Managing Liquidity at a Time of Crisis

Throughout a period of unparalleled market and economic uncertainty, combined with heightened levels of personal anxiety, treasurers have stepped up to help restore certainty and confidence in their organisations, and position their organisations for a ‘new normal’ ahead. Taking rapid steps to maintain liquidity across the business has been central to these efforts.

While the COVID-19 crisis is not a financial crisis, organisations of all sizes and in many sectors are experiencing an immediate revenue impact and some are fearful for the future. Consequently, organisations have simultaneously sought to draw down on bank facilities and other sources of liquidity, with the result that market liquidity has dried up, and the cost of borrowing has risen sharply.

“As treasurers see their peers in other organisations drawing down on facilities, there is a tendency to do the same, leading to somewhat of a herd mentality, and creating further market liquidity constraints.” — Francois Masquelier, EACT

Some companies are choosing to delay supplier payments to protect working capital, but this behaviour creates a negative impact that cascades through supply chains, creating supply chain fragility and damaging relationships.

The Fight for Liquidity

In some cases, the urgent search for liquidity has not necessarily resulted from an immediate liquidity gap, but the lack of visibility over group funding needs and possible future scenarios means it has been difficult to anticipate when and where liquidity gaps might appear.

“One of the reasons why treasurers have reacted – and in some cases over-reacted – to the COVID-19 crisis by building up liquidity levels is that their cash flow forecasting has not been good enough. Those who have forecasts have found that they are not fit for purpose, without sufficient scenario analysis and stress testing. While many larger corporations have liquidity structures such as cash pooling in place, new restrictions on participating entities may have emerged, driven by government support measures requiring cash to remain in country. Local management behaviour, such as avoiding centralizing all the cash to the centre, has also made it more difficult to support group liquidity” — Didier Vandenhaute, Partner, PwC

Bank facilities have been the first port of call for many treasurers, but there are risks associated with this approach. Many bank lines are uncommitted, which means that banks can cancel these without notice. Similarly, committed lines include covenants which could be at risk as companies draw down on their credit lines, invest the proceeds but do not generate sufficient EBITDA to avoid covenant breach.

“Companies across all regions are drawing down on existing bank facilities, but although some are also exploring alternative forms of credit, such as non-recourse financing, many are not. While overdraft facilities appear easy and convenient access to liquidity, treasurers need access to cash to repay these debts. Conversely, other forms of financing could be complementary and increase the resilience of the wider financial supply chain” — Jan Rottiers, Head of Liquidity Management, BNP Paribas

Wider liquidity strategies Governments globally are also taking various approaches, such as loan guarantees, to help shore up their economies and encourage a bounceback to more normal operations as restrictions are lifted.

“Many governments are introducing measures such as loan guarantees to support businesses and protect jobs. While these differ across countries, some national schemes are likely to appear attractive. Before applying, however, treasurers need to understand the terms of these schemes, such as the duration and conditions. In most cases, loans (partly) protected with these guarantees must be used for working capital purposes, with conditions on the activities they intend to support” — Jan Rottiers, BNP Paribas

In some cases, companies are already cutting costs as they lack the necessary visibility of cash. Some will also be looking to see what assets across the business could be liquidated.

“We’re seeing private equity firms knocking on the doors of companies in difficulty and seeking to buy assets at a discount. In some cases, companies will feel compelled to sell – and indeed, this may be a valid source of funding, but it is not the ideal time to do so, if at all possible” — Francois Masquelier, EACT

A Pragmatic Approach to Cash Visibility

Whatever approach treasurers take to reduce their liquidity risk and prepare for an uncertain period ahead, addressing the gaps in visibility over cash and liquidity is essential. Given the immediacy of the crisis, and the scale of its impact, treasurers need to achieve this as quickly as possible.

“Treasurers in many organisations are taking rapid steps to increase their visibility and control over liquidity, but the way in which they do this will differ depending on the degree of maturity in their use of technology. In some cases, treasurers will want to adjust their daily reporting, either for their own purposes or to meet new demands from senior management.

Depending on their systems, however, this is not necessarily straightforward, particularly if data is sourced from multiple places. We are seeing a number of companies, implementing ad hoc, cloud-based solutions that bring data together more quickly than modifying existing reporting and integration. This approach may not be the ideal, and some functionality on which treasurers might otherwise expect, such as drill down on individual transactions, may not be available. It can be a quick way to monitor business-critical KPIs and identify where cash is accessible, or where trapped, across the business” — Christian Mnich, SAP

Rethinking Liquidity for a 'New Normal'

As some countries start to plan for the relaxation of lockdown rules and a gradual return to more normal levels of economic activity, treasurers will be starting to consider the transition from the original shock of the crisis to managing the business in a ‘new normal’ environment. As this happens, how might treasurers start to think differently about liquidity?

Cash visibility. Prioritise systems and process improvements so that treasury has timely, accurate and complete visibility over cash and liquidity across the group

Liquidity sources. Review and seek to diversify liquidity sources, whether bank credit, supply chain financing and/ or accessing capital markets

Cash flow forecasting. Redouble efforts to improve cash flow forecasting, an initiative that is now likely to have greater support from senior management

Treasury centralisation. Review the current use, and future potential of centralised cash and liquidity management structures such as cash pooling, in-house banking, and payments and collections ‘on behalf of’ group entities, with a view to including as much of the group into these structures as possible

Working capital drivers. Emphasise to senior management the importance of treasury engaging with, and influencing more directly the drivers of working capital, including accounts payable and receivable, sales and procurement. With greater influence over working capital, treasurers are also in a better position to leverage supply chain financing opportunities.

“After the crisis, many treasurers are likely to review bank relationships, recognising those banks that have offered the greatest support during the crisis, and emphasizing the value of loyalty and trusted relationships. On the other hand, treasurers will still need sufficient diversification to access credit facilities and mitigate counterparty risk. A proper wallet sharing approach will help drive these decisions.” — Didier Vandenhaute, PwC

The COVID-19 crisis has illustrated the value of liquidity and risk management and the role of the treasurer. As they keep their organisations liquid and viable over a period of unprecedented uncertainty, and equip the business for a ‘new normal’ ahead, treasury’s role is likely to be more widely recognised and respected than ever.

2020 is the fifth anniversary year of the Journeys to Treasury partnership, comprising BNP Paribas, European Association of Corporate Treasurers (EACT), SAP and PwC. We are marking this special alliance with a ‘Journeys to Treasury Bitesize’ series, providing topical insights and support for treasurers as they navigate this challenging period.