How to hedge against unstable economic times

How to hedge against unstable economic times

What can leading companies do on the ghost train ride that is the current global economy: the ASX pops out like a spook with a $24 billion yesterday wipe-out yesterday and recovers most of it today; Europe’s scream echoes through the darkness as it draws closer to an economic precipice, with daily news from Greece and Spain loosening its precarious toehold on order; America’s jobs growth suddenly falters.

The solution? It’s back to the balance sheet to buy some flexibility.

Some listed companies are moving fast: yesterday, recruitment site (ASX:SEK) raised $125 million in capital to pay down debt, while Brambles (ASX:BXB) used an accelerated rights issue to improve its balance sheet by $448 million.

All leading companies, public or private, are tackling the issue of uncertainty.

Until now, chief financial officers were not strongly focused on reducing debt in the first quarter of the year according to a CFO Survey by accounting firm Deloitte, with only 9% naming it as a strong priority in their business strategies. Most (65%) were focused on growth and increasing cashflow (44%).

That is because the balance sheets of public and private companies are in pretty good shape. In fact, 44% of CFOs thought their balance sheets were ungeared, and 46% aimed to increase debt over the next year.

But as the headlines ring increasingly with gloomy predictions about the “spectre of the GFC”, leading companies can build a bulkhead against the possibility of a return of the global crisis.

1. Put or keep the expansion plans on hold

Frustrated as leaders and their CFOs are to get on with business growth, staying conservative is the strategy de jour. If the balance sheet is in good shape, it’s best for the moment to keep it that way. Now is not the time to increase gearing.

2. Probe the bank

Moments like these, the wise leader of every leading company, no matter how big, make an appointment with the bank manager to run through the financials of the business, answer any questions and respond to any concerns. That way, leaders know if they can depend on the bank’s help if need be.

3. Top up owner’s investment

Private companies can return to their shareholders just like public companies. Private companies can call together all owners, executive and non-executive, to discuss whether there is capital to commit if need be in the coming months. Public companies can return to their shareholders, as Seek and Brambles have done, to reduce debt or build a war chest

4. Coffee with wealthy private investors

Although wealth private investors (business angels) usually stick to the small end of town, they do work with medium-sized and large companies at times when bank finance is expensive. Typically, angels can fairly quickly assess a company and provide a loan. This sometimes comes with a provision that it converts to equity if payments are not made as agreed (so it can be expensive). Any private deal is going to be is slower than a bank, however, so leading companies are already taking out wealthy private investors for coffee and lunch to sound out future possibilities.

5. Time for a stocktake

If the economic uncertainty coagulates into a second crisis, leading companies will know precisely the value of their assets. This is crucial to scenario planning – a sustained downturn might mean changing business strategy and reducing or cutting some operations. Part of the decision will hinge on the quality of the assets involved in each business division; some might be better sold and the proceeds reinvested in core operations.

6. Take advantage where you can

While the markets are down and the dollar high, now is the time to buy rivals, swoop on ailing competitors’ markets, acquire staff in weaker labour market conditions, ready new products or service for market, and buy essential plant and equipment from overseas suppliers.

7. Ready for the upturn

In the first quarter, CFOs told Deloitte they felt optimistic, and were poised for an upturn. Whether or not this has changed, an upturn will eventually come. Picking the moment to unleash pent up growth, investment, advertising and marketing is what sets leading companies apart from the others.


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