Welcome to Corporate Treasury 101!
If you are new here, you will probably want to read our free eBook to understand what Corporate Treasury is, and what Treasury departments are responsible for! Click here to download it for free! 🙂
Welcome (back) to Corporate Treasury 101! Since this is not your first time here, you will probably want to read our free eBook to understand what Corporate Treasury is, and what Treasury departments are responsible for! Click here to download it for free! 🙂
In today’s dynamic financial environment, treasury management emerges as a crucial domain, evolving in response to the global market’s changing tides. The role of treasury in sub-investment-grade companies presents particular challenges, often redefining the usual finance rules. This article explores these unique challenges and the strategies employed to navigate them.
Our guide through this complex terrain is Karen Van Den Driessche, a treasury expert with an impressive 25-year career. As the treasurer of Ontex Group, she plays a key role in implementing the company’s Transform2Grow strategy. Additionally, her leadership as president of the Association of Treasury Experts (ATEB) in Belgium has significantly shaped the country’s treasury landscape.
This article aims to dissect the layered challenges treasurers face in sub-investment-grade companies and their strategies to navigate these hurdles.
We will explore:
The real-world implications of a sub-investment-grade rating for treasurers.
Innovative financing alternatives in the wake of downgrades.
Effective management of increased borrowing costs post-downgrade.
Tactics for lessening the impact of lowered credit ratings.
Crucial skills and tools for thriving in these rigorous settings.
The significant role of ATEB in advancing Belgium’s treasury sector.
Readers can anticipate gaining a well-rounded perspective on managing treasury under challenging circumstances, arming treasury professionals with essential knowledge and strategies for success in this demanding yet rewarding field.
Understanding Credit Ratings and Their Impact on Companies
What are Sub-Investment Grade Companies?
Sub-investment grade companies have low-quality credit and a high risk of default. Contrarily, investment-grade companies possess manageable debt, strong earnings potential, and a solid debt payment record. Companies rated triple B or higher by Standard & Poor’s and BAA or above by Moody’s receive investment grade status. Ratings below these thresholds indicate non-investment grade status.
The Role of Rating Agencies
Rating agencies like Fitch, S&P, and Moody’s assess company credit quality. A lesser-known agency, Scope, focuses on European corporates, providing a region-specific perspective. Whether from renowned or emerging agencies, these ratings play a crucial role in financial markets.
The Meaning and Dynamics of Credit Ratings
A credit rating is a forward-looking indicator of a company’s ability to meet its financial obligations, assessing the likelihood of defaulting on debt payments. Ratings are sensitive to changes in a company’s debt levels and earnings outlook. Improving ratings is a gradual process, requiring sustained positive performance over multiple quarters.
Changes in Credit Ratings
When a company’s credit rating changes, it usually moves by one notch, though drastic shifts are theoretically possible. Ratings can also be assigned a negative outlook, signaling potential downgrades if key metrics are unmet. Companies typically undergo annual reviews by rating agencies, with most having similar ratings from different agencies. Split ratings occur when agencies assess a company’s credit differently.
Multiple Ratings and Their Significance
Companies often seek ratings from more than one agency for broader investor appeal, as some investors require dual ratings to invest. While generally viewed similarly, major agencies vary in choice based on historical presence and market focus. The cost of obtaining these ratings influences the number of ratings a company pursues.
The Corporate Perspective on Credit Rating Agencies
Corporations engage in meaningful exchanges with credit rating agencies, typically every six months, to discuss financials, budgets, strategic plans, and specific expenses. These discussions are more detailed and open than public disclosures, offering agencies a deeper understanding of the corporation’s financial health.
Role of Corporates in Rating Reports
When rating agencies publish reports, corporations have the final say in the wording and disclosure of information, though not in the rating outcome. This process ensures that public reports reflect the corporation’s perspective accurately, maintaining a balance between transparency and discretion.
Independence and Interaction of Multiple Rating Agencies
Companies with ratings from multiple agencies conduct separate, independent discussions with each. They may share different extents of information with each agency, but the goal is usually transparency. Each agency has its criteria and methods for rating, focusing on consistent metrics like cash flow, liquidity, and debt.
Understanding Agency Methodologies
Corporations invest time in understanding the unique calculation methods of each agency. Agencies rely on publicly available information and their specific criteria, leading to potentially different ratings for the same corporation.
Rating Agencies’ Focus and Inquiry Depth
While the fundamental metrics different agencies consider are similar, the depth and nature of their inquiries can vary. The tenure of the analyst handling the corporate’s file and their familiarity with the business influence this variance.
