2023 corporate treasury trends

Treasury teams seek certainty on future debt issuances

While the Fed signaled a slowdown on rate hikes, we’re unlikely to see rate cuts or a return to zero rates in 2023 — the era of ZIRP (zero interest rate policies) is over. To create certainty on existing and future debt, many companies are employing new interest rate risk management strategies. With the cost of forward hedging at historically low rates, corporations are taking advantage of negative forward premiums to lock in low rates on future debt issuances. We continue to see strong usage of cross-currency swaps, primarily to synthetically convert debt from USD to EUR, JPY, and CHF. After many corporates re-couponed their cross-currency swaps in asset positions in 2022, we are starting to see some come back into the market to execute new transactions.

Corporates face the LIBOR transition deadline

With LIBOR scheduled to end on June 30, 2023, corporates previously taking a wait-and-see approach will step off the sidelines to modify their existing debt instruments, derivative agreements, and other contracts to replace LIBOR references with alternative reference rates. LIBOR’s preferred replacement, SOFR, exists in several indices, making specification and selection more challenging. Companies may also 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. Corporations must also consider hedge accounting implications since debt and derivatives falling back to different SOFR indices (often Term SOFR for the debt and Daily SOFR on the derivative) can create a mismatch that triggers a de-designation/re-designation event. Corporates that act now can avoid a “traffic jam” in the second quarter of 2023 as a flood of late movers come up against the deadline.

The strong dollar brings FX to the forefront

Given recent economic volatility, geopolitical uncertainty, and central bank actions, the U.S. dollar is the strongest it has been in 20 years. After companies came to expect EUR-USD in the 1.20 range, the currency pair has since plunged to below parity. For U.S. companies, this reduces earnings by devaluing non-USD revenues from foreign subsidiaries. It also significantly impacts cross-border mergers and acquisitions, increasing the FX risk between deal announcement and close. Many corporates are increasingly focused on managing foreign currency risk and mitigating its impact by starting new hedging programs, adding cash-flow hedging programs, or reassessing existing programs to ensure they still meet objectives.

Treasury moves from assessment to action on commodity risks

With dramatic, unexpected price fluctuations impacting natural gas, oil, steel, aluminum, corn, wheat, soybeans, and many other commodities, hedging programs proved their value in 2022. For organizations where commodities represent significant input costs, hedging will move beyond the discussion phase into action for 2023. Chatham has seen increased hedging frequency for steel, base aluminum, and agricultural products. Hedge accounting has also proven more attainable for commodities, although it can still pose challenges in nuanced hedging markets. Corporates planning to start new commodity programs should standardize their commodity contracts, where possible, to avoid pockets of disparate risk that are difficult to hedge and put counterparties, regulatory compliance, and system testing in place well in advance of executing the program.

Global issues impact treasury strategies and investments

Several global issues will impact how central banks navigate the fight against inflation in 2023. The loosening of COVID-zero policies may impact global inflation and demand should China fully reopen. Natural gas prices may affect European consumers and businesses, especially through the winter. The ongoing Russia-Ukraine war may also have significant impacts. Central banks will continue to monitor the impact on inflation and employment. With rapid changes occurring across many industries, we are seeing accelerated investments in digital transformation to better understand exposures and communicate program impacts to a wider set of stakeholders. As financial reporting increases in importance, treasury teams are also increasingly seeking to automate manual processes, integrate disparate systems, and improve controls.

Stepping up to manage forecast uncertainty, liquidity concerns, and volatility over the past three chaotic years, treasury teams raised their profiles and earned a seat at the table for enterprise-level strategic conversations within their organizations. This year, they will leverage this higher profile 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 tools and insight to execute a successful hedging program has never been more critical. We look forward to empowering our clients to make the best capital market decisions by accessing our data, insight, and operational support.