Iran War Has Treasurers Talking Liquidity, Bank BCPs, Debt Deals

# Geopolitics

# Risk Management

# Cash and Working Capital

Members on NeuGroup crisis calls also discuss the potential need for backup plans to pay workers in the region.

Treasurers managing potential risks sparked by war in the Middle East are closely monitoring their liquidity and verifying that banks in the region have strong business continuity plans. During Iran crisis calls organized last week by NeuGroup, most participants sounded confident about their banks, with the overall tone calm but cautious—a reflection in part of lessons learned from other recent risk events.

Some members said crisis committees at their companies had been activated. Others said the situation had not yet risen to the level of launching crisis emergency responses. The spectrum speaks to varying circumstances for different corporates but also to the uncertainty the war has created.

One treasurer whose company has a well-established system of monitoring markets for signs of crisis said, “On the one hand, you could have seen this eventually coming; on the other hand, the speed at which it came was a little bit of a surprise.”

Said another, “At the moment the situation is very complicated and we have no clear view on potential consequences.”

Bolstering liquidity. That lack of clarity predictably has finance teams making sure they have enough liquidity in local banks to weather continued instability in the Middle East. Treasury at one company with an activated crisis committee has doubled working capital within some countries to two months’ worth to guard against potential disruptions to cross-border transfers by the company’s in-house bank.

Part of this team’s scenario planning involves setting up a process similar to what treasury did after Hurricane Maria cut off access to ATMs for some employees using local banks in Puerto Rico in 2017. The treasury team worked with Western Union to help those workers get cash.

Another company uses internal cash pooling in the region and has beefed up cash in markets including the U.A.E and Saudi Arabia to “ensure that if something weird happened with the banking system we’d have enough cash on the ground to deal with local payments and salaries for about a two-month period of time,” the treasurer said. So far, there are no signs of trouble.

Debt market volatility. On some days over the past two weeks, market volatility and seesawing oil prices have put issuers of investment-grade debt firmly on the sidelines, followed by days like this Tuesday with a flood of new debt. A never-ending news cycle full of conflicting headlines is just one reason. Whatever the causes, “there’s a lot of debt one needs to refinance in the coming months and the volatility in the capital markets is certainly not helpful,” said one treasurer.

One member said that after the war started his company paused a fixed-income deal when its spreads widened by about 10 basis points; but the offering went forward when the market settled down. It’s important to remember that IG bond spreads have been at historically narrow levels, meaning temporary widening of spreads is less impactful.

Another treasurer noted that corporates funding acquisitions are at times “price takers” and can’t let slightly wider spreads stop them from tapping investor demand for IG debt. That may involve persuading CFOs to abandon an “anchoring mindset” that prevents them from accepting spreads or yields tied to some time in the past.

A focus on commercial paper. Another treasurer is watching the commercial paper market closely. “It’s a little bit hit and miss, but it’s fairly easy to get done,” he said. His team uses CP to cover liquidity needs within a given month; recently, they have told him, “It’s a little bit spotty seven to 10 days out.” So he tells them to simply issue CP with a three-day maturity that can be “rolled”—refinanced repeatedly—instead.

However, “If we had to go overnight, that’s a sign you have to be thinking about your backup liquidity, but that has not been the case,” he said.

Payment issues. A medical technology company that that sells humanitarian equipment on a prepaid basis to buyers in Iran under an OFAC license is considering whether to ship some products prior to payment, under open account terms. In an email to NeuGroup, the treasurer said customers were already having trouble accessing euros through their banks before the war began. But even if the company agreed to open account, he noted, “finding a shipping company willing to do it remains complicated.”

A member at a tech company this week said that after the war started its sales team had come to treasury and the credit team with requests from customers, distributors and agents in countries near Iran to accelerate shipments and extend payment terms.

The goal: obtaining more equipment before the war spreads further, but with delayed payments. The requests were denied.

Hedging help. One treasurer found the session she participated in very valuable, particularly insights on liquidity, cash pools and hedging. On the last topic, one participant said there has been no change in his hedging strategy, but he is monitoring shipments. As long as shipments arrive in the same month, there is no impact. However, shipping disruptions could throw off the timing of hedges. Another member said he is looking into modifying his hedging strategy.

“I’m glad that everybody is sharing what they’re thinking,” the first treasurer said. “I’m going to go back to my team and consider a few additional things. It’s really helpful to have the conversation; I really appreciate the sharing.”