Companies aren’t ready for the end of Libor
It’s a little like the tale of the boy who cried wolf. Regulators have been telling the market for more than a decade that the Libor rate benchmark’s end was nigh. But now that it’s really, seriously, going to end as of December, loads of big companies are unprepared.
Why it matters: Companies that don’t adequately prep for the death may wind up paying the price in time and money, Amol Dhargalkar, global head of corporates at financial risk adviser Chatham Financial, tells Axios.
- One example: If the benchmark on a company's debt winds up differing from the benchmark that its associated hedges — like interest rate swaps — are pegged to, then it could cost the company money if the two benchmarks move in different directions, Dhargalkar says.
Backstory: Libor fell out of favor after widespread manipulation of the rate came to light in 2008. Regulators began laying the groundwork to phase it out shortly after (read more about that here).
- The Federal Reserve has said that loans and derivatives contracts issued after Dec. 31, 2021, can't be tied to Libor. By June 2023, all legacy Libor contracts must transition.
- More than $200 trillion in global debt is currently Libor-based.
State of play: The companies that are being proactive are currently taking inventory of their total Libor exposure, moving agreements to new benchmarks where they can, and getting pricing indications to understand how to address their future needs, Dhargalkar says.
- Much of this activity is focused around transitioning to Term SOFR, a new benchmark that regulators have recommended.
But, but, but: Chatham recently surveyed 100 corporate treasurers — from companies with revenue between $1 billion and $25 billion — and 39% of respondents were "completely unsure if there are any urgent to-do items to act on in response to the transition."