The Treasurer July-August 2005

Risk management for today and tomorrow

Risks that treasurers face both as individual professionals and on behalf of the organisations for which they work are subtly shifting. In some ways, the treasurer appears to be enjoying boom times. Recent market research suggests that the cost to investment grade companies of raising funds through the syndicated loan market is at its lowest for eight years. The fall in the cost of borrowing is a further sign of the flood-like levels of liquidity that are running through banks and capital markets.

Even while money is plentiful there is evidence that innovation is at an equally full level. The hybrid capital market is yet another US import which has crossed the Atlantic and is attempting to take root in Europe. For all its complexity the message of hybrid debt is straightforward enough: it is a financing tool that offers companies access to cost-effective capital without diluting shareholding or putting the credit rating on the line. And who could argue with that?

But it would be a mistake to think that treasurers are clearing their desks ready for their summer break with a “we’ve never had it so good” feeling. The technical issues which they are facing certainly do not appear capable of easy resolution. The issue of pension liabilities is set to run and run both in British boardrooms and on the political stage. There may be imaginative solutions which treasurers either acting for corporates or for trustees can engineer, but those solutions will not be straightforward, cheap, nor universally popular. The uncertainty in the world of financial reporting as the international standard setter seeks to converge with the US holds as much threat to European corporates as it does opportunity. The idea of having to file one set of standards to satisfy any market regulator across the globe is a powerful idea, but treasurers scarred by Sarbanes-Oxley (SOX) and bemused by the present rules on accounting for financial instruments are justifiably sceptical that the vision can be turned into reality without inflicting material damage to their companies’ reported numbers. SOX and accounting also throw up the thorny issue of technology where treasury systems and the rest of the ledgers appear in many companies to be only vaguely related.

And if treasurers look at the financial state of the organisations for which they work, they will be reading very mixed messages. One reason why corporates do not want to gear up is because they cannot see where and how they will make the returns that will justify the borrowings. With so much uncertainty on so many fronts treasurers need to be fully conversant of the range of risks as they impact on their company. They need strong risk management policies in place now to cope with present realities and tomorrow’s possibilities.


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