Hedge Trackers’ Commentary on the Demise of LIBOR
“Fear and Loathing On The Road to Libor’s Demise”
“Then last July, the FCA announced that the panel of banks that currently submit rates required to calculate Libor will no longer be compelled to do so after 2021. Some will continue to participate , but presumably some will cease. That will weaken the value of Libor as a benchmark.
Other benchmark rates are already emerging to take its place. Financial institutions use benchmarks to set their own rates, and the usefulness of each benchmark rate derives in part from how accurately it tracks debt-market risk. As new benchmarks haven’t yet built up a long-term track record, transactions based on alternative benchmarks have so far been mostly short-term instruments.”
Hedge Trackers CEO, Helen Kane, commentary:
Transitioning away from LIBOR reminds me of Y2K, where corporates were late to the scramble. It seems that only lately the media and the treasurers have tuned in and are now panicking and screaming LIBOR, LIBOR, LIBOR!
Corporates have good reason to be nervous. Financing costs are going to be more unpredictable. They don’t know how effective their hedges will be and a lot of companies have interest rate hedges that go beyond 2021. It is not clear if these hedges will protect them against rate changes in the “alternative rate” in their financing agreement(s).
AFP (Association for Financial Professionals) has created an easy to understand checklist, 5 Actions to Take Now, that can help corporates figure out how for the Libor transition for your organization.
Hedge Trackers Senior Director of Client Services, Ruth Hardie, commentary:
As LIBOR is phased out, LIBOR contracts may become Level 3 in the fair value hierarchy – which means more in-depth disclosures and greater difficulty valuing LIBOR contracts as rates become more and more illiquid.
Treasurers should be looking at what their phase out options are under their specific contracts. For any new contracts, treasurers have the option of choosing other benchmark rates such as SOFR.
You can read more about SOFR and how it can impact your hedge program in my latest blog.