SONIA benchmark boosted by Deutsche Bank real estate loan

Writing a loan referencing SONIA could help drive industry consensus on a replacement for LIBOR.

Deutsche Bank’s commercial real estate arm has arranged its first loan using the SONIA benchmark as an alternative to LIBOR.

The move could provide momentum for the SONIA benchmark to become the lending industry’s standard reference rate when LIBOR is phased out from 2022.

SONIA is the Sterling Over Night Index Average and will be used in a deal between Deutsche Bank’s European Commercial Real Estate Group and Kennedy Wilson Europe Real Estate II to refinance Ditton Park in west London. The loan references a compound average of SONIA set in arrears with a five business day lag.

The two firms said it is not only their first use of SONIA but one of the first loans to reference and average of overnight SONIA in the whole market. It is understood a corporate loan was written referencing SONIA in July this year and some other commercial real estate projects have considered the benchmark though in the end did not write it into their documentation.

Earlier this year, PDI reported that the lack of an agreed replacement for LIBOR, which the UK’s regulator the Financial Conduct Authority has signalled will be phased out as soon as 1 January 2022, could cause major problems for private debt funds, which usually reference LIBOR as a floating rate within their loan documentation.

It is seen as unlikely that debt funds will look to change their documentation until there is a consensus in industry on which benchmark will replace LIBOR. As a major player in commercial real estate debt, Deutsche Bank’s use of SONIA provides the benchmark with significant backing to become the new reference rate of choice.