Cash & Liquidity Management

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Leveraging Financing Opportunities for Competitive Advantage Regulation and competition are restricting corporations' ability to finance their business using bank debt; consequently, treasurers are looking into a wider range of markets and funding sources than ever before.

Leveraging Financing Opportunities for Competitive Advantage

by Helen Sanders, Editor

There can be few business leaders today who do not recognise that securing access to liquidity is critical to business continuity. Indeed, declining or negative free cash flow and unresolved future debt maturities are amongst the strongest warning signs of a company in distress. Regulation such as Basel III is putting pressure on corporations’ ability to finance their business using bank debt. Equally significantly, companies need to compete effectively with corporations that have greater access to liquidity in their home markets, such as China. Consequently, treasurers are – and should be - looking to a wider range of markets and funding sources than ever before.

Trade expansion

With both China and India reporting a slowdown in growth (although levels are still well in excess of most Western markets), companies need to be more innovative in finding ways to sustain growth, both by looking to new markets and driving improved operational and financial efficiency. Kaushik Shaparia, Asia Pacific Head of Trade Finance and Cash Management for Corporates, Global Transaction Banking, Deutsche Bank outlines,

“Sustaining growth is becoming more of a challenge in Asia, so companies are looking to access new markets to increase their competitiveness. As a result, we are seeing an expansion in trade finance activity, particularly within Asia, which is growing more quickly than inbound or outbound trade.”

Banks in Asia have high levels of liquidity and traditional lending is a major business activity for local banks.

The growth of intra-regional trade in Asia has a variety of implications. In many cases, these trade flows are, of course, between entities of foreign multinationals. However, competition from local and regional players is increasing, and will continue to do so. One point of differentiation between these regional players and foreign multinationals is the way in which they are financed. In most cases, Western corporations will finance their business centrally, usually in or close to their home or core traditional markets in Europe or North America. In these markets, constrained liquidity and growing regulatory demands are making it more difficult for companies that are not at the top of the ratings table to access traditional sources of finance. In contrast, Asian multinationals or those financing locally may not be subject to the same level of constraint, with the potential for accessing keener pricing through local markets. Vishal Kapoor, North Asia Structured Trade Head, Global Transaction Banking, Citi suggests,

“Banks in Asia have high levels of liquidity and traditional lending is a major business activity for local banks. The lending environment remains benign, with high confidence in corporate lending, resulting in tighter spreads than in other regions.”

Kaushik Shaparia, Deutsche Bank explains, however, that liquidity is more readily available for shorter-term borrowing, particularly outside China,

“At the shorter end, regional banks – including those from Japan, Australia as well as Asian banks that are in expansion mode – often have high levels of liquidity and may not yet have adopted global regulations such as Basel III. At the longer end, prices are increasing and with reduced availability, the priority for treasurers is access to financing rather than pricing.”

He notes, however,

“While there is a difference in the behaviour and priorities of Asian versus foreign multinationals, the distinctions are starting to blur. Non-Asian multinationals would typically arrange financing globally through group treasury, including bilateral lending and global supply chain finance programmes. These companies typically work with fewer banks and maintain global relationships. The regional treasury centre is therefore less concerned with the cost of financing while transaction banking services and reducing costs through operational efficiency is a greater priority. Multinationals headquartered in Asia are more motivated by financing costs and are less focused on operational and process efficiency. However, these characteristics are now becoming less apparent as corporations become global in their reach and the distinction between Asian and foreign multinationals disappears.”

Financing requirements, constraints and opportunities are issues for all organisations, and the differences between corporations headquartered in various parts of the world may be becoming less apparent; however, access to financing remains a competitive differentiator that no company can ignore. Kaushik Shaparia, Deutsche Bank comments,

“Companies that are able to secure longer-term financing have a competitive edge, particularly to finance large scale capital projects. Chinese companies are often able to access programme-related investments or export credit agency financing, while corporations headquartered elsewhere are seeking support from their banks to compete on an equivalent basis.”

This creates a dilemma not only for treasurers of multinationals headquartered outside Asia, particularly China, but also their banks, particularly amongst those that are already, or close to complying with Basel III. After all, as Kaushik Shaparia continues,

“The implications of Basel III are considerable for banks, not least as trade finance and some forms of off-balance sheet financing impact on ratios. This, in turn, is affecting the availability and cost of both long- and short- term financing.”

As banks increasingly adopt Basel III, the discrepancies in the financing landscape may become less apparent; however, there are other positive changes too. The recent announcement that Chaori Solar Energy Science and Technology Co had defaulted on an interest payment on its RMB 1bn bond reflects a move forward in China’s transition from a controlled economy to a market economy in that risk is being introduced to the market. This is positive in terms of market dynamics as it shows that risk, which is essential the workings of a market economy, is being introduced, which will in turn impact on pricing and credit.

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