Finance

5 Introduction The London Interbank Offered Rate ("LIBOR") is deeply rooted in trillions of dollars of financial products across currencies, jurisdictions and asset classes. It has been called the "world's most important number," owing to its pervasive use and critical role in the financial system. It is also going away. Global regulators have, in various ways, signaled the end of LIBOR by the end of 2021. Banks and other financial institutions have been actively directed to prepare for the "transition"—from LIBOR to alternative reference rates—by formulating plans, amending contracts and readying systems. But what about corporates? The LIBOR transition is not simply a "bank problem." LIBOR's cessation as a critical benchmark or reference rate presents specialized challenges for corporates because they are direct "users" (i.e., buyers and counterparties) of LIBOR-based products. In addition, corporates rely on LIBOR in critical internal systems and risk models. They also use LIBOR in pricing mechanisms and for other purposes in various types of contracts, from purchase agreements to vendor agreements. The looming LIBOR transition deadline of year-end 2021 presents a tight timetable. Given the vast quantity and array of financial transactions that are subject to LIBOR, and the fact that LIBOR is embedded in critical financial and treasury management processes and systems, the work still required to be done by corporates and other market participants is extensive. While COVID-19 has exacerbated the situation by diverting management resources to pandemic-related areas, not even a pandemic will delay this transition. Yet the path to replacing LIBOR is, and remains, a complex one. Despite the seemingly constant drumbeat of official speeches and white papers, there are many unresolved issues facing corporates, not least the concerns on certain mechanics relating to the various so-called risk-free rates ("RFRs") that are intended to replace LIBOR and other IBORs. By this point in the transition, the largest financial institutions already have sophisticated programs for the replacement of LIBOR in place. The regulators have effectively required them to take the lead in this evolving picture. Other institutions have yet to ramp up fully. If there is a benefit for those latecomers, it is that they can learn from experiences of more advanced firms and recent regulatory guidance. In all cases, however, there is still some work that can—and should—be done to ensure a smooth and seamless transition. This guide is specifically designed for corporates navigating the LIBOR transition. For a successful transition, corporates should be taking five key steps: 1. Take Stock of Their LIBOR-based Products, as Issuers and Buyers 2. Minimize Potential Mismatches Between Existing Obligations and Matching Derivatives 3. Analyze Material Risks and Formulate Risk Mitigants 4. Plan How Best to Convert Systems and Amend Legacy Contracts 5. Prepare for Communications and Regulatory Engagement Our guide discusses each of these steps. While others are most certain to arise in the course of transition-related work (a checklist of other key tasks is provided on page 25), we believe these steps set the stage for proper and thoughtful engagement by those within the corporate treasury and financial function to advance a firm's transition away from LIBOR.

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