AFP Tip Guide: Making Preparations for a Post-Libor World
Libor has been used by corporate treasury departments for 30 years, amassing trillions of exposures within the financial system. The Libor transition to Risk Free Rates is a global event with an unequivocal 2021 end date that is drawing ever closer. While business and the wider market have been provided with new overnight rates, they have not been told how to implement them, migrate to them or deal with the consequences of using the new rate mechanisms.
Much has been left open to choice or for a wider market consensus to arise, which has generated uncertainty and resulted in market participants looking to others to make decisions. Without clear guidance, corporate treasury departments have been left to work out a path for themselves. Waiting for greater clarity has been an attractive option, but with market-wide resourcing expected to be stretched thin in 2021, risks also arise from being at the end of the queue. The increasing numbers now pro-actively looking to put plans in place are having to make judgement calls and foresee issues on complex financial topics, the consequences of which will become clearer over time.
This Treasury in Practice guide intends to support those choices, providing the latest information on the expected changes in the market that will be crucial in helping corporate treasury departments gain knowledge and prepare for the transition from Libor while protecting their businesses and ensuring positive outcomes for their treasury portfolios. Topics include:
- Understanding why Libor is being replaced
- Suggesting where to look for Libor exposure within your organization
- Providing guidance on SOFR and Ameribor Libor replacements
- Discussing the latest thinking in regards to migration, fallbacks and spread adjustments
Table of Contents
- Why Libor is Ending
- SOFR: Libor’s Anointed Successor
- Libor Fallback Language
- ISDA Fallbacks Supplement and Protocol
- SOFR Credit Supplement
- The Road to 2021
In 2017, the UK Financial Conduct Authority (FCA) announced that it no longer plans to compel banks to submit London Interbank Offered Rate (Libor) quotes past 2021. Once that happens, Libor will lose its status as the global interest rate benchmark and that title will likely be taken over by an Alternative Reference Rate (ARR). Needless to say, this shift has major implications for treasury departments, come 2022.
In this Treasury in Practice Guide, underwritten by Kyriba, we will provide a detailed look at why this once trusted benchmark rate got to this point, which rates will be taking its place in 2002, what actions regulators have taken to being the transition, and how treasury departments should prepare. Libor will soon be a thing of the past. This is your opportunity to plan for a world without it.
Why Libor is Ending
Regulators began pushing for a transition away from Libor following the 2012 revelation that multiple financial institutions had manipulated the rate in order to improve their positions among other banks and clients. But while one could argue that the scandal was an outlier that is not truly representative of Libor’s potential, in actuality, it revealed key flaws inherent in the rate itself.
Following the scandal, the International Organization of Securities Commissions (IOSCO) established a set of principles for determining a good benchmark rate, and Libor doesn’t fit that criteria. For example, a key principle is for benchmark rates that they be “anchored by observable transactions,” rather than based on so-called “expert judgment” by the banks. “In most instances, Libor is based on expert judgment. On average, less than 30 percent of submissions are based on actual transactions,” said Ming Min Lee, partner with Oliver Wyman.
Furthermore, the transactions underlying Libor submissions—unsecured wholesale term lending to banks—are no longer active following the financial crisis. “Banks have largely moved away from interbank lending to something that is more stable,” Lee said. “So that’s a big change and we don’t expect the transactions that used to underpin Libor to come back.”
In remarks made during the Bank Policy Institute’s Credit-Sensitive Benchmark Symposium in September 2020, Nathaniel Wuerffel, Senior Vice President of the Federal Reserve Bank of New York, explained that that a “robust” benchmark rate would be “based on a market that is deep and broad enough that it does not dry up in times of stress, is resilient even as markets evolve over time, and cannot easily be manipulated. By ‘deep and broad,’ I mean that the market has enough volume and diversity of transactions to serve as the bedrock for the trillions of dollars of financial contracts that will reference it.”
