The unprecedented global effects of COVID-19 will not delay the previously announced 2021 termination date when banks will no longer be required to publish rates used to calculate the London Interbank Offered Rate (LIBOR). LIBOR serves as a reference rate for derivative transactions, as well as bond investments, bank loans, and variable-rate mortgages. LIBOR is deeply entrenched in financial markets, and weaning off that rate is moving slower than expected. While progress is being made, there is still a lot of work to be done.
Companies should consider the following questions:
- Do you have any LIBOR-linked contracts that extend past 2021? Are they, individually or in the aggregate, material?
- For identified contracts, what effect will the LIBOR discontinuation have on the contracts’ operation?
- Do loan documents address the calculation of interest rates in the absence of LIBOR?
- For contracts with no LIBOR fallback language, do you need to take actions to mitigate risk, such as proactive renegotiations with counterparties to address the contractual uncertainty? What are each party’s rights in the event LIBOR is no longer available?
- What alternative reference rate could replace LIBOR in existing contracts? What basis adjustments would need to be made?
- For LIBOR-based derivative contracts used to hedge floating-rate obligations, what is the effect on the effectiveness of the company’s hedging strategy?
Other items to consider that may have an accounting and financial reporting effect include:
- Inputs used in valuation models—property, cost of capital, pension liabilities, and capital asset pricing models
- Benchmarks for asset managers
- Project finance calculations
- Late-payment clauses in commercial contracts
The transition away from LIBOR will be complicated and likely require significant hours to implement correctly for companies with a large volume of contracts. If you would like assistance, contact your BKD Trusted Advisor™ today.