There’s been progress. Obligations linked to the UK’s replacement benchmark, Sonia, are now common and have become the norm for new issuances in markets such as UK corporate debt. “We started transitioning in 2018, and we’re still going,” said Shaun Kennedy, group treasurer at Associated British Ports. “We have a lot of Libor exposure — loans, bonds, private placements with US investors — a bit of everything. We’re having to go through every single one, it’s an unreal amount of negotiating.” “The FCA announcement has focused minds,” said James Leather of Corium Treasury, who is helping businesses handle the transition. “The conversations between lenders and borrowers on how to move to Sonia are becoming more and more constructive.” Companies are becoming increasingly confident in hedging their Sonia exposures, too.
So is the corporate world prepared? No. Some of the most crucial fixings, involving US dollar Libor, are due to be phased out in the middle of 2023.
That’s not down to a lack of trying. Corporate treasurers (and their lawyers and lenders) have had to spend a great deal of time rooting out Libor obligations, which over the course of the benchmark’s life made it into every nook and cranny of the global financial system. The UK’s Financial Conduct Authority said in March that from December 31 most of its 35 daily fixings of rates, which are meant to represent the cost of unsecured borrowing in different maturities in five of the world’s most important currencies, would cease to exist.
Another big problem is that some current benchmark replacements do not at present include so-called term rates like Libor, which enable borrowers to fix the rate they will pay over a set period, say three months. Instead, Sonia and other alternatives are often used in a backward-looking way, taking an average of short-term rates over the borrowing period. This means the size of the repayment is only known days before it is due, creating uncertainty for business. Markets such as trade finance would particularly struggle with such a scenario. “You don’t want to go through the effort of transitioning to something, spending all that money and time, and then find out that you didn’t need to,” said Sarah Boyce, of the Association of Corporate Treasurers. “Clearer definitions of what’s going to count as tough legacy would be really helpful.”
In the US, bodies tasked with handling the transition have passed legislation to amend some contracts, but not everything is covered by the new laws. In the UK, there is a lack of clarity, leading businesses to put off work. Yet several challenges remain. One is the transfer of so-called tough legacy contracts, which, should Libor cease to exist, contain either no fallbacks or woefully inadequate ones.
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