When assessed against that piece of criteria, it becomes clear why Libor is inadequate, Wuerffel explained. “Over the four decades since LIBOR was formally developed, the wholesale funding market that it seeks to measure has withered,” he said. “The Global Financial Crisis accelerated the decline of Libor’s underlying market, as banks found more stable ways to fund themselves. With so much economic value riding on a thin market, the incentive to manipulate Libor increased and—as we all are painfully aware—such exploitation ultimately became a reality.”
Impact on Treasury
There is more than $200 trillion in outstanding USD Libor-based contracts. The majority of existing exposures to Libor are slated to mature before 2022, but not all. According to the New York Fed, in the U.S., approximately $36 trillion in notional outstanding will not mature before Libor is set to end, assuming there are no new Libor-based issuances. While most of that exposure is in interest rate derivatives, longer-dated positions in other asset classes are sizeable, such as an estimated $4.7 trillion in consumer and business loans.
Most corporate treasury departments have begun to consider their options, but those that haven’t yet are quickly running out of time. Finding an alternative rate is critical because it will affect funding costs. And since the fallback rate would be higher than Libor, treasury departments will want to look for a comparable or cheaper rate.
Lee pointed out some ways that treasurers could be impacted by the shift, the most obvious being floatingrate debt instruments, and committed lines with banks. But there are other areas that practitioners might not be thinking about, such as intercompany funding agreements and late payment penalties that could be Libor-based.
Libor could also be used in a corporate’s systems and processes. “Libor has been around for 30 years,” Lee said. “If you have a billing or contract management system for your supply chain management activities that has an implicit interest rate built into it, it wouldn’t surprise me if Libor is the reference rate.”
Treasurers also need to consider that Libor is currently managed by one administrator across five currencies and a range of tenors. “Multinational corporations will need to care about the evolution of the alternatives for all five currencies, each on its own timeline,” Lee said. “In all likelihood, we will have a multitude of conversion approaches; not just one.”
Understand where Libor exists within your organization. Take note of all your borrowing and funding commitments that are dependent upon Libor. Consider payroll loans, supply chain financing, factoring, asset-based lending, in-house banking, etc. Figure out what your spreads and maturities are, what you’re going to need to refinance your contracts, and what the results of triggering existing fallback language will be.
SOFR: Libor’s Anointed Successor
Over the past several years, markets have begun to craft alternative rates that would effectively replace Interbank Offered Rates (IBORs). In the United States, the Fed formed the Alternative Reference Rates Committee (ARRC), a special group of private market participants, to choose a new benchmark rate.
“Central banks set up working groups like the ARRC to come up with determinations and answer two questions,” said Tom Wipf, vice chairman, institutional securities for Morgan Stanley and chair of the ARRC, in a session at AFP 2020. “One, could they find a replacement that did not employ expert judgment, but that was entirely reliant on transactions? Two, how would we get from Libor to that alternative reference rate?”
The ARRC has evolved considerably over its existence, assembling corporates, regional banks, and trade groups, and puts them in the room with all the major U.S. regulators. “So it’s a very large and diverse group that in fact banks now sit in the minority when we look across the entire spectrum of the ARRC,” Wipf said. “And we have a set of specific working groups who address particular parts of this market.”
The ARRC ultimately selected the Secured Overnight Financing Rate (SOFR) for U.S. dollar derivatives and other financial contracts, and it is the heir apparent for loans. The ARRC has introduced a Paced Transition Plan with steps and timelines designed to encourage the adoption of SOFR.
SOFR differs greatly from Libor, and that has major implications for corporate treasury. The ARRC noted that the rate has certain characteristics that could make it a vast improvement:
- SOFR is produced by the New York Fed “for the public good.”
- The rate is derived from an active and welldefined market, which makes it difficult to manipulate or influence.
- It is based on observable transactions, rather than dependent on estimates.
- SOFR is derived from a market that weathered the global financial crisis, and the ARRC believes that signifies that the rate can reliably be produced in a wide range of market conditions.
