With only a few months remaining before LIBOR’s expected end date, how prepared are treasurers for the transition – and what should they be focusing on right now?
The transition away from LIBOR dates back to the aftermath of the financial crisis and the discovery of a widespread rate-rigging scandal that resulted in fines amounting to over US$9bn. In 2017, the FCA subsequently announced its intention to stop compelling banks to submit to LIBOR after the end of 2021. As such, LIBOR is set to be replaced by several different risk-free rates: the Swiss average overnight rate (SARON), Euro short-term rate (€STER), the Sterling Overnight Index Average (SONIA) for GBP; Tokyo Overnight Average Rate (TONAR) and the Secured Overnight Financing Rate (SOFR) for USD.
While the end of 2021 is still expected to be the end date for most LIBOR rates, the ICE Benchmark Administration (IBA) published a consultation paper in December proposing that some USD LIBOR settings – namely overnight and one-, three-, six- and 12-month LIBOR – would continue to be published until 30th June 2023.
The outcome of the consultation has not yet been announced – but in the meantime, most LIBOR rates are still expected to cease publication at the end of this year. With only a few months to go, how much progress have treasurers made in preparing for the transition?
Wait and see
At this stage, many treasurers have opted for a ‘wait and see’ approach. Svenja Schumacher, Assistant Director, Treasury Advisory at Deloitte, explains that banks have been mandated to offer non-LIBOR products alongside LIBOR from Q4 2020, “and as a result we have recently noticed an uptick in conversations about this topic, primarily with some companies raising new debt.”
So far, says Schumacher, companies have generally preferred to opt for LIBOR products with the inclusion of suitable fallback provisions. “Only in the past few weeks have we started working with more corporates that are willing to take the plunge and raise new debt based on SONIA,” she adds.
Indeed, a survey carried out by Deloitte during a virtual conference in November indicated that 67% of companies had had no contact with their relationship banks with regards to existing LIBOR-based products to discuss the upcoming LIBOR changes. In addition, 45% had not yet done any analysis on the fallback provisions included in their existing contracts.
“We know of larger organisations who did indeed start their preparation (or at least some review/planning) earlier, and some more of our larger corporate clients have started the active transition of existing products since our conference,” Schumacher adds. “But I think it is fair to say that the majority of the market is probably not as advanced on the transition to SONIA as the FCA would like it to be at this stage.”
Be prepared
For treasurers that still have some way to go, it’s important to note that there may be some significant challenges to overcome – not least when it comes to the task of identifying existing references to LIBOR across the company.
“Many companies do not have a complete inventory of where LIBOR is currently referenced within their organisation, since references to LIBOR are not only included within contracts close to Treasury, such as debt, derivatives or cash and investments, but also elsewhere in the organisation, such as in commercial contracts or employee benefits,” explains Schumacher. “It is therefore important to identify and brief all stakeholders, before treasurers even start with the time-consuming exercise of extracting the relevant information from contracts.”
And as Schumacher points out, another challenge is the assessment of the potential consequences of the transition, from fully understanding the commercial differences between LIBOR and SONIA to assessing the impact on existing hedge accounting relationships and taxation.
“The consequences can be significant, including fallback to suboptimal arrangements and potential value transfer upon transition,” she concludes. “To achieve a smooth and fair transition to SONIA, treasurers will require a multidisciplinary team with experts from other functions of the organisation.”
