Sterling Libor transition: Loan delays
Hot on the heels of our latest IBOR reform report, the working group on sterling risk-free rates has put out a statement on the difficulties encountered in transitioning the loan market. In spite of the delay, the transition should be achieved by 1Q21. Meanwhile, the focus on fallback spread adjustments intensifies
Loan laggards: New deadline in 1Q21
Regular readers of our Libor reform updates would not be surprised that loans are proving to be one of the slowest markets to transition.
Given the lack of public data, how slow is hard to say, but the working group on sterling risk-free rates noted key milestones in bilateral and syndicated loans referencing Sonia. The working group has already acknowledged, at the end of March that the coronavirus pandemic was affecting the shift. The latest update admits complete transition by the original 3Q20 deadline will not be feasible.
The new hard deadline for the issuance of Libor-referencing loans is the end of 1Q21 but the working group wants lenders to be in a position to offer non-Libor linked products by the third quarter of this year. What's more, the new deadline doesn’t preclude the need to include contractual arrangements to facilitate conversion by the end of 2021 when the demise of Libor is planned.
Focus on fallback calculation
The extended timeline in loan transition does not mean progress has stalled in other areas, on the contrary. Fallback spread methodology has become a key focus after the ISDA published its members’ favoured spread adjustment method, and after respondent to the working group survey on fallbacks in cash products expressed their preference an approach consistent with derivatives.
Ahead of Bloomberg publishing fallback adjustment spreads for the main currencies, we provided estimates and explanatory notes in our latest Ibor transition report. We re-produce the chart below showing how the fallback spreads from 6 months Libor to Sonia will be calculated.
Fallback calculation: 5Y median of the Libor-counpounded Sonia spread
There is no saying where that spread will eventually settle but the length of the lookback window (the spread will be calculated as the 5-year median between Libor and compounded Sonia) and the proximity of the trigger event (by the end of 2021 we presume), means that it should not diverge too much from its value if it was calculated today.
As things stand, we think between 20bp and 25bp is a realistic estimate.
Download
Download article"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.
This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.
Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.
ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).