The London Interbank Offered Rate (LIBOR), though still one of the world’s favourite numbers, will cease to be available from the end of 2021. The end of LIBOR will affect all users of the interest rate benchmark and both lenders and borrowers need to be prepared for this change.
This change was announced in July 2019 as several factors questioned the sustainability of LIBOR as a reference rate. These were, concerns around the manipulation of benchmarks, a decline in activity in the interbank market and banks’ subsequent reluctance to continue to submit quotes for the purpose of calculating LIBOR. The planned transition away from LIBOR (and other interbank offered rates) will be to alternative forms of reference rates known as near Risk-Free Rates (RFRs). The main RFR in the UK is the Sterling Overnight Index, known as SONIA.
This transition will constitute a fundamental change to the way banks and financial institutions operate. Progress towards using SONIA at the moment falls well short of widespread adoption of the new benchmark. Though the Covid-19 pandemic has affected this year in many ways, it has not affected the timing for the end of 2021 timing for the cessation of LIBOR.
We have seen that levels of preparedness for the transition, particularly among borrowers are very mixed and that the vast majority of corporates have not made progress towards transitioning away from LIBOR.
To prepare for the transition, commercial borrowers will need to identify their exposure to LIBOR, prepare a transition plan and implement this plan well before the end of 2021. To assist, the below questions will help get a business started:
Identifying areas of exposure is the key first step to addressing the transition, the next necessary step is to work with advisors to form a strategy to manage this exposure, determine the appropriate substitute rates and approach counterparties to negotiate appropriate amendments to existing contracts.