creating opportunities
Fe a t u re : C o r p o r a t e B a n k i n g & Pe r s o n a l Fi n a n c e
STRATEGIES FOR DEALING WITH REDUCED EXTERNAL LIQUIDITY by Iain Taylor, Head of Global Payments and Cash Management, HSBC Singapore
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ne of the most obvious consequences of the recent credit crisis has been the reduced availability of external liquidity. This sudden contraction in liquidity availability from the end of 2008 and through 2009 delivered a key lesson to many corporate treasuries – to seriously reconsider their existing strategies in their management of liquidity. There is no better time than now for corporate treasurers to put in place structures that will deliver longterm benefits for return, flexibility and risk management - and in turn they are taking a major step towards ensuring the long-term stability and profitability of their companies. Events of the past 24 months have brought a widespread realisation that the impact of liquidity on a company can be as significant as credit or foreign exchange risk. Previously, companies with respectable credit ratings were able to tap into seemingly limitless and inexpensive liquidity by issuing commercial paper, notes or bonds – or turn to banks to take advantage of uncommitted facilities. That relaxed era is now most definitely over - credit has become a scarce and considerably more expensive commodity.
So What Can Corporate Treasuries Do About Liquidity? In today’s environment, it is vital for corporate treasuries to have a proper framework to mitigate liquidity risk – and in particular, make optimal use of internal liquidity, which has shot up in value. The basic starting point is to have complete visibility of all company cash at the treasury level. This enables the cash position, funding requirements and investment transactions to be tracked in real, or near-real, time. The company’s cash must also reside in a mechanism that allows any idle balances to be used quickly and efficiently. In addition, the
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associated investment policy has to be robust, with all the appropriate risk parameters, checks and controls in place so that security if not sacrificed in pursuit of yield. Accurate forecasting of cash-flows underpins the above points, as well as the ability to model appropriate stresses to test the resiliency of liquidity reserves to external shock. While the forecast may never precisely match the outcome, if the process if hampered by poor practices or disciplines, the corporate treasury may face unpleasant surprises that add to the pressure of liquidity management.
Real and Relative, Current and Future Benefits Given the resources required to implement a liquidity solution, corporate treasurers are understandably eager to have a clearer picture of the possible benefits before committing. The benefits are considerable: Once treasury has visibility and control of corporate cash, it can use surpluses in one part of the business to finance deficits in others, reducing the overall need for borrowing. If, as part of the liquidity management programme, treasury has control over payments, collections and trade flows, then cash flow forecasting will improve and liquidity fluctuations should become less of an issue. Borrowing requirements can be centrally managed, thereby leveraging the higher credit rating of the parent company to reduce borrowing rates. Net surpluses can also be invested centrally, with the ability to secure higher returns by investing larger balances. Counterparty risk in its various forms can be managed more effectively. Centralising cash and treasury
“Procrastination invariably results in a reactive rather than a proactive response when conditions subsequently deteriorate.” With credit markets having moved rapidly from monsoon to drought over that same time frame, another important lesson for corporate treasurers is to establish a diversified portfolio of credit facilities – diversified by lending institution and by facility type. This ensures that the appropriate tool or contingency measure is always available to cover liquidity risk.
activities with group liquidity and balance sheet management enhances their efficiency through greater automation and enhanced reporting. Control over cash can also be improved, with better segregation of duties and “auditability” of activities. Many of the steps required to improve liquidity management