The cessation of LIBOR has led to significant large-scale transitions for larger companies. Here, Edel Hough, head of corporate finance at British American Tobacco (BAT), talks to The Treasurer about some of the planning and project management issues at the group.
Senior management sponsorship enabled me to take this forward and a project team was formed with key stakeholders from accounting, legal, IT, tax and treasury. This was to ensure that the impact of the cessation of LIBOR was appropriately assessed, ensuring wider implications were considered.
I collected data and developed a deep understanding of the alternative rates and various market conventions that were being discussed among the industry-led working groups. This allowed me to carry out an impact assessment on the financial instruments used by BAT.
I began to map out BAT’s existing LIBOR exposures and prepare an action plan, recognising that these changes would have wide-reaching consequences. The practicalities of implementing these changes were also taken into consideration and we remained prepared to adapt where necessary.
As with any large-scale change projects like this, effective and timely communication would be a key element to the successful outcome. The project team met on a monthly basis or more frequently as required. When Covid-19 hit and we all started working remotely, I created internal project working groups in Microsoft Teams where all contributions were shared, and this allowed everyone involved to keep up to date with progress and address any issues on an ongoing basis.
We had to deal with the technicalities of figuring out how interest would be calculated based on a backward-looking rate that is published daily instead of a forward-looking term rate. An additional complexity was that we were trying to propose and implement changes while at the same time market conventions were continuing to evolve.
Upon a review of our legal agreements, we realised that we had to develop appropriate fallback language to allow us to potentially amend floating-rate transactions that were historically based on LIBOR as the reference rate.
In March 2020 we engaged with our banking counterparties and moved from theory to practice to incorporate fallback language into our £6bn revolving credit facility (RCF). This was the world’s first syndicated multi-currency RCF to incorporate both the sterling overnight index average (SONIA) and the secured overnight financing rate (SOFR) as the replacement rates for GBP and USD LIBOR respectively. The facility also incorporates the euro short-term rate (€STR) as the reference rate for euro swingline loans, which is intended to replace the EONIA as the overnight euro rate.
As a market participant, we believe this transaction helped the progress of official sector-led efforts to transition the sterling and USD LIBOR loan markets to their alternative reference rates and provided an opportunity to aid the broader market evolution towards new approaches and interest-rate conventions. It also provided a helpful reference point for the wider market.
Additionally, we were one of the first corporates to sign up to the ISDA 2020 IBOR Fallbacks Protocol published in October 2020 to incorporate fallbacks for our derivative portfolio linked to certain IBORs.
Internally, given the complexity of the new calculation conventions, we wanted to ensure that our IT systems would be able to handle the new interest calculation methodologies and settle transactions referencing the new backward-looking rates. We engaged at a very early stage with our treasury management system provider and once the functionality became available, we started the IT leg of the project to implement the changes. We wanted the system to have the ability to compute interest based on any of the interest conventions that were being considered across markets and products to ensure maximum flexibility.
In summary, 2020 was a challenging year in many ways for the treasury community. Not only were we dealing with a global pandemic that meant that many treasury teams were at the forefront of the crisis, managing liquidity, refinancings, rate volatility, etc, but we were also preparing for BREXIT as well as LIBOR-EXIT.
BAT is in a good place in terms of being ready to welcome transactions incorporating the new reference rates. We have developed robust plans and we are ready for a smooth transition.
We have already executed some transactions using daily risk-free rates instead of LIBOR and we will ‘switch’ our RCF over to SONIA and SOFR in June 2021.
There have been challenges along the way and with those challenges great opportunities to learn have emerged. I have found the key to successfully managing such a complex and broad-reaching project is to be open to change, be prepared to challenge to drive change and to expect the unexpected. LIBOR cessation is around the corner and this change was going to happen whether we liked it or not. The journey towards alternative reference rates is ongoing and it has been a great learning process. To be involved in something revolutionary is very exciting and rewarding not only for me, but also for the entire team who have worked so hard to deliver on such an important transition.
Edel Hough is head of corporate finance at British American Tobacco, responsible for the strategic funding activities of the group and leading its LIBOR transition project
Further ACT resources on the LIBOR transition can be found here: treasurers.org/hub/technical/libor.