“Rising interest rates hold opportunities and challenges for corporate treasury. Borrowing costs more, but those with money to invest are finally getting a return.”

Rising interest rates have increased our cost of borrowing, at the same time the challenging macro-economic environment has put pressure on our credit rating. Together, this has significantly raised our cost of capital and our issuance costs in a trend we expect to continue medium to long term.

We have tried to flatten our debt towers and ensure we have no more than US$500m payable in any given year. This allows us to either re-finance without feeling any major impact from higher rates because it is a relatively small sum, or we can fund it out of cash.

We had US$1bn coming due this April that we refinanced last September. We split this into two tranches of US$500m, giving up a note that cost us under 4% for two notes that cost us approximately 6.5%. This is an example of one of the impacts we have felt because of rising interest rates.

In 2026 we will have approximately US$2bn of debt to re-finance. We will have to be very particular about how the market looks and the interest rate environment as we approach the deadline. When we issued this debt in 2016 the coupon rate was 4.2%. Now that same debt could cost us in the 7% range, and we are very aware of the risk of replacing cheap money with more expensive borrowing costs. We still have three years before we need to refinance, but the key question is timing when we go to market.

Our borrowing is at a fixed rate, so we don’t hedge to achieve floating to fixed. However, we do enter cross currency swaps to reduce the cost of our borrowing. For example, we issued bonds with an average coupon of 6.5% and entered a cross currency swap, converting from dollars to euros notionally. At the time, that swap gave us a 200bps benefit, reducing our cost of borrowing. Depending on euro and dollar moves, currency swaps probably save us 10% of total issuance expense.

On a short-term basis, our typical cash cycle shows that we use cash in the first part of the year to build our inventories. We then ship goods and, from Q2 onwards, receipts come in. This means we need to borrow short-term paper at the beginning of the year to fund the inventory build. Prior to the actions of the various central banks, we paid less than 1% on such debt but we are now paying in the 5% range. Whether commercial paper or a credit revolver, the cost of short-term money is a lot more than it was. The solution is to generate more cash to mitigate the impact of higher interest rates, but this is difficult for our business during this part of the cash cycle.

We are also watching the banks, as they are a source of liquidity. After Silicon Valley Bank collapsed, we noticed a pull back in the commercial paper market. We are also exposed to Credit Suisse as they are in our banking syndicate, however given their recent acquisition by UBS the exposure has been diminished. It is my job to ensure our banking syndicate will step up when needed and syndicate banks are contractually obligated to provide a lending facility, but if a bank is under pressure, they can sell their position to another bank, and this could increase our counterparty risk.

Hopefully the market will stabilise, but everyday seems to get more challenging regarding interest rates. And of course, interest rates also have an impact on our FX costs. We report in dollars but generate a sizeable portion of our business outside the US.

Central bank rates have risen at the fastest pace on record. Peak rates may now be in sight if forecasts are to be believed. For treasurers, this brings challenges and opportunities.

On one hand, rate rises have brought higher funding costs. Simultaneously, businesses, just as much as consumers, are feeling the effects of high inflation. While inflation is beginning to fall, and technical effects ahead mean further decreases should materialise, our core view is that inflation will remain above central bank targets for some time.

On the other hand, there are bright spots, including in cash. After many years of zero or ultra-low rates, cash is finally generating healthy income again. We expect income from cash to remain high for the foreseeable future. Even if central banks begin to cut rates later this year or in 2024, we think it highly unlikely, rates – and hence cash income – will fall back to the levels we experienced over much of the last decade.

Corporate treasurers need to act to access the best rates on their cash. The rate paid on cash on deposit can “erode” quickly compared against market rates. Being ready to move cash if needed is important.

Money market funds (MMFs) are attractive now because of their high “beta” – the relationship between the central bank base rate and the average rate paid by a bank deposit or MMF. History shows MMF betas are higher than bank deposit betas. MMF yields adjust quickly to rate rises, while bank deposits re-adjust slowly. A good example is the average deposit rate in the European Union: at end-February, the average new overnight deposit rate was 31 basis points. Euro MMFs, in contrast, were yielding 245 basis points. The prevailing central bank rate was 250 basis points. While these figures are averages, they highlight the phenomenon. If rates begin to fall, the beta effect tends to work in reverse – MMF yields fall more slowly than bank deposit rates.

There are more actions treasurers can take if rates stabilise or even fall. Chief among these is working on segmenting cash pools into short, medium (or reserve) and long-term (or strategic) buckets. The latter two may be invested with a longer horizon, using “standard” MMFs or even ultra-short-duration bond funds to eke out extra yield from term premium, without materially impacting the overall cash pool’s security or liquidity.

MMFs have experienced two major stress events in the last few years – the onset of COVID-19 and the sterling market stress of September 2022. MMFs successfully navigated both, continuing to provide liquidity in full and on demand throughout. This augurs well for future stress events. It is reasonable to expect more adverse events, whether business failures or market instability. Higher rates revealed flaws in business models or risk management, as we saw with Silicon Valley Bank. Corporate treasurers can at least expect sustained income from their cash investments, but achieving the maximum benefit will require careful attention.

There is no one single response as to how companies should navigate higher interest rates because the impact varies. Corporates that require regular financing are already facing an increased cost in financing with a negative impact. These companies face constraints not only because of higher rates but because banks will charge them a premium because they perceive their business as more sensitive to rising rates. Other companies that secured long-term financing negotiated when rates were low, will feel the impact less.

The extent to which companies are and will struggle depends on their sector. Companies producing industrial raw materials and products and goods that have been impacted by the economic slowdown or by supply chain disruption, may have to borrow more in a high interest rate environment. Banks are also becoming more prudent regarding their credit exposure and the risk of default.

In a flip side, there are also companies that are cash rich and for whom higher interest rates are an advantage. Companies in this bracket include utilities, telecoms, media, and tech groups, well positioned in the current market. Even if the economy slows down, these companies will still see strong business flows. They can put money into investment products and receive a better yield in medium to long-term bonds than in years past.

The current climate creates an incentive to increase treasury management of cash across a group. Companies that don’t have central treasury management processes and don’t globally pool their cash from their subsidiaries, won’t have a global view of their position. Not having a global pool creates inefficiencies because a company might have cash available on one side of the business but is still borrowing in another; 40-day windows of positive cash in a global position could be used to cover short-term borrowing needs.

A centralised cash pool acts like an internal bank, but it requires tax considerations and treasury will have to review transfer pricing agreements between the head office and subsidiaries.

Treasury should also explore their banking relationships in a climate of rising interest rates. Corporates should hunt deals available from different banks and encourage competition between their banking relationships.

Economic conditions are particularly challenging. Inflation is mostly in energy and food prices and is not a consequence of economies overheating. Rising interest rates will reduce the ability of businesses to invest in agriculture and new energy, in a vicious circle that feeds this type of inflation. Overall, it is still not clear if central bank interest rate policies will work when the underlying factors that are creating inflation are linked to topics that are more complicated.