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Wednesday, 10th June 2026 |
| Change is the only constant - a review of the Irish corporate treasury market in 2006 |
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By: Ciaran Kane, Ciaran Kane
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| The corporate treasury market in Ireland continues to experience ongoing change and development, with 2006 bringing new challenges and opportunities for the corporate treasurer. Ciaran Kane outlines some of the significant themes in the market in 2006, across a range of perspectives, and looks forward to what 2007 may hold. |
A borrowers market
Credit conditions are benign and are likely to remain so into 2007. Global growth remains strong and corporate balance sheets reflect the strong fundamental operating environment of the past few years. Leverage is at multi-year lows, and EBITDA growth, although slowing, remains robust. These global conditions have been reflected in Irish activity in the credit markets which are still very favourable for borrowers. Much of the re-financing of syndicated facilities took place in 2005 and while there has been less activity in this sphere in 2006, the leveraged market continues to see very strong levels of deal activity. The M&A and LBO space is heavily underpinned by private equity inflows with cash investments into funds remaining at all-time highs. Recent strong performance from maturing funds will lead to further activity in this space – recent fundraising from the large international players is at record levels. | | Ciaran Kane |
The corporate banking market in Ireland has seen a number of new entrants in 2006, reflecting a positive international outlook for the Irish economy. While media commentators have focussed on the ongoing transformation of the retail banking market in Ireland, there has been considerable activity in the corporate banking market. There has been renewed interest from bulge bracket U.S. investment banks in the top end of the corporate market, albeit on an opportunistic basis. A number of existing players have been ramping up their Irish businesses, among them Barclays Bank, who incorporated a wholly owned Irish subsidiary in 2005 and has seen growth in balance sheet and staff numbers approaching 50 per cent over 2005 levels, reflecting strong underlying activity in both the corporate and property space.
Barclays has been to the forefront of the ongoing development of the non-bank corporate borrowing market, transacting three U.S. private placements for Irish borrowers in the last twelve months. This market consists of specialist U.S. based investors and is open to un-rated borrowers – amounts raised can vary from $50 million to over $1 billion (ESB raised just over $1 billion in late 2003 in a deal co-led by Barclays). This trend is likely to continue in 2007 as borrowers take advantage of relatively attractive interest rates and credit spreads to lock in longer term fixed rate funding.
Going forward, the increased level of sophistication of Irish borrowers will likely lead to them accessing other forms of financing in both the public and private markets. This trend is likely to see borrowers working closely with banks who have specialist capital markets expertise, to identify funding that best meets their needs in terms of pricing and structure.
There have been some interesting developments in the management of foreign exchange and interest rate risk within the corporate treasury space in 2006. These are covered off in some detail by my colleagues Paul McEnroe, Bryan Conway and Sean MacHale elsewhere in this publication, but are summarised below.
Hedge accounting and the impact of IAS39 continues to feature prominently on the agenda of the Irish corporate treasurer. There is an ongoing debate on the accounting versus economic impact of hedging financial market risk within the European treasury community. Treasurers in Continental European companies have managed their foreign exchange and interest rate risk with priority given to the economic effect on the firm. There is a willingness to manage the impact of such hedging on the profit and loss account and to educate the investor and analyst community accordingly.
UK and Irish treasurers have tended to be more conservative in their hedging policies, with the accounting effect taking precedence and a general unwillingness to take any profit and loss impact. This is slowly beginning to change and we are seeing a greater willingness to hedge risk as effectively and efficiently as possible and to understand the impact of such hedging on the profit and loss account. Barclays has done a considerable amount of work in this area, including the use of Value at Risk (VaR) analysis to assess the volatility of underlying hedging transactions and their potential impact on the profit and loss account. It is likely that as treasury and finance professionals become more comfortable with IAS39, we will see a similar trend to that witnessed in the US with FAS133 i.e. a greater willingness to base hedging policies on economic rather than accounting rationale.
We are also seeing a greater willingness to consider the use of derivatives as an effective and efficient foreign exchange management tool. In particular we are seeing a lot of demand for zero cost option structures that give the corporate a degree of participation in favourable currency moves. Barclays has been to the forefront of product innovation in this area internationally and we have been bringing this expertise to bear with our Irish client base in 2006. We believe that demand for these products will continue to grow in Ireland in 2007, and with our global structuring and pricing expertise, Barclays will remain a significant player in this space.
Finally, in line with the additional responsibilities that are falling within the remit of the corporate treasurer, we are seeing an increase in the amounts of commodities hedging business being transacted. Increasingly, treasurers are making these hedging decisions and many are using banks to hedge out the financial price risk. Barclays are a leading player in the commodity risk management space, with particular strengths in energy and metals. Irish companies are hedging these risks more actively, as higher commodity prices become a more meaningful cost and we expect to see this trend continue into 2007. There is also a greater awareness of other potential business risks that could be managed through the financial markets e.g. inflation, particularly in regulated businesses and also credit risk, where a company is exposed to a small number of large customers. |
Ciaran Kane is director of treasury risk management at Barclays Capital.
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