Corporate treasurers in crisis-fighting mode look set to misslooming deadlines to abandon the scandal-plagued LIBOR benchmark,threatening a showdown with regulators powering ahead withreforms.

In the grip of this once-in-a-generation pandemic, manybusinesses have already given up on this year when it comes toshifting away from the reference rate that has underpinnedtrillions of dollars in loans, bonds, and derivatives, according tothe Association of Corporate Treasurers.

Lenders and borrowers risk entering a legal no man's land whenthe London interbank offered rate (LIBOR) expiresat the end of 2021—relying on the generosity of regulators andcounterparties for their contracts to be recognized.

The risks associated with LIBOR-linked loans are rising. In theU.K. from October, banks still using securities tied to the ratewill be effectively penalized through a limit on their borrowingfrom the Bank of England (BOE), tightening their balance sheets andmaking it harder to lend to companies fighting for their lives.

U.K. officials said last month that firms should stick to thefinal target but acknowledged that the virus outbreak has affectedthe transition plans of many businesses.

Corporate treasurers "may be in their pajamas, but are workingflat-out," said Caroline Stockmann, chief executive of theAssociation of Corporate Treasurers, a global trade body. "It's allabout liquidity, all about survival, and not about the referencerate in over a year's time from now."

LIBOR was tainted after European and U.S. banks were found tohave manipulated rates to benefit their own portfolios. The U.S.group that's guiding the transition to the new Secured Overnight Financing Rate (SOFR)—theheir presumptive to LIBOR in dollar markets—revealed a frameworklast week for moving cash products from the old to the newbenchmark.

Lawyers and consultants are warning corporations from Europe toAmerica that missing the final deadline could materially impactrepayment costs and liquidity, while the market volatility onlyunderscores the benchmark's manifest flaws.

Smaller British companies with LIBOR-linked loans, inparticular, could lag in their financial planning even as bankersforge ahead with their transition plans, said Ed Moorby, riskadvisory partner at Deloitte.

Similarly, hedge funds, asset managers, and commercial borrowersand issuers of debt "were just coming to grips with the shift, andnow this happens," said Michele Navazio, a partner at Seward &Kissel LLP in New York. "What are they doing now? The short answeris they are not worrying about LIBOR."

As Clock Ticks, Companies Add Fallback Language toContracts

The Financial Conduct Authority (FCA) and the BOE said lastmonth that the U.K. loan market has made less progress, which mayaffect some of the milestones.

The two agencies and the Working Group on Sterling Risk-FreeReference Rates "will continue to monitor and assess the impact ontransition deadlines, and will update the market as soon aspossible," they said at the time.

For now, banks have until the end of September to cease issuingcash products linked to sterling-denominated LIBOR. The FCA toldasset managers to consider ceasing to launch new products withbenchmarks or performance fees linked to the benchmark by then.

The demand to stop lending in LIBOR is the key concern, saidJoshua Roberts, associate director at advisory firm ChathamFinancial, who said the deadline was always very aggressive. "It'shard to imagine regulators forcing companies that are alreadystruggling to access liquidity to stop borrowing on LIBOR ifthey're not set up for the alternative," he said.

In the U.S., the Alternative Reference Rates Committee (ARRC)—abody convened by the Federal Reserve that is helping to guide thetransition—has effectively reminded firms that work on SOFR isstill progressing and the deadline is still the end of 2021.

"The date hasn't changed," said David Bowman, special adviser tothe Board of Governors at the Fed. "People can speculate. Maybe thedate will change in the future."

Bowman said during a webinar hosted by consulting firm OliverWyman on Tuesday that some of the ARRC's near-term goals "will bedelayed a bit" but encouraged participants to "find the placeswhere you can continue your work."

Recent deals seen as helping the bond market's transitioninclude the European Investment Bank's first dollar transactiontied to a compounded SOFR index and a sterling offering by theEuropean Bank for Reconstruction and Development that opens thepath to a universal SONIA index.

As the clock ticks, companies are being advised to ensure theyinclude fallback language in their contracts that allows the use ofa replacement benchmark by the end of next year. This won'tsubstitute for proper management of the transition, but it couldhelp keep companies away from messy lawsuits. Without thefallbacks, "a customer who has a LIBOR-linked loan from you couldsay the contract is frustrated and you end up in litigation,"Deloitte's Moorby warned.

Not everyone has abandoned their plans. Chatham Financial'sRoberts said a number of funds are working intensively to findexposures and sort out legacy contracts. Many companies are hopingfor an official delay, as happened with the MiFID II securitiesrulebook in Europe and the Dodd-Frank Act in the United States.

Yet this could lead to a regulatory game of chicken, withofficials wary of easing the pressure in case LIBOR never ends.

"What used to be good isn't really working, and what's supposedto be replacing it isn't really working," said John Coleman, seniorvice president at RJ O'Brien & Associates LLC in Chicago. "Thefuse is burning."

—With assistance from Silla Brush,Lucy Meakin & Alexandra Harris.

Copyright 2020 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.