While corporate treasurers generally know they need to respond to this new reality, the big question is how they do so. While the consensus is that rate rises are close to peaking and the next major move will be down, there is no guarantee that will be the case nor clear central bank signals when it will happen.
For the short to medium term, one general theme amid the uncertainty has been a greater openness from corporates to discuss optionality. For instance, many are now willing to consider buying an interest rate cap, which limits the maximum interest cost for floating-rate exposures. This solution would therefore take action to address an imminent risk while not locking in what might look like onerous interest expenses in a year or two.
That might be considered sensible, but CFOs and treasurers also should take a broader and longer-term view. From our discussion we are observing a greater focus on making sure there is a framework to manage interest rate risk either being put in place or being updated. Certain larger corporates have implemented policies that allow them to change the mix between fixed- and floating-rate financing in a relatively wide range – empowering the treasury department to act quickly when economic variables change.
Before that the first priority for any corporate treasurer is to understand the tools available to them in today’s market. We support our clients with a variety of training sessions and workshops on interest rate risk management, particularly for those who may not be accustomed to dealing with interest rate products.
Data is also key to informed decisions. This can include to look to times when the rates curve was previously inverted, such as during the oil crisis in the 1970s. We support clients both with such backtesting as well as with a forward-looking risk quantification via value-at-risk analytics to help them assess the potential impact of today’s decisions on their KPIs.
For clients who utilise financing in various parts of the world – whether in emerging or developed markets – they need to be aware of interest rate dynamics in multiple markets with vastly different macroeconomic profiles. Here HSBC can throw the tremendous value of its global network into the conversation – being able to provide relevant information and execute the risk management solutions chosen by our clients across the world.
Finally, a growing range of financing instruments includes clauses linked to our clients’ sustainability targets. In many cases those targets can be mirrored in hedging solution to allow companies to align their ESG strategy across financing and treasury operations.
Ultimately, the need to make adjustments comes down to the assessment of the individual company’s risk capacity – with interest rate derivatives like swaps, caps or swaptions being available to transfer the risk profile efficiently. After the past 18 months have handed corporate treasurers a painful reminder of interest rate risk, they should ensure they are better prepared for it in the future. HSBC strives to be their partner on this journey and our teams are looking forward to the next conversation