Fed Chair Jerome Powell and Christopher Giancarlo, former chairman of the U.S. Commodity Futures Trading Commission, said in 2018 that the choice of SOFR “resolves the central problem with Libor, because it will be based on actual market transactions currently reflecting roughly $800 billion in daily activity. That will make it far more robust than Libor.”
But there are some other key differences between the two that are immediately apparent to a corporate treasurer. First, Libor is an unsecured rate at which banks purportedly borrow from one another—it includes a bank credit risk premia. SOFR, in contrast, is a nearly risk-free rate based on repo financing of U.S. Treasury securities; it’s not a purported rate like Libor.
Second, SOFR is also currently an overnight rate only; it’s not a rate of multiple maturities. That could eventually change; the ARRC’s Paced Transition Plan includes the development of a term reference rate based on SOFR derivatives. But right now, they don’t exist. That could mean big operational changes for treasurers, who currently borrow at one month, three months, etc. For that period, Libor is fixed for them.
With Libor, there was some amount of predictability, noted Joseph Buonanno, partner with Hunton Andrews Kurth LLP. “But now, they’ll have a SOFR rate that can change on a daily basis,” he said. “So not only will you have to manage the adjustments that the banks notify you of on a daily basis, but you’ll have to keep track of it yourself because you’ll need to be much more careful about how rates are changing and what the volatility is in rates so you can continually adjust your funding mix. How is the daily adjustment to SOFR relative to the weekly or monthly adjustment to Libor?”
Buonanno believes that corporates will begin to hedge interest rate risk more frequently in the near future than they’ve traditionally done using International Swaps and Derivatives Association (ISDA) derivatives. “A lot of corporates already do that to comply with all the Dodd-Frank Act rules to continue to trade derivatives on an OTC basis,” Buonanno said. “But I think you’ll see greater use of derivatives in the future.”
Experts generally agreed that SOFR is the only viable alternative to Libor. “The $200 trillion-plus on Libor will move somewhere,” said Tom Wipf of Morgan Stanley and the ARRC, at the 2019 U.S. Chamber event. “So we have to think about where the safest place it is for it to land. [The ARRC thinks] the safest is overnight SOFR.”
Unfortunately, the market as a whole is still apprehensive about SOFR. Ann Battle, head of benchmark reform for ISDA, has called on market participants to educate themselves on the rate, as there’s really only so much trade associations and regulators can do. “We’ve given the market the tools they need, now the market needs to learn how to use SOFR,” she said.
The goal of SOFR is to be a durable, IOSCO compliant rate, Wipf said. The ARRC sees SOFR is the key pillar that could support the vast majority of current market activity. “We don’t want to do this again,” he said. “We want to do it once and do it right.”
However, the ARRC isn’t going to be the one to move U.S. companies onto the new rate. David Bowman, special adviser of the Board of Governors of the Federal Reserve, stressed that the transition from Libor to SOFR needs to be decided by businesses. “Ultimately, we can’t dictate what prices you pay for your contracts or what rates you use in your contracts,” he said. “So this transition ultimately has to be up to the private sector. So we’re giving you one path that you can choose to go down if you’re going to transition.”
Tess Virmani, associate general counsel and executive vice president of public policy for the Loan Syndications and Trading Association (LSTA), noted that what many stakeholders desire is a forwardlooking term rate. However, that may not actually be attainable without first moving to a rate like SOFR. “It’s starting to dawn on people that if everyone in the cash markets waits on a forward-looking term rate, we have a problem there,” she said. “If we wait, we may not get that rate.”
Battle agreed. “The reality is, you don’t get a forward-looking rate based on SOFR until you have a robust market based on SOFR,” she said. “The derivatives market has to be based on SOFR for there to be a forward-looking term rate.”
Do your homework on SOFR. Learn as much as you can about this new rate and how it is performing relative to Libor. Figure out what that means for your own credit spreads, because credit spreads are based on risk, and each corporate is its own individual risk. Corporates need to compare themselves not only to businesses in the same industry, but also comparable benchmarks and credit spreads that they have historically tracked.
