With our packed LIBOR and Deals of the Year coverage, it has been a while since our last short bulletins, so here is our latest round-up of reports and announcements with relevance to the treasury community. Starting with more LIBOR…
US corporates and financial institutions are acting too slowly on the move away from LIBOR, global watchdog the Financial Stability Board (FSB) has stated. In a 6 July report to the G20, the FSB cited concerns around US entities’ new use of LIBOR-linked products at the current stage of the transition, stressing that in order to align with regulatory time frames, market participants must cease new use of LIBOR in their contracts by the end of 2021.
The report acknowledges some successes, noting that US issuance of SOFR floating rate notes (FRNs) has overtaken that of LIBOR FRNs. Meanwhile, the adjustable rate mortgage (ARM) market has moved rapidly to SOFR since government-sponsored enterprises stopped accepting new LIBOR-referencing ARMs. In addition, use of SOFR in derivatives markets has increased, with SOFR-based products garnering more than $6 trillion of open interest.
“However,” the report points out, “some USD markets need to make substantial progress. Although use of SOFR derivatives has increased, activity in USD LIBOR-based derivatives has grown since 2017, and the share of outstanding SOFR derivatives is still a small percentage of LIBOR.” The report welcomes the recent launch of a US ‘SOFR First’ initiative, which urged interdealer brokers to change USD linear swap trading conventions from USD LIBOR to SOFR on 26 July. But with a few exceptions, it notes, US securitisation issuance remains primarily LIBOR based.
In an assessment that will have considerable resonance for corporate treasurers, the report singled out the business loan market for being “especially slow to begin transition”. Most banks, it explains, “are continuing to offer LIBOR as the primary or only floating-rate business loan option. Borrowers report that lenders have provided them with limited information about LIBOR alternatives.”
In a stern statement, the FSB said: “With timelines for cessation of LIBOR panels now confirmed, there should be no remaining doubts as to the urgency of the need to transition away from LIBOR by the end of 2021. The FSB encourages authorities to set globally consistent expectations and milestones that firms will rapidly cease the new use of LIBOR, regardless of where those trades are booked, or in which currency they are denominated.”
It added: “Market participants are urged to cease new use of LIBOR in all currencies as soon as practicable, respecting national working group timelines and supervisory guidance where applicable, and in any case no later than the end of 2021.”
Read the FSB’s full report here.
Regular readers of The Treasurer will recall that last spring we featured a definitive guide on modern slavery in supply chains, courtesy of Patricia Carrier at the Business & Human Rights Resource Centre. As Carrier noted, investors are becoming increasingly aware of – and vocal about – the risks of modern slavery within companies’ operations and global supply chains. Now, the EU has taken steps to raise awareness of the issue even further, with the publication of special due-diligence guidance for corporates.
Published in July, the guidance notes: “Responsible business conduct by European companies plays a crucial role in ensuring that EU policies on human rights are effectively implemented, including with regard to labour. The EU is committed to promoting the implementation of responsible business conduct across all sectors of production and all levels of the supply chain and the protection of victims of business-related human rights violations and abuses, and calls on EU companies to respect human rights – including labour rights – regardless of their location, size, sector, operational context, ownership and structure.”
With that mission in mind, the guidance sets out a nine-point checklist on how to recognise forced labour, with the intention that corporates will work it into their everyday due-diligence habits. It also stresses that company policies should be specially attuned to the risks of forced labour, through methods such as:
1. Stipulating a zero-tolerance policy for forced labour, alongside other policies relevant to how forced labour may arise in the business’s supply chain – for example, as a result of subcontracting, use of recruitment agencies and/or state-sponsored forced labour.
2. Clarifying that suppliers and staff will not face reprisals for reporting either risk or actual instances of forced labour. The business must not discourage suppliers or staff from reporting risk or instances of forced labour – instead, it must provide a clear procedure for how any reported risks will be addressed and, if necessary, escalated.
3. Building awareness among key suppliers and company staff, such as buyers or procurement officers, on what constitutes forced labour – for example, the most common forms, as well as the types of vulnerable workers and supply chains that are most likely to be affected. It will be particularly important for a corporate to build internal awareness of how its own activities, such as purchasing practices, may increase the risk of unauthorised subcontracting and other forced-labour risk factors.
In a statement, European Commission executive vice-president and commissioner for trade Valdis Dombrovskis said: “There is no room in the world for forced labour. The Commission is committed to wiping this blight out as part of our broader work to defend human rights… Businesses are key to making this happen, because they can make all the difference by acting responsibly.”
