Not a drop to drink

Corporate treasurers talk dreamily of the halcyon days of 2004 to 2007 when cash seemingly grew on trees and there was an embarrassment of liquidity. Banks were bending over backwards to lend them money and were even prepared to take losses on loans in order to secure lucrative ancillary business down the line. It was the day of the 'covenant light' loan, where margins were non-existent and money was readily available from banks, not just locally, but from across the globe.

Fast-forward to 2009 and the world is a very different place. As the fallout from the financial crisis subsides and banks begin to emerge from their shelters once more, corporate treasurers are facing up to a new reality. Working capital lines have dried up and the banks that had so eagerly provided credit just 18 months ago have become paranoid about who they lend to and are charging far more for the privilege. Relationships have soured.

A recent treasury management survey by consultancy PricewaterhouseCoopers found that financial officers at companies are still surprised at the extent of the damage done to credit markets by the banking crisis of late 2008. "Treasurers are disappointed, even hurt, by the apparent evolution of relationship banking," according to the survey.

Once seen as financial fairy godmothers, banks now resemble more unscrupulous landlords, taking away the furniture and putting up the rent. Peter Williams, editor of The Treasurer magazine, summed up the mood of many when he wrote recently that banks appeared to be less helpful, taking more time to make decisions, applying greater scrutiny, putting extra pressure on margins and attempting to accelerate repricing.

"The banks' desperation to start the process of rebuilding their balance sheets may be understandable, but the result as far as some treasurers are concerned is that they are being bullied, while others feel ignored," he said.

Stuart Siddall, the former financial director of FTSE-listed engineering firm Amec and now chief executive of the Association of Corporate Treasurers, sums it up: "For the first time in many years, lending to corporates has become profitable. Up to 2007, margins on loans were very low and the price of risk was low. Now, the banks have much stronger leverage because credit has become a scarce resource," he says. "The foreign banks have gone home, fewer banks are prepared to lend and there is greater concern over counterparty risk."

Intraday price war

One potential development that epitomises the current state of affairs is the debate over whether to charge for intraday liquidity. Historically a service that has been provided by banks to companies for free, intraday liquidity could now be the subject of bank charges. Andrew Long, head of global transaction services at HSBC, says that this is an area that banks are increasingly looking to price. "We are talking internally about the availability of intraday liquidity and the pricing of it," he says. The decision to charge for the service is not so much to do with making money, but reflects a new, more risk-averse attitude among the world's biggest lenders.

Although this debate has raged for some time, it seems a closer reality now than ever before. Mr Siddall says the potential pricing of intraday money is an unwelcome point of discussion. "It is a big subject and if it becomes a reality it will bring negative issues for everybody, the whole transaction business becomes a completely different game," he says.

Mr Siddall has deep concerns over the ramifications on the global payments system should pricing be introduced. "A lot of systems are designed to pay out at different times during the day and if you start charging for intraday facilities, the natural conclusion for everybody would be to make their payments at the end of the day," he says. "If you think then of the volume of payments that will now come in at the end of the day, rather than spread across the day, it will create huge difficulties."

Charging for intraday liquidity will also encourage firms not to make payments until they have been paid themselves. This will lead to payments being back-ended, which could potentially crash the system. "Suddenly you make the whole payment issue absolutely critical in a very short space of time," says Mr Siddall. "It is a very broad subject that's got some quite wide ramifications that need to be thought through. You have to think about how the payment system can cope."

The hunt for cash

Arguments over whether to price intraday liquidity are just one facet of a wider debate about how companies will fund themselves now that traditional sources of bank credit have dried up. So what are treasurers to do? One answer has been to seek out other sources of funding, outside traditional bank relationships. Larger companies are increasingly using commercial paper to finance themselves and there has been a rush of corporate bond issuance over the past 18 months. Private placements and equity offerings are other ways of raising finance for companies. However, all of the above are extremely expensive ways in which to access funds and available only to the biggest firms. Small and medium-sized businesses do not tend to have the credit ratings necessary to raise money using commercial paper or on the bond markets. Equity offerings also only make sense to those companies already listed on an exchange. Once again, scale is imperative.

The options open for smaller, more medium-sized companies are limited. Michael Burkie, Bank of New York Mellon's market development manager for treasury services in Europe, the Middle East and Africa, says that corporates that had been kept afloat with a tidal wave of money have been left exposed. "Companies have had to get smart in order to make the most of a diminished resource," he says. "They wanted more money from their banks, but at the same time were not looking at their own internal processes."

