Fund early; fund long

This has been the message from the ACT for the last few years – though what we actually said was "fill your boots" as we did not expect the then favourable market conditions to persist.

The message bears repeating – even in the current climate where bond markets are often closed and many banks don’t want to hear about anything longer than two days.

If funding windows open, they are not a signal to relax but to fund while you can, even without an immediate need for the funds.

Banks’ talk of invoking market disruption clauses and the continuing consolidation and de-leveraging in the financial sector are all signals that companies will in future have to look more to bond markets and less to banks. A model of corporate over-funding and running cash is likely to be seen, with bank lines still important but used more genuinely as stand-by lines.

De-leveraging will extend to the corporate sector as well as the financial. Equity will become more important in companies’ plans. The cost of equity will be higher. The last few years have seen companies following academic studies in reducing their estimate of the equity risk premium (but not as much as the academics urge) and this will now go into reverse.

Increased volatility in markets will also tend to increase equity costs.

So the weighted average cost of corporate capital may tend to rise – whatever happens to the authorities’ policy rates. Companies have generally used higher WACCs than academics would urge. For companies, under-estimating cost of capital causes more and more significant investment selection errors than over-estimating.

Even so, with financial sector contraction, some companies will not be able to fund all the investment projects they would like to undertake, giving the economy another twist downwards.

However, for those companies that did "fill their boots", the coming period should give opportunities to expand market share, even if capital costs are rising and their product markets are, overall, shrinking.

And, if you are finding times are hard, don’t forget the ACT’s Briefing note “Contingency Planning for a Downturn in the Economy: A Treasurer’s Checklist” at www.treasurers.org/contingencyplanning (which we expect to update in late October).