Turn of the screw puts treasurers in the front line
The world’s financial markets have been severely spooked – and not without good reason. Of course, with the benefit of hindsight the summer market volatility had an air of predictability about it. Everyone said there had been too much easy credit and that as a result there had been bad/crazy lending decisions. Abundant credit, liberalised financial systems across the globe, a desire for growth, in the UK fast-rising asset prices (in the housing market), plus a dash of enviable glamour in the form of private equity with its allure of half hard-nosed business sense, half alchemy. For those with grey hair and long memories, it had the whiff of the run-up to the 1970s secondary banking crisis.
But parallels can only be taken so far. The central banks had already professed themselves uneasy about the uncertainty of where the risks were and whether organisations and individuals truly understood those risks. We all knew that it couldn’t last for ever and it was a matter of if, not when. Sensibly, treasurers have been quietly building contingency plans for when the screw would turn.
The biggest ‘known unknown’ – how much does the world owe Donald Rumsfeld? – is how much more bad news has yet to emerge. Mortgage arrears and repossessions started this fall; will other bad news continue the decline?
Only when you quantify with certainty the losses in the sub-prime market can you begin to tackle the problem. Before that happens, everything else is fire fighting.
While it may have started as a silly season story, with the media not understanding liquidity, it seems to have moved on from there. We wait to see whether there will be an economic slowdown as consumers respond to the rise in interest rates. At the time of writing we are being told there are still deals out there waiting to be done.
Above all, there is one key and simple question: where next for the markets? At the moment anyone who is prepared to make predictions is either very brave or very foolish.
Whatever happens, treasurers must hold their nerve, keep their focus on the fundamentals of the business, and remind their colleagues to do the same. Decent companies will still find bank support, albeit at a higher prices. For corporates that don’t fall into the decent category, it could be a long, hard or expensive autumn.
How to get the best out of money market funds
Recent press reports about the capital loss in some money market funds have highlighted the general issues a treasurer should be looking out for when placing funds under management.
The global credit crunch which so rocked international capital markets this summer is likely to lead to a long tail of negotiated and renegotiated deals and debt issues long into the autumn.
At the recent Talking Treasury conference in Dusseldorf in June, three treasurers from different sectors and from different locations in
Europe gave a fascinating glimpse into their differing treasury challenges.
Apart from the grumblings of a few politicians, most European commentators have been remarkably sanguine about the rise to new heights of the euro. But a close look at the situation shows the damage a strong euro does to the global competitiveness of the euro zone economies. A strong euro makes it hard to take advantage of the global boom, and even if it wants to there is little the European Central Bank can do about it.
It must be rare for a treasurer to move from working in Brentford, west London, to living and working in Vienna. But Brendan Boucher seems to have made the switch from the delights of Kew Gardens and Brentford FC to the coffee houses and State Opera of Austria’s capital city with ease.
Since its first meeting in January 2003 the ACT Advisory Board has come to play a crucial part in the ACT’s strategic thinking. Board members Paul Spencer, chairman, and Alastair Clark tell Jennifer Carruth what the advisory board aims to achieve
Rexam’s €750m 60-year 6.75% hybrid was priced at euro-mid swaps plus 190 basis points. It was accompanied by a 9.9% equity placing to raise £286m that, combined, supported its BBB and Baa3 corporate rating. The group was keen to find a financial solution that worked for its shareholders by minimising dilution; was attractive from a debt holder perspective – which meant maintaining Rexam’s investment-grade ratings – and was also cost-effective when compared with other financing options. It was also vital to get comfort on the tax treatment. The key to the hybrid’s success was getting the structuring right. The process is very different from issuing a senior bond, where the terms and conditions follow a familiar path.
Talking Treasury, the third in our thought-leadership series, was held in Dusseldorf in the summer, organised by the ACT and VDT and sponsored by JPMorgan Asset Management. Peter Williams reports on what was on the minds of Europe’s corporate treasurers.
Late payments are the bane of many small and medium-sized businesses. What’s more, the problem appears to be getting worse as larger companies force their suppliers to play a waiting game.
Much of the discussion about extracting value from corporate property portfolios by hiving properties off into a UK real estate investment trust (REIT) has been purely in the domestic context, but are similar structures possible for pan-European portfolios?
The banking industry has faced unprecedented change in the last few years with increased consumer action, new technology and an ever competitive marketplace. This, coupled with the relentless pace of regulatory and accounting changes in the UK, has left the sector exhausted. Basel II is one such change which has involved a major investment on the part of those institutions required to adopt it. The impact will be felt far wider as credit models used to assess the creditworthiness of obligors have been developed for the corporate and retail sectors alike. This article seeks to establish what those impacts might be.
The current dislocation in the global credit markets has been characterised by the well-documented underperformance of both credit default swaps (CDS) indices and, to a lesser extent, single-name CDS. The article concentrates on credit default swaps, both singlename and indices, which make up the largest proportion of the market and are most relevant for corporate users. CDS are increasingly used by the capital market as a proxy for assessing a credit’s relative value, and therefore by banks and bond investors as an input for bond and loan pricing. Single-name CDS and CDS indices also have direct applications for corporate users as a tool for credit hedging, risk mitigation and liquidity management.
According to Raymond Haines, Managing Director of ABN Amro, there is a basic rule when assessing risks. At the conference’s liability-driven investment (LDI) seminar, he advised delegates that risks should be assessed in two categories: affordable (those where disappointments are not disasters) and rewarded (those with a positive outcome).
Shareholder activism is a force that even the largest corporations can no longer ignore. Although critics charge activists with focusing only on short-term gain, boards must now have a contingency plan ready should they become a target.
It will not have escaped the attention of pension scheme sponsors that almost everyone is clamouring for higher scheme funding levels – not least trustees and the Pensions Regulator. And there are, indeed, strong incentives for funding, not least potential reductions in tax bills and the risk-based levy of the Pension Protection Fund. Yet despite these demands, strongly performing equity markets and some increases to long-term interest rates in the UK have combined to give treasurers something new to worry about – the possibility of unproductive surpluses arising in pension schemes, where there may well be no future benefit accruals to be funded and little chance of obtaining a refund. This article looks at some of the generic measures available to scheme sponsors for avoiding trapped surplus.
As we resume after the summer recess it is a useful time for individuals to review their situations. Employers should review their teams, and assess their development needs, succession planning, benchmarking, salary reviews for the next year, project management and the allocation of duties over the coming months. Employees, on the other hand, should review their development, areas of weakness and strength, and opportunities in their current positions (whether in treasury or across the group).
