Six Pillars of Banking Wisdom

Cash Management Strategies in Turbulent Times

by Nick Diamond, Treasury Product Delivery Executive, EMEA

Bank of America Global Product Solutions

With debt capital markets nearly frozen and the global economy sliding into a recession of uncertain magnitude and length, two topics are dominating boardroom agendas: the adequate supply and efficient management of corporate liquidity, and access to sufficient new capital at the lowest possible expense.

Companies with approaching maturities have historically expected that the debt capital markets and their banks would be accessible when the time came to refinance these liabilities. But lending criteria are tightening as banks seek to safeguard their vital replenished capital in the face of an uncertain outlook for many potential borrowers. Bank consolidation is further removing the pool of potential lenders that, in good times, contributed to a ready flow of capital at historically attractive rates. The remaining banks that do have capital to lend are now fixated on achieving market-based pricing. The market for commercial paper, which once provided $1.6 trillion in short-term financing, can no longer be relied upon as a viable funding tool, while bond investors have a reduced appetite for high quality, non-cyclical issuers.

Here are several considerations for companies managing surplus liquidity:

Practice the basics of efficient cash management. Corporate treasurers might have once enjoyed the luxury of leaving credit balances on the accounts of subsidiaries. Now, they should look to centralise surplus cash on a regular basis. Banks have increasingly sophisticated cash management tools that can help corporates consolidate cash under their control. Internal financial restructuring may be necessary, including inter-company lending or dividends. We have also seen a trend among multi-national corporate clients to repatriate all surplus capital back to the corporate headquarters. This is consistent with the heightened strategic importance of maintaining adequate liquidity.

Learn the lessons of the banking crisis: nothing destroys value at a faster rate than the perception of financial vulnerability.

Having amassed and centralised liquidity, be vigilant about where it is left. Corporates have been shunning the absolute highest yields and moving deposits from second-tier banks to a small number of strong institutions in a “flight to quality.” However, the group is relatively small and counterparty limits are still an important consideration. While the new deposit guarantees have been welcomed by corporates, they are still wary of leaving their cash with just one organisation. It may be necessary for corporates to revisit their treasury policies, to confirm the ability to spread deposits across a range of permitted institutions and to consider the most appropriate counterparty limit for the banks that they deal with (be that a revision up or down).

Scrutinise your supply chain. Working capital can be a major consumer of liquidity so corporates should work with their trading partners to shorten their working capital cycle where possible. Also talk to your banks - the leading trade finance banks will have product solutions that can assist in more efficiently managing every aspect of working capital.

What if you are not among the select group of corporates that already have robust liquidity and capital positions? Here’s what you need to know about the changing market landscape in order to help you raise new capital during these difficult times:

Address financing needs as the opportunities arise. Be prepared for disappointment if you are seeking pricing guidance on new debt capital-raising, especially if you benchmark this against the deal you were able to achieve while the markets were more stable. Closing your transaction during a window when markets are open should be just as important a consideration as the cost of capital. Do not assume the short-term markets will re-open anytime soon. Focus on achieving a portfolio of appropriate duration to reduce refinancing risk. [[[PAGE]]]

Be prepared to accept terms and covenants that you may have rejected in the past. Banks have trended towards shorter tenors; five-year facilities have become the maximum duration achievable. The scarce availability of capital has led lenders to pursue smaller commitments/outstandings, either at closing or by secondary market sell-down. In order to compensate, we are seeing an increasing prevalence of wider syndications, and more active sell-down strategies. Banks are more forcefully insisting on the ability to freely transfer their commitments without the consent of the borrower.

Choose banks that will emerge from this crisis strong. Just ask any of your peers, who had counterparty exposure to one of the failed banks, how important it is to constantly assess the strength of your banks. As treasurers, you and your CFO should re-evaluate your existing pattern of banking relationships and be willing to make changes to your banking services providers in the event it becomes necessary to raise capital for your business. Evaluate your current bank’s balance sheet strength and how transparent it is for you to access the information you need. Anticipate what might happen to your investor base, and understand what would be required to quickly access term debt, should the need arise. In addition, many banks employ reputable and well-regarded economists - their assessments should be available to you as clients, so ensure you are on the bank’s mailing list. Institutions with strong capital bases, comprehensive product capabilities, and the highest quality people are expected to thrive as we move towards the new, post-recessionary financial services landscape.

If you find yourself in that unfortunate position where your financial covenants are coming under pressure, or your liquidity is getting tight, then talk to your trusted financial advisors sooner rather than later. Learn the lessons of the banking crisis: nothing destroys value at a faster rate than the perception of financial vulnerability. Think about risk in relation to market sentiment. Your primary concern should be not only what your banks think, but also what every stakeholder (investors, shareholders, suppliers, employees, etc.) is thinking, and how they behave. If applicable, get views on your rating. Explore any potential funding source and take advantage of windows of opportunity that will emerge between periods when the markets are tight.