Change is a constant factor in the world of business. Economic factors such as fluctuating interest rates can impact any business; affecting consumer spending, demand for products or services, and the ability to access financing.
For international groups the situation can be even more complex with different regulatory environments to navigate, diverse workforces to manage, and varying market conditions in each region. And the recent increase in interest rates has thrown up additional considerations that international groups will need to take into account. These include the following:
Borrowing and bank covenants
Interest rates can have a significant impact on the borrowing costs of a company seeking to borrow funds, for example to purchase a property for use operationally within the group. When interest rates rise, the cost of borrowing increases, which can make it more expensive for a company to finance. If that property is subject to bank covenants, which are agreements that place restrictions on the borrower’s behaviour, the impact of rising interest rates could be further compounded.
Banks typically impose covenants to protect their risk and ensure that the borrower is able to meet its repayment obligations. If a company’s borrowing costs increase as a result of rising interest rates, it may find it more difficult to meet the terms of its covenants.
The market value of property during times of unstable interest rates may also decrease. In this case the loan to value ratio would worsen, causing potential issues with financial covenants put in place by the bank. This could trigger penalties or even a default, stretching group funds as cash from one operational area is diverted to cover or reduce borrowings.
Interest rates also have an impact on cash management for international groups. For example, high interest rates can make short-term investments, such as money market funds, more attractive – particularly in times of rising inflation. Holding these investments, however, will reduce the operational cash available for immediate needs. As a result, closer attention needs to be given to cash management – balancing up locking up cash in short-term investments against freeing up cash for working capital.
Further cash management complexity is added for international groups as interest rates can vary from country to country depending on a range of economic factors and conditions. Central banks closely monitor interest rates and adjust them as needed to achieve their policy objectives. This means that interest rates can change frequently and may differ significantly between countries, even for similar types of loans or financial products.
Under these circumstances, cash flow management requires more thought. Increases in interest rates elements of cashflow projections become more volatile, so forecasts must be monitored to ensure interest dependent elements are not overlooked.
Currency exchange rates
The current mix of geopolitical instability and changing interest rates can result in fluctuating currency exchange rates, which can have a significant impact on international groups. If a country raises interest rates, for example, its currency may strengthen, making exports more expensive and potentially reducing demand for goods and services.
While forward contracts, local currency pricing (passing the currency risk to the customer), hedging and good relationships with the customer can help, but it can still prove very challenging.
Overall, interest rates obviously can have a significant impact on international groups, and it’s important to monitor interest rate trends more carefully and adjust strategies accordingly.
The information in this article was correct at the date it was first published.
However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.
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