Volatility and Shrinking Liquidity: Positioning Treasury in a Financial Crisis

The Association of Corporate Treasurers (ACT) Annual Conference took place in Manchester, UK last week, under the heading ‘Adapting, diversifying and sustaining – dealing with the new normal’. This is something that the UK Chancellor, Alistair Darling, was attempting to do as the conference started, when he made his Budget statement announcing the UK’s financial plans for the next year onwards. Initial reactions to the Budget from many commentators has focused on the vast levels of debt and public borrowing contained in it, as well as the ‘optimistic’ growth levels predicted. One option for a country in recession is to turn to its manufacturing sector for the growth stimulus, but the financial restructuring of the 1980s to turn the UK from a manufacturing economy to a service economy means this is now not an option. The fact that this conference was held in Manchester, a hotbed of the industrial revolution, added a tinge of irony to the proceedings.

A Volatile Year

The Chairman’s opening remarks, from Gerry Bacon, deputy president of the ACT, looked back one year to the previous conference and noted how then no one was anticipating the severity and length of the massive financial crisis that treasurers and banks find themselves facing today. The UK Budget announcement was clearly aimed at calming the market volatility, but the method of increasing borrowing as a way out of the crisis is controversial, as many see borrowing as the main cause of the current problems.

John Wood, head of balance sheet management EMEA at HSBC Holdings, then took to the stage to give a presentation that analysed how the financial crisis has unfolded, and how things may go on from here. Wood’s main take on the ‘new normal’ of financial services is that things are going to get very boring for a long time if a route is to be negotiated out of the current turmoil – banks are turning inwards to get their houses in order before they can compete for new business, focusing on building up strong capital and liquidity bases. For treasurers too, Wood advised a back-to-basics approach – cash is king so make sure you know your cash position in every territory. Layered on top of this is the ‘new normal’ for treasury – practices such as global pooling that just two years ago may have seemed specialist are now mainstream, while corporates have to assess their banks as a counterparty risk. It’s wrong to simply say that things can only get better, and treasurers need to act accordingly.

Funding and Liquidity: the Latest Scarce Resource

A panel discussion on the first day of the conference brought to light many common topics that would be cited by speakers over the following few days. Taking part in the discussion were Tom Fallon, treasurer for United Utilities Group; Neil Garrod, director of treasury at Vodafone; Andrew Kluth, group head of funding with National Grid; and Chris Whitman, treasurer from Deutsche Bank.

Looking at current methods being employed to tackle the global downturn, Vodafone’s Garrod said that he thinks there’s a contradiction inherent with quantitative easing and higher issuance. “I’m glad they’re doing it, but it is morally wrong,” he commented, adding that the reduction in gilt yields is making things worse in the market.

Many corporates could be forgiven for radically changing their business and funding strategy as bank charges increase on certain instruments. However, United Utilities Group’s Fallon argued that this is not best practice and corporates should not be panicked into short-term thinking. “We are sticking to the funding formula and business strategy we have – if prices go up we pay them, through gritted teeth, but we keep our strategic formula,” he explained. Whitman at Deutsche Bank also picked up the theme of the circle of decline in funding, stating that he doesn’t think there will be a return to rates of Libor+25, +50 or even +75 in the next few years.

So what steps can be put in place to return a sense of normality or even a ‘new normal’ to the banking industry? Fallon suggested that separating investment banking activities from normal banking may well be the way forward, and raised the prospect of a return to the Glass-Steagall model or something similar. The US Glass-Steagall Act, enacted in 1933, legally separated the risk/reward activities of investment banking from basic commercial banking activities. This was repealed in 1999 by the Clinton administration with the introduction of the Gramm-Leach-Bliley Act, and some commentators have speculated that this is what is responsible for the current problems. While it is too simplistic to argue ‘yes it did’ or ‘no it didn’t’, it is clear that there is a lot of support among treasury professionals for wilfully risky banking activities to be taken out of their day-to-day corporate banking sphere.

Banking With the Government

The Royal Bank of Scotland (RBS) has been hard hit by the recession and, compounded by some questionable decisions made by its previous directors, the bank’s largest shareholder is currently the UK government. Paul Ward, head of EMEA, corporate coverage and advisory, global banking and markets at RBS, gave a presentation that looked at the financial crisis and also examined the recent history of his bank and where it goes from here.

The overwhelming message of the first half of Ward’s presentation was to reassure UK treasurers present that RBS is still there for them to do business with – yes the bank’s balance sheet is being reduced, but the vast majority of this is not in corporate business and, specifically, not in the UK.

