Cash Management

Treasurers Urged to Act on Rising Rates

Consultant warns that poor management of the trade-off between protecting against rising interest rates and maintaining liquidity could leave balan...
Marie LeoneDecember 3, 2004

Corporate treasurers generally grasp the myriad of factors that drive a tightening money supply. Now, however, is the time to act on that information, new research suggests.

“Treasurers have gathered their acorns for the coming winter,” notes Stephen Baird, of Chicago-based consulting firm Treasury Strategies Inc, in a report he authored for He contends that corporate treasury executives have brought a significant number of deals to market despite tight credit conditions and now have “bragging rights to sweetheart coupon and swap rates for years to come.”

Indeed, Wednesday’s Wall Street Journal reported that record-low interest rates have allowed corporations to hoard cash. In fact, according to research conducted by Treasury Strategies, corporate bond issues in 2002 and 2003 reached record levels — nearly $5 trillion last year — as treasurers refunded older, higher-cost debt to take advantage of low rates.

Baird’s research also finds a rise in corporate hedging, with the nation’s outstanding amounts of over-the-counter interest-rate hedges nearly doubling between 2001 and 2003, to $142 trillion. He cites the increase as evidence that treasurers were busy working the capital markets.

Still, Baird warns treasurers to recognize the “serious threats” that can stem from rising interest rates and a restrictive monetary environment. For example, he cautions treasurers to be thorough about hedging their balance sheets, asserting that poor management of the tradeoff between protecting against rising interest rates and maintaining liquidity could leave balance sheets vulnerable.

He also finds a connection in his research between shareholder value and rising interest rates. Higher borrowing rates result in a higher cost of capital, and a higher cost of capital translates to depressed stock prices, he says.

With those ominous sounding threats in mind, Baird suggests some treasury-protection efforts. For instance, he urges treasurers to factor funded debt into their companies’ interest-rate exposure equation. He also recommends including other potential risk sources, such as asset-based borrowing facilities, off-balance-sheet leveraged leases, and unused revolver commitments.

Baird also advises finance executives to develop a board-approved, quantifiable risk profile. The profile could, for instance, set limits for interest expense below certain standard deviations.

With interest rates rising, it may be time to “scale back the share repurchase program or incorporate more equity financing in the strategic growth plan,” Baird adds. That’s because higher rates change the optimal mix of debt and equity in a company’s capital structure.

Further, Baird advises that finance executives decrease working capital levels as the economy moves into a restrictive monetary environment. The reason is that reducing working capital helps offset higher costs of capital. If treasurers aren’t in a position to compress billing cycles or optimize payments, they should least make a case for the treasury benefits to be gained via reduced working capital.

As short-term rates climb, excess cash balances need to be liberated. Liquidity management plans, says Baird, should include streamlining bank account structures to avoid trapped cash; redomesticating or investing offshore cash; reducing or optimizing backup liquidity; and refining the cash-forecasting process.