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Liquidity Management in Uncertain Times: How to Display Grace Under Pressure 


Podcast TMI - Thursday 12 October 


Leveraging market uncertainty and a dynamic rates landscape as a springboard for progress and an opportunity to reinvigorate policy and explore new activities around working capital and investments. We want to outline fresh ways to approach the oncoming macro headwinds and explain why risk does not always equate to a negative for treasury teams. 

There's always a silver lining, as the old saying goes, but does it apply to cash flow? 

Generally speaking, I'd say that every cloud has a silver lining, and that these crises remain opportunities. Let's seize them! Fear can help to "sell" projects that the treasurer thought impossible or difficult to obtain.  The art lies in convincing treasurers that this is the right time to invest in technology and skilled resources, and in revisiting policies and processes to achieve a higher level of internal control. In this turbulent environment, managing liquidity remains the number one objective of any CFO: maximizing investment income while protecting principal, securing future financing, and forecasting future cash flows. But it is clear, and the past has shown, that a crisis is an opportunity for a treasurer to reposition himself while creating value. What if the treasurer could no longer be ignored? 


The current specific context… (market perspectives) 

If we wanted to describe the current and context, we could describe it as uncertain. After a double crisis, we barely had time to breathe when interest rates (finally) started to rise, but at supersonic speed. Never in the world had so many rates been raised in a single year. 

Despite slowing inflation, rates reached their highest level in ten years (e.g., US 10 years at 4.9%). The markets have realized that central banks will not be lowering rates any time soon. They will remain high for a long time (i.e., the famous "higher for longer"). This is known as a "Table Mountain" situation. Today, we live in a world of high rates, and with inflation remaining high, it's reasonable to assume that rates will remain high for the whole of next year. High rates mean better returns on excess liquidity, more expensive credit and possibly higher spreads and interest rate differentials. So, optimizing working capital and better forecasting cash flow are becoming absolute necessities for everyone. A post-crisis economic consequence which implies adapting, but which also offers real opportunities, notably to revisit processes, strategies, and policies, and to seize opportunities to automate processes. 

The fact that situations differ from region to region further complicates the role of treasurers. And then, what happens if rates stay high for a long time? Even if the price of derivatives could be volatile, I think the biggest danger comes from the lack of automation on the pre-trade side and the difficulty of identifying currency exposures in real time. Volatility is only one factor in justifying greater efficiency, so this is the first point of opportunity. Becoming more efficient in managing FX is becoming more important than ever.  

We can add that geopolitical factors, the large number of upcoming elections and war tensions in many regions do not help to make things any clearer. There are also fears of a resumption of the trade war between China and the USA, for example. I believe that central banks are in an uncomfortable and delicate position. 

And when they emerge, the landing is likely to vary from region to region, creating even more differences and situations to manage. If the landing is not smooth, spreads may come under pressure and financing costs rise. 


When will rate cuts start?  

I'm not an economist and it's impossible for me to say, only to predict. I wouldn't say before the end of 2024. As I have often written in recent months, I fear refinancing difficulties for some of the hardest-hit sectors, e.g., real estate, building and construction, energy-intensive heavy industries, sectors undergoing transformation, etc. If these rates remain high for some time, we'll have to adapt quickly to the inevitable consequences. 


Was the March banking crisis the only thing that will break?  

This spring's banking crisis, even if it seems to have been an epiphenomenon, is still worrying and reminds us of the counterparty risk that is always so quickly forgotten after any crisis. Yet it is real, and this reminder should force us to review our internal processes and strengthen our internal controls in a serious and firm manner. This increased counterparty risk is prompting many treasurers to review their approach and internal rules. The last thing they want is to lose principal through poor counterparty or product selection. A treasurer is never encouraged by a bonus (i.e., incentivized) to generate investment income. On the other hand, a loss would be reproached and fatal.  This is a point to watch out for, especially as it's a complex risk for a treasurer to manage, no matter how sophisticated the tools. Everything moves too fast. 


Impact of conditions as they affect treasurers – hidden/unexpected consequences? 

Current economic conditions could have hidden or unexpected consequences for cash management. First, let's not forget that every crisis brings new financial regulations. A tsunami is brewing in Brussels: EMIR, MiFID/MiFIR, Basel3, PSD2, MMF, Instant payments, etc. Some of these measures are designed to correct problems and prevent future crises by regulating financial transactions. Regulatory constraint inevitably has negative impacts, if only through additional reports or impediments and prohibitions. EMIR is the most obvious risk to consider. 

