Old Time Rock and Roll or Risky Business?

18 Apr 2012

The second day of the Association of Corporate Treasurers (ACT) Annual Conference in Liverpool took a long, hard look at risk. First up was a plenary on whether 2012 was a make or break year for the UK economy, whereas two session tracks looked at how corporates can manage liquidity and counterparty risk in uncertain times.

RBS’s chief economist, Andrew McLaughlin, opened the second day of the UK’s Association of Corporate Treasurers (ACT) conference in Liverpool by tackling the question of whether or not 2012 is a make or break year for the UK economic recovery. Even though the global economy has been recovering, for the past four years, albeit at an annual growth rate of about 4%, the situation in the UK has not "felt that good”.

McLaughlin outlined three reasons why:

1. Most of the growth in the global economy is happening elsewhere.
2. The UK is trying to trade its way out of trouble, but it is running up against the fact that the majority of its exports go to developed markets that are facing similar issues as the UK.
3. The source of the momentum is based mostly on growth from the expansion of central banks’ balance sheets, which incur side effects within the economy. The ‘Daghi Put’ effect means that the central banks’ debts have expanded, while consumers, banks and governments have shrunk theirs.

McLaughlin argued that although this action by the central banks has successfully prevented a deeper recession, it couldn’t stimulate a vigorous economic recovery. He outlined three things that would make or break the UK:

1. Corporate balances sheets are in good shape: to make a recovery, corporate need to spend more and save less.
2. Falling inflation will boost the take-home pay of indebted consumers: if inflation falls away, as the Bank of England predicts, then this will have a positive impact on the economy.
3. The need for impressive trading growth: the Chancellor George Osborne predicts a doubling of exports in the next decade.

McLaughlin said that although 2012 was not a ‘break’ year, it was also not a ‘make’ one, but more of a ‘grin and bear it’ period.

Risky Business, Risky Year

In the first set of break out sessions, one track explored how corporates can ensure they raise liquidity for their global businesses and manage the associated risks. This session explored the impact of Basel III and the CRD IV regulations, as well as credit rating agencies’ (CRAs) downgrades.

Neil Garrod, director of treasury, Vodafone Group, challenged the commonly-held view that Basel III will have a big impact on the market, controversially likening it to the “damp squib” that was Y2K. He believes that corporates will not see a huge increase in the cost of capital as a result.

However, Garrod spoke from the position of a cash-rich corporate, which may not be true for those corporates that are more reliant on bank lending. His idea is to reduce investment in European money market funds (MMFs), despite the attractiveness of daily liquidity, and look at buying back Vodafone’s own debt. “Our own debt is riskless; we can’t default on our own business,” he said. Charles Van Der Welle, director of treasury, ITV, agreed that the best cash management is to buy back your own debt.

Garrod also highlighted that return on investment was not as important to him as simply getting the principal back. There were many nods in the auditorium, including Van Der Welle.

This sentiment was repeated in the next session ‘Managing Risk in Uncertain Times’, when Gavin Jones, vice president treasury, Ahold, stated that departing from the objective of capital preservation was a “career choice”.

In his session, Jones laid out Ahold’s operational priorities for the next 12 month to manage risk, including:

• A pan-European cash management request for proposal (RFP), balancing bank capabilities with robust creditworthiness.
• Funding and integration of treasury activities in new countries (e.g. Belgium) or companies.
• Continue to implement innovative but cost effective ways for Ahold’s customers to pay, which meet their evolving payments habits.
• Renewal of Ahold’s euro medium-term note (EMTN) programme and potential extension of its current credit facility.
• Keep board and wider business updated.
• Team development and training.
• Upgrading its IT2 treasury management system (TMS).
• Implementing new policy frameworks.

Philip Learoyd, head of funding and treasury operations, SABMiller, who joined Jones and Matthew Davies, head of Europe, Middle East and Africa (EMEA) corporate sales, global treasury solutions, Bank of America Merrill Lynch (BofA Merrill) on the panel, spoke about how SABMiller had restructured its treasury operations, particularly in light of the Foster’s acquisition in 2011. The company decided in 2008/2009 that it needed a more efficient treasury. The plan involved moving from a regional, decentralised treasury to a more centralised, regional hub structure.

The project was completed in Europe in 2011 and is currently in a pilot phase across Africa. It will also be rolled out to Asia and the Americas and should be fully completed within two years. IT2 is again playing a central role in delivering the technology solution across the whole company.

First published on www.gtnews.com