The treasurers bite back

It was once said that, aerodynamically speaking, the bumblebee shouldn't be able to fly, but the bumblebee doesn't know that, so it goes on flying anyway. There has been something of the bumblebee about the corporate sector during the global economic downturn. With access to credit drying up during the nadir of the crisis in early 2009, and the price of loans soaring, companies that really should have dropped out of the sky have managed to keep on flying.

Traditional forms of bank funding all but disappeared and those companies that did survive were forced to rely upon alternative sources of finance. Bigger companies were able to tap the international bond and equity markets, while smaller entities strived to extract much-needed liquidity from within. Effective working capital management became the treasurer's mantra in 2009.

Despite the number of insolvency cases soaring over the past two years, this bumblebee mentality has ensured that a good number of companies are facing 2010 with a renewed optimism. A survey of 1600 European corporate treasurers at the annual Eurofinance conference in Copenhagen late last year showed that 64% were bullish about the prospects for 2010.

Treasurers have become the darlings of senior management and are consulted now, more than ever, by chief executives and chief financial officers. The role of the treasury department in companies has been transformed by the economic downturn.

Richard Raeburn, chairman of the European Association of Corporate Treasurers, goes so far as to say that the recession has done "wonders" for the profession, particularly when it comes to awareness of counterparty risk. "Much smaller companies now have to think in terms of how to manage bank relationships and the risks associated with having exposure to banks," he says. Counterparty risk has indeed shot to the top of the list of treasurers' priorities, in particular the solvency of their banking partners.

The worm turns

According to Tim Martin, senior director of corporate treasury at Research in Motion, makers of the Blackberry device, the downturn has created a new world for all parts of a company's supply chains. "You can't just rely on the ratings agencies anymore. We have to look for other sources of credit information [when it comes to evaluating banks]," he says. Companies are now looking carefully at banks' credit default swap rates, equity prices and even Tier 1 capital ratios to establish their credit worthiness.

The attitude of companies towards their banks has been fundamentally changed by the financial crisis. Many lay the blame for the downturn squarely at the feet of the banks. They feel they have been forced to suffer the consequences of a dearth of credit and soaring prices on account of bank incompetence. Their chief tormentors are the very people who caused the problems in the first place.

Relationships between banks and their corporate customers have been tested to breaking point. Eurofinance's survey on treasurers found that about 60% felt that banks had used the crisis unfairly to set higher prices. Such a statement may or may not be true, but it is the perception that matters. "I am sure that borrowers have long memories and I think those memories will be scarred for some time by what has happened to companies at the hands of the banks over the past two years," says Mr Raeburn.

SME strife

It is the smaller companies that have suffered the most. Larger corporations have been able to tap international bond and equity markets, while smaller and more medium-sized entities have been forced to survive with a 'dig for victory' campaign of extracting liquidity from within. They are disillusioned by their treatment at the hands of the banks, many of which have either ramped up pricing or disappeared from their bank groups altogether. "There is a push for the banks to be finding 'better customers' to be dealing with, so there are plenty of companies out there who are struggling with their bank relationships and liquidity," says Mr Martin. "We are in a fortunate position in that we've got the banks knocking at our door." He adds, however, that even for well capitalised companies such as Research in Motion, pricing has changed.

"Pricing is a big issue. We're seeing big gaps in pricing from different banks. Either based on individual costs of capital or based on other factors that allow banks to price more aggressively."

As a result of this, future reliance on bank financing could dwindle as companies have increasingly been forced into finding alternative sources of liquidity. New issuance of syndicated revolving lines of credit dropped 28% by dollar volume in 2009, according to figures from Reuters Loan Pricing. Volumes of $547bn in 2009 were a third less than volumes in 2007, which stood at $1800bn.

According to Jean-Philippe De-Waele, treasurer for the European and African operations at automotive parts manufacturer Johnson Controls, the crisis has cemented some relationships and with others it has been an eye opener. His strategy is to be prepared for any eventuality, a particularly sensible approach since Johnson's Controls is a BBB rated, pure industrial company with exposure to the automotive industry. "This is not an easy profile," says Mr De-Waele. "We will make sure we strengthen our ties with existing banks and work on adding banks, or at least being prepared for some banks to reduce their commitments when our revolver comes to maturity."

Going agnostic

Banks' attempts to win the favour of corporate customers through offering ever more products and services, such as payments processing and advanced cash management techniques, have also been met with scepticism by some. "None of the value-add stuff works without facilities [loans]. They have the product capabilities, no doubt, but do they have the balance sheet?" asks Mr De-Waele. "There is still a disconnect between the product guys and the credit guys. Products are worthless if the bank cannot make the balance sheet available... at a decent price."

