LIBOR update – what borrowers need to know

LIBOR (the London Inter-bank Offered Rate) will cease to be available from the end of 2021. Following on from our last update in June 2019, here we briefly summarise some of the recent developments and suggest some steps for borrowers.


The discontinuation of LIBOR represents a fundamental change to the way interest is calculated within the finance market, with discussion focussing on finding an alternative “reference rate” to replace it. The Financial Conduct Authority (FCA) recently raised concerns that liquidity in LIBOR-linked products is likely to decline, and there may not be sufficient LIBOR submissions for the rate to remain representative of the underlying market even before LIBOR officially ends.

At the time of writing, it is uncertain where the market will settle on a replacement rate. The most likely replacement for LIBOR in the UK is SONIA (Sterling Overnight Indexed Average). The main issue with SONIA is that, as an overnight rate, it cannot currently be used as a direct replacement for forward-looking LIBOR term rates which often set the interest basis for three or more months in advance.

Daily SONIA quotations over a reference period can be compounded and used as a backward-looking rate, but this could cause issues with budgeting as the interest rate will only be known in arrears. It is also worth bearing in mind that whilst lenders will have a general duty to treat customers fairly, it can be their discretion as to which rate to replace LIBOR with.

Work remains ongoing in the market to reach a consensus on the most appropriate replacement rate for LIBOR, but in the meantime, the regulators expect lenders and borrowers to start taking steps to future-proof current and new loan documentation against the LIBOR discontinuance. And of course, discussions are also ongoing in other countries to find a replacement rate for other currencies, some more advanced in their conclusions than others.

Replacing LIBOR in existing contracts

Lenders will need to agree with their borrower customers to amend LIBOR-linked contracts which extend beyond 2021 and do not currently provide for a successor rate.
Amendments to contracts may include:

  1. adding fall-back provisions to existing contracts such as providing for the lender and borrower to agree an alternative rate, or giving the lender the power to dictate the replacement rate; and/or
  2. referencing an alternative rate, such as SONIA, known as “hardwiring” an alternative fall-back rate.

Replacing LIBOR in new contracts

Lenders have been advised by the regulatory bodies that, for products maturing after the end of 2021, these should reference risk-free and other alternative rates, rather than LIBOR, when first signed. The target date to phase out new LIBOR-linked contracts expiring post-2021 is the end of Q3 2020.

Referencing alternative rates goes further than including fall-back provisions into new loan agreements. Whilst fall-back provisions have become increasingly common, the regulators’ view is that these mitigate the risk that the products cease to meet customers’ needs, but merely kick it down the road and do not negate it completely.

Which alternative rate to use?

The Working Group on Sterling Risk-Free Reference Rates (RFRWG), an industry working group supported by the Bank of England (BoE) and the FCA, has been assessing which alternative rates would be most appropriate for borrowers. It believes that SONIA, compounded in arrears, will become the industry standard in most bilateral and syndicated loan markets.

The RFRWG found that use of SONIA compounded in arrears would be appropriate for approximately 90% of the LIBOR loan market (by value rather than by number of borrowers), representing larger, more sophisticated borrowers. The remaining 10%, which mainly consists of lower value loans to a wide range of smaller borrowers, would likely require alternative rates, such as fixed rates, the BoE’s bank rate, or a SONIA term rate which still needs to be developed.

Next steps for borrowers

We suggest borrowers consider the implications of LIBOR discontinuation sooner rather than later. Some practical steps include:

  • reviewing existing LIBOR-linked loans to identify if fall-back provisions (if any) specify what happens when LIBOR is discontinued;
  • making an inventory of LIBOR-linked products, including how long after LIBOR disappears the loan still has to run;
  • consulting with their lenders to discuss options, or to find out what the lender is doing or proposing;
  • reviewing alternative rates and their suitability for the underlying business – it should be remembered that SONIA is only one option of several; and
  • considering accounting and tax systems to ensure they are not affected by LIBOR discontinuance.


This information is for general information purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given. Please contact us for specific advice on your circumstances. © Shoosmiths LLP 2024.



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