Possibility of Having Three Ratings
Corporations may opt for a third rating, especially in cases of split ratings, to potentially leverage the higher of the three ratings. All ratings are public, allowing investors to access any of them. The decision to have multiple ratings involves strategic considerations and cost implications.
Implications of Credit Ratings for Treasurers
The primary challenge for treasurers in sub-investment grade companies is accessing liquidity and its associated costs. In investment-grade companies, liquidity is often readily available and affordable, but securing funding becomes significantly more difficult and expensive in sub-investment-grade companies. This shift in funding accessibility and cost is a stark reality that treasurers in sub-investment grade companies must navigate.
Operational Impact of Downgraded Credit Ratings
A downgrade in credit rating affects more than just financing costs. It impacts operational aspects such as:
Supplier Relationships: Suppliers may perceive increased risk and shorten payment terms, adversely affecting the company’s working capital.
Customer Perceptions: Customers might worry about the company’s ability to deliver products due to a higher risk of default. This concern can lead to clients diversifying suppliers, potentially resulting in a loss of business.
The Importance of Communication
Effective internal communication within the organization is crucial in managing the implications of a sub-investment grade status. Clear understanding across the organization about the risks and challenges associated with a higher likelihood of default is vital for operational stability and maintaining trust with stakeholders.
Day-to-Day Impact of Sub-Investment Grade Status on Treasurers
The fundamental role of a treasurer remains consistent, whether in a sub-investment-grade or investment-grade company. Essential responsibilities like ensuring funding access and managing liquidity do not change. The main difference lies in the liquidity constraints, which become more challenging in a sub-investment grade environment.
Transitioning to a Lower Credit Rating
A transition to a lower credit rating, often triggered by external factors like market downturns, intensifies the challenges for treasurers. This downgrade reduces access to alternative financing sources, like supply chain finance, and increases the difficulty of obtaining bank guarantees.
Immediate Effects of Downgrading
The moment a downgrade occurs, immediate effects manifest through reduced banking facilities and stricter conditions from financial institutions. Top of Form Banks may swiftly adjust intraday limits and credit terms, significantly impacting the company’s financial operations.
Navigating the Downgrade Process
Companies are typically informed of their rating downgrade a few days before it becomes public. This brief window allows them to anticipate and plan for the impending challenges, such as tighter banking conditions and altered supplier terms.
Strategies for Recovering from a Downgrade
Recovering from a downgrade involves several strategic steps:
Improving Business Performance: Focus on increasing earnings and reducing debts, tailored to the specific reasons for the downgrade.
Internal Efficiency: Seek ways to enhance efficiency and savings within the organization.
Revisiting Business Strategies: Consider divesting certain business units or altering investment strategies to improve financial health.
Role of Treasury in Recovery
The treasury department can contribute significantly to recovery efforts by:
Efficiently managing treasury operations and debt repayment.
Balancing fixed and floating debts to mitigate impact.
Assisting in managing risks like commodity prices and foreign exchange fluctuations.
Enhancing communication within the organization ensures everyone understands the importance of improving cash positions and operational efficiency.
Effective internal communication, down to the production line, about the significance of cash and operational efficiency is crucial for overall organizational improvement. This comprehensive approach helps a company navigate the challenges of a lower credit rating and work towards improving it.
Challenges and Rewards in Treasury Management at Sub-Investment Grade Companies
Managing treasury in a sub-investment grade company presents unique challenges and opportunities. Key challenges include:
Managing External Debts: The uncertainty around refinancing existing debts, given the potential for limited liquidity access and higher costs.
Making Investment Choices: Balancing the need to invest in the business against the desire to enhance treasury efficiency with better systems and automation.
Dealing with Credit Limit Reductions: Handling reduced credit limits creates operational inefficiencies, frustration within the team, and credibility issues with suppliers due to delayed payments.
Finding Positives in Difficult Situations
Despite these challenges, there are rewarding aspects:
Increased Importance within the Organization: The treasury department gains recognition and involvement in critical organizational decisions.
Broader Learning Opportunities: Managing working capital offers a deeper understanding of various business areas, like inventory planning and customer-supplier relationships.
This complex role in treasury management necessitates balancing practical constraints with the opportunity to drive impactful organizational changes, making it both challenging and rewarding.
Skill Development in Challenging Treasury Environments
The first step for treasurers considering a shift to more challenging environments is self-assessment. Understanding whether one can thrive in such settings is crucial. It requires resilience, adaptability, and the ability to remain pragmatic under pressure.
Key Skills and Perspectives
In challenging treasury roles, essential skills and perspectives include:
Pragmatism and Perspective: Handling situations pragmatically and not taking challenges personally.
