For all the disruption that the pandemic has brought to companies and economies over the past year, it’s clear that the nature of the current crisis differs considerably from the financial crisis of 2008/9.
As BNP Paribas chairman of the board of directors Jean Lemierre noted at the virtual Sibos 2020 conference: “This is not a crisis in banking, or a financial crisis. It has an economic impact, but so far the financial sector has done its job.”
Nevertheless, as the pandemic escalated and stay-at-home orders stacked up in March 2020, the spectre of the 2008 financial crisis was never far from treasurers’ thoughts.
As the COVID-19 situation gained momentum, many companies took steps to shore up liquidity by tapping into their revolving credit facilities (RCFs), securing new funding lines and issuing debt.
For treasurers, the major focus was on ensuring their companies had enough liquidity available to weather challenging markets. But shoring up liquidity can in itself result in additional challenges for organisations, particularly in a low- or zero-interest-rate environment.
As the COVID-19 situation gained momentum, many companies took steps to shore up liquidity
“At the beginning of the crisis, some corporates were tapping into their committed credit facilities – they were drawing down just in case, because they were anticipating a possible liquidity crisis,” recalls François Masquelier, CEO of consulting firm Simply Treasury.
“The problem with this approach,” he notes, “is that you can’t get a return on that cash, particularly in euros, because of the negative interest rates. Between spreads and commitment fees or utilisation fees, you end up paying twice.”
As it happened, government interventions did much to calm the markets as the crisis continued.
“I think the markets were quite jittery around this time last year, when it wasn’t clear how things were going to pan out with COVID-19,” says Alison Stevens, group treasurer at Thames Water.
“But the announcement of government support really did change the tone – I think things could have looked quite different, both in the UK and worldwide, if it hadn’t been for some of the government lending schemes.
“Fortunately, there was plenty of lending appetite for Thames Water, so we didn’t need to use any of the funding/liquidity schemes ourselves.”
A year down the line, while the picture has changed considerably, challenges remain – particularly for companies that have faced significant pressures during the crisis.
“What I’m hearing from banks is that the bank market is certainly not back to normal, but it’s facilitating new agreements that are being put in place – albeit, as I understand it, on a shorter tenor basis,” says Hailey Laverty, group treasurer at InterContinental Hotels Group (IHG).
Likewise, while pricing has improved, Laverty says it is not yet back to pre-COVID-19 levels – “especially for any credits that actually have been impacted by COVID-19.”
On the bond side, meanwhile, she says there seem to be “some reasonable and significant deals getting done at a good rate – and our pricing, if we wanted to go to market, is entirely reasonable and in line with something we would look at if the need arose”.
Companies may be forced to give more pledges or guarantees that they did not have to give before
“In the near term,” agrees Stevens, “the market seems to be in quite good shape. Obviously, governments have accumulated a lot of debt during the past year, which could have more of a knock-on effect to the economy in the medium term. But for now, we have no immediate concerns.”
As Masquelier emphasises, the extent to which companies are able to access funding still depends on how those companies have been affected by the pandemic: “There are companies that are benefitting from the crisis and have been able to develop alternative services,” he says. “So for them, it is not a problem to get funding.”
He notes: “There are companies that have not really changed, but are still OK. And there are companies that have been affected by the crisis and are facing major challenges.”
In particular, he says that while there do not appear to be constraints where bank financing is concerned, “companies may be forced to give more pledges or guarantees that they did not have to give before the crisis, and may be forced to accept to pay slightly higher spreads”.
In Europe, Masquelier notes that the EU is continuing to focus on the capital markets union (CMU) – an initiative that aims to drive more integrated capital markets in the EU, deepen financial markets and make funding more accessible.
“One of the ideas is to make sure that we promote alternatives to bank financing,” he says. “I do believe that the portion of capital markets in the funding of European companies should be higher – and the CMU project aims to provide better and smoother access to the markets.”
Meanwhile, the focus on green funding continues to intensify. “A lot of companies will need to consider green bonds or green financing,” says Masquelier, noting the importance of the EU’s Sustainable Finance Disclosure Regulation in driving standardisation.
