Cash Management

A Fortress Balance Sheet

Two seasoned treasurers say what's on their minds — and making balance sheets shock-proof is just one notion.
Edward TeachJune 18, 2009

Build a “fortress balance sheet.” Maintain good credit ratings. Actively monitor your counterparty risk. And if you took out a five-year revolver in 2007, don’t wait until 2012 to renew it.

That was just some of the advice offered in a panel discussion on treasury management at The CFO Core Concerns Conference in Boston on Friday. Nine months after the near-meltdown of the financial system, corporate treasurers are focused on cash and liquidity above all, said John Tus, vice president and corporate treasurer at Honeywell International.

The shift in priorities from earnings per share to cash was confirmed by a recent survey conducted by the National Association of Corporate Treasurers, said Edward Liebert, chairman of the association and treasurer of Rohm & Haas, which was acquired by Dow Chemical in April. “You can miss your earnings targets and survive, but you can only run out of cash once,” commented Liebert. Treasurers voiced four other top concerns in the NACT survey: employee benefit funding, primarily pensions; capital spending; cost control, such as keeping insurance premiums and bank fees down; and maintaining or gaining access to capital markets.

Tus said he first heard the phrase fortress balance sheet from Jamie Dimon, CEO of JPMorgan Chase & Co. “What it really means is having a balance sheet that can withstand shocks,” explained Tus, particularly those that may “come out of the woodwork,” such as contingent liabilities and covenant breaches. A fortress balance sheet also gives companies deal-making flexibility, he added. “Historically, companies that do the best deals do them at the trough of the market, not at the peak.”

The economic downturn has underlined the importance of maintaining a good credit rating, said Tus: “During good times, ratings determine what you pay for capital. In bad times, they determine your access to capital.” Honeywell, a $38 billion industrial conglomerate, boasts a single A credit rating and a tier-1 commercial paper rating, he said. Liebert pointed out that A-rated companies still issued commercial paper during the height of the financial crisis.

Both Tus and Liebert stressed the importance of monitoring counterparty risk. “Our greatest counterparty risk is with the cash we invest around the globe,” said Tus. Honeywell shuns “things that are exotic,” he noted; the company doesn’t want to take on more risk for an extra basis point or two. Liebert said Rohm & Hass routinely tracks counterparty risk, monitoring not only balance sheets and credit ratings but also more-subjective matters, such as a bank’s strategy and the quality of the banking relationship.

Finally, the two treasurers observed that many companies have five-year credit facilities coming due in 2012. That’s because while banks routinely extended such facilities when money was cheap, the practice came to an abrupt end in August 2007 with the onset of the subprime panic. Liebert and Tus advised companies to consider renegotiating such facilities before they are due, say if there’s a window of opportunity in 2010. If the banking industry isn’t on firm ground by 2012, warned Liebert, the demand for credit could be huge — but the supply may be limited.