assessing and safeguarding liquidity - seb...

Assessing and safeguarding liquidity – Key factors in liquidity optimization

6880 77 85

65

70 6769

0

20

40

60

80

100

120

140

160

180

2009 2010 2011 2012

Tota

l siz

e of

unu

tilis

ed fa

cilit

ies

and

cash

Total Cash & Cash Equivalant Total Unutilised facilities

Total size of Liquidity for Nordic listed firms EUR bn

+ 16% Liquidity

+ 7%

+ 24%

Level of liquidity has increased post-crises Core liquidity strategy more essential than ever before

51%

49%

53%

47%

54%

46% 45%

Source: SEB Research

55%

2

Research shows that companies’ current liquidity strategy is a source of excess cost and inefficiencies. Failure to address this issue and coordinate across departments could potentially lead to excess cost and missed opportunities

3

• What is our future level of capital expenditures (maintenance and expansionary)?

• Any planned divestments or acquisitions?

Forecasting operational cash

flows

Determining working

capital need

Budgeting capital

expenditures

Setting capital

structure

Identifying available

cash

Deciding on strategic liquidity

level

• How stable are cash flows? • How well are cash flows

protected against movements in e.g. FX, interest rates and commodity prices?

• Can we rely on existing forecasts?

• Do we have a clear view of our future WC requirement?

• How could WC be impacted from seasonality and/or other risks?

• Do we have full control over cash and liquid assets?

• How much of our cash is used for day-to-day operations?

• How much cash is restricted?

• Do we need additional liquidity (for other then operational needs)?

• What is each stakeholder’s view on liquidity? • Equity holders • Rating agencies • Credit investors • Banks • Customers & suppliers

• How large are our existing unused committed facilities?

• Any upcoming debt maturities?

• Dividend or share buy-back programme?

Key components of a liquidity strategy

• Optimizing the capital structure and ultimately the cost of capital

• Reducing cash flow volatility by managing financial risks

• Improving cash flows through an improved interest net

• Reducing the liquidity risk by proactively managing e.g. capex and dividend levels

A successful liquidity strategy create shareholder value by…

Source: SEB Research

Standard & Poor’s liquidity framework put in a Nordic corporate context

4

Sources: SEB research, Data from Bloomberg and annual reports

Funds from operations

Excess cash

Unutilized committed facilities

Capex

Working capital change

Shareholder distributions

Debt maturities

1xMinimum

?x

3. Who will provide liquidity?

2. In what form should we hold our liquidity?Cash or committed facilities, or can I rely on expected cash flow?

1. How much liquidity do we need?

Sources of cash Uses of cash

Additional liquidity buffer

Standard & Poor’s Liquidity framework Sector analysis - Median Liquidity Ratios 2012

Standard and Poor’s liquidity framework can be used for peer comparison and in-depth analysis. A high liquidity factor indicates that a company holds liquidity well in excess of its future estimated uses

4,2x

3,2x

2,6x 2,5x

2,2x2,0x 1,9x

1,7x1,5x

1,1x 1,1x 1,1x1,0x 1,0x

0,0x

0,5x

1,0x

1,5x

2,0x

2,5x

3,0x

3,5x

4,0x

4,5x

Median Liquidity Ratios

Factor Correlation Overview

Growth opportunities • Firms with large growth opportunities hold more liquidity. This result is in line with the theory that growth firms hold more cash

because they face greater cost of cash shortage as they have to give up valuable growth opportunities. In addition, greater information asymmetries makes external funding more expensive and liquidity valuable

Firm size • Total liquidity is positively related to firm size. Result is in line with the theory that large firms have been profitable historically and

have been able to accumulate more cash over time. A larger shareholder dispersion among larger firms could also make room for more opportunistic cash hoarding

Leverage • Total liquidity is negatively related to leverage. Firms use its liquid reserves before issuing debt and highly leverage firms face higher costs when investing in liquid assets and should hence hold less relative to others

Debt maturity profile • Firms with longer debt maturities hold relatively more liquidity, which is at odds with the theoretical predictions that firms with shorter debt maturity structure hold cash for precautionary reasons

Seasonality • Firms experiencing high seasonality, the systematic volatility in cash flows within a year, hold more liquidity in order to minimize the risk of liquidity shortage during the year

Cash generation • Firms with strong internal cash generation hold more liquidity

Cash flow volatility • Firms with relatively higher volatility of cash-flows requires more liquidity

Working capital intensity • A firms liquidity need decreases with the amount of working capital (that can be converted into cash)

Investment intensity, R&D intensity, cash flow volatility and dividends

- • No evidence that investment intensity, R&D intensity, cash flow volatility or dividends determine the level of total liquidity

Other factors to consider

• Funding certainty and flexibility • Transaction cost associated with capital markets and credit lines • Fee associated with credit line • Rating agency requirements • Signaling effect of cash • Tax shield

