Members discuss the Libor-SOFR transition, including contracts and other non-treasury Libor exposures.
Regulators want corporates and their banks to price new loans and other financial exposures using a USD Libor-replacement rate such as SOFR by the year-end deadline—just nine months away. But who should take the lead in this transition—the banks or the corporates?
- That question and other issues that companies confront relating to the move away from Libor arose at a recent meeting of NeuGroup for Capital Markets sponsored by Wells Fargo.
- The bottom line: Members and banks still have a lot to do and must face some big unknowns.
First movers. In terms of pricing loans over SOFR, members said banks were in the best position to move first, given the size of their balance sheets and the large number of loans they hold.
- But while it may seem perfectly logical that banks should take the lead because lending is what they do, discussions among bankers at NeuGroup meetings make clear that it’s not that simple.
- The banks say they aren’t ready, one member said. He added that banks in the UK voiced similar sentiments about pricing his firm’s debt over SONIA, the UK equivalent of SOFR.
- “We just said, ‘We’re doing it, here are the terms,’ and they all signed up for it.”
Follow the leaders. Proactively searching for and resolving Libor-related issues can devour treasury resources, and members agreed that other market participants with broader and deeper exposures have greater incentive to lead the charge.
- Among the players and participants seen as appropriate leaders are other corporates, banks, custodians and trustees.
- “So we can be fast followers,” said one member, adding, “But as the date gets closer my anxiety is starting to build.”
- Another member is actively pushing for a solution in the securitization market where his company is a major player. “The leaders in specific segments have to be thoughtful and help solve issues,” he said.
Non-treasury exposures. One member raised the issue of who beside treasury has been involved with determining companies’ total exposure to Libor.
- One member said his treasury is coordinating the effort but, “We’re relying on support from other functionaries to go through the contracts.”
- Another member said his team had anticipated finding USD Libor exposure in leases and procurement contracts across the company but was pleasantly surprised to find it limited mostly to treasury.
- A corporate restructuring by one company prompted it to search for Libor among tens of thousands of contracts. Only a few involved Libor issues, including late fee rates on one-off supply contracts. The issue for peers, the member said, “is whether to find them or deal with the small tail risk when it comes up.”
- Two companies found employee stock ownership plans (ESOP) with Libor-priced loans spanning decades that will likely have to be negotiated bilaterally, and another found exposure in its captive financing unit.
Term SOFR? One member brought up banks that recommend a daily average of SOFR with observation shift, adding wistfully, “It would be really nice if there was a [forward-looking] term SOFR.” Other members agreed but expressed some doubts.
- One member mentioned insufficient liquidity supporting a term SOFR raising concerns about renewing a revolving credit over a daily-average SOFR, since “flip” clauses in credit agreements could change the rate to the term version before enough liquidity emerges. “An opaque market is what got Libor into trouble in the first place,” he said.
- Another member recalled a Fed official saying at a recent ARRC meeting that a term SOFR could increase banks’ hedging costs, prompting them to avoid such transactions or pass on costs to corporate clients.