The rest of the presentation offered some common sense suggestions for corporates and their risk, including:

  • Assess and measure all risks simultaneously and not in individual silos.
  • Take advantage of any funding opportunities when they arise.
  • Consider accessing multiple sources of financing to spread funding risk.
  • Avoid the cloud of refinancing and consider forward start facilities.

The presentation ended with a few predictions from Ward about future market conditions. These included a hope that the recession should end in 2010 but that, after 15 years of growth in debt, the next decade will see a very different financial landscape as many observers agree that debt needs to be reduced. Finally, Ward suggested that the next year would see the continued retrenchment of international banks to their home markets.

The Private Equities Perspective

How is the UK economy positioned in relation to the rest of the world? This was a topic tackled by Jon Moulton, founder and managing partner of private equities firm Alchemy, in a session entitled ‘The New Order in Finance’. The fact that Moulton’s slideshow was accompanied by images of the trenches of World War I, a sinking Titanic and UK riots from the 1980s does not bode well for the future, one suspects.

Moulton explained how bonuses are now a critical risk factor for the regulators – for too long massive incentives have led to massive risk taking, regardless of the results. By targeting this culture of rewarding risk rather than results, the financial services industry may start to learn and recover from the huge errors that have found UK plc in its current predicament.

He also attacked regulators and their calls for transparency by arguing that simply publishing complex statistical models and vast documents filled with accounts, operating strategies and core values does not work, because nobody in their right mind is actually going to read these statements, let alone understand much of the information they contain. Transparency as a concept is a nice idea, but the approach should be to keep it simple and understandable. Many of the activities in investment banks and funds that brought about this recession were not even understood by the Board members of these institutions, which is frightening to think of today.

As mentioned earlier, the UK is bereft of any major industry (apart from financial services, which is not in a position to help out currently) and the country is heading towards a far greater level of public debt as a percentage of GDP than other similar struggling economies. Here are some possible suggestions from Moulton as to what the UK might find itself getting in response to the crisis:

  • A lot more regulation (especially for hedge funds and private equities).
  • Efforts to regulate the incomprehensible.
  • Banks may take years to get sensible balance sheets – meaning a credit shortage for a protracted period.
  • A serious loss of the Financial Services Authority (FSA), which provided 27% of UK tax revenues only a year ago.
  • More debt – repackaged as quantitative easing, or other ‘euphemisms’.
  • Inflation – to sort out the debt – but when?
  • Lots of small gimmicks from the government – Moulton cited the government ’s Budget as an example of this.

Treasury’s Added Value

Against this bleak assessment of the UK economy, how can the treasurer add value? This was the topic picked up by Dev Sanyal, group vice president and group treasurer at BP, who faced the unenviable task of following Moulton onto the stage.

Looking at the management of financial risk, Sanyal made the case that systemic liquidity is the biggest risk issue for treasurers today. In this case it is crucial for treasurers to hold a cash buffer, position their company to take advantage of funding opportunities when they arrive, and to think expansively by looking at a broader range of funding opportunities – be flexible in location as well as timing.

In terms of operational risk, Sanyal made the case that there are two facets. Treasurers are at the heart of company’s decision-making processes. There’s a need for stability – a company’s response to events needs a stable foundation. Also, treasurers hold a unique position by seeing the totality of the company’s cash flows and early indicators of the pace of change. This position is elevated today.

So what opportunities exist for treasurers in this crisis? Sanyal highlighted the following four points:

  1. Create flexibility. The treasurer can add value here.
  2. Delivering performance. Only efficient companies will come out of the crisis in a position to take advantage of the opportunities.
  3. Building capabilities. It is a good time to be investing in talent.
  4. Invest in driving efficiency.

Sanyal gave an example: BP has been thinking about raising debt recently. The company has been active in the bond market, investing in kangaroo (Australian), samurai (Japanese) and dragon (Hong Kong) bonds, which is a good example of how a multinational should take a global approach to investment and funding, and looking at which markets around the world could be good for them.

Treasury strategy is a servant of corporate strategy. This is affected by the industry that you are in. Treasurers must understand the corporate strategy before implementing the treasury strategy. In Sanyal’s example, BP is in the oil industry and has a strong balance sheet because of this – others may not be in such a position and therefore have to act accordingly.