The crisis has certainly accelerated the digitalisation of the treasury function
He predicts that companies will increasingly focus on ESG compliance as the investor appetite for ESG-compliant assets continues to grow.
Rohan Gunatillake, group treasurer of Golding Homes, agrees that ESG funding is becoming a higher priority. Citing the firm’s standby liquidity agreement with MORhomes – a borrowing vehicle for housing associations – he notes that the next bond issued by the vehicle will be a 30-year sustainable bond: “ESG funding is becoming a hot topic in this sector.”
Beyond access to financial markets and the availability of liquidity, treasurers will continue to be challenged in other ways as the pandemic evolves in the coming months.
Much as treasurers have adapted effectively to working-from-home conditions during the past year, new challenges will arise as companies navigate a return to the office, as well as continuing to work on strategic projects.
Laverty, for example, notes that IHG is currently in the process of implementing a new treasury management system (TMS) and payments platform – a project that was already in the pipeline before the crisis began.
“It was just as we were finalising the scope and contracts in March 2020 that COVID-19 hit,” she recalls. “As a sector that has been heavily impacted by COVID-19, a lot of capital projects did get postponed at the beginning in order to save cash, but for the TMS project we still got the approval to go ahead.”
In part, says Laverty, this was because the team knew the new system would be needed even more during the crisis, “in terms of getting that granularity on cash-flow forecasting that we haven’t had in the past”.
The team did, however, split the project into two parts in order to spread both the costs of the project and the resource requirements while the team was adapting to the working-from-home environment.
As Masquelier observes, “Alongside the sharp focus on liquidity, the crisis has certainly accelerated the digitalisation of the treasury function and prompted treasurers to revisit the ways they work – and it’s also brought an opportunity for treasurers to position themselves closer to the C-level.”
How the pandemic changed minds
In contrast to responses to previous crises, governments have put in place far-reaching funding packages and fiscal stimulus.
This year, the UK government has put in place £59bn in additional stimulus. President Biden’s milestone $1.9 trillion stimulus, also known as the American Rescue Plan, was passed in March.
In the EU, a Next Generation EU (NGEU) post-pandemic recovery fund aims to put billions in debt, collectively backed by EU member governments, into the hands of businesses in poorer parts of the EU – an approach that prior to the pandemic was roundly rejected by richer members.
The fund, which was instigated mid-2020 and came into being this year, is worth up to €750bn. The Organisation for Economic Co-operation and Development estimates US fiscal stimulus will amount to 15% of GDP, compared to 7% in the euro area and 4% in Japan.
Since its very beginning, the EU has promoted the idea of a single market for capital, but progress on a Capital Markets Union (CMU) has been slow.
The pandemic has given new impetus to the project, however, and the clamour around sustainability and ESG is increasingly embedded within debate around its overall direction.
The COVID-19 crisis has made implementation of CMU even more important, proponents argue. Capital markets have an acknowledged role to play to fund recovery, particularly when it comes to recapitalising European companies, including SMEs.
Towards the end of 2020, the European Commission released a new CMU Action Plan with sustainable funding a central theme.
And the president of the European Central Bank, Christine Lagarde, recently highlighted the synergies.
“The shift to net zero emissions, together with an adequate digital backbone, will require major investments across Europe in technology, infrastructure and networks,” Lagarde said in a conference in May. “If green finance continues to emerge to fund this transition, the consequences for Europe’s financial system could be sweeping.
“In fact,” she continued, “I believe that the green transition offers us a unique opportunity to build a truly European capital market that transcends national borders – or what I would call green capital markets union.”
The EU Sustainable Finance Disclosure Regulation is accelerating discussions around ESG principles for companies of a broader range. The regulation, which became effective in March this year, applies principally to asset managers and other financial markets participants, including the largest listed corporates.
The European Commission subsequently published proposals for a Corporate Sustainability Reporting Directive that would cover still more companies, including publicly listed SMEs.
Rebecca Brace is a freelance journalist specialising in treasury and banking
This article was taken from the Issue 2, 2021 edition of The Treasurer magazine. For more great insights, log in to view the full issue or sign up for eAffiliate membership