As we have all heard the London Interbank Offered Rate (LIBOR) will stop being published at the end of December 2021, with US LIBOR tenors to stop being published in June of 2023. As a result, it is important for organizations to consider the impact that this will have. There was hope that LIBOR would continue because of COVID-19, however that does not appear to be the case.
Some believe that the switch to the PRIME rate may be the easiest course of action. While on the surface this may be so, there are potential consequences with the use of the PRIME rate. For instance, the PRIME rate may be higher than other rates. While easily determinable, it is subject to various economic factors and may rise or fall over time depending on the current state of the economy.
Where do we go from here?
The elimination of LIBOR will mainly impact debt agreements as interest rates are often based on LIBOR. It is important for an organization to perform an analysis so that management can begin to determine the overall impact on financing and operations and how best to handle the impact of the move away from LIBOR.
What you can start doing now?
Organizations should identify all financing agreements that utilize LIBOR to determine interest rates. It is critical to contact your lending institution to determine what the substitute rate will be. Many financing agreements are unclear or give the lending institution the right to substitute an “appropriate rate.” To protect your institution, you should ensure that the substitute rate is fair and appropriate.
Additionally, if you are in the process of entering into a new financing arrangement, ensure that LIBOR is not the basis for determining the interest rate.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.