Britain extends deadline for Libor loan switch due to pandemic

(C) Reuters. FILE PHOTO: The logo of the Financial Conduct Authority is seen at the agency’s headquarters in the Canary Wharf business district of London

By Huw Jones

LONDON (Reuters) – Britain’s markets watchdog has extended the deadline for ending the use of the Libor interest rate benchmark in new loans until the end of March next year to avoid crimping the flow of cash to companies struggling to deal with the coronavirus pandemic.

The Financial Conduct Authority (FCA) had said that new sterling-denominated loans should stop using the London Interbank Offered Rate from the end of the third quarter of this year as part of a wider transition to the Bank of England’s overnight Sonia rate, a Libor replacement.

“All new issuance of sterling LIBOR-referencing loan products that expire after the end of 2021 should cease by the end of Q1 2021,” the FCA said in a statement on Wednesday.

Regulators want to avoid disturbing the flow of loans to keep companies afloat as a deep recession looms because of the national lockdown to fight the coronavirus pandemic.

As the COVID-19 crisis continues “it is vital that the banking and finance industry ensures a smooth flow of credit to the real economy”, banking industry body UK Finance said.

Libor is on its way out after banks were fined billions of dollars for trying to rig the benchmark, which is still used in financial contracts worth up to $400 trillion globally. The process of ending Libor’s benchmark role is one of the biggest challenges faced by financial markets in decades.

The FCA said it remained a central assumption that companies cannot rely on Libor being published after the end of 2021.

The FCA said that, within sterling cash markets, transition to the Sonia rate in the bond market had been largely completed, but full transition in the loans market would not be possible by the third quarter of this year.

“There will likely be continued use of LIBOR-referencing loan products into Q4 2020 in particular, to maintain the smooth flow of credit to the real economy,” the FCA said.

However, by the end of the third quarter, lenders should be in a position to offer products not linked to Libor, it added.

After the third quarter, lenders should include in all new and refinanced loans “clear contractual arrangements” to transition to Sonia or other alternatives ahead of the end-2021 deadline for ending use of Libor.

The Association of Corporate Treasurers said it welcomed the pragmatic solution to challenges being faced by companies during the pandemic.

Libor is the rate used by companies in most of their short-term and floating debt and interest rate hedging with contracts maturing up to 50 years into the future, ACT said.

“The sequencing of the different deadlines for lenders and borrowers is helpful to allow time for new conventions to be clarified and for systems software to be upgraded,” said ACT Chief Executive Caroline Stockmann.