| Corporate Treasury Guide 2006: Benign interest rate environment puts treasurers in driving seat |
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| Historically low European interest rates, combined with a strong appetite by banks to provide debt, and increasing competition in the marketplace, has provided a very favourable funding environment for Ireland’s corporate treasurers, allowing them to dictate the terms and the pricing of their loans. Elsewhere, treasurers have been benefiting from increasingly sophisticated structured products and hedging strategies to reduce risk, and boost return. |
Interest rates | | Corporate Treasury Guide 2006 |
With the European Central Bank committed to raising interest rates, 2006 is set to be a time of change for Ireland's corporate treasurers, and a number of articles in this issue examine how they can prepare for this changing environment.
On page 4, Leslie Cosgrove examines the options available to treasurers who wish to manage their debt interest rate risk, and explains how treasurers can avail of more innovative types of products such as window swaps and capped floating swaps to hedge their risk, rather than the more plain vanilla options such as caps and collars.
In the US, the appointment of Ben Bernanke as Alan Greenspan’s replacement as chairman of the Federal Reserve, may have a significant impact on the US' interest rate policy. On page 12, John Coffey and Richard Iley profile the new chairman, and say that his stewardship is likely to be characterised by a ‘restlessness to see many of the Fed’s current informal practices formalised in line with current central banking best practice'.
They predict that the Bernanke Fed, may eventually moving to an inflation-forecast targeting regime with particular weight attached the probability distribution around the central forecast projection.
Currencies
Currencies will also be hugely important over the next year, and on page 8, John Beggs says that, ‘the risk of a very significant fall in the US dollar against other major currencies constitutes the single biggest threat to the Irish and European economies this year'.
However, while he envisages some weakness in the dollar this year, he believes that its decline against the euro is likely to be limited to below the $1.30 level.
Financing
Treasurers availed of a unique funding environment in 2005, which gave them an opportunity to refinance bank debt from a somewhat unusual position - they dictated the terms and the pricing of their loans. Writing on page 26, John Cronin points to the continued popularity of US private placements amongst Irish corporates, with deals by Kingspan and the Grafton Group transacted during the year.
However, he adds that these deals are not suited for all corporates, saying, ‘In the main, this type of transaction is best suited to a listed company, a company with investment grade or near investment grade status, a semi state entity or other corporates who have ambitions to become one of the same'.
The European syndicated loans market also experienced strong growth during the year, driven by strong merger and acquisitions activity. In Ireland, we saw the large ?3.8 billion Jefferson Smurfit/Kappa Packaging merger financing, whilst across Europe, investment grade oan market volumes were also driven by strong growth from the crossover market, i.e. the leveraged corporate grade market, and emerging market issuers, writes Robert Roughan on page 24.
Cash management
Over the past number of years, there has been a significant growth in the availability of cash investment products on the market. ‘This has been evidenced by the proliferation of yield enhancing products such as dual currency accounts and range accruals, the myriad of liquidity funds in the marketplace, the change in the 2003 Finance Act allowing Irish resident institutions issue CDs, the increase in internet banking investment opportunities and new entrants into the domestic Irish market,' says Pat Leavy on page 20.
To read the full Corporate Treasury Guide 2006 click here. |
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