Brexit and beyond
The outcome of the UK’s Brexit referendum on 23rd June sent shockwaves around the world, but with the terms of the exit yet to be decided, the impact for corporations remains unclear.
Nevertheless, there is certainly concern about the impact of Brexit. Research published by Greenwich Associates in August found that over a quarter of European companies intend to move away from UK banks once Britain leaves the EU.
These concerns relate to the possibility that banks’ passporting rights will be withdrawn following Brexit. Currently, British banks can use passporting rights to offer financial services across the EU and European Economic Area (EEA) without requiring authorisation in individual countries. Concerns have been raised that if these passporting rights are withdrawn as part of the Brexit negotiations, some financial institutions would move their headquarters to another country within the EEA.
Aside from this issue, Brexit has had wide ranging implications for treasurers. “The implications of Brexit haven’t yet fully unfolded in a legal sense, but there has been quite a profound effect to the capital markets from a UK perspective,” says Chris King, Group Treasurer at Vita Group. “The currency, gilts and swaps movements have certainly tested and validated downside sensitivities in business and covenant scenario modelling. UK defined pension schemes have had a large impact, and the investment approach has been strongly challenged.”
King adds, “whilst the uncertainty will need to be considered in more detail and managed accordingly, particularly in light of ongoing liquidity in ever more febrile markets, it does offer scope for some lateral thinking and reassessment of how best to manage the risks.” He notes that the opportunities are just as significant as the risks, given that most of the downside market impact has – seemingly – now been felt.
Beyond Brexit, other geopolitical events have featured prominently in 2016. “Political instability in the Middle East and Africa has led to the largest involuntary migration since the Second World War,” says Mitko Iankov, Head of Market Development – GTM Europe, Thomson Reuters. “This has unwittingly fuelled the populist politics within developed Europe, further exacerbating the protectionist attitude and popularity of extreme politics. This is not isolated to Europe, but indeed contributed to an anti-globalisation, anti-free trade business environment in which most MNCs thrive.”
Making the most of cash
Aside from these challenges, treasurers have continued to grapple with perennial concerns such as effective cash management and good forecasting. This is particularly pressing in the continuing low interest rate environment. Despite the Fed’s decision to increase interest rates at the end of 2015, other monetary authorities have not moved from the low rates introduced following the financial crisis. Interest rates remain at 0.25% in the UK, while Europe’s deposit rate was cut further to a record low of -0.4% in March.
Meanwhile, many companies continue to hold high cash balances. In May, Moody’s reported that non-financial companies in the US were holding $1.7trn on their balance sheets. With interest rates on bank deposits still low, companies with significant excess balances are looking for other uses for their cash.
“We have a lot of surplus cash,” explains George Dessing, SVP, Treasury and Risk at Wolters Kluwer. “Capital allocation has been a high priority for us in 2016. We recently announced our intention to do an acquisition as we are continuously looking for opportunities to support our organic growth strategy, so we are keeping active on this front. In February, we also announced a three-year plan to buy back up to €600m of shares.”
In other cases, the focus is on extracting as much excess cash as possible by optimising working capital management processes. “Companies are not getting the returns on their deposits that they used to, so there’s a real need to try to squeeze cash out anywhere you can,” comments Jennifer Boussuge, Managing Director, Head of Global Transaction Services EMEA at Bank of America Merrill Lynch. “This has been accompanied by advances in technology which are allowing companies to unlock previously inaccessible working capital. This can have very real benefits: I know one treasurer who has been able to finance some smaller acquisitions by putting in place more efficient working capital management practices.”
Boussuge says that interest in managing working capital more effectively is on the rise, noting that some companies have appointed working capital management executives who report to the CFO and are at the same level as the treasurer. “These executives will look at all of the supply chains across the company, with the goal of squeezing cash out of the balance sheet,” she explains.