European Banks May Raise Loan Rates as Libor Surges to Record

Sept. 30 (Bloomberg) -- European banks may pass on increased borrowing costs to companies in the form of ``market disruption clauses'' after overnight dollar rates rose the most on record.

``Certainly some U.K. borrowers found their banks discussing the use of the market disruption clause,'' said John Grout, policy and technical director at the Association of Corporate Treasurers in London. The agreements, common in loans, enable banks to increase the rates charged to borrowers so that they reflect their true cost of funds, according to the ACT.

Banks invoked the clause to get higher rates on a $1 billion loan to Hon Hai Precision Industry Co. The interest margin lenders charge to companies ``doubled or even tripled'' the day Lehman Brothers Holdings Inc. collapsed, Edmund Ding, a spokesman for the Taipei-based electronics company, said in a phone interview today.

The cost of borrowing in dollars overnight rose the most on record after the U.S. Congress rejected a $700 billion bank- rescue plan, putting an unprecedented squeeze on the global financial system.

The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 431 basis points to an all-time high of 6.88 percent, the British Bankers' Association said. The euro interbank offered rate, or Euribor, for one-month loans jumped to a record 5.05 percent, the European Banking Federation said.

Hon Hai agreed in July to borrow from lenders including Bank of Tokyo-Mitsubishi UFJ Ltd. and Cathay United Bank Co., paying interest of 40 basis points over Libor on a three-year portion of the loan, according to Bloomberg data.

The ACT said in a statement yesterday that banks should invoke market disruption clauses only as ``a last resort and implemented after certain other steps are taken.''

To contact the reporters on this story: Caroline Hyde in London chyde3@bloomberg.net; Tim Culpan in Taipei at tculpan1@bloomberg.net.

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net.