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SONIA arrives in the UK loan market

In a landmark move away from pricing loans using LIBOR (the London Interbank Offered Rate), earlier this month National Westminster Bank Plc became the first bank in the UK to announce that it has offered a corporate loan facility using interest rate benchmark SONIA (the Sterling Overnight Index Average), when providing a revolving credit facility to National Express.

SONIA is based on actual transactions which take place on the business day before it is published. It is calculated using the weighted average rate of all unsecured overnight sterling transactions and published at 9am on the following business day.

This transaction signals the start of the move away from LIBOR, which is based on a panel of banks providing their opinions around their own borrowing costs. In light of the LIBOR scandal in 2012 and the decreased dependency of LIBOR, the Bank of England recommended a transition away from LIBOR by the end of 2021.

The change from referencing LIBOR to SONIA is likely to be one of the biggest challenges facing the finance industry in the UK in the short- to medium-term, not least due to the substantial number and scope of transactions which are underpinned by LIBOR. Other markets will be introducing similar changes, including the European market which is expected to first publish the ESTER (the Euro Short-Term Rate) on 2 October 2019 (which will replace both EONIA (the Euro Overnight Index Average) and EURIBOR (the Euro Interbank Offered Rate)).

Corporate borrowers with loan facilities extending beyond 2021 may need to review the terms of their existing agreements with lenders, as such agreements may not adequately contemplate the replacement of LIBOR. Existing agreements may need to be amended to update the fallback provisions which deal with the calculation of interest when LIBOR is no longer available.

If you have any questions in relation to the implications SONIA may have on your finance arrangements, please get in touch with a member of our Banking and Finance Team.

This blog was written by Scott Cameron and Michael Atherton. 

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