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What is LIBOR?
Banks and other financial institutions use LIBOR (the London Interbank Offered Rate) as the benchmark to set interest rates for mortgages and corporate loans. The discontinuation of LIBOR represents a fundamental change within the banking and finance industry and may impact you as a borrower.
How is LIBOR used in my business?
Your business may use LIBOR in a number of places. Naturally, your financial facilities (corporate bank loans) should make clear whether LIBOR is used as an interest rate. However, it is also important to remember LIBOR can be found in other areas such as commercial contracts where it may be used in late payment clauses, standard interest rates and in corporate transactions where there are gross up provisions/price adjustment mechanisms in the share or asset purchase agreement (where payment is made after completion date). It may also be used in intra group accounts or in relation to pensions.
What does my business need to do?
Check if LIBOR is:
There may be third party consents required as well as the parties to the agreement. Practical difficulties with obtaining the necessary consents to any amendments can be avoided by starting the process in good time. You may also find that counter parties use this as an opportunity to renegotiate terms unrelated to LIBOR, which would add further time and complication to any amendment process.
The UK financial industry has put forward SONIA (the Sterling Overnight Index Average) as the preferred replacement of LIBOR. SONIA is an overnight rate set in arrears. It is not a like-for-like replacement as for example LIBOR is a forward-looking term rate, which means that the LIBOR rate for an interest period is set at the start of that period, with payment due at the end. As such, this provides certainty of funding costs to assist cash flow management. In contrast, SONIA is a backward-looking overnight rate.
As a result of such differences, the transition from LIBOR may have pricing, cash flow, accounting and operational implications for you and your business.
More information on SONIA and LIBOR transition in the UK is available from the RFR Working Group:
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