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  • Michael Anthony, Managing Director of Global Thought Leadership, Corporate Risk Solutions, HSBC

For more than a decade now, interest rates have been set at historic, unprecedented lows while asset prices have soared enabling corporate treasurers to obtain cheap and largely unfettered access to financing to fund growth and M&A (mergers and acquisitions). But as governments globally increasingly look to reign in quantitative easing (QE), treasurers are likely to face some challenges. Michael Anthony, Managing Director of Global Thought Leadership, Corporate Risk Solutions at HSBC, shared his insights at HSBC’s International Day about how companies could optimise their capital structures in today’s volatile markets.

Anthony highlighted that a number of geopolitical risks and macro headwinds could prove testing for corporate treasurers, due to Brexit, the political and economic disruption in Italy and the ongoing trade disputes between the US and China/EU. The possibility of further interest rate rises from the Federal Reserve, which has already caused significant fluctuations in FX markets, could fuel further instability in equities, fixed income and emerging markets,1 particularly those which have borrowed heavily in USD. In response, a well-adjusted approach to corporate treasury is pivotal to managing these risks.

Doing more with less

However, corporate treasurers are under mounting pressure. “We find that corporate treasurers are being entrusted with more tasks all of the time. In this growingly complex world, treasurers have more responsibilities, but their teams are in some instances getting smaller. Increasingly, when we speak to CFOs, they want their treasurers to be more involved in the strategic decision making processes at their companies – especially risk management - as they do not want to be caught short by some unforeseen event,” explained Anthony.

This is evidenced in a recent HSBC -Risk Management Survey, which found 87 per cent of CFOs at larger businesses said their treasury function had an important role in strategic decision-making2. The same HSBC study found that 60 per cent of CFOs at larger businesses said treasury received no additional resources or had been actively scaled back in the last two years2. Nonetheless, the report also conceded that CFOs in sizeable businesses did not expect their treasury resources to increase over the next two years2. Consequentially2, with treasuries becoming leaner and the risks more pronounced, having a solid capital structure in place is absolutely pivotal.

Achieving a strong capital structure

Nearly every attendee at International Day agreed capital structures were both inseparable to and highly correlated with their company’s overall financial and risk management strategy. “A strong, deep-rooted capital structure, endowed with solid risk-orientated metrics and statistical approaches is critical when managing many of the risks facing corporate clients. Not only that, but it helps companies gain a competitive advantage,” said Anthony. He added that while corporate approaches to capital budgeting had been predominantly guided by academic discourse, very few treasurers applied it to capital structuring, and instead adopted more practical, less theory-led methodologies.

As discussed earlier, Anthony noted that in an increasing number of cases, corporate treasurers are being asked to do more with less. To meet the need for efficiency and data management, he highlighted that treasurers can look to theory and more scientific methods covering a wider range of variables – such as volatility, correlations, and accounting2 – when determining their capital structure.

By adopting a more holistic, analytical-led approach, he said companies would become more efficient, while simultaneously reducing their risk exposures. As volatility creeps up, capital structuring will become an increasingly important component of risk management.

 

1HSBC GBM (December 11, 2018) Upping the ante for treasury risk management

2HSBC GBM – Rethinking treasury: How CFOs and corporate treasurers are rising to the risk management challenge


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