COVID-19: How much Liquidity is enough?

Businesses are rightly nervous as the world faces up, collectively, to the biggest humanitarian crisis in a generation, and the developing economic and business fall-out.

Covid-19 will deliver a serious economic shock, and while commentators are still trying to estimate the scale, the outlook remains highly uncertain. Companies need to be resilient not only to support their customers, employees, suppliers and shareholders, but also in this time of national and international need, to continue vital work to support populations.

Big business is a key part of the solution – mobilising resources and redirecting capacity to build vital medical equipment. Supporting supply chains and workforces. We have already seen many wonderful examples of companies large and small mobilising talent and capacity to benefit the greater good, whether that’s by manufacturing medical equipment or re-directing logistics to help deliver vital goods and equipment to front line industries.  

Treasurers play a pivotal role in helping companies manage through this period and, since the challenges of 2008, liquidity management has become a more frequent agenda item, both at Board and Risk Committee meetings.

Treasurers rightly focus on liquidity as the number one priority – how much does the company need; do we have enough; and how do we get more when needed?

In reality, at this juncture, the answers are not yet clear and will also be very dependent on the industry sector. Airlines, Hospitality, Transport, Consumer discretionary and many others have seen huge falls in sales and cashflow – while costs keep running – but supporting supply chains and the workforce is the right and responsible thing to do.

Many markets have been closed in recent weeks, including the key short-term CP markets which many corporates rely on for day-to-day working capital and liquidity, but with Money Market Funds shortening duration,  the CP markets are currently effectively closed.

Large companies have drawn down on about $200 billion of committed credit lines since mid-March. Most companies had always thought of these as last resort backstops, but understandably when some companies start drawing down it can be hard not to follow. Boards will want to know what the right thing to do for their company is, and the Finance and Treasury team will need to answer.  These questions have been forefront of mind for companies in recent weeks and form a key area for the banking industry in supporting our clients.

Drawing down committed lines may not be the best response if the cash is not urgently needed.  A committed facility is committed available funds – much the same as cash in a deposit account.

The challenge is that if everyone is doing the same thing at the same time – sourcing overnight liquidity - the system becomes less efficient and less effective.  Which is why Central Banks are providing liquidity and looking to find ways to re-open CP facilities in the UK, USA and Europe, - a focus which is paramount.

Banks are well capitalised and have big liquidity buffers but even so, the system will be less efficient if a huge quantum of facilities is drawn down and placed back on short term deposit, particularly if the longer liquidity markets remain closed.  

The liquidity rules which protect the banking system – critically the Liquidity Coverage Ratio (LCR) – requires banks to hold 40% of a corporate deposit with less than a month to maturity in high quality liquid assets (HQLA) - cash at central banks or Govt bonds. It can’t be used for lending.

Consequentially drawing RCFs and placing as short-term deposits grosses up the balance sheet of the system with every 100m of lending requiring 140million of deposits to fund it (with 40m being placed as HQLA). This reduces the overall credit capacity in the system.

The good news is the global authorities have seen this play out before and have been putting schemes in place, to re-open the term liquidity markets which should take hold imminently, increasing the overall flow of credit.

The Bank of England has led the way with the COVID Commercial Finance Facility (CCFF) – where eligible corporates can access and sell CP to The Bank at pre-crisis levels. Standard Chartered and other major banks are helping clients that don’t have existing CP programmes. It is important corporates have the opportunity to understand the eligibility and ratings criteria, to efficiently access the scheme.

Like all measures put in place there are enhancements that can be made to the various programmes: broadening the eligibility criteria for lower-rated companies; widening the range of collateral at the various funding windows. The speed and size of these schemes demonstrate the world’s major Central Banks are determined to ensure the system has enough liquidity, but focus will be required to get these all functioning efficiently with increased access.

QE programmes have ramped up, the Fed and ECB CP purchase schemes will come on stream soon. Corporate bond markets are also open – with record volumes close to $120bn and €50bn of IG Corporate issuance printing last week – including new issues by BAT, BP, Diageo and LVMH, proving that investor confidence is returning.

Many corporates are putting additional committed facilities in place on top of existing RCFs, with these structured and priced to reflect the need of the COVID-19 scenario.   When term liquidity comes back on line these facilities will often no longer be required and already we are seeing a few clients repay.

Working with banks will ensure there is plenty of global liquidity to go around - take what you need now and there will still be more tomorrow, if it’s needed.

At this hugely challenging time we need to partner and pull together to focus on ensuring business comes through sustainably, responsibly and calmly.


Clare Francis,

CEO, UK & Head of Global Banking Europe

Standard Chartered Bank

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