Relationship between lines of credit and cash

• Less leveraged firms prefer to rely on cash to a greater extent in order to avoid monitoring from creditors • No evidence that cash generation, investment intensity, debt maturity, R&D intensity or seasonality affect the proportionality of

lines of credit within total liquidity is found

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Key factors in finding the optimal liquidity point Recent academic research demonstrates how different factors relate to the level of liquidity

Sources: SEB research, Determinants of corporate liquidity in Swedish listed firms (2013)

Historically, corporates have focused differently depending on their current level of liquidity

• Scenario analysis to identify excess cash

• Tranching and investing of excess cash to increase investment yield

• M&A and financial distributions i.e. dividends or share buy-back programs

• Cash flow forecasting optimization

• Cash concentration i.e. reducing levels of trapped cash

• Foreign exchange, interest rate and commodity price volatility hedging

• Scenario analysis in order to identify cyclical and seasonal low points. Categorization of cash flows based on necessity e.g. maintenance and expansionary capex

• Working capital process efficiency

• Financial reengineering (working capital) e.g. receivables purchase, trade financing and supply chain financing

• Debt management to reduce refinancing risk

• Credit rating and bank strategy

Excess liquidity

Shortage of liquidity

Source: SEB Research 6

Client specific analysis performed by SEB Current liquidity situation based on available facilities, cash and forecasted cash flows

Benchmarking with industry peers – size and composition of liquidity buffer

Downside scenarios and stress testing of liquidity buffer

Rating agencies’ view on liquidity

Strategic considerations

Please contact SEB for a liquidity analysis and/or a proposed action plan/roadmap on how to address this issue

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Appendix – Sector By Sector Liquidity Ratios

Liquidity Ratios by Sector

Liquidity Ratio 2012 per Company in Sector Liquidity Ratio – Sector Median

- Technology

4,3x

3,6x 3,6x

4,2x

0,0x

0,5x

1,0x

1,5x

2,0x

2,5x

3,0x

3,5x

4,0x

4,5x

5,0x

2009 2010 2011 2012

Technology

Content Company Country Liquidity Ratio -12

Atea Norway 2,1x

Axis Sweden 1,1x

Ericsson Sweden 6,3x

Nokia Finland 12,1x

Opera Software Norway 8,3x

Tieto Finland 0,6x

8




- Automotive

2,9x

2,0x

3,9x

3,2x

0,0x

1,0x

2,0x

3,0x

4,0x

5,0x

2009 2010 2011 2012

Automotive


Autoliv Denmarks 5,7x

Concentric Sweden 4,5x

Haldex Sweden 10,6x

PKC Finland 1,2x

Scania Sweden 1,8x

Volvo Sweden 1,0x

9




- Basic Materials

1,9x2,0x

2,4x2,6x

0,0x

0,5x

1,0x

1,5x

2,0x

2,5x

3,0x

2009 2010 2011 2012

Basic Materials


Höganäs Sweden 3,6x

Kemira Finland 0,8x

Norsk Hydro Norway 1,9x

Outokumpu Finland 1,2x

Rautaruukki Finland 1,3x

Rockwool Denmark 4,4x

SSAB Sweden 7,8x

Yara Norway 3,2x

10



2012’s Liquidity Ratio per Company in Sector Liquidity Ratio – Sector Median

- Consumer Goods

2,9x

2,2x2,0x

2,5x

0,0x

0,5x

1,0x

1,5x

2,0x

2,5x

3,0x

3,5x

2009 2010 2011 2012

Consumer Goods


Amer Sports Finland 1,1x

Bang & Olufsen Denmark 0,7x

Björn Borg Sweden 3,5x

Duni Sweden 4,3x

Ekornes Norway 2,0x

Electrolux Sweden 2,6x

Huhtamaki Finland 1,2x

Husqvarna Sweden 2,8x

New Wave Sweden 5,9x

Nobia Sweden 1,0x

Nokian Renkaat Finland 2,4x

Oriflame Sweden 4,5x

Pandora Denmark 3,9x

Tikkurila Finland 1,8x

11




- Oil & Services

2,7x

3,4x

2,0x 2,2x

0,0x

0,5x

1,0x

1,5x

2,0x

2,5x

3,0x

3,5x

4,0x

2009 2010 2011 2012

Oil & Services


Aker Solutions Norway 2,7x

Fred Olsen Energy Norway 1,6x

Lundin Petroleum Sweden n.a.

