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Investment Management

Refinance or Wait?

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June 26, 2018

By Anne Friberg

A world-class funding strategy is defined by discipline in its adherence to long-term financing objectives
 

Bond2In May, I had the pleasure of chairing a stream at EuroFinance’s 23rd annual conference on Strategic International Treasury in Miami. The theme for this year’s event was The Intelligent Treasury and the many sessions addressed ways of making treasury smarter across its functional disciplines.

My day 1 stream featured a panel on investing in rising interest rates, led by DWS’s Americas head of corporate treasury coverage, Sara Flour (a NeuGroup sponsor); a practitioner panel on bank relationship management – including NeuGroup member Doug Tropp of Booking Holdings; a panel on cyber security with two corporate practitioners and reps from PwC, SAP and BNP Paribas (another NeuGroup sponsor). But the standout session was a solo presentation by NeuGroup Assistant Treasurers’ Group of Thirty (AT30) member Pradipto Bagchi, a crisp review of the financing strategy and tactical funding decisions at Allergan, the maker of powerhouse brand Botox.

Mr. Bagchi started out with some context on interest rates by noting that the yield on 10-year US treasury notes had moved up about 100 bps in the last year or so. That may sound like all the good opportunities to refinance are already gone. However, rates are still about 500bps lower than in the late 1990s. “This is not the end of the world,” he pointed out. What’s more, predicting interest rates is not something that should be expected of a treasury, especially since it’s not a profit center (at most MNCs). What treasury should focus on are (a) enunciating a rate-risk strategy and (b) executing the strategy well by taking advantage of tactical opportunities when possible.

Whether to refinance rests on a decision framework in three parts:

  1. Leverage strategy: de-lever, lever up or stay at the same leverage?
  2. Rate-risk appetite: go with the market (unhedged); hedge or hedge with upside potential?
  3. Fixed-to-floating debt target ratio: are you at target ratio or need to add fixed or floating?

In leverage transitions, i.e., periods of levering up or down, several considerations come into play to time actions tactically: what’s the time-frame and maturity ladder and what is the optimal steady-state debt profile? In de-levering scenarios, one choice may be between debt tenders or make-whole calls, but it’s important to also be clear on cash-flow management and the levels of cash needed in a lower-debt go-forward situation. If the company is levering up, how much rate risk are you ready for, and are there ways to average in to a reasonable overall rate, or defer the rate risk in some way?

If the aim is to keep a steady level of leverage, there needs to be clarity on access to cash and short-term liquidity, like a de-levering scenario, but Mr. Bagchi pointed to another set of considerations, too, in addition to the maturity ladder management: on the risk management side, what is the sophistication of the hedging infrastructure and is a full range of hedge instruments allowed, e.g., swaps and options? How is effectiveness calculated for hedge-accounting purposes and what other accounting policies and restrictions come into play? How much flexibility do you have in raising or lowering the fixed-floating debt ratio and what is the appetite for variability in interest expense?

Allergan itself is currently in a de-levering scenario: following the $66bn acquisition of Allergan by Actavis (they kept the Allergan name), which closed in Q1-2015, the company had $44.3bn worth of debt at the end of that quarter, including about $10B in bank debt. With a commitment to stakeholders to de-lever below 3.5x debt/EBITDA, it proceeded to reduce debt by paying down bank debt and term debt maturities. Some of the tactical rate opportunities Bagchi’s team took advantage of were a $2.8bn USD bond tender which they refinanced with EUR denominated bonds, and they exercised make-whole calls to retire bonds early.


 

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