1. What is LIBOR?
The London Interbank Offered Rate (LIBOR) has been used for over 30 years and is a measure of the average rate at which banks lend to each other on an unsecured, short term basis. It is calculated based on submissions from selected banks and is published in multiple currencies.
Other similar interbank offered rates include the Euro Overnight Index Average (EONIA) and the Euro Interbank Offered Rate (EURIBOR).
2. How is LIBOR used?
LIBOR is used widely across the world and is a major interest rate benchmark. According to the Bank of England, LIBOR underpins around $30tn of financial contracts including, derivatives, bonds and loans.
3. What is changing?
Owing to a number of factors, the use of LIBOR has been in decline in recent years. The FCA has stated that it will no longer continue to support LIBOR beyond 2021 and has advised businesses to prepare for LIBOR to cease to be available after this time.
4. What will replace LIBOR?
Sterling LIBOR is to be replaced by SONIA (Sterling Overnight Index Average). As the name suggests, this is an unsecured overnight rate calculated by reference to eligible transactions reported to the Bank of England.
Although all financial services contracts must be transitioned away from LIBOR, this does not necessarily mean that SONIA will replace Sterling LIBOR in all of those contracts. This is because each bank and financial institution needs to determine which alternative to LIBOR should be used in its products. This could be SONIA (compounded in arrears), or Term SONIA (which is likely to be available in one, three, six and 12-month tenors), or bank base rate.
5. When is LIBOR being retired?
The FCA has advised that it will not require banks to submit LIBOR quotations after 2021 and that banks and financial institutions using LIBOR must transition to alternative rates before this date.
6. When will we know for sure what will replace LIBOR?
All financial services companies and institutions using LIBOR are required to find alternatives before the end of 2021, so it is likely that more information will be available over the coming months.
7. Is this likely to be postponed due to the Covid-19 pandemic?
Despite the outbreak of the Covid-19 pandemic, the retirement of LIBOR has not been postponed and businesses must now start to prepare for the changes.
8. How will this affect my business?
The changes could impact any financing agreements you have, in addition to any commercial contracts which refer to LIBOR. One example of this could be the calculation of interest on late payment of rents, or other commercial contracts.
It’s advisable that you conduct a LIBOR audit to understand any exposure you may have. Once you have identified any exposures, you should assess any potential impacts by speaking with your financial services and/or commercial partners.
9. How will it impact BFS’s funding?
BFS uses LIBOR to calculate discount fees so we need to amend our funding agreements to reflect the transition away from LIBOR.
Alongside industry trade body, UK Finance we’re currently working on our transitional plans, However, aside from some changes to documentation, we envisage minimal impact on our clients’ funding facilities with BFS.
We will of course, be in touch with all of our clients over the coming months to detail any specific changes.
10. Where can I find further information?
Further information is available via the Bank of England and you can find out more about how the changes could impact businesses from UK Finance.
If you have any questions about how the changes could impact your facility with Bibby Financial Services, please contact your Relationship Manager.