Another Year of Evolution
The
array of challenges facing corporate treasurers has steadily grown since the
financial crisis first broke more than five years ago. Peter Williams looks at
what 2013 holds in store and how likely developments will continue to make the
treasurer’s role more strategic
An array of challenges face corporate treasurers
on a daily basis. And while most risks on their agenda for 2013 have a familiar
feel, they can expect plenty of twists and turns to the old favourites as well
as a surprise or two to keep them watchful in the year ahead.
For treasurers many of issues begin
and eventually end with funding. The bank drought is an ongoing tale. Ian
Fitzgerald, chief executive officer (CEO) of London-based consultancy Loans
Syndication Advisory Services, who describes himself as “an ex-insider now an
outsider”, says the corporate loans market looks “pretty gloomy”. The volume of
issuance in 2012 for syndicated loans to corporate borrowers was just over
€400bn (US$540bn) across the Europe, Middle East and Africa (EMEA) region, only
slightly above the low of 2009. And the figure for equity was a record low,
barely registering on the graph.
“A lot of companies have completed
refinancing and the low volume of M&A was driven by general uncertainty
across the board,” says Fitzgerald. “Corporates are continuing to deleverage or
get cash out of the bond market because of quantitative easing.” EMEA bond
issuance for non-financial corporates was relatively healthy at just over
£400bn, equalling the good year of 2009.
Fitzgerald describes the current
situation as a bit of a phoney war with banks relatively flush thanks to central
bank intervention. He adds: “The syndicated loan market has always grown when
there is relative economic confidence and companies are able to go to the
market for investment or M&A financing.”
Gary Slawther, corporate treasurer
with Octal Petrochemicals in Oman, echoes the gloomy prognosis. “The view I am
getting – and it is not just in this region – is that banks just aren’t lending
money,” he reports. “There are the local banks and that is it; the
international ones just aren’t interested.”
However Fitzgerald suggests the gloom
may be lifting and that treasurers who do want to do funding look set to be in
a good position in 2013. “Banks are flush with funds thanks to the European
Investment Bank’s (EIB) intervention and quantitative easing (QE) so the
competition is particularly stiff for corporate mandates, especially syndicated
loans.” He believes that it is a good time to borrow, which means “you are not
going to get money for nothing but treasurers can push the envelope a bit.”
An early boost
The EIB certainly put down a strong marker for 2013 when it announced on 8
January that its shareholders, the 27 European Union (EU) member states, had
unanimously approved a €10bn fully paid-in capital increase. It said the
funding would allow it to provide up to €60bn, over a three-year period, in
additional lending for [in its words] “economically viable projects” across the
EU.
While the EIB is expanding its balance sheets other banks are heading
in the opposite direction with deleveraging still firmly on their agenda.
European banks are expected to trade some €60bn in non-core loans in 2013, as
they step up actions to shrink. That figure compares to €45bn from such deals
in 2012 and €36bn in 2011.
The prediction comes from accountancy giant PwC which says that,
to date, a large amount of loan portfolio transactions have involved real
estate backing. This year the focus is set to be on corporate and leveraged
lending together with a longer maturity profile. But, says PwC, the banks have
some way to go at their current rate of disposal as the firm estimates that
unwanted loan portfolios total more than €2.5 trillion across Europe. Richard
Thompson, who heads PwC’s European portfolio advisory group, says: “In 2012 we
saw a large number of different banks bringing their portfolios to
market, trying to capitalise on first-mover advantage and recognising that
basic laws of supply and demand mean that the higher the deal volumes in
future, the lower the price. This issue of price will clearly remain a key
challenge in future for sellers in countries that are already developing as
more mature markets.
“We are also seeing greater transparency among many banks as to
the scale of their non- core portfolios. We believe there will be an
active market for at least the next five years, and probably a lot longer.” So
one more ‘probably’ for treasurers to deal with.
Steve Dwyre, managing director, industrials, Lloyds Bank notes
that treasurers are still concerned about a range of unknowns, including global
political uncertainty. In terms of the practical steps which treasurers can
take he says: “Treasurers are focusing on alternative sources of financing to
increase the diversification of their funding sources and reduce re-finance
risk.”
Dwyre points to the US private
placement (PP) market, which is attracting interest from the lower end of the
corporate market (businesses with annual turnover of £1bn-£5bn), which
traditionally have not had a rating or tapped the bond market.
Last year the US PP market topped
$50bn – compared with $45.1bn in 2011– and 60% of those tapping it were non-US
companies, including 20% from the UK, the Netherlands (8%) and France (6%).
Perhaps the stand out borrower in 2012 was German software company SAP, which
raised $750m. Dwyre also suggests that in the UK the retail bond market will
continue to attract attention in 2013. Colin Tyler, CEO of UK treasurer body
the Association of Corporate Treasurers (ACT) agrees that a process of
transition will continue away from bank debt towards the public bond and the
private placement market, driven by the changing business model of banks. The
key, says Tyler, is that corporates want to retain stronger control over their
funding.
Other options
As well as looking to public markets, Dwyre
suggests that a third option companies are examining is receivables finance and
commercial finance, or even securitisation if a more formal programme is put in
place. “We are seeing treasurers look to the working capital part of the
balance sheet and monetising that in an off-balance sheet way. This type of
initiative is being considered by household names, bigger companies than those
that normally look at factoring.”
Tyler predicts that treasurers’
interest in supply chain finance (SCF) will continue. But he suggests the focus
may move away from regarding SCF as a source of finance, and instead more
attention will be paid to looking at how dependent businesses are on strategic
suppliers and how help can be provided to those key suppliers who are
struggling to find funding. He says the eurozone crisis forced people to dust
off their contingency plans – helped by a planning note issued by the ACT – and
that prompted a more general look at how treasurers manage issues such as
funding. He expects the hunt for diversity in funding to continue and anticipates
more innovation emerging in this area. He points to the paper the ACT published
with think-tank the Centre for the Study of Financial Innovation (CSFI) in 2012,
Seeds of change, which looked at
emerging sources of non-bank funding for small to medium-sized enterprises (SMEs).
Slawther suggests that one strategic
risk in the supply chain, to which treasurers need to pay attention to ensure
their companies are not badly hurt, is commodities. He says: “A lot of money,
investment and liquidity is going into commodities, including food. In some
commodities this will represent a big geo-political shift and will cause spikes
in demand and in prices.”
You could be forgiven for thinking
that the old maxim ‘cash is king’ has lost some of its lustre when so many
corporates are holding so much cash: no one wants to spend and no one wants to
invest in anything that appears remotely risky – even if yields remain pancake-flat.
The only real development on this is the wry comment that Google is an asset
management business with a search engine attached.
The same could be said for any number
of technology companies. So more corporates may decide to do what UK packaging
company Rexam announced at the start of 2013 and decide to hand cash back to
investors – £395m in total following the sale of its personal care business on
the final day of 2012. Tyler comments: “Treasurers are carrying more cash than
they have in the past because they can’t rely on tapping money as and when they
want it. Structurally it is a different place than five years ago. You worry about
the little return you are going to get from the cash in hand – but part of the
treasurer’s role is not to lose the money and see that it is available to the
business as and when they need it to apply to growth plans.”
A more strategic role
So the ‘cash is all’ message of the
last few years is set to continue. Dwyre’s colleague, Nick Diamond, head of
cash management sales, Lloyds Commercial Banking calls it a “BAU” (business as
usual). He says: “The expectation from the board is that the group treasurer
will have full control and visibility of cash wherever it is in the world. So
the drive for the group treasurer is to free the trapped cash and deal with the
different currencies.”
The other cash trend Diamond is seeing
is a corporate move away from bank proprietary software systems to independent
systems, such as the ones provided by SWIFT.
With high cash balances comes
concentration and counterparty risk, which should remain a hot topic for
treasurers. Over the past 18 months many have been forced to learn to evaluate
risk in relation to their counterparty banks and, according to Dwyre, have gone
beyond public rating and credit default swap (CDS) spread in the analysis they
perform. This is an ongoing problem for cash-rich corporates, which need to
spread the funds around in an effort to avoid concentration risk.
The debate continues over whether the
treasurer’s role is becoming more strategic. Dwyre suggests that treasurers are
becoming more involved in the strategic discussion over procurement, such as
spending on financial solutions or a finance supply chain initiative that
provides a benefit to accounts payable. As well as the internal strategic role,
there is also an external one looking at the relationship banks and examining
spending and buying patterns. For instance, Diamond says treasurers and banks
may need to have a much more open conversation about their relationships and
what each party brings to the table. “Treasurers need to be strategic in
identifying what they have that banks want and finding the right fit with a
bank. This builds a solid base for a relationship to last and benefit both
sides.”
2013 is going to be another year when
the treasurers are going to be expected to look at the impact of regulatory
change, both on themselves and on their banks. Tyler says it promises to be a
significant year, as for the first time non-financial corporates are caught by
financial institution (FI) over-the- counter (OTC) regulation. Both the EU and
US adopted primary legislation, which aims to fulfil the G20 commitments that
all standardised OTC derivatives should be cleared through central
counterparties (CCPs) and that OTC derivative contracts should be reported to
trade repositories. The start date for the European Markets and Infrastructure
Regulation (EMIR) will be phased-in over this year and 2014.
“Any company in Europe that is
undertaking derivative transactions, even just FX forwards, will be affected and
be subject, for example, to an obligation to report its transactions to a
central ‘trade repository’,” says Tyler. “In a manner of speaking all companies
will find themselves, perhaps for the first time, brought within the ambit of
their local financial regulator.”
The details should become apparent as
the year progresses and corporate treasurers are going to have to ensure that
they have systems in place to manage the reporting correctly. This regulation
extends, for instance, to providing the regulator with details of inter-group
derivative transactions. Tyler says: “I can’t imagine what the regulator is
going to do with all this information when they see it. It is difficult to see
how the regulation is going to be effective and bring benefits. The systemic
issues have been with banks not corporates.”
From SEPA to M&As
Dodd-Frank and derivate regulation
should head the ‘must worry about’ list on the market side, while the Basel III
regime will have an impact on capital requirements and the pricing of financial
instruments. It may hurt if the fall-out means that your lead bank is capital
constrained and treasurers should understand that before expecting underwriting
for any merger and acquisition (M&A) deal.
Dwyre says that Lloyds is spending
time with treasurers, explaining how under Basel III banks are keeping liquid
assets available and on their balance sheet at central bank windows. “That is
now a published number, which a year ago treasurers would not have known. Many
treasurers will have a quarterly analysis of those numbers at least for their
top banks in the group.”
And the advent of the single euro
payments area (SEPA) in 12 months’ time continues to take up thinking time. Or
at least it should do: Diamond warns that a lot of corporates haven’t finalised
their SEPA approach. He says: “They don’t see it as a priority, more an issue
that could them cost them and drain their IT resources. Over the years many
corporates have created euro solutions outside SEPA that meet their needs. For
them there is not enormous upside.”
But with an end date of 1 February
2014 –when banks will be obliged to offer SEPA payment processes – interest is
bound to increase over this year. Diamond says that banks are starting a new
wave of proactively approaching clients to inform them about the system changes
– such as account identifiers.
“The treasurer of 2013 who ignores the
impact of regulatory changes on their corporate and their bank will be missing
a trick”, says Dwyre – and who would dare to differ?
And where will M&As go in 2013? Some
corporates have retained cash and financing ‘dry powder’, while other
corporates are damaged and only still around thanks to low interest rates being
mainatined. Slawther sees sclerosis in the M&A market promoted by the lack
of bank debt to support deals. He says: “It is just killing off deals”. Dwyre adds:
“Conditions are right for M&A deals, but CEOs hesitate from completing
transactions because they are not convinced the market environment is stable.” So
getting the price right is near impossible.
2013 should see strategic deals – particularly
transformational bolt-ons – where it really makes sense, whereas fear will keep
away opportunistic deals.
One big difference between January
2012 and January 2013 is the cost of funding for banks. CDS levels show that it
has dropped dramatically – at least by half – and what that means is that a
year ago no banker could make a return work unless in the B- range. Today in
the one-year to two-year range lending only banks can make a return and that is
a significant difference.
And finally a cloud on the horizon
that treasurers should be watching. Magnus Lind, who chairs Treasury Peer, the treasurers’
networking group, suggests one future challenge that treasurers have started to
worry about is long-term interest rates.
“The question
treasurers ask themselves is when inflation is going to come and when will that
lead to higher long-term interest rates,” says Lind. He adds that long-term
interest rates might be “an accident waiting to happen. Can we expect bond
rates to remain low despite a huge demand for long- term money?” He also points
to Japan, US and Sweden, where the central banks have conceded that the
inflation rate is not a concern, or even too low. Who could blame a government
for seeing inflation as a neat way of eroding the real value of their debt? Any
expectation of inflation is set to spark a rise in long term rates. And that
will cause treasurers rapidly having to readjust their strategies. Welcome to
2013.
The ACT has published a briefing paper
on OTC derivatives and on contingency planning https://www.treasurers.org/node/8649
https://www.csfi.org/files/Seeds_of_Change_by_Andy_Davis_PDF.pdf
https://www.treasurers.org/contingencyplanning/euro
Magnus Lind writes a blog
Peter Williams, FCA, is a UK-based Chartered Accountant and financial journalist. He has
edited, and written, for leading titles in the treasury, finance and
accountancy sector over the years, including The Treasurer, Accountancy Age and
Financial Director. He also spends time working with banks and companies on
their financial communication projects.