The discontinuation of LIBOR represents one of the most fundamental changes in the banking and finance industry in the last decade and may well impact on charities’ existing financing arrangements or certain financing arrangements that charities are looking to obtain.
In this briefing, we provide the background on the impending changes and flag the issues that charities should be thinking about at this stage.
What is LIBOR and who uses it?
LIBOR is one of the main interest rate benchmarks (along with base rate and fixed rate). It reflects the rate at which large banks lend unsecured funds to each other in multiple currencies and for various maturities. Panel banks submit the rate they pay, or would expect to pay, for borrowing from other banks and an average of those submissions is compiled and published daily. In line with market practice, a significant proportion of lenders lend on the basis of LIBOR and many other entities (including charitable organisations) have LIBOR linked loans or similar products outstanding.
LIBOR is not only used by banks. Other entities often use LIBOR as a reference rate for intragroup lending, in commercial contracts or derivative products, such as interest rate hedging/swaps.
What is happening?
Due to well publicised scandals regarding the manipulation of LIBOR, the FCA has made the decision to phase out the use of LIBOR across the banking and financial sector by the end of 2021. Most banks are well advanced in their preparations for this and may have already been in touch with their borrower clients about what they are doing.
The leading alternative to Sterling LIBOR is SONIA, an overnight sterling rate administered by the Bank of England and calculated using real data rather than subjective views. Banks should already (as of the end of September 2020) be including contractual provisions in all new and re-financed LIBOR-referencing products with a maturity date after the end of 2021 to enable conversion from LIBOR to SONIA or some other rate, such as base rate, and the industry anticipates that new LIBOR products and contracts will be actively phased out by the end of Q1 2021.
What should charities expect and what should you do?
LIBOR is a unique type of interest rate benchmark and the alternatives, including SONIA and base rate are very different and may produce a very different economic effect depending on how a switch to an alternative rate takes place, when it happens and which alternative rate is chosen. Tiny differences in this can have a huge impact when dealing with very large financial products.
For those of you seeking out new financing or refinancing any existing borrowing for your charities, you should expect to see new provisions referencing the alternative rate rather than the more familiar LIBOR. Some of these provisions can be lengthy and complex and you may wish to analyse the commercial (and legal) impact.
For those of you with existing LIBOR linked loans expiring after the end of 2021, you will be contacted during the course of the next 12 months by your lender who will need to move you to a different rate - possibly by amending the existing documents. You may be asked to consent to or enter into negotiations to amend the terms of the loan and should review any such request carefully.
You may wish to begin seeking professional advice on the impact of LIBOR discontinuation and the introduction of SONIA and other alternative rates, particularly as lenders get in touch with you in the coming months. Such advice might include consideration of the financing documentation that you might need to amend or put in place as a result of the LIBOR phase out, as well as considering how this might affect your obligations as a charity.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, December 2020