ASSIGNMNET 4

ToplineSTATS OF THE MONTH

18.1% Percent of consumers expecting an income increase

-0.1% Retail sales dip in December 2015

-0.2% Fall in producer price index, December 2015

5.8% Rise in S&P/Case- Shiller Home Price Index, November 2015

-8.15% Year-to-date performance of S&P 500, as of January 27

Although currency vola- tility jumped onto the list of their most worrisome risks last year, many treasury and finance professionals are only just starting to put to- gether plans to hedge those exposures, according to the Association for Financial Professionals’ annual risk survey released in January.

Ranking fourth behind

political and regulatory uncertainty, tougher com- petition, and customer re- tention, currency volatil- ity appeared in the top five risk factors for the first time in the past four AFP risk surveys (see chart below). Thirty percent of the 335 corporate finance practitio- ners responding to the as- sociation for the 2016 study

rated currency worries as the top risk factor, compared with 16% in the prior year’s survey.

Given the rapid rise of the U.S. dollar over the past 20 months, along with the equally rapid fall of the euro, ruble, and other currencies, it’s not surprising that cur- rency volatility has also ris- en high on treasurers’ worry lists. Still, the survey’s find- ing that only 50% of the finance pros’ companies had plans in place to miti- gate interest rate, currency, and commodity risks is “not good,” says Craig Martin, executive director of the AFP Treasurers Council.

Martin notes that while larger companies have greater financial ability to hedge currency risk with options, futures, and the like, only 60% of compa- nies with annual revenues of more than $1 billion had hedging plans in place. Still, he says it is a promising sign that 27% of larger compa- nies with no hedging pro- gram in place said they will

▼ RISK MANAGEMENT

Treasurers Fret Over Currency Risks But only half of companies surveyed have taken measures to mitigate forex exposure, says a new study.

CONFLICTING SIGNALS

Sources: The Conference Board, U.S. Commerce Department, Department of Labor, S&P/Case-Shiller

10 CFO February 2016 | cfo.com

Top 10 Risks Risk factors that will have the greatest impact on earnings in the next three years

Source: 2016 AFP Risk Survey

Political/regulatory uncertainty 43%

Tougher competition 42%

Customer satisfaction/retention 40%

Currency volatility 30%

Product innovation 26%

Interest rates 23%

GDP growth 22%

Energy price volatility 21%

Country risk/geopolitical challenges 20%

Liquidity 19%

Risk factor % of

respondents

Thinkstock

“implement a plan to deal with these risks in the next 6–12 months,” accord- ing to the study.

Widespread Uncertainty But currency movements are only one factor in an economic environ- ment that seems more and more un- predictable. Overall, fears about the global economy have spawned wide- spread uncertainty about future earn- ings among the CFOs, treasurers, and controllers at public and private com- panies who responded to the survey, which was conducted in October 2015. Fifty-two percent of the respondents believe their companies are exposed to greater earnings uncertainty than they were three years ago, while another 37% said the level of uncertainty is un- changed.

The 52% share of finance profes-

sionals reporting increased earnings risk is much bigger than the 43% found in the previous survey, but is much smaller than the 59% reported in 2013.

The biggest interest rate, currency, and commodity anxieties for finance executives are the increased cost of financing (cited by 61%) and currency translation risk (53%), according to the 2016 study.

Finance professionals from smaller companies (those with annual revenues less than $1 billion) and privately held ones seem more worried about the in- creased cost of financing and currency translation risks than are their peers at bigger or publicly owned companies, according to the study’s authors. “One reason for this is that smaller firms are less likely to have an active hedge pro- gram and therefore are more exposed to those risks,” they write.

To be sure, the framers of the cur- rent study decided to focus on “specifi- cally how companies are addressing interest rate, currency, and commod- ity risks.” Thus, the high rating finance professionals gave currency volatility was perhaps to be expected.

By contrast, the focus of last year’s study—cyber risk—has seemingly dropped off finance professionals’ ra- dar in recent months, according to the AFP. Only 7% of respondents ranked cyber risk as a key concern in the 2016 survey, compared with 19% in the pre- vious survey.

“This shift in sentiment may likely be due to a growing recognition that cyber risk is now a core business risk requiring active management rather than a rejection of any actual improve- ment in the cyber risk environment,” the study’s authors write. ◗ DAVID M. KATZ

The proportion of downgrades to total rating actions reached 69% last year, the highest level since the financial crisis in 2009, but the outlook for global credit mar- kets remains strong, according to Standard & Poor’s.

In a report released last month, the rat- ing agency said it downgraded 892 cor- porate issuers (accounting for about $6.9 trillion in rated debt) and upgraded 394 is- suers (accounting for about $2.7 trillion) in 2015. Downgrades also were at the highest level since 2009.

The United States, with its large sample size of rated issuers, led downgrades in 2015, followed by Europe and emerging markets.

“The emerging markets continue to deteriorate, with increased geopolitical risk, slow economic growth, and financial volatility all contributing to a rapid decline in credit quality and substantive increase in downgrade propensity,” S&P said, citing Russia, Saudi Arabia, South Africa, Argentina, and Brazil as particular trouble spots.

But elsewhere, the United States, Europe, and other developed markets are continuing to show below-aver- age negative bias (a measure of downgrade potential).

The negative bias, globally and in the U.S., has been slowly rising off historical lows for about two years, indicating a trend of steady credit deterioration, but not quite breaching historical averages, S&P noted.

“We remain guarded in our view that, while we expect further deterioration in global credit markets, we do not see a particularly disruptive or abrupt accelera- tion, despite a backdrop of financial and market volatility in recent weeks,” the re- port said.

“This view is grounded in our belief that the U.S. economy remains strong and continues to show resilience (as with the recent employment figures) and the European economy continues to gain momentum vis-à-vis its strong business and consumer confidence,” it added.

While China’s economic slowdown prompted the International Monetary Fund in January to reduce its global growth forecast for this year to 3.4%, S&P said its impact “has heretofore been more pronounced with re- spect to market volatility than a rapid, lower revision of our ratings on global corporate (financial and nonfinan- cial) issuers.” ◗ MATTHEW HELLER

CAPITAL MARKETS

Debt Downgrades at Highest Level Since 2009

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11cfo.com | February 2016 | CFO

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