The SVB Downfall: Lessons in Financial Risk Management and Corporate Finance from Lisa Dukes
In the ever-evolving world of finance, keeping up with changes (like SVB Downfall) and understanding intricate dynamics is crucial. It’s like navigating a ship in uncharted waters – you need the proper knowledge, tools, and guidance. So, how do you master these tides? How do you make informed decisions that ensure your organization’s financial health? We’ve got the answers right here for you.
In today’s article, we are privileged to hear from Lisa Dukes, an industry heavyweight with extensive experience in corporate finance, derivatives, and treasury innovation. As a co-founder of Dukes & King, a boutique dedicated to corporate finance and risk management, Lisa’s innovative approach helps companies achieve their strategic objectives. Her insights will undoubtedly sharpen your treasury management skills. Lisa’s involvement in prestigious committees like the UK’s Foreign Exchange Committee and the Global Ethics Committee showcases her knowledge and influence in the treasury field.
Whether you’re a seasoned professional or a newbie in the world of treasury, this article promises to equip you with practical tips and expert advice that will make your journey a whole lot smoother.
By reading this article, you can expect to learn the following:
- What Happened with The SVB Downfall
- The Impact and Importance of Financial Risk Management
- The Main Lessons That Corporate Treasurers Can Learn from This Event and What They Have to Do in The Future
- What Lisa Do in Details with Dukes & Kings and Her Role with The Ethics Global Code of Conduct
- And Much More.
So, Let’s dive in and explore the invaluable insights from Lisa’s recent podcast interview, broken down into easily understandable nuggets of wisdom.
What Exactly Happened with the Silicon Valley Bank?
The Silicon Valley Bank (SVB) event was a complex situation involving multiple elements, including poor management of interest rates and lax regulatory oversight. To make it easier for everyone to understand, let’s break down what Lisa described:
SVB, a specialized bank focused on tech companies, had a large and concentrated deposit base. During the post-pandemic years, their deposits significantly increased. The bank invested a substantial portion of this windfall into US government bonds. Although these bonds are generally low-risk, SVB failed to use interest rate swaps to hedge against potential interest rate risks.
The problem arose when interest rates began to rise sharply, causing the bond values to decrease. At the same time, a tech recession occurred, forcing depositors to withdraw their money. When SVB had to start selling these bonds to honour the withdrawal requests, it cemented their losses. As news of SVB’s troubles spread, more depositors began withdrawing their money, resulting in a “run on the bank.” This means that a large number of people were trying to withdraw their money at the same time, creating further instability.
Despite SVB being the 16th largest bank in the US, it wasn’t recognized as a globally systemically important bank. However, the effects of its collapse were felt worldwide. It created a ripple effect leading to the rescue of Credit Suisse, a more strategically important bank, a few days later.
Another intriguing factor contributing to the debacle is the accounting treatment of assets. There’s a notable difference in accounting treatments for assets held to maturity versus those available for sale. Only the latter requires disclosing gains and losses in the accounts, which may have contributed to the failure to hedge, leaving SVB massively exposed to a leveraged interest rate position when the rates increased.
What Are ‘Accounting’ and ‘AFS’?
When Lisa referred to ‘accounting’ and ‘AFS,’ she explained how to record assets. AFS, or Available for Sale, and Held-to-Maturity are two categories of asset treatment.
Here’s what you need to know:
- Held-to-Maturity: If an asset is classified as ‘held-to-maturity,’ it sits on the balance sheet until the end of its life. Suppose you sell even a single bond marked ‘held-for-maturity,’ all of which have to be realized as available for sale.
- Available for Sale (AFS): In this category, any gains or losses must be disclosed on the balance sheet, resulting in potential profit and loss volatility.
The difference between an asset’s market value and accounting value could potentially result in either a gain or loss when the asset is sold, depending on its value at the time of the sale.
In other words, when you buy an asset, its value can change over time. If you plan to sell it before it matures or reaches the end of its life, you ‘mark to market’ that position on your accounts. This means you compare the price it’s currently valued against how much you bought it for. If you hold it to maturity, you don’t have to ‘mark to market’ that position.
