Minnie Mouse enthusiasts at Disneyland Paris in July. Walt Disney Co. is among the companies that have started alerting investors to the pendin
Efforts to skip the London interbank offered rate for new transactions by end of next year are forcing finance executives to take stock of their contracts, communicate with banks and investors and adjust their interest-rate cost calculations.
Global policy makers decided to do away with Libor, an interest-rate benchmark underpinning trillions of dollars worth of financial instruments, after concluding it was prone to manipulation. Banks face a Dec. 31, 2021, deadline to replace Libor with alternative rates for new contracts following a yearslong transition effort.
A majority of financial and nonfinancial companies recently said their Libor transition plans are ahead of schedule, according to a survey by consulting firm Accenture PLC released earlier this month. In some cases though, the pandemic has caused delays.
Corporations including Walt Disney Co. , network-equipment maker Juniper Networks Inc. and cancer treatment firm Varian Medical Systems Inc. have started alerting investors to the pending changes and the potential challenges as they shift to a new rate regime.
Businesses face potential adjustments to interest costs, arising from Libor being calculated differently than its likely successor in the U.S., the Secured Overnight Financing Rate, or SOFR.
For one, the immediate cost of borrowing may be cheaper. While Libor is derived from daily price quotes provided by a panel of banks, SOFR is based on the cost of transactions in the market for overnight repurchase agreements, or repos. Financial companies already use the repo rate to borrow cash, using U.S. government bonds as collateral. SOFR is considered a less risky rate, which means overall interest costs for companies could be lower than under Libor.
But SOFR currently doesn’t allow for predictive, forward-looking rate calculations, a notable deviation from Libor, which can be calculated three, six or 12 months out. This limits the insight treasurers can glean into future interest-rate costs.
Timken Co. ’s Chief Financial Officer Philip Fracassa is working to ensure that the North Canton, Ohio-based maker of engineered bearings and power-transmission products shifts its contracts to SOFR. “The discontinuation of Libor requires a lot of restructuring of debt agreements,” Mr. Fracassa said.
He doesn’t expect big changes to Timken’s interest costs as part of the transition, but foresees additional paperwork, including updating contracts and policies. “There’s a lot that you’ve got to do,” he said.
Finance executives also need to deal with existing contracts that cite Libor. That can be tricky—especially in cases where some of these debt instruments are held by hundreds of investors who all need to agree to the changes. Transaction lawyers suggest that finance chiefs create an inventory of agreements that reference Libor, and take a look at when they run out and who the other party is. The cut-off date for existing contracts to stop referencing Libor is June 30, 2023.
“The issue for treasurers and CFOs is managing the transition across the whole company,” said Michele Navazio, a partner at law firm Seward & Kissel LLP. “It is not going to happen simultaneously, which could add to the complications.”
Serena Wolfe, CFO at Annaly Capital Management Inc., a New York-based mortgage real-estate investment trust, hopes legislators will make it easier for companies to deal with some of these legacy contracts. A potential fix for certain residential credit securitizations currently is being debated by New York state lawmakers.
Annaly Capital has a Libor working group, which found that recent upgrades to the company’s technology systems will make it easier to manage the data required to transition away from Libor, Ms. Wolfe said. Other companies, especially those still relying on manual data entry and Microsoft Excel, could find that harder, she said.
Dealing with two benchmark rates—SOFR for new contracts after Dec. 31, 2021, and Libor for legacy contracts until June 30, 2023—won’t be a problem for Annaly Capital, Ms. Wolfe said, adding that the company already holds swaps which cite different rates.
For some businesses though, the dual rates will present a challenge, said Venetia Woo, lead Libor adviser at Accenture. “Corporates now have two expiration dates for Libor contracts and they need to determine if the economics to convert [by year-end] outweigh the burden of running two operations,” she said.
Write to Nina Trentmann at [email protected]
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