Speak to senior officials at the debt management offices of many government borrowers in Europe and a growing number will identify a key shift in the way they operate today compared to before the crisis. A borrower like the Spanish Tesoro, for example, is now regarded by the Ministry of Finance as playing an essential role in macroeconomic policy, which has not necessarily always been the case in the past.
Far from simply being a cog within the ministrys wheel charged with accessing funding at the cheapest possible price, there has been a recognition that the Tesoros broader funding strategy has a direct influence on the profile of the economy. As a consequence, there is a much closer dialogue these days between finance ministries and debt management departments than ever before.
This trend, say bankers, has been mirrored at the corporate level, where in many cases treasury management is playing a much more important role within companies strategic thinking. Rather than being expected simply to find funding without paying up, treasurers are increasingly being identified at a board level for the input they can and should have to overall corporate strategy.
Mike Turnbull, head of corporate debt capital markets at Bank of America Merrill Lynch in London, says that a good example of this dynamic has been provided by companies in the oil and gas industry since BPs Gulf of Mexico oil spill.
"Since the Gulf of Mexico incident we have had a growing number of discussions with oil and gas companies about terming out their debt," says Turnbull. "They dont have an immediate need for funding with commodity prices where they are. But there is a growing recognition in boardrooms that because their projects are longer and more capital-intensive and the risks associated with them are higher than before, it makes sense to look at locking in 30 year equity-like funding while they can at very attractive rates. That is a decision that is being discussed at board level in consultation with the treasurer."
Others agree that senior board members at corporates throughout the world are keeping a keener eye on liquidity than ever before, and breathing down treasurers necks to ensure that ample liquidity is accessible at all times. "The important dynamic is that for all borrowers, be they financials or corporates, funding has become a much more important consideration in their overall business risk assessment," says Richard Bartlett, head of corporate debt capital markets and risk solutions at RBS in London.
"We had a prolonged period when liquidity was always available. Because it was just a question of the cost of that liquidity, the treasury function was very much one of price optimisation. Now that weve been through a systemic shock which indicated that funding is about significantly more than pricing alone, board members and shareholders recognise that liquidity can no longer be taken for granted."
Boards, say bankers, are also now taking a much more hands-on approach to the more general challenge of liability management, which has moved to front and centre for many treasurers since the crisis. "Treasurers are clearly managing their refinancing risk more actively than in the past," says Fabrice Famery, head of the corporate solutions group at BNP Paribas. "Much of the impetus for this is coming from the top level. Im not sure if board members were very interested in liquidity risk in the past, or if they paid much attention to the refinancing risk of a bond and loan maturing at the same time. Now they surely do."
Liability management has, however, been embraced much more enthusiastically in some countries than in others. Many bankers confess to being mystified as to why French treasurers have been so much eager to grasp liability management opportunities over the last year than their German counterparts.
"Culturally, German treasurers appear to be uncomfortable with liability management because they believe it implies they are taking a view on interest rates," says Russell Schofield-Bezer, head of corporate debt capital markets at HSBC in London. "French and UK treasurers seem to see it much more as an insurance policy worth paying for."
While treasurers may still feel that it is beyond their pay grade to take a punt on interest rates, bankers say that many are at least paying much closer attention to how their risk management and funding strategy may be affected by a host of external macroeconomic influences and trends. "I think that today the corporate treasurer is more knowledgeable than ever before about a whole range of macroeconomic variables," says Martin Egan, global head of primary markets at BNP Paribas in London.
One of these, says Famery at BNP Paribas, is inflation. "I think more and more treasurers will start looking at inflation risk, which can be a much less obvious risk to corporates than to pension funds or sovereigns," he says. "Im not referring to companies such as utilities or toll road operators which build inflation protection into their contracts, but to clients that are concerned about whether their business models will enable them to pass the impact of inflation on to their customers.
"If youre a utility and you know that 20% of your revenue is linked to inflation, you can issue inflation-linked bonds. But it is more complicated when inflation leads to higher costs and therefore makes it more difficult to protect your margin."
Increasingly, Famery explains, his group is advising treasury teams on adopting the same sort of dynamic approach to hedging inflation risk as they would to managing interest rate or currency risks.
Famery describes this much closer focus on macro factors as a move in the treasury function from "tactical to strategic". "I think that in general corporate treasurers are becoming more strategic in their approach," he says. "They are spending less time thinking about when and where they should fix their debt and hedge their currency exposure, and more time focusing on achieving a more appropriate proportion of fixed and floating debt and the right mix of foreign exchange exposure."
"More specifically," Famery says, "the crisis pushed companies to review their risk management policies." In response, his team is now advising many corporate clients to rebalance their fixed and floating exposure. "We have noticed that a number of clients have built up a large amount of fixed rate debt that was disproportionate to their overall leverage," he says. "Over the last 20 years, it was much more expensive for them to be in fixed than floating rate debt, so we are saying that less leveraged companies should be reducing the share of their fixed rate debt as the expected reduction in the cost of debt outweighs the negative effect of the interest cost volatility."
Bankers say that treasurers are also becoming more attuned to dynamics in local currency markets in developing their overall funding strategies. "The importance of local currency funding has increased in relative terms," says Schofield-Bezer at HSBC. "Corporates, on the whole, managed the funding challenges of the crisis very well. Balance sheets are robust and corporates have access to liquidity. Therefore, without the need for large, benchmark refinancings, corporate treasurers are looking to niche markets and sub-benchmark sizes, where appropriate, to build an efficient funding curve and better match assets and liabilities. This is why we have seen more issuance in markets ranging from Canadian dollars to Chinese renminbi, as well as in the US private placement market."
