With all the upheaval and financial challenges businesses have faced in 2020, many may have overlooked the fast approaching cessation of LIBOR (The London Interbank Offered Rate). If you are a borrower with a LIBOR linked loan product, you will need to turn your attention to this topic over the coming months.
- LIBOR is a globally accepted benchmark interest rate which is utilised in a number of financial contracts, including loans, bonds and interest rate swaps
- Due to a number of issues with LIBOR, the Financial Conduct Authority (FCA) has announced that LIBOR should not be relied upon after the end of Q4 2021
- Both the FCA and the Bank of England (BoE) have indicated that there is no intention to delay this deadline as a result of Covid-19
- As a result, lenders will most likely be transitioning to alternative risk free rates
For sterling facilities, the recommended alternative is the Sterling Overnight Indexed Average (SONIA).
Relevant LIBOR timescales
By the end of 2020 – lenders should be in a position to offer non-LIBOR linked loan products. All new loan documentation entered into after this date (including those documenting the refinance of existing loan facilities) should include either (i) an alternative rate to LIBOR or (ii) mechanisms for conversion by the end of 2021.
- End of Q1 2021 – no new sterling LIBOR linked loan products with maturity dates extending beyond the end of 2021 should be issued
- Mid 2021 – lenders should have established formalised plans to amend all legacy contracts (with maturity dates extending beyond the end of 2021) to enable a transition to an alternative rate by the end of 2021
- End of 2021 – all should be prepared for LIBOR to cease.
Practical steps for borrowers
- Engage with your lenders on the cessation of LIBOR as early as possible. Useful information can be found on the websites of the FCA, BoE and Loan Market Authority (LMA)
- Take advice from your relevant advisors to assess the likely impact the cessation of LIBOR may have and to establish a plan for dealing with the transition. There will almost certainly be financial implications
- Engage with your lender(s) to commence the process of amending affected contracts to include conversion mechanisms if needed.
We anticipate that many of our borrower clients will need support over the next 12 months preparing for this transition. To that end we have partnered with Vivadum Ltd to host a webinar on 8 December 2020 to provide you with the information needed to navigate the transition. If you are interested in joining our free webinar, further details and booking information can be found here.