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To paraphrase Frankie Valli and the Four Seasons, the word of the week is “Greece”. Concerns about the financial stability of the Greek economy were the focus of the global capital markets. Because Greece is a member of the European Community (EC), questions have been raised about the value of the currency, the riskiness of credit in Europe and the impact on the potential growth of the European economy.

Unlike 2009, when the general feeling was that all the economies were slowing down as a result of the financial crisis, 2010 is already shaping up as a year where individual countries’ economies will not be moving in such lockstep.

Absolute credit spreads were wider in Europe this week, as well as the spreads on Credit Default Swaps. What is of particular interest is the significant increase of CDS on sovereign credit. There is concern that the challenges faced by Greece (a slowing economy and a massive government deficit) will soon be faced by other EC members, in particular Portugal and Spain.

As more and more countries succumb to a slowdown, the fear is that Europe will experience a double-dip recession.

The dollar is now trading at a six-month high versus the euro. We saw a bit of a flight-to-quality trade take place as investors moved to safer, less risky investments.

For the first time since last March, the yield on the 1-month US Treasury bill went negative. Basically, investors preferred owning a security that would guarantee a small known loss, rather than being exposed to a potential larger loss. January ended up being the worst month for equities since February of last year. This occurred in spite of the US government reporting the best GDP numbers in 6 years.

Again, after feeling the economies of the world were improving, people are beginning to ask if we have come too far, too fast.

Though debt issuance soared in the first half of the month, investors have stepped back of late. The credit concerns in Europe; China putting the brakes on its economic expansion; and general questions about the rate of growth and whether there will be a need for higher interest rates, has caused investors to pause their rate of investment.

The issuance of floating-rate debt has dropped off dramatically since the earlier part of the month. As the likelihood that the Fed would be increasing interest rates in the immediate future waned, the attractiveness of floaters has diminished. The current yield on floaters is quite low, making this type of security unattractive at the present moment.

On the banking front, we continue to see failures across the country. With the 6 failures announced this week, the total for 2010 is 15 banks. If this pace continues, we will witness 250+ bank failures this year. That compares with the 140 failures we saw in 2009 and the 25 we watched in 2008. Since the banks are the best indicator of how the credit markets are performing, it will continue to be important to watch for signs that the rate of bank failure is subsiding.

Does your risk management strategy support your firm’s strategic plan? Here are two opinions:

“Many of my current and former clients do not holistically align all their risk management with their business strategy,” says Dan Perkins, CTP, Senior Vice President, GTreasury. “If a company wants to truly align its risk management with its business strategy the treasurer should either sit on the purchasing/commodity committee, or execute the hedges—or both.”

Jennifer Morrison, CTP, Vice President, Senior Risk Manager, Corporate One Federal Credit Union: “What we have found to be fundamental to our weathering the storm has been, first, our organization’s cultural alignment with our risk management practices. Where there are no risk mitigations available, our Enterprise Wide Risk Management Committee, a committee of the board, is tasked with reviewing the risk assessment, mitigation plans, and accepting the residual risk (or not). This has created a culture that is very risk aware and a culture that then understood the storm that hit our investment portfolio in particular beginning in late 2007.”

Read more in the February issue of Risk, coming soon.

Download the January Risk here.

AFP staff will present a complimentary Webinar on the recertification process for all CTPs and CCMs—Everything You Need to Know About Maintaining your Credential—on March 23 at 3:30pm Eastern. Topics to be discussed include:

• The recertification cycle
• Requirements for renewal
• How to calculate and submit credits earned, and
• How to identify qualifying continuing education activities.

The presentation will be followed by a Q&A segment to answer your questions. Participants also receive a guided tour of the newly re-formatted online credit reporting tool. Register here.

Brad Larson, CTP, VP, Global Treasurer for Claire’s Stores, is profiled in Wall Street Journal’s Financial and Accounting Jobs Now site. Using Industry Associations to Build Your Professional Network features Larson talking about how he leveraged his membership with AFP to build his career. You can visit AFP’s career center here.

Uncertainty, the foe of the finance professional, reared its ugly head this week. With a surprising election event in the Commonwealth of Massachusetts and the Administration’s new strategy for dealing with systemic risk, the financial markets reacted quite significantly.

After seeing strong debt issuance and tighter spreads to start the year off, the market took a bit of a breather this week. Debt issuance was lighter and credit spreads were wider.

Given the volatility in credit spreads, more than one deal was pulled out of the pipeline this week. Some issuers are waiting to see if this drop in investor appetite is just a temporary blip or if we will continue to see a rising premium for risk.

US Treasuries benefited from a slight flight to quality after the Administration outlined its ideas about limiting depository institutions’ ability to execute leveraged trading strategies. When in doubt, the market will tend to buy the safest product available. As a consequence of the increased demand for Treasuries, while at the same time a decreased demand for credit product, both Swap spreads and CDS spreads widened. Any time there is increased uncertainty and risk, spreads tend to widen.

Adding to the general feeling of uncertainty this week, China surprised the market with stronger than expected fourth quarter and full year 2009 GDP numbers. The growth of the Chinese economy has been greater than expected. Somewhat counter-intuitively, people are concerned that this current rate of growth is both unsustainable and actually undesirable. Commodity prices and the companies and countries that are producers saw their prices drop on the possibility of weaker demand from China.