In summary, the situation with Silicon Valley Bank was a combination of many elements, including failure in interest rate management, inadequate regulatory oversight, and accounting practices. These factors aligned to create a ‘perfect storm,’ leading to the bank’s collapse.
How are Bonds Declared, and What is Financial Risk Management?
Hussam asked an interesting question about the point at which bonds are declared as ‘held to maturity’ or ‘available for sale.’ Lisa clarified that you have to define this at the moment of purchase. You can’t change this designation during the bond’s course.
Let’s elaborate on that a bit more:
When you buy bonds, you must decide how to account for them from the start. You can’t purchase a bond and then decide later whether to mark it as ‘available for sale’ or ‘held to maturity.’ This choice is important because it affects how you report any gains or losses from that bond in your accounts.
A Refresher on Financial Risk Management
Guillaume asked Lisa to give a refresher on what financial risk management is. As Lisa explained, financial risk management involves several steps:
- Identifying potential risks includes various types of risks an organization might face. It could be market risks such as foreign exchange (FX) rates, interest rates, or inflation. It could also involve credit, liquidity, operational, or legal risks, among others.
- Analyzing the risks: After identifying the potential risks, the next step is to analyze and measure them. This could involve determining the likelihood of a risk, how it would impact the organization, and what can be done to mitigate it.
- Managing the risks: This step involves developing strategies to reduce the risks to an acceptable level.
- Reporting on the risks: Regardless of whether any action is taken, all risks should be reported. This can help keep everyone in the organization informed about the potential risks and what is being done to manage them.
Lisa also mentioned the importance of regularly reviewing and updating the risk management policy. This is crucial because markets can change quickly, and a policy that was suitable before may become outdated. She advised having a flexible policy that can be adapted to meet new market challenges.
SVB’s Risk Management Failure and Global Interest Rate Trends
Guillaume questioned Lisa about the Silicon Valley Bank (SVB) event, asking if the failures in risk management could be linked to the absence of certain policies. Lisa highlighted that SVB did have interest rate hedges, but there was a mismatch between customer deposits and their longer-term investments. The bank became vulnerable to market moves and increased volatility without a proper risk management approach to match the difference between these two products.
So, let’s dissect that a bit more:
- The mismatch between deposits and investments: SVB had a mismatch between the short-term deposits from customers and their long-term investments. These two types of trades have different tenors, meaning they operate on different timescales, and each tenor comes with its interest rate assumptions.
- Lack of proper risk management: Any changes in the market could lead to significant volatility without a risk management approach to match the difference between these two products. That’s what seems to have happened with SVB.
The Role of Interest Rates
Then, Hussam asked if the interest rates were the main reason behind the problem. Lisa agreed that interest rates played a significant role, especially because as interest rates increase, the value of longer-dated US bonds decreases. This is something that SVB appears not to have hedged effectively.
Let’s understand this further:
- Role of interest rates: Changes in interest rates can have a big impact on the value of bonds. When interest rates go up, the value of existing bonds, especially long-term ones, decreases. If a bank or company isn’t using derivatives or other methods to manage this basis risk, they can become exposed to significant losses.
- Zero interest rate environment: For many years, the world has been in a near-zero interest rate environment. This situation might have made some banks complacent about managing their interest rate risk.
Global Trends in Interest Rates
Lastly, Lisa was asked about the global trends in interest rates. She mentioned that interest rates have seen the most dramatic rises in over five decades due to high inflation. This has led to increased volatility and changes in the capital structure and derivative choice approach.
Here’s a brief look at what’s been happening:
- The rise in global interest rates: Over the last few months, global interest rates have risen dramatically. This is in response to high levels of inflation that have reached multi-year highs.
- Inflation: Inflation has been high due to several factors, including supply chain pressures, weaker currencies in non-USD countries, and commodity volatility. If inflation lasts long, people’s expectations can increase, leading to more inflation.
- Impact of high inflation: High inflation can impact the economy in various ways. One common response by governments and central banks is to increase interest rates and tighten money supply and credit conditions.
In conclusion, the SVB case is a cautionary tale for other banks and financial institutions. Effective risk management, including interest rate risk management, is crucial to ensure the stability and success of an organization. Meanwhile, the ongoing changes in global interest rates underscore the importance of keeping abreast of economic trends and adapting strategies accordingly.
