The recent twenty-five basis point cut in UK base rates caught the city by surprise. In a display of pessimism remarkable even by economists’ standards it was interpreted as ‘what does the Bank of England know that we don’t?’. The Bank of England Committee’s statement mentioned lower than expected growth at home and abroad.Yet the controversy around the decision arises out of the interaction between interest rates, inflation and the housing market.
These are a selection of issues announced recently. The details, updated to the middle of last month, were supplied by Thomson Financial Securities Data and other sources.
Governance for life
The FSA continues to cement its role as regulator of the UK insurance sector with its latest programme of proposed reforms for the life insurance business.
At the end of January, the Securities & Exchange Commission (SEC) released a preliminary report on the role and functions of the ratings agencies in the US capital markets. The report1 was prepared in response to Congress’s concerns about the part rating agencies may have played in the corporate governance failures at Enron and other companies. The SEC was required to prepare the report under the Sarbanes-Oxley Act 2002.
From 1 January 2004, companies operating share option plans for their employees will see their reported earnings reduced, if a new draft accounting standard comes in to force.In November 2002, the UK Accounting Standards Board (ASB) published draft accounting rules (FRED 31) requiring share-based payments to be recognised in reported earnings from the first accounting year beginning on or after 1 January 2004.The International Accounting Standards Board also published a similar draft standard (ED 2) at the same time (see December Hotline, p10).
There has been considerable press speculation that this will lead to the demise of many share schemes, with a poll by ProShare indicating that about a quarter of the top 500 companies would abandon their employee share schemes.It is therefore important to understand what the new rules will mean.
Trade finance products can help take the cashflow pressure off UK-based companies doing business with overseas parties. Stewart Mcgill of the Royal Bank of Scotland explains.
Each year, the pace of change increases. For treasurers, it mostly manifests itself as an inexorable pressure to keep abreast of external change, particularly in regulation and market developments, while trying to add more value, at less cost and with lower risk. Those who rise to this challenge advance, those who fail, increasingly, frequently have change imposed upon them.
These are challenging times for the corporate treasurer. The confidence of capital markets investors has been dented by an ever-growing assault: the global threat of terrorism, corporate fraud, financial accounting irregularities and now the shadow of war.
This has created a downward spiral in the equity markets as falling prices have raised still more concerns linked to rising pension fund deficits and insurance company insolvency. The debt side has fared little better.With investors remaining wary of the shadow of corporate failure, the bond and commercial paper markets have shied away from many lower credit rated issuers and the lending banks are looking ever more closely at a borrower’s ability to sustain debt servicing in an adverse trading environment.
There is an inherent danger when markets are perceived generally to be heading in only one direction. Whether rising or falling, there is a risk that overall sentiment dictates that each market development and each piece of new information is interpreted in the context of the overall trend. Therefore, there is a danger that the trend becomes self-fulfilling.
This year began with the UK equity markets falling to their lowest levels since 1995 and market commentators speculating that a sustained recovery is unlikely in the short term. Concerns about the economy, low manufacturing output, faltering retail confidence and the potential impact of a realignment in the UK housing market, as well as wider geopolitical concerns, continue to affect investor sentiment.
These are difficult days for the insurance sector. Over the past few years, general insurers’ results have been hit by a number of issues ranging from the effects of global warming and climate change to the costs of longtail liabilities such as asbestos claims. The increased threat of terrorist activity has also greatly affected the industry. Many general insurers have reported underwriting losses and the insurance cycle is now set firmly in a ‘hard market’ of increased premiums.
Something quite remarkable happened in the fixed rate euro corporate bond market in January.Within the space of a few days, three separate BBB-rated companies all launched 30- year bonds. They were responding to investor demand: these issues were not pushed into a reluctant market. They put the vivid colour of low investment grade credit into part of the corporate maturity spectrum that had until then been an empty black. It has been a long time coming, but the long end has finally arrived.
Since it began in 1986, securitisation in the UK has developed rapidly and is now the largest securitisation market in Europe. While in volume terms issuance by financial institutions has represented the bulk of the UK market, companies are increasingly turning to securitisation as a means of financing ever more diverse assets and businesses. As you will see in Figure 1, it now accounts for almost a quarter of bond issuance for UK companies. While securitisation by financial institutions has led the way (see Box 1), the technology and expertise developed for those transactions have formed major building blocks for the corporate market.
Securitisation is not seen as a mainstream source of finance by most CFOs and treasurers. There are many reasons, in fact, why companies would see it as financing method of last resort. However, in this article we challenge this perception and set out some recent developments that will bring securitisation back onto the agenda for treasurers, whether your business is highly rated or sub-investment grade.
In an era of tough shareholder demands, increased regulatory and rating agency scrutiny, and the current low growth, if not recessionary environment, the pressure to produce solid return on capital and consistent performance is greater than ever.
During 2002, an increasing flow of international corporate borrowers rejected the public capital markets in favour of the lesser known private placement market. One of them was Scottish & Newcastle plc, which raised $850m over maturities as long as 12 years. Here, we will explore the market and explain why it has particular appeal to a broad range of corporate borrowers, including Scottish & Newcastle.
Although most commodity borrowers, including sovereigns and supranationals, continue to focus on the high-profile public Euromarkets, the volatile and sometimes uncertain reception offered to many corporate borrowers during the latter part of 2002 exemplifies why many have been prepared to look for alternative sources of capital and to redirect their attention towards the lesswell publicised, but perhaps more transparent and predictable, market of senior debt private placements.
There are many considerations for businesses thinking of accessing the private equity markets, which we will explore in this article. But, first, companies will want to know: “Are funds really available through this route?” The answer is an emphatic “yes”.
Businesses are under increasing pressure to maximise the use of their existing capital assets. At the same time, it is difficult to raise additional capital by issuing new stock, and with corporate debt levels already high many companies find that raising capital from unsecured debt is not an option. A company’s property portfolio, whether held freehold or leasehold, may offer a solution.
One of the expectations of members of the ACT – and certainly of our Council – is that we should achieve and sustain an external profile for the organisation. There can be heated debate as to what ‘profile’ really means but I am under no illusions that part of my job is to do my best to meet that expectation.
Treasurers shouldn’t watch Big Brother. I try to follow that ACT membership rule but still I’m addicted whenever it’s on. For those treasurers who behave like true professionals and don’t have the first idea about what I’m talking about, I should first explain the nature of Big Brother. Every so often on Channel 4, a group of young people are brought together in the Big Brother house. They all wear concealed microphones and there are lots of CCTV cameras dotted round the house to capture their every waking and sleeping moment. Every week, the housemates nominate two people for eviction and we, the viewers, vote for one out of those two to leave the house on the Friday evening.
Treasurers have a lot to cope with at the moment: the usual day-to-day pressures, increasing demands from the Board to manage risk more tightly, squeezing out another basis point here and there, keeping the rating agency onside, reviewing the financial implications of new business strategies and so on. The regulators are also making life more difficult, with new accounting standards, governance rules etc. You must feel like you are being blown from pillar to post.