Since the 1980s the London Interbank Offered Rate (LIBOR) has been used to calculate rates applicable to a range of financial products including loans, mortgages, bonds and financial contracts. But since the financial crisis of 2008 interbank borrowing simply doesn’t happen as often, making the index less reliable.
When will LIBOR end?
From the end of next year LIBOR, the most used benchmark for short-term rates, will be discontinued.
How does the end of LIBOR affect my contract?
The end of LIBOR will affect every LIBOR-indexed product and with LIBOR underpinning approximately USD300 trillion in financial products, the impact of this change will be enormous.
Companies should start the process of identifying contracts which refer to LIBOR and consider:
- Does the contract provide for an alternate to LIBOR?
- If so, will using an alternate rate mean the borrower will be facing a rate substantially higher or lower than LIBOR?
- Does the contract allow the lender to change the margin and period?
- If no alternate is provided, does the contract need to be amended?
- What are each party’s obligations if the contract is terminated?
What will replace LIBOR?
In the UK, LIBOR will be replaced by the Sterling Overnight Indexed Average (SONIA), an interest rate administered by the Bank of England. This is not a like for like replacement, unlike LIBOR SONIA is a backward-looking rate, measured each day over the interest period rather than being fixed in advance. This key difference between LIBOR and SONIA will ultimately affect a party’s financial exposure.
Will Covid-19 delay the LIBOR transition?
The Financial Conduct Authority has confirmed that the deadline had not changed and that firms cannot rely on LIBOR being published after the end of 2021 despite the pandemic.
This article is provided by Burlingtons for general information only. It is not intended to be and cannot be relied upon as legal advice or otherwise. If you would like to discuss any of the matters covered in this article, please contact Lydia Mills or write to us using the contact form below.