Almost two-thirds (64%) of UK companies are unsure about how the nation’s new crop of freeports will work, as found in a poll by law firm Womble Bond Dickinson. Announced in the UK Budget of March 2021, the freeport sites have been talked up as critical future assets for enhancing trade, boosting innovation and attracting inward investment. However, the poll indicates a majority of firms have only a sketchy understanding of how these zones – classified for legal purposes as outside the UK – will actually operate.
That sense of vagueness is echoed in the sceptical views of some of the corporates that provided comments to a report based on the poll. In one case, recently appointed Condor Ferries CEO John Napton – writing in his former capacity as director of UK and Irish agencies at Brittany Ferries – stated: “When you think of a shipping company, you’d think freeports would be the answer and a good match; but it’s difficult to say just yet if freeports will be great for our business. The opportunity is there and it could be a great thing if all the benefits are delivered, but there are a lot of steps before we get there.”
He noted: “In order for freeports to work, those operating in logistics and across the supply chain need to collaborate. It’s currently unclear who our potential clients will be and where the supply chain will come from, [so] improving that visibility to encourage collaboration will be key to success.”
As set out in the Budget, freeports will be established at eight locations: East Midlands Airport, Felixstowe and Harwich, the Humber region, the Liverpool City region, Plymouth, the Solent, the Thames and Teesside.
Also writing in the report, Lloyds Bank director, industrials and infrastructure, Gary Chapman says that the extent to which freeports will benefit the UK is “still a question mark” for many of the lender’s business clients. That said, he notes, “it is clear from discussions that freeports offer a big opportunity, especially along the East Coast. There is a lot of excitement around the inward investment opportunities… Clients in the south are reporting that they are dealing with many inbound enquiries, which is a really positive sign of things to come”.
Turning to the scope for risks, Chapman points out that the main issue with freeports is security: “They hold the potential to become home to fraudulent activity, which poses a danger to the UK.” He also cites the designation of freeport status for a period of just five years as “counterintuitive”, warning: “It may not be enough time to fully invest, see manufacturing productivity come to fruition or see a fully stimulated economy.”
Green bonds still comprise just a small fraction of debt issued by US non-financial corporates (NFCs), according to a recent report from the Climate Bonds Initiative (CBI) – but key sectors show potential for future growth. The report notes that since its 2016 inception, the US green, social and sustainability (GSS) bonds market has grown by an average of 72% year-on-year and by 11% in the first three months of 2021. While cumulative market issuance has totalled $276.4 billion, NFCs have accounted for just $40.4bn of that sum.
Renewable energy (76%) and low-carbon buildings (13%) remain the two largest use-of-proceeds (UoP) categories within the NFC segment – but in the CBI’s view, this means that investors with specific mandates or preferences to buy labelled debt “have limited opportunity to construct diversified green bond portfolios”. As such, a broader variety of issuers funding different UoP categories would facilitate diversification. The report cites telecoms provider Verizon’s green bonds of 2019 and 2020 – each worth $1bn – as examples of activity in a sector that could benefit from greater uptake.
Another is automotive. The report points out: “So far, globally, only a handful of auto manufacturers have issued green bonds, and more should join the market as the growth of electric vehicles [EVs] accelerates.” Apart from two, green asset-backed securities ventures from Texas-based Toyota Financial Services, there has been no green auto issuance in North America to date. However, the report adds: ”Cases such as… General Motors’ commitment to developing EVs over the next five years and the pledge to phase out all internal-combustion vehicle production by 2035 pose good opportunities for further diversified green issuance.”
Read the CBI’s full report here.
While London remains the world’s second-largest city for fintech, other UK locations – some of which are far smaller – are nurturing their own, promising offshoots of the sector: the latest annual report from specialist market intelligence firm Findexable has found.
In addition to welcoming three new UK cities into its global index of more than 260 fintech hotspots – with Birmingham entering at 123, Cardiff at 127 and Newcastle at 155 – the report cites “significant climbs” from Cambridge, Edinburgh, Belfast and Glasgow. But underneath those metropolitan areas is a growing ecosystem of town-based ‘tertiary hubs’.
Findexable founder and CEO Simon Hardie said: “We are seeing how investment in creating technology hubs in secondary cities is translating into the creation of thriving communities and viable companies. We have even seen fintech companies emerge in towns like Macclesfield, Ashford, Caerphilly and Inverness.”
He explained: “It is part of a greater push toward bridging the gap between companies and their customers that we have identified happening across the world since the annual report started in 2019, but which has accelerated in the past 12 months as a result of the pandemic driving more people to use digital finance. Where there are more customers there will be more businesses, and in an innovation-driven sector like fintech, that translates to greater chances for new ideas that can shake up the entire industry.”