A key challenge facing corporate treasurers is the brisk rise of bank lending costs due to changes in the regulatory environment. Concerns over the increasing cost of loans could cause global luxury retail company DFS to alter its borrowing strategy in the coming months.
The overall cost of loans have increased by around 50 basis points (bp) to 75bp over the last year, says corporate treasurer Kenneth Ng to Asiamoney PLUS. That rise has led the Hong Kong-headquartered corporate to consider refinancing the US$300 million five-year club loan that it secured in 2010 either this year or next.
“One of our concerns is Basel III and how it is going to increase our cost of capital,” Ng said in an interview on July 5. “This is going to affect how we do business in Asia. That’s why we are trying to manage this earlier, especially given that our club loan is going to mature in 2015.”
The Basel Committee on Banking Supervision (BCBS) expects its member jurisdictions to begin the implementation of Basel III from January 1, 2013 in phases, with full implementation by January 1, 2019. The rules require banks to keep more capital on hand and maintain proper leverage ratios which help improve the banking sector’s ability to deal with financial and economic stress. This in turn increases the cost of lending to corporate customers.
Ng believes that DFS could tweak its overall fundraising strategy In order to minimise the impact of Basel III on its capital costs, principally by reducing the tenor of its outstanding debts. The retailer intends to refinance its outstanding debt obligation, but hopes to balance its longer tenor club loan of five years with those of shorter duration – around one to three years.
“We are thinking about another facility, where we will have shorter tenors in order to lower our overall costs,” said Ng. “Because we are in the midst of expanding our operations, we are trying to increase our lines.”
DFS plans to raise about US$100 million-US$200 million in short-term bilateral loans for working capital purposes, he adds. Depending on the size it is able to obtain for its bilateral loan, the company could seek to increase the volume of its current club loan to help cover this funding.
Besides trying to manage the rise in overall bank lending costs, NG is also busy trying to manage DFS’ foreign exchange (FX) volatility.
The retailer’s functional currency is the US dollar, but it has exposures to several currencies on a weakening trend such as the Japanese yen and Australian dollar. Ng highlights that managing that FX fluctuations in recent months have become more challenging.
“A lot is going on and the general trend has changed, making foreign exchange markets become more volatile,” he said.
This has altered the way DFS manages its foreign currency exposures.
Previously the retailer has always maintained some excess foreign currency – the Australian dollar, New Zealand dollar and Japanese yen – in its multi-currency account.
This is because for the former two currencies, the company is able to obtain higher interest payments – approximately 4% for the Aussie dollar – versus what it would get when converting into the US dollar, which is close to 0%, notes Ng.
But in recent months, the weakening of these currencies has resulted in DFS accelerating the sale of its foreign currencies.
“We are lucky because for us, the US dollar has become stronger,” said Ng. “Right now we are trying to sell it all off even though the deposit rate for the US dollar is low.”
The Australian currency buckled to a three-year low of US$0.9074 per Australian dollar on July 3, bringing its losses since April to 14%, according to Bloomberg data. Meanwhile, the yen has slumped about 14% against the US dollar to ¥100.31 in 2013.
The retailer is keen on accumulating its exposure to the renminbi, which has enjoyed a slow-and-steady strengthening trend over the last few years.
The Chinese currency has appreciated by about 1.4% this year, and in recent trade the exchange rate was Rmb6.15 to the US dollar, down from Rmb6.23 six months earlier.
“We think that the renminbi is still on the appreciation trend and the deposit rate is substantially higher than the US dollar,” said Ng. “We try to accumulate some renminbi. In the last two to three years, that strategy has been working.”
As a result, DFS places its excess renminbi into either money market funds or time deposits that offer a return of 3% per annum. Including the potential currency appreciation of 1%-2%, the overall return that the company is able to reap is approximately 4%-5%, notes Ng.
Famous for its airport stores, DFS runes over 40 stores in 14 countries and offers a range of luxury brands of cosmetics and perfume, jewellery, liquor, tobacco, apparel and other high-end goods.