Principles-led, strategic financial risk and accounting advisory.

For a Treasury function, leading your business through a transformational event such as multinational acquisition, disposal or even super-sized capex, can be a minefield. For an acquisition, senior management’s focus will invariably fall on the integration efforts surrounding people, technology and generating the best returns for shareholders through the upcoming restructure- passing regulatory hurdles without giving away too much value, maximising synergies, reducing duplicated effort across all functions and achieving economies of scale.

There will of course be a focus on optimising capital structure and the cost of capital- deciding on the best form of consideration- equity, hybrid equity, public or private market debt, bank facilities or cash reserves. 

Whichever route is taken there will be a wealth of timing considerations around issuing, drawing down as well as risk management, tenor considerations and returning the new group to a stable financial profile at least-cost, but with space for flexibility if things invariably don’t go quite to plan. 

As with any long journey, planning ahead is critical. Here are five suggestions from PC for dealing with the risk management and funding hurdles:

1) Plan ahead, even if an event is uncertain

As a risk manager you must think and act under business as usual conditions, but plan for those contingent dial-turning events that make you stand out as being worth your salt. Planning for a substantial business change (a positive one, rather than a disaster!) definitely falls in the ‘non-urgent, important’ category of your task list.

In recent times this blogger worked over a period of 2-3years with a FTSE100 entity whose name was always floating in the press with respect to large strategic events. At the time I was called, their name was being associated with a cross-border target that would be a transformational acquisition. 

The team ran scenarios on funding, currency mix of funding, interest rate hedging, FX hedging, ratings considerations, debt capacity and the like all on a range of hypothetical scenarios- some linked to the rumours, others not. This would allow the Treasury team to talk in depth with senior management/the Board about risk and capacity considerations and costs, if or when an event happened. It also allowed the team to understand where additional internal approvals or policy changes- the kind of thing that prevents a large organisation from acting both nimbly and efficiently- may be necessary.

And don't just think about how you would react to an event. Think about how you create flexibility in your day to day actions that will open your options in the future. Is there flexibility in treasury policies? Do they provide guidance for big events or just BAU? Are your hedge accounting designations made as flexibly as possible?

2) Its not just an event, life goes on afterwards

It can be easy to focus on the risks around close and the immediate needs associated with it- funding and risk managing the consideration/proceeds. However the go-forward business, whether larger or smaller than before, has risks that persist into the future. That longer time horizon brings a wider spectrum of risk exposure, and this must be planned for before the event.

Both the balance sheet, go-forward P&L and re-financing/de-leverage impacts should be considered so that actions taken around the close do not limit your actions afterward, or increase costs of amending your financing and risk management model further down the line. A classic example here, is the preference of bank syndicate teams to hit ‘sweet spots’ in investors’ demand for tenor which, these days, are longer than you may require to achieve a target de-leveraging plan without incurring additional buy-back costs. In all likelihood the premium incurred for moving away from a sweet spot is likely to be less than the cost of funding too long, or the risk left on the table from funding too short.

3) Plan to pay more when risks are larger

I know- obvious right? But 'high hedging costs' can catch senior stakeholders by surprise. 

Besides the fact that events usually involve larger numbers than you encounter in your day-to-day activities, the risks are usually more nuanced too. Regulatory approvals, timing uncertainty and perhaps opacity around risks within a target company all increase the magnitude of risk. 

It is a simple rule that if your risks are larger, then the potential benefit of reducing them is larger too and so the cost of managing them would rightly increase. 

Deal-contingent trades (ones that fall away with no close-out cost if the exposure you were hedging ceases to exist) and other option-based trades come into their own in this space; but the costs associated with hedging those larger notionals can leave management and Boards a little short of breath.

Again, it may be wise to be ready to give management an early indication of such costs so that they can be built into initial analyses of the viability of a deal, or at least an opportunity to get their head around the cost/benefit analysis.

4) Look for the new natural offsets

Not every new risk requires a new proactive solution. Are you already hedging BAU foreign currency sales which could now be considered a natural hedge of large capex spend? Be ready to go back to your BAU schedule and identify what planned financing and risk management actions can now be amended or ceased because the event introduces exposures which provide a natural offset.

5) Socialise your thought process and plan

As with most complex matters in life- many heads are likely to be better than one. Bring in the key stakeholders and those likely to help you execute on a plan at an early stage. Identify the big risks, the potential roadblocks and the sequencing of events. Think about the time taken to implement, the approvals required (both your own and potential counterparty's processes) and identify whether any commitments to support can be obtained or refreshed periodically.

FINAL THOUGHTS

While the devil is regularly in the detail making sure you are well placed to have time to focus on those details, because the big picture is sketched, is always going to be helpful.

If you need help mapping out a plan for a large event, the risks involved and the best way to quantify and manage those risks, please get in touch via LinkedIn or the principlesconsult.com website.