A panel discussion followed, with Bacon from ACT questioning both Alchemy’s Moulton and BP’s Sanyal. On the point of how the Securities and Exchange Commission (SEC) and other authorities can be pushed to get simplified disclosure, Moulton reiterated his point that there’s no point producing too much disclosure, and that if treasurers are faced with vast bank and corporate reports, they should just keep telling the authors that the report is too much/too complicated until a simpler and clear form of reporting emerges. Sanyal then began to make the argument that regulations are evolving, but was shut down quickly by Moulton, who argued that regulations are not evolving, rather growing at an accelerated rate like cancer. This is not a positive development – the clear message from Moulton is that there is a real danger of financial services becoming over-regulated as a reaction to the crisis, something that he believes must be avoided.

So, what should the financial services industry do? The situation was highlighted by Moulton in one of the most memorable quotes from the conference: “We need innovative banks like we need innovative 747 pilots.” Echoing a previous presentation, he also speculated that perhaps something like Glass-Steagall or something similar is required – if you want collateralised debt obligations (CDOs), etc, go to a hedge fund or a spin-off investment bank.

Despite the general mood of the conference, it was clear from this roundtable discussion that it is not all doom and gloom for corporates. Moulton made the point that corporates with large cash reserves are in a fantastic position currently. If they’ve got the nerve, it’s a good time to pick up other corporates that are not in a good position.

Additionally, the current popular movement to attack the bonus culture in banks is having some unexpected ‘bonuses’ for corporates – as Sanyal gave the example that BP has been hiring personnel from the financial services sector. As banks downsize, there are talented people in the financial services sector that could do a good job for corporates as they seek to invest in talent for the future.

Treasury Aspirations for the Coming Year

A tracked session at the conference examined the current focus of treasurers. Taking part in the debate were Magnus Attoff, head of financial risk management and treasury controlling at Ericsson; Malcolm Cooper, group tax and treasury director, National Grid; and Bob Williams, group treasurer, Barratt Developments.

The number one strategic focus at National Grid is a familiar issue to treasurers today: funding. National Grid currently has a debt level of £22bn, and this is rising by approximately £1bn every year. To accommodate this, Cooper needs funding of £2-2.5bn per year. The debt at its current level is manageable in this way, and Cooper also demonstrated how increasing the debt level could have a negative effect on funding – if National Grid increased its debt level by £5bn, this would have a negative effect on the organisation’s credit rating. In turn, this downgrade would limit the access he has to funding markets, making the prospect of deliberately increasing debt on a large scale unthinkable for National Grid.

Cooper’s second strategic focus is on risk management. He explained that this issue is now so important at an organisational level that he’s finding himself making presentations to the Board every month. This is a good example of the rising profile of the treasury function within the organisational structure. The perception of treasury has changed within business, with executives now asking the question ‘what’s the impact on cash’ in their strategic planning, something that rarely, if ever, happened before. As was commented from the stage, if you can’t make a success in the role of treasurer in the current spotlight, there’s probably no hope for you.

Williams from Barratt finds himself in an industry particularly hard hit by the current economic downturn, with the mortgage markets in the state they are in, house builders are cancelling or postponing a large amount of projects. Barratt also had a large refinancing programme last year as part of M&A activity. Williams’ main advice to treasurers is to work hard on your bank relationships. He provides quarterly reports to his key banking partners, as well as some monthly reports too, in an effort to ensure that the banks never face any surprises. By ensuring a high level of communication to core banking partners, treasurers can strengthen these relationships in the bad times and come out of the other end of this credit drought (whenever that may be) in a positive position.

Ericsson’s Attoff made the following points about how treasury can keep a flexible risk strategy:

  • Separate commercial flows from trading.
  • Frequently carry out back-testing to identify exposures generating results.
  • Identify complimentary risk measures to compliment the VaR in order to monitor risks that are not covered.
  • Take the bigger picture and look at exposures outside of those that are actively managed.
  • There are no ‘free lunches’, you need to understand the reasons for results (return on risk).

Flexibility was rightly one of the key themes of the conference. During the current volatility, treasurers need to be able to adapt their funding norms to take advantage of opportunities when they arise.

Looking Outside the Norm – Transferable Lessons to Learn

As corporates look for advice and best practice on how to navigate the current financial crisis, two presentations stood out as offering real examples of best practice from outside the mainstream of established business models. The first of these came from Martyn Wates, CFO of the The Co-operative Group (the Co-op), who gave a rousing presentation, outlining the alternative business model that his company follows, and how all corporates may be able to learn from this during the current crisis. The Co-op is headquartered in Manchester, so the speech gave a local flavour to the conference. To start proceedings, Wates outlined the differences in business models, which you can see in the following table.

