Insight & Analysis

Treasury teams talk liquidity management in a climate of rising rates

Published: Aug 2022

Treasury Today speaks to US corporates Newell Brands and Fluor Corporation, and Japanese car giant Nissan, to get the low down on liquidity management in a time of rising rates.

Stacks of coins with rate graph rising

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 whistle stop 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 (DPO) and days inventory outstanding (DIO).

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.

Over 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 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

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 dollars is now paying 3% which accounts for 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 is 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.”

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,” he concludes.

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