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| Press release - Nordic and Baltic |
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Key Themes in Nordic and Baltic Cash and Treasury Management
EuroFinance’s recent conference in Riga – Cash and Treasury Management in the Nordic and Baltic Regions – underlined the extensive range of opportunities and challenges that Nordic and Baltic corporate treasuries are addressing. Currently, many of the region’s treasurers are putting particular emphasis on capital structure, financing, connectivity and risk, while private equity is also exerting an increasing influence.
Key treasury themes in the region right now can be found across all of the major areas of activity: cash, liquidity and FX; payments and connectivity; financing and capital structure; risk management; tax, accounting and regulation; technology; and strategy.
The last of these themes takes in the important concept of support for the company’s operating business. This is both in technical areas such as working capital and in even more fundamental contexts, like overall efficiency, profitability, corporate activity including acquisitions and buy-backs, and – for a growing number of larger Nordic companies - strategic risk management.
Naturally, across a region as diverse as the Nordic/Baltic area each individual company relates somewhat differently to these themes. Indeed, with the local corporate universe spanning a particularly broad spectrum from global blue-chips such as Nokia and Ericsson to tiny start-ups in non-Eurozone countries with very short histories of private-sector activity, priorities vary quite widely.
Coping with PE
One rapidly emerging theme is that of private equity. While Baltic activity is accelerating fast but from a tiny base, the Nordic countries are already some of the most active markets in Europe for PE. Denmark, in particular, has seen a host of transactions – including two of Europe’s largest-ever buyouts, ISS and TDC (the former TeleDanmark).
Sweden is home to the region’s three key local PE firms and a host of more traditional investment companies operating large portfolios of public and private equity; it too has already seen its first buyout of a blue-chip giant (Gambro). Finland and Norway are also active, though with a focus on smaller and medium-sized companies.
From a cash and treasury perspective, the significance of this high level of activity is two-fold. Firstly, it means that treasurers are increasingly likely to find themselves working for PE owners in the future.
Although not every PE firm takes the same approach with its portfolio companies, this generally translates at a treasury level into an aggressive and financially sophisticated demand for best practice – especially over matters like cash conversion, working capital and paying down debt. Similarly, the owners’ focus on cash flow tends to be unrelenting.
This contrasts notably with the approach of public shareholders and more traditional private owners, such as founding families. Their demands on and even contact with treasury are usually significantly lower.
As PE-sponsored buyouts involve leveraging the target’s balance sheet to a significant extent, it also means learning the skills required to manage high levels of debt. These include interest rate risk management, refinancing negotiations, portfolio optimisation (fixed versus floating, short versus long, foreign currency components), bank and debt investor relationship management, and entries into new markets, including securitisation (potentially).
Clearly, newly bought-out companies face many often unfamiliar challenges. It is unsurprising, then, that treasury advisory firms in the region report brisk business from this constituency.
The demands of PE owners may also have a broader impact. On the sidelines of the recent Riga conference, there was much debate about if and when shareholders in publicly-listed companies will begin to demand PE levels of leverage in the companies they hold.
Share buy-backs and special dividends have already become common in the region as excess cash is returned to shareholders. But a further shift towards leverage may make the traditional corporate treasury - managing a comfortable net cash position and rarely borrowing other than via overdrafts or credit lines - an increasingly rare entity.
Accelerating capital
Another important and related theme is an increasingly sophisticated approach to capital structure. While this of course requires approval and guidance from senior management and shareholders, treasury can supply much of the initiative as well as the implementation.
Examples of the new approach include the increasing use of mezzanine and hybrid debt instruments and of convertible bonds (also typically subordinated). Senior bonds too are coming increasingly to supplement the classical capital base of equity plus bank debt.
Hybrid debt, which has been issued by companies in the region such as Denmark’s DONG and Vattenfall of Sweden, combines characteristics of debt and equity. These include tax deductibility and equity credit from ratings agencies.
Both hybrids and mezzanine have a fairly junior rank in the capital structure; hybrids may have a perpetual maturity and rank senior only to equity, whereas mezzanine – which is best known as a component of buyout financings, though it can also function as a source of growth capital – is normally dated.
