• commercial paper
  • Covid-19
  • Loan facilities
  • supply chain finance

Hunting for cash in a crisis

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Treasurers say cash is king as they squeeze every last drop of working capital from balance sheets and supply chains.

by Paul Nicholson

Published: 26 May 2020

The coronavirus pandemic has led to a 3.5% Q1 decline of GDP in the EU, the most since the 2008 financial crisis, and Q2 is likely to be worse. As revenues plummet in European firms, treasurers have taken centre stage and are playing a key role in their companies’ short-term survival, according to speakers at a EuroFinance webinar on 12 May.

“The CFO is coming to the treasurer, and he’s asking them, do we have enough cash?” explained Patrick Kunz, interim treasurer at Takeaway.com and consultant for boutique firm Pecunia Treasury & Finance. “You’re not paying your bills with profit, you’re paying them with cash”.

The good news is that there are plenty of tools that smart treasurers can use to survive, according to Vincent Almering, treasurer of Dutch Dairy Commodity Trading company Interfood. “You need to have multiple funding lines available to make sure you can sit out the crisis.

Vincent Almering, Group Treasurer, Interfood

Echoing a warning first sounded by Almering on 7 April in the article “Managing treasury through the Covid-19 crisis”, the commodity treasurer cautions “if you cannot fix as a treasurer, your short term credit needs, then this whole Covid-19 can become a credit crisis’.

At the onset of the crisis, “a lot of companies were hoarding cash” and “looking for easy short-term solutions by drawing down their credit lines”, Almering says. For companies that need financing, banks are still picking up the phone, “I have learned that banks are willing to help you out and support you through this crisis” Almering added.

Kunz agrees that loan covenants can be renegotiated, “Talk to your bank before it all hits the fan”, adding that “It’s a good opportunity to get better deals on your financing”. If you try to refinance too late however, banks become anxious, spreads increase and credit is more expensive, Almering comments.

A quick win for treasurers seeking liquidity is to scrutinize your cash conversion cycle, “liquidate aged inventories, chase overdue accounts, and if possible renegotiate payment terms”, Almering says, whilst cautioning that the latter could “backfire on smaller companies in the supply chain”.

In stark warning, Almering thinks that some hard-hit supply chains could collapse further without government protection schemes, “US farmers have been pouring milk down the drain in April because, like oil, there is nowhere to store or process it” he says.

Supply chain finance can also help smaller companies, where they benefit from the higher credit rating of the big companies, and where “the discounting of receivables is more favourable than their own cost of funds”, explains Almering.

Kunz agrees that for smaller firms, “inventory and receivables can be their only source of financing”.

Derivatives and trapped cash

More treasury tools and fixes to the cash crisis also include reducing the demand for cash by pulling investments and acquisition activity and reigning in risks, “don’t do that deal in a country far away”. Whilst commenting that derivative markets are a hedge for commodity price risks, trading should be managed so that “you do not need to have cash for future margin calls”, Almering advises.

A further strategy for hunting down cash is to “locate trapped cash and repatriate it back to your home country”, Almering says, even where that might have been an expensive exercise pre-crisis.

Government programmes to defer tax payments and VAT schedules, as well as help with payroll are schemes that Treasurers should be mindful of “to relieve the short-term cash drain”, Almering adds.

For larger companies with high rated assets, money markets and commercial paper markets are open and can provide short term liquidity, however these markets have “dried up” a little and are “not easy accessible to smaller companies”, Almering observes.

Patrick Kunz, interim treasurer at Takeaway.com and consultant for Pecunia Treasury & Finance

Whilst repo markets are also a source of liquidity, and “a relatively inexpensive and easy to setup product”, you have to have high quality “liquid assets that can be sold, but many commodity firms have already pledged their assets to the bank”, as collateral for loans, says Almering.

“Interest rates are drastically going down”, Kunz comments, referring to rate cuts, and for highly rated companies, “financing costs are near to zero”. In European bond markets, even for junk paper, “if you have no rating or below investment grade, the market is interested in your paper at higher interest rates”, advises Kunz, adding that “the calm has returned to markets”.

It is a tale of two credit markets however, “investment grade companies have an easier time getting access to funds, whilst unrated companies may find it much more difficult” Almering comments.

Both treasurers agree however that the secret to avoiding cash and liquidity crisis is through the practice of frequent stress tests in cash forecasting. It is essential to ask the question “what happens if 20 percent of my receivables are not being paid?” postulates Kunz. Then you will need a smart answer for the CFO.