Co-op Business Model Plc Business Model
One member one vote One share one vote
Fixed value shares Share value fluctuates
Profits for members and communities Profits for capital holders
Belongs to its members Belongs to its shareholders
Constituted under the I&P Societies Act Constituted under company law


Wates stressed the point that the Co-op follows a ‘profit with a purpose’ mantra, that members won’t gain individual wealth from owning shares but rather that profits are ploughed back into local communities (no pun intended) and used to offer fair terms to suppliers.

Wates aimed to show to the audience how, by being honest and transparent with shareholders, banks and business units, treasurers could enhance their standing within their organisation and, in turn, enhance their organisation’s reputation. Here’s a list of key points Wates believes we have learnt as a result of the financial crisis:

  • Relationship banking is win/win for both parties.
  • Provide timely management information, such as half-year and full-year events, budget and plan, and ensure there are no surprises waiting for your bank or shareholders to discover.
  • The role of treasurer/CFO requires total transparency and trust/stewardship. Finance directors are the stewards of their organisation, holding the baton for a certain period of time before handing it on – don’t drop the baton.
  • Manage covenants/manage the business. Wates suggested that you could only make your business better if you make changes in real life, which requires getting into the details of how your company is operating. At a time when some senior bankers freely admit they had no idea regarding the types of financial instruments they were involved with, it’s plain to see what can happen if you abrogate your responsibility.
  • Be flexible. No one can predict the future, especially in the current financial landscape, so make sure you have a clear vision of where your business is going, and do the right thing.

By taking on board these lessons, it is possible for treasurers and CFOs, even those from the plc environment, to protect their treasury function against the harsh economic conditions currently being endured.

As well as learning from the co-operative business model, corporates in the audience were also given a personal example of the fraught conditions a start-up organisation has to operate under, and how lessons from this environment can be applied by mature corporates in the current crisis. This presentation came from Barbara Cassani, executive chairman at Jurys Inns, who founded Go airlines as a start-up business, having previously spent 10 years working in a mature, market-leading multinational, British Airways. As Cassani introduced it: “How do you recalibrate your business for the new reality?”

Now that the good times are over, corporates need to manage their operations cleverly and examine what makes their own brands successful in order to negotiate the current turmoil and succeed. Using an example from her Go experience, Cassani told the audience that, in the start-up environment, it was critical to fix any mistakes fast and to keep a keen eye on the company’s cash position. There shouldn’t be a blame culture attached to strategic mistakes as long as they are identified early, put right and not made again. Go nearly went out of business and had to reposition its business, which meant that huge personal sacrifices for the staff. However, because the actions taken at management level had always been shared with staff in a transparent manner, the mistake was admitted honestly and the motivation behind the new direction was clearly explained, the airline was able to change it’s structure and strategy with the backing and great assistance of its staff. It’s very easy to be lax and let an organisation become a siloed entity, with every department covering its own back but, at times like these, it is corporates that move together with a defined purpose that will be in a stronger position.

In terms of volatility, it’s unlikely many businesses will have been faced with what Go endured three years after it had started. Having launched in 1998, the airline had just begun to turn a profit at the beginning of the decade. Shortly after achieving this accomplishment, terrorists flew two aircraft into New York’s World Trade Center towers, and the bottom fell out of the airline industry. This was an event that would take out some huge national carriers, so the task to keep operating that Go faced was daunting in the extreme. However, even (or maybe, especially) in times this bad, Cassani urged the treasury and finance professionals in the auditorium to find a way to turn an advantage. At Go, they wrote to all of their suppliers and asked them to reduce their prices. Which, as an act on its own, would be dismissed out of hand by anyone in business. However, in the Go letter, they also shared their corporate vision for growth in the business going forward and how this could be accomplished. By supplying at a reduced rate in the short term, these suppliers would be looking at longer profits in the longer term. And, according to Cassani, this bold approached worked and around 50% came back with an improved price list. Other useful advice from Cassani included:

  • Slay ‘sacred cows’. If a function in the business is losing money, but the old argument that it is ‘strategically important’ is used, find a way to get rid of it, for the good of your business.
  • In these troubled times, try worrying about the clients and business you already have, not your own personal career. If your core business continues to be happy with you, they’ll keep coming back.
  • Fix your mistakes. People will follow you if you are honest about this. And don’t use management jargon – be direct with colleagues. They’ll respect you for this.
  • Let your staff take some risks – trust becomes reciprocal.