Effective Communication: Engaging in open communication and listening actively, as treasury, is a collaborative role within the organization.
Making Tough Choices: Navigating situations without perfect solutions and making the best possible choices.
Crisis Management: Developing skills in managing crises, applying the 80-20 rule for efficiency.
Expanding Horizons Beyond Treasury
Such roles offer opportunities to broaden one’s skill set and knowledge base, potentially paving the way for roles outside traditional treasury functions. They demand an openness to learning and an interest in exploring various business aspects.
Tools Used in Sub-Investment Grade Environments
Tools like SAP and Excel are commonly used in a sub-investment grade environment. While Excel is versatile, it carries human error and data loss risks. Despite the absence of fully integrated Treasury Management Systems (TMS), companies use available technology, such as SAP modules for in-house banking and interfaces for bank statements and payment files.
Leveraging Technology for Better Visibility
Adopting new technology skills is increasingly important. For instance, using Power BI models to enhance visibility on working capital connects to existing platforms like PPC and SAP, providing valuable insights for senior management.
This environment demands a blend of technical know-how, strategic thinking, and the ability to navigate resource constraints, making it both challenging and enriching for treasury professionals.
Adapting Treasury Management in Sub-Investment Grade Companies
Treasurers often need to find creative solutions with limited resources in sub-investment grade environments. Utilizing specialized FinTech tools for particular issues can be more beneficial than implementing a full-blown Treasury Management System (TMS). The key is to identify the specific problem and then find the right tool that addresses it effectively without requiring extensive implementation.
Approach to Tool Selection
The principle of problem-solving guides the approach to selecting tools in such environments. Treasurers should identify their core issues and seek tools that offer a solution. This method contrasts with acquiring tools first and finding problems they can solve, a common practice in more mature treasury settings.
General Advice for Treasurers in Sub-Investment Grade Environments
The overarching message for treasurers in sub-investment grade companies is to embrace the challenges and learn from them. Working in such environments can be demanding but also rewarding. It provides an opportunity to learn extensively, requiring an understanding the specific environment and striving to excel within its constraints.
In summary, managing treasury in a sub-investment grade company involves creatively using specialized tools, focusing on problem-solving, and embracing the learning opportunities that come with the challenges. The experience gained in such roles is invaluable, contributing significantly to a treasurer’s professional growth and adaptability.
Role and Activities of the Association of Treasury Experts (ATEB) in Belgium
ATEB, with a history spanning over three decades, was founded to formalize the exchange of ideas and information among treasury professionals. As the president for the last eight years, the focus has been on fostering an environment for knowledge sharing and professional growth in the treasury field in Belgium.
Activities and Events Organized by ATEB
ATEB actively organizes various events to facilitate learning and networking among treasury professionals:
Monthly Events: Regular in-person events, shifting to webinars during the COVID period.
Treasury Summit: A semi-annual event providing in-depth insights into treasury topics.
Specialized Events: Including tech days featuring vendors and other stakeholders.
Networking Opportunities: Emphasis on post-event networking for experience sharing and relationship building.
Informal Quarterly Gatherings: Less structured meetups focusing on casual interactions.
Corporate Snapshot Events: Corporate-only events for sharing specific challenges and experiences, often leading to the formation of focused workgroups.
Openness in Information Sharing
ATEB ensures a comfortable environment for treasurers to share challenges and solutions, especially in corporate-only settings openly. Discussions can range from specific operational issues, like RFPs with banks, to broader strategic topics. This openness has been a key element of ATEB’s success.
Historically exclusive to corporate members, ATEB expanded its membership to include non-corporates about five years ago. This expansion was carefully managed to maintain a balance, ensuring continued corporate-only events for open discussions among treasurers.
Balancing Corporate and Non-Corporate Members in ATEB
Integrating non-corporate members, such as banks, vendors, and insurance companies, into ATEB was driven by the desire to enrich the treasury ecosystem with diverse insights. The advantages include:
Broader Perspective: Non-corporates offer valuable insights, contributing to a more well-rounded view of the treasury landscape.
Enhanced Information Exchange: Interaction with non-corporates provides a deeper understanding of various aspects of the treasury world, from banking viewpoints to system vendor methodologies.
Challenges and Solutions
However, integrating non-corporates also presented challenges:
Balancing Commercial Interests: The main challenge was ensuring that non-corporate members contributed constructively without overly focusing on selling their products.
Maintaining Professional Exchange: Clear boundaries were set to ensure that discussions remained informative and not sales-oriented.