Why Does Market Volatility Increase with Rising Interest Rates?
If you’ve been wondering why volatility – which refers to unpredictable and sudden changes in market prices – tends to go up when interest rates rise, you’re not alone.
Lisa explains that volatility isn’t just linked to interest rates; it’s a sign of market uncertainty. Think of it like the market’s weather forecast. It can predict the likelihood of ups and downs for all sorts of things, not just interest rates but also foreign exchange rates and other financial markets. The higher the volatility, the greater the ‘risk premium’, which is the additional return expected by investors for taking on more risk.
When there’s high volatility – a turbulent weather forecast, if you will – it becomes more expensive to buy options. Options are financial instruments used to hedge or protect against future price changes. They’re like an insurance policy against adverse market movements. But as insurers charge more when there’s a higher risk of trouble, so do options become costlier when volatility increases.
But options are quite cheap when there’s low volatility, and the market’s weather forecast is calm. This is because there’s little expectation of significant market changes.
To make it simpler, high market volatility is like a warning sign of increased uncertainty. Tools used to protect against this uncertainty, such as options, become more expensive when the market is uncertain. The providers of these services, like any good insurance company, charge more when risks are higher.
The SVB Case: A Story of Inflation, Interest Rates, and Risk Management
Now, let’s get back to the SVB case and try to understand it from a bird’s eye view.
Inflation has been rising globally due to various factors, such as the pandemic and geopolitical tensions. Governments and central banks have been raising interest rates in response to growing inflation.
SVB had invested in long-term bonds when interest rates were low, which seemed smart. However, they didn’t fully protect themselves against rising interest rates. As interest rates began to climb, the value of their bonds fell, causing a ripple effect of worry and triggering customers to withdraw their money.
It’s important to note that banks don’t always hold all their customers’ money. They invest some of it, as SVB did with bonds. When customers rushed to take their money out, SVB was bound. They had to sell the bonds at a lower price than they had bought them for, which led to losses.
Additionally, SVB faced an unfortunate timing issue. A tech recession hit, and SVB’s heavily tech-based customer base all needed their money back simultaneously. This created a domino effect of challenges for SVB, leading to a rapid spiral of withdrawals and losses.
What Could Have Been The Correct Interest Rate Risk Management Strategy?
Many people often ask after a financial crisis: “What could have been done better?” In the case of SVB, the question revolves around better management of interest rate risk.
Lisa explains that interest rate risk management is all about managing the risk associated with capital. In this context, ‘capital’ could mean cash, debt, or even a mix of both.
One way to manage this risk is through a ‘swap’. Imagine you have a debt that charges a floating or changing interest rate that lasts for three years. If you want more predictability, you might ‘swap’ that floating rate for a fixed rate. Or you might do the opposite if you prefer a bit of risk with the possibility of lower rates.
The key is understanding your ‘underlying exposure’, a fancy way of knowing how much risk you’re exposed to. Then, you match that exposure with a hedge, another financial tool designed to protect against risk to remove volatility or big swings in value.
Interest rate risk management isn’t a set-it-and-forget-it type of task. It needs to be assessed and modified constantly to keep up with the changing financial markets and your business’s direction.
Components of a Comprehensive Risk Management Strategy
Here are some components of a comprehensive risk management strategy:
- Primary Risk Management: This includes managing the main risks you face, such as interest rates, foreign exchange rates, inflation, and others.
- Credit Line Risk Management: This is about ensuring you can continue to hedge your risks going forward.
- Counterparty Risk Management: You need to understand the risks involved with all the other parties you’re dealing with, whether they are your customers, stakeholders, or for corporations, the banks.
- Liquidity and Refinancing Risk Management: It’s important to understand these risks and plan to manage them.
- Strategy and Economic Risk Management: Finally, you must also manage the risks of your business strategy and wider economic conditions.
One important point is that credit line utilization can be high for longer-dated swaps. Therefore, careful consideration and balance are needed when using these financial instruments.
Remember, risk management isn’t just about dealing with the present. It’s also about preparing for where the business could be and shaping strategy accordingly. Even though each industry, like banking or corporations, may have unique risk management methods, managing risks stays the same: understanding the risk, planning for it, and staying ready for change.
