What acorporateneedsThe modern corporatetreasurer operateswithin a risk-averseenvironment. Thetreasury is run not as aprofit-centre operation,but as a cost-centredepartment. It isaccountable for itsbot<strong>to</strong>m-line.“Very few corporateclients run FX profitcentres,as they do notappear <strong>to</strong> have the time<strong>to</strong> run positions andcover their needs for thecompany,” says BobEveling of SocieteGenerale.So, how have thechanges of focus andoperations withintreasury affected its FXrequirements?“We have seen adivergence away fromthe standard vanillaproducts in<strong>to</strong> a morestructured approach <strong>to</strong>hedging FX positions,”says Neil Parker at RoyalBank of Scotland. MansGrunberger of SEBagrees: “We cannotidentify any majorchanges in hedgingtechniques during thelast couple of years, butgeration, but which will be the moredifficult <strong>to</strong> halt the longer it lasts. Ourassessment does mean that there is aserious risk of the dollar losing furtherground as long as there are - besides theconcern that the US current-accountdeficit is no longer sustainable - otherreasons (yield spreads, doubts <strong>about</strong> thedurability of the US recovery) suggestingthat the dollar is unlikely <strong>to</strong> makeup for its losses.”corporate clients havebecome moresophisticated incombining instruments.Eveling claims FXoptions have becomepart of their corporateclients’ arsenal againstFX exposure but in CF’sFX Survey in its Oc<strong>to</strong>berissue, some of thecriticisms levelled at thebanks were that thebanks were offeringstructures and productsthat were <strong>to</strong>osophisticated and thatthey were overpromisingand underdelivering.“We send outthe best strategy bestsuited for our clients.On a weekly / monthlybasis we continue <strong>to</strong>provide our in-houseforecasts and economicviews. We also provideour own ideas on FXrates and moves on adaily basis via directcontact on thetelephone.”Trevor Williams atLloyds TSB would notaccept such criticisms.“We aim <strong>to</strong> provide aservice corporates want;a service which involvescharts, keeping a closeeye on volatility andearly-warning signs oftrend movements aswell as any upside ordownside risk that wefeel a client needs <strong>to</strong> beaware of.”Demand varies, saysGrunberger. “Somecorporates want a shorttermview which reliesmainly on technicalanalysis, flow analysisand market behaviour,whilst the majority ofour corporate clientshave a medium or longtermview and wouldlike analysis whichcombines marketbehaviour andpositioning, structuralcapital flows, macrofundamentals, politicalanalysis.”Whatever thecorporate need, be itshort- or long term, saysMichael Schubert, atCommerzbank, the keyfor any successful clientbankrelationship isconsistency.“Consistency in ourforecasts is important.We try <strong>to</strong> elaborate inour reports the variousinterdependenciesbetween the variablesmentioned. It isnecessary that theamount of depreciationor appreciation wepredict for a currency isquantifiable from theclient’s point of viewand that changes in ourforecasts arecomprehensive.”Yen going from strength <strong>to</strong>strengthA good FX forecast can act as an earlywarningsignal <strong>to</strong> off-set futureliabilities. The USD-JPY currency pair isa good example. Forecasting the resurgencein strength of the Japanese yenwould have been very profitable <strong>to</strong>many of the banks’ corporate clients inthe past 12 months, who generateprofits in yen but later repatriate in<strong>to</strong>USD-CHFTotal Position Frequency AverageCommerzbank 40 1 6 6.67RBoS 37 2 6 6.17Citigroup 35 3 5 7.00Lloyds 34 4 6 5.67SocGen 32 5 7 4.57SEB 31 6 5 6.20UBS 29 7 5 5.80AMEX 26 8 3 8.67JPMorgan 26 8 4 6.50Goldmans 24 10 3 8.00dollars. Equally, a good relationshipwith your FX forecaster may have convincedyou <strong>to</strong> take out a forwardcontract <strong>to</strong> pay for goods that youintended <strong>to</strong> purchase later on in theyear. “If the Bank of Japan hadn’t intervened,”says Williams, “I could seeUSD-JPY trading as low as 100 or even95. It certainly would have damagedtheir recovery.”Williams admits <strong>to</strong> being taken bysurprise by the Bank of Japan’s action.“I was very much surprised by how farthe Bank of Japan intervened. Theyneeded <strong>to</strong> prevent further deflationarybias against the yen, but I was still surprisedby the amount of dollars theybought.” So what other currenciescaught our forecasters off-guard?Parker and Schmidt say the SouthAfrican rand and the Turkish lira, whileEveling looks <strong>to</strong> the euro. “I expected arecovery when it broke back throughparity in early December 2002. Iexpected it <strong>to</strong> stabilise at around 1.18,which I consider fair value for the currency.”The current high level of theeuro will, he adds, be detrimental <strong>to</strong> arecovery in the euro zone.Mans Grunberger of SEB on theother hand was shocked by the impressivestrength of the Australian dollar.