The Treasurer is pleased to provide a series of articles on managing interest rates.
The series, entitled The Treasurer’s Challenge: managing value in today’s rate environment focuses on the practical issues arising from managing debt and cash exposures in the current interest rate environment.
A message from the sponsor
At RBS Financial Markets, we believe that treasury management is a key process, interlinked with the underlying business. For us, treasury management means creating bespoke solutions that add value across a increasingly large range of business activities - and across different interest rate environments. We are therefore delighted to support The Treasurer's Challenge Series. For further information on how RBS Financial Markets can be a powerful ally in the markets you have to compete in, please visit us at www.rbsmarkets.com.
Article 1: A look at the economic and business conditions which have led to the current excess of liquidity.
Article 2: Building the perfect balance sheet.
Article 3: Peter Williams assesses the options for treasurers of cash-rich companies.
Article 4: How funding and interest rate management is aligned to debt and interest rate profiles.
Article 5: Report on the roundtable of treasurers and bankers discussing the issues raised in the previous articles.
This series of articles is supported by The Royal Bank of Scotland (www.rbs.co.uk).
At the moment there is an over supply of money being offered by lenders to would-be corporate borrowers. One reason for low level of interest rates is unusually weak demand for credit from the corporate sector driven by the lowgrowth prospects. Treasurers should consider constructing risk management policies for interest rates that although may be low, may be subject to volatility. Treasurers should be reviewing whether they have the correct working capital management policies and balance sheet structure in place. It remains to be seen whether treasurers will rediscover an appetite for debt.
If an organisation can find its optimal balance sheet structure then it can maximise its returns to shareholders. The ideal balance sheet structure will typically depend on whether a company is growing organically or in an acquisition phase. Having decided on the amount of debt a company can manage, the treasurer has to decide whether to borrow short or long, whether to fix or float. A company that achieves lower cost of debt today must realise that the trade-off could be more volatility in the long term. Issuing hybrid capital could suggest the corporate is weak in the same way that the City has traditionally viewed rights issues as a shoring up of the balance sheet.
Due to a variety of circumstances many corporates are faced with higher surplus levels of cash than previously experienced for which they need to seek an adequate return. Companies need to take professional advice when investing cash deposits to ensure that they have a clear strategy. Investments are likely to be short-term and for most treasurers the priorities will be security, liquidity and yield. A variety of investment options is open for treasurers depending on their risk appetite.
Treasurers need to check that their funding policy and interest rate risk management guidelines are up to date and in line with current business objectives. Treasurers are in a position to define and manage funding and interest rate management strategies which are optimal in respect of the profile of the business. The last few years have seen strong levels of liquidity and a good appetite in the market for funding, so companies should look at the mix of funding options available to ensure that they are taking full advantage of current conditions.
Highly leveraged loans may have had their heyday and the tide could be turning on unrestricted access to funds. Holding cash can be a concern but gives flexibility and headroom. Value at risk analysis is increasingly popular as way of correlating risks. Approaches to risk mitigation are changing.
