On the news that the LIBOR era would end, Associated British Ports (ABP) group treasurer Shaun Kennedy realised that the organisation’s portfolio of long-dated debt, derivatives and US private placements would require a weighty transition effort.
Here, he tells The Treasurer about progress so far and the remaining pipeline of work, bearing in mind the Working Group (the Working Group on Sterling Risk-Free Reference Rates; RFRWG) recommendation to complete the conversion of all legacy GBP LIBOR contracts before the end of Q3 2021.
At ABP, we could see we had significant exposure to LIBOR, with long-dated loans going out 20 or 30 years. What’s more, our long-dated debt was not all hedged perfectly, so we had a degree of mismatch in terms of our exposure.
All of that made us appreciate that we would need to be more actively engaged on the issue of LIBOR transition than other corporates perhaps would.
Much of the work so far has focused around our derivatives portfolio. We took the decision not to enter into new LIBOR-linked instruments in September 2018. Since then, new loans have been issued on a compounded sterling overnight index average (SONIA) basis or, where banks were not ready, on a LIBOR basis with a pre-agreed switching mechanism and spread.
That still leaves a lot to do in terms of transitioning existing debt – our plan is to work through the remaining LIBOR-linked loans over the next three months.
In addition, there is a publicly listed bond still outstanding and US private placements, which also need to transition. We will be tackling those in the next six months.
The derivatives work is more straightforward in the sense that it is relatively easy to document – by agreeing to change the terms of the derivative and formally amending existing documentation.
With loans, there is now standardised documentation available, which provides a framework for documenting the changes in the underlying interest rate. Listed bonds, however, have a wider set of requirements. It’s a question of going through the formal process of amending bond terms via a consent solicitation process and issuing a public amendment.
With the loans and the US private placements, it is more a question of putting the legal documents in place to note changes to bilateral arrangements between us and those counterparties.
I think with standard loan facilities there is a question around whether the onus is on the banks to initiate conversations with corporates. In many cases, it will be a question of banks getting in touch with clients to explain what needs to be changed.
For ABP, we have loans and private placements with pension funds and life companies as counterparties. In cases like these, the onus is probably just as much on the corporate to make the changes and push LIBOR transition through.
The other challenge we are seeing on loans right now is managing the transition of instruments with zero-LIBOR floors in the documentation. The RFRWG has set out a recommended approach, but putting this into practice has needed further work on our part and remains a work in progress.
On derivatives, I’m delighted to say that ABP has adhered to the International Swaps and Derivatives Association (ISDA) Protocol. When it comes to the ISDA Protocol though, the outcome may not necessarily be desirable for corporates and I’m not convinced that all treasurers are aware of the potential impact.
The ISDA protocol will transition to a SONIA-compounded settlement process used in the cleared spot market. For our derivatives, we are putting in five-day lag periods to align to what we are doing in the debt markets, which allows time to perform the calculations and settle interest.
As such, the ISDA Protocol is not a permanent solution for ABP – but provides an option if we are not able to restructure bilateral all of our derivative instruments before the end of 2021. However, each corporate will need to arrive at its own view around what works for its situation.
What I can recommend that will help overcome many challenges is to decide how you want to use SONIA early on. Then talk to counterparties about how to implement it for new or existing products.
Take a look at resources provided by the Working Group and the guidance documents available. This will save time and hassle in the long term.
It takes time and treasury teams have competing demands. It depends on the extent to which you have LIBOR embedded within your financing arrangements. But in my experience, it is a process that takes time even with willing parties involved.
There is potentially a concern (for ABP and/or other corporates) around accessing legal support and questions as to whether there will be sufficient advisers to go around. Sample documents that are available will be helpful and will streamline the process.
However, with debt instruments, going through the process of making the changes across a portfolio will require hands-on attention from treasurers.
The challenges we’ve worked through in the past few years include systems issues – ensuring that treasury systems do what treasurers need them to do for compounding SONIA-type products, for instance.
Certainly, the big challenge for our treasury management system was around accounting. Once you have transitioned products, what seems like really simple issues around accruing interest becomes really complicated when you are doing daily compounding.
So, you need to change the way you think about that, which can take time. By now, most treasury management systems will have the functionality.
I don’t see many issues remaining though – it’s all about making it happen in 2021.
Shaun Kennedy is group treasurer at Associated British Ports. Prior to that he was group treasurer at Affinity Water. He has been actively involved in LIBOR transition as a corporate member of the Working Group on Sterling Risk-Free Reference Rates and the Senior Advisory Group
He was speaking to The Treasurer’s editor, Liz Loxton
Further ACT resources on the LIBOR transition can be found here: treasurers.org/hub/technical/libor.