AFP recently spoke with Mack Makode, assistant treasurer for Mylan Pharmaceuticals, on his upcoming session at the CTC Corporate Treasurers Forum, May 22-24 at the Sofitel San Francisco Bay. Makode, along with Anita Prasad, general manager, treasury capital management for Microsoft and Tom Hunt, CTP, AFP’s director of treasury services, will discuss how global companies can avoid falling short on liquidity.

AFP: Your session is on liquidity risk, and how it is the greatest risk in terms of bankrupting a company. What should companies do to avoid a funding shortfall?

Mack Makode: My personal opinion is that the number one job of any treasury department is to manage liquidity, which is central to protecting solvency. Liquidity should be viewed from two angles—sources and uses, both at the corporate level and at the local level by jurisdiction. When we talk about sources, it’s very important to know where the cash is located and where it’s needed. Are there any restrictions on the movement of cash? The cash in one country could look good, but if you’re to bringing it back into the U.S., you may have some tax and FX implications. So it’s very important to keep track of the total, final sources of liquidity in terms of cash.

Another, cheaper way to supplement or complement your liquidity would be to secure working capital operating lines with your banks. But an important thing to remember about working capital operating lines is, you have to use them. If you only use them in emergencies, that could send a panic signal to the market. But if you use them regularly, an individual draw shouldn’t create a big issue.

AFP: Do you recommend liquidity stress testing?

Makode: I strongly recommend stress testing, and also, the concept of the ‘survival horizon’ under various stress tests. Treasury should have a clear idea of the stresses that could shape the corporation. It should know what the survival horizon is under those different stresses.

Now, the stresses could be different for different corporates. It could be based on industry, it could be based on how a particular corporation is operating. For example, an industry could be susceptible to a union strike and a corporation would need to know how long the strike can go on without affecting the survival horizon. Other corporations might be susceptible to commercial paper (CP) availability. So if something happens to the financial markets and they lack access to CP, how are they going to survive that shock? What is their backup liquidity?

The concept of the survival horizon is very common among financial institutions. But as a corporation—especially after the financial crisis, when many corporations went under—the survival horizon needs to be ingrained into the culture.

AFP: Since the crisis, are the majority of corporations out there are implementing these concepts? Are they taking the necessary steps to secure their liquidity?

Makode: I think that, in general, if you ask corporations if they are better off in terms of liquidity, I’m sure the answer is yes. But how specific are they in terms of implementing formal stress testing and calculating formal survival horizons? In my experience, speaking with treasury departments, they feel there is more work that needs to be done, especially among industrial companies. For corporations that felt the stress of the crisis, I’m sure they’ve gone there. But for corporations that were generally unaffected—they probably are behind the 8-ball.

AFP: Is the current FX volatility making the liquidity situation even more stressful for corporates, in your observation?

Makode: Again, let’s go back to the sources and uses. FX definitely has a big impact on corporate liquidity, especially if the liquidity is offshore. So FX affects contribution towards liquidity in the U.S. if the U.S. dollar terms would change. If it’s hedged, there’s probably not a big impact, but if it’s not hedged, than there is. If you’re a U.S. corporation and your cash is offshore, you depend on bringing that cash here temporarily for your liquidity purposes. It’s the same thing with the uses also. If you have a need for cash in a foreign country and your source of liquidity is in the U.S., FX is going to affect that as well.

AFP: Can you talk a bit more about your upcoming session at the CTC Corporate Treasurers Forum? Anything we can specifically look forward to?

Makode: In addition to discussing how we can systematically think about liquidity risk in terms of stress testing and the survival horizon, we’ll also look at keeping track of where the liquidity is and the calculation for its final destination. When you’re bringing liquidity across borders, there are haircuts you have to take on taxes, FX and other things. So we going to talk a lot about global liquidity, as well as local liquidity.  

Don’t miss Mack Makode’s session, Long-term Access to Global Liquidity, at the CTC Corporate Treasurers Forum in San Francisco. Register here.