Will COVID-19 impact UK LIBOR transition?

The LIBOR transition is a huge undertaking for banks, requiring transition teams across many areas of business – front, middle and back office. Teams are required not only to review and analyse the thousands of transactions potentially affected by transition, but also to participate in market task forces, drive internal strategy forward, meet the operational challenges a shift to new rates will pose and to meet governance obligations relating to customer awareness. Some of these tasks will be outsourced to advisory and law firms, also requiring large teams to work on transition. To some extent, the review of transactions will be assisted by AI and machine-learning platforms, but human input and interaction is still key.

The Bank of England and the Financial Conduct Authority have targeted the end of Q3 2020 as the cut off for new Sterling LIBOR-based loan transactions. That is only months away. The bilateral market is slowly moving towards using new risk-free rates (compounded in arrears SONIA/SOFR) with the syndicated market further behind. We have “exposure drafts” from the Loan Market Association but these have areas of uncertainly, for example, around which conventions should be used; do we still need break costs and cost of funds drafting? Is a lag or a lock-out structure more appropriate? A lot of work still has to be done by a lot of people.

COVID-19 will have an impact on banks’ ability to undertake the work necessary to transition to the new rates – for new transactions, by the end of Q3 and for legacy transactions, by the end of 2021 – because staffing is almost certainly going to be affected by the outbreak, either though illness, isolation, social distancing or childcare responsibilities if schools close for a period. The BoE  Governor Mark Carney said on March 3, 2020 that the effectiveness of UK banks’ contingency plans to prevent their operations being hit by a pandemic is being put to the test given the coronavirus outbreak. He said that the BoE is in ‘daily, hourly’ contact with banks and other major financial institutions as they bring in their contingency plans, which include requiring staff to work at second sites or remotely.

Of course, it is “business as usual” so far as possible, so banks will continue with their LIBOR transition workstreams as best they can, but it remains to be seen what effect the outbreak will have on banks’ ability to meet the deadlines for transition.