Lloyds and Riverside rehitch revolving loan to Sonia

£100m Sonia facility overcame late operational hurdles to be among the first done since the onset of coronavirus

Riverside builds and manages social housing in the UK

UK bank Lloyds has switched a corporate client to Sonia-linked revolving credit facilities, overcoming interest rate volatility and remote working challenges to complete one of the first post-coronavirus deals of its kind.

While the virus slowed progress of the deal at the later stages, bankers say the trade offers little indication of whether the sterling loan market can shift to the overnight rate before a regulator-set deadline later this year.

The new £100 million ($125 million) five-year facility for UK social housing provider Riverside is linked to a backward-looking compounded Sonia rate. The facility, signed last week, was a renewal of a previous Libor-linked bilateral credit line.

Talks began in December, but the onset of the pandemic, which has forced many financial industry staff to work from home or at disaster recovery sites, slowed discussions as the deal neared completion.

“Most of us nowadays have remote capabilities and are well-placed to work from home. It’s physical things like getting signatures for documents that have become more of a challenge but ones that we are able to resolve,” says Richard Meddelton, corporate and institutional coverage lead for Lloyds Banking Group’s Ibor programme.

The deal took place amid wider market turmoil and changes in the spread between Sonia and sterling Libor. Three-month Libor was at 0.76% on February 3 before the crisis took hold, and three-month backward-looking compounded Sonia was at 0.71%, according to NatWest Markets’ realised rate tool, a difference of just five basis points.

But with the Bank of England cutting rates to 0.1% on March 19, three-month Libor slipped to 0.66% on April 7, whereas three-month realised Sonia fell to 0.53% – a difference of 13bp.

The widening basis echoed concerns in the US about pegging revolving credit facilities to the secured overnight financing rate (SOFR), which is linked to US Treasuries. Lenders feared that a flight-to-quality in a stress scenario would push the rate down at a time when bank borrowing costs in the unsecured market have risen.

“If you look at the history, there’s times when there has been an oscillation of rates. However, the client saw stability through Sonia, and it brought less volatility than we’ve seen elsewhere, especially in the last two months,” says Meddelton.

Last November, the UK Financial Conduct Authority said it was expecting new sterling loans to cease referencing Libor by the third quarter of 2020. That target remains in place.

And at the end of March, the Bank of England, the FCA, and the industry working group on sterling risk-free rates reiterated that markets should not expect Libor to be published after 2021 despite the disruption brought about by Covid-19.

Meddelton says it’s unclear whether the ongoing situation will affect banks’ ability to hit that target date.

“I think we need to take stock after Covid-19 and see what the impact has been. In a project of this size, the pandemic doesn’t change things immediately, but we’ll need to understand where all our customers are after Covid-19 which will drive our next steps as well as that of central authorities,” he says.

Meddelton says clients are increasingly aware of the deadline and the need to explore Sonia as an option, noting that this week the bank has already received two new requests for Sonia-based facilities. But he admits some firms looking to renew their revolving facilities might take the easy route and stick with Libor, given the shift in priorities due to the virus.

“It’s a case of balancing short-term versus long-term need,” Meddelton says. “It’s likely that the Libor transition will be back on the agenda when current uncertainty has been at least somewhat addressed. For example, many of the businesses we work with plan five-year funding cycles in which the old Libor linkage will no longer apply.”

March also saw British American Tobacco sign a new £6 billion multi-currency revolving credit facility linked to Sonia and SOFR with 21 banks. Meddelton says there are other deals in the pipeline, with interest coming from large corporates.

“The trend we’re seeing is that large corporates are already paying greater attention to Sonia. It’s something that will build momentum over time, particularly once current emergency measures have been reduced. As you might expect, some conversations have had to be put on hold as companies look to get additional liquidity in place as quickly as possible,” he says.

Editing by Alex Krohn