23 April 2020
EuroFinance and The Economist Group’s most recent webinar invited three treasury professionals to share their experiences of dealing with the pandemic
Find out more about products and services
23 April 2020
Find out more about products and services
Session moderator Sebastian di Paola, a partner at PwC Switzerland, introduced John Ferguson, director of macroeconomics at the Economist Intelligence Unit (EIU) to outline the economic impact of the pandemic and a panel of three treasurers for the discussion that followed: Christian Held, head of corporate treasury for pharmaceutical group Bayer AG; Guy Simons, VP corporate finance for ZF Friedrichshafen AG (ZF Group), a systems supplier to the auto industry; and Bruce Edlund, senior treasury director for software group Citrix Systems.
In his opening remarks, Ferguson reported that the EIU now expects a decline of 2.5% in global economic growth in 2020, which compares with a -1.7% reduction at the height of the global financial crisis in 2009. EIU’s previous projection for this year had been positive growth of 2.3%.
“EIU now expects a decline of 2.5% in global economic growth in 2020, which compares with a -1.7% reduction at the height of the global financial crisis.”
John Ferguson, director of macroeconomics, the Economist Intelligence Unit (EIU)
The unit expects a deeper decline of -2.9% for the US this year while China should still manage 1% growth against an earlier projection for 2020 of 5.9%. A full-year recession is now expected for Europe. Global trade in goods, excluding services, is forecast to fall by 15% this year. Ferguson noted that while these figures are unprecedented, they would be even grimmer in the absence of the fiscal rescue.
Noting that economists have discussed U, V and W-shaped recoveries as potential post-pandemic scenarios, he suggested a U-shaped or “staggered” recovery was most likely for China. As business activity resumes there, he added “we won’t see things snap back into place automatically”.
Choose your preferred banking topics and we will send you updated emails based on your selection
Before the panel session got underway, the audience was invited via an online poll to select – from five available options – which aspect of treasury they anticipated being most impacted by Covid-19. The response was as follows:
Liquidity and funding – 34%
Cash flow forecasting – 33%
Credit risk on receivables/supply chain finance – 14%
Managing the treasury team remotely – 10%
FX volatility management – 9%
The panel session got underway with Guy Simons briefly outlining how the sector served by ZF Group normally generates €36bn in annual sales and provides systems for car manufacturers and their suppliers across 40 countries. In the depths of the previous crisis, in 2009, sales had typically dropped between 40% and 60% over a period of nine months.
Currently 95% of the group’s operations are shut down, especially in China, the US, Europe and Brazil, with customers in lockdown unable to visit car showrooms and factories shuttered.
With uncertainty over how many months these conditions might last, the impact on liquidity isn’t clear, especially as payment within 30 or 60 days is normal. So the full effect of Covid-19 has yet to be felt, but as ZF Group operates in a capital-intensive industry it needs to have a handle on its fixed costs, said Simons, adding that the group’s annual R&D spend of €2.6bn is one potential area for cutbacks. ZF Group is also talking with its banks, he added and “the first instinct was to go all around the world, asking what facilities do we have, are you ready, can we use them, a 2009 reaction, the great financial crisis still fresh in our memories”.
Noting that both Ford and GM have drawn down more than US$15bn each on their credit facilities in order to be assured that they have the liquidity, ZF found its banks quite willing to support them but also indicating to not scrounge around the edges, to go through the centre via headquarters in the home country, where there is typically also the most support from government. Simons added that as a private business owned by a charitable foundation, ZF does not meet many of the tests that would otherwise make it eligible for financial help from governments, but on the plus side, there is also no short-term pressure from shareholders to contend with. Still, for ZF as for any other company in its industry, it is paramount to demonstrate to lenders that it can very quickly adjust costs.
A pandemic isn’t necessarily good news for Big Pharma – nobody wants to be seen as benefiting from the crisis.
Christian Held, head of corporate treasury, Bayer AG
Nor is a pandemic necessarily good news for Big Pharma. Noting that nobody wants to be seen as benefiting from the crisis, Held said that Bayer has chosen not to make a profit from its most relevant product against Covid-19. And while the industry isn’t as heavily impacted as many, lockdowns inevitably affect sales as customers remain at home.
The company has also received first requests for extended payment terms. A potential risk lies in the ability to ship its products due to the disruption caused by the pandemic. This could become a particular problem in Brazil, one of Bayer’s major markets, noted Held, although the first signs of recovery in China were a positive development.
Asked to identify the key challenges in funding and financing, Held said that the pre-Easter period had seen a credit squeeze in the US market lessen, but the European commercial paper market was more of a problem and German corporates are experiencing difficulties. This has put pressure on short-term funding, although the banks have responded by providing more credit lines. Nonetheless, the future is uncertain and this, coupled with limited forecasting ability, makes it a challenge to ensure adequate liquidity is available.
Held admitted that he felt a little envious of US corporates that pay dividends on a quarterly basis rather than annually. In Germany the majority of dividends are paid in the period from late February to April, so the Covid-19 crisis came at just the wrong time. The months of April and May also see a big demand for liquidity from German companies, which is usually covered adequately by commercial paper.
Di Paola suggested that requests by customers for extended credit terms might also present the opportunity for building on the customer-supplier relationship but Held responded that striking the right balance was a challenge as the company couldn’t act in the same way as the ECB, the Fed or the Bank of England, he commented. If too many customers requested and were granted longer payment terms then Bayer’s own funding requirements increased in turn.
