LIBOR transition: For all clients with impacted products the time to act is now
We discuss how the end of sterling LIBOR in its current form will impact businesses in the UK and what they need to do to prepare.
The end of sterling LIBOR (London Interbank Offered Rate) in its current form at the end of 2021 represents a significant change for some business borrowers. A new survey by UK Finance has found that with less than six months to go, a quarter of businesses (25%) may be unsure if they have a loan or contract linked to LIBOR that could be affected.
LIBOR is the most common interest rate benchmark in the UK and, following a decision by public authorities, any existing contracts linked to LIBOR that continue after 2021 must be switched to robust alternative rates where possible in advance of the end of this year.
Whilst this transition to alternative rates does not affect all businesses, it will impact a significant number given how widely LIBOR is used, and it is important that any potentially impacted client understands how the change in interest rate benchmarks could impact their wider business.
New UK Finance resource
To help businesses understand the transition, the robust alternative rates and the way any new calculation could be made, UK Finance has launched a new SME LIBOR Transition Resource on its website which answers key questions, signposts businesses to all the information available to help, and urges impacted firms to act now.
As LIBOR is found in commercial loans, leasing and servicing contracts, discount rates used in valuations and company pension schemes, it is important businesses look at the bigger picture of all borrowing, timings and requirements and understand if and how this affects them. Though it is worth checking financial facilities first, LIBOR may also be present in other less obvious areas for example intra-group accounts and commercial contracts, such as in late payment clauses.
Businesses will need extra support
In the UK, the pace for transition has been set by a Working Group on ‘Sterling Risk-Free Reference Rates’, consisting of lenders, regulators, borrowers and trade associations. Banks and lenders are now increasing communications with all business customers, looking to transition as many contracts as possible before the end of September, in line with the milestone from the Working Group which is supported by the Financial Conduct Authority (FCA) and Bank of England.
Therefore, in the coming weeks and months, businesses are likely to need more support in understanding the different rates and the impact of a change in rate to their contracts. For many, this support will be from their accountants and advisors, who will be playing a crucial role in guiding clients through this.
An encouraging result from the UK Finance survey showed that of the businesses which knew they have a LIBOR linked product, 82% feel very or fairly confident they will be ready for the LIBOR transition on 31 December. Knowledge is key to confidence.
The important thing now is for any business which has a financial product that could be affected to check for LIBOR exposure, review the impact this might have, make a plan, and speak to their bank, lender or adviser if they have any questions. With less than six months to go, the time to act is now.
Find out more
For more information on LIBOR transition, UK Finance has also published an introductory guide for SMEs and a more detailed joint best practice resource with the Confederation of British Industry (CBI). The Working Group on Sterling Risk-Free Reference Rates has also produced a swathe of information for businesses.