Corporate treasurers along with their CFOs, are increasingly taking center stage as the economy has imploded, and previously workaday tasks, such as issuing commercial paper, have become headline news.
The U.S. economy usually hums along, and most treasurers can be reasonably confident of securing the funding their firms need to operate, says Tom Deas, speaking as a board member of the National Association of Corporate Treasurers. Deas also is vice president and treasurer with $2.6 billion FMC, the Philadelphia-based chemical company.
Now, just about every upheaval that can happen has happened, Deas adds. Short-term interest rates are up, with the three-month LIBOR rate zooming from about 2.8 percent in early August to more than 4 percent by early October. The commercial paper market has been going crazy, with the spread between AA nonfinancial commercial paper and 30-day A2/P2 skyrocketing from around 80 basis points for most of 2008 to 400-plus basis points as of October, according to data from the Federal Reserve. At the same time, the amount of asset-backed commercial paper outstanding plummeted from $1.2 trillion in early 2007 to less than $800 billion as of this fall.
“What we're hearing is that only the highest-rated, most widely known companies in our group are able to access the commercial paper market on a consistent basis for the maturities they typically need,” Deas says. Most companies prefer to issue paper maturing at least 30 days out, but this has become more difficult. The amount of AA nonfinancial commercial paper maturing in one to four days more than doubled between August and October, increasing from $470 billion to $949 billion. Conversely, the volume of paper coming due in six months or more dropped by one-third, from $129 billion to $82 billion. “The vast majority of members are finding that they've only been able to issue overnight,” he adds. “It becomes a hand-to-mouth existence that companies haven't had to endure since right after September 11.”
While the past 18 months have been a rough time, these events have been particularly unsettling and forced treasurers to re-examine all of their assumptions about the markets, says Irina Simmons, senior vice president and treasurer with $13 billion EMC Corporation. “You have to make each decision carefully and not rely too much on the past.”
Simmons and her colleagues noticed the beginning of the upheaval in mid-2007, as the meltdown in mortgages and then auction-rate securities gained prominence. While EMC's core businesses generate enough cash that the company hasn't needed to access the short-term credit market, they still decided to position the company defensively. “Our reaction was to maintain liquidity and not hang our hats on things getting better in a hurry.” Since year-end 2006, EMC's stash of cash and short-term investments has grown from about $3.4 billion to $5.9 billion.
“This is the perfect meltdown storm,” notes Mike Gallanis, partner with Treasury Strategies, Inc., in Chicago. Acting proactively is key to weathering it, he notes. Treasurers who wait until the last minute risk running into roadblocks when trying to obtain funding. Financial executives also need to stay close to their banking partners and be on the alert for changes.
HoMedics, a privately held developer of health and wellness products based in Commerce Township, Michigan, was able to close on a new credit facility over the summer, before the credit markets shut down entirely, says CFO Bill Carroll. “We accelerated the timing of the deal, given the deteriorating credit market,” he says, adding that it's unlikely that anyone could have predicted the severity of the downturn. While the new facility came at higher price tag than the company previously paid, HoMedics was able to lock in financing for several years.
The volatility within the financial sector means that “treasurers are looking for leaks everywhere,” Deas notes. They're monitoring their insurers, checking that they'll have the funds they need to meet claims. Many are taking a closer look at potential counterparty risk on commodity hedging transactions. They're also scrutinizing even longtime customers' creditworthiness and reviewing the mutual fund options offered within employees' 401(k) saving plans, watching for signs of trouble.
Brian Richter is director of global treasury with $6.4 billion IAC/InterActive Corp., a New York-based Internet company whose portfolio of brands includes Citysearch, Evite, and Match.com. About a year ago, Richter began moving IAC's investable funds out of money market funds and into treasury securities. He was prompted by several events that highlighted the stress in the market, such as the declining yields on treasuries, which indicated investors fleeing to quality. The final straw was Reserve Primary, a money market fund, breaking the buck, Richter says. “That was never supposed to happen.”