As the global economy gradually returns to normal and companies begin to focus once more on growth, rather than mere survival, banks will find a far tougher environment in which to operate. Companies will be looking to forge ever greater-sized banking groups to diversify financing and mitigate counterparty risk. The concept of doing all their business with just a handful of close relationship banks could become a thing of the past for many companies.

"The world has moved on a heck of a lot from the days when companies were deeply in bed with their banks," says Mr Raeburn. "Savvy corporate treasurers will continue like this so they are less at the mercy of unexpected bad news on the part of their banks. There is a big question mark over what will happen to the big banks. The regulatory attack on them also creates further uncertainty in treasurers' minds."

Increasingly, treasurers are working on ways in which they can become independent of their banks. Such 'bank agnosticism', as some have labelled it, will create an entirely new competitive landscape.

Mr Martin says this is an approach Research in Motion is spending a lot of time analysing. "We are looking to be more bank agnostic... so we have the ability to unplug from one bank and plug into another - as we either need to manage our counterparty risk with our banks or, if we find pricing advantages, to move our business to one or more banks," he says.

Just another commodity

The process of becoming less dependent on banks will be greatly aided by developments coming out of inter-bank communications specialist Swift. The company has designed standardised software that can be used by corporate customers, allowing them to shift easily from bank to bank when it comes to payments, treasury and securities orders.

Mr De-Waele says that his company has already launched a process of becoming bank independent from an operational perspective. "We started looking at Swift and the opportunities it can offer us," he explains. "You need a common gateway to all your banks [if you operate a multi-bank strategy] and that is through Swift."

One of the many challenges for banks as they look ahead into 2010 will be to halt the increased commoditisation of their services that has been brought about by both technology and new regulation. The loyalty of many corporate clients can no longer be relied upon and banks will have to work harder to retain them as clients. "There is lots of room for banks to come forward with value-added services," says Mr Martin.

A certain degree of humility has also crept into negotiations with banks, according to Mr Martin. "They are definitely humbled," he says. "In terms of the way the banks feel that they need to come to you, put their best foot forward and try to win business rather than say 'here's how it is'."

Stability and commitment

So what more can banks do to win back the hearts and minds of an increasingly sceptical client base? "What companies want is stability in their banking relationships and reliability and therefore confidence," says Mr Raeburn. "If I was a bank trying to sell business to the SME [small and medium-sized enterprises] market, I would hope I could come along with baggage that was convincing in terms of stability and a commitment to be in the market and remain in the market."

Winning back trust and confidence will be critical to any future bank strategy. Those banks that withdrew funding to some clients during 2009 will find a far more sceptical market on their return. This is particularly the case for those banks in foreign markets that pulled out as a result of the crisis. "There are signs that one or two of the old names and some new names are trying to get back into the market and it is absolutely certain that the finance directors and treasurers will be quite scarred in terms of how they view the return of some of those guys," says Mr Raeburn.

Looking ahead into 2010, it is clear that companies, no matter what their size, will be looking for stability in their bank relationships and commitment. With the prospect of a double-dip recession looming on the horizon, companies will want to know that their relationship banks will be there to stand by them. Bumblebees are not generally aggressive creatures but they do have the capacity to sting, particularly when handled roughly.

The treasurers' views

At last October's Eurofinance conference in Copenhagen, 1600 European corporate treasurers completed a survey about their attitudes to finance in the current economic climate. Here is a snapshot of their responses.

1. Is the financial crisis over or is there more bad news to come?

15% Over

71% More bad news

14% Don't know

2. Are you bullish or bearish for 2010?

64% Bullish

36% Bearish

3. Should the G-20 be concerned about bankers' bonuses?

58% Yes

42% No

4. How will the $/€ be this time next year?

8%

39% $1.21-$1.40

40% $1.41-$1.60

13% > $1.60

5. What will oil prices [per barrel] be in October 2010?

3%

51% $50-$100

35% $101-$150

6% $151-$200

5% > $200

6. Over the past six months, how have lenders been measuring and pricing risk?

49% More realistically

51% Too conservatively

7. When are you collecting invoices?

20% Earlier

25% Later

55% Same time as usual

8. When are you paying invoices?

3% Earlier

33% Later

64% Same time as usual

9. How far into the future are you with your cash flow forecast?

14% 1 year or more

15% 6 to 12 months

19% 3 to 6 months

22% 1 to 3 months

16% 1 month

8% 1 week

6% In the dark

10. Since the collapse of Lehman Brothers, are you using more or fewer banks?

28% Fewer banks

21% More banks

51% Same amount

11. Do you think the banks have used the crisis unfairly to set higher prices?

57% Yes

33% No

10% Unsure

12. What are your main concerns at the moment?

25% Counterparty risk

22% Availability/cost of credit

18% Forecasting cash flow

18% State of the economy

8% More regulation

5% Lack of yield

4% Inflation

Source: Eurofinance conference, Copenhagen 2009. Audience poll.