Turning to the topic of financing and liquidity risk management, di Paola suggested that as a major IT company, Citrix was widely regarded as being cash-rich.
Edlund responded that the end-2017 Trump tax reforms had changed policy for many corporates that previously left cash offshore until the reforms freed it up to return to the US. Investors and other stakeholders wanted that cash to be used once it became accessible, so Citrix introduced a dividend payment in Q4 2018 and has also made share buybacks. Consequently it is not sitting on excess cash.
Adding that Citrix has a very finance-focused CEO, the company conducts regular cash forecasting and stress testing, with many team members having experience of the 2008-09 crisis. The good news is that the financial system is in rather better shape this time around and credit facilities actually are available, noted Edlund.
Di Paola remarked that some companies had been quick to draw down their revolving credit facilities when the pandemic began, adding that ZF Group had the challenge of operating in a very capital-intensive industry sector.
Simons agreed that the auto industry is recognised as a major employer and so attracted much attention from the authorities. As the focus centred on the big manufacturers, the smaller businesses further down the supply chain tended to be overlooked and had less access to credit facilities. That made it important for government support to trickle down the supply chain to prevent potential future production issues.
Simons reports that in Wuhan, where an 11-week lockdown was recently lifted, demand for cars from the dealerships has begun to recover but is still 15% to 20% down on a year ago. Smaller cars are in favour, with more consumers keen to avoid public transport systems and dealerships are seeing more first-time buyers.
ZF Group is assuming that the eventual post-pandemic recovery is more likely to be U-shaped than V-shaped, but is confident that the auto industry will eventually return to health. The big question is the long-term impact on consumer behaviour now that oil prices have fallen back significantly. Will this slow the increase in demand for electric cars while social distancing boosts the prospects for autonomous, or self-driving cars?
Di Paola asked whether, with production at near-standstill, ZF Group had yet drawn on its revolving credit facility. Simons said that a US$7bn acquisition of commercial vehicle systems group Wabco Holdings was pre-financed via a bond offering and the group therefore already had a current cash surplus, but that even after closing of the transaction, its RCF was well-proportioned for a 2009-size downturn.
The discussion moved to the credit risk on receivables and customer behaviour since the pandemic began.
Edlund said although it was still early days, Citrix had reviewed its risk-adjusted revenue (RAR), payment histories, customer payment terms and identifying which industries had been most directly impacted by the pandemic and were finding it hard to meet payments. The company was also assessing a scenario in which it was unable to collect many of its account receivable balances, although it had yet to draw on its credit facility.
Simons agreed that ZF Group’s credit risk was more highly concentrated and its own ratings had already been downgraded a notch by Moody’s and S&P, but the main change had been that its routine cash forecasting and monitoring of the payment behaviour of customers was now getting the attention even of the CEO.
Di Paola then raised the issue of liquidity in the FX markets, which Held said had showed signs of returning after a temporary drought. With currencies such as the Canadian dollar, it was proving difficult to place some tickets, he revealed. The crisis had distinguished those banks able to provide liquidity from others forced to borrow it after cutting back on their FX business.
Consequently Bayer had seen difficulties in some currencies, Held added, observing that while the sun is shining everything’s OK, but once it turns stormy treasury must identify who are the most reliable counterparties. The company had reviewed its policies as the cost of hedging certain currencies had skyrocketed and decided it was better to leave them unhedged than pay excessively high costs.
Simons said that ZF Group was already reviewing whether the hedging levels for 2021 were still appropriate but also questioning whether, for example. it would make sense to take advantage of the current stressed levels and stock up immediately. He also warned that balance sheets tend to change dramatically as a result of shutdowns and exchange rate and commodity price changes, and along with an intensification of cash forecasting and a greater focus on the balance sheet, also cash flow and balance sheet hedging needed to quickly adapt.
The panel’s final topic was the mass adoption of working from home (WFH) in recent weeks and its potential long-term impact. Citrix’s main product aims to facilitate mobility and Edlund confirmed that he regularly works remotely and, in normal times, some members of Citrix’s office-based staff were already routinely working from home one day per week.
So most of the team has adapted to the new environment fairly easily and hasn’t needed to make too many changes, although for a few employees it has proved a bigger challenge.
Held felt that Bayer’s team has managed surprisingly well, considering its members were unaccustomed to trading derivatives from anywhere other than the office. He said that a week before the pandemic really hit, the company conducted a simulation to test its back office facilities, in which 97% of the treasury team worked from home. Remote working hadn’t worked quite as well for projects that were already moving forward, but demand for WFH will definitely have increased once the pandemic is over, he forecast.
Simons said that ZF Group’s treasury already operated digitally, so its transition to WFH had been fairly easy. It had proved a boon for cloud applications and the team had adjusted its assumptions for disaster recovery, he reported.
The options generally worked well, despite the higher demand for bandwidth affecting the quality of network connections, he added. Project work was definitely harder, but the volume had been reduced in order to maintain liquidity and keep the group’s financial strength intact.
Summing up, di Paola said that treasury teams had learned a lot very quickly in recent weeks although there was still room for improvement, which was good news for the IT industry. In this strange new environment, peoples’ working conditions were very much dependent on their home situation; whether they had children, a separate room to use as an office, an apartment or a house with a garden.
As in 2009, “liquidity is again the biggest challenge,” he concluded. But this time around the situation is changing far more rapidly, which makes activities such as this webinar series invaluable.
The EuroFinance/Economist Group webinar, Managing treasury in times of Covid-19, was supported by Deutsche Bank and presented on 8 April 2020.