Cash & Liquidity Management

Liquidity management strategies amid rising rates

Published: Aug 2022

Liquidity and working capital management is treasury’s unsung hero. It is also front of mind as interest rates grind higher. Treasury Today speaks to US corporates Newell Brands and Fluor Corporation, and Japanese car giant Nissan, to get the lowdown on liquidity in a time of rising rates.

A red kite and blue sky

At Newell Brands, the US manufacturer and distributor of household brands spanning home appliances to office supplies, liquidity calls come in clear cycles. The company requires most liquidity in the beginning of the year when it is building up its inventory but come the end of the second quarter, that inventory starts to ship, shortly followed by invoicing, and realising cash.

It’s an approach that balances cash-on-hand with the rate of received cash, inventory – but not too much lest it tie up too much liquidity – and timely and nimble access to the capital markets, explains Robert Westreich, Senior VP Treasurer and Chief Tax Officer at Newell Brands, speaking to Treasury Today from the company’s Atlanta office, just back from a whistlestop tour to Newell’s Dublin office. “Liquidity is the lifeblood of the organisation. You must have immediate, short and long-term plans to manage it.”

Westreich shapes a proactive strategy around tiers. The company runs a global notional cash pool that effectively deploys cash and minimises the amount of cash on hand; a receivables factoring programme provides cash more quickly than standard traditional collection activity, and the cash conversion cycle effectively manages days payable outstanding and days inventory outstanding.

Elsewhere, liquidity is ensured via a low-cost commercial paper facility providing immediate funding if needed, and a longer-term debt programme managed across maturities and not stacked up in one particular year. Under the cash conversion cycle, Westreich targets a long-term 50-day conversion rate, currently around 70 days but reduced from a high of 120 days. “The lower the cash conversion cycle, the more cash you produce and the greater your liquidity,” he says. He also targets a 100% ratio of free cash flow to net income. “If you can convert all your net income to cash, you’re doing a great job,” he says.

In Asia, liquidity at Japanese car giant Nissan is also front of mind for Rakesh Kochhar, Senior Vice President Global Treasury and Sales Finance, in the car company’s Tokyo head office. The working capital requirements of the company rose during the pandemic on a combination of lower sales and higher inventory. Now the ongoing semiconductor shortage, coupled with longer shipping times as global ports remain clogged, has compounded the need to have high inventory levels, lest manufacturing plants are left short of vital components when semiconductors are in stock. “Our working capital requirements have increased, and we have secured high levels of liquidity to fund it,” says Kochhar.

Rising rates

Anecdotes from global treasurers reflect the challenges of liquidity management in the current environment. From supply chain issues leading corporates to maintain high inventory levels to demand unknowns coming out of the pandemic, liquidity is front of mind. But perhaps the most pressing and critical component of liquidity and working capital management is the impact of rising interest rates on the cost of servicing and refinancing debt added to corporate balance sheets when money was free. “A recession impacts all businesses differently, some that are long in the short part of the curve with size will be caught in an uncomfortable situation without the notional or yields needed to offset these higher borrowing costs. I’d expect their net interest expense to move unfavourably which is fairly easy to spot by investors,” predicts Todd Yodder who heads up global corporate treasury at Fluor Corporation, the Texas-based engineering and construction firm.

Companies with negative cash flows using debt to invest in the business will particularly struggle. But stable companies financing debt at maturity will also feel the pinch. “In the last couple of weeks, a company that was paying 1% on US$5bn is now paying 3% which accounts to some US$150m of additional interest. It’s not insignificant,” says Kochhar. “Companies are sitting pretty that raised money two to three years ago but when it comes to refinancing it will be much more expensive.”

Newell Brands locked in low rates back in 2016 when it issued around US$12bn debt of which around US$1bn notes are due in 2023. Mindful that only the current swathe of rate rises are priced in, Westreich is keenly watching central bank nuance and signs to time refinancing. The company has a split rating with the credit agencies meaning its bonds are a combination of investment grade and high-yield – where the cost of borrowing has risen sharply. As the price of these bonds moves in the opposite direction to their yield it is triggering a different strategy. “Yields are moving dramatically so for our longer-dated bonds the cost of buying them back is actually cheaper because the yields have risen so much.”

ESG-linked issuance also offers a route to cheaper borrowing. Nissan raised US$11bn in 2020 in three, five, seven and ten-year tranches and Kochhar doesn’t expect to have to return to the market to meet new funding needs, hopeful that supply bottlenecks and inflation will ease. “Our hope is that the supply chain improves, and we will have lower working capital and liquidity needs. I don’t anticipate our working capital and funding needs going up,” he says. However, he is contemplating ESG issuance pegged to the company’s ongoing transition to electric vehicles enabling a tap of more favourably priced debt should interest rates grind higher. “You can raise money at attractive rates if it is linked to ESG and we may do something in the next couple of years. Not because we need the money, but because we want to tap this market and it is good brand equity – it conveys the fact we are a responsible company.”

