Corporate treasurers face liquidity challenge

With fewer underwriters to help them raise money, corporate treasurers are learning to live with a lack of liquidity in the global markets.
Times are difficult for corporate treasurers as liquidity drains away from global money markets and credit fears continue to grip investors.

The US governmentÆs $700 billion bail-out plan to shore up the global financial system has not allayed concerns about the sectorÆs future.

The market has also seen the rapid disappearance of major bond houses Bear Stearns and Lehman Brothers, while Merrill Lynch has been taken over by Bank of America. Morgan Stanley and Goldman Sachs have also given up on attempts to remain as independent investment banks.

This has meant that corporate treasurers are now left with fewer underwriters to help them raise money. Not only has the rising cost of issuing debt made it difficult in terms of issuance, but the banksÆ own elevated costs of funding are expected to have a greater impact on the cost and availability of funding to companies.

ôGlobal banks are shoring up their balance sheets and also seeking to inject huge amounts of capital,ö says Chris Furness, managing director for transaction banking at Standard Chartered Bank. ôAs a result of the meltdown, the access of commercial paper to liquidity in the market is drying up in some cases. The cost of liquidity has hence gone up; anyone wanting to borrow is paying a lot more today than in the past.ö

Across Asia, companies are looking at ways to maximise their access to liquidity. However, market participants in fact point to an excess of cash in the region; central banks excluding Japan have around $3 trillion of reserves 10 years after the financial crisis of 1997. And the liquidity growth trend is the same for corporates, they say.

The downside of excess cash holdings is also highlighted, as it can limit returns on equity and erode shareholder value.

ôCompanies that have excess cash are either returning the excess to shareholders via dividends or are doing share repurchases from the market,ö says Kok-Keong Tay, regional head of product management, cash management in Asia-Pacific at Deutsche Bank.

ôThis is because of the high costs associated with holding cash; the return on cash typically across all markets is below 6% while the average cost of capital is at least 10%. This is why companies are becoming savvy about holding the optimum level of cash. They need to decide whether they should hold the minimum amount or run the risk of having to go out and raise capital in the markets when they need it," Tay says.

Companies are being encouraged to establish strong liquidity structures, which in turn will enhance their interest income, create balance sheet efficiency, reduce transaction costs and help them manage their risks better.

ôJohnson Controls is a growth company; when I joined the company just over two-and-a-half years ago, the turnover was around $25 billion, now we are heading for $38 billion,ö says Wolfgang Ratheiser, corporate treasurer, Asia Pacific/Middle East at Johnson Controls, a buildings and automotive systems maker. ôIn order to be prepared for future growth we need to get prepared now and liquidity is one of our top priorities.ö

Another noticeable trend is that companies are diversifying their portfolios of banking partners in order to ensure they increase their chances of obtaining credit. As they continue to face difficulties to refinance, banks too are assessing the relationships they generate with counterparties.

"Companies with the right credit rating can get liquidity, so it is not just a case of liquidity in short supply, it is liquidity at what cost,ö explains Nikhil Ratnam, Deutsche Bank's head of treasury solutions for Asia-Pacific.

ôOverall credit in the market has declined, but across the board financial institutions are being forced, not just because of the liquidity crisis but also as a result of regulations, to look at how they price credit regardless.ö

Corporate treasurers are under increased pressure to ensure they hedge their positions, manage their profit and loss accounts and apply sound accounting practices. In addition to managing cash and obtaining credit, their main priorities are to maximise internal funding and free up working capital

In the current environment, liquidity risk and capital preservation remain key watchwords for global financial services.

ôThere is a huge amount of liquidity coming from China and the overall Asia region,ö concludes Frantois Masquelier, senior vice-president and head of treasury and corporate finance for the RTL Group, a European media conglomerate.

ôOn the other hand if you use money market funds you could have some exposure to banks with high refinancing costs; therefore whatever your position, whether it is long or short in cash, borrower or lender, you have to be extremely cautious.ö
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