The London Interbank Offered Rate (LIBOR) is one of the main interest rate benchmarks used in financial markets, determining interest rates for financial contracts around the world. However, after being linked to a series of highly-publicised rate fixing scandals, LIBOR is being phased out. With the exception of certain US dollar LIBOR settings (which remain available until the end of June 2023), all LIBOR settings will cease to be published on their current basis from 1 January 2022.
It is common for loans to be made in the context of trust structures, whether between trustees and underlying entities or between trustees and beneficiaries. Where such loans are interest-bearing, interest rates were sometimes linked to LIBOR.
In light of the discontinuation of LIBOR, trustees should ensure that, going forwards, interest rates are no longer linked to LIBOR for any new loan relationships. There are a variety of other options which may be suitable including, for example, linking the interest rate to the Bank of England’s base rate or to HMRC’s official rate of interest. Risk-free rates (RFRs) have been recommended as replacements for LIBOR for various currencies and on various bases, but the complexity involved in employing them for loans might make them unsuitable for many trust structures.
With regard to existing loan relationships where interest rates are linked to LIBOR, we would recommend that trustees review the relevant documentation to determine whether, and how, a replacement rate of interest is provided for.
For any loan agreements without suitable “fallback” wording, trustees will need to consider whether it is possible to amend such agreements to incorporate a new interest rate. Care should be taken in this regard to ensure that any amendments do not have unexpected consequences (including, for example, adverse tax implications). However, whilst this “active conversion” to replacement rates is recommended by financial regulators, a “synthetic” sterling LIBOR will be published from the end of 2021 and may offer contractual continuity where amending a specific loan agreement is unviable.
If you require advice on the impact of the discontinuation of LIBOR, please get in touch with your usual contact and we would be happy to help.