What Wider Risks Should Be Considered in Capital Rate Management, and Are There Any Opportunities?
In any financial scenario, it’s crucial to consider a broader spectrum of risks beyond the immediate and obvious ones. Lisa’s response here provides a holistic perspective on the issue, identifying two significant wider risks: inflation risk and cross-currency interest rate risk.
Inflation risk is the danger that the purchasing power of your cash might reduce due to rising prices. In other words, the money you have today could buy less in the future if inflation rises. All businesses should remember it, especially when making long-term financial plans.
Cross-currency interest rate risk refers to the risk that changes in interest rates in different countries could affect the value of investments. If your business operates in multiple currencies, this is a risk you need to manage carefully.
Like with interest rate risk, the aim is to manage these exposures efficiently and in line with your business strategy. But, of course, it’s not always simple. There are often other factors and relationships, like opportunities (or sometimes necessities) in cross-currency and inflation.
Can there be opportunities in such risky situations?
The answer is “Absolutely.” Wherever there are risks, there are opportunities. For instance, if your company has lots of cash and interest rates are rising, you can deposit that cash and earn a better return. That’s great news for your bottom line.
Similarly, if markets are volatile and inflation is at an all-time high, it might make sense for businesses exposed to inflation risk to lock it in now.
As a risk manager, it’s essential to manage risks effectively and be proactive in seizing market opportunities as they arise. Whether it’s a leveraged or low-levered business, it’s important to ensure liquidity, manage financial covenants, and understand the future of P&L (profit and loss).
Remember, the goal isn’t just to survive these risks. It’s to use them to your advantage, enabling your business strategy to thrive in all circumstances. The essence of successful risk management lies in maintaining a position of strength to manage risks and capture opportunities as they appear.
What Are the Wider Market Implications for Banks and Corporates Out of Recent Events?
Let’s dive into Lisa’s insights about how recent events might impact the broader market, especially banks and corporates.
Accelerated Credit Tightening Cycle
First, there’s a strong chance that these events will speed up the credit tightening cycle. Simply put, it could become harder for businesses, particularly those with less favourable credit, to borrow money. They may have to pay more to borrow or find less money available to lend.
Wider Credit Spreads
Moreover, it’s expected that credit spreads will widen. To put it simply, the cost of borrowing for corporations could increase. This change underlines the need for businesses to think about cutting their risks, especially related to their near-term capital needs.
The Role of Derivatives
Lisa brings up the potential role of derivatives in this de-risking process. For those who might not be familiar, derivatives are financial contracts. Their value comes from an underlying asset, like stocks or bonds. These can be used to protect against risks or to speculate on future price movements.
Lower Swap Rates for Certainty
Lisa’s team has been exploring certain interest rate structures for corporates. They aim to provide near-term certainty at swap rates lower than current ones. This move could benefit many businesses, especially those with high leverage, near-term financing needs, or lower credit strength.
Reflection on the 2008 Financial Crisis
Hussam asks Lisa if the tightening credit conditions could lead to a situation similar to the 2008 financial crisis, where banks stopped lending altogether. Responding to Hussam’s question, Lisa acknowledges the importance of avoiding complacency and suggests that recent bank failures could serve as a wake-up call for regulators. She asks if the current regulations are still suitable given the rapid technological advancements. The ease of withdrawing money today could intensify the problem if a bank fails.
The Impact of a Non-systemically Important Bank Failure
The recent stress on Credit Suisse’s market price, despite not being a systematically important bank, shows that the impacts of such events can spread far and wide. We will have to wait and see whether the regulatory landscape will change in response to these events.
How are Corporate Treasurers Responding to Recent Events and Their Impact on Counterparty Risk?
In this part of the discussion, Hussam, Guillaume and Lisa delve into the concept of counterparty risk, particularly from the perspective of a corporate treasurer. Let’s break it down.
Counterparty Risk: The Risk that Banks Pose
Hussam makes an interesting observation. He mentions that a bank is essentially a third party for a corporate treasurer, making them a ‘counterparty’. When a bank fails, it could mean that the risk associated with this counterparty has changed.
