Libor reform: corporates start asking questions

Author: Lizzie Meager

The corporate sector is slowly awakening to regulators’ proposed phasing out of Libor.

Over the past year developments in new risk-free rates (RFRs) have begun to gain traction in the derivatives and public debt markets. Many in financial services have lamented the absence of corporates at the table, especially considering how important the benchmark is to the real economy.

But this is gradually changing. Edouard Nguyen, director of corporates and treasuries at Axis Alternatives said he has seen some instances of corporates trying to amend market disruption and/or fallback clauses.

At the instruction of their bank or lawyers, any corporate selling new Libor-linked debt now or in the future will include some form of fallback language. This language, which has been honed over the past year to become standard, is relatively vague and typically refers to a future discontinuation of the relevant reference rate.

“Some clients have told me they’ve changed fallback clauses to anticipate a total disappearance rather than just a temporary disruption,” added Nguyen. “Others have made changes to make the new rates as precise as possible, and to make sure the benchmark could be disputed or at least challenged. Obviously this is a challenge and banks are reluctant to go this way, considering how much uncertainty there is on the transition to new euro benchmark rates.”

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That uncertainty has meant that even where fallbacks are being embraced by issuers, there’s only so much they can do. For instance, no contract or document has yet named a specific replacement rate, such as the UK’s Sonia [sterling overnight index average] or the US’ Sofr [secured overnight financing rate].

Some are further ahead than others. “The multinational treasurers I speak to are very educated on the topic,” said Martin Bardenhewer, head of financial institutions and multinationals at Zürcher Kantonalbank and a member of the Swiss National Bank’s (SNB) working group on risk-free rates. “The main problem for corporates now is ensuring that systems are ready to cope with the transition. It’s important that we speak directly to system vendors to ensure that can happen.”

And a roundtable organised by the SNB’s working group last year had around 45 corporate representatives in attendance, which, according to sources, is high for such a small market.

Associated British Ports’ (ABP) group treasurer Shaun Kennedy told Practice Insight that the company is currently exploring restructuring its existing Libor-linked floating rate notes to a Sonia basis.

See also: Banks lobby for consistency in Libor fallbacks

Key Takeaways

  • Despite being largely uninterested in the process until now, corporates are slowly beginning to take an interest in benchmark reform;
  • They’re increasingly asking their banks what kind of work they should be doing, establishing working groups and beginning to review documentation;
  • Some European corporates are more ahead than others, with some already requesting changes to documentation and one already having ceased any Libor-linked transactions;
  • Others are only now beginning the exploratory phase of working out what they have linked to the ill-fated rate.

See also: Read the 12-page special report on Libor reform

“ABP has a number of long-term financial products linked to Libor, including loans, private placement interest rate derivatives and cross-currency swaps, so has taken an active interest in the work on the transition to risk-free rates over the last 18 months,” added Kennedy. “We have taken the decision not to enter into any more Libor-linked instruments going forward, and intend to transition our portfolio of existing Libor instruments ahead of the end of 2021.”

ABP is in the distinct minority here though. The vast majority of corporates have not taken such proactive steps, with many continuing to rely on Libor.

At the instruction of their bank or lawyers, any corporate selling new Libor-linked debt now or in the future will include some form of fallback language. This language, which has been honed over the past year to become standard, is relatively vague and typically refers to a future discontinuation of the relevant reference rate.

“The fact that Sonia and Sofr-linked deals are still newsworthy tells us everything we need to know about where people are right now,” said Andrew Bernstein, partner at Cleary Gottlieb.

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“The risk is that they wait too long to amend complex Libor-based products that take time to negotiate, so we’re recommending that they at least take stock of what is outstanding,” added Jim Ho, partner at Cleary Gottlieb in London.


Most corporates have either only just, or not yet started that process. That’s not such a concern for borrowers with only one or two debt instruments linked to Libor – there’s still years left – but as some products or contracts can take far longer to negotiate than others, it’s wise to start soon.


“I’m concerned about large corporations with complicated treasury departments that have Libor in credit agreements, indentures, swaps and intercompany loans – yet I don’t see their CFOs doing much about it,” said Geoffrey Peck, finance partner at Morrison & Foerster in New York. “Even some sophisticated companies haven’t yet grasped how complicated it is.”


But the view from the market is somewhat at odds with its supervisors. A European regulator told Practice Insight that this is gradually changing, and since last summer there have been very few new Libor-linked floating rate bonds. But that may have more to do with the current interest rate environment: with rates gradually climbing, the past six months have seen a marked shift towards fixed rate debt.


As the broader interest rate environment makes it less appealing to sell floating rate notes in general, it’s also stymying potential progress in new replacement rates.


“In the US especially, most alternative rates – including Sofr – are more expensive than even Libor, so from a treasury management perspective, it’s just not sensible to start paying a higher interest rate now,” added Peck.


“Traction is definitely building with corporates now,” said one UK-based treasurer who wished to remain anonymous. “All we really want is some products from banks that we can use.”

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