In the previous issue of Drilling Down, KPMG’s Brian O’Neal and Eamonn Maguire described the challenges oil and gas corporations can expect in the coming transition from LIBOR to alternative reference rates. Here, they discuss how firms can prepare to navigate the process.
Many corporations with significant exposures still have a tremendous undertaking before them. Conversations with a number of clients indicate many companies are in the early stages of preparation, but they are markedly behind the financial institutions in their banking groups.
This is not to say companies are ignoring the issue. Many have made significant headway in identifying exposure areas outside the Treasury function’s traditional debt issuance and rates management activities, such as intercompany lending, embedded financing in customer offerings, escalation or penalty clauses in sales and procurement contracts, and franchise contracts. However, moving from “identifying” to “analyzing” and “updating” remains a future-state activity for most firms.
Major energy corporations with complex organization structures and significant, complicated exposures face market-related issues and a host of practical challenges, such as:
The process to fully transition from LIBOR to the RFRs will span several years and consume significant resources. Firms that begin early will secure crucial advantages in making this transition both effective and efficient.
Once corporations determine how the transition could affect them, they should be better positioned to understand the magnitude and complexity of the task ahead, develop an effective roadmap, and assemble resources to plan and execute on an enterprise level.
At KPMG we recommend an initial focus on four areas:
KPMG has a long history of helping clients think through complex transitions and executing against strategic plans. We are currently working with our clients to identify exposures outside their banking relationships and developing plans to tackle the LIBOR transition at the enterprise level. For example, we can help with:
We advocate completing a holistic LIBOR assessment as soon as possible, with attention paid both to standard exposures (debt instruments and derivatives) and non-standard exposures (other contract references, process impacts, and technology impacts). Companies should then take a programmatic approach to addressing and mitigating LIBOR transition risks.
Finally, we recommend companies consider advances in natural language processing, analytics, and contract technologies as a means to streamline their efforts and provide new insights into their rate-based business activities.
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