What’s on International Treasurer’s radar screen.
The International Treasurer editorial meeting this week produced a few topics that will be fleshed out in the coming weeks. One is a fairly new funding vehicle for corporates in Europe whose genesis came in wake of tighter credit during the financial crisis. Also on tap is another look at rating agencies, as they are once again coming under scrutiny after their oversights of some of the crisis-causing assets. Finally, we’ll explore some of the key takeaways from The NeuGroup’s Treasury Investment Managers’ Peer Group (TIMPG) meeting, which convened this week.
New line of credit
A painful lesson learned as a result of the credit crisis was that the generous flows of cheap funding were essentially shut off or much more expensive for all but the highest-rated borrowers. Thus, did the Corporate Funding Association (CFA), which aims to create an additional and permanent source of funding at a fair price, and is intended to be a supplement to traditional bank funding, come to be?
The CFA is a consortium of corporate groups worldwide, which has created a bank “whose sole purpose will be to provide its corporate shareholders with long-term credit facilities” and will target “corporate companies with an investment-grade credit profile whose main activity is not in the bank, insurance or real-estate business.”
CFA’s loans (3-10 years in EUR) will only be extended to its members who will also be required to be equity holders. The equity stake required will reflect the member company’s credit rating; non-rated members will need a private rating (for the first three years, the CFA has to rely on external ratings after which it can begin using its own ratings model as long as it’s been tested approved by the central banking regulator). The higher the rating the member company has, the lower the required equity stake and the more it can borrow against any given level of equity. Similar to the commercial bank-lending world, if a member gets downgraded, it has to increase its equity or decrease its maximum borrowing amount.
A member’s borrowing cost is partly offset by the dividend it will receive from its equity stake. CFA profits are aided by a low operating cost structure.
CFA said its business strength “relies on basic banking techniques (credit diversification, strong governance and conservative risk policy), as well as several original mechanisms, which will give this bank a privileged access to the international debt capital markets.”
Rating agency redux
Because of its integral and perhaps infamous role in the financial crisis, it seems certain that rating agencies will continue be the occasional whipping boy of regulators for years to come. Recently, the newly formed Financial Stability Board has recommended eliminating references to credit ratings in legal statutes and business practices, and incentivize the creation of independent credit risk assessment and due diligence.
“The use (or ‘hard wiring’) of CRA [credit rating agencies] ratings in regulatory regimes for banks and other financial institutions has contributed significantly to mechanistic market reliance on ratings,” the FSB said in a statement. “This in turn is a cause of herding and cliff effects from CRA ratings changes that can amplify procyclicality and cause systemic disruption.”
International Treasurer will explore how credit agencies need to change and what alternatives exist outside of the big rater universe. Also notable is the FSB’s insistence that banks, market participants and institutional investors “make their own credit assessments, and not rely solely or mechanistically on CRA ratings.”
TIMPG
The TIMPG is meeting this week and has a lot of subjects to explore. On the agenda are a host of topics, including the economic outlook and the best portfolio structure and strategy to meet any coming challenges. Members will gain insight on sovereign hot spots and land mines, whether rates will rise and by how much as well impact of Dodd-Frank.
Members will also learn different ways to measure portfolio performance. How one measures the company’s portfolio depends on what is important to the company, such as total return vs. impact to the income statement, for example, or the current economic environment.
Following the meeting, International Treasurer will report on a few of these conversations and what they mean for treasury going forward.