On their heels for nearly two years, treasurers are thinking about more offensive cash strategies.
As crisis fears recede and access to capital proves to be no longer a concern, treasurers are once again thinking about capital structure from a value creating perspective. That is, they can now start thinking offensively vs. just playing defense as they have in the last few years.
One idea that came up at a recent NeuGroup T30 peer group meeting was that treasurers should think about moving to the long end of the yield curve when issuing debt. That’s the case one banker made at the meeting, suggesting that members consider more long-term debt issuance in corporate funding mixes. Using simulations based on available interest-rate data, the banker showed that 30-year issuance in the debt mix moves most corporates closer to an efficient funding frontier, given that it helps them markedly reduce the cost of rollovers and mitigate related event risks.
The banker added that members with strong cash flows and ample excess cash can then swap more of their shorter-term debt to floating or generally layer on swaps to compensate for the longer-term fixed positions and still be likely to come out ahead. This strategy was described as a barbell approach, heavy on 30-year fixed and more typical three-to-five year issuance that can then be swapped. Plus, given that spreads have come in, while long-term rates have remained low relative to the last ten years, it was a good time to start pursuing a remix of the debt portfolio.
And finally, given the demand from pension funds and annuities for long-term debt exposure and the relative lack of supply, investor appetite should still be favorable. However, the analysis did not factor in credit spreads or counterparty risk, which prompted one member to note that the swap layering portion of the debt strategy would create counterparty risk that might erode some of its benefit. For this reason, a highly rated corporate (single-A or above) might consider issuing three-to-five year FRNs instead.