Pandemic will not delay Libor phaseout

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The COVID-19 pandemic will not delay the phaseout of Libor at the end of 2021, participants in a seminar sponsored by the Government Finance Officers Association were told Thursday.

The Financial Stability Board issued a statement April 2 affirming that it is sticking with the phaseout plans, which means local and state finance officers need to begin their preparations.

Cindy Harris, chief financial officer for the Iowa Finance Authority, said her agency has a $90 million to $95 million exposure to Libor as well as a line of credit that will expire before the end of 2021.

“We're getting close to the end of 2021 where we need to think about how we'll deal with our financial obligations, particularly taxable financial obligations in the post-Libor world,” said Patrick McCoy, director of finance for New York’s Metropolitan Transportation Authority.

More than 300 people participated in the web-based video session to get advice on how local and state governments should prepare for the phaseout.

In fact, 57% of the seminar participants said in an instantaneous online poll they haven’t started preparing for the Libor transition.

Twenty-four percent have done some planning work, while 12% said they have identified their exposure and begun executing some work. Only 2% have almost completed work and just 5% said they have put into place robust fallback language.

Libor, an acronym for the London Inter-bank Offered Rate, is used in over $400 trillion worth of contracts and outstanding debt worldwide with about $200 trillion of that in the United States, according to Jay Goldstone, a retired managing director for the Public Finance Group of Mitsubishi UFJ Financial Group.

“So transitioning from Libor or to some other reference rate is no small undertaking,” Goldstone said.

The Federal Reserve Bank of New York took what McCoy described as a significant step in March by starting to publish daily averages for the Secure Overnight Financing Rate, also known as SOFR.

SOFR, which is likely to become among the most commonly used alternatives to Libor, is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities. The New York Fed also publishes for 30-day, 90-day, and 180-day average rates for SOFR.

The advantage of SOFR is that the trades are fully collateralized with U.S. Treasuries.

“SOFR or the overnight repo market secured by U.S. Treasuries is one of the most robust markets that we have in the U.S.” said Readie Callahan, head of communications strategy for the Wells Fargo LIBOR Transition Office.

“It has in excess of a trillion dollars in daily volume,” said Callahan. “It's represented by thousands of market participants, and all of the data flows through DTC Bank of New York Mellon. It’s actual trades that are calculated. There's a very clear methodology on the New York Fed’s website.”

In addition to SOFR, other alternative reference rates include the Fed Funds rate, SIFMA, and the yet-to-be-released International Swaps and Derivatives Association’s protocol for conversions, said Seema Mohanty, managing director for Mohanty Gargiulo LLC.

“There is some benefit to waiting until the ISDA protocol comes out,” said Mohanty.

Mohanty also said that SIFMA is a really good alternative rate right now for conversions in the current market with SIFMA rates near historical lows.

State and local governments also have recent guidance from the Governmental Accounting Standards Board. In April, GASB issued Statement 93 which provides accounting and financial reporting rules for transitioning from Libor to other reference rates.

The U.S. Treasury and Internal Revenue Service also have proposed transition regulations for governmental units moving away from Libor that address the possibility that modification of a debt instrument, derivative, or another financial contract could be a taxable transaction for federal income tax purposes or could result in other tax consequences.

Both the Treasury proposal and GASB guidance include all other IBORs offered in other countries, including Switzerland, Japan, and the European Union.

Governmental issuers still do not have templates or protocols for documents that would comply with the new reference rates. Those protocols are expected to be issued by the International Swaps and Derivatives Association.

Cindy Harris, chief financial officer for the Iowa Finance Authority, said her agency has a $90 million to $95 million exposure to Libor as well as a line of credit that will expire before the end of 2021.

Harris said that once finance officers identify their own Libor exposure, they need to determine whether it’s material and how that can be mitigated.

Libor exposure may come through a private placement or from swaps and derivatives, said Harris, suggesting termination or refinancing variable-rate debt into fixed-rate as among the options.

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