This coming week, the FOMC is conducting its first meeting (of eight) in 2010. There is no expectation that the Fed will change its target of 0.00 – 0.25% for the Fed Funds rate, at this time. The Fed Funds rate has been in this range since December 2008. The market will continue to analyze the text of the Fed’s announcement in order to glean any insight as to when the Fed might start to raise interest rates. Currently, the markets are pricing in a 50% chance the Fed will tighten the Funds rate by the September 21^st FOMC meeting.

This week has provided corporate practitioners an excellent example of the value of financial planning and risk management. Political and regulatory risk was definitely increased by events in Massachusetts and Washington, D.C. Given the globalization of the worlds’ economies, the possibility of any kind of slowdown on the part of China has had an impact on currencies, commodity prices and equity prices around the world.

The ability to react to sudden and unexpected events, such as a change in regulatory policy or the change in demand of a major customer, highlights the need for constantly sweeping the horizon for threats and opportunities that might arise.

Firms that are vigilant, and have developed plans and actions to minimize risks and maximize opportunities are the ones that will thrive in the current environment.

As we continue to move forward in the new year, the floodgates of new corporate debt issuance continue to be wide open. After the traditional quiet time of year end, January debt issuance is usually a busy time. But this year looks to be busier than most. In fact, we may be experiencing the busiest January since the late 1990’s.

Why is this occurring? Often the factors that cause this to occur are due to alignment. Issuers have a lot of supply and investors have a lot of demand. But it goes much deeper than that.

After experiencing a once-in-generation credit event and concerns about the global economy heading towards a depression, we find ourselves in a much different place here in 2010.

After the central banks of the world provided massive amounts of liquidity to the world economy and drove interest rates down to levels not seen in 70+ years or more, we are faced with the questions of: How will all this liquidity be removed from the market? When rates start to rise, how high will they go? Read the rest of this entry »

Global Capital Markets

2010 is off to a roaring start in the debt markets. After the traditional quiet period of the last two weeks of the calendar year, the pent-up supply of issuers met-up with the pent-up demand by investors to create a very busy first week of the year/decade.

This week was the busiest week for U.S. corporate bond issuance since last September. There was over $44 billion in bonds issued. This is very similar to the dollar amount issued during the first week of 2009. On Tuesday, we experienced the second busiest day ever, with over $23 billion issued.

Freddie Mac issued $4 billion of a 5-year reference note.

Ford Motor Co. issued $1.25 billion of TALF securities (which a Federal Reserve program). The TALF program is set to expire on March 31 of this year.

For the first time since 2007, companies have issued pay-in-kind (PIK) bonds. PIK bonds are securities that pay interest in additional debt rather than cash. Read the rest of this entry »

Overhauling the financial markets could keep cash yields low for the foreseeable future, according to one observer. “This is already evident in the expected changes in 2a-7 money market regulations suggested by the Investment Company Institute, the President’s Working Group on Financial Markets, and the SEC that would have an impact on the Weighted Average Maturity, liquidity, and credit quality of money market funds,” says Adrian Schultes, CFA, vice president of PIMCO. “The exact role of money market funds and their intermediating role in the daily liquidity of the marketplace are still critical questions that will have to be addressed in the coming months.”

Three PIMCO financial experts will discuss how treasury can invest their corporate cash in a one-hour Webinar on Jan. 14 at 3:30 pm. “Investing your Corporate Cash: Opportunities in the Cash and Short Duration Markets in the New Normal” will feature advice from Paul McCulley, PIMCO’s Managing Director, Generalist Portfolio Manager, as well as EVP Jerome Schneider and SVP Paul Reisz.

The Webinar will focus on:
• the state of the economy and its impact on the cash markets
• the outlook for the markets
• a framework to assess liquidity needs and asset allocation.

This Webinar has been approved for CPE credits. For more information on obtaining CE credits by participating in AFP webinars, please view the re-certification requirements.

The biggest mistake corporate treasury and finance professionals make when cash flow forecasting? “Not making clear the operating assumptions that drive the financial valuation, and then not monitoring the realization of benefits during the integration of the business over time,” says Henry Osti, managing director of Osti & Associates.

Osti, who will speak in AFP’s Advanced Approaches to Valuation Incorporating Unique Cash Flow Risks Webinar on Jan. 7, 3:30 pm ET, says valuating a business is especially difficult today. “The factors that drive the value of a business including cash flow, risk and financing, have all been tremendously impacted by the recent changes in the economy,” he says. “It is critical to understand how to model the impact of these factors in mergers, acquisitions and business valuation.”

Also speaking in the Webinar:

• Danny Huff, EVP & CFO, Georgia Pacific
• Fred Ryder, Senior Vice President, Corporate Strategy and Development,
  Blue Cross and Blue Shield of Florida
• Doug Cox, CFO, Arkema

The Webinar will cover:

• The techniques for valuing a business
• Benefits and disadvantages of valuation techniques
• How to rank order business value drivers
• How to apply risk-based techniques in valuing a business
• How to value business synergies in a fact-based manner
• Determination of specific factors that drive business value
• How to make projections for business value drivers in uncertain times
• Risk-based business valuation using Monte Carlo methods.
• A case study of Georgia Pacific’s acquisition analysis.

Global Capital Markets

JPMorgan sold $4 billion of 13-month extendible notes with a final maturity in December 2015

Travelers raised $500 million selling catastrophe bonds, the biggest issuance this year of securities that allow investors to bet against natural disasters.

U.S. Treasuries

Treasuries dropped, pushing 10-year yields to the highest level in four months.

The yield curve widened to a record as investors bet an accelerating recovery will fuel inflation and hurt demand for unprecedented government debt sales. Read the rest of this entry »