So too are convertible bonds. Lately these have provided a growing range of Nordic companies with the opportunity of selling equity at a premium and crystallising value from the volatility of their shares. Recent issuers include Finnish real estate developer Citycon; Norwegian technology company Tandberg Data; compatriot oil services company Atinex; and Lithuanian grain processor Malsena.
The Baltic experience provides an interesting counterpoint to the idea that bond markets are only receptive to the largest companies. In recent years, the local Baltic debt markets have accommodated a growing number of corporate bond issues, such as Malsena’s. The flexibility and appetite of local investors is underlined by the wide range of senior, subordinated and equity-linked structures that have been sold - denominated either in Euros or in local currencies.
Moreover, the major European mezzanine provider (ICG) sees considerable potential for the instrument in the Baltics now.
Deriving credit
Awareness of credit derivatives is a related theme here. Companies are only gradually coming to understand the increasingly central role played by credit default swaps (CDS) and other credit derivatives in modern capital markets. But this development has several important implications for treasurers.
Firstly, the demands of CDS investors – most notably, hedge funds – may limit companies’ room for manoeuvre quite severely. For example, any corporate reorganisation that threatens to remove or orphan bonds that underlie CDS contracts is likely to arouse opposition from these investors – even though they hold instruments that the company did not sponsor and which raised no new finance for it.
Secondly, and more positively, the growth in CDS provides more options in managing counterparty credit risk. For all sorts of companies, whether multinational, regional or domestic, this can be a very valuable addition to their risk management toolkits.
Thirdly, the CDS market provides an important new benchmark for market assessments of a company’s own credit strength. Its growing liquidity makes it a more accurate reference for pricing new debt than underlying bonds, which may be illiquid, and provides an early warning system for worsening perceptions of the company.
Setting sail for SEPA
As implementation from the start of next year draws nearer, the Single European Payments Area (SEPA) is a clear priority – both for the only Nordic/Baltic market inside the Eurozone (Finland) and for the others. While these seven are each outside the single European currency (though Denmark and Sweden are nonetheless members of the European Central Bank (ECB)’s TARGET settlement systerm), they typically have significant operations and cash flows within the region that will benefit from SEPA.
The initiative will require banks to price all cross-border settlement in Euros at the same level as the comparable domestic product. Although some local instruments like cheques and bills of exchange are not included, key regulations and message standards are in place for the rest.
While its tax and compliance consequences will vary from country to country, in general SEPA should facilitate reducing local accounts across the Eurozone or even moving to a single concentration facility. Accordingly, it should lower pricing, bring greater transparency and support initiatives such as e-invoicing, as well as making payment factory structures more viable for smaller companies.
Scoring swiftly
Another important theme in the area of connectivity is corporate access to SWIFT. While a number of corporate pioneers have piggy-backed on the Society for Worldwide Interbank Financial Telecommunication’s secure inter-bank payment infrastructure via so-called member-administered closed user groups or an older treasury access model, adoption has not been widespread – even in the technologically sophisticated Nordic/Baltic region.
But now SWIFT is moving beyond its MA-CUGs with a new system, SCORE. This has already attracted a variety of corporates from global titans to one with annual turnover of EUR10m. All hope to generate cost savings by transmitting payment instructions and other messages to their banks via the SWIFT.
A number of Nordic companies, including fertiliser giant Yara International, are poised to joint or are already under way with SCORE. Some plan direct access, while others will use a service bureau for this.
Note that SWIFT insists that corporate to corporate communications via its infrastructure are not yet on the agenda.
Commodities, carbon, weather, EM FX…
Inevitably, a host of other themes besides the five areas highlighted above are also occupying Nordic/Baltic treasurers. In the risk area alone, for example, several topics are gaining prominence.
For one, management of energy and other commodity risks is becoming increasingly important. The long rally in commodity prices over recent years, driven by increasing consumption of raw materials and energy in China and the other fast-growth emerging economies, has forced this issue on to the agenda.
The more exotic area of weather risk is also starting to attract attention. Concern over environmental liability is giving impetus to carbon trading too as a theme.
Moreover, globalisation and market liberalisation have made managing exposure to emerging markets currencies like the Russian rouble increasingly important.
Away from risk, further significant current topics include liquidity management (diversifying from bank deposits), outsourcing (not just for SWIFT messaging, but rather the full spectrum of repetitive ) and procurement (gaining transparent cash flows and auditable compliance through online purchasing).
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