Also consider how transitioning to it will affect you, focusing on the procedures that will have to be put in place to track SOFR on a daily basis. Contemplate whether or not you need to do a periodic analysis more often to optimize your capital structure.
Libor Fallback Language
In the spring of 2019, the ARRC released its recommended fallback language for Libor. This language indicates the rate that corporates would fall back on, should Libor become unusable after 2021.
The LSTA has issued a guidance on the Libor fallback language for syndicated loans. As the LSTA notes, many loans will be outstanding when Libor ceases, and thus it is “critical” to develop fallback language in any new loans and collateralized loan obligations (CLOs). In the United States, SOFR is poised to replace derivatives, and may also take over for loans, CLOs and floating rate notes. Since SOFR is secured and is expected to be lower than Libor, loans that fall back to it will require a spread adjustment to make the rate more comparable to the current benchmark, the LSTA explained.
Fallback language is contingent on a “trigger”, i.e., an event that initiates the switch from Libor to a new rate (e.g., the benchmark administrator or the administrator’s regulator announcing that the benchmark will cease, or a public statement from the regulator that the benchmark is no longer representative). Fallback language also requires a replacement rate to take over for the current benchmark.
TWO TYPES OF FALLBACK LANGUAGE
The ARRC has developed two versions of fallback language for syndicated loans:
- The amendment approach: Following a trigger event, the bank group enables a streamlined amendment to replace Libor.
- The hardwired approach: Fallback language is built into the original credit agreement so that the loan can automatically convert to a new rate in the event that a trigger occurs.
The LSTA noted that both versions have their pros and cons. The amendment approach takes advantages of loans’ flexibility and doesn’t lock market participants into a rate that doesn’t actually exist yet. But it also is subject to potential manipulation depending on the economic landscape at the time of the transition. Additionally, if thousands of loans need to be transitioned at the same time, this approach might not actually be plausible.
Meanwhile, the hardwired approach would not be subject to manipulation and would likely be more workable en masse when Libor ceases to exist. But it requires participants to agree to a rate that does not yet exist. Thus the LSTA surmises that the market may choose the amendment approach until there is greater clarity on Term SOFR.
Switching Ahead of Schedule
The LSTA noted that corporates can switch loans to SOFR before the Libor cessation. For the hardwired approach, once it has been identified that a certain number of loans have used Term SOFR plus a spread adjustment, then the agent, required lenders and the borrower can switch to Term SOFR by affirmative vote. For the amendment approach, it can be determined that loans are being executed or amended to incorporate or adopt a successor rate and can elect to switch to that rate.
The ARRC is encouraging market participants to switch to SOFR for cash products ahead of Libor cessation, and has even released a whitepaper to help them do that. That makes sense; again, SOFR is the ARRC’s preferred alternative to USD Libor.
A treasury professional who wished to remain anonymous told AFP that the atmosphere lately has been leaning towards shifting financing away from Libor quickly—from syndicated business loans to consumer lending. “In my opinion, we’ll see consumer lending shift first on adjustable rate mortgages,” she said. “Before that can happen, I believe that GSEs need to provide guidance to lenders by including a new rate amongst the eligible rates for qualifying mortgages. To ensure the new ARM product is able to be financed without paying a high premium, it is an easy assumption that discussions are taking place.”
ISDA Fallbacks Supplement and Protocol
In October 2020, ISDA launched its IBOR Fallbacks Supplement and Protocol, in an effort to reduce the systemic impact of the cessation of Libor and other key IBORs while market participants still have exposure to those rates. The ARRC recommends adopting the protocol.
The supplement amends ISDA’s standard definitions for interest rate derivatives, incorporating robust fallbacks for derivatives linked to certain IBORS. Changes go into effect on January 25, 2021. After that date, all derivatives that reference the definitions will include the fallbacks.
The protocol allows market participants to incorporate the revisions into their legacy, noncleared derivatives trades with counterparties that adhere to the protocol. At launch, 257 derivatives market participants had adhered to the protocol during a two-week, pre-launch “escrow” period.
