LIBOR to be discontinued in 2021.

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.

Alternatives interest arrangements

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.

Where can you find more information?

More information on SONIA and LIBOR transition in the UK is available from the RFR Working Group:

• Bank of England – Transition to sterling risk-free rates from Libor
• Bank of England – SONIA interest rate benchmark