| Corporate banking strategies for CFOs in 2012 |
|
| JOHN FINN of Treasury Solutions Ltd reviews the treasury landscape for 2012. He says if refinancing in 2012 or 2013, start early in 2012 & be wary of covenants and special conditions attaching to credits |
The 2011 experience of Treasury Solutions remained across a broad range of corporates ranging from SMEs to large private and public companies and multinationals. | | John Finn |
The experience of SMEs is one of limited or no choice of banking partner, higher margins and, ironically given the cause of the crisis, a lack of availability of risk management tools including inability to fix debt (premium of 1.7% being charged on fixed loans in addition to swap rate and margin).
Larger domestic companies who are banked by more than one bank are being pushed to develop wider banking arrangements as the “hold” levels of bank lending in club deals decreases. However when combined with a reduction in active banks in the market and a more cautious lending environment, it is making borrowing more challenging and this, as a result, is driving up borrowing margins for these customers.
The larger corporates had a reasonably stable year as 5-year facilities re-emerged and margins stabilised although the increase in credit spreads on fx and swap deals was more pronounced and generally higher from the non-Irish banks (a symptom of the risk evaluation of Ireland in general from outside the country).
Finally multinationals continued to focus on credit risk (for deposits and FX) and the worries over the euro, especially the potential for significant volatility. Some MNCs have also changed Treasury policy to impose a maximum exposure to banks for funding (with increased emphasis on the % funding sourced from PP and bond markets) but there was a general flight to high-rated banks outside the country and, in some case, a flight to other currencies.
Emerging issues for 2012
2011 is ending on a note of tight credit so the announcement of the unlimited 3-year credit lines to banks by the ECB was welcome but it needs to translate into credit for corporates. My guess is that 5-year facilities will become scarcer in 2012 and we could see a reversion to 3-year facilities again. The need for a mix of business from corporates will be ever more apparent from the banks' perspectives in order to achieve acceptable return on capital so expect tighter conditionality between the provision of credit facilities and ancillary business.
Tight capital for banks will probably be the story of 2012. Between the need to balance loan/deposit ratios, the exposure of balance sheets to sovereign debt and Basel III, I would expect further consolidation in the international banking market, more state ownership (if not control) of banks in certain jurisdictions and a resultant tightening of credit availability and higher margins.
The credit ratings arena will also be more volatile in 2012 and this will have an effect on credit risk management and compliance with policy.
So what should corporates do?
1. Revisit Treasury Policy (or draw one up if not in place) as the issues above are of strategic importance and require Board discussion and approval. Treasurers or Finance Directors should NOT be taking these decisions without approval at the highest level
2. If refinancing in 2012 or 2013, start early in 2012
3. Watch the ability of banks to assign debt as it is a possible means of hedge funds and private equity to acquire access to equity via a debt route. This could have serious (and negative) consequences for companies especially indigenous companies
4. Avoid complacency - a benign interest rate environment does not guarantee low interest rates. Debt and FX management needs to be undertaken and reviewed with increased frequency. Better to look at every month for 1 hour rather than a half day every quarter as the potential for the markets to move adversely very quickly in the current environment is real
5. Upskill in the risk management area. Treasury risk is no longer peripheral within finance functions. The implications of good and bad risk management are wide-ranging so it needs to be recognised as a core competency now in all organisations. It may mean moving outside the comfort zone for many accountants but the sooner they accept it is not going away, the faster they can get up the learning curve. |
John Finn is the managing director of consultancy firm, Treasury Solutions Ltd
|
|
|
