Life after LIBOR: is your business prepared?
16 September: So much will change as a result of the move away from LIBOR. With regulators holding to their pre-COVID target date for discontinuation, it’s now time for businesses to move transition plans up the list of things to consider, writes Daniel Cichocki, Director of LIBOR Transition and Commercial Finance, UK Finance.
Since the outbreak of COVID-19, the highest priority for most businesses has been how to navigate this unprecedented disruption. The upcoming unavailability of the benchmark LIBOR rate has comparably seemed a distant concern.
However, the fact remains that no one can rely on LIBOR being available post-2021. The number of transactions in the underlying market LIBOR seeks to measure have reduced, with its volatility during the COVID-19 market disruption serving to further evidence its potential vulnerability.
This will affect a significant proportion of British businesses in some way and given the timelines for transition now left, the implications need to be considered. Firstly, finding the true extent of a business’ LIBOR exposure is no small feat, with LIBOR found in a range of places including lending facilities, 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 the expected LIBOR cessation.
New finance businesses seeking to raise could also be affected. From Q4 of this year, lenders will be required to include alternative rate products in their offerings and subsequently, businesses will find increasingly fewer products offered linked to LIBOR. Any new LIBOR linked loans from this point will need to contain an agreement to switch to an alternative rate ahead of end-2021.
There is much to consider before the end of 2021 and if a business is not yet familiar with LIBOR transition, Q4 2020 is the critical time to start understanding the impacts. On Friday 18 September the RFR Working Group, which is coordinating the transition in the UK, will be hosting a webinar with the ACT and CBI focusing on topics including transition implications for loans, active conversion of contracts and practical next steps from corporates who have already begun their transition.
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.
Daniel Cichocki is Director of LIBOR Transition and Commercial Finance, UK Finance
Further reading from ICAEW: LIBOR transition – what you need to know.