The end of LIBOR will mean some big changes for businesses. The end date of December 2021 may seem a long way off, but companies need to start preparing now for the changes to their financing and accounting, along with other potential consequences such as changes to commercial agreements with suppliers, vendors and sub-contractors. I’d like to make members aware of what is required.
Where to start
At the outset, your business must identify any loans or contracts which reference LIBOR. If these agreements extend beyond 2021, you will need to establish if there is a 'fall back' clause in the agreement. The fall back provision will directly affect your interest payments on your loans. How exactly the fall backs work will depend on the contract. This is particularly important for companies with longer-term debt and related hedging products.
Following this, you will be better-informed about what you need going forward and what discussions you may need to have.
What’s the alternative?
Replacements for LIBOR will be quite differently constructed to the original rate. For example, SONIA – which is replacing GBP LIBOR – is primarily an overnight rate. It has yet to be confirmed how longer terms might be calculated, and what this will mean for interest costs and derivative values.
You may want to consider alternatives, for which I recommend consulting the Business Finance Guide. Bank facilities are one of many ways of financing your business, whether for growth or cash flow management. If you’re advising businesses, you should ensure you’re aware of the different financing options available.
Talk to your bank, whether you have a loan or not. If you’re looking to obtain finance over the next year or so, don’t assume it will be at the same rate as today.
Chartered accountants and the finance function have a fundamental role at the centre of this change, and can help drive the best outcomes for their businesses and those they advise. ICAEW’s Financial Services Faculty has produced helpsheets and is holding webinars to offer support and guidance. I highly recommend members take advantage of these resources.
If you have further questions, please contact our Financial Services Faculty on firstname.lastname@example.org, and a member of the team will get back to you.
For more on this and other matters, please follow me on Twitter @MichaelIzza.
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