How Is the LIBOR Transition Going?

Loan contracts built upon the London interbank offered rate (LIBOR) must switch to a new benchmark interest rate within the next year. A March 2022 law dictates that if these agreements do not specify a fallback process for moving away from LIBOR, and they are not amended before the end of June 2023 to incorporate a new benchmark, they will automatically transition to a benchmark selected by the Federal Reserve Board of Governors—the secured overnight financing rate (SOFR).

Last week, Treasury & Risk published the first half of a conversation with Amy McDaniel Williams, a partner in the structured finance and securitization practice at law firm Hunton Andrews Kurth LLP who helps clients draft purchase agreements, bilateral credit agreements, and securitization contracts. She explained that new loans are now incorporating SOFR or other alternatives to LIBOR, but that many companies and lenders are trying to sort out what will happen to legacy loans and credit agreements that refer to the old reference rate.

This week, we’re finishing that conversation by exploring exactly what treasury teams should be working on right now to prepare for June 2023.

Treasury & Risk:  So, what do corporate treasury teams need to do before they can make this transition?

Amy McDaniel Williams:  They need to take stock of what they have in their legacy contracts so that they are ready to switch over. They need to understand how they want the interest calculations to work—when you have a bilateral syndicated loan, you are in effect negotiating on all those details. And they also need to adjust their treasury systems to perform the interest calculations in a way that aligns with what’s in the revised legal contract.

Making sure what you offer in your legal contract matches what your back-office operations are doing is very important. And, to that point, I don’t think corporate treasuries should wait for the blunt instrument of federal legislation to dictate what they do. Most treasury groups should be planning to implement their own amendments to change over to SOFR—or whatever other benchmark they choose—before next June.

T&R:  How does a treasury group do that? If they have a lot of contracts that need to be remediated, do they go into each one and read, line by line, and figure out what needs to change?

AMW:  That is one approach. They can write amendments that specify what wording they want changed, on what line, throughout each of their loan contracts. An alternative approach is to put together some sort of omnibus amendment that gets it right, more or less, 99 percent of the time—and that is something all the syndicated loan’s lenders will sign on to.

That is the question we’re seeing borrowers grappling with right now: What’s the most efficient way to deal with various loans? Obviously, if you have a billion-dollar contract, you’re going to get your lawyers to read it in detail. But if you have a lot of smaller contracts, what do you do then?

While the financial institution is usually holding the pen, some corporate treasurers can have a say in changing their loan contracts. Whether and how you want to will depend on your risk tolerance and whether you think it’s worth the cost to pay lawyers to go through every detail.

T&R:  How long will the process of making all these decisions take the typical company? And how does the treasurer convey the urgency if the company currently has a little over a year?

AMW:  Well, that can be a problem. When the deadline got pushed back to June 2023, people took a deep breath, and some stopped focusing so much on the LIBOR transition. I think over the next couple of quarters, treasury teams are going to start focusing more attention on remediating these longer-term loan contracts.

T&R:  For the companies that took a deep breath, as you said, where are they now in preparing for the transition?

AMW:  Late last year and early this year, corporate treasury teams were focused on shifting their new loans to SOFR and getting operationally ready for that. And I honestly don’t think they have gotten very far in terms of remediating older contracts that don’t have a renewal date before June of 2023. But that needs to happen this year—and, like I said, there’s an advantage in terms of the credit spread adjustment to switching over soon.