The end of LIBOR and continuing potential for lending disputes

We previously wrote about the London Interbank Offered Rate (LIBOR) interest rate benchmark coming to an end in 2021 and the impact it could have on your borrowing. This has now come and gone and with 1 January 2022 all LIBOR rates set in CHF, EUR, JPY and GBP have ceased to be published on their old methodology. Only some USD tenors continue to be published and a number of other rates will continue to be published on a ‘synthetic’ basis.

What is a ’synthetic’ basis?

LIBOR was a benchmark rate that lenders used to price the cost of borrowing, usually on the basis of LIBOR with a lending margin expressed as a percentage, such as LIBOR + 1.5% for example. LIBOR was previously set by a number of panel banks based on the rate that these banks self-reported were the rates on which they could borrow from one another. This self-setting nature led to a number of abuses that were uncovered following the 2008 financial crisis with financial sanctions being issued against a number of banks. It also led to LIBOR being phased out and a new benchmark rate being developed. For GBP LIBOR this was Sterling Over Night Index Average (SONIA). Despite this history, a number of tenors of USD LIBOR will continue to be published on the basis of member banks contributing rates until 30 June 2023, but for the remainder of rates this self-setting practice has now ceased. New lending by reference to LIBOR is not permissible.

For a number of GBP tenors the Financial Conduct Authority (FCA) has designated LIBOR as a critical benchmark under Article 23 of the Benchmark Regulation  due to “significant legacy exposures” with the effect that they will continue to be published, albeit on a “synthetic” basis. The basis of this “synthetic” setting methodology for GBP is SONIA for at least the remainder of 2022.

Offering the customer an alternative… but is it fair?

The FCA previously encouraged lenders to transition their lending away from LIBOR to alternative rates and to offer their customers alternative rates. The recognition of continuing significant exposure to LIBOR designated lending means that the FCA continues to encourage lenders to transition away from LIBOR. This change also means that LIBOR must be replaced by another equivalent benchmark rate and the FCA’s designation of LIBOR as a critical benchmark and defining it by reference to SONIA has the effect that this has happened automatically for any GBP lending previously set by reference to LIBOR.

While the definition of LIBOR by reference to SONIA largely takes it away from the previous abuses of the system it may be that this rate or other alternatives that your lender may offer you are not appropriate or suitable. As we outlined in our previous article this could have significant impact on the cost of borrowing and we stressed the importance of ensuring that the lending remains fair. This now continues to be a concern for 2022.

If you would like advice as to the impact of the amendments on your business, please contact a member of the commercial litigation team.

Fred Feistauer, Associate, BLM

Disclaimer: This document does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest to clients of BLM. Specialist legal advice should always be sought in any particular case.