Corporate finance has seen a lot just in the past 20 years, so I think most are well prepared to ensure resilience and not over correct as has been the case during certain turbulent periods in the same time horizon – some companies have adopted more conservative liquidity strategies, such as maintaining higher cash reserves and/or securing additional lines of credit, to buffer against additional unforeseen shocks.
Regulatory changes or updates, such as amendments to liquidity risk management regulations or capital adequacy requirements, may necessitate adjustments to how the corporate side manages liquidity. We need to ensure all the core items are covered – noting changing regulatory guidelines, capital requirements, and standards to ensure sufficient liquidity buffers are there to mitigate regulatory risks.
As I have said many times over the past 15 years, “hope is not a strategy;” instead, we closely monitor credit conditions and lending standards, tightening credit markets or reduced access to financing can restrict options. Many corporates I know are proactively engaging with lenders to secure favourable terms and explore alternative financing sources to ensure adequate liquidity is there if needed. Running scenario analysis and stress testing to assess the resilience of the company’s liquidity position under various economic scenarios. We model different outcomes and identify potential liquidity risks; we then develop contingency plans and adjust liquidity strategies accordingly to mitigate adverse effects on the business.
Capital allocation should always be top-of-mind not just when we see turbulence in the horizon, we weigh the trade-offs between deploying capital for growth initiatives, debt repayment, shareholder distributions and maintaining liquidity reserves. It’s important to set up favourable credit agreements when you don’t need them – ideally moving when opportunities in the market are present.
Many of the CFOs I’ve spoken with over the past few years (who were able to) pre-hedged and are seeing positions way in the money and also moved to renegotiate credit agreements when rates were far more favourable than what we see in the current market. Given what I know now, I think two scenarios could develop, one is we see the forecasted cuts much slower than the market has priced in for 2024, and the other is we see something break and rates come down much faster than the market has priced in – credit markets are smart, I think they are priced in the middle of each of those scenarios.
What I have seen in the market in the past couple of years is those that have needed to tap the capitals markets moved beyond traditional debt issuance to alternatives such as convertible bond offerings, equity issuance and structured financing transactions.
The best approach in the long run is to stay informed and when opportunities arise be agile and ready to layer into those opportunities, closely monitor developments in monetary policy, the regulatory environment (B3 endgame), and adapt and remain agile in navigating changing market conditions to effectively manage funding costs and maintain financial flexibility. I have had more colleagues from a variety of companies call me to ask about hedging IR risk in the past 18 months than my entire career combined – a lot of discussions about the risks – asset/liability alignment duration, repricing, spreads, slope change, liquidity, credit and regulatory. The only trend I’ve seen is an uptick in those getting more educated. I think we are in a wait-and-see while being prepared space right now, and if rates do begin to fall later this year, we see a lot layering into these opportunities.