Tackling the Financial Crisis – Today and Tomorrow

The final session at the conference saw four senior finance professionals being questioned by BBC broadcaster John Humphrys about the current crisis and where it may lead. The panel in question was Barbara Cassani – executive chairman of Jurys Inns, Trevor Williams – chief economist at Lloyds TSB Corporate Markets, Paul Boyle – CEO of the Financial Reporting Council (FRC), and Alistair Clarke – former executive director and advisor to the governor at the Bank of England.

First, Humphrys asked the panel what they had made of the recent UK Budget announcement, did they feel positive or negative about the details? Cassani from Jurys Inns said that while she was encouraged that the budget did show the government understood the scale of the downturn the UK economy is on, she was very dispirited by the growth predictions it makes. Williams from Lloyds TSB, agreeing with the minor positive from Cassani, pointed out that it was at least a realistic Budget in terms of UK debt levels, particularly the public debt. Boyle at FRC said people will have to face up to a lower standard of living because of the massive public debt, and added that the increase of the top rate of income tax for top earners to 50% was a mistake as it won’t raise much revenue, while at the same time it will dispirit the brightest and the best at the top of industry, particularly within corporations. Clarke, again trying to find some positives, said that there was really very little room for maneuver for UK chancellor Alistair Darling, but that the debt implications were alarming. When the audience was polled if they thought Darling had got it right with the Budget, just three people raised their hands, with the vast majority opposing this view. Clearly, as seen through history, incumbent governments face a collapse in popularity in times of recession.

Another pertinent question, when thinking about the theme of the conference, asked what the key facets of the ‘new normal’ are in the corporate environment. Cassani from Jurys Inns said that she thinks corporates have to change the way that they strategically look at themselves, which won’t be much fun. Clarke highlighted his belief that there will be a shift in the power of borrowing between borrowers and lenders, as we move into times where lenders are increasingly cagey, borrowers are in for some very uncomfortable times. Lloyds TSB’s Williams stated that deleveraging is the ‘new normal’, but that gearing is ok as long as both the borrower and lender are happy with this. Boyle from the FRC highlighted the growth in focus on, and importance of, risk management: “Unlikely events are still unlikely, but not as unlikely as we thought.” However, he stated that the FRC does not want to see excessive regulations brought into the corporate sector. This question helped provoke a lot of theories, but as one of the panelists commented: “It’s hard to make predictions. Especially predictions about the future.” In times of great volatility such as these, treasurers need to be flexible and have a variety of contingency plans in place for many different scenarios. This preparedness should be the new normal, as the markets and global economies will not be ‘normal’ for a long time to come.

To underline this point, one ominous question asked if pensions are the next ticking time bomb for corporates. This was met with an immediate “yes!” from Cassani, who argued that the only good thing to happen to the pensions market recently was that some companies have moved away from the defined benefits model. If the credit crisis had hit seven or eight years earlier, the pensions industry would have face an even greater catastrophe. Williams from Lloyds TSB put the simple equation on the table: “Is enough being set aside in the UK for people in their old age? No!” It is a fundamental flaw in the UK’s economy – we’ve not saved enough and have spent too much, and this is crystalised in the pensions issue. Boyle from the FRC brought a regulatory perspective to the debate, pointing out that there has been a lot of criticism of the accounting standards for pensions for being too tough. Well, Boyle agrees that they should be criticised, but for precisely the opposite reason – for being far too lax. He finished with the stark warning that, if corporates are not very careful, the huge risks associated with defined benefit pensions will sink many organisations.


The ACT Annual Conference 2009 took place during one of the worst financial crises of the past 80 years. The themes of many of the speeches at the conference were downbeat in terms of assessment of financial markets and predictions for the future – certainly very few speakers or delegates agreed with Alistair Darling’s predictions that the UK economy will see growth of 3.5% in 2011.

However, it is certainly a much better time to be a treasurer than a banker, and this is where the positive action points of the conference came from. The conference demonstrated how can treasurers can implement best practice to enhance their operations by being vigilant and flexible, holding their nerve by maintaining a long-term strategy rather than flip-flopping into short-termism, while being prepared to take advantage of funding opportunities at any time and in unexpected geographies. By maintaining a strong treasury function, treasury professionals will help steer their organisation into a position to come out of the other side of the turmoil in a robust position. By focusing on key banking relationships, enhancing speed and quality of performance through targeted use of technology, and by making their voice heard at the board level and within the business, treasurers will play a critical role in business survival and recovery.


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