Finance Turns Overtly Cautious

Companies pile cash onto the balance sheet, initiate crisis moves but stick to Treasuries for now.

The financial meltdown in the fall of 2008 prompted many large companies to prep for future calamities, but recent events are pushing them to accelerate the implementation of those defensive moves.

Corporate giants including Coca-Cola, Hyatt Corp., Kinder Morgan and J.P. Morgan have issued upwards of $5 billion in long-term debt over the last week, notes Robert Kramer, vice president of working capital solutions at PrimeRevenue, an Atlanta-based supply chain finance provider. 

Market volatility—rather than last week’s downgrade of U.S. debt—is “pushing treasury departments into very defensive cash positions, so they’re issuing longer-term debt and piling cash on the balance sheet,” Kramer says.

In fact, FMC Corp. pushed to renegotiate its main $1.5 billion credit agreement ahead of schedule, closing it Friday morning—before the credit downgrade and Monday’s market volatility. “I’m very glad to have that process completed,” says Tom Deas, the chemical company’s treasurer. “I wouldn’t want to be doing a bank syndication this week.”

In addition to the volatility, anemic economic growth appears to be here to stay, a prospect the Federal Reserve acknowledged Tuesday when it said it would keep its key interest rate near zero until mid-2013. “That indicates the Fed expects economic growth to be very slow,” Kramer says.

Companies have been stockpiling cash ever since the credit crisis in 2008, as well as working to strengthen their balance sheets in other ways that recent events have accelerated.

Amol Dhargalkar, director of risk management advisory at Chatham Financial, says prior to Standard & Poor’s downgrade of U.S. long-term debt last week, there was concern that a government default would hike rates, prompting some companies to put on interest-rate hedges. 

However, the recent volatility in rates—for example, five-year swap rates dropped 15 basis points last Thursday, rose by the same amount Friday, then fell 10 basis points Monday—has prompted most companies to take a wait-and-see approach on the interest-rate front, Dhargalkar says.

“We haven’t seen anybody actually getting out of Treasuries,” he notes.

The price of oil has plummeted since last spring, as have the prices of many other commodities, prompting companies to lock in prices using swaps and other derivatives. “We’re seeing some companies that had risk on the commodities side going into the market, not so much over the last day or two days but over the last few weeks,” Dhargalkar says.

Craig Jeffery, managing partner at Atlanta consultancy Strategic Treasurer, says companies have been analyzing their risk exposures ever since 2008, whether it regards specific countries, industries or financial counterparties, to determine which require more or less attention. “People are doing more modeling of scenarios with interest-rate, commodity or currency risk, and what happens if a problem arises with several of large customers or counterparties,” Jeffery says, adding that some companies are moving such efforts back to the “front burner” after recent events.

Dhargalkar said Chatham has worked with several companies recently that are seeking to diversify the counterparties in their interest-rate hedging programs. Normally, they would have instituted programs on a more concentrated basis, he says.  “But now, even at a marginal cost to themselves, they want to diversify their counterparty risk. So a company that might have concentrated its risk with one bank is now using two or three.”

Lance Pan, director of investment research and strategy at Capital Advisors Group, says the precarious situation of Italy, Europe’s third-largest economy, is a much bigger concern for corporate finance departments than S&P’s new AA+ rating on Treasury bonds. Even if companies don’t hold Italian sovereign debt, any European banks they use as lenders or derivatives counterparties probably do. A precipitous drop in the value of those bonds could eat into banks’ regulatory capital, potentially inhibiting their lending and increasing their risk as counterparties.

“One thing we noticed was that European banks [in the syndication] seemed to be under a lot of stress,” says FMC’s Deas, adding that when the company renegotiated its credit facility, it also renegotiated bilateral foreign exchange lines with the banks in its syndicate to ensure enough capacity to deal with increased currency volatility.



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