Treasury Risk is Business Risk

When a decision was made to enter a new market or for a capex the board obviously made a risk reward calculation. Business risks were frequently measured and followed up regularly, but the financial risks were delegated through the treasury policy to the treasury to manage over time. Financial risk management became administration and financial risk was no longer a business risk. The crisis changed all that. Financial risk is now a business risk returning to the board’s plate.

The key figures were all earnings related. The crisis changed all that. Now earnings are only accounting, cash generation is the key. Finally the basic rule of positive cash flow generation has replaced the EBITDA focus.

Now the boards have to relearn and embrace financial risk as the business risk it is. Financial risk can not just disappear through a policy, it has to be managed and there is no way to just hedge it away. Hedging is just postponing the effect and facilitating EBITDA budget follow-up. Financial risks should always have been a board level issue. And now many boards have to relearn, many treasurers need to get a better understanding of the way boards operate and their expectations. Our November meeting of the European Treasurers’ Peer Group will address this issue with treasurers and with a board present. If you are interested to join please contact me to apply for a membership.

Negotiating a Facility

Negotiating a facility is a cumbersome process nowadays. We can not expect that all banks supporting us previously will want to remain. The rating agencies require that we have reasonable planning horizon meaning that we need to start negotiating more than one year prior to maturity. We see a clear trend that companies below investment grade must rely more on the bond market than on bank loans. We have a problem to figure out which banks are global and which banks will be there for the long run. Which banks shall we spend our time and efforts on? Bank relationship management has never been so challenging and time consuming. We should learn to be more opportunistic; take the opportunities to finance to reasonable terms when they pop-up. We should not try to get marginal term improvements. This is not the time to be greedy. Another lesson we have learnt is that we shall conserve our cash and implement stringent cash allocation procedures. Cash will be a scarce resource for the long term.

Why Are We Merrier?

We have been close to an economic apocalypse so they say. But now we are getting merrier and see more bright on to the future. Is it all stimulus? Or are we just tired of being depressed? Are there actually many or only a few variables that have improved? Or is this a baby bull market that will ride for the long term? We will ask our treasury peers (soon 300) to find out how they plan for the near future. Their input will probably push us closer to the true answer. If you are interested to participate please contact me. Note that only corporate treasury managers are invited.