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The Bankruptcy StrategistLJN NewslettersNewsSections

LIBOR and Bankruptcy in the Current Market

By Jeff J. Marwil
June 26, 2008

Distressed companies and those in bankruptcy nearly always require some amount of loans to fund their recovery, exit from bankruptcy, or sale. What happens when those loans are not available, too expensive, or too risky in the eyes of the capital market? Combine that with volatility in The London Interbank Offer Rate, 'LIBOR,' the rate at which money is lent to other banks, and the terms, in particular, interest rates, that are offered to these distressed borrowers, are constantly in change. While LIBOR is recognized as the foundation of pricing of products internationally, recent issues have arisen, causing additional erosion of the confidence in the financing market. The integrity of LIBOR has been addressed in recent months, specifically pointing to certain financial institutions' possible misrepresentation of borrowing costs as a method of minimizing their respective losses during the crisis in the financial markets. It is unclear if the capital markets consider these issues a 'crisis' in terms of the LIBOR benchmark calculation, or if the identified problems are considered to be resolved.

Concurrent with these concerns is the observation that use of the LIBOR system may not be as desirable as it once was. Regardless, the system still is one that is distinct and separate from the system used by The Federal Reserve Board to set interest rates.

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