Richter was concerned that investors were leaving the funds, regardless of the quality of the investments. “You don't want to be holding a note when all are fleeing,” he says. “It becomes illiquid, even if it's paying.” By mid-2008, IAC had completely moved its investable funds to treasuries. “We're getting no yield, but in this environment, you don't worry about yield. You worry about value,” Richter notes.
The current crisis also hammers home the importance of accurately forecasting short- and medium-term cash flow, says Holger Fortnagel, managing member with IAM Treasury Services LLC in Pasadena, Cal. With the economy contracting and credit tight, the lack of a clear forecast only invites trouble.
EMC's established cash flow forecasting process has been critical, Simmons says: “We're well tuned to what's coming down the pike in terms of liquidity needs.” She adds that this isn't a discipline that can be quickly built. “It takes time to build a process that gives accurate results.”
Many CFOs and treasurers are, not surprisingly, focused on managing internal working capital more effectively, given that external sources are tightening, Gallanis says. This means reviewing credit terms, analyzing the timing of the cash flow cycle, and watching spending.
HoMedics sells through the retail channel and typically sees a big boost in revenue during the fourth quarter. With the economy slowing, consumer credit tightening, and incessant news reports on slumping housing sales and a dropping stock market, Carroll and his colleagues are carefully watching consumer spending. “Our concern is how consumers will comport themselves,” he says. “We know that Christmas will be here on December 25. We don't know if they'll buy a $100 or a $50 gift.” Replenishment orders are a big question mark, Carroll adds. To be safe, the company is delaying the hiring of any new staffers until after the start of the new year and is keeping inventory levels leaner than in the past.
At the same time, Homedics' immediate customers, the retailers, are under stress. One, Linens 'n Things, appears headed for liquidation. This forces Carroll and his colleagues to keep a close eye on the credit they extend.
As Carroll is doing, financial executives need to “keep their heads and be cautious, but not shut down,” Gallanis says. To get through the crunch, companies will have to continue making products and offering services in order to bring in cash. If they can do this prudently, the tough times will pass sooner rather than later, he adds.
Weighing In on the Bailout
The U.S. government, along with the governments of many developed countries, has spent the past several months doing just about everything it can to jump-start the economy. Most notably, of course, President Bush signed the Emergency Economic Stabilization Act of 2008, aka the Bailout, in early October. Several days later, the Federal Reserve created the Commercial Paper Funding Facility, enabling itself to purchase some kinds of commercial paper.
While most business people presumably are committed capitalists, more than a few are giving qualified thumbs-ups to the government's interventions in the economy. “I'm against the government being involved in general, but we don't have a choice right now,” says Holger Fortnagel, managing member with IAM Treasury Services LLC in Pasadena, Cal. “It's way better than doing nothing.”
The insight, based on his study of the Great Depression, that Ben Bernanke brings to his role as chair of the Federal Reserve System is particularly important right now, says Bill Carroll, chief financial officer with HoMedics, Inc. “He is keenly aware of the errors to avoid.”
Together, the steps taken in Washington and by governments around the world should restore confidence over time, says Tom Deas, board member with the National Association of Corporate Treasurers and vice president and treasurer with FMC Corporation. However, Deas adds that corporate treasurers would have welcomed the chance to voice their concerns to the government and provide suggestions that would make the government's actions even more effective. “They didn't have practical input from corporate treasurers,” he notes.
For example, the Fed's Commercial Paper Funding Facility will buy commercial paper from only the highest-rated companies, leaving many others still unable to access the credit markets, Deas says. The government should have considered buying commercial paper from the other companies — which also are investment-grade — and adjusting the maturity dates to account for any uptick in risk. “There's no help for the part of the market that's having the most trouble,” he adds.
Brian Richter of IAC/InterActive Corp. says that he's concerned that even as the government takes on bad assets from the banks, it isn't giving the banks any incentive to start making loans again. Considering the continued unsteadiness of the economy, most banks will be tempted to hang on to the cash rather than lend it out, which will do little to ease the crunch.
Still, most agree that action, even if it includes some trial and error, was necessary. “You can't just pull out a playbook and follow the steps to address the situation,” says Mike Gallanis, partner with Treasury Strategies, Inc. “There's a lot happening at once, and it's not obvious what actions need to be taken.”