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Short and long term treasury challenges resulting from the current economic crisis

Joe Rudkin Treasury, Market Insight

Since March, the United Kingdom alongside the rest of the world has been dealing with the impact of the COVID-19 outbreak. All businesses, industries and functions, including those in treasury, have been dealing with challenges not experienced for over a decade.

With expert insight from treasury professionals we are running a series of interviews in which we’ll discuss the challenges being faced, the short and long term implications, the lessons learnt and advice for future similar situations.

A huge thank you to the following for your contribution:

  • Paul Leacy, Interim Group Treasurer at Badoo
  • Martin Walker, Treasury Consultant with experience in leading treasury functions across a range of sectors 
  • Catherine Porter, Chair of the Membership Advisory Panel at the ACT
  • Nick Axton, Group Treasurer at Travelport

 

In the first interview of this series we asked the experts:

 

“What do you expect to see as the key Treasury challenges both over the short and longer term as a result of the current economic crisis?”

 

Some of the key challenges our interviewees highlighted are:

  • Liquidity management
  • Accurate and effective forecasting
  • Adapting to changing business models
  • Adjusting to a prolonged period of working from home

 

Paul Leacy: In good times and bad the key treasury challenges always include liquidity management, risk management and corporate funding. All of these challenges require reasonable and relatively accurate forecasts to be managed effectively and the current uncertainty means that forecasting the financial performance of a business in the short and medium term is highly problematic (clearly some industries performance will be much more affected by COVID-19 than others). There are many knock-on effects of not being able to confidently forecast business performance but for some treasurers this has meant:

  • Businesses have fully drawn bank facilities (regardless of imminent need)
  • Requested financial covenant waivers from lenders (on potential but not certain breaches)
  • Settling or adding new derivative trades where the underlying requirement has disappeared or materially changed

How much confidence can treasurers enter into new derivative trades and how will auditors view IFRS 9 requirements in light of COVID-19? I would expect that treasurers will have to work with a number of cashflow and business performance forecast scenarios that consider various durations and impacts of COVID-19 without being highly confident on any one of them in particular.  For some businesses the need to refinance or raise new capital in this uncertain environment may well have adverse pricing and availability impacts.

 

Martin Walker: The Treasury challenges will vary dependent on the business. The issues facing a supermarket chain, will not be the same as for a builders merchant or a retail chain which was already in intensive care due to the shift from high street to the internet. The immediate and short term challenges common for most businesses will be around accessing and adapting to the rapidly changing conditions and the impacts that has on the business model. The role of the Treasurer as a strategic partner in the business should be to the fore as the impacts of various responses are assessed. Timely and accurate cash forecasts will be more important than ever for a lot of companies, with an immediate focus on the shorter term (to 13 weeks) forecast. Treasuries will need to build in the changes to the normal business model, for which there will be no reliable historic data, and the impacts of the government support where relevant. Actions may be needed to preserve cash or to find additional liquid sources to get through short term shortfalls. Forecasting systems which have proved reliable on more stable situations may need a degree of manual intervention to give the immediate results necessary.

At present most Treasury teams will be working remotely from their homes. This will test out the resilience of company IT support and banking and treasury management systems. The more organised treasuries would have already tested that this could work, but no doubt some issues will persist. Maintaining relationships with banks during this period will be important, both to ensure that the daily operational work continues as normal and that the banks can support where needed. Treasurers will need to focus on if and how the business model has been impacted and ensure that the capital structure is appropriate. Communications with banks, lenders and rating agencies will remain important. Capital and debt markets may expect to remain volatile for a while, and treasurers looking to raise funds and refinance will need to follow developments carefully and be prepared to act quickly if necessary. 

 

Catherine Porter: I see two main challenges for Treasurers. The first being maintenance of liquidity – which is a business issue as much as a treasury issue. i.e. customer collections and potentially renegotiating payment terms as much as whether overdraft is (in)sufficient or whole model now flawed due to current/future best case cash flow neither servicing lenders nor suppliers. The second being cash flow forecasting – is the business able to do this and what extra items have to be included such as government support, delayed payments etc. i.e. revised model to be discussed and worked on, quite possibly under the pressure of maintaining liquidity and with multiple entities.

 

Nick Axton: There will undoubtably be both short and long term challenges. In the short term I foresee several challenges.  Access to liquidity with many banks under pressure from Companies who have chosen / will choose to draw on their committed facilities or are looking to access other forms of financing to support their businesses. Many are drawing their full facility to maximize cash in bank to ride out the period of uncertainty. Keeping up with the constantly evolving impact on P&L budget's and cash flow forecasts, which are continuously changing leaving exposures looking very different to those originally hedged. Also, impacting capital allocation planning. Bank credit lines being frozen or reduced, causing issues with topping up hedges, maintaining day light facilities or banks requesting close out of outstanding deals in their favour. Credit ratings being downgraded (possibly industry wide rather than through own performance) impacting ability to raise new finance. Having to work remotely and operating the BAU processes and controls, maintaining oversight and support. Extra layers of approval have been added to the payment process, which have caused issues with timing of funding.

In the long term, I envisage the main challenges being treasurers working through longer term scenario planning when unsure whether the business will and when it will recover to the levels seen pre-crisis; rethinking the working environment to accommodate the new world thinking given that teams have been  used to working from home; and finally understanding the key learnings from this crisis and working them into a continuously improved processes. This crisis has challenged the sufficiency of liquidity, the entire P&L & cash flow forecasting process, brought laser eye focus over the receivables collection and payables process and business continuity plans, which were never tested in this detail.  

For advice or more information about the latest developments within the treasury world, visit the ACT website www.treasurers.org. They have a vast array of technical supports. Alternatively, feel free to contact us at Brewer Morris as we may be able to put you in touch with the relevant people.