| The treasurer’s challenge - dealing with uncertainty |
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By: Declan Fitzgerald, Declan Fitzgerald
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| Capital markets is an umbrella title for the newly amalgamated Ulster Bank Financial Markets and Specialised Finance units. Declan Fitzgerald writes about how his team are prepared to meet the challenges faced by Ulster Bank’s business customers. |
Were you involved in financial markets five years ago? Remember when EUR/USD was at 0.86 and most experts were looking for a move to the 70s? They were calling the Eurozone a fiasco and predicting that property prices had reached their peak in Ireland? Dot coms were a sure way to make money and oil was trading around $20 a barrel with an endless supply from the Middle East. Did you sell your house, buy USD, invest the proceeds in dot coms and wait for your fortune to roll in? Unlikely – instead common sense prevailed, and you made sure the risks taken were in line with your ability to weather the storm if your expectations didn’t materialise. | | Declan Fitzgerald |
Though the future is uncertain, it is still essential to have a view. When taking that view into account, it is imperative to ensure that there is a balance between risk and reward, with the end goal to ensure that risks are minimised and potential profit maximised. The challenge here is risk management. Most companies are likely to have significant interest rate exposures linked either to debt positions or investment portfolios. It is important therefore that management policies be in place to help determine how the many risk factors that will affect your business will be managed.
Few saw the start of the current rising rate ECB cycle in 2005 but we in Ulster Bank did and at the time we offered our customers advice and a range of hedging solutions to ensure they were protected. These ranged from conventional interest rate swaps executed at very competitive rates to solutions that allowed clients tailor the hedge around their exposures or pressure points. In 2005 one particular product stood out as offering very good value – this was the client extendable swap. For a slightly higher rate, customers had the right to extend their five year period of cover at the original contract rate to 2015 – these clients have benefited in light of the rate movements since the end of 2005.
It now appears we are at a crossroads regarding the intentions of the ECB and the risk of higher rates – market expectations are fairly benign but the language from the ECB remains hawkish. So it makes sense to have cover in place. Double trigger swaps look particularly attractive at the moment – with this, you pay a discounted rate every period euribor sets within a defined range. If it sets outside this range, you pay a higher rate for that quarter (i.e. if euribor subsequently sets within the range you revert to paying the discounted rate). The ranges available, relative to market expectations, look good at the moment.
The Ulster Bank Capital Market’s view is that the dollar is going to slide further in 2007 – so should you simply go out and sell USD and wait for the windfall or if you need to buy USD should you simply wait for this to happen? This depends on how deep your pockets are but most of us operate within a defined framework or treasury policy designed to protect our businesses from this type of behaviour. This doesn’t mean you can’t benefit from anticipated USD weakness it just means you need to identify your maximum downside. We can give companies of all types and sizes, insight into risks that they may or may not be aware exist. We help them steer off those risks and pro-actively manage the uncertainty. This is not a one size fits all approach. What sets us apart is our ability to relate to customers, to see things through their eyes and offer them solutions that they haven’t seen elsewhere. Frankly we enjoy the positive reaction we receive from customers – they’re impressed.
When looking to the stock markets you ask how we have previously helped our customers maximise their return. Well, in early2005 we identified European property as representing good growth potential for investors. In April of that year our European Property Bond was launched. A fully capital protected deposit instrument, guaranteeing a minimum return of 10 per cent over a five year term. To date, the underlying asset has appreciated by over 60 per cent. We have a similar story regarding commodities, being the first in the Irish market to marry property and commodities in a single,capital protected investment with multiple issuances. As we look forward to 2007 there will be a focus on further increasing our global range of underlying investment assets as well as continuing to create innovative and imaginative payout styles across for our entire client base.
At Ulster Bank, we undoubtedly owe much of our success to partnerships – to the way we build and maintain lasting relationships with our customers; and this approach is the cornerstone of capital markets. This also fits extremely well with the customer-led orientation of our parent bank The Royal Bank of Scotland (RBS). One of the world’s largest banking groups, RBS have built a first class operation, with banking, market trading and treasury solutions available to business in every corner of the globe. Ulster Bank Capital Markets is the Irish arm of this operation and delivers its services in tandem with our market leading colleagues in corporate and business banking.
The new capital markets team based in Ireland is regionally focused, delivering their global solutions locally. We are an Irish team with world-class credentials, training and specialist skills. A team with systems that can produce interest rate hedging, foreign currency, commodity and a range of other treasury solutions that mirror what’s on offer in the UK, China or the US. An Irish operation that the smartest financial markets experts are queuing to join because they want to work for a world-beating bank.
Corporate treasurers both now and in the future, will have to deal with the positive and negative aspects of the fast pace of growth in Ireland. Government policy in the next few years will focus on encouraging Irish indigenous industry to grow further and to expand globally. We see a rapid increase in the requirement by many SMEs for structured debt solutions to help manage the level of debt required to sustain growth. The ideas that our team are geared to provide make rapid growth a viable option for businesses, because we gain a fundamental understanding of the business needs first – then we shape the financing structure. At large corporate level, there is some activity for Irish companies going to the international debt markets to generate the levels of funding required to go global using private placements and as part of RBS, we are particularly strong in this sector.
Summing up the capital markets team approach to business - we have a well earned reputation for designing products and services that are customer focused; this is underpinned with a down-to-earth integrity and a capacity for hard work. Our solutions driven team make leading international hedging and investment instruments accessible, easy to understand and competitively priced. Our main aim is to get our customers to understand that five years on, views on EUR/USD, property in Ireland, dot coms and oil still vary, and can still dramatically impact business performance. You don’t need to be right on all outcomes but you should at least consider how to protect yourself if you’re not! |
Declan Fitzgerald is head of capital markets at Ulster Bank.
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