HSBC's Guide to Cash, Supply Chain and Treasury Management in ...

Understand Your Loan Agreements
Fortified Against Future Financial Crises?
The accepted covenants and clauses when negotiating loan agreements may seem reasonable at the
time. Financial covenants are an inevitable part of bank loan agreements. However, during the crisis,
even covenants that had seemed very remote became tripwires. Therefore, it is important to have a
good understanding of what will cause a breach and be ready to communicate early with lenders.
The clause that caused several companies significant problems was something few would normally pay
a lot of attention to: the market disruption clause. When invoked, this caused companies to go from a
LIBOR-based rate to paying the bank’s cost of funds, which it was impossible to verify.
Maintain Good Relationships With Your Banks
While there is much discussion about the merits of relationship banking, there can be no doubt about
the truth of the old adage: it is in difficult times that you find out who your real friends are. It is always
important for companies to make sure that relationship banks understand their business, and what
makes it work. When faced with a crisis, banks are forced to trim their exposures due to the constraints
they face, and companies need to ensure that they are on the list of relationships the bank wants to
preserve.
Equally important is ongoing communication. Problems identified and communicated in advance are
easier to deal with – and the company is recognised as being competent and professionally managed.
No matter how good a company’s relationship with its bank, it is not helpful to demand help at short
notice, as many companies did in 2009.
Currencies Are Volatile
Currency hedging generates significant debates in most companies, and is too large a topic to cover
comprehensively in this article. One of the biggest problems is that most companies have many currency
experts – unfortunately, most of them do not work in treasury.
It is true that a good hedging programme costs money, in terms of the actual cost of hedging,
opportunity costs if potential gains are lost, and, above all, in the administrative effort required to gather
data and monitor exposures.
Manage Counterparty Risks
Managing counterparty risk is another thing everyone agrees is necessary, but which encounters a lot of
resistance in practice.
Again, the crisis showed that it was important to have processes already in place for looking at all
counterparties, and understanding all risks, even those that were not immediately obvious. While some
changes are needed, it is much easier to adapt existing processes than to start from scratch in the
middle of a crisis.
Now that the crisis has passed, it may seem tempting to lower the level of vigilance.
HSBC’s Guide to Cash, Supply Chain and Treasury Management in Asia Pacific 2012 45
The New Economic
Landscape