Fallbacks will kick in for a particular currency after there is a permanent cessation of the IBOR in that currency. ISDA noted that for Libor derivatives specifically, the fallbacks in the relevant currency would also apply after a determination by the FCA that Libor is no longer representative of its underlying market. In each case, the fallbacks will be adjusted versions of the risk-free rates identified in each currency.
“The implementation of fallbacks for derivatives will go a long way to mitigating the systemic risk that could occur following the disappearance of LIBOR or another key IBOR,” said Scott O’Malia, ISDA’s CEO. “With the fallbacks in place, derivatives market participants will be able get on with transitioning their IBOR exposures with confidence that there is a robust back-up in case of need.”
Get your bankers to include fallback language in your agreements. If you’re doing a refinancing or are entering into an amendment for an existing credit facility, discuss SOFR with your bank partners and see if you can get fallback language implemented into the agreement if your loans extend beyond 2021. Banks may be willing to address the issue and include language that states if Libor goes away, the borrower and the administrative agent will agree on a replacement index. If you have the prime/alternative base rate as a fallback rate, you should probably look to renegotiate to a different reference rate or at a minimum have a clause on how a reference rate would be determined.
SOFR Credit Supplement
Throughout summer 2020, the New York Fed held workshops to build a shared understanding of the challenges that lie ahead for banks and their borrowers as they attempt to transition away from the London Interbank Offered Rate (Libor) before 2022. These sessions are also exploring methodologies to develop a robust lending framework that considers a credit sensitive spread that could be added to the Secured Overnight Financing Rate (SOFR) for revolving lines of credit, commercial and industrial loans, and commercial real estate loans.
Ahead of a meeting that attempted to gauge corporate borrowers’ concerns about the transition, the Fed scheduled a call with AFP and a group of treasury professionals to gain their perspective on the potential credit supplement to SOFR. It quickly became apparent that corporate treasury and finance professionals are apprehensive about the supplement. Practitioners appeared particularly concerned that it could be applied across further SOFR categories.
In a follow-up call with AFP members, Meredith Coffey, executive vice president of research and public policy for LSTA, addressed treasurers’ concerns. She doesn’t expect the credit supplement to emerge in Libor fallback language. She began by noting that the ARRC currently recommends using hardwired fallback language for any new agreements beginning after September 30, 2020. The hardwired approach basically says that when Libor ceases or is declared unrepresentative, the market participant falls back to SOFR, plus a spread adjustment.
“The spread adjustment that the ARRC is going to recommend in a hardwired approach is the ISDA spread adjustment. Everything is perfectly aligned there—you’ve got SOFR, and you’ve got the spread adjustment as recommended by the ARRC, which will be the ISDA spread adjustment,” she said. “There is little likelihood of going through a risk-sensitive spread adjustment in the hardwired approach.”
But what about the ARRC’s amendment approach for fallback language? In this situation, Coffey still believes that the ARRC/ISDA spread adjustment would become the market standard. But it does allow for the possibility that a risk-sensitive spread adjustment could become the norm instead. “So, with a hardwired approach, there’s no chance of getting a risk-sensitive spread adjustment,” she said. “With the amendment approach, I think the risk is low but there is some potential if a risk-sensitive spread adjustment was developed and then became the market standard.”
Treasurers that have existing loan agreements that haven’t been amended or renewed recently and mature past 2021 should work with their administrative agent if Libor hasn’t been addressed or if they plan to use the amendment approach, advised Tom Hunt, CTP, AFP’s director of treasury services. In reality, the real deadline is June 1, 2021 for all new loan syndications to be using SOFR as a fallback as recommended by the ARRC.
Even more importantly, treasurers should check whether their bank groups subscribe to the ARRC’s recommendations. The smaller the bank, the more likely the amendment approach would be acceptable, and that could include the credit sensitivity component—thereby treating SOFR differently across SOFR exposures in derivatives, loans, asset-based lending, etc. “It’s best to work with your general counsel, understand your position and work with your bank group and administrative agent to address this before the clock runs out, as banks have far more exposures than corporates do,” Hunt said.
