The London InterBank Offered Rate (LIBOR), a benchmark interest rate for short-term loans in the global market and once considered the “world’s most important number [paywall],” is set to retire at the end of 2021. As LIBOR phases out and is replaced by a new standard rate, the transition will have far-reaching effects on businesses across the globe.
Companies in every industry and at every level of LIBOR exposure need to plan now to manage risks associated with the phase-out. Among the key risks are: contract risks, which require identifying impacted contracts and negotiating necessary amendments to those contracts with all relevant counterparties; risks associated with tax and financial reporting implications of contract amendments; and operational risks brought about by the need to update costly, LIBOR-dependent technology and data processes.
What’s happening to LIBOR?
LIBOR plays a critical role in today’s global markets, serving as the most widely used reference rate for a vast range of short-term financial products, including floating-rate bank loans, adjustable rate mortgages, interest rate swaps, and credit cards. It’s estimated that $200-300 trillion in financial instruments currently reference LIBOR.
The end of LIBOR comes after years of speculation that banks and traders were manipulating the rate for profit. The suspected manipulation caused the rate to be increasingly viewed as an unreliable benchmark and led UK regulators in 2017 to announce the phase-out.
As LIBOR is fully phased out by the end of 2021, it will need to be replaced with a new rate, such as the Secured Overnight Funding Rate (SOFR), or other reference rate selected by contract by parties to loans, debt, and derivatives to serve as the benchmark going forward. SOFR may initially be most dominant in the US, as there are different potential benchmark replacements in different jurisdictions.
How Ontra can streamline your reconciliation of the LIBOR phase-out
Parties to floating-rate debt and other instruments tied to LIBOR will need to expend significant resources to manage the anticipated expiration.
To smooth the process, Ontra offers a comprehensive LIBOR phase-out solution for finance documents that is customizable to suit every business. Combining proprietary software and a network of expert lawyers, our LIBOR reconciliation process follows four easy steps:
First, Ontra creates a customized “scorecard,” a consistent template for abstracting key terms across a single contract type, to capture how each of your debt financing documents addresses the LIBOR phase-out.
Next, Ontra connects you with a team of expert, specialist lawyers who will abstract all your relevant agreements for you, so you can continue to focus on the high-value work that’s core to your business, rather than diverting internal resources n to the LIBOR phase-out.
Your specialized lawyer team then uses Ontra’s proprietary software platform to perform the abstracting of key terms in each document into an easy-to-reference scorecard. When the abstracting is complete, your scorecard will contain embedded links that allow you to generate a side-by-side view comparing the relevant underlying provisions in each document.
The next step is using the business and legal terms abstracted on Ontra’s software platform to generate reporting to facilitate efficient data analysis. Users can:
- Generate a list of agreements that require amendment;
- Sort agreements with LIBOR replacement triggers from those with fallback provisions or other terms; and
- Sort agreements by counterparty.
Ontra’s leading LIBOR solution combines sophisticated, proprietary software and expert lawyers to streamline your LIBOR reconciliation process and ensure quality and accuracy every step of the way.
Act now to reconcile loan documents affected by the LIBOR phase-out
With LIBOR set to phase out at the end of next year, the time is now to reconcile your debt finance documents on new and existing transactions.