In the upcoming years, European telecoms need to issue an average of €30 billion in bonds. But financial market instability suggests that even highly credit-worthy companies may have trouble gaining access to funds.
Liquidity risk management once again became a pillar of corporate financial policy following the Lehman collapse in 2008. It involves a continuous exercise of cash control and refinancing plans that goes far beyond the traditional purpose of bridging temporary imbalances between receipts and disbursements.
For the past two and half years we have been living with the ominous threat of a financial market freeze. These concerns were highlighted by the events of the past week, described in a June 24, 2011, Financial Times article by Michael Mackenzie and Nicole Bullock:
Investors are withdrawing cash from money market funds heavily exposed to short-term debt issued by European banks out of fear that a Greek default could spark contagion across the region’s financial sector.
At the same time there is increasing reluctance among US banks to lend to their European counterparts in the past two weeks…
Investors have not forgotten how some money market funds, viewed as cash-like holdings, had short-dated Lehman Brothers debt and lost money after the bank declared bankruptcy in September 2008.
Once banks stop lending to each other out of concern with counterparty risk, money markets shut down and short-term credit to corporations ceases. When this happens, companies have to support themselves without backup, a situation which can be exacerbated if key customers and critical partners do not meet their obligations.
Companies therefore need their own liquidity sources to be robust enough to carry them through periods of disruption. They need to ensure capital availability and a tight grip over operating cash flows in different scenarios, selecting for each scenario the appropriate actions that reduce the probability and/or impact of bad events, for a given degree of residual risk tolerance.
Most importantly, companies must correctly simulate their debt refinancing needs, adjust debt maturities to the risks of a market freeze, diversify alternative funding sources, and ensure that the available credit facilities are committed, unrestricted and long term.
Liquidity risk management is necessary for companies to implement their strategic goals and avoid costly business interruptions. It is often said in finance that “cash is king”. It certainly is so when cash is the difference between success and failure, life and death. When equity financing is not viable and good assets sell below their full value, companies should remember: long live the king.