Lisa confirms this and urges the importance of proactive planning. She mentions recent failures, such as SVB and various crypto failures, share common themes – a concentrated customer base and arguably poor risk management.
A Wake-up Call for Risk Management
Lisa suggests treating these failures as a wake-up call. Even if a bank’s downfall doesn’t directly affect a company, it still provides an opportunity to plan for future events that might.
The Frequency of Bank Failures
Contrary to common belief, bank failures are surprisingly common, Lisa notes. Since the turn of the millennium, over 500 banks have failed in the US alone. What made recent failures notable is the size of the banks and the time elapsed since the last failure, making them exceptional cases.
Reviewing Counterparty Procedures
Lisa emphasizes the importance of corporates reviewing their counterparty procedures. While acknowledging that some level of risk will always be accepted, it is essential to be prepared. Various factors come into play, such as the bank’s ratings, cash concentration, and diversification between counterparties and territories. Secure methods of holding cash, like repos, are also worth considering.
Updating Existing Data and Evaluation
Following significant events like the SVB failure, Lisa advises treasurers to update their data and evaluate whether new information is material. They can do this by performing a review, potentially using a traffic light system. They should also consider factors such as Credit Default Swaps (CDS) behaviour, share and bond price performance, short-term and long-term rating outlooks, and bank capital and solvency ratios.
Taking Action If Needed
After this review, action should be taken if a material risk is identified. This might include moving cash to counterparties or territories with less perceived risk, reviewing bilateral lines of credit, or holding less cash through various strategies such as paying suppliers early.
Reassessing Interest Rate Risk
In response to recent events, Lisa suggests that corporates should reassess their acceptable levels of interest rate risk. This involves examining the sensitivities associated with operational forecasts and interest ranges. Interest rate volatility remains high, and rates could still increase, meaning a thorough reassessment is crucial.
Refinancing Risk and Working Capital Levers
Lisa recommends that corporates look at refinancing risk, considering interest rates and counterparty aspects. She suggests assessing upcoming maturities and the general need for refinancing in the next few years. To mitigate risk, she suggests exploring actions such as term extensions.
Additionally, Lisa highlights the importance of considering working capital levers to boost liquidity. With elevated rates, the cost of capital tied up in working capital becomes significant. Understanding this and the terms of any agreements is key to knowing the impact of operational and financial covenants if an event occurs.
Enhancing the Resilience of Corporate Treasury Departments
Guillaume asks how corporate treasury departments can increase their resilience and overall influence within a company. Lisa’s advice is straightforward: preparedness. A more active and proactive risk management approach becomes invaluable with a shift from a low-interest rate environment.
Lisa encourages treasurers not just to accept the status quo but to take a fresh look at their approach to ensure preparedness for any eventuality. She emphasizes running sensitivities on risks and opportunities, including additional stresses that might not usually be considered.
Is There a Difference in Bank Regulation Between the US and the UK?
Hussam asks Lisa if there is a significant difference between bank regulations in the US and the UK; Lisa explains that while she hasn’t looked into the data, she acknowledges the two countries’ banking industries are distinctly different.
For instance, Lisa believes there could be fewer bank failures in the UK because of differences in industry concentration and regional diversity. The US has a much larger market, with different regions having specific banking needs, making it a more complex landscape. She also mentions that stress tests for banks are jurisdiction and size-specific, which can affect the dynamics between the US and the UK banking sectors.
Moreover, Lisa acknowledges the tech industry’s impact on the banking sector, given the rapid growth of tech companies in the US. She agrees with Guillaume’s assertion that the advanced tech industry in the US, particularly Silicon Valley, could play a role in banking dynamics.
How Can Corporates Utilize External Guidance Like Rating Agencies?
Hussam’s second question focuses on whether corporates can seek external guidance from entities like rating agencies and how these agencies are currently operating.
Lisa stresses that while ratings and outlooks are helpful, they tend to be backwards-looking and might not be the best tools for capturing systemic bank default. Instead, she suggests other measures like share price, bond price, and credit default swap (CDS) behaviour could provide a more dynamic snapshot of counterparty strength or weakness.
However, she also highlights that these other metrics can be somewhat patchy, and the data streams can only be used on a best-efforts basis. Corporations must weigh the cost of obtaining this data against the potential risk. In short, if the risk isn’t significant for your company, the cost of the data might not be justified.
