In its paper of 16 January 2020 on The use cases of benchmark rates: compounded in arrears, term rate and further alternatives, the Bank of England’s Working Group on Sterling Risk-Free Reference Rates (RFRWG) identified, among other things, that it had considered whether SONIA compounded in arrears would be appropriate to replace LIBOR as the benchmark for use in project finance transactions. The RFRWG concluded that it would be, due to the sophistication of corporate borrowers, able to understand the benefits, risks and potential costs associated with the rate and the ability to adapt systems and procedures over time.  The prevalence of hedging was also another reason, necessitating alignment between project finance loan and derivative products.  The derivatives market has been shifting from LIBOR to SONIA for some time, with further expected movement in 2020.  In fact, as the paper sets out, the Financial Conduct Authority and the Bank of England have encouraged market makers to change the market convention for sterling interest rate swaps from LIBOR to SONIA in Q1 2020.  

The paper flagged that the RFRWG has established the Sub-group Benchmark Transition issues in Syndicated Loan Markets and the Loans Enabler Task Force to address the remaining barriers to transition in loan markets.  The sub-group has been tasked with addressing “additional considerations” for project finance transactions, which we expect to cover:

  • the long tenors of project finance loans;
  • the need for cost certainty in thinly-capitalised structures;
  • the cross-border nature of many transactions;
  • linked interest rate and other hedging; and
  • complex documentation, including project documents with varied and numerous third parties.