Credit crisis and corporates - funding and beyond

The results of our credit crisis interviews with over 40 treasurers have recently been published and the report is available here.

This was a time consuming but hugely valuable exercise in assessing the effects of the credit and banking crisis on our members – we will be updating this work ahead of further discussions at the Annual Conference in April. As you can see there is some good news, some not so good news and a surprise or two!

One of the surprises is that the use of formal ratings is expected to grow substantially as previously unrated companies seek formal ratings. Whilst ratings are generally required for companies looking to raise funds in the public markets, the banks use ratings (calculated in-house if no external ratings are available) to calculate capital allocation required under Basel II regulations. We understand this process can vary quite a bit from one bank to another – do you know your bank’s rating of your company? A formal rating may help to make your company a more attractive lending proposition for the bank. The Policy and Technical team at the ACT has commented on this issue before to help treasurers in this tricky area. ("Shifting sands" The Treasurer Jan-Feb 2008 and "Into the unknown" The Treasurer June 2006)

The companies we spoke to were generally in good shape – however there was evidence that some banks were using technical breaches in covenants to create substantial levers in their favour. It would be very worrying if banks were to use such technical breaches to secure major changes to facilities, significant fees or, worst of all, to enable banks to exit their commitments altogether. If any of our members have comments to make in this regard we need to know – we will treat comments received as confidential but we will use them (without attribution) to flag unacceptable behaviour.

The Bank of England has started to buy sterling commercial paper at attractive rates – another small step to improve liquidity in the UK markets. For more details see www.treasurers.org/boeassetpurchase. The Bank is committed to buying longer term corporate paper - bonds and syndicated loans. These two areas offer greater challenges than CP as the Bank may have to hold the paper for many years – nevertheless we will be working with the authorities on your behalf to find a way through the jungle of issues. Again if you have a view on this please contact us so that we can get the points across or better still establish a method of you getting your points across directly.

Last week over 70 corporate treasurers attended talkingtreasury in London – the ninth in this series. There was a lively exchange of views that covered the impact of the credit crunch, risk management and the role of the treasurer. The key points from the discussions were as follows;

• Life is very tough for companies that only have access to banks for funding needs
• Higher borrowing margins are here to stay
• The Bank of England’s asset purchase facility - whilst welcome – is only going to help the larger companies. Those companies that don’t have investment grade ratings see the initiatives as irrelevant to their needs
• Reduction in the availability of credit insurance can have a devastating impact
• Treasurers are not, in some cases, integrated into the company’s operational activities

This week talkingtreasury is moving to Moscow – where again over 70 are expected to take part in the discussions.

I attended a lunchtime debate arranged by CSFI/RUSI recently that focused on the effects of the credit crisis on security in general – there was some lively debate about whether the crisis was foreseen – but for me what it tells us is that one can manage a number of risks but “shocks” are just that. We need to build our models so that they can survive the unforeseen – isn’t that the main lesson from recent events?

By Stuart Siddall