What are the Lessons from the SVB Downfall, and How Should Companies Manage Interest Rate Risk?
Guillaume and Hussam delve into the lessons learned from the SVB downfall, focusing particularly on the issue of interest rate risk management. Lisa provides enlightening insights on the topic, highlighting the importance of proactive risk management for companies.
Lessons from the SVB Downfall
When Guillaume asked Lisa about the lessons to learn from the SVB downfall, Lisa expressed surprise at a recent survey. The survey found that less than half of European corporates had over 50% of fixed-rate interest cover. She explains that despite being in a period of high-interest rates, companies should not rush to cover everything immediately. Instead, they should find ways to plan proactively and use derivatives appropriately to enable a smoother route and de-risk going forward.
Guillaume added that, usually, corporate treasury departments have a treasury policy where the mix of floating versus fixed interest rates on loans and debts is clearly defined. However, due to the prolonged period of low-interest rates, some companies may have overlooked these limits or not set them at all.
Managing Interest Rate Risk
In response to Hussam’s question on whether the oversight of risk related to long-term bonds was due to complacency or drastic changes in the risk environment, Lisa asserted that the balance is essential. She noted that many companies might have become complacent or numb to managing interest rate risk due to the global financial crisis and near-zero interest rate environment.
However, the combination of central bank rate increases and recent volatility has awakened many to the need for proper management. Lisa emphasized the difference between active and reactive risk management and the importance of having a governance structure, policies, and frameworks ready to react to risks and opportunities.
She pointed out that companies should plan from a position of strength, which means they should be prepared to react to both the good and bad, depending on the opportunity or risk that comes their way. This way, companies can better balance their risk to cost and avoid complacency or oversight in their risk management approach.
What Do Dukes and Kings Do, and How Does it Help Corporate Treasurers?
Guillaume seeks to understand more about Dukes and Kings (DK), the company where Lisa works. Given their focus on end-to-end innovation and optimization, he is particularly interested in how they support corporate treasurers. Lisa details the work they do and how they aim to assist companies.
Overview of Dukes and Kings
Lisa shares her role at Dukes and Kings, a firm she joined with Chris King. Together, they have over 40 years of experience in corporate finance, primarily focusing on developing and implementing innovative structures across various corporate finance activities. Lisa, however, keeps her introduction brief, given the time constraints.
Dukes and Kings’ Key Focus Areas
Lisa shares that Dukes and Kings’ core focus falls into two main areas.
- Using Derivatives and Financing Structures: The first focus is on using derivatives and financing structures to enable or accelerate strategy. They do this by covering pre-hedging approaches to Mergers and Acquisitions (M&A) and near-term financing, among other things.
- Holistic View on Capital Structure: The second area focuses on a holistic view of the capital structure, which includes working capital. In this context, ‘holistic’ means considering the overall business strategy.
When a business focuses on growth, they consider two aspects. First, they look at how organic growth consumes cash through working capital and what can be done to mitigate that. Second, where growth happens through M&A, they explore reducing the need for equity either partly or entirely, which is generally seen as beneficial.
Lisa emphasizes that whatever route they choose, they aim to connect business objectives with changing financial markets to optimize the outcome. They often look at approaches beyond the traditional, considering options to facilitate more custom credit-efficient structures that address a business’s risk profile. They also focus a lot on the future trajectory of the business, managing future risks, and putting the business in a position of strength.
Growing Interest in Dukes and Kings
In response to Guillaume’s remark about their workload, Lisa admits there has been a lot of interest in what they do, citing their excellent connections and relationships across markets. They are working with some great corporates, which Lisa finds very encouraging.
Lisa’s Role on the FX Global Code of Conduct Committee
Hussam seeks to understand Lisa’s role on the FX Global Code of Conduct Committee and requests a case study on a project Dukes and Kings undertook for a client specifically related to risk management. Lisa provides insights into her committee role and a recent use case from Dukes and Kings. He mentions having read about Lisa being part of the FX Global Code of Conduct Committee, which he sees as prestigious. He wonders what this role involves.
