Life after LIBOR: Shell throws weight behind SOFR

Royal Dutch Shell on Friday announced it has signed a $10 billion revolving credit facility (RCF) to replace its existing $8.84 billion facility. Notable in the change is the transition from operating under LIBOR, set to expire at the end of 2021, to the Secured Overnight Financing Rate (SOFR).

Shell has branded the new RCF as “one of the world’s first credit facilities linked to” SOFR, which was selected as the preferred alternative to LIBOR by the Fed-formed Alternative Reference Rates Committee in June 2017. Under the terms of the Shell deal, the LIBOR interest rate will be replaced by SOFR as early as the first anniversary of the signing date of the RCF, once the bank market is fully prepared for SOFR as an underlying rate.

“Transactions such as this play a crucial role in establishing conventions that can be widely adopted across the market, and Shell has demonstrated real leadership by engaging with banks to demonstrate a path to a post-LIBOR world.”

Tushar Morzaria, Chair, Sterling Risk Free Reference Rates Working Group

With its new RCF, Shell joins Fannie Mae and Barclays among industry leaders to embrace SOFR. Bank of America and Barclays Bank acted as joint coordinators for the Shell facility.

“I am delighted that Shell has been able to develop a practical solution for the transition to SOFR,” said Tushar Morzaria, group finance director at Barclays and chair of the Sterling Risk Free Reference Rates Working Group, in an emailed statement. “Transactions such as this play a crucial role in establishing conventions that can be widely adopted across the market, and Shell has demonstrated real leadership by engaging with banks to demonstrate a path to a post-LIBOR world.”

Following the discovery of manipulation and fraud with the rate, the Financial Conduct Authority, the U.K. regulator that oversees the maintenance of LIBOR, said it will no longer compel financial institutions to report information that forms the basis for LIBOR past 2021, leaving markets and regulators globally to determine new means of benchmarking financial products.

Though SOFR, a measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities, has clout, it’s far from a definitive choice to replace LIBOR, which has been used as a benchmark to determine lending terms on products ubiquitous to U.S. markets, such as corporate and municipal bonds, variable-rate loans, asset-backed securities, and many derivatives. For its part, the Securities and Exchange Commission has made it clear it still does not endorse the use of any particular reference rate as a replacement, though it has preached “urgency” to market participants in finding an alternative.

“The Commission staff is monitoring whether the adoption of a variety of replacement rates for USD LIBOR instead of the emergence of a dominant successor could limit the effectiveness of all replacement benchmarks,” the SEC said in its latest update.

Other U.S. regulators are also pressing to provide guidance for transition. The Federal Reserve has stressed transition efforts should already be underway, and the Commodity Futures Trading Commission this week said it intends to be the first agency to provide LIBOR-transition related relief, with a series of relevant no-action letters set to publish by Dec. 20.

“This relief will remove many of the barriers to converting legacy LIBOR swaps to SOFR,” CFTC Chair Heath Tarbert said before a Market Risk Advisory Committee meeting. “The relief will cover amendments to existing swaps that either add a fallback provision or change the reference rate to SOFR or another risk-free rate.”

Meanwhile, the Financial Accounting Standards Board (FASB) has already made adjustments to hedge accounting rules to allow for a seamless transition from LIBOR to SOFR. The accounting rulemaker is seeking to have a final standard in place on LIBOR reform by early 2020 after voting last month to approve temporary, optional guidance to ease the potential accounting burden for transition.

In a recent Accenture poll, only about 40 percent of 177 global financial institutions surveyed said their organizations have a unified and consistent approach in place for transition from LIBOR.