Tag Archive for: funding strategy

Brexit – the impact on your business

| 02-05-2018 | Lionel Pavey |

 

As the negotiations between the EU and the UK get ever more complicated, there is a strong possibility that rather than a hard or soft Brexit there will be no agreement whatsoever. For businesses that either export to the UK or import from, this could have a fundamental impact on their survival. The Netherlands exports goods and services to the UK with a value in excess of EUR 40 billion per year; more than 200,000 jobs are directly linked with trade to the UK; Dutch capital investment in the UK is more than EUR 180 billion. We take a look at some of the key areas where business could be affected from the viewpoint of cashflows.

Foreign Exchange

It is not known how many Dutch companies actively employ a hedging policy. If GBP was to significantly get weaker, demand in the UK might fall or lead to more contracts having to be settled in GBP. However, at the same time, Dutch companies relying on components from the UK could see their suppliers having their profit margins squeezed – potentially leading to problems in maintaining and fulfilling existing contractual obligations. The biggest concern would involve increased currency volatility. If EUR/GBP does become more volatile, this could lead to clients in the UK shopping further afield to obtain the goods and services they require – leading to a drop in exports for the Netherlands. What are the alternatives available – banking in the UK; offsetting existing supply chains by changing components with UK firms etc?

Funding

At present, the UK receives EU funding and this can be the basis for investment decisions regardless of the location of the business. As this will stop when they leave, there will be an impact on companies that have a multiple presence in both countries. Changes in regulations will bring extra complexity, restrictions and possibly affect the profitability of existing business arrangements. The immediate loss of passporting rights for financial services should not be underestimated.

Supply Chain

All existing supply chains operate under the premise of the single market, with no internal quotas or tariffs. The initial affect will be seen by the imposition of trade barriers, caused by a new trade agreement. This does not just extend to trade tariffs, but also to the implementation of VAT (BTW) on B2B transactions. The dairy industry is one that could be hit especially hard. EU tariffs for non-EU countries are as high as 45 per cent on some dairy products.
Non trade barriers are also a threat – different technical standards, labelling, compliance, together with extended delays in the shipment process (as goods will need to be inspected) will add to both the cost and time of trade.

KYC

All parties will be affected – but do you know what the position is of your clients in the UK? What are their pain thresholds; are they seeking alternatives markets; are they looking for alternative suppliers; how resilient are their logistical chains to change; how will changes in law and regulations affect their operations?
There are a myriad of unanswered questions that need to be addressed – one on one – with every counterparty.

What to do

It is imperative that companies perform a Quick Scan as soon as possible to try and evaluate what their exposure is in the UK and what percentage that makes of all trade for a company. Having ascertained the exposure, it then becomes necessary to stress test the processes and try to model the results on the company by inputting new variables.

With less than 1 year to go, you will need to start very soon!!

Lionel Pavey

Lionel Pavey

Cash Management and Treasury Specialist

 

Repurchase Agreements – alternative short term funding

| 16-04-2018 | treasuryXL |

 

There are times when a corporate needs to borrow funds – this can be accomplished in a manner of ways. If the corporate actually held securities (Government paper, bonds etc.), it could consider entering into a repurchase agreement – better known as a Repo. This transaction entails a trade where the corporate sells securities at an agreed price and date to a counterparty and purchases them back at a future date for an agreed price. In return, the corporate receives cash – in essence, a Repo is a collateralised loan. Let us look at the working and reasons behind this money market product.

As a funding instrument, repos have been around for 100 years – originally used by the Federal Reserve to facilitate open market operations. As a repo is a collateralised loan, the interest rate is, normally, lower than for unsecured lending. The major factor is the type of collateral that is offered. This can normally be Government paper, but can also include other forms of bonds and securitised paper. The interest amount is not paid separately, but included in the final price upon redemption. The classic term for a repo is a “sell and buyback” – the paper is sold in exchange for a principal amount and bought back on the agreed future date. The counterparty that buys the paper is entering into a reverse repo.

By offering the paper as collateral, the lender is entering into a secured transaction – if the borrower defaults, the lender still holds the paper. The preference in the market is for high quality liquid securities, though markets can be found for more opaque paper. After the financial crisis, the demand for repo trading rose sharply as the interbank market was reluctant to extend unsecured funding to counterparties.

The paper falls into 2 distinct categories – specials and general collateral. A special refers to a specific security (recognised by its unique ISIN number) that is in demand. These are bonds that are normally being very heavily traded in the market and market makers need to cover their short positions by borrowing the paper. As such the rates on specials can be appreciably lower than on normal repos – and far below the rates on the interbank money market. In particular times of shortage, rates can even be negative.

General collateral is any paper that is accepted as collateral at that moment – it could be any German Government paper as this is deemed by market participants as being of equal value and standing. Most collateral is subject to a haircut – due to the additional work involved and the potential credit risk. This means that a bond with a face value of EUR 1 million can only be used as collateral to borrow EUR 950,000. Whilst these loans are collateralised, and often cover Government paper, the is always a specific credit risk.

