Corporate Liquidity: A New Era of Uncertainty

One thing that can be stated with much more confidence is that 2015 looks set to be a year when corporate treasurers continue to make great strides.

There is still economic instability in Europe and political unrest in the Middle East, while the huge variation in global growth and inflation prospects mean that the global economy will likely remain relatively volatile – therefore uncertainty will continue to be the new normal for treasurers.

As for the United Kingdom, uncertainty over the country’s future in the European Union (EU) with a potential ‘Brexit’, its economic policy and Scotland’s place in the UK are all issues that will loom large in the short- to medium-term.

Furthermore, the regulatory environment is also in a state of flux, with a raft of new banking regulations that directly impact on businesses, including rules affecting banks’ minimum capital ratio, liquidity coverage ratio (LCR), net stable funding ratio (NSFR) and money market fund (MMF) reform.

So it is time to get used to the new era of uncertainty.

The Role of the Treasurer

The function of the treasurer is also shifting and dynamic treasurers are already adopting practices more akin to asset management as they adapt to being the custodians of volumes of cash and other assets.

Treasurers are more present in the boardroom and are facing a very unusual set of circumstances – possibly even unique in living memory – thanks to a number of catalysts.

The drawn-out recovery and global instability have seen many corporates push back spending plans until they have greater confidence in the economic environment. That said, there are signs this situation is shifting particularly for our bigger multinational names.

Meanwhile, the quantitative easing (QE) programmes applied by many central banks mean that finance is readily available and cheaper than it has been for years.

The cost of credit will undoubtedly rise going forward – and would have already were it not for the central banks’ liquidity injection – so many companies have been making hay while the sun shines.

Cash Piles

The macro-economic uncertainties mentioned mean that although the number of exceptions are increasing, many corporates are sitting on their hands until they are confident in rolling out their investment plans, which is why capital expenditure (capex) and merger and acquisition (M&A) activity continues to recover, albeit slowly.

According to Capita Asset Services, the result is that cautious UK FTSE 100 firms are sitting on cash piles worth a total of £53.3bn (€73.4bn/US$84.0bn), or more than four times the net cash held on their balance sheets back before the recession in 2008.

This reflects strategies of borrowing at low interest rates and running conservative balance sheets to build up bigger liquidity buffers against future instability.

The real challenge for treasurers as interest rates remain at record lows is to optimise returns while maintaining availability and security.

In response, the most dynamic are already evolving their models by using different types of finance, diversifying their sources and shifting the mix of debt.

A Broader Mix

At the time the recession hit in 2008, the vast majority of corporates followed traditional paths when it came to sourcing debt, with most funding coming from traditional bank debt.

Today, while bank debt is still a significant component for most corporates, many more options have entered the mix. They include senior bonds, Eurobonds, loan notes, US private placement bonds, UK retail bonds, convertible bonds, asset-backed securities (ABS), US senior loan notes and German Schuldschein.

Part of the answer lies in modernising and broadening investment policy; something that treasury should undertake in partnership with its relationship bank. All banks have their own liquidity management policies that can be applied as a benchmark to ensure in-house policies are watertight too.

Banks can also be a useful source of intelligence around counterparty risk.

Hit the Buffer

Finally, excess liquidity is expensive so it is important to determine how much of a buffer a business really needs.

This will require robust stress-testing to predict how firms could move quickly to capitalise on an unforeseen opportunity, which could involve a merger or acquisition, standing up to an unprecedented and unexpected ‘Black Swan’ event or even increased FX and Interest rate volatility.

Businesses should also revisit strategic planning, examine historic cash flow volatility and nail down expectations of market conditions.

Corporates should take a view of future cash flows and think about what tools are at their disposal should that requirement need cutting – perhaps by reducing capex or changing dividend policy. This level of planning and flexibility could prove crucial should the worst happen.

Although we are possibly at the top of the cycle, today’s corporate treasurers are managing the largest amount of money in recorded history. As liquidity management becomes an ever-more important aspect of their responsibility, many treasurers are finding their skills and experience are being tested like never before.

Therefore, a focus on diversifying finance sources and carefully managing risk will continue to be key in 2015.


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