Treasury Today Country Profiles in association with Citi
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September 2008

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Editorial

Bring an umbrella

It is no secret that crisis acts as a catalyst for change. Plato observed as long ago as 360 BC that ‘Necessity is the mother of invention’ and it remains true today that need is what spurs us to action. For treasurers, the current market conditions have prompted a reappraisal of their priorities and as a result we are seeing a higher level of interest in solutions that the banks have been touting as a means of unlocking working capital.

The treasury world has been talking for a couple of years about the benefits of financial supply chain management, but it is only now, when companies are facing worsening credit conditions, that these ideas are really starting to take hold. This is good news for the banks, who have been developing such solutions in the face of growing disintermediation from trade processes. Following a decline in the use of traditional trade instruments such as the letter of credit, banks have been keen to develop techniques that will safeguard their position between buyer and seller. Demica reported earlier this year that 93% of major global banks are now offering supply chain finance solutions, with a steady increase in corporate take-up.

At the same time, the credit crunch has shifted the balance of power in the corporate/bank relationship, slowing and in some cases reversing the trend to consolidate bank relationships. As finance becomes scarcer, corporates are more motivated to maintain a number of bank relationships and a wider pool of lenders. Greater importance has also been assigned to securing committed facilities, with treasurers less willing to leave anything to chance. As one of the speakers at the EuroFinance conference in Antwerp observed earlier this year, the best time to buy an umbrella is when the sun is still shining.

Similarly, with the rating agencies’ reputations damaged, treasurers have had to reassess the extent to which they can trust in the judgement of others. Money market fund providers, for example, are reporting that treasurers are becoming more proactive in wanting to see details of the funds’ investment strategy and portfolio make up. Meanwhile, yield has moved a long way down the priority list for ever-more cautious investors, with capital preservation the overriding concern.

The moral of the story?

While the clouds of the global liquidity crisis may turn out to have a silver lining for the banks, corporates are increasingly reluctant to venture outside without an umbrella – and many want a raincoat as well.