An early bid for clarity
Amid the noise and haste of the present volatility, it may be instructive to reflect on the thoughts of Charlie McCreevy. The Commissioner in charge of the EU’s Internal Market and Services may be a highly experienced Eurocrat but he hasn’t forgotten his accountancy roots. Speaking to the European Parliament’s Economic and Monetary Affairs committee, in the middle of last month, he drew preliminary lessons on the consequences for Europe of the US sub-prime mortgage crisis. The rating agencies, perhaps predictably, came under renewed fire. The criticism is simple. They stand accused of being slow to downgrade their credit rating, and of relying on a weak and poorly explained methodology. McCreevy also suggested that the ratings agencies face a “potential conflict of interest”.
On the one hand, credit rating agencies provide objective ratings to investors in asset-backed securities; on the other, they provide advice to banks on how they should structure their lending to get the best rating. At the same time the agencies’ ratings are used as a basis for the calculation of banks’ regulatory capital. Genuine and longstanding concerns exist in government circles over the tangled web the agencies seem to weave, their role and their power.
But while few may take issue with the argument that the role of credit rating agencies could be clearer and that they could do better, perhaps we should be careful not to shoot the messenger. Harking back to a previous crisis, McCreevy said that a common theme ranging from Enron to Parmalat to today’s crisis was the use of off-balance sheet entities. He wants to address with supervisors the adequacy of risk appreciation and oversight of such vehicles.
The crisis was born out of risky loans being repackaged and sold on to institutional investors, at least some of whom did not appear to fully understand the nature of the underlying risk. Putting these assets in offbalance sheet structures may have blinded many managers in financial institutions to the underlying risk inherent in these securities, particularly in a crisis. Did the supervisory authorities have, in their turn, a sufficient overview of the links that a parent institution might still have with an off-balance sheet vehicle? How robust have the internal models used by risk managers been in the extreme liquidity crisis of recent weeks? Renewed interest in special purpose vehicles seems inevitable and justified.
For many corporates as well as consumers, until recently these would have been academic questions. Now such questions seem to be relevant but as yet unanswerable. What is clear for treasurers is they are operating in a new era where, for the moment at least, confidence has waned and uncertainty has increased.
PETER WILLIAMS
Editor
Emerging markets close gap in the race for international acquisitions
Deal flow between emerging and developed economies is beginning to converge as companies in the BRIC nations (Brazil, Russia, India and China) start to ramp up their mergers and acquisitions activity.
ACT responds to the PPF’s levy proposals
The ACT Policy and Technical team have responded to the Pension Protection Fund’s recent consultation concerning the development of the pension scheme levy.
The credit crunch and ensuing financial crisis that have left the markets reeling will mean that the summer of 2007 will live long in the memory of the world’s investors and institutions.
Risk management challenges are changing for treasurers. and one particular re-emerging risk shows how the role of the treasurer as risk manager is expanding.
Economists point to higher unemployment and modest average pay rises while employers complain about skill shortages and the risk of rising pay costs. The answer to this dichotomy lies in understanding the difference of perception arising from whether the labour market is analysed at big-picture level or experienced at first hand.
Pippa Mason recounts how Astrazeneca successfully issued $6.9bn of SEC registered bonds followed by their Euro debut amidst volatility of a magnitude rarely experienced in the capital markets.
Plumbing and building materials is big business for FTSE 100 stalwart Wolseley group, which has grown more by stealth than through mega-deals. Group treasurer Mike Verrier explains the strategy to Graham Buck.
Enterprise risk management has become a buzz phrase and interpretations of what it entails still vary considerably. In line with the increasing emphasis on good corporate governance, all treasurers can expect to see and hear ERM discussed even more widely. The premise of ERM is that it provides a framework for companies to conduct risk management based on the concept that risk can be an opportunity and not just a threat.
The ripples from the US sub-prime mortgage market have widened since midsummer and spread to a group that usually attracts little attention – the monoline bond insurers.
Most treasuries struggle with often mundane problems of data, analyses and reporting, and lack proper systems for this routine, day-to-day business. The perceived costs and risks of changing are seen as too high or uncertain.
The implementation of the Markets in Financial Instruments Directive will affect the securities markets and investment firms of all EU member states. The measures in the directive are primarily targeted at regulated firms operating in the financial markets, but MiFID will also have an impact on corporates active in the markets as customers of regulated firms. Treasurers do not need to be experts on MiFID, but they do need to be aware of the implications for their companies. With this in mind, the ACT has published a guidance note that goes into the full technical details of MiFID as useful background for the treasurer, in-house lawyer, or company secretary. This summary article explains the specific practical changes that will affect corporates.
The Treasurer has focused recently on the massive development of credit derivatives markets over the last few years, and its impact on corporates. This article examines the impact of credit derivatives on a company’s syndicated debt.
Two years after international financial reporting standards were introduced, shareholders are still unsure of their value. Two contrasting approaches are being adopted: a conservative approach that focuses on IFRS-friendly products, or an approach that views shareholder value as paramount and accepts unavoidable income statement volatility as and when it occurs. For the treasurer the dilemma is whether accounting or economics-based decisions should be pre-eminent. However, some companies have demonstrated that income statement volatility from financial instruments accounting can be explained successfully.
The launch of the euro in 1999 was regarded as the catalyst for a high level of cross-border bank acquisition. Even bigger domestic and international deals are set to follow. The general view is that treasurers can afford to be relaxed at this stage.
In the lemming-like rush to be part of the huge wave of new business, many institutions may have resisted making sober judgments on the merits of transactions. But in reality, do these firms have the resources to make up their own minds, or are they reliant upon the analysis and models of others?
In August 2007 the Pension Protection Fund published two important documents: Modelling Uncertainty: An introduction to the PPF Long Term Risk Model; and The Consultation on the Future Development of the Pension Protection Levy (the consultation document).
This article is mainly concerned with the impact of the latter on UK pension schemes and their sponsors in the event that the changes it proposes are accepted after the consultation, which is due for completion on 3 October. These changes are far-reaching, with potentially significant consequences. We also briefly describe the long-term risk model, since its output is driving some of the levy changes proposed by the PPF.
This article does not attempt to summarise all the subjects dealt with in either the consultation document or the long-term risk model paper – for example, we do not comment on multi-employer schemes, schemes with international employers and schemes funded above 104% of PPF liabilities.
