Preserving the relationship
While this summer’s credit wipe-out and the resulting panic that seized many quarters of the global financial markets appears to be subsiding, it would be a mistake to assume that all has returned to normal. Governments, regulators and market participants should all be looking to learn some lessons. Memories fade all too quickly as the strong human instinct to move on takes over – all too often in the belief that it won’t happen again. One of the ways that the recent turmoil may have altered the corporate landscape is the realignment of the long-term relationship that corporate treasurers enjoy with banks.
It comes after years of easy credit. If the value of a relationship with a bank has any currency at all, then it lies in the fact that the corporate will stick with a bank in good times. The well understood quid pro quo is that when the going gets tougher, the bank will stick with the corporate. Treasurers well understand the risks of ending a bank relationship and need convincing that the benefits outweigh those risks. There is a natural reluctance to move away from long-established relationships; severing one and attempting to develop a new one demands significant time and attention that make it a course of action to be adopted only as a last resort. As one of the contributors to our article on changing banking relationships on page 32 observes, it is far better to shift some business away from a bank that doesn’t come up to scratch and give it the opportunity to improve its performance.
Even if it is not perfect, both banker and treasurer have every incentive to make the existing relationship work. And with some of the transaction banks less hungry for business as a result of the latest credit squeeze, the traditional relationship banks will be keen to reinforce their reputation for keeping their facilities open in both good times and bad. However, the well-understood concept of the long-term and relatively open relationship between a bank and a corporate was already shifting before the credit crunch.
The rise of private equity, along with the accompanying gearing, has shifted some of the fundamentals. Before a buy-out, banks are viewed as suppliers and service providers. After a buy-out, the bank has a different role, with the company accepting the need to provide reporting to syndicate banks and meet performance targets. The corporate must also accept a degree of control previously unheard of from the banks over day-to-day matters. And even for companies neither owned by private equity nor highly geared, longer established treasurers have witnessed a change in bank/treasurer relationships. The traditional relationship bankers are under pressure to extract more from the relationship. As in other sectors, banks want to maximise profits and competition in the banking industry has grown. There may be regular shifts in their relationship, but both treasurers and bankers know how crucial a relationship is. And whatever the strains and stresses both sides need to ensure that it is preserved.
PETER WILLIAMS
Editor
Pension schemes could fall foul of credit crunch
UK defined benefit pension schemes could be among the indirect casualties of the fall-out from the credit crunch sparked by US sub-prime mortgages.
Transparency on bond pricing
A recent European Commission (EC) public hearing in Brussels into how the bond market could improve access for retail investors brought together regulators, trade associations, academic and governmental practitioners. The ACT was there, but non-financial corporates were under-represented.
The unprecedented late-summer credit crunch has not shut the door on major fundraisings, as shown by the €13.5bn package arranged for German tyre giant Continental.
Anyone who has been involved in home loan finance knows that prudence was sent on her way a long time ago. US sub-prime losses of $50bn pale into insignificance compared with the global losses that have arisen from the sub-prime collapse. For corporate treasurers, life has become distinctly uncomfortable, as many of their Libor-linked loans were due to roll over. But the crisis has provided treasurers with an opportunity for some sensible housekeeping.
The new Chancellor of the Exchequer gave his first Pre-Budget Report (PBR) on 9 October. By now, many hectares of newsprint have been devoted to analysing its implications for entrepreneurs, private investors, families and politicians. But what did it do for corporate treasurers? In truth, this was a very quiet PBR for treasurers, although there are some changes to consider.
There is a broad spectrum of capital market instruments ranging from senior debt to common equity, Khalid Krim, Head of European Hybrid Capital at Barclays Capital, told the ACT’s symposium on hybrids.
For much of the past 12 months, it appeared that the major story of the past three years would again be growth. As Ian Fitzgerald, Managing Director and Head of Loan Syndicate at Lloyds TSB Corporate Markets, observes, within the lending markets as a whole, the main driver over this period was private equity driven leveraged buy-out/management buy-out (LBO/MBO) activity. Since 2004 growth in this type of lending went from 20% of total European market lending to a point where, mid-way through 2007 it represented 35% of the total market.
Low-cost airline Easyjet has been on a fast growth track since it was founded 12 years ago. Group treasurer paul phillips talks to Graham Buck about how the group plans to maintain growth while strengthening its green credentials
Vodafone Group has a centralised treasury that handles all funding, liquidity and financial risk management for the group, with a non-recourse concept where, depending on local requirements, risks and financial markets, a greater proportion of treasury activity is undertaken locally. This concept applies to operating companies in India, Egypt, Turkey and Albania and, for India, means that all operating company debt is raised locally and supported by the business with no explicit support from the shareholders. Surplus cash is not repatriated to the UK other than by way of shareholder distributions. Any hedging is direct with bank counterparties. This was not new to the Indian treasury team, but a longer-term approach to treasury management compared to the previous majority shareholder was.
It will be several weeks before the findings of this year’s ACT/JPMorgan Asset Management Global Cash Management Survey are revealed, but it will be a shock if they do not show a continuing trend for investment-grade companies to make use of fewer banks. The trend has implications for treasurers’ relationships, both with banks they stop using and those they retain.
Sukuk are a form of Islamic financial instrument that have similar characteristics to corporate bonds. Given the large amounts of liquidity in the Muslim world, corporate treasurers should consider issuing sukuk to diversify
their funding sources. New tax rules should be welcomed as an important first step enabling UK companies to issue sukuk and putting on a firm foundation the taxation of investors in sukuk.
Public authorities are increasingly open to using complex commercial structures in their relationships with suppliers. The delivery vehicle for most PFI contracts is a special purpose company with two key financial risks: interest rates and inflation. Evaluation of public-sector procurement decisions revolves around value for money and affordability.
Centralisation of treasury functions will let corporates achieve savings through economies of scale and avoidance of duplication. The centralisation of non-core business functions will facilitate automation and the end of paper processing. Standardisation in terms of payment formats, transaction processing and reconciliation will help treasuries benefit from the introduction of new transaction types.
This article – the first of two – reviews the fundamental principles of treasury application service provision, and analyses the model’s applications and value, primarily from the perspective of an entry-level treasury operation.
Advanced Diploma MCT students are now studying and attending online tutorials from their homes and workplaces in Hong Kong, the Netherlands, Poland, Singapore, Switzerland, Trinidad and the United Arab Emirates, as well as the US and the UK. Meanwhile, reflecting the virtual nature of the online course, one of the two senior tutors, Mike Northeast, enjoys a view from his office over a sea-loch in north-west Scotland.
