Background
The Policy and Technical team has been speaking to a number of treasurers over the last few weeks, to understand what issues they are facing and in what areas the ACT can help. We are also talking with the main banks to understand how they are responding to the COVID-19 crisis. At the same time, we have held a number of conversations with HM Treasury, the Bank of England, the CBI, the City of London and UK Finance. Through these forums we have been able to ensure that the views of the treasury community are heard by policymakers through a number of different channels.
Last week Caroline Stockmann and I joined a call with the US National Association of Corporate Treasurers. It was useful to hear the various challenges faced by American businesses and they were keen to hear what was happening in the UK. More details of these conversations can be found at the end of this blog under the heading Views from around the world.
A list of useful material from the ACT, the Regulators, the Government, and others can be accessed from the ACT Knowledge Hub.
General overview
There were no new announcements from the UK government this week, which gave treasurers and banks time to digest the new CLBILS scheme and work through their responses.
One of the latest topics in our calls with treasurers is how to deal with dividend payments. The obvious response in times likes these is to cancel dividends to protect cashflow - particularly if one is benefiting from government programmes. However, many pension providers rely on dividends as do citizens which makes any decision less clear.
The other main topic relates to what can be included in the exceptional line in the financial accounts. The implications for this are far-reaching and it’s an area we plan to explore in the next few weeks. (If you have your own thoughts or insights that you’d like to share, please drop an email to technical@treasurers.org.)
We have been in touch with the various rating agencies and on how they are responding to rating requests in relation to the CCFF programme. Fitch has provided the following information:
The BoE’s Covid Corporate Financing Facility requires that corporate issuers must be investment grade (or able to meet investment grade standard as of 1 March) to access the Facility. For the duration of the Facility, Fitch is offering unrated companies a range of products, including a Short Term Public Rating, Short Term Private Rating or a private credit opinion, which are all accepted by the BoE, to determine whether the issuer can access this much-needed liquidity offered by the UK Government. In the current unprecedented and volatile situation, we are being flexible with the commercial arrangements for these products, up to and including there being no charge depending on the specific circumstances of individual companies and their existing capital markets activities.
We are seeing very strong interest from a range of companies and are currently processing their requests. As the matter is time sensitive, we are aiming to provide quick turnaround on decisions about eligibility. A credit indication which provides an initial view on whether the investment grade requirement set by the Bank of England will be met typically takes 1-2 days. If the investment grade standard can be met then Company may proceed to a Credit Opinion or full Short Term Rating. A Credit Opinion will take 1-2 weeks and a full public or private short term rating can take up to 4 weeks.
Latest feedback from Treasurers
Banking:
- UK and European banks continue to be very supportive. Some US banks felt to be under pressure to reduce lending
- CDS levels have spiked but only in relative terms and nothing like they did during the Global Financial Crisis in 2008/9. (This is an area we’re looking to cover in more detail in the next few weeks.)
- Relationship managers are being very proactive but everything still hinges on the credit teams in the banks
- Banks are anticipating waivers being requested on existing facilities but will expect to charge a fee and may not agree to a large number of waivers
- Some brokers are being less helpful which may reflect the speed of developments in the lending market
Liquidity and cash management
- Companies seem to moving into three clear groups – those:
- with sufficient liquidity to cover most likely scenarios;
- who feel they can access additional funding from existing stakeholders and the various government schemes; and
- who are unsure if they will survive the economic downturn
- Share buy back plans are either being scaled back or cancelled; cancellation of dividends or re-emergence of scrip dividends.
Cash forecasting / modelling
- Some unusual patterns emerging with government funded revenue even though there are no associated costs as the business has stopped operating
- It will take time to understand how and when some of the government schemes will start to pay out (e.g., furloughing compensation payments, any backlogs, etc.)
Access to government schemes
- The number of successful applications to all of the government schemes remains relatively low. Part of this is the time it takes to complete the necessary documentation and also a number of applications have failed key criteria (such as minimum drawings)
- It is estimated to take at least three weeks to complete the CCFF process:
- An initial eligibility test; and
- Two weeks for lawyers to negotiate the documentation (can take longer given the number of requests being submitted to the banks).
