LIBOR transition and corporate finance

LIBOR affects corporations too

Corporate CFOs are beginning to focus on potential risks of the coming LIBOR transition. They know managing corporate debt and liquidity could get more challenging as LIBOR-based products become less desirable. And, they may need to adjust their hedging strategies to manage risk. Without a thoughtful analysis it will be difficult for corporations to accurately identify all of their exposure to the change.

In fact, LIBOR can be scattered across a company’s entire business: in leases, accounts payable, and financing products offered to customers. It may be cited in transfer pricing agreements across global affiliates. While some contracts have “fallback” provisions that kick in if LIBOR is unavailable, these terms may not be desirable, and they could trigger disputes with key customers or suppliers.

Know your options

We encourage corporate leaders to take a disciplined approach to understand and mitigate the risk:

  • Help your colleagues understand how important this transition can be
  • Start now to identify all the functions that could be affected by the change
  • Quantify the real risk you face, and be ready to act as markets move and contracts start to expire
  • Reach out to financial partners to see how they plan to remediate risks, and make your own plan
  • Communicate with clients, trading partners, and other stakeholders about your plans

PwC can help you prepare your people, processes, and technology for the coming transition.

Potential impact of LIBOR on the balance sheet

Why it matters

The time to act is now. The deadline for the phase out of LIBOR from your business processes will be the end of 2021, maybe sooner.

Even now, there are significant events driving the market to adopt the new transition rates. Companies may experience difficulty in offloading LIBOR-based assets as 2022 approaches.

The LIBOR transition is not only a financial industry problem. LIBOR exposure is lurking in more than derivatives and investments.

The Risk of Value Transfer is real and companies must actively manage basis risk between LIBOR and alternative reference rates. Fallback language helps establish how financial instruments settle cash but will not fully mitigate basis risk.

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Jonathan Bergeson

Jonathan Bergeson

Partner, PwC US

Marguerite Duprieu

Marguerite Duprieu

Director, PwC US

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