Coffey noted that banks are dealing with “hundreds of thousands” of credit facility amendments under the amendment fallback approach, and not all of them are going to be resolved immediately after Libor ends. For those that don’t, they could end up with a prime-based rate, which she views as the worst-case scenario.
“Our concern from the lender perspective is market disruption. From the borrower perspective, I would be concerned that I’m in the group of people that do not get their amendments through, and end up in prime-based rate for a period of time,” she said.
Amid this turbulent environment, many banks are being more demanding when clients attempt to amend their revolvers. A treasurer for a major utility explained that his bank advised him that upfront fees and renewal fees would be much higher this year if the company elected to make an amendment on its revolver. “We have a five-year and we’re into our third year. So in normal circumstances, we would renew that this early because we have an automatic renewal clause and we pay upfront. But banks are advising to just wait to see if things cool down,” he said.
Most of the input during the call came from noninvestment grade issuers. One treasurer for a major retailer raised questions about “anti-cash drawdown language” in loan documents, in addition to Libor floors. He explained that his company drew down under its revolving credit and parked the money in cash, just to ensure that it had access to capital in case there was a repeat of what happened in 2008-2009. So, he had about $265 million in the bank by June.
The treasurer’s company then signed an amendment to its credit facility to expand availability in early June. Two of the biggest changes in that amended facility were the introduction of a Libor floor, and provisions designed to stop cash drawdowns. “So for example, I cannot borrow further on our credit agreement unless I can represent, at the time of the borrowing, that the amount of cash I have in the U.S.—including the amount I’m going to borrow—is going to be less than or equal to $50 million,” he said. So the company would have to spend more than $215 million before it could borrow more.
“I think the banks responded by making it crystal clear that you might have done in it in the past, but you’re not going to do it in the future,” he added.
Two other treasurers on the call fared better with their banks. They also signed amendments around the same time, but after fighting “tooth and nail,” they managed to avoid both Libor floors and anti-cash concentration language.
Banks appear to be testing the waters with these provisions right now, seeing whether corporates will agree to them. A fourth treasurer for a major auto manufacturer said that his company also recently renewed its facility. He said that while he doesn’t believe there is a big push for anti-cash drawdown provisions, his bank did bring them up in the negotiation. “But we were able to successfully renew without that,” he said.
While SOFR is the chosen successor to Libor in the United States, other rates have emerged as potential alternatives. Perhaps the most prominent one is Ameribor, which is the brainchild of businessman, inventor and entrepreneur Richard L. Sandor, chairman and CEO of the American Financial Exchange (AFX).
Ameribor isn’t aiming to be a competitor to SOFR per se; rather it seeks to serve the needs of small, medium and regional banks across the U.S. that do not borrow at either Libor or SOFR to fund their balance sheets. According to AFX, these banks “need a separate and distinct benchmark that reflects their actual borrowing costs.”
“We decided to be everything Libor was not,” Sandor explained, during a recent call with AFP. “Libor was international, we wanted a domestic index. Libor was opaque, and we wanted it transparent. Libor depended on opinion, we wanted ours transaction-based. Libor was the wild west and totally unregulated, and we wanted a rules-based, regulated exchange. And most importantly, we wanted to develop something that was unassailable and would represent America.”
To accomplish that goal, AFX looked at all of the disparate interest rates around the country. Sandor found it highly illogical that rates differed so greatly from state to state, and came up with the idea of creating a national rate by engaging banks in every state in the U.S. Though banks initially rejected the idea, they began to warm up to it once it became apparent that Libor was, in all likelihood, coming to an end. “People started saying, maybe you have an idea. Maybe Libor will go away,” Sandor said.
