Cash & Liquidity Management

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Rowing from the Rocks Cash Investment in Asia With recent announcements of recession in Japan and a growth slowdown in China, the current crisis is truly global. On the one hand, companies all over the world have the same need to manage risk and liquidity; on the other, the opportunities for liquidity management differ across regions. In this article, we look at one aspect of liquidity management, namely short term investment, and the trends in Asia in particular.

“Call on God but row away from the rocks”

(Indian Proverb)

As I said in my Letter this month, I am not going to begin to try and explain, or even comprehend the economic situation in which we find ourselves. Whatever the background, this downturn is characterised more than previous ones by a lack of trust - between banks and other banks, and banks and corporates. From a corporate treasurer’s perspective, the immediate reaction is often to look at their bank financing. After all, as John Busby, Greenwich Associates consultant discusses in a recent Greenwich Associates Report,

“In past market downturns, US banks have drastically pulled back on their credit commitments to the least qualified borrowers, but they largely continued to generate revenues by extending loans to companies with solid, investment grade ratings.

What we are now experiencing is something different and deeper than perhaps anyone imagined. This is a true crisis of liquidity - even the strongest companies are struggling to get short-term financing.”

Credit Market Seizure Deepens and Hits Companies Large and Small, October 2008

However, the lack of trust, which permeates the market, is not simply about the way that banks assess their corporate clients. The recent spate of government intervention to shore up many well-respected banks has also changed the way that corporates view their banks. Banks and corporates have a symbiotic relationship, so it is in neither party’s interests to be suspicious or short-sighted in their dealings with the other. As the opening proverb implies, it is easy to seek help from third parties - banks, governments, regulators, even divinities, but fundamentally, every organisation has to protect its financial interests proactively. In the case of corporate treasurers, a primary concern is preserving short term liquidity. Chris Oulton, Chief Executive Officer, Prime Rate Capital Management LLP explains,

“While we have been through a tricky period over the past 15 months, since then the liquidity crisis has got considerably worse. The collapse of Lehmans changed the financial landscape permanently and radically. Many assumptions have had to change, and there is an increasing awareness that no single counterparty is impervious to market conditions or “too big to fail”.”

Asian Response to the Crisis

With recent announcements of recession in Japan and a growth slowdown in China, the current crisis is truly global. On the one hand, companies all over the world have the same need to manage risk and liquidity; on the other, the opportunities for liquidity management differ across regions. In this article, we look at one aspect of liquidity management, namely short term investment, and the trends in Asia in particular.

Chris Furness, Managing Director, Transaction Banking, Standard Chartered, based in Singapore, summarises how he sees corporates in Asia responding to the situation,

“Treasurers are becoming increasingly cautious about where they place their cash. We are seeing companies continuing to put cash into traditional instruments but with banks with whom they may not have worked in the past. Some of these companies may not have had a formal investment policy before, or they may have sought returns over security or liquidity in the past. Now, treasurers are implementing more conservative investment policies rigorously and seeking Board approval on their actions.”

“Treasurers are also looking to invest their cash over a shorter time horizon, although their banking partners would generally prefer them to be investing longer term so they can structure their balance sheets more effectively. There is a strong emphasis on cash management, such as tools for concentrating cash and increasing the visibility of funds. Equally, there is a greater focus on cash flow forecasting.”

“We see a strong demand for liquidity solutions to release trapped cash. There is also a sustained interest amongst treasurers in appropriate hedging solutions particularly around credit and interest rate risk.”

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