The second consequence will be the impact on financing, which could become more expensive and scarcer, forcing companies to diversify their sources of funding. Debt servicing will become more complicated and will be a focus of attention. Private debt and capital markets should take up the slack. Private credit funds are expanding rapidly. Diversification of financing sources is a virtuous circle, and wasn't that the whole point of CMU (Capital Market Union) and DEBRA? Counterparty risk is going to cost more. Credit and FX derivatives could also see their prices negatively impacted. Access to credit or hedging could become more complicated, with cost of hedging and borrowing significantly increased. 

Obviously, it may be difficult to get access to further equity injections and thus corporates must try and tap credit and capital markets. Private credit can help filing up credit refinancing needs. There is increased competition between private credit providers, and they are particularly interested in lower quality credit that banks shy away from. Of course, there are extra options now that private credit funds are raising a lot of money.  The cost difference has also often explained why bank borrowings were still popular in Europe, compared to capital markets. Things will change soon.  


Enormous dry powder in private equity  

We can consider a switch from credit to equity financing particularly if you’re a firm that has low or negative operating cash flow and find the right partner well ahead of time. In fact, it was already the case for couple of years as PE’s acquired many assets spined-off by large MNC’s. On the other hand, rising interest rates are adversely affecting yields, and we may well see a little more cautiousness in the future, or less aggressive and more reasonable prices paid. 


How can we cope with this context and become more resilient? 

Technology is the primary source for meeting these challenges: automation and, above all, hyper-automation. We have solutions such as FENNECH to consolidate financial reporting, KANTOX to automate currency management, DEFTHEDGE to optimize raw materials management, DELEGA to digitize signing authorities, TREASURY SPRING to process all types of assets, CASHLAB to refine cash-flow forecasts, and many others could be listed. Technology is at the service of the treasurer. And when the going gets tough, you'll have to invest to improve your company's financial protection. Even if the return on investment must be justified, most large-scale, multi-year projects require the power of persuasion to "sell" them internally. This is not the least of the difficulties. 

Prevention also comes from better cash flow forecasts. This is a weakness common to so many companies. Without forecasting, how can we prevent and protect ourselves? Committed lines of credit are sometimes undersized, non-existent, or oversized and useless. The more accurate the forecast, the more appropriate the debt capacity. Prevention also comes from reviewing policies, which have often been neglected and are centuries old and unchanging. Even companies in good financial health are launching severe cost-cutting plans. Investing in technology in this context seems tricky, and yet automation is beneficial in so many ways. However, one of the few things that don't seem to be changing are international accounting standards. Are they finally sound and adapted? 


What treasurers could expect from a revised approach in terms of investment and working capital? 

It is obvious that there are different sources of investment available right now. However, the cost of borrowing will certainly continue to increase gradually. The first source of financing remains internal: working capital. However, it is a tricky one. Before covid the vogue was to reduce working capital as much as possible. Many big companies have negative working capital. But since the covid supply chain issues and then the more geo-political tensions meant greater levels of inventory are now necessary to prevent disruption and for that re-localization and in-shoring are needed. And at the same time there is political and investor pressure to treat small suppliers better particularly in payment terms. That adds to working capital. As a result, we’re seeing interesting solutions being tossed around. Inventory financing is one thing. Securitization of different types of assets is another. I do believe that the financial supply chain is an area for enhancements and should also be a key priority in future. 


Zero tolerance in case of uncertainty... 

First, a take-away, try to produce or review your treasury roadmap and “sell” it internally to your Treasury Committee or C-suite to get agreement on budget and sponsorship. The longer-term financing and hedging are now more critical for companies that cannot tolerate volatility in credit markets. Companies, especially those in high-risk, low-margin and sensitive sectors, will need to prepare themselves, because more than a storm, we can fear the impact of the cumulative effect and the reaction or over-reaction of the lenders' market to a tense situation. And let's not forget the possible impact of regulations, such as EMIR, which could totally change the game. Banks could impose collateral requirements, i.e., CSA, or withdraw from certain markets or products. A reform of Basel 3 (under review in Europe) or of money market funds could have other negative impacts and create competitive disadvantages for European companies. In such a context, the watchwords are agility and proactivity. You must move before you can be moved. The treasurer must demonstrate inventiveness, proactivity, creativity to define priorities and the means to achieve them, persuasiveness to sell digitalization projects and, finally, medium-term vision to adapt teams to new challenges and needs. A new cliff on the treasurer's path, no doubt? But every challenge is an opportunity to grow. 



François Masquelier, CEO of Simply Treasury – Belgium October 2023 



Disclaimer: This article was prepared by François Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (i.e., EACT). 

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