In times of financial uncertainty, it’s the corporate treasurer that must steer the ship to safety. Finbarr Bermingham reports on how they’ve stayed afloat in troubled waters.
For centuries, the port of Hamburg has been one of the most important hubs of European and world trade. Still today, it’s the second largest port in Europe, with more than 10,000 cargo vessels passing through its docks in 2011, carrying everything from pharmaceuticals and coffee, to spices and carpets. But in recent years, it’s had to adapt to the changing face of global trade. In 1970, East Asia accounted for just 11% of the cargo being traded through Hamburg. By 2010 China alone accounted for almost 500% more cargo than its nearest rival.
It’s an appropriate place to meet with a group of European corporate treasurers – a bunch that has also been an essential conduit to trade for time immemorial. Over the past five years, they too have had to adapt to keep pace with changing market conditions. The responsibility of ensuring the company has enough money to motor along remains. But in the post-2008 environment, stakeholders on both sides of the transaction – internally at board level, and externally at the bank – have become more risk averse. A war of attrition has ensued, with the treasurer slap bang in the middle.
Peter Matza, engagement director at the Association of Corporate Treasurers (ACT) tells GTR, as an unseasonal May deluge submerges the German city: “Along with a number of other areas of responsibility that corporate treasurers have had – trade finance, working capital – risk management has become a bigger demand on their time. The risk being: how can we finance our business and its growth? What happens if something goes wrong in our markets, our supply chain or our delivery of product to market? That’s not wholly the treasury’s responsibility but we’re now more heavily involved. Boards are now looking to the treasurer to be able to fund the whole cycle.”
The popular consensus among treasurers at Exporta’s Europe Trade Finance Week was that boards are taking a more formal interest in their activities. They’re seeking more justification – asking more questions. Treasurers have always been required to fight fires and perform when the company isn’t. But in the past few years their roles have become more holistic and in some ways, they’ve had to come out of their ivory tower.
“That  was a wakeup call for most boards. Our CEO came from a massive corporate,” says one treasurer, who’d rather not be named. “This guy didn’t even realise that we could have a cash problem – he didn’t realise the risk we had on the balance sheet. Two things changed: the whole understanding of your counterparty risk and the profile of the balance sheet. Over the course of three months everybody wanted to know what you have and don’t have. Who could’ve expected this? Five years ago, nobody would’ve had a conversation about counterparty risk, now it’s normal. Also, off-balance sheet facilities such as factoring broadened the task of the treasurer too. We had to become more open. The treasury had to become more business-orientated.”
But as it’s always been, the raison d’être for treasurers remains to ensure the company is well-capitalised, carrying as little risk as possible. And in a regulation-heavy environment, when many banks have been trying to deleverage, it’s been tougher than ever before. “It’s difficult to get faster funding,” says Martin Van Leeuwen, treasurer and head of export finance at Thales Netherlands, who despite being able to leverage the support of his French parent company, has found himself using ECA-backed financing on a regular basis.
“Our contracts last for four to six years. Clients want to pay as little as possible at the beginning, and more at the end. So for some contracts, we have a very negative cashflow, and for that I need funding. You can do it with a working capital facility, but that is based on the credit rating of the company. If you export in the long-term to a country like India or Tanzania, though, you need ECA cover. The Dutch ECA [Atradius] has ‘AAA’ credit rating and when we partner with them, the banks fund us on that credit rating. We can then pass that on to our clients.”
Q1 of 2013 saw a record number of corporates placing bonds on the debt capital markets. “Banks are not there,” Matthias Hellstern, managing director, corporate finance at Moody’s told the conference. Companies in the stricken economies of Spain, Italy and Ireland have had to diversify their debt portfolios due to the relative weakness of banks in those countries, and it’s often said that companies make an issuance instead of taking out a trade finance facility. While it may be true in some cases, there’s a feeling among treasurers that the instruments need not be mutually exclusive.
“I’m not convinced about the causality of capital markets access and working capital and trade finance for corporates,” says the ACT’s Matza. “In the last couple of years, access for investment grade corporates into the markets has been fantastic and corporates will take that money in for a variety of reasons: M&A, restructuring, engineering. Have they taken that in to fund working capital or expansion into emerging markets? Not explicitly. Have they used it for those reasons? Perhaps, but not always.”
And the majority of treasurers GTR talks to seem to confirm the notion. Corporates are still keen to tap the trade finance market, even if it’s sometimes challenging to attain. Ernst de Kuiper, executive vice-president of finance at CEVA Logistics, describes it as a “much more stable asset than a normal loan”, while Thales Netherlands’ Van Leeuwen taps the markets “once or twice a year”, depending on orders. What is clear, though, is that there’s some discontent among the treasury community around how banks have communicated the impact regulation will have on the credit lines they offer clients.
Some are diplomatic (Matza says “the industry has been positive and open” about how the likes of Basel III and the European Markets and Infrastructure Regulation (EMIR) governing over the counter derivatives will affect its clients), and others imply that a proactive treasurer should be acutely aware of how banking regulation will affect his access to finance. But there are a few who feel the discussions should be more frank. “Some may argue it could be improved,” says Thomas Neidert, the group treasurer at Qiagen, a Dutch provider of technology for molecular diagnostics, applied testing and pharmaceutical research. “When they’re in pure marketing mode, the banks tend to understate the inherent risk in the situation that would impact their ability to finance and lend to us.”
Stick or twist?
Just as the ships leaving Hamburg port have altered their collective course towards starboard, the treasurer has also trained his sights on markets further east. Again, as a means of spreading risk, finding alternative markets to the traditional western outlets has been thrust up the agenda. The crux of the treasury’s dilemma when a company diversifies its trade routes lies in the choice of banking partner: stick, or twist? The conclusion to be drawn from Hamburg is that there’s no ‘one-size-fits-all’ solution.
“We try to rely on the support of our international banking partners,” Qiagen’s Neidert tells GTR. “Two years ago, when we went live with a sales subsidiary in India, we wanted to rely on a global partner. The subsidiary there was going to be relatively small, with no dedicated treasury function. We felt that with a local bank, you have regulatory and cultural issues – for them, you’re a tiny client. But if you put the entire weight of your organisation into the scale, that can be much more beneficial.”
The other side of the coin, though, is that the flexibility of the local bank allows them to operate more nimbly in some markets than the multinationals. But, says CEVA Logistics’ de Kuiper, it’s important to make a judgement on a case-by-case basis. “Turkey’s a good example,” he says. “It’s becoming a very mature market. The counterparty risk is becoming smaller and smaller. Everybody’s joined up with local partners. We work with Isbank, Akbank… most of them, actually. We have multiple local partners – we’re growing quickly in the country and you need local partners. But we’ve never defined what we do – there’s always a fine line between risk management and capabilities”.