US companies adopt SOFR as an alternative to Libor

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Large US firms are cutting London interbank rates ahead of the year-end deadline to drop the ailing short-term interest rate benchmark.

Sports Car Manufacturer Polaris Inc..

Recently, as part of our business with Wells Fargo & Co, we chose Wall Street’s preferred alternative, the Guaranteed Overnight Financing Rate, as the new benchmark rate for auto dealer inventory financing.

Bob Mack, chief financial officer of Polaris, said SOFR is favored more by regulators than other options because of its widespread acceptance by regulators. The company, based in Medina, Minnesota, in June worked with several banks to include similar words for a $ 300 million line of credit extension, he said.

The switch to alternatives precedes the year-end deadline to end the use of Libor, unpopular after an operational scandal. Banks, borrowers and lenders make plans to convert Libor before December 31, which expires on a shorter date.

Libor supports billions of dollars in financial contracts and sets interest rates on everything from derivatives to consumer loans and corporate debt. Problematic referrals are only for $ 200 trillion in derivatives, so a smooth transition is essential to avoid legal disputes and leave borrowers without a critical payment rate. ..

Hedge funds and asset managers quickly phased out Libor, while US companies have been slow to choose alternatives. Some people wanted forward-looking rates that arrived in late July from a group of banks, insurance companies and asset managers behind SOFR, known as the Alternative Benchmark Rates Commission (ARRC). He said he was hesitant to change earlier this year.

Greg Gefen, head of North American corporate interest rate derivatives marketing at JP Morgan, said corporate adoption has increased since the committee approved a benchmark managed by the exchange operator. CME Group Inc. the same month. paddy field. He said the year-to-date volume of SOFR derivatives traded with corporate clients has increased 800% and that banks are trading four times as many clients as last year.

“The fact that we are approaching the deadline is forcing people to focus more on their hands,” Geffen said. “But the ARRC’s approval of the term CME SOFR is the only major contributor to moving the agenda forward these days.”

SOFR alternatives are also emerging and some companies are reluctant to choose a single benchmark. These include the Bloomberg Short-Term Bank Yield and Ameribor Index. This is a rate sensitive to the increase in financing costs during periods of financial stress. Accounting and investors in some companies are similar to Libor and prefer these alternatives to ease the transition from a system and operational perspective.

The renewed language of some Polaris contracts allows you to switch to a different reference rate at any time. “For some reason, we’ve added a bit of flexibility in case other standards become more popular than SOFR,” says Mack.

Banks will no longer be able to issue new financial contracts using Libor after December 31, but will be able to continue to refer to many existing debts until June 2023.

Some companies are waiting for the change until the deadline approaches.Cincinnati Financial Corporation..

Real estate and non-life insurer CFO Michael Sewell plans to switch contracts to a new benchmark rate almost three months before the 2023 deadline.

“We are ready to do it. The Fairfield, Ohio-based company has few Libor-based contracts, Sewell said. Cincinnati Financial pays by the deadline. There are no new debt contracts or existing lines of credit.

Cincinnati Financial is likely to switch to SOFR because it may appear to be popular with other companies, he said. “I want something with the lowest interest rate, but it’s hard to figure out in actual transactions, so I’ll wait a bit,” he said.

Morgan Stanley banker Tom Whip, who is also head of the ARRC, said use of Libor continued to decline and regulators continued to pressure corporate lending and syndication transactions using SOFR . He said he expected more in the future.

“All obstacles are now removed. It will ultimately be a question of economy, ”said Wipf. “SOFR covers like Libor covers are easy to negotiate. The liquidity is there.

Write to Julia-Ambra Verlaine (julia.verlaine@wsj.com) and Mark Maurer (mark.maurer@wsj.com).

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US companies adopt SOFR as an alternative to Libor


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