By Nina Trentmann
The European Union is lagging behind the U.S. and U.K. in
efforts to switch to new benchmarks underpinning financial
contracts, pressuring treasurers at eurozone companies.
Regulators want financial markets around the world to move away
from interest rates derived from bank estimates. That is a move
spurred by a manipulation scandal involving the London interbank
offered rate used in hundreds of trillions of dollars worth of
contracts, including mortgages and corporate loans. Instead of the
so-called Libor, banks and companies are supposed to use benchmarks
calculated with overnight transaction data.
Both the euro interbank offered rate, known as Euribor, and the
euro overnight index average, Eonia, have to be overhauled or
replaced by January 2020 to meet regulatory requirements.
The problem: the new euro short-term rate administered by the
European Central Bank, dubbed Ester, will only be available in
October, leaving just a few months before the 2020 deadline. The
tight schedule is complicating the changeover for treasurers, who
typically prefer months worth of trading data on which to base
business decisions.
Any delay could slow the issuance of corporate debt in Europe,
as companies might decide to wait as they lack a reference rate to
calculate the interest cost of future bonds. Finance executives
could resort to selling commercial paper or other short-term
financial instruments to meet their funding requirements.
The lack of clarity is concerning European treasurers whose
companies have financial instruments worth millions or billions of
euros linked to the benchmark.
Executives at Finnish industrial firm Wärtsilä, for example,
have expressed concern about the lack of progress around the
benchmark.
"Euribor is by far the most important benchmark for us," says
Anu Hämäläinen, the company's treasurer. "It's a worry that the
replacement process is so delayed."
It is unclear whether Euribor, currently underlying contracts
with a nominal value of EUR180 trillion ($202.7 trillion), will
survive. The European Money Markets Institute, which administers
Euribor and Eonia, deems Eonia in its current form noncompliant
with EU benchmark regulation. The institute, which couldn't be
reached for comment, has developed an alternative methodology for
Euribor, but it is still awaiting regulatory approval.
"It is currently highly uncertain if all these required steps
can be taken in time by all market participants to ensure a smooth
and timely transition," a working group of banks and industry
associations on euro risk-free rates stated in September, according
to published minutes. Some have requested an extension of the
2020-deadline, but it is unclear whether it will be granted, a
spokesman of the European Central Bank said.
That would ultimately need to be agreed upon by the European
Parliament and European Commission, among others. "No one seems to
have certainty, and there is no easy alternative for corporates in
this situation," said Anna Pinedo, a partner at law firm Mayer
Brown LLP. Most of the treasurers she works with are still in the
process of assessing their outstanding debt portfolio, Ms. Pinedo
said. "They are trying to figure out what is happening."
Wärtsilä has hundreds of millions of euros in bilateral loan
agreements and other debt instruments, and the majority of those
stretch beyond 2020. "Renegotiating a bank loan takes time," said
Ms. Hämäläinen. "It's something that nobody wants to do."
The treasurer said she would prefer Euribor and other interbank
offered rates be replaced one-to-one with a new benchmark, without
the need for companies to recalculate and renegotiate their
interest payments.
Existing financial contracts have fallback arrangements for
situations in which there is no interbank offered rate
available--using the cost-of-funds rate for loans, for example--and
treasurers could resort to those. But the cost-of-funds rate for
loans is based on reference prices provided by banks, which makes
them less reliable, according to Ms. Hämäläinen.
Companies in the U.K. have already made changes to some of their
financial instruments. They have been able to do so because the
transition to new benchmarks is more advanced in the U.K. and other
countries, including the U.S.
Associated British Ports, a company that operates 21 ports in
England, Scotland and Wales, has restructured some of its cross
currency and interest rate swaps that were based on the Libor. It
transferred them to the U.K.'s overnight rate, called the Sonia
rate.
"We talked to about 10 to 12 different investors and around 16
to 17 banks," said Shaun Kennedy, the company's treasurer.
Associated British Ports started talking to its financing
partners about 12 months ago, and some of the discussions, such as
those with bondholders, are ongoing. "Some are cautious about being
the first to make changes," said Mr. Kennedy.
National Grid PLC, the network operator, said it is still
evaluating the best of course of action. The company has
derivatives and loans linked to Libor, and compiled an inventory of
contracts that mature after 2021.
Meanwhile, Wärtsilä's Ms. Hämäläinen said she hasn't made any
changes to the company's financial instruments yet. "You just have
to hope for the best," she said.
Write to Nina Trentmann at nina.trentmann@wsj.com
(END) Dow Jones Newswires
February 16, 2019 07:14 ET (12:14 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.