans when LIBOR stops being published. This latter piece of work should be done by reviewing all your variable rate loan agreements.

Please note the move from LIBOR to SONIA is only relevant for variable rate bank or building society debt, not for any funding from the corporate bond markets.