I cannot count the number of times over the last year the phrase ‘when the credit cycle turns’ has come up in meetings – and without wishing to suggest covert ageism in this observation on many such occasions I have sensed a reluctance on the part of some to allow the conversation to dwell on this eventuality. But current market developments do suggest that treasurers and corporate financiers may be in for an interesting summer.
Our Policy & Technical team are keeping a close eye on what is going on and they and I are very much of the view that treasurers should be watching the gathering storm clouds and make sure they are ready. Given the easy credit and competitive rates of the past year I hope that most refinancing plans are completed or well in train.
An interesting research analysis by Henry Maxey a couple of months ago explained how the search by investors for relative value had led to increasingly complex and risky structured products. The complexity and lack of liquidity in these instruments means they are priced by reference to models rather than the normal market price discovery process. Without the usual market trading arbitrage mechanisms there is no safety valve so any collapse when it comes will be sudden and severe.
We have very recently seen the problems a couple of large Bear Stearns funds have had in the US with subprime mortgage lending. Even investment grade borrowers will not be isolated from the repercussions since problems at the non investment levels will feed back into a general withdrawal of liquidity. How severe any changed conditions will be is hard to tell but for treasurers the message must be to take sufficient risk management precautions to minimize the impacts back on your company.
Private equity and the debate on leverage continue, not least with the Commons Treasury Select Committee inquiry into private equity in full train. The concepts involved in private equity and related financial engineering remain somewhat cloudy and mysterious in the public domain. We were able to pick out one misunderstanding of the characteristics of "Cov-lite" loans and have written to the Chairman of the Committee to explain the true nature of such agreements. My personal view, incidentally, is that there has been an extraordinary obfuscation on the part of those defending the fiscal treatment of private equity managers, in terms of the true nature of the claimed ‘capital risk’ being taken.
We have a conference on private equity on 22nd November; do hold the date in your diaries as I am sure this will be an outstanding opportunity to address both the very public issues making the headlines but also the numerous questions that impact treasury and corporate finance professionals – ranging from financing structures through to the career opportunities and challenges posed by the growth of the sector.
I would like to end by extending my personal congratulations to all who recently sat and passed their ACT professional qualifications. The results for the second round of examinations under the new AMCT syllabus were successful, with many papers showing a good increase in the pass rate. For the Certificate Papers, the high pass rate continued for candidates taking the Financial Mathematics & Modelling and the Risk Management for Pensions papers – both had an 80% pass rate. These results reflect thorough preparation by some very committed and well-qualified candidates. Further information is available by referring to the examiners report, which is available online and in the July edition of The Treasurer magazine. For those who have passed AMCT I must just remind you that the enrolment deadline for the MCT Advanced Diploma is the end of this month – please visit the MCT website if you would like further information.
