Treasury teams making the case for floating-rate debt see commercial paper as a flexible tool to gain exposure.
One of corporate treasury’s perennial challenges is determining the best ratio of fixed- to floating-rate debt, and that conundrum has been heightened by factors including record low interest rates and the significant debt companies took on last year.
- An assistant treasurer in a recent NeuGroup Assistant Treasurers’ Leadership Group (ATLG) meeting noted that efficient-frontier analysis suggests companies should hold a minimum 30% to 40% of floating-rate debt, while CFOs and corporate boards often call that amount the very maximum.
- Floating rates change gradually with cycles, but rolling over fixed-rate debt can result in much “chunkier” moves, raising the question: Which is truly more volatile?
Inching toward floating. The AT recalled analyzing the fixed/floating relationship seven years ago and finding savings from floating-rate debt of approximately 1.5%.
- He theorized that with steadily declining fixed interest rates, the benefit should have diminished. But it hasn’t. In fact, he found the economic benefit remained even during very different periods of economic cycles, such as before and after the 2008 financial crisis.
- Given management and board reticence about relinquishing historically low fixed rates, the AT said he planned to pitch to his CFO lifting floating-rate exposure from zero today to 25% to 30%.
- He’s recommending some permanent commercial paper (CP), floating-rate notes when financings needs arise, and fixed-to-floating swaps to match up against the first eight or 10 years of longer fixed-rate bonds.
CP convenience. The AT at a major healthcare company said it, too, has all fixed exposure and is starting to leg into the floating-rate market, recently restarting its CP program to get some exposure.
- Her team is also considering refinancing upcoming fixed-rate maturities either with floating-rate notes or CP, depending on the need for cash long term.
- Noted the first AT, “Part of what I like about CP is that it’s a bit cheaper than floating-rate notes, and it’s an additional liquidity tool, just like cash,” he said, adding that if cash becomes excessive, less CP can be issued. “So, I like a mix of them.”
CFO concerns. The healthcare AT noted the difficulty in persuading the CFO to agree to take on the volatility of a floating-rate debt now, when fixed rates are still so low.
- Another peer said that his company’s CFO prefers the currently 100% fixed portfolio because there are no surprises, of which there have been plenty in the last 18 months. So, gaining exposures synthetically through swaps, he said, “would be a very difficult sell.”
Messaging tips. He said that entering “organically” into the CP market, in which the company was a regular participant prior to the pandemic, is on the horizon. One message, he added, is that it’s good to show the rating agencies that the company has a vehicle to delever, if it needs to.
- Another member at a global consumer-products company said looking at the interest expense on net debt rather than gross debt illustrates that the adverse impact on cash from rapidly falling rates during the pandemic would have been offset by a larger floating-rate exposure.
- “I’ll have to remember to use that line,” said a peer.
