Credit Crisis and the Corporate

Qualitative study into the effects of the banking crisis on UK industry

Press Release

23 February 2009

Today the Association of Corporate Treasurers (ACT) publishes findings from a series of in-depth qualitative interviews with over 40 corporate treasurers from non-financial corporates within the UK’s top 350 quoted businesses which assess the financial impact of the recent turmoil in the banking sector on industry.

Key findings from the interviews include:

The good news:

• Prepared treasury teams with access to capital markets are reasonably well placed in today’s tough conditions.
• Where uncommitted credit facilities have been withdrawn there has been minimal impact on those interviewed.

The bad news:

• Typical borrowing margins have risen by up to five times.
• Corporates are receiving inconsistent messages from banks about their appetite for new business.
• The approval process within banks is unclear and unpredictable.
• There is lack of clarity on the basis of support for banks by various authorities.
• Five to seven year maturities are being reduced to around three years as bank facilities are renewed.
• Fundraising is more challenging and expensive for those lacking geographical diversity or who operate in troubled sectors.
• Refinancing needs will increase in 2010 and 2011 – potentially creating a large financing gap.
• Financial derivatives have been adversely affected – leading to wider spreads, a lack of liquidity and heightened counterparty risk.

Surprises

• More corporates will obtain credit ratings in order to access non-bank sources of finance.
• A few are still expecting financing conditions to improve soon – most are more realistic.
• Evidence that a few banks may use technical covenant breaches to create substantial levers in their favour.

Gerry Bacon, ACT Deputy President, said

 For those corporates who are either sufficiently well-rated, or geographically diversified, funds are available. However others, including those in troubled sectors, who need funds in 2009 and 2010 are going to have to work hard and take some tough decisions if they are to secure the investment capital they require. Some bank staff are still stunned and these findings show that the impact of the banking crisis goes far beyond funding. 

Stuart Siddall, ACT Chief Executive, said

 Banking markets have suffered changes, some of which could persist for a generation. We will need to accept the new norms. Treasury management has moved up the priority list. All corporates will need to ensure that their finance teams have the necessary skills to meet the treasury management challenges in the future. 

The ACT has held in-depth interviews with senior treasury professionals at 43 corporates including 19 UK corporates from the FTSE 100 (of which 10 were in the top 50), 17 from the FTSE 250/350. The full report can be viewed at www.treasurers.org/creditcrisisimpact

The ACT will be discussing this report and providing an update at its Annual Conference in Manchester in April www.treasurers.org/annualconference

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Notes to editors

Some quotes from respondents

 No one wants overnight deposits. To go longer you need the stronger banks and they are inundated with it and don’t want it. 

 Due to the new capital requirements our main banks all say that the capital which backed a £350m facility only allows a £200m facility now. 

 Swap prices and forward points are all over the show and vary from bank to bank. 

Corporate borrowings

Large corporates typically cover their borrowings needs with banks. Banks provide committed credit facilities or lines running for 5 years. Such loan agreements can be bilateral (with one bank) or syndicated (one agreement but with multiple banks) and contractually bind the banks to lend as and when the borrower requests it as long as the borrower is not in breach of any covenants. Financial covenants are set by reference to certain financial ratios and trigger the repayment of the loans if breached. The agreements will specify the borrowing rate to be the going market rate (referenced from LIBOR) plus a margin reflective of the borrower’s credit riskiness. Margins range from 0.3% to 2.5% or even higher

Uncommitted lines are arrangements between bank and borrower that do not contain the contractual commitment to deal, but rather the administrative arrangements are set up in advance but the bank is not obliged to lend.

Corporates needing to borrow sums greater than around £250m can make use of the public capital markets and issue a bond to longer term investors like pension funds and financial institutions. Although not a legal requirement, corporates generally need to obtain a credit rating in order to access these markets.

Corporates can also issue bonds in private placements to investors, avoiding some of the compliance work and ratings needed for public markets.

Derivatives

Derivatives are financial instruments the value of which derives from the value of whatever is referenced. In managing their risks, corporates often use currency, interest rate, inflation and commodity price derivatives and sometimes credit and other more specialised derivatives. As the market value of the derivative changes one or other of the parties will have a contingent liability to the other. This gives rise to credit risk for the party which is “in the money” on the counterparty that is “out of the money”. In managing that credit risk, all the obligations of that counterparty, however arising, will be considered.

Gerry Bacon will become President of the ACT from May of this year. He currently works as Senior Advisor for Anthem Corporate Finance. Until Christmas 2008, Gerry worked for Vodafone where he held the post of Group Treasurer for over 15 years and also for 4 years as CFO for its central services subsidiary providing marketing, HQ and technology services.

About the ACT

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