The Groans of August: CFOs Acclimate
The impact of S&P’s downgrade and the market’s wild ride force finance executives to rebalance their reactions, even as they search for investments that work.
First, the Standard & Poor's downgrade of its rating on the U.S. sent shivers through the corporate finance -- and the rest of the world -- late last week, dropping the nation from AAA to AA+. In its report explaining the change, S&P described Washington's compromise fiscal consolidation plan as falling short “of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.” Then came the global markets' tumbles, recoveries, and tumbles again, reflecting European concerns as well as American ones.
For CFOs and the people who work with them, now comes trying to deal with it all. And try to explain what it means.
“We’re in unknown waters,” says Anthony Carfang, partner and director with Treasury Strategies Inc., who notes that a primary impact of the change is to boost an already high level of uncertainty in the economy. “CFOs have never had to issue corporate bonds when U.S. debt itself, the benchmark, was not triple-A rated.”
With the downgrade, Treasuries have gone from being viewed as riskless to carrying at least a bit of risk, adds Lance Pan, director of investment research and strategy with Capital Advisors Group in Newton, Mass. “There’s no precedent,” he says. “This is the benchmark from which all securities are priced.”
In practical terms, of course, among corporate and other investors “Treasuries are still considered a safe haven,” according to Pan, participating in a conference call. In fact, the yield on one-year Treasuries, which was at about 20 basis points in late July, dropped to 10 basis points in early August, according to the Federal Reserve.
Tough Decisions, Delayed
What’s more, the debt ceiling agreement reached in Washington just days before merely put off tough decisions on spending and taxes to be dealt with later; the congressional committee, formed to address those issues, became the latest "team of rivals" put in charge of finding a solution. And the spending cuts agreed to don’t occur until 2012 and 2013. As a result, “CFOs are taking more and more chips off the table, because they’re losing confidence in Washington,” Carfang says.
In an environment with this level of uncertainty, raising cash is a prudent step that many CFOs already are taking, he observes. “They’re building a bigger cushion, being more cautious.”
On Friday -– just before the downgrade -– FMC Corp., the $3.2 billion chemical company, executed a five-year, $1.5 billion unsecured credit agreement with a group of lenders; the company can use the funds to grow existing businesses, pursue external growth opportunities and reward shareholders, according to a statement announcing the loan agreement.