Better management of companies' financial supply chain is needed, according to Mr Burkie. It is a lesson that has not passed by the senior management of most companies. Liquidity management, once a responsibility delegated to lowlier company accountants, has become top priority at corporate board meetings - as has the issue of counterparty risk. Werner Steinmüller, head of global transaction banking at Deutsche Bank, has noticed the change in attitude among his clients. "Companies are looking much more to working capital financing: off-balance-sheet solutions such as receivables financing and supply chain financing," he says. "All these kind of instruments are of high interest because they want to accelerate liquidity. They have also drawn on syndicated loans and invested them with the safer banks to make sure that in a crisis they have liquidity."

Stuart Siddall, chief executive of the Association of Corporate Treasurers

Small world, big concerns

The other major headache for companies is co-ordinating their activities across the globe. Even small and medium-sized players these days have suppliers, customers and operations in numerous different countries. Gaining transparency on exactly where cash is at any one time is critical in such straitened times.

Susan Webb, an executive vice-president at JPMorgan and head of global core cash management, says the bank's clients are becoming increasingly disciplined about cash-forecasting and cash-flow needs, particularly when looked at from a global perspective. "All of our clients, even the small ones, are global. Many of the larger ones have at least 100 or 200 banks they do business with and literally thousands of accounts across the world," she says. "In the past, trying to centralise all of that and put in place a robust treasury management structure is something that few have accomplished. It takes a lot of backbone."

These days, however, treasurers are getting much more fortitude, says Ms Webb, and much more high-level support. "There is an awareness now of the degree of risk with doing business with so many different banks. Bank risk, currency risk and country risk. It is hard to get true transparency on where the cash is and why it is there," she says. The answer to this problem, according to Ms Webb, is to do business with fewer banks around the world and use bigger global players in order to reduce these risks.

Werner Steinmüller, head of global transaction banking at Deutsche Bank

Trade finance ignored

Another fact to emerge since the onset of the credit crunch is quite how little interest corporate treasurers have shown towards co-ordinating their cash management operations with their trade finance activities. According to a recent survey by treasury and finance website GTNews, just 14% of company treasurers play a leading role in trade finance. The survey also found that just 20% of the 267 companies interviewed said they had a global management structure for trade finance. It is a statistic that shocks Mr Burkie. "The fact that corporate treasurers are not in the loop when it comes to trade-related risk is quite staggering," he says.

It is clear that if companies are to avoid the credit difficulties experienced in the past 18 months, co-ordinating trade finance with cash management operations will be critical. The survey concluded that while treasury departments have implemented processes to ensure visibility and control over their cash positions, this monitoring and access to real-time data is often absent in trade finance. In the future, companies will need to enforce centralised policies and invest in advanced technology for trade finance if they are to get a complete picture of their global cash position, according to the survey.

Multiple choice

Looking ahead, there are any number of ways in which companies can extract liquidity to maximise their working capital. It will not be easy and many firms have been forced by the credit crunch to wake up to certain funding realities. A complete review of internal processes is needed before companies can truly reap the benefits of centralisation and co-ordination of operations. The treasury function has shot up the list of priorities in company boardrooms. The financial crisis has shown, with crystalline clarity, the importance of optimising internal liquidity as a way to mitigate liquidity risk. Real-time visibility of global cash positions will be crucial, as will be accurate forecasting of cash flows and regular stress tests of a company's liquidity status. "There is a high demand for real-time visibility into where everything is, anywhere in the world, in any account, in any second of any day," says Ms Webb.

Added to that, a diverse portfolio of credit facilities ranging across lending institutions will be critical in mitigating future counterparty risk. In many ways, the financial crisis has provided companies with a gilt-edged opportunity to revolutionise the way they run their internal process. Efficiencies wrought now through new systems and processes will continue to benefit companies long after the recession has subsided.

Common challenges cited by companies

- Risk management, including foreign exchange risk.

- Technology investment, including collecting real-time data and cash-flow forecasting.

- Shortage of liquidity and difficulty in obtaining funding/credit.

- Problems with trading partners (from communication to uncertain creditworthiness).

- Regulations, including local bank account rules and transfer pricing.

- Communications within the company.

- Finding an appropriate partner bank.

Source: GTNews Trade Finance Survey 2009