• Hitting the critical balance: managing risk and yield

    Hitting The Critical Balance: MANAGING RISK AND YIELD

     

    Getting the most out of the company’s cash while maintaining liquidity is challenging enough at any time – but, with the current combination of low rates and uncertain global economic conditions, it’s even more demanding. Here, three Lloyds Bank experts focus on the need to reassess cash strategies in a difficult environment.

     

    Companies have always liked to keep cash for its financial flexibility. With surplus cash, successful treasurers aim for a judicious balance between investing it and retaining it to support company liquidity. But it’s rarely easy.

     

    The financial crisis has changed corporate treasury priorities – today’s top priority is security – hence the current corporate trend to hoard cash. However, the possibility of a prolonged low yield environment should cause treasurers to rethink the drag of large cash balances and the optimal maturity of their asset portfolios.

     

     

    “HOLD A REALISTIC CASH BUFFER”

    Yuri Polyakov 

    Yuri Polyakov- Head of Financial Risk Advisory. 

     

    Companies increasingly cite the need to access their cash in its entirety at extremely short notice – overnight or up to one month at most. However, when you start to review requirements, it is often the case that immediate access to all cash balances is not needed.

     

    The key question is what cash buffer the company realistically needs, and what percentage should be in cash and in bank credit. We work with companies to look at the volatilities in their cash generation process – revenues, operation margin and working capital.

     

    Lloyds Bank can help examine the historical behaviour of those variables, and with the right technology project what will be the significantly stressed (yet realistic) scenario for generating cash in any year. With that and other key factors, like committed or non-discretionary cap-ex, it’s possible to determine the company’s ‘stressed case’ cash requirement, and therefore adjust their cash buffer accordingly.

     

     

    “START WITH TERM LAYERING”

    Phil McCabe 

    Phil McCabe- Head of Structuring.  

     

    Company balance sheets are under increasing scrutiny and treasurers are torn between preparing for the worst and making use of excess capital.

     

    Providing risk management solutions has always been a mainstay of our relationship with corporate treasurers. Effective delivery is based on the prioritisation of our client’s strategic objectives.

     

    At Lloyds Bank, to help treasurers preserve cash and liquidity against a backdrop of continuing global instability, we’re developing innovative methods of conserving liquidity whilst increasing yield based on offsetting cash balances against liabilities generated by prior bank or capital markets funding activities.

     

    Simple portfolio income protection, however, starts with ‘term layering’ – dividing the cash surpluses into short, medium and longer-term tranches. With the correct cashflow analysis, an all too critical yield pick up can be easily achieved without sacrificing liquidity when it’s most needed.

     

     

    “MANAGE DEBT COVENANTS”

    Johann Kruger 

    Johann Kruger - Head of Accounting & Regulatory Advisory.  

     

    While aligning economic and business risks, lengthening the term of cash deposits may affect balance sheet presentation of debt and cash. Even more important are loan covenants that are defined in the loan agreements. The covenants are often (but not always) based on the accounting balance sheet. Breaching the covenants could have a real cash impact on the business; however in many situations there are ways to manage these risks.

     

    At Lloyds Bank we have been helping clients to ensure that ‘net debt’ continues to take into account all or most of the new layers of deposits, in accordance with UK accounting standards as well as in accordance with IFRS. This may involve re-design of an accounting policy for presentation of ‘net debt’ or ‘liquid resources’ or a change in covenants.

     

    We are also helping clients to formulate their thoughts about these aspects upfront, thus avoiding unexpected reporting and regulatory risks in the future.

     

     

    TIME TO TAKE ACTION?

    In light of current market conditions, corporate treasuries may begin to realise some potential from a more active cash management approach. Once the risk and regulatory implications have been considered and a structured approach taken to increasing yield whilst conserving necessary liquidity, the right strategy or strategies can be developed and maintained.

9/17/2019 3:34:56 PM