Annual review 2017

Chaos as usual

How can companies meet their financing needs in a secure and sustainable way at a time of unprecedented economic volatility and political uncertainty? The answer, argues Sachin Davé, is by arming themselves with the right tools to remain extremely agile.

Sachin Davé

Partner, Allen & Overy

Currency and equity market volatility, the prospect of higher interest rates, conflict, terrorism, Brexit, Trump, nationalism, protectionism, the slowdown in China. It is something of an understatement to say we live in highly uncertain times.

Yet, for companies and institutions trying to plot secure and sustainable ways to meet their everyday financing needs, the current environment has given a new depth of meaning to the word ‘uncertainty’.

That is the view of Sachin Davé, an ICM partner based in our London office, who says that “constant volatility” and “complete policy uncertainty” are the defining characteristics of the current business environment.

“I would say we are probably in the most unpredictable time since the end of the financial crisis and it is now a very different set of issues that is driving events. You don’t just have macro-economic and political uncertainty; it’s the impossibility of predicting what’s going to happen next that is so difficult to contend with.”

Following the financial crash, there was at least some kind of policy consensus among political leaders and central bankers about how to respond, he argues. But if you ask clients to pinpoint the biggest issues facing them today, they are often at a loss to decide between any number of uncertainties.

In the context of debt financing, clearly future interest rate policy is a big concern. Most clients work on the assumption that other central banks will follow the U.S. Federal Reserve and start to raise rates fairly soon, bringing to an end one of the longest periods of low interest rates on record.

Yet despite the impact that will have on the availability of cheap debt, clients are generally of the view that monetary policy, though important, is today only a relatively small part of the uncertainty puzzle they are wrestling with.

On the political front, you would expect Brexit to be right at the top of many boardroom agendas, yet it is in the politics of the U.S. that the deepest worries lie, he says.

“Most of our clients are global businesses and Brexit, to be frank, is not right at the forefront of their radar screens. Companies are far more worried about what President Trump is doing – precisely because there is no policy certainty whatsoever.”

For many clients this is uncharted territory.

“We are in a strange world where companies feel they are dealing with a level of macro-economic risk that is so overwhelming that their own internal business issues become almost secondary to it,” says Sach.

“An executive I spoke to recently put it perfectly. Explaining why his business was pushing ahead with a financing transaction despite considerable volatility within the business, he simply said: ‘I would rather pay for my own uncertainty, because I don’t want to pay for macro-uncertainty when who knows what the politicians will do next’.”

The finance conundrumRead more

Plotting a workable financing strategy in this environment is tough. How does a treasury team judge the right time to raise finance and decide on the best route to take, whether that is to issue bonds, launch a rights issue, seek new bank financing, complete a high yield issue or place debt privately with investors?

When events and conditions are so unpredictable the honest answer, says Sach, is they can’t, precisely.

Instead they need to arm themselves with the right toolkit enabling them to react as quickly as possible to events as they unfold. Above all, he says, that calls for agility.

“You need to develop as many alternative funding platforms as you can, across currencies and across types of instruments. And you need to remain flexible so that when market windows open and opportunities present themselves you are ready to grab them, knowing that the window may not stay open for long and that the opportunity may not come back again.”

For many of the largest and most sophisticated global banks and corporations that agility has probably long been part of their DNA, he says.

“They tend to maintain a whole range of funding platforms. That might include an SEC-registered debt shelf, a European medium-term note programme, a separate platform of structured products, the ability to raise finance in one currency and swap to another at the right time, and all those things co-exist.”

“Armed with this kind of corporate financing menu, they can react quickly to events, picking the appropriate items from the menu at the right time. In advising clients of this kind, our job is to help them look at all their options as a whole and make sure they keep disclosures and other issues consistent as they jump from one to the other fairly quickly.”

Companies on the next tier down – perhaps big national champion companies or banks that may need to access international capital markets less frequently but at key times – face a tougher time in making such calls.

They don’t have the resources to maintain a rich variety of funding platforms. Instead they look to us to help them create a flexible financing framework that gives them the chance to access multiple markets and use as wide a range of instruments and structures as possible.

While putting such a framework in place might be a bit more expensive in the short term, he says, there will be savings down the road, a fact that many clients miss by focusing too intently on the upfront transaction cost. “They should be thinking: ‘If I can make a 25 basis point saving on raising USD500m, what does it matter if I spend another USD15,000 up front?”

But creating a strategic framework for short, medium and long-term funding options requires planning from day one, he says.

“It’s like building a house. It’s much better to think of all the extensions you might eventually want to do at the beginning, otherwise you’re going to be knocking down walls and moving things around, and it’s inevitably going to end up being a lot more costly.”

Balancing riskRead more

The need to plan ahead has become all the more important for two reasons.

Firstly, transactions are now being completed at a much faster pace than ever before as companies try to complete deals quickly and before they get hit by any unforeseen risk that might suddenly emerge.

There is also a noticeable increase in tension between clients and their banking advisers about how best to read and react to the chaotic environment they are operating in – a tension that can often lead to opportunities being missed.

“We’ve generally seen that the most nimble, fast-moving clients – those willing to take a degree of risk – tend to do better because they are ready to jump at opportunities when they come up.

“But there’s a counter-balance to that too which I don’t want to overlook – the risk of executing too quickly, of course, dramatically increases the risk of mistakes happening.”

That, he says, is A&O’s calling card. “Because of our global network we are close to the issues on the ground in multiple jurisdictions, able to interact with regulators across different markets bringing both in-depth local market knowledge and a global perspective. Combined with our technical ability across the full range of financing options, we are in a position to help clients think through their options and react quickly when events turn.

“And that’s important because these issues generally come up on a Friday night,” he says, citing a major transaction where an attempted military coup happened between the signing of a deal on Friday afternoon and the closing of the transaction early the following week. “A great deal of knowledge and expertise had to be mobilised at very short notice to steer the transaction safely through.”

Temporary or permanent?Read more

So are the current levels of uncertainty a temporary phenomenon or a permanent feature of life for A&O and its clients?

Sach is quite clear it is the latter.

“Somewhere around 2010 I thought maybe it was all going to get more sane for a while. But I have completely given up on that view now and personally I’ve resigned myself to the idea that we will continue living in uncertain times,” he says.

“But the truth is, either you embrace the chaos, ride it and say you will make a success of it, or you fall behind.

“Our message to clients is that, by working together, we can embrace the chaos and succeed.”

“But the truth is, either you embrace the chaos, ride it and say you will make a success of it, or you fall behind. Our message to clients is that, by working together, we can embrace the chaos and succeed.”