Monitoring cash positions has taken on greater urgency in the face of revenues under pressure and the uncertainty around the business environment in the short to medium term. With governments providing working capital relief, managing the liquidity also means looking for safe haven short-term investments.
The consensus view is that there isn’t going to be a V-shaped recovery. “The ability of businesses to recover will depend on the pace at which consumer demand rebounds, which in turn hinges on governments' ability to restore confidence by reducing fear of contagion,” says Clara Lau, a Moody's group credit officer and senior vice-president.
Another credit rating agency, Fitch Ratings, points out that liquidity factors were a particular driver of credit rating downgrades within the homebuilding and basic materials sectors, both in the second quarter of 2020 and over the last 12 months. Sector-wide market changes, meanwhile, have been a particularly important driver of downgrades in the retail, leisure and consumer products sector since the effects of the pandemic started to be felt by corporates.
In response to both liquidity and market changes, a number of companies have been doing internal housekeeping within their financial operations, including accelerating the adoption of technology in their treasury function. For example, APIs (application programming interfaces) feature more, enabling real-time visibility of transactions and trade settlements for treasurers across multiple accounts and third-party platforms, such as mobile wallets.
“APIs help companies easily adopt digital solutions. For some companies, this is critical for them to continue doing business in the future,” explains John Laurens, group head of global transaction services at DBS. “We will see extensive cloud-based API interactivity with customers and ecosystem partners in the short-term. That will be the norm going forward.”
The unprecedented lockdowns that halted businesses globally forced governments to step in to provide relief measures. Moody’s Lau points out that these fiscal and monetary stimulus programmes have helped and provided temporary relief to companies. “However, the operating performance and financing capability of companies are vulnerable to financial market shocks, particularly if a second wave of infections results in renewed lockdowns.”
Meanwhile, the large sums of cash received, especially by these large business groups, present a different kind of challenge. “Treasury departments are now sitting on a dilemma because their treasury management mindset does not handle this much cash normally,” shares Aidan Shevlin, head of portfolio management for global liquidity, Asia-Pacific, at J.P. Morgan Asset Management. “They are struggling almost to invest it. Banks are offering zero rates or even negative rates in some cases.”
Shevlin suggests diversifying into liquid short-term investments, such as money market funds, given today’s low interest-rate environment. Treasurers looking to optimize their capital, she continues, should first consider the timeframe of their investment and also the expectations on returns.
Tracking cash via APIs and deploying them for short-term investments are likely to dominate corporate treasury room discussions for the rest of 2020. Across Moody's Asia-Pacific rated corporate portfolio, the rating trend in Q2 2020 remained negative, although the number of negative rating actions has decreased with the agency taking 86 negative actions in Q2, down from 120 in the first quarter.
At Fitch Ratings, downgrades of Fitch-rated corporates in the Asia-Pacific exceeded upgrades by three times over the last 12 months, and by 13 times during 2Q20. Among the 60 downgrades over the 12 months to June 2020, 20 were due to weakened liquidity. A further 11 were driven by sector-wide market changes, where revenue declines affected credit profiles on a long-term basis, but liquidity remained adequate and was not the reason for the downgrades.
