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Prepping liquidity in times of uncertainty

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After managing liquidity during the pandemic, treasurers discuss how they are pulling treasury levers to navigate through the next business cycle.

by Anmol Karwal

Published: August 16th 2022

Finance chiefs tackled one of the biggest business challenges during the coronavirus pandemic: maintaining liquidity. But with inflation accelerating to 40-year high, central banks have raised benchmark interests, thereby adding higher cost of borrowing to the equation.

Speaking at the 2022 Global Treasury Americas Miami conference, treasurers at Nissan Motors Acceptance Corporation and Marriott Vacations Worldwide discussed what steps they took to secure financing at the height of the pandemic and how they are adjusting their strategies in an environment of higher interest rates.

Maintaining liquidity

The immediate and abrupt lockdown of the global economy resulted in revenue declines for a large majority of businesses, most notably those reliant on revenue from retail, hospitality and manufacturing and in order to sustain their business, treasurers had extended credit lines, tapped bond markets and bolstered cash reserves.

“We promptly drew down our revolver, we had a fully untapped $600 million revolver at the time.” said Joseph Bramuchi, SVP & global treasurer at Marriott Vacations Worldwide.

Based in Florida, Marriott Vacations Worldwide, which offers vacation ownership, exchange, rental and property management services under multiple brand names, saw its revenue dip from a billion dollars in the first quarter of 2020 to just $480 million in the subsequent quarter and as the pandemic spread across the globe, there was an immediate need to look at the company’s liquidity, and assess its financing needs.

“We started to re-up our financial model and assumed scenarios including no new sales for 18+ months, based on which we determined a range of liquidity we would want to pursue.” Bramuchi told delegates at the conference.

Similarly the Japanese multinational automobile manufacturer, Nissan Motors Ltd., used the asset backed commercial paper lines while revolver credit facility with banks was never used keeping it as its last resort.

“When you think about liquidity, you have to think in terms of risk management and there are two main components of that equation. The first one is the amount of liquidity the business needs, and the second one is the diversity of funding” said Victor Pausin, treasurer at Nissan Motors Acceptance Corporation & Treasurer Americas at Nissan Motors Ltd. 

With $15.9 billion in committed liquidity and almost half of it secured or backed by an asset, the company was well prepared before heading into the pandemic, mainly due to its discipline in managing liquidity which helped the company navigate through the crisis without using the revolver.

Changing strategies

With the Federal Reserve increasing benchmark interest rates to 2.5% to tame inflation, it has prompted treasurers to not just manage liquidity but also prepare for higher pricing of funding.

“We are shifting from probably the lowest interest rate environment that we have ever had, to the highest in recent years …and for us, this makes for a material change in the ways we approach the business..” Pausin told delegates.

Nissan, like other automobile manufacturers, operates a sales finance business, where it borrows money to support the sale of vehicles through financing. As interest rates have increased, the cost of financing has also expanded which if not passed to customers may lead to profit margin deterioration.

In order to tackle this challenge, treasurers have been changing the mix of financing, by using more secured asset backed securities as opposed to unsecured financing which is costlier than the former as the debt is not backed by any asset class. 

“The consequence of this is that we are going to be more efficient and try to change our mix.” Pausin further said.

Meanwhile, Marriott did three loan-backed securitizations since 2020, where the costs of funds were at a record low of 2.53%, 1.52% and 1.64% and also raised $1.575 billion from secured and unsecured debt. However, its most recent financing came almost 300bps higher at 4.59% as credit spreads increased.

The company is also exposed to higher interest payments on its floating rate term loan of an outstanding amount of $784 million but much of it is hedged using interest rate swaps for a notional amount of $250 million and $200 million under which the company receives the floating component and pays a fixed rate of 2.96% and 2.24% respectively.

The company had also entered into an interest rate collar on $100M of its floating rate term loan with a cap strike rate of 2.5% and a floor strike rate of 1.88% to further hedge interest rate risk on the term loan.

Treasurers believe that given the prevailing uncertainty about liquidity and interest rates going forward, it is better to be prepared now and take advantage of the current liquidity position to adjust the funding mix accordingly.

“I'm a firm believer that liquidity is there right now and that's why, we're renewing and extending an existing tranche, which in a normal scenario would have been renewed for 364 days, but we'll extend it to five years to take advantage of the liquidity position right now.” Pausin added.

Joseph Bramuchi and Victor Pausin were speaking at the EuroFinance Global Treasury Americas Miami conference on May 24th 2022