Corporate treasurers should be anticipating the cessation of LIBOR, the widely used interest rate benchmarks, by end-2021. There had been some modification of interim deadlines* in acknowledgement of the COVID-19 crisis but the transition to alternative reference rates almost certainly affects your business, requires action now and will not be solved for you by your banks.
Over the summer 2020, the Sterling Risk Free Rate Working Group has published new materials to support a wide range of firms in preparing for the transition away from the use of LIBOR. These materials include a recommendation (1 September 2020) on standard market conventions for sterling loans based on compounded in arrears SONIA, as well as a series of videos, which can be found here: https://www.bankofengland.co.uk/markets/transition-to-sterling-risk-free-rates-from-libor
On 18 September 2020, the Working Group hosted a webinar in collaboration with the Association of Corporate Treasurers (ACT) and the Confederation of British Industry. The purpose of the webinar was to raise awareness amongst the corporate sector of the LIBOR transition changes taking place and the actions needed to prepare for the use of alternative rates. A video recording of the webinar is available here: Webinar on ‘Is your business prepared for LIBOR transition?’ – September 2020
The 2-hour webinar included insights from the Bank of England, FCA, corporates and banks on their experiences of transition and it was divided into 4 equal sessions:
(i) Why firms must act now to transition (ii) Progress in transitioning from LIBOR in loans products, and what to prepare for (iii) Examples and practical considerations to actively transition existing LIBOR bonds and loans (iv) International update, derivatives, accounting and practical next steps.
In the final session I was invited on behalf of the ACT to recap some of the key messages for businesses and to set out some practical next steps for any corporate treasurers who may be at an early stage in their LIBOR transition. In the video (from 1:49:30) you can hear in more detail my 7 steps to achieve a successful transition from LIBOR. In summary, these are as follows:
1. Who? Create a communications plan; identify and contact your counterparties and stakeholders (external & internal).
2. Why? Understand why LIBOR is changing and why you need to transition.
3. Which? Which alternative rates and conventions will you use? Systems implications?
4. Where? Identify where you may find LIBOR(s), including commercial contracts and associated hedges as well as financing activities.
5. What? Update your inventory of LIBOR exposures.
6. How? Plan how you will address each type of contract and mitigate the associated risks? How will you treat ‘tough legacy’ contracts?
7. When? Agree the timeline with all stakeholders.
* The RFR Working Group timeline ‘road map’ (updated 28 July 2020) is available here: https://www.bankofengland.co.uk/-/media/boe/files/markets/benchmarks/rfr/rfr-working-group-roadmap.pdf
