Keeping the Liquidity Tap On
by Helen Sanders, Editor
The liquidity crisis, which indeed it has been, has seen the liquidity tap (faucet) gradually turned off since the summer of 2007. Not only has the flow been reduced, but the cost of liquidity has increased dramatically. September 2008 saw a sharp reduction in flow, leaving just a dripping tap into an empty sink. Nearly a year on since Lehmans, where are we now? There have been signs of recovery and the elusive hand of the markets (and to some extent governments) may gradually be turning the tap back on, but costs remain high and firms are jostling to fill their cups from the trickle and there is not enough to go around. Where are firms today from a liquidity perspective, and what should their focus now be? While the free flow of liquidity could, with hindsight, perhaps not have continued indefinitely, treasurers today are far more aware of the need to manage their liquidity risk closely, perhaps the most considerable change in treasurers’ approach to liquidity in the past twelve months.
Cash and liquidity management has always been an important consideration for treasurers, but this has been more operational than strategic in approach. The squeeze on credit has made treasurers starkly aware of the need to identify, measure and manage liquidity risk, which has changed many behaviours, not least the focus on accessing liquidity internally where possible, as opposed to relying on external lenders. Steve Everett, Director of Balance Sheet and Operating Assets at Northern Trust summarises the key liquidity concerns over the past year,
"We would identify three key issues for corporate treasurers from the perspective of liquidity management: firstly, financing and diversification of funding sources; cash forecasting and treasury management infrastructure efficiency; and cash investment/risk management practices."
"The most significant impact of the crisis on corporates is in the area of financing. Over the period from July 2007 onwards, liquidity dried up in financial markets, accelerated by the events of September 2008. Over this period, capital markets have become constrained in a variety of ways. Consequently, firms that historically relied solely on cost in driving their financing decisions came to realise that diversification and stability of their funding sources is of greater priority."
Lisa Rossi, Head of Liquidity Management, Global Transaction Banking, Deutsche Bank agrees,
“Credit is the number one challenge at the moment for all of our clients, whether letters of credit, loans etc. as financing has become more expensive and/or difficult to secure.”
So what has this meant in practice? Large multinational companies are generally suffering least, and indeed the first quarter of this year saw a large volume of bond issuance, albeit often at a very high rate. Steve Everett, Northern Trust explains,
“Companies raised capital during good times because it was relatively easy and cheap to do so, even when they did not necessarily need the cash short-term. Corporations with solid balance sheets or issuers with government support were able to issue bonds during Q1, 2009, however, oftentimes paid more than their secondary debt levels in the market, showing that market conditions are improving but not yet fully repaired.”
The most significant impact of the crisis on corporates is in the area of financing. STEVE EVERETT
There are various reasons for doing this. In some cases, they simply needed the cash, of course. In others however, companies sought to maintain relationships with potential investors so that they could continue to be assured of buyers for their debt in the future. Smaller companies are finding the situation more difficult. Orlando Lyomu, Finance Director of Kenyan firm Gulf Energy explains,
“As a growing company without a strong international brand, we are finding big differences in our situation compared with that of multinational firms. Capital is very difficult to access, and very expensive.”
He continues by explaining how Gulf Energy has addressed this,
“We have continued to work closely with our primary bank, BNP Paribas, with whom we have a very strong relationship. It is important to maintain a long-term outlook when forming and maintaining bank relationships, so that they understand our business in detail, making it easier to weather the storm.”