Risk management for logistics
Source: Barclays Capital , Author: Rob Riddleston and Sam Ford
Posted: Mon October 24, 2011 2:21 pm

INTERNATIONAL. In August of this year all the members of the Bank of England Monetary Policy Committee agreed for the first time since May 2010 to hold the Base rate at 0.5 percent, with the two most “hawkish” members giving up their calls for the cost of borrowing to rise.

From a quick glance at longer-term historical interest rates, it is not hard to see that we are living in an unusual interest rate environment. Barclays Capital economists expect that Base rate will remain at this historic low into next year and possibly 2013. 

Barclays is already starting to see an increase in the number of businesses swapping floating rates into fixed to take advantage of the flattening rate curve. The interest rate swap is the workhorse of the derivatives world but it is by no means the only instrument in the risk management toolbox for businesses looking to manage risks from the potential future economic uncertainties they face.

There is a wide recognition that medium and large corporates need to take risk management seriously, dedicating resources to planning for operational contingencies in this uncertain world, and mitigating financial risks (when it makes sense to do so) through their Treasury function working with their bank and their professional advisors.

One of the issues currently facing transport and logistics companies is proposed changes to lease accounting rules which will affect how lease commitments are reflected on corporate balance sheets.

The proposed new standard would require businesses to recognise the liabilities of leases on balance sheet rather than the current standard of having some off-balance sheet.

The transport and logistics sector could be amongst the hardest hit as a result of the overhaul. Often leasing most of their vehicles, companies with multiple long leases will be forced to recognise these payments as a liability on their balance sheets.  We have already seen a number of clients approach us and enter into contracts to mitigate their risk ahead of the changes which may come in during 2013 at the earliest.

For example, some companies are reducing their inflation exposure in exchange for certainty around their commitments.  Any company which leases assets including vehicles, machinery or real estate should adopt a proactive stance and start considering how these changes will impact their business, if they have not already done so. 

Hedge accounting may also help businesses bring stability back to their earnings by mitigating volatility, using derivatives to manage risk. Despite the potential benefits, some businesses have shied away from applying hedge accounting practices due to the onerous rules currently in place.

However, the new accounting standard IFRS 9 will significantly broaden the qualifying criteria for businesses looking to apply hedge accounting. Very broadly speaking, if a transaction makes sense from a risk management perspective then it should qualify under the new hedge accounting rules.

Although the standard will not come in effect until 2015, once guidelines have been published in the fourth quarter of this year, businesses can choose to become early adopters, if it makes financial sense.

Transport and logistics companies which constantly evaluate the risks they face in the widest sense, and seek access to a range of solutions and strategies to combat these risks, will be better placed to navigate the current economic environment.

Note: Rob Riddleston is Head of Transport and Logistics at Barclays Corporate and Sam Ford is Managing Director, Risk Solutions Group at Barclays Capital.

Barclays Capital is the investment banking division of Barclays Bank PLC.

For further information about Barclays Capital, please visit www.barclayscapital.com.

 

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