Le magazine du trésorier - n°70 - 2ème trimestre 2010 - (Page 10)

Reducing your Corporation’s Refunding Costs through Managing its Debt-Duration(1) Leading Central Banks signaled last March their readiness to reign in the excessive liquidity needed to keep the money markets afloat during the banking crisis 2008/2009. This move also ends a permissive monetary policy, which yielded (too) low interest rates for two decades. Corporate treasurers are now confronted with the risks of rising money market rates and bond yields, along with ongoing gyrations of risk and liquidity spreads initiated by the lingering sovereign debt and banking crises throughout the world. Next to their top priority - safeguarding the company’s liquidity at all times - treasurers endeavor to profit from the near term interest rate volatility and, at the same time seek shelter from the long term perspective of deteriorating refunding conditions? Through applying, on a currency by currency basis, an Asset Liability Management model to the financial and commercial cash flows of an industrial corporation we are able to demonstrate a remarkable isolation of its funding costs from the impact of rising interest rates. Furthermore the percentage of the expected currency appreciation/ depreciation in relation to the debtduration coefficient delivers a valuable gauge for the size of risk that is added from foreign currency funding. These conclusions are derived from simulating four different balance sheet adjustments for linear interest rate moves; whereas a fifth simulation introduces non-linear interest rate moves, a sixth simulation evaluates the currency effect. To avoid distorted debt-duration results the ALM-model is adapted from its retail banking applications to fit the particularities of corporate cash flows. Only stable cash flows should enter the model calculations, since their sensitivity to interest rate variations is assimilated to the bond duration of equivalent maturity. Then the debt-duration is derived from the balance sheet’s assetliability-gap i.e. the difference between the duration of the present value of the total assets and the duration of the present value of total debt, to be calculated as shown in exhibit 1. Since the model calculations do not take into account participations, fixed assets and equity capital, their values have to be compensated through a correction factor, which affects both the asset-duration and the debt Exhibit 1 FOCUS Exhibit 2 devation (exhibit 2). A final adjustment relates to McAuleys concept of modified duration: As the value of duration varies for each value of the yield curve, the duration number has to be corrected by the yield level at which it is calculated. Which yield is relevant to correct the debt-duration? In analogy to a zero coupon bond – its duration equals its yield – the liability-duration is chosen as a yield level, to reflect the debt-duration’s position relative to the yield curve, (cf exhibit 3). 10

Table des matières de la publication Le magazine du trésorier - n°70 - 2ème trimestre 2010

Cover
Contents
Editorial
Financial hightlights
Interview
Focus
Forum of advertisers
Treasurers' Associations
News

Le magazine du trésorier - n°70 - 2ème trimestre 2010

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