Amol Dhargalkar and Kevin Jones speak in Global Treasurer about corporate treasury's transition to SOFR
Despite some operational issues, global corporate treasurers have embraced SOFR and are working to transition their debt to the new benchmark. Speaking to Global Treasurer, Amol Dhargalkar and Kevin Jones discuss the progress of corporate borrowers making this transition.
"There are no new loans on Libor and trades between banks are generally on SOFR. It is the Libor borrowers — our clients — that are still mainly in this process of transitioning over," says Kevin Jones, director of treasury advisory.
The outsized U.S. dollar exposure to Libor means progress with SOFR is keenly watched by the financial services sector, not least by U.S.-based financial risk manager Chatham Financial, which offers corporates expertise in the debt and derivatives markets, including execution services.
Kevin Jones, director of treasury advisory, says one challenge being faced by both lenders and borrowers alike is the emergence of various versions of SOFR, spanning debt, derivatives, and hedge accounting treatment, which has introduced “considerable ambiguity” to the path forward. At the same time, with legacy debt and derivatives based on Libor able to persist until June 2023, borrowers are left grappling with the tension of taking action now versus waiting to cutover to SOFR.
Indeed, says Jones, progress with the transitioning to SOFR is best viewed in terms of the contrasting experience of lenders on the one hand, and borrowers on the other.
“Banks as primary lenders have pretty much fully transitioned. There are no new loans on Libor and trades between banks are generally on SOFR. It is the Libor borrowers – our clients — that are still mainly in this process of transitioning over,” he says. ...
Amol Dhargalkar, managing partner at Chatham, says there are several reasons why a company would want to wait to refinance and thereby trigger the move away from U.S. dollar Libor.
“If the company refinanced just a year ago they may, understandably, be reluctant to do it again so soon, especially as there will be costs to consider,” he says. “It’s one of those situations where we [at Chatham] aren’t necessarily advising them to refinance now or refinance later. It has much more to do with the company’s capital structure and strategy, it’s not a decision built around Libor. Libor is an element of that decision making process but it’s by far nowhere near the driving factor.”
As for derivatives, if they are Libor-based, Chatham is generally advising clients to utilise Libor-based derivatives to hedge the debt rather than creating some type of economic mismatch between a SOFR-based derivative and a Libor-based derivative.
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