A year ago the loan market was adamant that it needed a forward-looking rate, and there are four benchmark administrators working on some form of Term SONIA Reference Rates (TSRR) right now, and some time in Q1 2020 these should be published “for observation” by potential users and then available for use in Q3. The RFR working group, in Thursday’s “Use Cases of Benchmark Rates: Compounded in Arrears, Term Rate and Further Alternatives” says usage of TSRR should be limited to essentially two cases:

  • Unsophisticated borrowers – “smaller corporate, wealth and retail clients for whom simplicity and/or payment certainty is a key factor” may want it, although they might also prefer fixed rate loans
  • Financing involving discounting of receivables

How many corporate treasurers will want to be seen as being simple and unsophisticated? As for payment certainty, will lenders be prepared to offer borrowers an estimate on day 1 of an interest period of the next required interest payment to the borrower (on day 91 or whatever) and agreeing that if, as it turns out (once the backwards-looking compounded SONIA calculation is done), the estimate is too high or too low, the principal amount is adjusted (i.e. capitalising the shortfall or treating the excess as a principal reduction), so that your borrower has absolute cashflow certainty, if they really can’t cope without it and don’t want a fixed rate loan?