INTM516035 - Thin capitalisation: practical guidance: interest cover - debt servicing: LIBOR (London Interbank Offered Rate) replaced by SONIA and Short-Maturity Treasury Debt Issues

Floating interest rates used to be expressed in terms of LIBO(R plus, say “LIBOR + 250 basis points”. LIBOR was a widely used reference rate.

LIBOR represented the lowest rate at which the leading London banks could borrow unsecured and was compiled from bank submissions for release just before 11 a.m. on a given day. The participating banks submitted their own rates, which were then averaged out for each currency and each maturity. LIBOR rates were published for each banking day for ten currencies and fifteen different maturities, from an overnight rate to a rate for eighteen months. The rates were all expressed in an annualised form, and were published by the British Bankers’ Association (the BBA).

However, in 2012 collusion was discovered amongst the contributing banks that led to financial regulators globally requiring the withdrawal of LIBOR by June 2023 and replacement with appropriate short-term benchmarks whose calculation would be managed by central banks, taking these out from under the potential influence of financial services firms. Thus, GBP-denominated debt now uses either overnight SONIA or short-maturity GILTS, released daily by the Band of England. USD-denominated debt is awaiting implementation of the alternative proposed by the US Federal Reserve and EUR-denominated debt is awaiting implementation of a similar solution offered by the European Central Bank.

A basis point provides a simple way of measuring an interest rate (or a movement in an interest rate). It represents one hundredth of a percentage point, so 100 basis points is 1%, and 250 basis points are 2.5%. It is conventional to talk about 30 basis points than “point three (of a) per cent”. The addition of a number of basis points to a rate like SONIA is referred to as the “margin over” the benchmark rate.

The relevant benchmark for floating rate debt should not be confused with the “base rate”, which is set by the Bank of England and represents the rate at which it will lend to banking institutions. The base rate is not accepted as a reference rate for calculating floating interest rates.

Historic LIBOR rates are available within HMRC via the Transfer Pricing Group home page on the intranet, but the date of phasing out should be noted and the relevant benchmark for each currency checked by reference to the relevant central bank.