Corporate Treasurers Proceeding With Caution
Corporate treasury professionals are reassessing investment strategies to stay agile and conserve cash amid interest rate shifts and geopolitical uncertainty.
Huge interest rate shifts and geopolitical uncertainties have prompted a major rethink by corporate treasurers as they steer their companies through an economic landscape that exposes them to risk and opportunity in equal measure.
A sense of nervousness amid ongoing global disruption pervades strategic thinking across global treasury functions. Sixty-four percent of respondents to the 2024 Corporate Debt and Treasury Report, from Herbert Smith Freehills (HSF) and the Association of Corporate Treasurers (ACT), cite a neutral to negative outlook. While that represents a 15% decrease from 2023, it suggests that a fear of business interruption persists. In fact, navigating poly-crises is a theme that ACT encourages treasurers to accept as very much the new normal.
“This is part of our new business as usual,” says Naresh Aggarwal, associate director, Policy and Technical, at the association.
It’s a predicament that started to emerge as far back as 2018.
“Access to finance was a huge concern at the start of the pandemic [in 2020] as thoughts turned to the global financial crisis and a potential repeat of bank insolvency,” notes Kristen Roberts, partner and head of the London corporate debt practice at HSF. “So we saw a lot of activity in terms of drawing down and moving monies around. One of the products of that is that cash is again king, as it was in the ’90s.”
Corporates are hoarding cash, and that has meant a return to dividends and distributions but also more conservative cash management. This means converting products and services to cash as quickly as possible, centralizing cash, ensuring access to it, and updating treasury policies to address illiquidity or insolvency risks.
This recalibration of investment policies raises numerous regulatory questions, notes Henrik Lang, managing director, global head of Liquidity, Global Payments Solutions at Bank of America.
“Historically, these policies were very much set-and-forget,” he says, “but we are speaking with clients much more frequently about these as uncertainty around central bank action has introduced a lot of questions that were immaterial in a low-interest-rate environment.” Flexibility, he advises, is key to warding off restrictive rigidity.
Trapped cash is a key concern for large multinationals; the more currencies they operate across, the bigger the headache. Extracting value from this liquidity has been crucial for treasury desks in recent months; global conglomerates in particular are charting a complex course that requires close collaboration with treasury, Lang notes.
“Our clients typically operate across multiple legal entities, through multiple global subsidiaries, and in multiple currencies,” he says, “so monitoring regulatory changes and their impact on the corporate treasury function gets complex quickly. Regulation is also changing more rapidly, giving clients less time to adjust.”
HSF partner Gabrielle Wong echoes Lang’s view on the need for greater collaboration, noting a growing willingness by treasurers to invest time and money to access the market.
“Corporates are conducting much closer relationships with their banking partners,” she says. “In terms of capital markets activities, they’re making smaller but more frequent issuances to stay close to investors. How they access the market has also changed. Treasurers are now willing to invest money way in advance—for instance, to prepare offering memorandums, private placements, and note agreements—so that they’re ready to move quickly when the conditions are right.”
Companies are also prioritizing just-in-time delivery and supply-chain resilience, accepting higher costs for the certainty that nearshoring, for example, provides. HSF has seen a greater focus on certainty of supply chain in the financing sphere through credit insurance, trade finance facilities, and supply chain financing.
“If there’s one message, it’s play it safe,” Roberts counsels.
But diversification generates other costs. “While diversification has clear value,” says ACT’s Aggarwal, “it complicates life for treasurers as businesses become more opportunistic and agile,” making payment terms and currency risks more variable.
Aggarwal also notes a trend for businesses to return to some degree of vertical integration, having spent years divesting non-core business activities. “Technology has been a big driver and enabler of that,” he says, “due to the need for greater visibility of payments, balances, settlements, and counterparty risks.”
Counterparty Contagion
The contagious nature of counterparty risk came into sharp focus following the US regional banking crisis in March 2023, heightening corporate awareness of the need for robust risk management in the current climate. In its Liquidity Survey 2024, the Association for Financial Professionals (AFP) reports that 45% of organizations moved deposits from regional to larger banks in response to the collapse of Silicon Valley Bank, Signature Bank, and First Republic, while 35% spread their deposits among a greater number of institutions to further reduce risk.
Although the crisis was contained, it underscored the risks of overconcentration in certain sectors or asset classes and highlighted the need for stricter capital and regulatory requirements for banks, translating into tighter lending for certain segments, says Kelly Wen, head of Treasury Advisory at BNY.
Kelly Wen, BNY: Industries that face greater risks are seeing banks becoming more selective in making capital available to them.
“What we have seen over the past year is that industries that face greater intrinsic and market risk are seeing banks becoming more selective in making capital available to them,” Wen notes, “resulting in a higher cost of funding and treasurers exploring alternative sources of funding.”
BNY, the US’s oldest bank, is now broadening its approach to client services.
“Historically, we focused on the highest-rated corporate clients, and these are mostly Fortune 500 companies,” Wen explains. “Now we are taking a more industry-driven approach to evaluating lending opportunities as well as non-lending solutions, such as payments and analytics, to enable clients beyond their banking needs.” This allows BNY to serve more capital-intensive sectors, such as manufacturing and emerging technology, “while staying true to our resilient balance sheet and promoting more inclusive growth.”
Diminishing Returns
Enthusiasm for sustainability-linked finance, by contrast, has waned. Initially driven by complex mandatory reporting requirements and investor interest, treasurers were under a certain pressure to explore environmental, social, and governance options. With many of these initiatives now in place, some treasury teams are stepping back as sustainability becomes a core corporate agenda item and the focus shifts to becoming more sustainable in a broader sense.
Some early adopters of sustainability-linked loans in 2020-2021 are now questioning the necessity of these provisions, with some removing them from revolving credit facilities. Some treasurers may have come to regret previous forays in the arena, says Aggarwal.
“The number of treasurers looking at sustainable-labeled finance is definitely diminishing,” he says. “For some, the costs involved were higher than anticipated and it’s become something of a straitjacket, for an upside that was only ever going to be marginal.”
Looking Ahead
Treasurers are also keeping an eye on their companies’ appetite for mergers and acquisitions, and the impact it could have on their funding needs. But few are holding their breath.
Earlier this year, Deloitte forecast a return to deal-making. As of the beginning of the third quarter, however, signs of a recovery had faded despite inflation easing globally. Unless political and macroeconomic conditions stabilize further, predicting a resurgence in M&A or a significant releveraging of balance sheets remains challenging, according to HSF.
“Are treasurers starting to look for more fixed-term debt? Are things bottoming out? I think it’s too early for that,” Roberts opines. “I don’t believe that the lowering of inflation has actually had an impact to date. There may be some plans being made around M&A, but there is still a nervousness around rates. And while I think that companies are more accustomed now to those higher rates, there’s still a reticence to go big on M&A activity at this stage.”
The cost of capital is still extremely high, Wong adds, “7% or 8% was considered a high yield just a couple years ago. Now it’s 13%. It’s a tremendous cost for funding acquisition activities.”
The post Corporate Treasurers Proceeding With Caution appeared first on Global Finance Magazine.
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