Before, everything was so simple. Companies wishing to borrow at variable rates could take out loans or issue bonds knowing they could rely on Libor, a benchmark that, despite all its shortcomings, was easy to use and used around the world.
Not anymore. The Libor, or to give it its full name, the London Interbank Offered Rate, is dying.
The UK Financial Conduct Authority said in march that from December 31, most of its 35 daily rate fixtures, which are supposed to represent the cost of unsecured borrowing at different maturities in five of the world’s most important currencies, would cease to exist.
Some of the most crucial fixings, involving the US dollar Libor, are expected to be phased out in mid-2023.
So, is the corporate world prepared? No.
It is not for lack of trying. Corporate treasurers (along with their lawyers and lenders) had to spend a lot of time eliminating Libor bonds, which over the life of the benchmark found their way into every nook and cranny of the world. global financial system.
“We started the transition in 2018 and we are continuing,” said Shaun Kennedy, group treasurer at Associated British Ports. “We have a lot of exposure to Libor – loans, bonds, private placements with US investors – a bit of everything. We have to go through every one of them, it’s an unreal amount of negotiation.
There has been progress. Bonds linked to the UK’s replacement benchmark Sonia are now mainstream and have become the norm for new issues in markets such as UK corporate debt.
“The FCA announcement has been very popular,” said James Leather of Corium Treasury, which helps companies manage the transition. “The conversations between lenders and borrowers on how to move to Sonia are becoming more and more constructive. Companies are also increasingly confident in covering their exhibitions at Sonia.
However, several challenges remain. One is the transfer of so-called difficult legacy contracts, which, if Libor were to cease to exist, either contain no alternatives or are woefully inadequate.
In the United States, the agencies responsible for managing the transition have passed laws to change some contracts, but not everything is covered by the new laws. In the UK there is a lack of clarity leading companies to postpone work.
“You don’t want to put in the effort to move on to something, spend all that money and all that time, and then find out you don’t need it,” said Sarah Boyce, Association of Corporate Treasurers. “Clearer definitions of what will count as a difficult legacy would really help. “
Another big problem is that some current benchmark replacements do not currently include so-called forward rates like Libor, which allow borrowers to set the rate they will pay over a set period of, say, three months.
Instead, Sonia and other alternatives are often used retrospectively, taking an average of short-term rates over the borrowing period. This means that the repayment amount is only known a few days before it is due, which creates uncertainty for companies. Markets such as trade finance would particularly face such a scenario.
In the United States, meanwhile, several benchmarks are competing to succeed Libor, delaying the transition and increasing the cost of hedging exposures. To speed it up, the heads of the Commodity Futures Trading Commission have advised inter-professional brokers transferred their swap agreements from Libor to Sofr, the officially approved US alternative, on July 26.
If that happens, Tom Wipf, chairman of the Alternative Reference Rates Committee, a public-private body set up to manage the transition, thinks he can recommend a Sofr-linked term rate “days, not weeks” later. the tilt.
“The earlier there is a Sofr term, the better,” Boyce said, adding that it would help calm the market. “[Moving on from] Dollar Libor is the biggest challenge, mainly because it blows everything else out of the water in terms of scale. “
Yet despite all the chaos, treasurers want a transition. Libor, an indicator based on low volumes of real transactions, defined by a small group of bankers of 20 lenders based in towers of the City and Canary Wharf, was not suited to play such a gigantic role in finance. global.
“We want a robust and transparent rate,” Kennedy said. “There were a lot of things I didn’t like about Libor. The transition is definitely a step forward, even if it takes time.