LIBOR

LIBOR is the London Interbank Offered Rate which is a benchmark interest rate used by lenders (including Principality) to set interest rates on loan agreements. LIBOR represents the rate world banks offer when they lend to one another in the interbank market for short-term loans.

Since 2013, serious questions have been raised about the future sustainability of LIBOR benchmarks (for more information visit https://www.fca.org.uk/news/speeches/the-future-of-libor).  A reduction in relevant transactions between major banks which LIBOR relies upon has led to the rate increasingly depending on expert judgments about the cost of borrowing, rather than market data, which led to the conclusion that financial markets continuing reliance on LIBOR benchmarks creates a risk to financial stability. The Financial Conduct Authority (FCA) among other regulators and industry groups have emphasised to the global market the need to end their reliance on LIBOR and transition to alternative Risk-Free Rates (RFRs) to contribute to financial stability.

LIBOR’s publisher, IBA (ICE Benchmark Administration), will stop publishing LIBOR related rates at the end of December 2021. The FCA and Prudential Regulation Authority are encouraging UK lenders to prepare for LIBOR no longer being available by the end of 2021 and Principality are planning changes on this basis.

LIBOR will be replaced with a Risk Free Rate (RFR), for some users of LIBOR the Sterling Overnight Index Average (SONIA) may be used, but another rate like the Bank of England Base Rate, might be a more suitable and a preferred replacement.

A rate of interest that does not include future bank credit risk (i.e. the rate assumes there is no risk of payment default, so does not include a credit risk premium). RFRs are considered more robust and less susceptible to manipulation than interbank offered rates, such as LIBOR, because they are based entirely on market transactions and do not include expert judgments.

The performance of any replacement benchmark cannot be guaranteed to mirror the use of LIBOR in the past, because past performance is no guarantee of future results.  However, Principality is committed to ensuring that any changes will not introduce inferior terms.

We have chosen to use the Bank of England Base Rate, subject to a floor rate of 0.01%, as our preferred replacement to LIBOR. We are currently working through a timetable of changes based on ending our reliance with LIBOR by the end of 2021.

We’ve committed to ensuring that any transfer to a new rate will not cause either party to directly benefit or lose out, insofar as this is possible. However, variable rates are subject to market changes and this can affect payments at any given time. The difference between LIBOR and any new RFR will also vary, which is beyond our control.

For the duration of the fixed interest period, there will be no changes to fixed rate products that are benchmarked on LIBOR.  If the fixed interest period ends before the expiry of the underlying facility, any further rate offered will be based on the Bank of England Base Rate, subject to the floor rate.

If you wish to move your existing facility to the Bank of England Base Rate, please contact your Relationship Manager to discuss this.

From 1st October, we will no longer issue on LIBOR and will only originate on the Bank of England Base Rate, subject to a floor rate.

The floor rate reflects the minimum level that we would be prepared to provide the facility to you. In the event that the Bank of England Base Rate drops below 0.01%, the borrowing outstanding on your facility will be charged at the margin with the floor of 0.01%.

New borrowing – your loan will originate on Base Rate.

Existing borrowing (expiries before 31/12/2021) – we will discuss options with you before your current deal expires.

Existing borrowing (expiries after 01/01/2022) - we will be in contact with you on or before 01/07/2021 to discuss options.

This will be discussed with your Relationship Manager and documented in your Facility Letter.

When your rate is linked to Base Rate, your interest rate will change when the Bank of England Base Rate changes (subject to floor rates on products). Any changes to Base Rate that are announced by the Bank of England will be effective on your account from the 1st of the following month.

No, we have a regulatory requirement to stop originating new lending linked to LIBOR from 1st October 2020. Existing loans will transition to Base Rate by the end of 2021.

Most loans will have fixed rate options available, please contact your Relationship Manager to discuss this.

Any fees applicable for repaying your facilities before the expiry date will be set out in your agreement. 

If your agreement expires after 31/12/2021 there will be no fee to switch from LIBOR to Base Rate. Other fees may be applicable if you choose to make changes to your agreement in any other way. Please contact your relationship manager to discuss your options.

Yes, we will provide new loan documentation (new Facility Letter/amendment letter/terms) for any changes.

No, we are unable to offer a SONIA solution. We have chosen Base Rate as our replacement to LIBOR.

You will receive statements as requested, on either a monthly or a quarterly basis.

If your account has a variable rate and we have not specified a minimum rate in the facility letter, the reduction will be passed on. Fixed rate accounts are not affected by changes in interest rates.

Our regulator confirmed that when moving from LIBOR to a new interest rate, lenders may charge a fair adjustment to reflect the difference between the old and new rates. As a goodwill gesture, we’ve agreed to waive our entitlement to an adjustment and move all variable LIBOR loans to Bank of England Base rate as a direct swap.

No, there is no impact on your agreed margin for your loan(s), which remains as set out in your Facility Letter.

For example:

• Your current 3 month LIBOR linked loan has the interest fixed once every three months on the 15th of the month.
  
• If interest is fixed on 15th October 2021 using 3 month LIBOR, that rate will apply from 1st November 2022 until 31st January 2022 (this is your 3 month interest period).
  
• In early February 2022 we will write to you confirming your new interest rate using Bank of England Base Rate which will apply from 1st February 2022, together with any changes to your payments, as per our usual mailing process.
  
• From 1st February 2022 your interest rate will only change if Bank of England Base Rate changes, and this will be applied to your loan at the start of the calendar month following the rate change.
  

For example:

• Your current 3 month LIBOR linked loan has the interest fixed once every three months on the 15th of the month.
  
• If interest is fixed on 15th November 2021 using 3 month LIBOR, that rate will apply from 1st December 2022 until 31st February 2022 (this is your 3 month interest period).
  
• In early March 2022 we will write to you confirming your new interest rate using Bank of England Base Rate which will apply from 1st March 2022, together with any changes to your payments, as per our usual mailing process.
  
• From 1st March 2022 your interest rate will only change if Bank of England Base Rate changes, and this will be applied to your loan at the start of the calendar month following the rate change.
  

For example:

• Your current 3 month LIBOR linked loan has the interest fixed once every three months on the 15th of the month.
  
• If interest is fixed on 15th December 2021 using 3 month LIBOR, that rate will apply from 1st January 2022 until 31st March 2022 (this is your 3 month interest period).
  
• In early April 2022 we will write to you confirming your new interest rate using Bank of England Base Rate which will apply from 1st April 2022, together with any changes to your payments, as per our usual mailing process.
  
• From 1st April 2022 your interest rate will only change if Bank of England Base Rate changes, and this will apply to your loan at the start of the calendar month following the rate change.