Availability and Use of RFR Term Rates
In January 2020, the Bank of England Working Group on Sterling Risk-Free Rates (UK RFR WG) set up a Term Rate Use Case Task Force (the “Task Force”) to provide guidance on the need for the potential usage of Term SONIA Reference Rates. Post their analysis, the Task Force concluded that the use for SONIA compounded in arrears was operationally achievable for 90% by value of the Sterling Libor loan market sampled and that the remaining 10% by total loan value would likely require alternative rates.
These alternative rates could be fixed rates, the Bank of England Bank Rate or a SONIA term rate (if and when available). To assess the necessity of the usage of SONIA term rates, the Task Force laid out the following criteria:
- Structure and characteristics of the product; and
- Operational capability and the sophistication of the borrower or end-user.
The findings of the Task Force acknowledged the need for term rates or equivalents for 3 product classes: (1) Trade & Working Capital Products (including discounting/letters of credit, supply chain finance, etc.); (2) Export Finance & Lending in Emerging Markets; and (3) Islamic Finance. (Source: BoE Use Cases of Benchmark Rates: Compounded in Arrears, Term Rate and Further Alternatives)
Please see the conclusion of the findings of the Task Force in the table below:
Table 3. Task Force Conclusions on their Study of Use Cases for SONIA
||Recommended Rate (By UK RFR WG)
|Bonds / Loans / Trade
||Large Corporate / Leverage
||Sponsor / Leverage / Large Corporate
||Corporate deals / Sponsor lead acquisitions / recapitalizations with a deal size £25m
||Compounded in Arrears
|Loans / Trade
||Mid to Large Corporate / Specialist Finance
||Banks, insurance providers, asset managers, funds, hedge funds and broker dealers
|Mid to Large Corporates
||Annualized revenue >£25m and deal size £10m - £25m
||Lending to Social Housing firms
|Education / Local Authority
||Lending to schools / Higher Education / Local Authorities
||Financing a major independent capital investment
||Commercial Real Estate firms
|Export Finance / Emerging Market
||Funding to outsized capital expenditure with export finance guarantee
||Term / Alternative Rate
||Lending to emerging markets
|Mid Corporate / Private Banking & Retail
||Annualized revenue >£6.5m and <£25m. Excludes specialized lending
|Small, Micro Size Enterprise
||Annualized revenue <£6.5m
|Wealth / Private Bank
||Offers Banking and affluent clients, families and fiduciaries based in the UK, offshore or emerging markets
||Trade & Working Capital
||Trade & Working Capital
||All Trade & Working Capital products including discounting / Letters of credit, supply chain finance, etc.
||Islamic facilities forbid interest payments on loans
As of March 2021, regulator-endorsed Term RFRs are not yet available. For SONIA, the administrator for the term rates has not yet been finalised. For SOFR, there is no certainty on the status of the availability at the associated timelines for Term SOFR.
Key Considerations when Opting for RFR facilities
You should consider the potential impacts of any future changes to benchmark rates for products and agreements between you and FAB. These may include amendments to the calculation of amounts payable, which may change the rate of interest that you pay or amounts that might be paid to you.
In particular, we suggest that you:
- Ensure you understand the differences between LIBOR and the RFRs, including the key differences pertaining to the interest calculation methodologies.
- Familiarize yourself with the different conventions and methodologies pertaining to the usage of RFRs for both new and transitioning facilities. These may include interest rate compounding methodologies, CAS calculation methodologies and other loan conventions. You may refer to the frequently asked questions page to get more information on the resources that have been provided by various Regulators and Supervisory bodies in this regard.
- Review operational readiness, hedging considerations and any accounting changes.
- Ensure you understand the impact of agreeing to the terms of your transitioning LIBOR facility or a new RFR linked facility.
- Comprehensively assess your LIBOR referencing contracts/exposure and seek professional advice if required to prepare for the transition.
We recommend that you keep up to date with the latest developments in relation to the changes and the potential alternative benchmark rates that may be relevant to you. Nothing on this webpage or in our communications with you constitutes investment or other advice unless expressly agreed in writing between us. You should consider whether you need to obtain independent advice (legal, tax, financial, accounting, or other advice) on the possible impact of the LIBOR reforms on the financial products and services you use or may use in the future.
This communication does not deal with every important topic pertaining to LIBOR transition. It is not designed to provide legal, financial or other advice. By reviewing this communication, you agree that First Abu Dhabi Bank is not acting as your advisor and is not providing advice or making any recommendation regarding LIBOR transition; it being understood that any information or explanations pertaining to LIBOR transition provided via this communication shall not be considered advice or a recommendation. Each recipient of this communication will make its own independent decisions regarding LIBOR transition, based upon its own judgement and upon advice from such advisors as it has deemed necessary. This communication should be read in conjunction with IBOR Transition.