LIBOR underpins over US$350 trillion of transactions globally, yet there does not seem to be much attention being paid to how urgent it is to do get started and solve the problem. A survey by Herbert Smith Freehills with the Association of Corporate Treasurers, and follow-up interviews with, finance and treasury professionals of over 75 large UK corporates (primarily FTSE 100, FTSE 250 and equivalents) conducted in February and March 2019 showed that:
- 45% of the corporates had NOT been contacted about the upcoming transition away from LIBOR and other IBOR Rates (one corporate noted that: "Banks haven’t figured out what the IBOR transition means for them let alone their customers. Very few banks out there voluntarily raise IBOR transition with us”.)
- 63% have NOT begun contingency planning for the upcoming transition away from LIBOR and other IBOR Rates.
(Source: Corporate Debt And Treasury Report Issue 6 April 2019, see.)
The report points out that this is a critical issue for corporates. For example,
- if IBOR rates are not available and the standard fallbacks do not provide a reference 'base rate' for interest calculations then borrowers may find that the applicable rate is the banks' cost of funds (and corporates are entering into long term loan arrangements (eg 5 years+) accepting these risks)
- There is also uncertainty as to whether this would be a viable long-term solution to the disappearance of IBORs. It also potentially creates issues for banks in forcing them to determine their actual cost of funding at a particular time (and if this becomes the market default banks would need to constantly report their cost of funding)
- IBORs have permeated beyond treasury products into other business areas, such as accounting, commercial contracts and leases.
One corporate concluded that, "LIBOR changes are under-reported and will become a prominent issue in 2019. This is potentially as much work as Brexit was in 2017 and 2018."
ACT Annual Conference - “I’m leaving you for SONIA”
Shaun Kennedy, Group Treasurer, Associated British Ports presented on the journey from LIBOR in his brilliantly titled talk, “I’m leaving you for SONIA”.
- How SONIA (the new BofE rate) is anchored in active, liquid underlying markets, and can be easily compounded for use in term contracts
- His analysis of how LIBOR compares to SONIA:
Source & Copyright©2019 - Association of Corporate Treasurers
- ABP took over two years to move their book from LIBOR to SONIA as they first had to get board approval on the project and then on the impact of the move to the new rate, and change all their internal systems and their TMS
- Although, there is a Working Group on Sterling Risk-Free Reference Rates (RFRWG) supports work currently underway to develop a term benchmark based on the sterling risk-free rate, known as a Term SONIA Reference Rate (TSRR), he encourage other corporates “not to delay preparations to conduct new business using overnight rates while the development of a TSRR takes place”.
He stressed that there is a need for market practice (or standards) for referencing SONIA across all products, e.g. SONIA linked loan facilities (bilateral and syndicated). Also, corporates need to:
- Develop their SONIA ecosystem
- Development of critical infrastructure
- Development of SONIA term benchmarks
- Address Legacy Positions:
- Establish accounting principles (e.g. hedge accounting impacts)
- ISDA consultation and adopting protocols
- Resolve legal documentation issues that are preventing transition.
His main message was that other corporates need to start their work now and get involved with:
- The libor reform group at the ACT: https://www.treasurers.org/liborreform
- Working Group on Sterling Risk-Free Reference Rates: https://www.bankofengland.co.uk/markets/transition-to-sterling-risk-free-rates-from-libor
CTMfile take: Moving to SONIA and all the other new risk-free rates around the world will take time and huge resources. Have you started yet? When will you be ready?
LIBOR replacement: RFR Term Risk Free Rates portal
ICE Benchmark Administration Limited developing the needed term structures and benchmarks
BofE confirms SONIA compliance with IOSCO principles
The Bank of England has confirmed it will apply international best practice in its administration of the SONIA rate
Ameribor, SOFR or Sonia? What will replace Libor?
This week's Economist highlights some of the concerns and risks to the financial system as Libor comes to a 'planned demise' in 2021