When terrorists destroyed the World Trade Center a year and a half ago, they shut down the financial district–at least temporarily–leaving all but the most creditworthy issuers able to tap the credit markets. Many companies found themselves facing short-term liquidity crises and scrambling to find cash to pay suppliers and meet payroll. The attack also got many executives thinking about scenarios that up to that point seemed unfathomable–and how their companies might meet such challenges.
Now, as the U.S. edges ever closer to war with Iraq and as the FBI and the new Department of Homeland Security warn of an upsurge in terror attacks against American targets, including financial and business venues, companies are beginning to take some steps to make sure they aren't caught short again.
For instance, during the week leading up to Feb. 14–the deadline President Bush had set for determining whether Iraq was living up to its obligation to report any weapons of mass destruction in its possession–corporate bond issuance totaled a whopping $23.2 billion, according to Moody's Investors Service. That compared with just $9.2 billion the previous week and $14 billion the week before that. To be sure, some of the increased debt issuance should be attributed to record low interest rates and corporate efforts to reduce commercial paper indebtedness. But, says Pamela Stumpp, Moody's chief credit officer for corporate finance: "There has definitely been some stepped up activity in debt issuance, and some of it is related to the threat of war and increased terrorism, which does pose a risk of liquidity shocks."
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Chris Donnelly, director of leveraged commentary and data at Standard & Poor's Corp., notes that since the start of the year, 54% of the volume in the leveraged market has been refinancing activity–a significantly higher-than-average percentage that reflects both the Bush administration's saber rattling and the likelihood that rates will begin to move higher as the federal deficit expands again. "The high-yield market has been sort of finicky, and it's not hard to imagine it shutting down in a war situation, so it makes sense that people are moving early," he says.
So if the threat of war is weighing on the minds of many treasurers, why has the concern not translated into more concrete actions beyond the credit markets? Part of the reason could be that unless they have facilities or offices in New York or Washington–two of the likeliest targets for terrorism–most executives feel relatively safe. A survey by the National Association of Manufacturers bears this out: 72% of the 79 NAM directors polled in early February believed that a war with Iraq would have minimal economic impact, and, by extension, would not likely disrupt businesses.
Some aren't as sanguine. In a study released in February, the General Accounting Office warned that the nation's clearing organizations, a number of which are based in New York City, appear not to be prepared for another terrorist attack. The GAO reported that, despite the collapse of the commercial paper market after 9/11, only six of 15 exchanges and clearing organizations surveyed currently have business continuity plans in place. Four of the 15 told the GAO they had no back-up facilities, while six said they have back-up facilities that are located just two to 10 miles away from the main office–a distance some experts consider too close for some types of crises. And security experts claim that the clearinghouses are not alone. "Companies should have a tiered strategy all laid out so you know what you should do as things change," says Jim Francis, senior vice president of security service group at security consultancy Kroll Inc. But "most still will have to do it all on the fly."
One company that had a business recovery plan in place and put it to good use was AT&T Corp., which had to restore communications to the Manhattan financial district following 9/11. "We tell our customers that the most important thing they need to do is have a crisis management plan ready to go," says an AT&T spokesman. "But what we've learned is that a significant number of them have never thought about a crisis plan, don't have one and have never rehearsed one."
A few, however, are getting the message. "We've been getting a lot of calls from corporate security people asking us what they should do," says Kroll's Francis. "We do see companies cutting down on travel and bolstering plant security."
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