In the May issue of iTreasurer we take a peek at tax policy and the ongoing challenges of doing business in Latin America. In between we discuss the dangers that the repo market poses, M&A, a new swap product and more on LatAm counterparty risk.
First, in “Uncertainties of Tax Reform and Rates Keeps Treasurers Short,” we discuss what corporates are up to with their cash as they await tax reform and rates to rise. Generally speaking, whatever they do, they are keeping durations short and staying flexible in case rates eventually do rise as the Federal Reserve wants them to. But unfortunately the market doesn’t believe them. “You’re seeing a Fed that has begun to raise rates and has told us they intend to raise rates further this year,” says Jerry Klein. “But the market doesn’t appear to believe it when you see the 1-year Treasury at 1% and the 2-year at around 1.25%.” Thus, investment managers are taking a wait-and-see approach to see what happens with rates and just as importantly, tax policy.
In “Anticipated Exposures” we discuss how communication is critical to M&A success, assessing counterparty risk in Latin America, and also a new swap curve product from Eris Exchange.
In “Will Repo’s Smaller Profile Create Problems?,” we discuss how the lack of bank intermediation has shrunk the size of the repurchase agreement or repo market. “[B]anks have stepped away from the market or largely curtailed their role in the markets mainly due to new rules,” according to a report from the Bank for International Settlements. “These rules include stricter standards like the leverage ratio and the G-SIB capital surcharge” that for many banks requires holding capital in proportion to the size of their balance sheets. Since repo is more a service than a money-maker, banks are reluctant to use up balance sheet space with it.
This month’s NeuGroup Peer Group summary is from the LatAm Treasury Peer Group, which met earlier in 2017 in Miami. At the meeting members discussed what impact US policy under the Trump administration will have on the region. The verdict: “Fortunately, it appears that the impact will not substantially affect a return to economic growth for at least two of the three major economies.” This led to a more substantive discussion on bank offerings in the region.
Contributor Geri Westphal interviews Deutsche Bank’s Roger Heine who offers thoughts on the possibility of tax reform and the impact it could have on tax deductibility. Many have speculated that elimination of this deductibility of corporate interest could have a negative effect on companies with a lot of debt. But Mr. Heine says getting rid of tax deductibility on debt “may only have a limited long-term impact on how most companies use debt in their capital structures, and by implication limited impact on the structure of capital markets and financial institutions.”
Finally, contributor John Hintze discusses bond issuance and how companies are keeping their issuance on the short side and finding floating-rate notes attractive to issue. Like their counterparts in cash management, treasurers are keeping things short as they await more direction from Washington.
Enjoy.