• Covid-19
  • Hedging
  • International 2020
  • liquidity
  • revolving credit facilities

The eye of the storm


A new elite of battle-tested treasurer has been forged in the sectors worst hit by the pandemic.

by Ben Poole

Published: 13 October 2020

Treasurers in industries particularly impacted by Covid-19 – such as the aviation, travel, and oil sectors – have overcome significant adversity to secure the very survival of their businesses. When securing precious liquidity from skittish bank counterparties, boldness is everything.

“In the airline industry, there’s a playbook for this sort of thing”, noted Christine Rovelli, Group Treasurer at Finnish flag carrier Finnair, speaking on a panel at the EuroFinance virtual International conference. “You pull in as much as you can, as fast as you can. The big learning we took from the last crisis was don’t even think about it, just do it all. If things turn out well, you just pay it back. And if they don’t turn out well, at least you have it.”

Pulling on all expected lines of credit proved problematic for some, however. In the travel industry, for example, even a company as cash rich as online travel giant Booking Holdings found itself at the back of the queue for bond issuance.

“We were labelled as a ‘Covid business’… I’ve never seen anything like it” says Douglas Tropp, Booking Holding’s Corporate Treasurer. “There was absolutely no interest in new bonds coming from a Covid issuer. While I wasn’t running out of money any time soon, I was thinking ahead and looking at the worst case scenarios. What if I have zero revenue for a period of time? What if I have zero EBITDA for a period of time? All these things put stress on my financial covenants, and the ability for me to keep my facilities alive”.

Even when the markets began to open up in April for ‘Covid issuers’, it was still not an easy process.

“We were able to go to market with $4.1 billion, paired between convertible and non-convertible debt” explains Tropp. “The problem with it was that I had new issuance concessions of 100 basis points on top of my secondary. But it was really great to get that money in the door.”

Squeezing the accordion

Booking Holdings also had a $2 billion revolver with an accordion. An accordion allows a borrower to increase the total amount of financing available within an existing credit facility, and is particularly popular for growth companies considering an acquisition. But when he sought to use it as an emergency facility, Tropp found his accordion was inaccessible during the downturn.

“You have to get bank consent to exercise the accordion, and no banks were going to do this during Covid” he says. “The banks were working 24/7 dealing with companies that had immediate working capital issues and were unable to make debt repayments. Happily, we weren’t in that situation”.

Understanding the situation and working with the banks, Booking Holdings found a way to move from the back of the queue to the front in order to shore up its access liquidity.

“We were able to line up the revolver amendment we were looking to do with the bond deal” explains Tropp. “The amendment was a leverage covenant holiday. For a fixed period of time, we were able to have a liquidity covenant where we keep a certain minimum level of liquidity on hand without having to do the leverage calculation. By putting that together with the bond, we rose to the front of the line. We got our amendment in place, and they had a successful bond deal”.

Flying high

Over at Finnair, treasury’s early liquidity goal to pull on as many capital levers as quickly as possible was more straightforward.

“There are a number of short term levers that treasurers can use to provide the cash that you might need, such as revolving credit facilities and term loans, so we did some of those things” says Rovelli. “We also did some secured financing, and we borrowed against our pension fund contributions.”

In late March and early April when the Finnair treasury was securing this liquidity, the amount of cash it was putting on the balance sheet drew some flack from industry observers. But with the crisis still very much in evidence some six months later, the foresight to act swiftly has been vindicated.

Having acted so quickly to secure liquidity, Finnair was then in a position to think about what else it needed to do going forward to secure solvency, which included an oversubscribed rights offering.

Managing collateral

Corporates in the oil industry faced a double challenge, as the pandemic quickly impacted demand, and a price war between the OPEC countries and Russia flooded the market with supply. A major problem for Norway-headquartered energy company Equinor was a virtual shutting off the US commercial paper market early in the crisis. That had a knock-on effect on the company’s significant derivative exposures.

“The US CP market has been our go-to source and our safety net for short-term funding needs” says Annant Shah, VP, Head of Capital Markets at Equinor. “We have collateral agreements on derivatives, and what we found in this crisis was very much a flight to US dollars, and a lot of volatility in the credit and the FX markets, which resulted in unpredictability for us, due to the large swings in collateral movement”.

Equinor uses over-the-counter derivative products to manage its FX, interest rate, and commodity price risks. In terms of commodity price sensitivity, at the end of 2019 if the oil price were to fall by 30%, the company’s commodity derivatives would gain US$569 million in value. As noted in the company’s 2020 Q2 report, in the first half of 2019, net operating income was positively impacted by changes in the fair value of derivatives and inventory hedge contracts of US$711 million.

At the end of 2019, US$585 million of cash was held as collateral by Equinor to mitigate a portion of its counterparty credit exposure on the derivatives, up considerably from US$213 million at the end of 2018. The volatility earlier this year created uncertainty and size of collateral outflows and inflows on a day to day basis, particularly with the hundreds of millions of dollars in play at Equinor.  Shah’s treasury team targeted hurdle rates – the lowest rate of return a project must earn in order to offset the costs of the investment – as a tool to manage this.

“We increased hurdle rates across the business – from the upstream as well as across all sides of the business – to immediately dampen down some of that outflow activity” explains Shah.