By Nina Trentmann 

The European Union is lagging behind the U.S. and U.K. in efforts to switch to new benchmarks underpinning financial contracts, pressuring treasurers at eurozone companies.

Regulators want financial markets around the world to move away from interest rates derived from bank estimates. That is a move spurred by a manipulation scandal involving the London interbank offered rate used in hundreds of trillions of dollars worth of contracts, including mortgages and corporate loans. Instead of the so-called Libor, banks and companies are supposed to use benchmarks calculated with overnight transaction data.

Both the euro interbank offered rate, known as Euribor, and the euro overnight index average, Eonia, have to be overhauled or replaced by January 2020 to meet regulatory requirements.

The problem: the new euro short-term rate administered by the European Central Bank, dubbed Ester, will only be available in October, leaving just a few months before the 2020 deadline. The tight schedule is complicating the changeover for treasurers, who typically prefer months worth of trading data on which to base business decisions.

Any delay could slow the issuance of corporate debt in Europe, as companies might decide to wait as they lack a reference rate to calculate the interest cost of future bonds. Finance executives could resort to selling commercial paper or other short-term financial instruments to meet their funding requirements.

The lack of clarity is concerning European treasurers whose companies have financial instruments worth millions or billions of euros linked to the benchmark.

Executives at Finnish industrial firm Wärtsilä, for example, have expressed concern about the lack of progress around the benchmark.

"Euribor is by far the most important benchmark for us," says Anu Hämäläinen, the company's treasurer. "It's a worry that the replacement process is so delayed."

It is unclear whether Euribor, currently underlying contracts with a nominal value of EUR180 trillion ($202.7 trillion), will survive. The European Money Markets Institute, which administers Euribor and Eonia, deems Eonia in its current form noncompliant with EU benchmark regulation. The institute, which couldn't be reached for comment, has developed an alternative methodology for Euribor, but it is still awaiting regulatory approval.

"It is currently highly uncertain if all these required steps can be taken in time by all market participants to ensure a smooth and timely transition," a working group of banks and industry associations on euro risk-free rates stated in September, according to published minutes. Some have requested an extension of the 2020-deadline, but it is unclear whether it will be granted, a spokesman of the European Central Bank said.

That would ultimately need to be agreed upon by the European Parliament and European Commission, among others. "No one seems to have certainty, and there is no easy alternative for corporates in this situation," said Anna Pinedo, a partner at law firm Mayer Brown LLP. Most of the treasurers she works with are still in the process of assessing their outstanding debt portfolio, Ms. Pinedo said. "They are trying to figure out what is happening."

Wärtsilä has hundreds of millions of euros in bilateral loan agreements and other debt instruments, and the majority of those stretch beyond 2020. "Renegotiating a bank loan takes time," said Ms. Hämäläinen. "It's something that nobody wants to do."

The treasurer said she would prefer Euribor and other interbank offered rates be replaced one-to-one with a new benchmark, without the need for companies to recalculate and renegotiate their interest payments.

Existing financial contracts have fallback arrangements for situations in which there is no interbank offered rate available--using the cost-of-funds rate for loans, for example--and treasurers could resort to those. But the cost-of-funds rate for loans is based on reference prices provided by banks, which makes them less reliable, according to Ms. Hämäläinen.

Companies in the U.K. have already made changes to some of their financial instruments. They have been able to do so because the transition to new benchmarks is more advanced in the U.K. and other countries, including the U.S.

Associated British Ports, a company that operates 21 ports in England, Scotland and Wales, has restructured some of its cross currency and interest rate swaps that were based on the Libor. It transferred them to the U.K.'s overnight rate, called the Sonia rate.

"We talked to about 10 to 12 different investors and around 16 to 17 banks," said Shaun Kennedy, the company's treasurer.

Associated British Ports started talking to its financing partners about 12 months ago, and some of the discussions, such as those with bondholders, are ongoing. "Some are cautious about being the first to make changes," said Mr. Kennedy.

National Grid PLC, the network operator, said it is still evaluating the best of course of action. The company has derivatives and loans linked to Libor, and compiled an inventory of contracts that mature after 2021.

Meanwhile, Wärtsilä's Ms. Hämäläinen said she hasn't made any changes to the company's financial instruments yet. "You just have to hope for the best," she said.

Write to Nina Trentmann at nina.trentmann@wsj.com

(END) Dow Jones Newswires

February 16, 2019 07:14 ET (12:14 GMT)