Corporate treasurers and debt advisory firms have voiced their concerns since the end of last year that the move away from Libor for their loan facilities was too sluggish, with little consensus among the banks that are meant to be fixing the problem before the well-telegraphed end of 2021 deadline.
These concerns were redoubled this week, with claims of banks being “all over the place” in their approach and leaving corporates frustrated at the lack of progress.
Bankers in the various risk-free rate working groups will disagree with this assessment, and many have been working hard to try to find a solution. But that only goes to highlight the communication breakdown between banks and their clients that is causing so much frustration.
Thankfully for all involved, the issue is pressing but not imminent as far as corporates are concerned. The Loan Market Association has provided an update to its documents, allowing for the benchmark rate to be changed after 2021. Corporate borrowers are having to accept on a trust basis that it will work out fairly for them when the time comes.
This has given banks some breathing space to come up with an answer, but a growing number of corporates and third parties working for treasury departments are becoming uneasy with how opaque the procedure is and how long it is taking.
Some advisers have told their corporate clients to prepare for their syndicated facilities to cost more — although estimations of by how much vary wildly. This seems to be about the best guess the advisers can give with what they think is the limited information banks have fed them.
With Brexit looming, treasurers have enough to contend with without prolonged stress over what an increasing number of them consider a technical detail in their loan documentation that banks should have long been able to sort out among themselves.
The loan market has not showered itself in glory in the move away from Libor. It tries to pitch itself as a serious contender against bonds when it comes to shorter dated borrowing, but the bond market has taken the switch to Sonia in its stride.
Two things are now essential. First, any loans that are moved from Libor to Sonia using the existing LMA documentation need to be fair and competitive for the borrowers that have been forced to put their trust in the system working. Any attempt by lenders to squeeze basis points out of deals during a transition will lead to huge distrust from corporate borrowers. Better for banks to take a slight margin hit, considering swathes of borrowers see this as a bank problem.
Second, whatever banks do eventually come up with, it has to work pretty much perfectly from the get-go. Talks have taken so long that there just won’t be time for any alternative.