Imagining the future for rapidly changing corporates

That it’s a time of great change for the world’s large companies is well known. From climate change, to geopolitical frictions, to new technologies, the economy’s tectonic plates are shifting fast and demand a swift strategic response from companies intending to prosper in the 2020s.

Less well appreciated, though, are the big and complex risks that businesses are taking to implement their new strategies. Substantial capital investment programmes, mergers and acquisitions, or even radically different business models might be needed. And new strategies often demand new approaches to raising finance and mitigating risks.

As companies seek to transform themselves, so their banks must match this dynamism. It’s a time when innovative and intelligent advice is needed like never before. For banks to be able to devise optimum financing and tailored risk management solutions in fast changing industries and market environments, they must thoroughly understand a company’s strategy and goals as well as its weaknesses, arising from a detailed knowledge of its business model, balance sheet, risks and competitors. 

As Pascale Moreau, Global Head of Fixed Income and Derivatives Corporates Sales, Societe Generale explains: “Some corporates believe they need to make huge changes if they want to succeed in the next decade. It might be an airline taking on new FX risks or a company with a capex programme taking a lot of market risk. Often, this results in a need to review the company’s entire hedging policy."

Innovative advisory services 

Enel’s September 2019 US$ 1.5 billion five-year green bond and attendant cross-currency swap is a rare public example of how financing and risk management innovation can enable a radically new corporate strategy. The Italian energy utility is committed to increasing its renewable energy generation by 2030, in line with United Nation sustainable development goals. The bond and swap link the cost of finance to Enel’s progress towards its self-imposed emissions target. Should Enel fall short, the coupon on the bond will step up. Societe Generale was a joint-bookrunner for the transaction.

There are many fast-changing industries where innovative approaches to finance and risk will be required. Take Europe’s traditional car industry. Facing fast-evolving EU regulations, growing consumer demand for electric vehicles and pressure from investors, traditional auto manufacturers are committed to rapidly ramping up their production of electric vehicles. Rare earth minerals are a vital component in their powertrains, yet their supply is controlled by just a few countries. Not only does this create difficulties securing supply but also price hedging strategies for these minerals are needed.

Illustrating quite how great change is today, the boundaries between sectors are blurring. Tech companies are straying into other sectors, especially autos. Google’s self-driving car project, Waymo, aims to overturn not just combustion engine technology but also the entire auto industry’s business model, as people pay to use cars rather than owning them. This is forcing the auto industry to review its business models and could well lead to major capital expenditure and different types of cashflows, which would need new approaches to financing. 

A kind of laboratory

Moreau believes that banks must devote time to understanding the new challenges and opportunities that their clients face, so equipping themselves to help with fresh ideas for financing and risk management. “We are creating a kind of laboratory,” she says. “Every industry has a research team. We are looking into all the big trends.”

That means thinking like a company insider rather than a banking insider. “We have a fantastic library of knowledge of clients and analyse them as if we were working for the company,” adds Moreau.

 While large companies are experts in their own businesses, often the dynamic changes being made in their businesses involve risks that only risk management professionals completely understand. They have the expertise to ask the right questions and to construct the best solutions. 

In fact, like many of their entrepreneurial clients, banks must change fast. Fixed income is a relatively straightforward industry that is ripe for automation. But banks will still be able to offer a highly valuable service in complex areas of financing and risk management.