For the buyer of a repo, they are lending funds and receiving collateral. One of the main players on the buy side are Money Market Funds. For the seller there is an opportunity to receive short date finance whilst pledging assets that they are holding in their portfolio.

Repos normally have a short tenor – from overnight to 3 months. They facilitate the short dated market and provide funding at attractive rates, and assist bond traders in covering their positions.

If you have any questions, please feel free to contact us.

 

 

Has the Bond bull market run out of steam?

| 02-11-2016 | Lionel Pavey |

building2

The yield on Dutch 10 year government bonds has increased sharply in the last month (October 2016) –from 0.02% at the start of the month to 0.28% at the end – bond prices of course move in the other direction and have gone down. Why?

Possibility that the Federal Reserve will raise rates in America? Uncertainty over when the ECB will end their QE programme and the knock-on effects in the market?



ECB president Draghi has not said if the programme will end in March 2017 as originally envisaged. As monetary policy has not delivered the boost to the economy that was expected, maybe it is time for Government to look at changes to the fiscal policy via a Keynesian stimulus leading to lower taxes and an increase in direct government spending.

So if the bond market has reached the bottom and prices will start to rise, what will be the consequences?

The ECB is holding over EUR 1 trillion worth of bonds – can they unwind this position? Immediate selling would lead to a collapse in prices and a large increase in interest rates – deflating an already fragile economy and withdrawing liquidity from the financial system. Could the debt be monetized – the scale involved has never been seen before, so difficult to say.

But, what will happen to bond prices when yields start to rise?

If the yield on 20 year government bonds in the EU was to increase by 2% from their current levels, this would lead to a fall in price of 25%. If the yield on 30 year government bonds in the EU was to increase by 3% from their current levels, this would lead to a fall in price of 44%.

As the ECB would have to sell their existing bond holding at lower prices, there would be a huge loss on their portfolio – who ultimately would have to bear this loss?

What would be the effects on the equity markets – there has to be a knock-on effect if bond yields rise leading to a fall in equity prices. Is the current fragile market able to absorb these transactions – is there enough liquidity in the market?

Very worrying times ahead – companies will have to review their funding strategies, but this can lead to opportunities.

Lionel Pavey

 

 

Lionel Pavey

Cash Management and Treasury Specialist – Flex Treasurer

Business case – Funding strategy : how Fastned uses Nxchange

| 09-05-2016 | interview with Claire Tange from Fastned

Fastned’s growing and they’re giving investors the chance to directly buy and trade in certificates of shares via Nxchange. We’ve asked Fastned’s CFO Claire Tange to explain this type of financing.

 

What is new about this type of financing?

Fastned is now listed on a new pan-European regulated stock exchange called Nxchange. This new stock exchange cuts out the middleman (the broker). This means that investors in Fastned can directly buy and trade in certificates of shares via the Nxchange website. Also, there is a strong social component to the exchange. It’s like Euronext meets LinkedIn.

How would you describe the process?

Because Nxchange is a fully regulated stock exchange, Fastned has to comply with all the regulations that also hold for companies listed on e.g. Euronext. That means that a.o. we changed our accounting to IFRS reporting and that we filed a prospectus with the AFM. This was an intense process, but we did it.

Which alternatives did you consider?

Fastned already had a listing on NPEX, but we felt that we needed a bigger exchange to raise more capital. Given the fact that Nxchange is a fully regulated stock exchange this opens the doors to funds that hold this as a prerequisite. Also, the new exchange offers benefits to our investors, such as vastly improved liquidity.

What are the risks in comparison with other types of financing?

Nxchange is a step between crowdfunding and Euronext. It offers the comfort of a regulated market without the illiquidity of crowdfunding. Like any investment, an investment in Fastned has risks associated with it. We are a new company in a new market. On the other hand, Fastned is infrastructure. Investments are backed with tangible assets. And in the end, the business model is ‘good old’ retailing. We sell electricity on location. Perhaps not so exotic after all.

What are the benefits for you?

Fastned has a very strong community that wants to support the company and the mission we are on. Nxchange is the way to engage and expand our community. We started with the EV enthusiasts but now more and more ‘regular’ investors are joining in.

What are the benefits for people joining?

For Nxchange: Investing in fast growing companies directly on the exchange. Fastned is the first but definitely more will follow. For Fastned: Investing in a huge growth market. If you believe in the transition from fossil fuel powered cars to electric cars you will realise that this will create huge opportunities. In Europe alone 500 billion Euro worth of sales of diesel & petrol annually will shift to electric. Fastned is one of the leading companies in this transition.

If you want to know more about investing in Fastned please visit their website.

Claire TangeClaire graduated as chemical engineer at the TU Delft. After an internship with JP Morgan she decided to pursue a career in the financial sector. She continued as investment banking trainee with ABN Amro / RBS and for almost six years, half of which in London, she worked in M&A and Corporate Finance. Since 2006 Claire was increasingly involved in renewable energy projects in faraway places (Antarctica, Himalayas) and from there on it was a small step to join Fastned and strengthen the team with her financial expertise.