The LIBOR benchmark interest rate is ending – what does this mean for housing associations?

UK Finance detail what steps housing associations should be taking now to ensure they are ready for the end of LIBOR.

The past year has thrown us many challenges and changes for business, and the path ahead is not yet clear. If there is one thing you can be certain of for 2021, however, it’s the end of the London Interbank Offered Rate (LIBOR) in the sterling market.

As you probably know, LIBOR is a series of benchmark reference rates used for calculating interest rates for financial products. Public authorities globally have announced that LIBOR is no longer sustainable and the market should move to robust alternative rates.

In the UK, the Bank of England and the Financial Conduct Authority (FCA) have set out the need for this transition, and from April 2021 lenders will no longer be able to offer new loans linked to LIBOR. Any existing LIBOR based loans will need to be switched by 31 December 2021.

The National Housing Federation estimate that in the last 30 years around one third of borrowing by housing associations nationally has been linked to LIBOR, and so this change is likely to have an impact on many associations’ borrowing arrangements.

It is not just loans; LIBOR can also be found in leasing and servicing contracts, commercial contracts, discount rates used in valuations, and company pension schemes.

To help prepare for this change, a new simple introductory guide from UK Finance and the CBI, ACT, ICAEW and LMA, recommends that businesses review LIBOR mentions (in both products and accounting systems), assess the implications different rates will have, and plan on how to transition with minimum impact. Lenders will be in touch with their clients, if they haven’t already, to discuss plans for transitions so being familiar with exposure and the alternative rates will make these conversations easier.

In terms of which rates to choose, an outline of how suitable different replacement rates may be relative to different borrower and product types has been published by the Working Group for Sterling Risk Free Reference Rates. The Group, of which the Bank of England are ex-officio members, are leading the transition in the UK. You can read the Group’s findings here.

For many associations, LIBOR is likely to be replaced by the Sterling Overnight Index Average (SONIA). SONIA works in a number of different ways to LIBOR, including being backward looking and quoted overnight on actual transactions. Alternative rates such as Bank of England Bank Rate (or ‘Base Rate’) may also be offered and may be more appropriate where simplicity or payment certainty are needed. These alternatives may vary by bank within the framework set out by the national Working Group. 

As to any potential change to the amount or terms, the FCA has made it clear that: “LIBOR discontinuation should not be used to move customers with continuing contracts to replacement rates that are expected to be higher than what LIBOR would have been, or otherwise introduce inferior terms.”

For now, the clock is ticking, and the move to safer, more transparent interest rates for businesses has started. Be prepared, put LIBOR on your list of priorities for 2021.

For more information please visit the National Housing Federation’s webpage on LIBOR transition or in addition to its introductory guide, please also see UK Finance’s detailed guide on the discontinuation of LIBOR.