Some companies are ready for the end of libor, but not all

From January 1, US banks will no longer be allowed to issue new debt linked to Libor, the global benchmark underlying billions of dollars in financial contracts. Financial authorities began phasing out Libor in 2017 after discovering that traders at major banks had manipulated the rate by submitting fake data.

Major US financial institutions have been preparing for the transition for years. Many of them have replaced Libor with alternative benchmarks, including the Secured Overnight Financing Rate – Wall Street’s preferred choice – for some of their assets, including interest rate swaps and bank-backed securities. mortgage claims.

Meanwhile, non-financial corporations and smaller institutions such as regional banks are at various stages of selecting a replacement rate and updating their systems to handle the change, analysts say. Some companies have hung on to Libor, making another new deal before the end of the year, as debt sold before the deadline may continue to refer to the rate until June 2023.

Executives, lawyers and investors expect these companies to make further progress to move away from Libor in early 2022. But for some non-financial companies, preparation could lead to distractions from their core business. , and worse yet, lack of preparation can raise financial questions. regulators on their ability to manage the transition, said Venetia Woo, senior global advisor Libor at consultancy firm Accenture.

“These changes may look very minor from the outside, but they have big ripple effects,” Ms. Woo said.

Many products, including currency swaps and floating rate notes, have been replaced by Libor, Michael Gibson, director of the Federal Reserve’s supervisory and regulatory division, said at a board meeting at the beginning of the month. All new mortgage-backed securities issued by Fannie Mae and Freddie Mac are now tied to SOFR, he said, and about 90% of recently issued floating rate notes.

The value of interest rate swaps referencing SOFR has grown from less than $ 1,000 billion in September 2020 to over $ 7 trillion through November 2021, Gibson said. Currency swaps, where one party borrows one currency from another and lends another currency in return, between the US dollar and other currencies have almost entirely shifted to SOFR or other benchmarks, has t -he adds.

But for business loans, the transition has been slower. According to Leveraged Commentary & Data, of the $ 598.59 billion in excess listed business loans sold this year through December 27, only 2.6% referred to SOFR. Leverage loans are typically issued by companies with high earnings leverage and used by private equity firms to help fund business buyouts.

Earlier this month, WideOpenWest Inc., a cable operator based in Englewood, Colo., Launched a $ 730 million loan maturing in 2028 to refinance an existing line of credit. The company chose SOFR over other replacement rates because it is based on observable transactions and large volumes, said CFO John Rego.

“We believe that the key characteristics of SOFR underpin its strong presence and acceptance in the market, and will be the main benchmark in a post-Libor era,” said Mr. Rego.

Also this month, medical device maker ICU Medical Inc. sold an $ 850 million leveraged loan to help fund its pending $ 2.35 billion acquisition of the medical division. of Smiths Group PLC, an engineering company. Executives at the San Clemente, Calif., Based company chose SOFR after their lenders told them it was the most accepted replacement rate in the leveraged loan market, the leveraged loan market said. CFO Brian Bonnell. ICU Medical did not consider credit sensitive alternatives, said Bonnell.

“We weren’t looking to do something exotic to be unique,” ​​he said.