LIBOR transition: five things all businesses need to do now
LIBOR will no longer be allowed as a reference rate in loan agreements or derivatives from 2021 and its use is rapidly diminishing. Over the next year banks must contact businesses with loans that charge interest based on LIBOR to agree what their new rate will be.
Steve Farrell, Partner at Deloitte notes that “…companies need to look carefully at their loans, derivatives and upcoming financing needs. The way LIBOR linked interest rates have been calculated previously may no longer apply, and your financing charges may well vary as a result. Therefore, be prepared when you’re talking to your bank.”
For practitioners and business advisers, don’t forget to ask your clients about their LIBOR related loans. Not all businesses are aware of the upcoming transition, or the impact it may have on their finance charges.
- Take stock of all your borrowing, look at your loan agreements and identify where you have loans which reference LIBOR.
- Consider what the position is at the end of 2021 and which loans or derivatives will be affected.
- If loan agreements extend beyond 2021, note what fallback provisions are in your contract. The fall back provision will affect your interest payment. What they are intended to cover, and how they work may differ by bank, product, and facility (ie fixed term loan vs overdraft). This is especially important for companies with longer term debt and hedging needs.
- Consider alternatives. Bank facilities are one of many ways of financing your business whether it be for growth or cash flow management. If you’re advising businesses, ensure you’re aware of the different financing possibilities available.
- Talk to your bank, whether you have a loan or not. If you may be taking out finance over the next year or so, don’t assume it will be at the same rate it would be today.