As the bank debt and bond markets are experiencing extreme volatility, Redbridge’s treasury and finance advisory team has listed six lessons learned from the 2008/2009 financial crisis to help finance departments in their primary mission: managing corporate liquidity.
1. Ensure the availability of financing
Make sure that credit facilities negotiated with your funding partners are available. Consider drawing on your facilities for extended borrowing. Give preference to long drawdowns. For those who are currently in negotiations, finalize the arrangement as soon as possible.
2. Assess the impact of the crisis and communicate with your lenders
Deteriorating economic conditions mean that you must revise your budget. Communicate proactively with lenders on how you evaluate and manage the impacts of the coronavirus crisis, the oil markets and the rising economic uncertainties.
3. Anticipate the potential deterioration of your financial ratios
Verify the covenants in each of your facilities and run scenarios to assess potential breaches. If potential scenarios might lead to a breach, begin the discussion with your banks and credit providers now.
4. Manage your counterparty risk
Bank credit default swaps (CDS), which are a proxy for banks’ funding costs, tripled over the last few days. Review the group’s exposure to each banking counterparty and assess the ability of each funding partner to support your business through any potential stress scenarios.
5. Keep abreast of debt market developments on a daily basis
Watch the market for liquidity (e.g. LIBOR-OIS spreads, repo markets). Anticipate liquidity squeezes for banks, especially banks whose primary funding comes from a different market. While the regulatory changes implemented since the last crisis were meant to address the lessons learned, expect issues to arise from unanticipated areas. Keep in mind that a flight-to-quality can also prove beneficial for the best-rated borrowers.
6. “Cash is king” – Optimize your treasury management
Accelerate the implementation and conclusion of projects that will enable the company to better concentrate cash (cash pooling), improve cash generation (WCR optimization) and increase visibility on available cash (cash forecasts).
If you have any questions, please contact our debt advisory team. As always, we are here to help.