Sep 4, 2008... increased reward = increased risk. ➢. Challenge assumptions on liquidity. ▫.
Seek independent advice (The Tao of Warren Buffett – Rule #57) ...
Credit Crunch Issues for Corporate Treasurers Ivan St Clair 4 September 2008 for Macquarie University Alumni Association Victorian Chapter
Session outline •
Background
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Bank relationships
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Funding
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Interest rate risk
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FX risk
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Investments
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Key considerations if lenders “turn”
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Going forward
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Background •
12 months ago the “sub-prime crisis” was “interesting”
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Since then:
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Securitisation structures were suspect Credit margins were expanding Corporations shouldn’t be materially impacted Private equity was still “aggressive”
Massive losses in some large US financial institutions Some capital markets have “evaporated” (eg CMBS) A material decline in confidence Central banks are very concerned
There is a “crisis of confidence” - in the “system” and in some companies
Bank relationships
Banks are “under the pump”:
Increasing funding costs Asset write-downs Uncertainty about future impacts
Behaviour/attitude towards corporate activity has/will change: Credit is limited, banks will be selective Deals must be profitable Some clients/industries will be refused Both security AND cash flows are required Comprehensive information required KISS - “bad” bankers may need to be informed, the “Press” will want to sell more papers
RBA suggests re-intermediation - how?
The balance of power in the bank/corporate client relationship has changed - transparency is required but ensure that bank confidentiality is retained
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Funding Issues - short term
Check loan documentation carefully - can the facility be denied? Covenants, review events - monitor closely Purpose of loan loan vs sale of income?
Check forecast debt carefully: What are the risks that debt will blow out? Check assumptions underlying cash flows
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fuel prices
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exchange/interest rates
Have the current and non-current debt figures checked
Stick to the funding maturity limits - no matter what cost
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Funding Issues - medium term
Monitor working capital closely - suppliers and customers will be working it hard
AP, AR, Inventory
Conserve cash Review CAPEX programs
Assess under-performing assets
Dividend re-investment plan?
Diversify funding sources - banks, direct investment, shareholders
Develop alternative funding plans (amount and timing) – and stick to them
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Funding Issues – long term
Monitor your business and industry closely
Volatility in commodity prices, FX, equity prices and interest rates are impacting competitive advantages
If you do need to restructure – do it sooner rather than later
Need to retain cash
Sell under-performing assets early – first mover advantage
Don’t allow under-performing to start draining cash – close if necessary
Stay close to relationship banks and monitor capital markets activity
Monitor the behaviour of lenders and remember
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Interest rates
Expect volatility RBA is managing inflation through short term interest rates
Some key drivers of inflation have been energy prices and food
The economy is “lumpy” – resources and infrastructure doing well, finance and manufacturing not so well, Victoria vs NSW Bond traders are monitoring long term inflation
Treasurers should be monitoring economy and shape of yield curve • •
What is the yield curve shape in a recession? Are S/T and L/T rates historically high/low?
Hedging limits are hedging limits - don’t defer waiting for better rates
Hedges are hedges - beware knock-outs, knock-ins, right-to-breaks
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FX rates
Importers Normally fairly regular in hedging
Exporters Monitor currency/commodity relationships Some reasons for not hedging current year receivables may have evaporated
Many resource exporters stopped hedging around 2000 – hedging hurt on the way down
Forward points in 2000 were negative – they now get 3 cents for 12 month hedging
Revising earnings guidance is always difficult (particularly so when it was something that could have/should have been hedged). The market is particularly punishing in the current environment
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Why did some miners stop hedging currency?
Record lows for the AUD – this is where hedging should have STARTED
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The benefit-cost-benefit of exporters hedging 12 month forward points
No benefit here !!
200 100 0 May-90 Jan-92 -100
Aug-93 Mar-95
Oct-96 May-98 Jan-00
Aug-01 Mar-03
Oct-04 May-06 Jan-08
-200 -300 -400 -500 -600
But there’s 3 cents now
Investments
Some local NSW and WA local govt authorities had invested in securitised products
The value of some of those products has dropped substantially
It is now emerging that the problem may be more widespread
Key issues for treasurers: Invest funds to match cash flow requirements
Don’t chase yield - increased reward = increased risk
Challenge assumptions on liquidity
Seek independent advice (The Tao of Warren Buffett – Rule #57)
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Key Considerations if Lenders “Turn”
Monitor closely the potential for facilities to be withdrawn Events of Default, Covenants and Reviews
Be prepared – the providers of debt are not always predictable Why would they close out hedges?
Stick to the rules All transactions are confidential Contracts are contracts
Ensure lenders are kept fully informed
Fair valuing transactions may work against you
Appoint a financial advisor who is experienced in corporate recovery
Going forward Corporate Treasurers will need to be:
Conservative in estimating and meeting their financing requirements
Diligent on documentation and the ability to meet covenants
Aggressive in their management of working capital
Challenging in their industry analysis, corporate planning and hedging programs
Accommodating towards their bankers
Prepared to pay more for their facilities
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Going forward (cont.) For interest sake, monitor some of the potential fall-out of the sub-prime crisis:
What role the Rating Agencies in the future?
Will short-selling still be around in 12 months time?
Will fair value accounting survive in its current form?
Will the Press and other commentators have greater accountability for the sensationalist headlines they print?
Are we witnessing the beginning of the end of the USD as the global currency?
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Questions ? Ivan St Clair
[email protected] www.treasurytraining.com.au
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