Stay in the know
We’ll send you the latest insights and briefings tailored to your needs
9 May 2024
Insight
Compared to 2023, do you anticipate that you will enter into more or less of the following treasury products in 2024?
- Survey results illustrate the number of respondents indicating no change in their use of interest rate derivatives significantly up from last year, and the number of respondents intending to use interest rate derivatives down from last year, perhaps reflecting expectations that the height of the interest cycle has passed.
- The number of respondents using currency derivatives increased slightly on last year, again perhaps reflective of macro-events and strength of the US dollar.
- Responses indicate use of energy and commodity derivatives broadly static to last year, albeit with a limited number of respondents indicating these are used, suggesting that likely users for these assets classes remain sector dependent.
- More generally, accounting rules can influence a corporate's derivative strategy. "If you are in a sector where to hedge that risk is more important than P&L volatility then you will probably use derivatives".
- Another respondent highlighted the importance of natural hedges in the business as a means for corporates to protect against rate volatility, eg by passing costs on to customers.
- This seems a surprise given recent inflation highs, however some respondents suggested that these remained specialist products.
- One interviewee noted the need for corporates to have sophisticated hedging strategies if IR derivatives are to be used: "[usage] is very industry specific, looking at specific risks and having specific and efficient hedging policies."
|
"[We] implemented IR hedges that are currently positive to the business, given our business view that IR will not fall as quickly as the current curves predict." "Our core strategy remains unchanged but we are reviewing developments closely." "There are other ways to hedge eg smart procurement to lock in pricing, pass costs on to customers." |
Indications are that the current interest rate cycle has peaked. Has that impacted your treasury planning and interest rate management strategy?
- Interview responses indicate corporates are raising shorter term bank lending until market conditions improve before borrowing long term fixed rate debt. As one respondent noted, "[we are likely to use] slightly short term funding until the rate decrease comes through" and another noted "[we will] delay longer term debt until rates fall again."
- On the interest rate cycle, the view from respondents seems to indicate the cycle has peaked although the general sentiment was that interest rates are likely to stay higher for longer and will not return to the historically low levels seen in the recent past.
|
"People are getting used to a higher interest rate environment….and recognising that we are in a world where interest rates in the medium term will stay the same" "[We] wouldn't be surprised if rates remain broadly flat over the next 12 months"… "[It] doesn't make sense to hedge interest rates – coming in too late – [we] hope it will come down later this year.." |
In order to address mismatches between functional currencies and the currencies of debt raised, do you anticipate that you will enter into currency derivatives in 2024 (to take advantages of opportunities in certain markets?)
- Interviewees were split on whether the results suggested any meaningful trend towards to arbitraging across debt market and currencies to take advantage of cheaper pockets of liquidity, however size of market was certainly relevant.
- One interviewee noted that a lack of strategy on this subject is surprising: "How can 24% be undecided?" but overall sentiment is that this would be a strategy for larger corporates pursuing opportunistic events and so willing to bear the additional complexity.
- One interviewee noted the depth of the US dollar bond market: "everything screams dollars at you". This could illustrate a trend in replacing sterling debt with USD debt and hedging the resulting currency exposure.
|
"The Sterling market is small and we need a bigger liquid market so went to Euro market which was cheaper." "Markets are liquid and competitive enough to avoid arbitrage." "[We are] changing the currency mix of our debt and swapping back to GBP so increased use of FX products." |
Key contacts
Legal Notice
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2024