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The end of LIBOR- Not just for Treasury Teams?


The publication of LIBOR, or the London Interbank Offered Rate, will cease on 31 December 2021 – to be replaced by alternative “risk-free rates” (in the UK, probably SONIA, or the Sterling Overnight Index Average). For several decades, LIBOR has been used globally to price and calculate interest charged on borrowings – including derivatives, bonds and loans. A significant proportion of UK borrowers of all sizes have existing, or “legacy”, LIBOR debt.

The Bank of England has, through its Working Group on Sterling Risk-Free Rates, been urging the UK market to prepare for LIBOR’s imminent demise. In particular:

  • no new LIBOR debt should have been issued since 31 March 2021; and
  • all legacy LIBOR loans should be transitioned (i.e. amended) to a risk-free-rate, probably SONIA, by the end of September, ready for LIBOR cessation at the end of the year.

There is clearly work to be done – commercially, operationally and legally – to ensure a smooth transition. All treasury teams should be in active engagement with their lenders and advisors to ensure that all relevant existing loan documentation is updated appropriately.

But what about other teams, and other documents? LIBOR references in contracts that are not loans will be less common, but are not unheard of. Commercial or construction contracts may, for instance, use LIBOR rates to calculate default interest. By way of example, the rate of interest incurred on overdue amounts could be expressed as “LIBOR + 2%”. Once LIBOR ceases to be published, there would be no longer be a base reference to calculate any default interest.

To minimise future uncertainty, parties should consider updating such contracts to strip out LIBOR references – particularly if the contract is expected to be contentious or a claim is anticipated. If the document is being amended anyway then taking out LIBOR references at the same time would be sensible. Going forward, it seems sensible to ask teams managing a contractual variation to check for, and vary appropriately, any LIBOR references in that contract.

As to what that amendment should be: it will depend on the circumstances, and we would suggest talking to your legal advisors. For default interest, replacing LIBOR references with the Bank of England’s Base Rate might well be appropriate.

LIBOR references should also not be included in any new contractual arrangements that will continue into 2022.

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