Enforcement and Self-Regulation
Enforcing these guidelines has been necessary to maintain the association’s focus. Occasional removal of overly aggressive sales-oriented members, whether individuals or companies, has occurred. The treasury community in Belgium, being relatively small and interconnected, naturally leans towards self-regulation, with members collectively ensuring that interactions remain professional and beneficial for all.
The Belgian Treasury Landscape and ATEB’s Role
Belgium’s treasury community, though tight-knit, encompasses a wide range of organizations. This includes large international firms, medium-sized companies, and smaller businesses that may not have a dedicated treasurer but still engage in treasury activities.
ATEB’s Membership Dynamics
ATEB, currently boasting around 200 members, includes individual and company memberships comprising corporations and non-corporates. The diversity of its membership reflects the multifaceted nature of the treasury profession in Belgium.
Expanding ATEB’s Reach
ATEB aims to include professionals from smaller organizations who handle treasury functions as part of their finance roles. This initiative reflects ATEB’s commitment to supporting treasury activities across various scales and complexities within the business sector.
Challenges in Broadening Membership
Reaching out to potential members in smaller organizations poses a challenge, given ATEB’s voluntary nature and the time constraints of its members. Despite these limitations, ATEB strives to engage a broader audience and enhance its support for the treasury community.
The impact of credit ratings on organizations and the hurdles treasurers face, particularly in sub-investment grade situations, are key takeaways. Karen Van Den Driessche’s expertise has illuminated the crucial role of effective communication in managing these complexities.
Treasurers in challenging environments encounter significant obstacles but also find opportunities for inventive solutions and skill enhancement. Facing these challenges head-on can lead to substantial professional development.
The Association of Treasury Experts (ATEB) in Belgium plays a vital role in this landscape, creating a platform for knowledge exchange and professional advancement. The integration of non-corporate members has broadened perspectives while maintaining a professional environment.
The president of ATEB, Karen Van Den Driessche, encourages Belgian listeners, particularly those unfamiliar with the association, to consider joining. Emphasizing the group’s enjoyable and professional atmosphere, ATEB is highlighted as a valuable network for gaining knowledge and connecting with peers in the treasury field. Members often share resources and advice, such as treasury policies, facilitating practical assistance in day-to-day operations.
Regarding treasury management in companies undergoing rating transitions, it’s acknowledged that the transition phase presents the most significant challenges. Navigating this period requires adaptability and strategic thinking. While still demanding, the steady state following a transition is generally more manageable.
Frequently Asked Questions (FAQ)
What are the immediate effects of a credit rating downgrade?
When a company’s credit rating is downgraded, it often experiences immediate effects, such as reduced access to banking facilities and stricter credit terms from financial institutions. Banks may swiftly adjust intraday limits and credit conditions, impacting the company’s financial operations.
What strategies can help a company recover from a credit rating downgrade?
Recovering from a credit rating downgrade involves several strategic steps. These may include improving business performance, reducing debts, enhancing internal efficiency, and revisiting business strategies. The treasury department also plays a crucial role in managing risks and communicating the importance of improving cash positions and operational efficiency.
What skills are essential for treasurers in sub-investment-grade environments?
Treasurers in sub-investment-grade environments require a specific skill set. These include pragmatism in handling challenges, effective communication to collaborate within the organization, the ability to make tough choices when no perfect solutions exist, and crisis management skills, applying efficiency principles in crisis situations.
What tools are commonly used in sub-investment-grade environments?
In sub-investment-grade environments, treasurers commonly rely on tools like SAP and Excel for treasury management. While Excel is versatile, it carries risks like human error and data loss. Despite the absence of fully integrated Treasury Management Systems (TMS), companies leverage available technology such as SAP modules for in-house banking and interfaces for bank statements and payment files.
How can treasurers adapt to limited resources in sub-investment-grade companies?
Treasurers in sub-investment-grade companies often need to find creative solutions with limited resources. Instead of implementing comprehensive Treasury Management Systems (TMS), they should identify specific issues and utilize specialized FinTech tools that effectively address these problems without extensive implementation requirements.
If you liked the article, why not spreading the Treasury word? :)
To thank you, receivefor free "The Corporate Treasury eBook", breaking down all our learnings from 120+ episodes!
Learn more about basic (and advanced) Treasury concepts
Get the best examples from 120+ podcast episodes & interviews
Understand all the functions covered by Corporate Treasury
We hate spam: your email address will never be shared or sold. By signing up here, you will receive articles, videos, commercial offers, podcasts, and other tips to help you with Corporate Treasury and anything that can directly or indirectly assist you with it. See full legal notices at the bottom of the page. You can unsubscribe at any time.