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2022 treasury trends and market dynamics

Date:
December 1, 2021
  • amol dhargalkar headshot

    Authors

    Amol Dhargalkar

    Managing Partner, Chairman
    Global Head of Corporates

    Kennett Square, PA

Closing a second COVID-impacted year brought many challenges to treasury and accounting professionals, especially related to managing financial risks. While record equity prices and demand for both investment-grade and high-yield debt created unique capital market opportunities for companies, other factors, including inflation and changing labor market dynamics, introduced unforeseen challenges throughout finance organizations. Looking forward to 2022, these and other dynamics will continue to impact both strategic and operational decisions treasury teams make to manage their financial risks. Three key dynamics from the past year impact priorities for 2022: inflation, labor market dynamics, and technology adoption.

Inflation

Inflation in the U.S. is consistently reaching levels beyond the Fed’s target due to a variety of factors, including:

  • Unprecedented fiscal stimulus
  • Supply chain impacts driven by a change in consumer consumption towards goods and away from services
  • Re-opening from 2020 COVID lockdowns

Low interest rates also fuel demand for consumers and businesses alike. Treasury teams must cope with higher input costs, impacts on financials, and the possibility of rising interest rates on impending debt maturities or existing floating-rate debt.

Labor markets

Inflation has had a meaningful impact on labor markets as well — increasing costs for consumers contributed to a shift in labor market dynamics towards employees for the first time in generations. COVID also created more flexibility, leading some employers to hire remotely for jobs that only two years ago would have been on-site, five days a week. Recruiting within treasury and accounting roles has been incredibly competitive, with firms in some cases struggling to retain or recruit talent, ultimately leaving the remaining team members to bear a greater burden and risking burnout.

Technology

Technology remains a constant source of hope for under-resourced teams, and rapid adoption of tools such as Zoom, Teams, and Slack enables efficiency gains. Across treasury, teams continue to focus on leveraging the most they can from their existing treasury technology stack, including treasury management systems, risk systems, trading platforms, ERPs, business intelligence tools, and other solutions. Increasingly, companies look to get more from available tools through integration rather than trying to fit processes onto difficult-to-modify technology platforms. By automating tasks that otherwise take hours every week, firms not only move treasury towards spending time on more strategic tasks but also increase their ability to retain top talent.

Clearly, these dynamics are inter-related and feed on one another, creating even larger impacts than if only one was prevalent by itself. With the ongoing expected impact of inflation, tight labor markets, and technology utilization, treasurers looking to manage financial risks in 2022 remain focused on both areas within their control (interest rate and currency risk) and adjacent risk areas (commodity risk).

Interest rate risk

The coming year brings both the impact of potential Federal Reserve actions to tame inflation and a significant capital markets change, the end of LIBOR. The annual concerns treasury faces around potentially rising interest rates are heightened in 2022. Pre-issuance hedging became popular throughout the pandemic for investment grade issuers, and now with the risk of rising interest rates is a critical tool in the treasurer’s toolkit to stem their impact. Similarly, extending existing hedging positions on floating-rate debt is important to consider going into early 2022. Unlike previous years, though, treasurers cannot simply “copy and paste” previous hedging structures as new LIBOR debt and derivatives will generally not be allowed (subject to some exceptions) in 2022. LIBOR’s preferred replacement, SOFR, exists in many different indices, making specification and selection more challenging initially. In addition, companies may need to restructure hedges to match debt or hedge fixed rate debt back into a floating rate, leading to a derivatives-based conversation around SOFR selection and availability.

Currency risk

With volatility remaining high, currency risk is always relatively high on treasury’s annual to-do list. For next year, with increasing turnover and greater-than-ever focus on meeting financial targets, treasurers are focusing on two key questions:

  • Is my FX program doing everything that I need?
  • Can I run the program more efficiently by focusing more time on strategy (such as exposure minimization) and less time on tactics?

For the first question, treasurers are evaluating their programs by resetting their objectives, comparing to peer companies, and often taking a “blank slate” approach towards currency risk management. For the second question, companies are increasingly investing in specialized technology platforms that save treasury significant time — and integrating these tools with the rest of their technology stack. While integration used to be challenging, new software solutions allow for easier movement of data from one set of tools to another, allowing for customization of processes and technology to maximize efficiency.

Commodity risk

Inflation is clearly seen with commodity prices rising rapidly throughout the year. For those firms for whom commodities represent significant input costs, hedging has become a higher priority than ever before. Unlike with interest rate or even currency risks, treasury doesn’t control most of the decisions around commodity risk management because other parts of the organization have direct responsibility, such as within supply chain or procurement. With only half of companies using financial hedges to mitigate commodity price risk, treasurers have largely focused on putting together the necessary cross-company team to understand and evaluate commodity price risks as an initial priority. For those going beyond this first step, companies face additional challenges, like nuanced hedging markets that may not perfectly match underlying exposures, and intricacies of hedge accounting to minimize volatility from hedging programs on the firm’s financial statements. Commodity hedging may be the most difficult program to develop; often it can be the most impactful on the firm’s competitiveness and overall business as well.

The bottom line

The next year will bring many opportunities for treasury professionals to demonstrate the value of prudent financial risk management to senior management, boards of directors, and investors. With such a rapidly changing environment, staying nimble and accessing the necessary knowledge and tools to execute a successful hedging program has never been more critical. We look forward to supporting corporate treasury teams throughout 2022 and beyond.

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About the author

  • Amol Dhargalkar

    Managing Partner, Chairman
    Global Head of Corporates

    Kennett Square, PA

    Amol Dhargalkar is a Managing Partner and Chairman for Chatham’s Board of Directors. He is the Global Head of the Corporates sector and brings over 20 years of experience in derivatives capital markets expertise.

Disclaimers

Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.

Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.

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