Financial markets
- After the tighter trading conditions seen in mid-March, the FX markets seem to continue to be functioning although spreads in some currencies have widened slightly
Quotes we have heard include:
- There is no one holding my hand as I go through the CCFF process for the first time
- I found doing a test trade very helpful as it meant I was confident when I applied for my first draw down. This was important given that the whole board was watching me and the process
- I need to close out a number of my hedges this year given falling demand, but the rates are attractive for 2021/ 2022. I’m looking for ways to rebook the trades but struggling
- I am estimating £20k in fees and 4 weeks to get a rating
- I’m looking to use the opportunity to build the capacity for a CP programme for when the crisis is over – not just to access the government scheme
Update from the UK regulators
- The Financial Reporting Council announced (09/4) it will put on hold plans to implement operational separation requirements for large accounting firms, aimed at separating their auditing and consulting departments. The freeze will be assessed in one month.
- HM Treasury and the Bank of England (BoE) agreed (09/4) to temporarily extend the use of the Government’s ‘Ways and Means’ quantitative easing facility, the government’s pre-existing overdraft at the Bank of England, to ensure that a short-term source of additional liquidity is available to provide cashflows and support orderly functioning of markets through COVID-19.
- The BoE’s Prudential Regulation Authority (PRA) published (09/4) its 2020/21 Business Plan, outlining actions it has taken to mitigate the impact of COVID-19.
- The Financial Conduct Authority (FCA) confirmed (09/4) its temporary financial relief package for customers of consumer credit products. Rule changes enter into force immediately, with all measures to apply from 14th April.
Views from across the world
As a member of the International Group of Treasury Associations, and the European Association of Corporate Treasurers and working with our colleagues in the US National Association of Corporate Treasurers we are keeping an eye on developments overseas.
Items that caught our eye include:
- The EU Commission’s financial services directorate (DG FISMA) is currently working on a roadmap for the financial sector to be part of the pandemic support and recovery. Ultimately the expectation is that the outcome of these deliberations is not going to result in a shift of some of the already identified priorities (revision of bank capital rules, review of trading rules in MiFID, sustainable finance and corporate disclosure and behaviour, as well as digital finance including payments and anti-money laundering) but rather identify ways in which support measures can be built into some of these revisions that are planned for launch in the coming two years.
- Commission to work out a recovery roadmap – focusing on support for job creation and fostering further single market integration.
- Governor of the French Central Bank, gave a speech (08/4) on emergency measures to tackle the crisis, while also providing insights on a recovery strategy after the crisis, notably on monetary policy and the treatment of debt accrued during the crisis.
Feedback from the US National Association of Corporate Treasurers
- CP market seems active through to May
- The criteria for accessing the US equivalent of the UK CCFF facility operated by the Fed is only that you cannot access funding on the same rates and tenors as before the crisis so it should be relatively easy to qualify
- Some larger firms are not accessing the CCFF facility as the upfront fees can be significant (as they are based on level of drawings in the previous year)
- Some firms are placing surplus liquidity with their lenders to ensure there is some ancillary business these banks are benefiting from
- Some firms have drawn down fully on their committed facilities to demonstrate to the board a “wall of cash”
- An increase in the use of Supply Chain Finance programmes as suppliers to highly rated customers are able to access funding either in addition to or to replace facilities that have been withdrawn
- Several non-US banks have withdrawn from the lending market given the current high costs of US dollars
- French banks seen to have been especially supportive
- The FX markets seen to be coping in the crisis, with the various swap lines established with major central banks assisting with liquidity. Emerging market currencies have seen lots of volatility
Engaging with the treasury community
Thank you to those who completed our survey on initial responses to the COVID-19 crisis. We are analyzing the results and will share these with you shortly.
We have started to get results on our liquidity barometer which we hope will provide a snapshot of how people feel about liquidity available to for their business. This will be rerun every 2 weeks to help build a trend of how treasurers are finding the market. We are looking for more participants and if you’d be interested, please drop a note to technical@treasurers.org.
We welcome conversations with our members on:
- How you’re dealing with the crisis
- What you’d like us to raise with the various bodies we are in regular contact with
- How the ACT can support you during this challenging time.
Send an email to technical@treasurers.org and either James Winterton, Naresh Aggarwal or Sarah Boyce will be in touch with you.
If you have found any resources which you feel we should include, please email us with details.
Naresh