In recent months businesses of all sizes have been rightly focused on immediate adjustment required as a result of the Covid-19 crisis. For many this has included accessing external finance, particularly through the various government loan schemes - Bounce Back Loans, CBILs and CLBILs. As some normality resumes, now is the time for businesses to consider the impact of the end of LIBOR.

The transition away from LIBOR is not something which can be left for banks to resolve alone, nor is it one of the many broader regulatory changes which can or should be delayed given the disruption Covid-19 has posed and continues to pose. Regulators and the overarching group leading the transition away from LIBOR (the Risk-Free Rate Working Group) have  made clear that everyone should be prepared for LIBOR to be discontinued at the end of 2021. There is broad recognition of the need to ensure businesses and banks are using robust replacement rates for LIBOR as soon as practical. In order to be ready for this, everyone impacted by LIBOR needs to take action now and in the coming months, and this includes businesses themselves.

In a move called for by UK Finance and other groups, in the immediate phase of the Covid-19 disruption, the Risk-Free Rate Working Group (RFR WG) provided some flexibility on some of the key interim milestones leading up to the end of 2021. In April 2020, the RFR WG told lenders that they will now cease to offer loans linked to LIBOR by the end of Q1 2021. But from Q3 this year, any loans they offer based on LIBOR will need to contain a mechanism to switch to an alternative rate, including SONIA, ahead of 2021. Understanding and engaging with this is critical for businesses themselves, not just lenders. 

For corporates, the new mechanism means two things. Firstly, they will start being offered loans or other facilities based on rates other than LIBOR as early as this year. In some cases, this has already begun and will only accelerate. The simplest way to not have to worry about what happens to a LIBOR-linked loan is to use alternative rates as they become available, such as SONIA. Secondly, for those borrowing on a LIBOR basis, loans will generally contain legal language which sets out a route to ensure the facility can transition away from LIBOR before the end of 2021. This could be achieved through a contractual mechanism to convert at a future date, or at least an agreement on a process to revisit the contract next year. This goes beyond a regular ?fallback? provision whereby the rate changes at the point of LIBOR cessation. The more that is agreed up front in terms of setting out how a 'switch? will occur and to what rate, the less both lenders and borrowers will need to do in the coming months.

Agreements which don't foresee LIBOR ending are now a thing of the past, and understanding the conversion mechanism included in contracts and making sure that it works for borrowers is critical.

If businesses have not done so already, now is a good time (given the timelines) for them to consider the implications of transition more broadly.  Businesses are likely to use LIBOR in a number of places. The most natural place to check first is financial borrowing facilities which should make clear what rate is being referenced. LIBOR also can also be found in other areas such as intra-group accounts (including transfer pricing documentation), commercial contracts, internal financial analysis, pension funds, reporting etc. Many of the implications can only be understood and assessed by businesses themselves.

Regardless of the level of familiarity with the LIBOR transition pre-Covid-19, now is the time to become familiar with what it means.  Businesses may will need to make decisions about what it means for their financing in the coming months. If in doubt, speaking with lenders is the simplest step. There is a range of material available to prepare for these conversations, including our guide for businesses. Trade associations and accountants are also useful sources of information.

The end of LIBOR is approaching fast and banks are only one affected group. Ensuring that business customers of all sizes now recognise the impacts they are facing and the steps they need to take is critical for the coming months.