Last month the latest annual Corporate Debt and Treasury Report was published by Herbert Smith Freehills (HSF) in conjunction with the Association of Corporate Treasurers (ACT).
Produced on the basis of views shared by members of the corporate treasury community across more than 100 large UK corporates, the report touches upon:
Overall, respondents reported a feeling of optimism in the market in the sense that the pandemic didn’t cause a financial crisis, and that significant pools of liquidity were available to those who required it.
Although not necessarily met with enthusiasm, corporate treasury teams said they were braced for LIBOR transition and the switch to risk-free rates.
Very few had braved the transition at the time of the report; we expect activity in this area to pick up keenly as we move into the second half of 2021.
Treasury teams were busy in the past year navigating their usual treasury activities through the turbulence brought on by the pandemic, with one interviewee commenting that it was “normal treasury activity at a higher cadence”.
While the position differed from sector to sector, the preparation and contingency planning undertaken in recent years had placed many on a strong footing as the pandemic hit and lockdowns came into being.
We found a general sense from respondents that, in many ways, this level of preparation was a result of lessons learned from the global financial crisis in 2008/9.
The key focus was cash collection and proactive cash management.
However, only a small number of respondents (15%) said they had raised additional debt and a similar number of respondents (11%) stated that they had required amendments and/or waivers in relation to their debt terms.
Those that wanted to bolster their liquidity buffer, and/or protect against bank liquidity issues, raised additional debt and made significant drawdowns under their revolving credit facilities (RCFs) early on in 2020, but later cancelled those liquidity lines or repaid the drawings once the impact of lockdown restrictions on businesses were better understood.
Similarly, waivers agreed early to mid-2020 were either not required or not extended past the initial 12- to 18-month waiver period.
We also found that limited numbers had accessed government-backed lending schemes (and the majority who did undertook the process of setting up the ability to issue commercial paper pursuant to the Covid Corporate Financing Facility).
Many of those had either decided not to borrow under the schemes or have paid it back, and in part due to certain negative connotations or the restrictions linked to such arrangements.
A hot topic of the year was – and continues to be – ESG and sustainable finance. A number of respondents suggested that ESG and sustainable finance is becoming business as- usual and that those who did not engage with it in relation to debt financings would be left behind.
The key driver to adopting ESG features in financings is not pricing, but rather investor and customer expectations of corporate responsibility and board pressures to respond to such expectations.
One respondent noted that the additional upfront work and monitoring certainly outweighed the net 0.01% commitment fee saving they would benefit from under their undrawn liquidity RCF.
Treasury teams said they were braced for LIBOR transition and the switch to risk-free rates
Respondents still see impediments to ESG and sustainable finance; however, these are weakening as the market continues to develop.
A large majority of respondents (65%) thought they would incorporate ESG features into their next debt financing, with sustainability linked loans the most likely type of financing (35%), followed by green bonds (17%), sustainable bonds (15%) and green loans (11%).
The report reveals that sustainability linked loans are sector-agnostic and structured as RCFs, so provide the necessary flexibility. Green bonds and green loans have more stringent reporting and structural controls over funds, and so we might see less take-up now.
However, we would expect these to become more attractive as corporates pursue green lending to achieve their specific ESG targets, such as the transition of a fleet to electric vehicles, for instance.
Those who needed to increase their net debt were likely to have done so in 2020 (against the backdrop of the fear of a liquidity squeeze), and that perhaps goes some way to explaining why 60% of the respondents did not think they would raise their net debt in 2021.
Those corporates that chose to put off refinancings and negotiate one-year extensions in 2020 are looking to refinance their debt in 2021.
The US and European debt capital markets are extremely active and corporates are taking advantage of the demand and favourable pricing and covenant terms to satisfy their funding needs, particularly for those who require larger issuances.
The US private placement market is also highly in demand and active.
However, some corporates are put off by inflexibility of terms, and lengthy and tough amendments and/or waiver processes for those falling outside the typical credit profiles most attractive to private placement investors (for instance, when they suffered a downgrade in ratings during the pandemic).
There were mixed responses from respondents on the approaches of their lending banks during the pandemic.
Some noted that their relationship banks provided waivers and liquidity lines at short notice and were generally supportive.
Others reported less favourable reactions and, when coupled with the evidence that banks are becoming more selective as to where they deploy their capital, pushed corporates to look for alternative sources of funding.
The results also indicated that only a very small percentage (5%) were not impacted by the imminent cessation of LIBOR and IBOR, but just 9% had implemented solutions to transition to risk-free rates.
This leaves a large number of respondents who will need to take action this year to switch to risk-free rates. The ‘wait-and-see’ approach taken by 27% of respondents was fast coming to a close.
We expect that those who have not yet started will now start to begin to transition, as it would be prudent to provide a buffer to do so before the end of the year, when LIBOR/IBOR for all currencies other than USD will cease.
The results of the survey indicated a marked change in the planned use of interest rate and FX derivatives compared to 2019/20.
There was a significant decrease in the expected use of FX derivatives (31% down from over 70% in 2019/20), which may reflect market sentiment, particularly on Brexit, as sterling-denominated businesses are more confident around sterling volatility.
There was a slight decrease in the expected use of interest-rate derivatives (an approximately 15% decrease from 2019/20), which may reflect the expectations of public funding and central bank interest rates remaining low in response to the pandemic.
Corporates continued to utilise commodity derivatives, which is prudent given recent volatility in hydrocarbon, raw materials and other prices.
Many of the respondents had put in place contingency plans and processes to ensure that Brexit would not have the significantly adverse effects that some had predicted.
As a result, around two-thirds of respondents described Brexit as having had a ‘minimal’ impact on their business.
Those who did report adverse impacts cited delays in shipment of goods, pre-Brexit structuring costs, impacts on the workforce and efficiency of trading with the EU. One respondent stated that there was a “huge cost to prepare for something that simply adds complexity and no value”.
We are encouraged by the optimistic outlook of respondents and expect that ESG and sustainable finance will remain firmly on the agenda for next year. And perhaps as a welcome relief to many, by the time of the next report, IBOR/LIBOR transition will become old news.
Find the full HSF and ACT report here.
Stacey Pang is a senior associate, and Kristen Roberts a partner in Herbert Smith Freehills’ finance practice
This article was taken from the Issue 2, 2021 edition of The Treasurer magazine. For more great insights, log in to view the full issue or sign up for eAffiliate membership