The following is provided for general information only and you should conduct your own independent research and analysis regarding the risks involved in conjunction with your legal, tax and/or accountancy advisors. The statements below are not exhaustive, HSBC Bank A.Ş and HSBC Group (“HSBC”) are not in a position to express a view on the likelihood of any particular event occurring nor is HSBC providing any advice or recommendation.
What are LIBOR & EURIBOR?
The London Interbank Offered Rate (“LIBOR”) and the Euro Interbank Offered Rate (“EURIBOR”) are interest rate benchmarks often used to determine the interest payable under banking products including loan and/or trade facilities.
What’s changing?
Widely used across the banking industry, LIBOR and EURIBOR are subject to national and international regulatory guidance and reforms, and recent developments may cause them to perform differently than they have in the past or to disappear entirely. For example:
- the UK financial regulatory authority which regulates the calculation of LIBOR has stated that after 2021 it will no longer compel banks to submit rates used for the calculation of LIBOR and that firms should treat the discontinuation of LIBOR as something that will happen
- financial regulatory authorities are encouraging the use of alternative risk-free rates (RFRs) which have been developed as alternative interest rate benchmarks but are calculated in a different way to existing benchmark rates such as LIBOR or EURIBOR
- the administrator of EURIBOR has announced that it intends to change the way in which it is determined, although it remains a possibility that EURIBOR will cease to be published or continue to be published but its use in products is restricted.
In such circumstances, a loan or trade facility may have provisions to address the temporary unavailability of LIBOR and EURIBOR as interest rate benchmarks. However these provisions may not be appropriate or work on a permanent discontinuation of LIBOR or EURIBOR. This may create uncertainty in the value and calculation of interest payments due under the relevant product.
Why are we informing you?
As you are considering using products from us that use LIBOR or EURIBOR to calculate payments, we wanted to make you aware of the potential impact these changes and the use of RFRs may have on such products in the future. This information may help you decide whether a different product is more appropriate.
What’s the impact for you?
While the banking industry is developing a more permanent solution, the current expectation is that impacted loans may need to be amended to refer to an alternative interest rate benchmark. This may affect you in the following ways:
- RFRs would typically be a lower rate than LIBOR or EURIBOR as a result of the different way RFRs are calculated. Therefore if the most appropriate alternative benchmark for your facility is a RFR, an amount may need to be added to the RFR to make it equivalent to LIBOR or EURIBOR (this additional amount is often referred to as an ‘adjustment spread’).
- Notwithstanding the application of an ‘adjustment spread’ it is possible that use of a RFR may result in changes to the amounts payable under the facility. Those amounts might be lower or higher than would have been payable if LIBOR or EURIBOR had applied.
- We also expect the way interest is calculated may change. This may include only being able to determine interest payable at the end of an interest period. This could mean that you need to make operational changes, resulting in potential additional administrative costs.
If you are using a derivative product to hedge your facility with us or any other provider, the fallback interest rates that may apply may no longer match and could result in the facility ceasing to be hedged appropriately by that product.
These changes are not expected to impact facilities that use local interbank offer rates as a benchmark, such as the Emirates Interbank Offer Rate (“EIBOR”) or the Turkish Lira Interbank Offer Rate (“TRLIBOR”).
Where can I find further information?
We are unable to provide specific advice or recommendations to you on this issue. However, given the current levels of uncertainty and the complexity of this issue, we strongly recommend you seek guidance from your usual professional advisors if you have any questions.
Further information is available at: www.gbm.hsbc.com/ibor