In our last article on the topic of Libor, we discussed the phasing out of the interest rate benchmark during the course of 2020 and 2021. This month we discuss what steps lenders and borrowers may wish to take to reduce Libor exposure.
1. Establish where your LIBOR exposures are:
You may want to check any loans, bonds, mortgages, deposit facilities, floating rates and derivatives that you are a party to, as these may refer to LIBOR. It is important to identify your exposure to LIBOR and to understand what will happen to these contracts if LIBOR is no longer available.
2. Check your contract terms:
You contract terms may include provisions for where LIBOR is temporarily unavailable. However, these terms may not cover a situation in which LIBOR is permanently unavailable. You should review these terms and ensure that they are amended if necessary.
3. Familiarise yourself with SONIA and what this means for you/ your business:
The Bank of England has proposed to use the Sterling Overnight Index Average (SONIA) as an alternative to LIBOR in the short-term. SONIA reflects the average interest rates that banks pay to borrow sterling overnight from other financial institutions. As SONIA relies on existing trade data, it should theoretically be harder to manipulate than LIBOR.
SONIA is not a like-for-like replacement for LIBOR and cannot be directly substituted into existing contacts. It is therefore likely that you/ your business will need to make changes in order to use SONIA.
4. Speak to your bank, consult with a financial services professional, and speak to us:
Discuss the upcoming changes with your bank, and ask them what changes they are planning to make and what this means for you/your business. When preparing for the transition, speak to financial professionals – and as always Fladgate are here to help.