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Deloitte’s third quarter CFO Survey highlights the impact of financial uncertainty on business strategies. This includes uncertainties resulting from the European debt problems. In this environment, treasurers play an important role in protecting their companies’ financial assets and liquidity position against any potential fall-out of the Eurozone challenges, and many Boards are seeking reassurance that this protection is in place. |
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Some common questions include:
- Do you have clear limits in place for the maximum exposure you accept against any one financial institution? Companies need to monitor all market developments and news stories and be ready to move funds to institutions with the strongest credit at the earliest indication of uncertainty.
- If you have undrawn revolving credit facilities, should you consider drawing the facility now if cash is likely to be required in the near future? The resulting cost of carry may be a small price to pay to ensure availability of funds.
- To the extent your company uses local uncommitted credit lines, could you cater for their sudden withdrawal? For example, businesses that rely heavily on trade finance such as guarantees or letters of credit (often issued under uncommitted facilities) need to prepare for the event these facilities are cancelled.
- Companies need to understand their rights and obligations under the legal documentation of derivatives (the so-called “ISDAs”). (Do you even have the ISDAs signed and ready to hand?). For example, you need to know whether you can offset the value of derivatives against cash exposures to/from the banks, and whether you have the right to close out derivatives as soon as the bank defaults or a negative credit event occurs.
In addition to the credit risk issues raised above, the continued uncertainty around the Euro and financial volatility pose potential new challenges for companies. Karlien Porré, a Treasury expert who has joined our Debt Advisory team, has noticed some changes in attitudes to treasury management: “Whilst most people expect the Euro to survive the current turbulences, companies are nevertheless reviewing their treasury policies in order to prepare for further challenges to the Euro. For example, should Euro currency exposures and hedges be managed on a country basis (or at least split between “strong” and “weaker” Euro countries) rather than treating all Euros as the same irrespective of their location, as is the current practice?”
Whilst it may be difficult for companies to fully insulate themselves from every conceivable fall-out from the current issues in the financial markets, some clear and focused actions now can at least limit – and hopefully avoid – any negative impact.
If you would like more information regarding any of the issues covered in this e-bulletin, please contact Karlien Porré on kporre@deloitte.co.uk or 020 7303 5153.
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