Federal Reserve Panel Discussion on Libor Transition Concludes, We Need Standardization Fast 03/30/2021

'After December 31, 2021, IBA will no longer have the necessary panel bank submissions to continue publishing overnight,' said Quarles. 'Some may speculate that the June 2023 date could be pushed back, but the IBA has now stated that it will not have sufficient panel bank submissions. Adjusting to a new reality can be difficult. So, let me be clear: These statements are definitive. There is no scenario in which a panel-based U.S Dollar Libor will continue past June of 2023.'

Quarles pointed out that the U.S. Congress is working on federal legislative solutions; however, '… We can't take any legislative solution for granted until it becomes law,' he said.

States may be moving quicker on this. Most notable is legislation recently passed by the state of New York. Introduced by State Senator Kevin Thomas and Assemblyman Kenneth Zebrowski, Senate Bill 297B/Assembly Bill 164B, will minimize the legal uncertainty and adverse economic impacts associated with the Libor transition, thus providing greater certainty to investors, businesses and consumers. The bill was signed into law by Governor Cuomo and included in his Executive Budget.

The ARRC Non-financial Corporate Working Group, co-chaired by Tom Hunt, AFP director of treasury services, and Tom Deas, chairman of the National Association of Corporate Treasurers, reported on the group's role in the transition.

'The ARRC formed the Non-financial Corporate Working Group last fall, which is made up of about 90 members, highly representative of the S&P 500,' said Hunt. 'There are public and non-public companies, net investors, net borrowers - the goal of this group is to focus on the needs of the borrowers. We provided to the ARRC a convention for intercompany loans based on 30 days SOFR in advance, and we're working on a vendor readiness assessment for all of the various treasury technologies in the marketplace.'

The group also shared findings from a survey it conducted of working group members and their preferences as borrowers, as well as their views toward SOFR. Results of the survey show that upwards of two-thirds of respondents' banks have not initiated communication, have not received proposals from their banks for how the banks are going to lend to them specifically going forward, and have not talked about alternatives or discussed what is possible.

'The majority of respondents - over 90% - want some type of in SOFR in arrears and SOFR in advance,' said Hunt. 'They want a rate that gives them a higher level of certainty- much like what we have now with LIBOR. Ultimately, when Quarterly EPS reported, if there would be minimal impact on quarterly interest income or interest expense adjustments quarter over quarter. Having that advance option really gives that higher level of certainty. However, from a treasury technology standpoint, the system changes just aren't there yet.'

Matt Johnson, treasurer for Genesco, Inc., talked about his experience with the transition. 'We are continuing to push on a rope with our lead bank: Progress is slow but improving. We had another Libor update call with them last week, and now we are waiting to see an example of the hardwired language that was not a part of our June 2020 COVID-related amendment. The bank is hosting a live work transition call for its clients on April 1, so again, it is progress, but it is slow. We have the advantage of a relatively simple capital structure. Our agreements are coming up for renewal in January of 2022, so the issue from my perspective is that I have got more unknowns today than I am used to, than I would like to see, or would be comfortable with.'

'I agree with the sentiment,' said Jennifer Herdin, VP, Corporate Treasury at PVH Corp. 'We are having the conversations with our banks, but there is nothing tangible to move forward at this point. Again, we have been asking for that hardwired approach, which should be coming, and then is that going to be enough? Based on the dialogue I am having with other corporates, between our working group and other peers, everybody is waiting for a little bit of a standard to be given. Right now, there are a lot of alternatives, and alternatives do not help to develop your systems or implement, because nobody wants to go first. They are still just waiting for clarity and waiting for that first move. Somebody needs to move soon. We talked about it -multiple currencies and multiple lenders. It is complicated. We need to look further into how to standardize those mechanics.'

Not having enough time to make changes to the system is the biggest downside, according to Johnson. 'There are quite a few complexities, whether it's an advance or in arrears, whether it's simple or compounding interest rate calculations, those are all the implications, those are all the downsides of not knowing. Even the vendors are hesitant to move forward because with the lack of standardization, nobody wants to make the first move. There is a first mover's disadvantage in this situation. So as Jennifer mentioned, we need standardization fast.'

For more information about the Libor transition and how to prepare your company, check out the AFP Libor Guide.

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