Lisa explains that she joined the UK’s FX Joint Standing Committee in 2020, a committee chaired by the Bank of England. By 2022, she became the UK’s Private Sector Representative of the Global FX Committee. In both committees, she serves as an advocate and voice for the corporate buy side, urging her fellow treasurers and corporates to understand the benefits of adopting the FX Global Code of Conduct.
The FX Global Code is a tool that promotes integrity and effectiveness in the FX market without imposing additional legal obligations. It applies a single code proportionately to each market user, buy-side corporates or sell-side banks.
Lisa highlights four key benefits for corporates to get involved:
- It provides a best-practice framework and a governance structure that everyone can use.
- It serves as a one-stop shop for policy building.
- It sets aspirations or areas that can be developed or targeted as companies grow.
- It serves as an excellent training tool for new team members and assures proper governance.
Lisa believes that signing up for the FX Global Code demonstrates a commitment to good governance and gives corporates an equal voice in the FX market.
A Use Case from Dukes and Kings
Moving on to Guillaume’s question about a use case related to risk management, Lisa gives an example where they helped manage capital structure and interest rate management to mitigate near-term covenant pressures. They used structures to ensure near-term earnings were protected and used option volatility to generate value to protect the near term better, utilizing the longer-term accepted risk.
They looked at structures significantly below market reference rates to provide near-term certainty. This approach was successful in the given situation and provided great long-term stability for the business. It allowed the business to focus on other processes, knowing that the near-term rates were secured.
Lisa emphasizes that Dukes and Kings always look for solutions to the specific risks a corporate or fund might face, providing bespoke and targeted assistance.
Lisa’s Advice for Treasury Professionals in Volatile Markets
Guillaume invites Lisa to share any additional insights or summarize the topics discussed. Lisa emphasizes the significant changes in financial markets and the importance of preparedness and advises treasury professionals on navigating the challenging times ahead.
Acknowledging the Market Volatility
Lisa starts by pointing out the dramatic changes in the financial markets. Volatility is increasing, which treasury professionals need to be aware of. This means approaching market sensitivities and timing has become more critical than usual.
Planning for Challenging Times Ahead
Lisa mentions that many market participants predict that the next 12 months will be very challenging, with periods of distress likely. She stresses the importance of planning for these challenges while the markets remain calm.
Here are a few tips Lisa suggests to consider:
- Evaluate liquidity needs for today and also 12 to 18 months from now.
- Consider refinancing early to eliminate that risk.
- Take note of the current market phase when approaching the market.
- Update policies, procedures, and controls to withstand a downturn.
- Prepare for what you would do in the event of a downturn. Being prepared is often half the battle.
Assessing Team and Skillsets
In addition, Lisa urges treasury professionals to evaluate whether they have the right team and resources to get through a challenging period. The skillsets required during such times are usually quite different.
Staying Flexible and Learning
Lastly, Lisa encourages treasury professionals to plan early, be nimble, and stay attentive to the markets. While maintaining the status quo is important, she reminds us that different periods and markets mean different risks and approaches. Hence, it might not make sense to be rigid and only stick to past practices.
Lisa concludes that, despite the challenges, treasury professionals should have fun and strive to learn something new.
Wrapping Up:
As we’ve journeyed through this insightful discussion with Lisa, we’ve unearthed a wealth of knowledge that treasury professionals can apply in their day-to-day roles. Lisa’s experiences, from leading organizations through turbulent times to actively participating in crucial committees like the Global FX Committee, have provided valuable insights into treasury management and risk mitigation.
Lisa’s advice about adopting the FX Global Code of Conduct underscores the need for integrity and effective functioning in the FX market. Additionally, her recent client experience in capital structure and interest rate management shows how bespoke solutions can address specific risks and provide long-term business stability.
But a proactive and prepared approach remains key in this increasingly volatile financial landscape. Planning for liquidity needs, considering early refinancing, understanding market phases, updating policies and procedures, and having the right team and resources are all vital elements to weather the challenging times ahead.
And above all, while we navigate these uncertain waters, let’s remember Lisa’s final words: be nimble, stay attentive, and continue to learn, even in the face of challenges. The landscape of treasury management is fluid, and only through continuous learning and adaptability can we truly master its tides.