Nissan also has another strategy in place to counter the impact of rising interest rates on vehicle demand. A so-called captive finance offering, where the company acts like a bank and lends to its customers to finance car purchases, is helping it manage profitability in a rising interest rate environment. Nissan borrows from its banks or the capital markets and lends to customers on a fixed rate. Although there is typically a few months lag between interest rates going up and Nissan charging more to customers, the business offers an important hedge. Even when interest rates were declining it proved profitable since the cost of borrowing for customers reduced with a time lag after Nissan’s own costs came down. “It’s a very attractive part of the business,” explains Kochhar. “Our captive finance business contributes a significant proportion of our total profits.”

Borrowing ahead

Some treasurers Treasury Today spoke to regret not having locked in across the curve during the rock bottom borrowing costs of the pandemic and now fear the kind of interest rates not experienced for a decade. Others are adamant the cure cannot be worse than the disease; rates will have to settle down following aggressive hikes by central banks. Indeed, it feels like treasury has fallen into two distinct camps: those that have been anticipating and waiting for rates to go up for years, and those that might have left it too late. “One group, anticipating for years, is finally looking right however we know that being right and early is many times as costly as being wrong,” reflects Yoder. “The other group is looking to get long fixed but may be caught late without adequate market appetite. Time always tells who was right. I have always been a believer in balancing rate, duration, and repricing risk on both sides to minimise impacts to net interest income.”

Moreover, corporate liquidity needs will be different for different companies in different regions. Some sectors like transport, particularly shipping, are generating huge stockpiles of liquidity, says Frankfurt-based Marion Reuter, Standard Chartered’s Regional Head of Transaction Banking Sales UK/Europe. Elsewhere, companies with large exposure to China, still in the grip of lockdown, are burning through their liquidity to keep operations running but generating few sales or revenue. “Companies with large exposures to China are most worried about their liquidity. Few companies operating in China are making any revenue because everyone is sitting at home. It’s having a massive impact on liquidity.”

Reuter also notices important new strategies emerging. Before, corporates tended to put cash into structured products with fixed tenors, hunting for the best possible yield. Now, more are putting money into their current accounts in a deliberately short-term approach, not committing on tenor but expecting maximum yield and banks to pass on the benefits of higher interest rates on deposits. It’s a challenge for banks, she says. “We are seeing lots of competitive bidding for money to sit in current accounts. From a cash management perspective, we are not traders, and this is not the way we are used to working with clients. What clients are leaving on account is very much linked to yield.”

It is feeding into another trend: a swathe of RFPs. Corporates are actively consolidating and paring back on their global and local bank relationships in an approach designed to both shore up liquidity and leverage the most favourable deposit rates. “If a company has liquidity in 20 different bank pockets it’s not efficient or visible,” says Reuter. “Corporates are reviewing their bank partnerships to better manage their cash and liquidity.”

RFP and tender activity are proving an opportunity for Standard Chartered to win new relationships in its core regions Asia, Africa, and the Middle East that don’t typically benefit from a high churn of mandate activity. “Our key markets are not typically tendered first because the different currencies mean they are not easily centralised but now we see many tenders across our markets. We are pleased with this development so there is still a lot to win and gain in our markets.”

Value creation

Liquidity considerations have also made value creation more important. Share buy backs to take advantage of cheap equities; deleveraging and dividend increases are all on the cards as corporates seek to return value to shareholders and shore up share prices in the volatile equity markets.

Newell has put in place strategies to cut debt since that 2016 issuance, reducing the cost of funding by deleveraging by over 50%. Elsewhere the company has shored up the share price via buybacks, throwing off the proceeds from a recent divestment. The company has a payout ratio of above 50% on its dividend and a dividend yield of 5%. Buoyed by less debt and a healthy share price, when it comes to refinancing, his priority is to remain nimble. Rather than lock in long-term borrowing with no opportunity to call the bond he is considering short-term, variable adjusted rates and exploring cross currency swaps. “There are tools in the box treasury teams can put in place,” he says.

Yoder also sees potential for some companies to grow their share price. “If we continue to see risk-off, those companies able to deploy excess capital with favourable return on capital employed (ROCE) and free cash flow (FCF) will have an advantage maintaining, and growing, their share price,” he says. “It is the challenge of every treasury to establish and maintain a ROC [return of capital] plan that investors’ want to see if you are not going to de-lever or invest in the business, you are going to need the optimal mix of repurchase and dividends.”

Nissan has just restarted paying dividends and Kochhar says it is up to the Nissan Board to consider buybacks at the appropriate time. Still, he notes many companies are looking at buying back their stocks in the current environment. “This is a good time to start buybacks because stocks are so attractively priced,” he says, pointing to most buyback activity amongst Chinese corporates.

From supply chain priorities and getting inventory levels right, the need for cash on-hand given enduring pandemic unknowns, especially in China, all the while navigating the prospect of higher borrowing and business costs leaves liquidity as much a priority as ever. Treasury’s cash operation is an unsung hero. Few people know about it – or want to know about it – but if it breaks down, its impact is profound.

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