Neste Oil Finland 2,3x

Petroleum Geo-Services

Norway 11,1x

Prosafe Norway 2,3x

Seadrill Norway 0,2x

Statoil Norway 2,1x

Subsea 7 Norway 1,5x

TGS-Nopec Norway 2,2x

12




- Engineering Products

4,1x

2,7x 2,6x

2,0x

0,0x

0,5x

1,0x

1,5x

2,0x

2,5x

3,0x

3,5x

4,0x

4,5x

2009 2010 2011 2012

Engineering, products


Alfa Laval Sweden 1,9x

Assa Abloy Sweden 1,7x

Atlas Copco Sweden 2,0x

Hexagon Sweden 1,4x

Hexpol Sweden 0,3x

NIBE industrier Sweden 2,0x

NKT Holding Denmark 2,2x

Saab Sweden 4,8x

SKF Sweden 2,6x

Tomra Norway 1,9x

Trelleborg Sweden 2,4x

Vacon Finland 1,8x

13




- Engineering Projects

3,1x

2,6x

1,8x1,9x

0,0x

0,5x

1,0x

1,5x

2,0x

2,5x

3,0x

3,5x

2009 2010 2011 2012

Engineering, projects


ABB Sweden 2,3x

Cargotec Finland 1,3x

FLSmidth & Co Denmark 5,7x

Kone Finland 0,7x

Konecranes Finland 1,3x

Metso Finland 1,6x

Outotec Finland 2,7x

Sandvik Sweden 2,8x

Vestas Denmark 2,8x

Wärtsilä Finland 1,1x

14




- Healthcare

3,3x3,7x

3,1x

1,7x

0,0x

0,5x

1,0x

1,5x

2,0x

2,5x

3,0x

3,5x

4,0x

2009 2010 2011 2012

Healthcare


ALK-Abelló Denmark 4,0x

AstraZeneka Sweden 2,3x

Coloplast Denmark 1,8x

Elekta Sweden 6,3x

Getinge Sweden 1,0x

GN Store Nord Denmark 0,4x

Lundbeck Denmark 9,9x

Novo Nordisk Denmark 1,6x

Orion Finland 0,8x

William Demant Denmark 0,2x

15




- Telecom Operators

2,0x 2,0x

1,4x1,5x

0,0x

0,5x

1,0x

1,5x

2,0x

2,5x

2009 2010 2011 2012

Telecom Operators


Elisa Finland 0,5x

Millicom Sweden 1,1x

TDC Denmark 1,7x

Tele2 Sweden 1,8x

Telenor Norway 1,3x

TeliaSonera Sweden 1,7x

16




2,0x

1,3x1,0x

1,1x

0,0x

0,5x

1,0x

1,5x

2,0x

2,5x

2009 2010 2011 2012

Construction

- Construction


BWG Homes Norway 0,5x

Cramo Finland 1,0x

JM Sweden 4,0x

NCC Sweden 1,1x

Peab Sweden 1,7x

Ramirent Finland 1,4x

Skanska Sweden 1,0x

Veidekke Norway 1,2x

YIT Finland 0,9x

17




- Food & Beverage

2,7x

1,7x

2,2x

1,1x

0,0x

0,5x

1,0x

1,5x

2,0x

2,5x

3,0x

2009 2010 2011 2012

Food & Beverage


Carlsberg Denmark 4,5x

Chr. Hansen Denmark 0,5x

Novozymes Denmark 2,9x

Orkla Norway 3,5x

Raisio Finland 0,2x

Rieber & Søn Norway -0,2x

Royal Unibrew Denmark 0,8x

Swedish Match Sweden 1,4x

18




- Pulp & Paper

1,9x

1,5x1,4x

1,1x

0,0x

0,5x

1,0x

1,5x

2,0x

2009 2010 2011 2012

Pulp & Paper


Ahlstrom Finland 1,1x

BillerudKorsnäs Sweden 0,3x

Holmen Sweden 0,9x

Metsä Board Finland 0,5x

Norske Skog Norway 2,2x

Rottneros Sweden 0,9x

SCA Sweden 1,3x

Stora Enso Finland 1,5x

UPM Finland 1,4x

19




- Media

3,8x

2,4x

1,4x1,0x

0,0x

0,5x

1,0x

1,5x

2,0x

2,5x

3,0x

3,5x

4,0x

4,5x

2009 2010 2011 2012

Media


Alma Media Finland 1,0x

Eniro Sweden 0,7x

MTG Sweden 7,7x

Sanoma Finland 0,9x

Schibsted Norway 6,8x

20




- Retail

1,6x

1,1x

1,3x

1,0x

0,0x

0,2x

0,4x

0,6x

0,8x

1,0x

1,2x

1,4x

1,6x

1,8x

2009 2010 2011 2012

Retail


Axfood Sweden 0,6x

Bilia Sweden 1,9x

Byggmax Sweden 0,2x

CDON Group Sweden 1,4x

Clas Ohlson Sweden 1,0x

Hemtex Sweden 3,9x

Hennes & Mauritz Sweden 0,9x

ICA Gruppen Sweden 1,5x

KappAhl Sweden 0,3x

Kesko Finland 0,4x

Mekonomen Sweden 0,8x

MQ Holding Sweden 1,0x

Oriola-KD Finland 1,4x

Stockmann Finland 0,8x

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Appendix – Foreign exchange

FX risk is having fundamental impact on businesses’ cash flow, liquidity and income

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