What Is LIBOR Breakage?

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LIBOR (London Interbank Offered Rate) is the most common international interest rate.
LIBOR (London Interbank Offered Rate) is the most common international interest rate. (Image: bank image by Pefkos from Fotolia.com)

According to Bankrate.com, London Interbank Offered Rate (LIBOR) is one of the most common interest rates. It is often used as a benchmark for adjustable-rate loans.

Definition

Breakage, financially speaking, is when the agreement is broken between two parties. With regard to LIBOR, breakage means prepayment. Sometimes, due to acceleration, the borrower prepays any LIBOR Rate Advance before the applicable interest period expires, and the lender considers it breakage.

Considerations

When borrowers (usually large companies) request advances from financial institutions, they have an option to receive the LIBOR-rate. Borrowers are ordinarily allowed to repay any interest-rate advances, but not the LIBOR advances (at least not before the expiration of the applicable interest rate period). Lenders have various conditions applicable to borrowers with regard to LIBOR advance prepayment, such as advance-notice requirement, repayment amount requirement and fee requirement.

Facts

LIBOR breakage is an undesirable circumstance for lenders. Thus, lenders impose fees on borrowers who intend to prepay LIBOR rate advances. These fees are known as "breakage costs" and are meant to cover the losses the lender will experience as a result of LIBOR-rate prepayment.

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