U.S. Companies Advised to Prepare for Multiple Benchmark Rates in Transition from Libor
October 22 2019 - 4:57PM
Dow Jones News
By Mark Maurer
BOSTON -- Advisers to globally expanding U.S. companies are
recommending that they prepare to use several short-term lending
benchmarks when the London interbank offered rate falls out of
use.
Libor is a scandal-plagued benchmark that is used to set the
price of trillions of dollars of loans and derivatives globally. A
group of banks and regulators in 2017 settled on a replacement
created by the Federal Reserve known as the secured overnight
financing rate, or SOFR. Companies must move away from Libor by the
end of 2021, when banks will no longer be required to publish rates
used to calculate it.
"We don't expect that 100% of the Libor-based positions today
will migrate 100% to SOFR," Jeff Vitali, a partner at Ernst &
Young, said this week during a panel at an Association for
Financial Professionals conference in Boston. "It is going to be a
scenario where entities are going to have to prepare and be
flexible and build flexibility into their systems and models and
processes that can handle multiple pricing environments in the same
jurisdiction."
U.S. businesses that plan to acquire or have acquired non-U.S.
businesses and funded those deals through floating debt should be
aware of where markets in other countries are in the
Libor-transition process. Those companies will also have to prepare
for the Libor replacement selected by other countries, such as the
various rules governing, for example, EURSTR, or euro short term
rate, in the euro region or Tonar, or Tokyo overnight average rate,
in Japan.
Companies have been slow to prepare for the switchover, which
involves assessing any inventory that had exposure to Libor and
amending contracts for existing financial instruments, including
credit cards, corporate loans and derivatives. Since July 2018,
businesses have sold about $300 billion of floating-rate debt
linked to SOFR, a small fraction of similar debt linked to Libor
during that period, according to exchange operator CME Group.
"Like with all the new accounting standards, people tend to wait
until the last minute and they rely on their banks and their
vendors to prepare everything for them," Peter Seward, vice
president of business development at treasury software provider
GTreasury, said in an interview.
Companies most affected by the transition are ones that are
capital-intensive. Examples include companies from the
manufacturing, real-estate and energy industries.
SOFR, a so-called risk-free rate benchmark, could lead to a
lengthy wait time before a company develops liquidity, Rob
Mangrelli, director of global real-estate hedging and capital
markets at Chatham Financial Corp., a financial risk adviser, said
during a panel at the conference.
The Financial Accounting Standards Board and the International
Accounting Standards Board have made efforts to provide additional
relief to companies affected by global reference rate
overhauls.
Companies are expected to spend about $155 billion on
technology, staffing and client outreach as part of the transition
away from Libor, according to consulting firm Accenture.
The uncertainty surrounding the shift could translate to higher
corporate borrowing costs or reduce company profits and stock
prices.
-- Daniel Kruger contributed to this article.
Write to Mark Maurer at mark.maurer@wsj.com
(END) Dow Jones Newswires
October 22, 2019 16:42 ET (20:42 GMT)
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