AFX teamed up with Cboe Global Markets, and then approached regulators, agreeing to provide yearly updates on their progress. “We visited the Fed, the OCC, the FDIC, the SEC and the CFTC. The idea was to have an overnight, unsecured market. We opened in December 2015 and we were doing $9 million a day,” Sandor said. “We’re now up to $2 billion a day. We have 204 members, 160 banks and 1,000 downstream correspondents. Our banks have $3 trillion in assets, so we’re 22% of U.S. banks by numbers and 15% by assets.”
Sandor says that AFX had a steady, gradual growth model in mind for Ameribor, starting in small towns, but ultimately adding insurance companies, brokerdealers and corporates.
In a written statement last summer, Fed Chairman Jerome Powell commented on the suitability of Ameribor as a replacement to Libor. Asked by the U.S. Senate Committee on Banking, Housing and Urban Affairs whether he supports alternative benchmark rates other than SOFR, he replied that the Fed supports the work of the ARRC and views SOFR as a robust alternative that will help many market participants make the switch from Libor. However, he reiterated that moving to SOFR is voluntary and market participants should transition in the manner that is most appropriate for them, given their own circumstances.
On that note, he continued that Ameribor is “based on a cohesive and well-defined market that meets the International Organization of Securities Commission’s (IOSCO) principles for financial benchmarks.” Nevertheless, while he believes the rate is fully appropriate for banks when it reflects their cost of funding, he added that the rate is “may not be a fit for all market participants.”
Sandor responded that Powell’s comments “reinforce the importance of choice” when it comes to the transition away from Libor. He added that Both SOFR and Ameribor “are complementary to each other” and offer robust alternatives as the market moves away from Libor.
These comments reflect those of Robert Owens, director of fixed income strategy for Farmer Mac, who commented on the AFP Conversations podcast that Ameribor is less of a competitor to SOFR and more of an alternative. “Obviously SOFR is the dominant alternative, but I think Ameribor has a nice place, especially in rural America,” he said.
Amol Dhargalkar, managing partner and member of Chatham Financial’s board of directors and senior leadership team, noted that while it is difficult to say whether Ameribor will take off or not just yet—particularly for medium-sized and larger corporates— the comments by Chairman Powell could help in that regard. Moreover, some market participants may favor Ameribor over SOFR due to some key similarities to Libor.
“Most corporates feel as though they will take the lead of their banks on the appropriate index,” he said. “One of the benefits of Ameribor is that it represents unsecured borrowings between financial institutions—typically smaller ones, relative to the large investment banks that provide services to large multinationals. This more closely mimics the concept behind Libor itself, so banks may find it particularly valuable and interesting as a SOFR alternative. This is particularly true for smaller banks whose funding costs may not be best approximated by SOFR.”
The Road to 2021
The Federal Reserve Board, Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC) issued a joint statement on November 30, 2020, urging banks to cease entering into new contracts that use USD Libor as a reference rate. The move immediately followed an announcement by the ICE Benchmark Administration (IBA), Libor’s administrator, that it would be consulting in early December on its intention to cease the publication of one-week and two-month USD Libor settings by the end of 2021, with the remaining Libor settings ending on June 30, 2023. IBA also recently announced consultations for its cessation plans for euro, sterling, Swiss franc and yen-based Libor.
Meanwhile, the FCA announced its plans for 2021, which includes potentially using proposed new powers under the UK Financial Services Bill “to ensure an orderly winddown for Libor.” The ARRC noted that these actions by the IBA and FCA reaffirm its expectations that Libor will end by December 31, 2021.
While New Year’s Eve 2021 might still be more than a year away, the wait to start your post-Libor plans is over. Study up on SOFR and explore other rates like Ameribor if you think they apply to your organization. If you have outstanding contracts that reference Libor that go beyond 2021, make sure you have fallback language in place. Get feedback from your fellow AFP members and your bankers, and perhaps even reach out to the ARRC directly to help you anticipate upcoming challenges. There may even be opportunities to work with them and help make this a more seamless transition.
The clock is ticking.
For all the latest insights on the Libor transition, visit AFP’s Libor Transition Guide.
Check out this webinar to learn how to plan post-Libor readiness with experts from AFP, Deloitte and Kyriba.