The LIBOR transition will impact close to $400 trillion in contracts. Organizations face a daunting task to examine, renegotiate and redocument any contracts containing LIBOR-based language or instruments before LIBOR expires on December 31, 2021.
In a recent webinar, Chris O’Connor and Bill Belt of CDS, along with Charlie Connor, CEO of Heretik, discussed how to perform a strategic overhaul of affected contracts, streamline the revision process, and avoid the consequences of failing to adapt. You can view the recorded webinar here.
We’ve distilled some of the major themes of their discussion below.
1. It’s definitely happening. It’s not too late. You just have to get started.
We’ve come to the point now where SOFR is going to be the preferred rate for the United States as a replacement for LIBOR, but how we calculate that rate has not yet been determined. You can sit and wait and say, “Once they determine that, I’ll start the process,” or you can start now and leave that last part for later. Which will be part of your roadmap for attacking this problem?
Just starting with a single person or a single computer or department is really important, and there are ways to handle paper if it needs to be digitized. Start the process and find a partner to help you get going. Don’t be embarrassed by what you don’t know.
Once you start, you’ll get some immediate insight. It will no longer be this big black cloud of contracts and a $300 trillion problem. It will become something real.
The mechanics of getting one of these transitions started is just getting past go, breaking away, and doing something. It’s recognizing that we need to do this and get the right stakeholders involved with the understanding that this is going to be a large project.
Everybody’s talking about the end of 2021. But when you think about the systems involved, the budgeting that goes into the additions, augmentations, and improvements to that system, there are things other than just the LIBOR remediation and transformation project that need to be in the works already. Those are under the control of other stakeholders and constituencies within an enterprise that all needs to get up and running.
A big portion of these projects were meant to have already occurred, for example, after an acquisition or a merger, but because of cost considerations at the time there wasn’t enough drive to get it done. But it’s happening and this will be “cash in hand” impacting.
2. The review journey starts with a few key first moves.
The first thing is to find your contracts. Then find partners to work with. You’ll need a legal partner to provide legal advice regarding the contract changes. Add an AI technology provider (like Heretik), an analysis tool which everyone can access, and a consultant to be the bridge between the two (like CDS). You’ll want to track progress with a project management application as well. Ideally, you’ll want to get it all in the same place.
Make sure everyone is monitoring the same things at the same time. There’s never a, “Oh, I told you last week, it’s going to be like this, but this week it’s actually something else.” Those conversations won’t need to happen.
Then, you must ask yourself: Who are all the stakeholders? Who are the right people? You need the General Counsel, your internal technology groups, your outside counsel. Who manages the tools that store that data, who manages the calculations for your payroll, etc.?
This will also give you a better understanding of the full scope.
3. Identify the key criteria that will help you prioritize your team’s time and resources.
The first major question to answer is: What does your exposure look like?
The process should combine both stakeholders within the enterprise as well as outside counsel. They need to figure out a plan of attack.
In the beginning, the software will give those initial data points – even just expiration dates and contract values – to start better conversations. As you go along, there will be a lot of questions and stakeholders involved.
You may be looking at contracts by dollar amounts, or maturity dates, or contract types, or you might use very specific financial instruments. Organizing by your own relevant parameters will speed up the process.
Then you begin analysis and streamlining. You realize you can eliminate plenty of the pile because they expire before LIBOR does. Or, maybe you have a pile of documents that are very similar and can be lumped together for mediation. So you put them in a separate pot, perhaps a silo where you say, “All the ones like this are going to be subject to this mediation.”
Make sure you’re working with a knowledgeable counsel that is going to process the information that your review team delivers and can take action. A good lawyer is a great strategist but only if he/she has all the right data points on hand. Having a team that understands what the endgame is, is critical and becomes more important than ever that they understand the technology, how it’s working, and what the limitations are, so you’re not surprised three months down the road when a deliverable has an unexpected outcome.
It’s okay if you don’t know everything. Maybe you don’t know certain things that you think you should know. You thought you had all your leases organized, then you might find a few extra ones. It’s okay. But that’s why getting these inventory snapshots is huge, because with the right stakeholders involved, you’ll start remedying what’s missing, but also start prioritizing the work that could be the focus of a bigger negotiation later on.
4. It’s a collaborative effort with various stakeholders and there will be considerable downstream benefits.
The path will involve a collection, identification, and evaluation process.
It’s not just a single silo. It’s not just the treasurer’s office. It’s not just coming from the C-suite. It should be a group of people who are dedicated to this conversion, because it will impact a variety of constituents downstream once the actual process initiates. The value that this information provides to those teams is immense. It’s night and day from how contract review used to be done.
When questions come up or a mystery needs to be solved, you’ll have access to the stakeholders who were involved from start to finish and can explain what you’re seeing. If someone asks, “Does anyone remember when we bought this company? or “When we sold this asset, what happened?” You want the people with that knowledge involved.
Having those explanations will accelerate the process of coming up with a solution. If you’ve involved the right stakeholders, you should hear clear answers, like “What you’re looking at was a known and expected anomaly that can be explained by X,Y,Z.”
It should be a regular communication process, whether you meet regularly or on an ad hoc basis but you should require people from both sides – the outside counsel and internal team members.
Having a transparent, single source of truth is really important from a defensibility standpoint since it will show where those decisions were made and where you may have gotten stuck. If you’re showing negligence because you didn’t respond to emails is very different from ‘you had to really dig in and investigate.’ The scanned hard copies of documents will all be tracked in the right tool when you’re managing that process with your partners.
It’s all about people, process and technology. And transparency.
5. Stay on top of new developments from the ARRC and SEC.
There are some very critical milestone deadlines set by the Alternative Reference Rate Committee (ARRC), which is the group that was assembled by the Federal Reserve and the Federal Reserve Bank of New York to come up with a more robust reference rate. They have some very helpful information on their website. It includes some timelines and milestones, two of which were dated June 30. If you look on their website, you’ll see deadlines for work that needs to happen under the hood to make sure systems are in place for IT groups to be able to handle a LIBOR transition. ARRC already has recommendations out there about new contracts which would impact what you’re doing right now and moving forward. You can see the latest from ARRC here: https://www.newyorkfed.org/arrc
The SEC just recently announced that they’re doing a more proactive analysis of these efforts so their compliance inspection examination teams are also in preparation mode.
6. When it comes to regulatory compliance or courtroom litigation, the cardinal rule is to make sure that you haven’t ignored it.
Having that defensible process already in place will not only just save you time and money but will give you confidence if something were to go to litigation. You’re going to be judged by the SEC on the sincerity of your efforts. The one thing that regulators and judges do not abide is the sense that somebody has ignored a regulatory mandate.
By leveraging the technology, you’ll have a solid narrative to bring to court, to an arbitration, regulatory hearing or proceeding. You’ll be able to show that you made an effort, and for lack of a better phrase, you didn’t just “blow it off.” That is the difference between being ready or having your feet held to the fire from start to finish.
Every litigator or trial lawyer will tell you the one thing you can expect is that you’ll never know what to expect. The one thing you can control is your process and setting up a plan that makes sense, executing on that plan with oversight, auditing and then documenting that plan so that you can go back and answer questions. You can do that today leveraging this technology exponentially better than you could ever have done it even three years ago.
7. Ultimately, it’s about the overall health of your business.
The world has been forced to digitize, but the LIBOR transition gives you a unique opportunity to not only address this particular regulation, but really to become more efficient and comprehensive in the way you evaluate your business. That will place your enterprise in a position of strength for the long haul, long after the LIBOR transition has come and gone.