Federal Reserve Chairman Jerome Powell suggested that the Fed would start tapering its bond purchasing activities in November with the plan of fully winding down the element of market support by mid-2022, at which point they might begin to raise short-term rates. The message is that short-rate increases will not occur until tapering is completed and, of course, will be responsive to key indicators—especially inflation—as we move through the next year. Interestingly, the Wall Street Journal reported that half of the Fed officials think rates will start to increase by late next year, which is quite different from even recent expectations.

 

1 Year

5 Year

10 Year

30 Year

Sept. 24-Treasury

0.08%

0.96%

1.46%

1.99%

v. Sept. 10

+1 bps

+14 bps

+12 bps

+6 bps

Sept. 24-MMD*

0.11%

0.44%

1.00%

1.59%

v. Sept. 10

+3 bps

+3 bps

+6 bps

+6 bps

Sept. 24-MMD/UST

137.50%

45.83%

68.49%

79.90%

v. Sept. 10

+23.2%

-4.2%

-1.7%

+0.6%

*Note: MMD assumes 5.00% coupon

SIFMA reset this week at 0.02%, which is approximately 23% of 1-Month LIBOR and represents a 0 basis point adjustment versus the September 8 reset.

Resiliency and the Management of “Accessible” Resources

Since COVID emerged we have advanced the argument that resiliency is the right objective for responding to the pandemic’s myriad dislocations. We have also stressed the point that resiliency is ultimately about resource allocation. Under this construct, success emerges from understanding the array of available resources, defining the competing roles those resources play, and determining how you position them to achieve the balance between resiliency and return that best fits your organization.

One of the critical distinctions across resources is between those that are “actualized” versus those that are “accessible.” Actualized resources are both in place and in the form needed to make their optimal resource management contribution. Unless they will be liquidated and spent on capital, long-term investments are an example of actualized resources that are in the form needed to pursue whatever resiliency or return priority they are assigned. An accessible resource, in contrast, typically requires a transaction or other event. Making use of debt capacity requires issuing debt; accessing external liquidity support requires establishing and then drawing on a line of credit; monetizing non-core real estate requires a sale or sale leaseback transaction. Any accessible resource must be transformed into an actualized resource, which introduces a whole set of important tactical considerations.

The central tension point around every type of accessible resource is reliability: will transformation be possible, even as we move through different capital, investment, operating, or risk cycles? In times of tight capital and higher rates, unattractive resource conversion pricing or lack of investor interest may reduce or eliminate transformation options. Even things as seemingly reliable as the transformation of debt capacity into funded debt can be restricted by high or dislocated interest rates, lack of access to floating rate or bridging structures, or other considerations that lead an organization to choose not to issue debt for some period.

Everything changes when available capital exceeds baseline investment opportunities, and the change can be remarkable when the capital demand versus supply gap widens to levels like what we are seeing now. The current environment is characterized by a diverse set of investors (traditional and non-traditional) controlling huge pools of capital and competing for the same set of traditional fixed income products. Simple resource conversions—like debt capacity into funded debt—are at peak reliability. But equally important is the explosion in opportunities around the “flex” subset of accessible resources. If debt capacity and bank liquidity represent “leverage resources,” flex resources include things like non-core real estate, parking facilities, energy plant infrastructure, and other asset pools that might be important but where alternate ownership or capitalization structures can be tolerated. The accessible-to-actualized process for this pool of resources is highly sensitive. Today’s capital-rich environment is characterized by high asset prices, elevated lender and investor interest in specialty assets, creditor willingness to assume different kinds of residual risk, and increased opportunities to outsource operations and capital to the same party; all of these combine to create an unprecedented opportunity to reposition almost any flex resource.

The general continuum of strategies that organizations are considering in assessing how to transform flex resources are offered below:

  1. Monetization (Sale of Non-Strategic Assets): The goal is to enhance enterprise resource positioning by converting a flex resource into a financial asset that either stays in cash and investments or is redeployed into operations, strategy, capital, or debt management.
  2. Financial Recapitalization (Sale-Leaseback of Non-Core Assets): Goals can vary but frequently include retaining access to the flex asset while generating up-front capital (or avoiding future capital) through an alternative/extension (off-balance sheet or off-credit) financing.
  3. Operating Recapitalization (Concession Agreements Involving Non-Core Operations): Goals can vary but typically include generating up-front capital (or avoiding future capital), securing alternate (off-balance sheet) leverage, and outsourcing management of the asset or activity.

Resource allocation is ultimately strategic balance sheet management; it involves continuously reassessing the portfolio of resources that are in place and in what form, whether each form makes the best resiliency-risk contribution, and whether it is possible to change various forms into something more accretive. The steps in building an accessible resource management strategy include cataloguing the portfolio of resources that fall into this bucket (ranging from leverage to flex) and then determining any repositioning goals. These organizational steps provide the best context for understanding which resource management alternatives apply and for developing the implementation/financing/partnering plan that will produce a good outcome. There are many different roads to success, so this requires a comprehensive and thoughtful approach.

Please stay healthy and safe and reach out to me by email or phone at (224) 724-3134 with questions or if we can help in any way.

Meet the Author
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Eric Jordahl

Managing Director
Eric Jordahl directs Kaufman Hall’s Treasury and Capital Markets practice and focuses on helping healthcare organizations nationwide by providing Treasury-related transactional, strategic, and management support across all financial assets and liabilities.
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