The treasurer’s role is becoming increasingly complex and varied. More boards are regularly consulting treasurers on financial matters. When you speak and write well, the board will not only seek your advice, they will also follow it.
COMMUNICATION IS KEY
To become a good treasurer, you need deep financial understanding and analytical skills, along with the ability to communicate your expert advice to an audience of non-specialists.
To reach a senior level in your career you need to be able to take everything you know and look at it from another perspective. You need to be able to:
- formulate, select and justify solutions for your organisation
- communicate effectively, in writing and in person, with colleagues, senior management and other stakeholders
- confidently recommend action and change.
TACKLE THIS SCENARIO
You need to develop your professional judgement to be able to successfully tackle challenging scenarios.
Your company has just negotiated a £100m, 10-year Libor-linked credit facility to fund a step increase in production capacity. The loan amortises in equal instalments from year six to year 10, as for similar loans in the past.
The company’s policy for interest risk management in these circumstances is to swap to fixed at the outset in order to protect the project return, so the return has been calculated on the basis of hedging at the current 10-year swap rate.
The FD believes that interest rates will continue at the current low level for some time to come and is therefore in favour of postponing a fix for the new facility, contrary to past practice.
Before sharing this belief with the chief executive, the FD seeks your advice, as treasurer, about how to implement his view without taking undue risk. Of particular concern is the need for a monitoring system to flag when action to hedge might be necessary.
Current interest rate data
Would you support the FD in their preference to postpone the hedge?
THE FIX COSTS MORE
Fixing the interest rate with a hedging interest rate swap will cost the swap rate of 2%, plus the company’s credit risk margin. Leaving the position open would be cheaper if interest rates remained unchanged for the next 10 years. At current market rates, we’d be paying only 0.5% plus the margin under the open position, rather than 2% plus the margin with the immediate hedge.
THE FIX IS USUALLY SAFER
If rates move against us, however, the open position might become more expensive. One advantage of hedging from the outset is to reduce interest risk of this kind. To discuss other relevant issues, we may need to refresh our in-depth subject knowledge at this stage.
|1. AMORTISATION||2.FORWARD START SWAP||3. SWAPTION|
The repayment or reduction of an obligation over time. For example, the repayment of loan principal by installments.
|An interest rate swap that will begin in the future, rather than today.||An option to enter an interest rate swap on pre-agreed terms.|
So would you decide to support the FD's preference to postpone the hedge?
Here is a useful technique to help you figure out the most robust way to frame your answer:
3. OTHER ISSUES
Let's apply this to our scenario.
The main advantage of postponing the hedge is the annual interest saving at current rates, approximately:
2% – 0.5% = 1.5%
x 100m = £1.5m per year
The disadvantages of postponing the hedge include the time costs of monitoring and managing the open position.
Also, the risks of:
- market rates moving adversely;
- potential breach of covenant;
- exceeding the company’s or board’s risk appetite; and
- potential failures in monitoring or management of the open position, through the company’s relative inexperience.
3. OTHER ISSUES
The amortisation of the loan from year six means that the interest risk on the open position will reduce from year six onwards. Ways to reduce the risk, without fully hedging from the start, might include:
- A forward start swap; or
- A swaption.
I would oppose the FD’s view and instead recommend hedging now. In my view, the benefit of the cost saving is outweighed by the disadvantages discussed above.
This isn’t the only possible response. Indeed, it’s entirely valid to reach exactly the opposite conclusion and support the FD’s preference to postpone the hedge. But, in either case, you must explain why.
continuing, boards accept advice from their treasurers across almost all types of debt funding.”
Developing and demonstrating these high-level behavioural skills, as well as technical skills, is your gateway to the most sought-after senior finance roles. It’s worth noting that 91% of senior level graduates move into a more senior role after they have completed the top ACT qualification. Higher-level qualifications progress the knowledge, comprehension and application skills you have already learnt. The focus at this level is on analysis, synthesis, evaluation and effective communication.
If you have worked your way through the ACT qualifications pathway or have a number of years experience under your belt, the Advanced Diploma in Treasury Management could be just what you need to push your career that one important step further!
Author: Doug Williamson
Source: The Treasurer magazine