At Deutsche Bank, global head of debt origination, Hakan Wohlin, agrees that treasurers have more of a finger on the pulse of local currency markets today than they did before the crisis. "Weve seen corporates fund in various formats recently in currencies ranging from CNH [offshore renminbi] to Chilean and Colombian pesos, Brazilian reais, Turkish lire, Malaysian ringgit, Singapore dollars and Russian roubles," he says.
As Schofield-Bezer adds, however, those opportunities may be less efficient for treasurers looking to swap the proceeds back into their home currencies. "Increasingly, treasurers will need to take note of appetite for banks to hold derivatives on their balance sheets, and of whether regulation will lead to derivatives being exchange-traded and fully margined through clearing houses," he says. "If it does, it could make the swap market prohibitively expensive for corporate treasurers and therefore force them to be much more domestic in the way they approach their debt funding."
Another responsibility that has become increasingly important for corporate treasurers since the crisis has been the efficient management of their very sizeable cash balances, which have now reached unprecedented levels. This is more critical than ever before for two reasons. First, because the returns companies are earning on their cash are not only very low, they are also well below the returns most expected to earn.
In a report published in March, Greenwich Associates reported that at the end of 2008, FT500 companies predicted that their cash investments would generate average returns of 3.6% in 2009. With the recovery failing to take hold as strongly as they expected, and with rates remaining low, in the event they only generated returns of 1.6%, according to Greenwich. When youre sitting on billions of excess cash, a shortfall of 2% can be quite a shock.
A second reason why the management of cash balances has assumed a much greater priority for treasurers than it did before the crisis is a function of risk management. "Companies are putting a much greater emphasis on the simple business of placing cash on deposit," says Deutsches Wohlin. "The Northern Rock collapse, for example, gave treasurers a fright. The consequence is that corporates counterparty limits have been reviewed or revised. Many corporates are looking to increase the number of banks they deal with; many are also moving some of their liquidity from bank deposits to triple-A money market funds."
Loosely related to this, another discernible way in which the treasury function is changing, say some market participants, is in the bargaining power many corporate treasurers now enjoy with their bankers. "For a lot of European companies, banking is seen as a plain vanilla, utility service, which will make it increasingly difficult for banks to differentiate themselves from their competitors," says Markus Ohlig, a consultant at Greenwich Associates. "It is more difficult for banks to add value in mature markets such as the US and Europe than in emerging markets."
Bankers acknowledge that competition for corporate business is intensifying. "Corporate treasurers are reducing the number of banks they use, and with M&A, bond issuance volumes and demand for hedging instruments all declining, banks share of the corporate wallet is being diminished," says Egan. "That means that ancillary business will become increasingly important."
Others argue that in the post-crisis period the focus for corporate treasurers will increasingly be on managing existing bank relationships. "Corporates discovered during the crisis that when banks were required to make a credit commitment they werent always ready to do so," says Roman Schmidt, head of corporate finance at Commerzbank in Frankfurt. "That was especially true in the case of foreign banks operating in some European countries. Today, I think treasurers are putting more emphasis than ever before on cultivating their banking relationships."
Basel III implications
In the future there will be no respite for treasurers as other challenges occupy more of their time. One of these is Basel III, the broader implications of which for the corporate sector are now becoming clearer. Already, the ramifications of regulatory change are the subject of much closer scrutiny by corporate treasurers. "Among treasurers we are seeing a much greater understanding of the challenges that are facing their counterparts in the banking industry," says Egan at BNP Paribas. "A lot are asking much more detailed questions about how Basel III is going to affect banks capital and what impact it will have on the price of liquidity. They recognise that the price of liquidity for banks will logically affect the price of liquidity for corporates."
Others agree. "I think that all treasurers are focusing more intensively on Basel III," says Bartlett at RBS. "The first area to be impacted will be liquidity facilities, especially those supporting CP programmes which banks will need to hold more liquidity against. Those facilities have traditionally been very cheap and played a significant role in companies overall funding and liquidity strategies. Under Basel III, they will become significantly more expensive. So we will see changes in the way treasurers manage their short term funding which should lead to significant new product development."
As Commerzbanks Schmidt says, the corporate sector has more time to play with than the banks in addressing the challenges of Basel III. "Analysts are demanding that banks adhere to Basel III straightaway," he says. "Corporates have another three years to prepare for the impact of Basel III, so I think they are under less pressure than the banks are."
Perhaps. Nevertheless, some of the other most pressing issues related to Basel III were highlighted in a recent summary published by the Association of Corporate Treasurers (ACT). In the area of bond market competitiveness, for example, this warns that "corporate borrowers may find themselves competing with banks to raise money in the medium term, whereas in the past banks were predominantly short term borrowers."
The ACT also sounds a word of warning on derivatives. "This is under review but expect higher capital requirements and hence more expensive derivatives," it advises. "Possibility that margining with cash collateral will become more widespread, despite high credit standing of counterparties.""Basel III is clearly going to affect all aspects of treasury, in cash management, risk management and funding," the ACT concludes. "It is now early days for it and implementation is over a long time... Expect a lot of change."