In times of financial stress, securing funding is an obvious priority. And yet, behind the scenes of the current pandemic, one of the main concerns for treasurers is the credit position of supply chains and customers. We probe the results of a new Greenwich Associates report with author, Senior Analyst, Ken Monahan.
There’s nothing like a crisis to focus the mind and COVID-19 is hitting businesses hard. Whilst funding status is an obvious first port of call, for trade to continue, supply chain partners must be strong too.
A poll conducted during a Bloomberg webinar on Greenwich Associates’ recent report, ‘Changing KPIs force treasurers to improve their risk technology,’ has shown this to be very much the case within the treasury community.
Asked how they are dealing with increased risks, 44% of responses from treasurers indicated they are more closely scrutinising credit, receivables and financing from their customers and suppliers. Some 38% of responses indicated they are increasing conversations with their lenders, and 15% of responses indicated they are expanding their hedging programmes. Only 1% of responses indicated their risk management stance was unchanged.
“One of the most intriguing results of our poll was that it revealed the most important risk focus for treasurers is the credit position of their supply chain and customers,” says report author, Ken Monahan, Senior Analyst at Greenwich Associates. “This even rated above improving relationships with their own creditors. This is interesting because the most observable phenomenon has been the rush to funding. The scrutiny of the supply chain and the customers goes on behind the scenes but is a top priority nonetheless.”The outcome is not a surprise per se, Monahan seeing this as now “a real and obvious concern”. What is interesting about it though, he says, is how high it scores relative to the answers provided in other questions. It was the most popular response within the survey conducted on the webinar. This is in contrast to its position prior to the crisis, a distant fourth place and presumably primarily focused on customers buying on credit. “So, what is surprising is the shift in focus. Liquidity management was always the top priority, to see credit risk leap like this is interesting to note.”
However, he feels that it’s hard to say at this point if this is just treasurers responding to an immediate threat or if something deeper and longer lasting is being witnessed. “The credit environment, and the risk environment generally, has been benign for a long time,” says Monahan. “This came up anecdotally in our interviews [for the report]. A number of treasurers with whom we spoke said that they felt as though the benign environment had reduced investment in risk systems and that it would take an exogenous shock of some kind to change that paradigm. Well, we have the exogenous shock, it’s very likely we will also have a shift in the paradigm.”
Of course, treasurers can check credit positions, but what matters is how they are responding. What are their options, bearing in mind they don’t want to damage relationships or the supply chain itself? For Monahan, this is a very interesting question.
In the Greenwich Associates survey, the most popular form of credit risk management was the establishment of credit limits per counterparty. “This is a fairly blunt instrument and it is very difficult to reduce limits once established,” notes Monahan. It is possible to insure receivables, and some firms have historically used credit-default-swap (CDS) to hedge them.
Although he notes that for many “this might be closing the barn door after the horse has left”, he believes that many firms will think about hedging methodologies in the future. “It should also be kept in mind that, as yet, there has not been a major wave of defaults, we just know that treasurers are being told to consider writing down receivables and to prepare for credit issues,” he adds. “If the level of government support combined with a relatively quick recovery succeed in forestalling a default wave, firms may not amend their practices as much as we think.”
Whilst it’s “a certainty” that lessons will be drawn from current events, Monahan concedes that it’s still pretty hard as yet to know what they are. “Maintaining undrawn revolvers, hedging out the supply chain and the extension of credit to customers are likely to be some of them,” he says. However, in the long run he feels that a more systematic approach to risk management, along with the accompanying investments in risk management systems, “is also a very likely consequence”.