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?
- Identify your LIBOR exposure.
Review borrowings, commercial contracts and group accounts, pension arrangements and corporate documents across your business to identify where LIBOR is referenced.
- Put in place a plan that covers the discontinuation of LIBOR for each document identified where it is referenced.
Check if LIBOR is:
- referenced in a short-term agreement – for instance a loan which matures before the proposed discontinuance of LIBOR at the end of 2021, and therefore no action may be required.
- referenced in a loan facility or asset financing which is likely to run beyond the end of 2021. Many such loan facilities will deal with what happens in the event of LIBOR not being available. However, in many cases such clauses only envisage a short-term cessation of the rate and may need to be examined with your lender. Alternatively, you may be contacted by your lender to provide you both with clarity on what happens following the cessation of LIBOR. This may be the introduction of a new rate such as SONIA (see below).
- contained in other agreements you would ideally commence arrangements to have these agreements varied or new updated agreements entered into.
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.
- Actively reduce reliance on LIBOR for documents that will extend beyond the proposed cut off. This may mean referencing new rates.
- Consider seeking advice from your financial and legal advisers.
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
Where can you find more information?
More information on SONIA and LIBOR transition in the UK is available from the RFR Working Group: