European Turbulence: How Treasurers Weathered the Storm
Marianna Polykrati, group treasurer of Greek food conglomerate Vivartia recounted the situation in Greece following the crisis. “The turbulence was great because the financing from Greek banks was non-existent,” she said.
A crucial job was to look after the supply chain – both Vivartia’s customers and its suppliers are typically small and need financial support. Her response was to be ‘very creative’. The crisis impacted Vivartia’s three divisions in different timeframes and so the answer was to move liquidity around the group to where it was needed through any means possible, such as intercompany loans or financing. “We were very short sighted,” Polykrati said. “We had a plan for a week. At the end of the week we had the plan for the next week.”
Not all companies or countries felt the blasts equally. Experian, a leading global information services company headquartered in Dublin, Ireland, had revenue of $4.8 billion at year end March 2014. Antony Barnes, Experian’s director of tax and treasury, noted that the company explored some acquisition finance in late 2008 and early 2009 which at the time looked as though it would be difficult to secure. “By the middle of 2010, when we refinanced our bank facilities, debt markets were back pretty close to normal,” he said.
Paul Hussey, corporate vice president, AECOM, previously worked in the banking sector. Before joining AECOM in late 2009, he headed up corporate banking in Dublin for Danske Bank and observed first-hand the problems treasurers faced at the time. “The corporate treasurer could not really get an understanding of what was going on. It was next to impossible to get credit and if you did, the pricing of credit was going through the roof.” This applied to all credit, as Hussey noted: “Even on the revolving credit facility, the committed loans and bonds and guarantees – which for a lot of companies is the bread and butter.”
One treasurer who did not wish to be named told gtnews that his company considered an acquisition at that time that would have required considerable debt funding; the price was low, as the target was being marked down by the market. “But we did approach some of our best relationship banks and were told ‘It might be possible but highly unlikely,’” he said.
Hussey also remembers that period. “From a banking point of view, trying to explain that was really difficult because the corporates didn’t really understand the mechanics of what was happening,” he said. “All around us we had balance sheets and banks being curtailed.”
Johnson Controls Inc. operates in over 40 countries in the EMEA region and has sales of $15 billion annual contributing to total revenue of $42 billion. Jean-Philippe De Waele, treasurer EMEA, noted that, like everyone in 2009 at the peak of crisis, Johnson had trouble in issuing commercial paper (CP). “We finance ourselves at the short end of the curve exclusively with CP,” he said. “Our European CP was very young and new on the market with our investor base building. We got shut out pretty rapidly in 2009.”
The CP market is back now but at the time, Johnson relied on the Bank of England’s Asset Purchase Facility, which helped large corporates maintain their liquidity in the darkest days.
Effects on Corporate-Bank Relationships
Now, the market is flooded with liquidity and the cost of funding is low, De Waele said. Experian’s Barnes is also cautiously optimistic: “An interesting aspect is that there is still new capacity coming into the European loan market. There are new players who are looking to build their businesses in Europe. Therefore whilst some of the more established players may have shrunk their balance sheets, there are new entrants and so there are still opportunities for treasurers to find new banking partners and build banking relationships.”
Mike Richards of consultancy MR Recruitment works with treasurers, constantly placing them in new roles. He thinks the turbulence has caused a permanent and profound shift in those banking relationships. He says: “Now it seems it is wallet share first and relationship second.”
Of course you could argue that corporates have played their part in reshaping that relationship. De Waele says that what he learned is increased awareness over an issue that pre-crisis he would have seen as a no brainer: monitoring the banks. Counterparty risk became the top concern as fear of bank collapse or non-performance took hold.
“Pre-crisis we did monitor our banks but we took comfort in the credit rating,” De Waele said. “Since then we have developed our own rating matrix, partly based on the credit rating agencies but also looking at other elements of risk profile of banks and every six weeks we conduct a review of banks. It is a pretty complex matrix.”
This shows how the liquidity problems lasted years, indeed still go on. For instance banks in Greece still have limited liquidity partly because of the ‘red loans’ they are carrying and the outcome is banking business grinds to a standstill. Polykrati says: “Negotiations between Greek corporates and Greek banks for refinancing or for structuring loans can take 2-3 years. I have one large syndicated loan with just Greek banks which expired in July 2013 and we are using a six-month extension in order to find a new structure. It is a very simple loan.”
It wasn’t just the worry of no credit, it was the fear of no bank. As Hussey noted after Lehman Brothers went down for a time, the question that treasurers were asking themselves and were being asked was “Is our bank next?”
A longer version of this article appears in the latest edition of Global Treasury Briefing.