If there’s one lesson to be learnt by CFOs from the Babcock & Brown fiasco it is that they managed to seduce and hoodwink not just investors but credit agencies and bankers too. According to a whistleblower's evidence presented at the liquidator’s hearing into the $3 billion collapse last year of the investment group, internal communications suggested that the ratings agencies were provided with false models. This meant that the GFC was going to have devastating consequences.
In late 2007 there was the first wave of the GFC resulting in tightened conditions in credit markets. CFOs would have had many worrying days – and sleepless night – for another 18 months before the dust finally settled – sort of. Now relegated to the history books, B&B was subject to a concerted attack by short sellers who smelled blood due to the prevailing conditions. Standard & Poor’s did downgrade its ratings on a subsidiary company of B&B, which resulted in the cost of funding for the group rising, but it was far from being rated at junk or very risky levels.
Not many CFOs need to worry about Standard & Poor’s ratings but all CFOs at some stage will need to be concerned about the company’s credit worthiness to a range of stakeholders including banks and investors as well as suppliers (who get very twitchy at the first hint of fiscal stress.). None of this, as CFOs well know, is rocket science but sometimes behaviours – as was evidenced in the B&B saga – suggests that the grasp of fundamentals was simply not present.
Financiers come back to what the old bankers call the three Cs, character, capacity and collateral. This may not be what the credit ratings agencies look at but these three factors may be akin to Credit Worthiness 101 in a post-GFC world. (See
Collateral in corporate finance is far more complex than bricks ’n mortar in the case of a personal or small business loans. In the corporate finance world, collateral – as was the case in B&B – can be ‘collateralised’ securities and pledges against management rights (against future fees!). Assets naturally fall into the physical category including accounts receivable and inventory. These are considered on a liquidated value basis.
Character is a much-bandied-about term, but in a post GFC and post B&B world, it may gain a Lazarus-like renewal in status. Boards of Directors as well as CFO credentials will once again fall into the spotlight. A persuasive case of why your business needs the money will need to backed with integrity and scenarios that are real not false. (See:
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