Embracing the IBOR change

LyondellBasell, headquartered in the Netherlands, is one of the largest plastics, chemicals and refining companies in the world. With its global presence and significant operations in the United States, the company has been affected by the IBOR reform. The Treasury team was well aware of this impact and proactively approached the transition away from the IBOR rates in order to be ready ahead of time.

While it was a global and multi-functional project, one of the first goals was to ensure the TMS readiness for the calculation with alternative reference rates and the new discounting methodologies. As part of the action plan, the LyondellBasell (LYB) Treasury team (supported by procurement and IT) issued an RfP in Q4 2020 with the aim to get external support for (a) the required system changes, (b) to provide business support for initial transition plans and (c) to adhere to the best-in-class ambition of the company.

Preparing for the transition

LYB selected Zanders as implementation partner and right after the selection the project kicked off in January 2021. Urszula Chwala, was the Treasury Lead for LYB and she outlines why LYB initiated the project earlier than many other corporates: “The project team was already busy since the beginning of 2020. We analyzed the potential global impact of the IBOR reform to LYB. Amongst other impacts we were aware that LYB’s SAP Treasury Management System was highly customized, especially in the area of SAP In-house Cash. As such, we wanted to make sure that we would be ready for the transition to support our business and to enable all teams at LYB to move forward with changes on financial, commercial and legal matters.” Urszula also further comments on the RfP process: “We were looking into the third party that had both technical and business knowledge related to the IBOR reform and could bridge the gap between LYB IT and the Treasury department.”

Appreciated approach

LYB is using SAP ECC EHP8 as their treasury system and as such the standard functionality developed by SAP to support daily compound interest calculation could be implemented. On the Zanders side, SAP consultant Aleksei Abakumov, Adela Kozelova (who fulfilled the role of the business expert and project manager) and Anuja Naiknavare in the role of support consultant have been closely working with LYB’s Treasury and IT teams throughout the project.

“Zanders made this project as easy as it could be. What I really appreciated was the approach taken by Zanders team. They have taken all the suggestions from us and tested them and then came up with additional suggestions as well. The Zanders team was thinking with us, taking our best interest in mind. They supported us in every detail and removed concerns and roadblocks. Zanders also acted as business alliance in the project to ensure that all business requirements are now fully translated into the technical solution,” Urszula says.

A new functionality

In order to achieve system readiness, the project included configuration and diligent testing of a new data feed source which was required as a base to enable the daily average compound, the simple compound interest calculation and the new evaluation type with enhanced discounting curves. Considering the uncertainty, the availability of the new alternative reference rates, market conventions and the exact timing, the project’s aim was to make sure that the system would be able to support different variations of interest calculation. The project went successfully live in May 2021.

Urszula outlines different challenges encountered in the project: “Technically the biggest challenge was finding the right market data feed for the new rates. The challenge was finding the source and, making it available in SAP and test all scenarios. For the actual transactions, the system is a lot more flexible with respect to entering transactions, which makes a deal capture more complex. But Aleksei has supported the team a lot in navigating through the new functionality and we are confident to enter new deals with overnight risk-free rates. On the business side, the market clarity, especially with regards to market conventions, is still challenging the business cutover.”

Transactions

On the transition side, Treasury was cautiously managing the exposure to the IBOR reform by refraining from entering variable interest rate referencing transactions over the last two years. As a result, there is no need to cutover of any existing transaction. However, there are few intercompany loans that will mature by the end of this year and some of them might be replaced by the deals referencing to the overnight risk-free rates. Having strong presence in the United States, the exposure to the USD LIBOR is considerably higher than to the GBP and CHF LIBOR ceasing at the end of this year. Therefore, the major transition is only expected over the next year, closer to the cessation of the USD LIBOR.

Urszula elaborates on the business transition: “Understanding the logic of how new instruments are going to work gives me a piece of mind for the transition. LYB never meant to be an early adopter of the change. Switching intercompany loans as first seems to be the best approach for us, because there are no corresponding derivatives needed for these products. Also, there is no dependency on the external counterparties, which makes the transition easier.”

Really achieved

LYB and Zanders are currently working on a follow-up project for the cash flow aggregation of interest in SAP. This need emerged from the new daily compounding functionality, which by default creates daily cash flow postings that are difficult to reconcile with the interest settlements. A user-friendly solution to aggregate these daily cash flows has been defined and configured and is currently being validated by the end users. This is the last step for LYB to be ready to create a first deal with daily compounding interest calculation in the system.

Urszula concludes: “The change is coming so you can choose either to embrace it or to postpone it. We decided to embrace it now. The greatest achievement of this project is that the project was executed within original timelines, without major issues and it gave the whole Treasury team confidence that the system will perform well. What needed to be achieved was really achieved. The complete solution is already implemented for the technical side.”