Support for Libor was set to end after 2021, but in November, the benchmark’s administrator proposed an 18-month extension to complete the array of complexities to transition legacy transactions.
While the extension will give market participants more time to transition legacy transactions to a replacement reference rate, regulators still want new loans to reference a replacement starting in 2021, requiring significant business and operational issues to be addressed while many corporates are still in the early stages of the transition.
Tom Hunt, CTP, director, treasury services at the Association for Financial Professionals (AFP), participated in a recent webinar hosted by Kyriba, a global leader in cloud treasury and finance solutions. A poll shared in the webinar suggests corporates must pick up the pace, not only to refinance debt coming due but because the Libor reference rate may be used for much more than loans.
Poll responders said first that they are starting to look at what the transition entails, followed respectively by identifying their businesses’ exposures to Libor and reaching out to their banks to plan the migration. Hunt said the poll results were “not surprising,” given many members are just beginning the transition and “trying to understand what this all means, including the 2023 [extension of Libor] date.”
Regulators have supported the delay, but they have also reiterated that all new floating-rate loans should reference a replacement rate by year-end, and preferably much sooner.
The Alternative Reference Rates Committee (ARRC), sponsored by the New York Fed, has promoted the development of the secured overnight funding rate (SOFR), a replacement benchmark supported by global banks and their customers. Regulators have also green-lighted the American interbank offered rate (AMERIBOR), favored by regional and community banks. The ARRC’s best practices recommend pricing syndicated loans and derivatives over a replacement rate by June 30, leaving corporates with plenty to do by then.
AFP is procuring a working group of nonfinancial corporates to provide pertinent input to the ARRC. A recent recommendation “overwhelmingly supported” by corporate participants, Hunt said, was for in-house banking that facilitates internal or intercompany loans to use 90-day SOFR as a convention to replace Libor. The intent is to uncover corporates’ transition complexities and aid the ARRC in developing best practices.
“We’re trying to make this [transition] more corporate-focused and bring the voice of corporates to the ARRC,” Hunt said, adding that the working group is accepting new members.
Libor often pervades companies in areas including leases, supply chain contracts and valuation models, noted Jehane Walsh, a manager in Deloitte’s treasury management services, who participated in the webinar. The floating-rate transition may impact many different corporate functions, she said, requiring “coordination to truly understand the exposures and figure out what changes need to be made to get ready for the change.”
Adam Bridgewater, Kyriba’s Libor-transition expert, pointed out in the webinar the significant differences between Libor, a forward-looking term rate enabling corporates to understand interest payments far in advance, and overnight SOFR and Ameribor. He noted that term versions of the “risk-free rates” are in the works but likely won’t arrive for a while. In the meantime, corporates must perform more complicated calculations to determine interest payments and ensure conventions between their loans and derivative hedges are in sync, or risk losing hedge-accounting treatment.
“You should make sure your vendor systems are ready for the new rates in each area where your business has exposures to USD Libor,” Bridgewater said.
For more on the Libor transition, download AFP's Treasury in Practice Guide: Making Preparations for a Post-Libor World.