The end of LIBOR: Time for businesses to prepare for transition

Since the outbreak of Covid-19, the highest priority for most UK businesses has been on navigating the unprecedented disruption, with focus centred on immediate cashflow needs. The banking and financial services industry has been working alongside these businesses throughout, with over £50 billion issued under the government-backed lending schemes alone. The upcoming unavailability of the LIBOR benchmark rates has seemed a distant concern in comparison, perhaps even something for others to worry about. 

However the fact remains that neither lenders nor customers can rely on LIBOR being available post-2021, something which has been repeatedly made clear by a working group leading this work in the UK. The number of transactions in the underlying market that LIBOR seeks to measure has reduced, while its volatile performance during the Covid-19 market disruption served to highlight further evidence of its potential vulnerability. There is therefore no question of this phasing out being ignored.

This will affect a significant proportion of British businesses in some way. Although it is understood there have been more immediate concerns to contend with, given the timelines now left, businesses need to make time to consider the implications for them. As Flora Hamilton, Director, Financial Services at the Confederation of British Industry (CBI) is reminding businesses: ?Don't let LIBOR transition fall off your radar as you deal with the challenges of coronavirus. The Bank of England and the Financial Conduct Authority (FCA) are committed to phasing out LIBOR before the end of 2021, so make sure you understand the milestones and challenges ahead so your business is prepared.? The impact is not only on existing borrowing which businesses might have, but also new finance they may be seeking to raise.

From Q4 of this year lenders will be required to include alternative rate products in their offerings and subsequently businesses will find fewer products offered linked to LIBOR and a corresponding much greater use of replacement rates such as SONIA in the sterling market, or indeed other rates such as Bank Rate (base rate) for some. Any new LIBOR-linked loans from this point will need to contain an agreement around how to switch to an alternative rate ahead of the end of 2021. Those with existing lending linked to LIBOR will need to work through the ?how and when? of transitioning, which banks and lenders should be reaching out to coordinate.

Banks and lenders know that this can seem complicated, especially with so much going on. But equally it is in everyone's interest that this is not left to the last minute or left at the bottom of the 'to think about? pile.  UK Finance and the CBI are working closely together to help businesses in the UK prepare for this move away from LIBOR and today we are publishing a joint LIBOR Transition Guide for Business Customers. This guide sets out the key concepts that businesses should be aware of before pursuing a smooth transition. Examples include the rates that may be an appropriate replacement for LIBOR for your lending facilities, the milestones set out by the market for completing transition and what these in turn mean for customers.

There is much that businesses need to consider before the end of 2021. Finding the true extent of a business's LIBOR exposure is no small feat and whilst taking stock of  lending facilities is a good place to start, LIBOR can often also be found elsewhere in intra-group accounts, commercial contracts, and internal financial analysis. Once identified, there is then the question of if and how these will need to be moved onto a replacement rate ahead of expected LIBOR cessation.

The guide also outlines a potential plan of action that corporates can implement as a starting point to identify the steps that could be taken to know what you can expect to discuss with your finance provider, and what needs to happen before these conversations can take place.

If any UK business is not yet familiar with LIBOR transition, Q4 of 2020 is the critical time to start considering the impacts for them. This guide is just the beginning of an increased amount of resources that will be made available in the coming months to help businesses familiarise themselves with what LIBOR transition means for them and how to act to ensure it causes as little disruption as possible.

On Friday 18 September the RFR (Risk-Free Rate) Working Group, the group co-ordinating a market-led transition in the UK, will be hosting a webinar in conjunction with the Association of Corporate Treasurers (ACT) and the CBI. This webinar will focus on topics such as the implication that transition may have for loans, the active conversion of existing contracts, and practical next steps. It will also be an opportunity to hear from corporates who have already successfully begun their transition away from LIBOR. Interested parties can register here, and more details regarding speakers and the event's agenda will be available on the RFR Working Group's Linkedin page.

As so much will change as a result of transition away from LIBOR in terms of new lending and existing lending, it is time to move the cessation of LIBOR up the list of things to consider. 

UK Finance and BDO are running a workshop, Liberating Accounting Relief for LIBOR, on 27 November 2020 which should be of value to members. Find more details here.


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