“Despite some question marks <strong>about</strong>the global economic recovery, geopoliticsand Australia’s poor externalbalances, the AUD has been supportedby strong productivity growth.”CF would like <strong>to</strong> congratulate the <strong>to</strong>p10 forecasters of 2003. It was a difficultyear, with some unexpected currencymovements. CF would also like <strong>to</strong> thankthe industrious forecasters who continue<strong>to</strong> reply <strong>to</strong> our monthly requestsfor information. It is extremelyappreciated. cfcorporatefinancemag.com March 2004 cf 33
MANAGING CASHSHORT-TERM DEBTHow are you fundingyour WCM needs?The CP market is the ideal short-term debt financing solution. Itis cheap for the issuer and low risk for the inves<strong>to</strong>r. But a fall inratings and economic stagnation has knocked the wind out ofCP and inves<strong>to</strong>r appetite. And, if CP is no longer an option whatare the alternatives? Robert Pink reports.Is the commercial break over forUS commercial paper?” That wasthe question raised by S&P inMarch 2002. The US commercialpaper market had undergone itslargest contraction in 40 years and theoutstanding market s<strong>to</strong>od at $1.35 trillion– the lowest level since the lastquarter of 1999 and 6.1% down on theyear-end for 2001.“As business investment picks upsteam,” asserted a bullish S&P, “workingcapital requirements will accelerateamong firms, in turn fuelling increaseddemand for commercial paper.”Market players, hoping for goodnews, heaved a sigh of relief and lookedforward <strong>to</strong> a return <strong>to</strong> normality.Almost two years later the USmarket has further contracted <strong>to</strong>around $1.3 trillion, although the Europeanmarket has continued growing.So what are the corporates using <strong>to</strong>finance their short-term debt needs?Commercial paper, say banks.Why CP remains <strong>to</strong>pCommercial paper is used by large corporates,with high credit ratings (andlow investment risk), <strong>to</strong> finance day-<strong>to</strong>dayworking capital managementneeds such as accounts receivable andinven<strong>to</strong>ry. It is available in a wide rangeof denominations, can be either discountedor interest-bearing, andusually has a limited or nonexistentsecondary market. Maturities typicallyrange from two <strong>to</strong> 270 days. It is sold <strong>to</strong>money market funds, banks, institutionalinves<strong>to</strong>rs and corporates.“Corporates have become increasinglylarge inves<strong>to</strong>rs in short-termpaper,” says Arnaud Achour, head ofcorporate debt origination at SG CIB.“They have built up enormous s<strong>to</strong>ckpiles of cash as a consequence of theirdeleveraging efforts.”“The advantage [of CP] over bankfinancing – where interest rates mayfloat two <strong>to</strong> three per cent above thebase rate – is that the cost of borrowing[with CP] is at Libor flat or less,” saysColin Withers, managing direc<strong>to</strong>r ofshort-term products at Citibank. It isalso flexible – allowing a company <strong>to</strong>match financing needs directly withcash flow. Libor stands for the LondonInterbank Offered Rate and is the rateof interest at which banks borrowfunds from other banks, in marketablesize, in the London interbank market.“Commercial paper offers a highgrade of flexibility and a very deep market,”says Norbert Mayer, head ofcorporate financing at the BMW Group.As head of corporate finance, Mayer isresponsible for corporate strategy onshort-term debt financing. BMW uses amixture of CP and the short-end of theMTN programme for its short-termneeds, says Mayer. “Having directcontact with the inves<strong>to</strong>rs is part ofBMW’s funding strategy. Bank loans arenot that important for us.”For Mayer, commercial paper is stilla viable option, but the figures releasedby S&P suggest BMW is one of the fewremaining corporates <strong>to</strong> be able <strong>to</strong>access the market.Corporate ECP Issuance from 1 Jan 2002 <strong>to</strong> 1 March 2004Rank Issuer USD Eqv (at issue) m Trade %Share1 Unilever NV 81,100.34 1,134 8.332 E.ON AG 52,057.91 761 5.353 Eni Coordination Center SA 37,926.09 480 3.904 Coordination Center Volkswagen SA 32,643.47 1,604 3.355 KarstadtQuelle AG 26,058.33 1,521 2.686 Deutsche Telekom AG 23,472.18 851 2.417 DaimlerChrysler AG 20,514.38 997 2.118 RWE AG 17,368.86 387 1.789 Tesco plc 16,738.54 327 1.7210 METRO AG 16,711.12 792 1.72Total 973,440.10 31,145 100.00Source: Dealogic34 cf March 2004 corporatefinancemag.com