LIBOR transition for corporates - tackling outstanding challenges

LIBOR transition has been a hot topic for the corporate treasury community for at least the past year. Although uncertainty over new reference rates has meant the corporate uptake has been relatively limited. A number of recent announcements should remind the treasurer that LIBOR’s likely eventual end date is fast approaching and action is needed. 

Firstly in December 2020, ICE Benchmark Administration (IBA) LIBOR’s administrator, issued a consultation on its intention to cease the publication of GBP, EUR, JPY and CHF LIBOR, as well as one-week and two-month tenors of USD LIBOR after 31 December 2021. IBA expects to publish the remaining tenors of USD LIBOR until 30 June 2023 and cease publication thereafter. 

Then in January 2021 the Working Group on Sterling Risk-Free Reference Rates set out its updated roadmap and LIBOR transition priorities for the upcoming year. These include further messages to the Sterling market for it to be fully prepared for the end of GBP LIBOR, by the end of 2021 as well as signposting certain key milestones leading up to that date, including:

• By the end of Q1 2021 banks should cease initiating new GBP LIBOR-linked loans, bonds, securitisations and linear derivatives that expire after the end of 2021 (unless necessary for management of risk management of existing positions); and
• By the end of Q1 2021, complete identification of all legacy GBP LIBOR contracts expiring after end 2021 that can be actively converted, and progress active conversion where viable through to completion by the end of Q3 2021.

The new calendar year has seen some corporates reinvigorate their LIBOR reform projects and focus on solving remaining questions and challenges. Especially as the banks increase their outreach efforts. However, many others are lagging behind waiting for the banks to approach them or are still wading through issues. From my discussions there seem to be a number of common questions:

1. Deciding whether to adhere to the ISDA protocol, especially if this causes a basis risk with other exposures;
2. Understanding how various credit adjustment spread methods will resolve the credit spread differences inherent between LIBOR and new reference rates, and how these impact contract transition strategies;
3. Understanding whether a value transfer will take place because of proposed changes to contracts and if it is likely to be significant;
4. Determining the accounting, tax and legal consequences of various approaches to amending contracts;
5. Justifying the use of new reference rates for international transfer pricing purposes;
6. Ensuring that related systems and processes are ready to accrue, forecast and value cash flows based on new reference rates;
7. Establishing an approach that will also work for cross currency exposures and products; and
8. What to do for those contracts where it might not be practicable to modify contract terms.

Of course it is certainly true that there is not necessarily a single common solution or answer to each of these. Indeed the answer may not yet be available or will require time and effort to work through. What is therefore important is for the impact on each corporate to be fully understood by their treasurer. The problem is that time is running out and doing nothing could be a very costly option. 

Now is the time for LIBOR transition to move up the corporate treasurer’s agenda to devise actions for any remaining challenges and ensure the implications and statuses are communicated appropriately over the next few months. 

To find out more visit our LIBOR Transition for UK corporates webpage.