Congress failed to make any progress over raising the ceiling on U.S. debt again on Tuesday. That has some finance departments preparing for the negative knock-on effects from a technical default on U.S. Treasuries or a downgrade of the country’s debt.
The federal government will not run out of cash on Thursday, the deadline for increasing the nation’s borrowing authority. But it may have to begin prioritizing its bills if the stalemate in Congress lasts more than a few days beyond October 17. By October 31, Treasury could be in a position to have to delay $6 billion in interest payments on its securities.
The potential effects for financial markets range from disruptions in short-term credit to a rapid fall in the value of the dollar to a spike in interest rates. Money-market fund managers like Fidelity Investments have already jettisoned U.S. Treasuries that mature between October 17 and November 15.
But there are other possible financial market disturbances that companies are anticipating. For example, Patrick Guido, treasurer at global apparel and footwear company VF Corp., told CFO that the investment-grade company has issued commercial paper “above and beyond what [it needs] to get through year end.” VF took the step “just in case a debt default disrupts short-term markets,” Guido said in an email. “The key here is to have extra liquidity and working capital on hand if you do not have excess cash.”
Treasurers should evaluate the amount of cash they have on hand and the status of contingent funding, says Goran Jankovic, treasurer of WellCare Health Plans, a publicly held managed care company. “Forecasting is critical,” he says. “Understand your payables. Absent any funding, how long will your cash-on-hand last?”
The contingent funding that needs evaluation includes revolving lines of credit issued by banks. “Make sure you have free and open access to those facilities,” Jankovic says. Many companies take access for granted, but if a credit agreement is written in a certain way a borrower may run into difficulties trying to tap its line. “As a borrower, every time I access [WellCare’s] revolver I have to represent to the bank that nothing materially adverse has affected my business,” Jankovic points out. “But what if you can’t make that representation? If you can’t make a draw, what then?”
Two of WellCare’s large banks recently asked Jankovic about the impact of the government shutdown on the company’s business. They told Jankovic if the company were to experience an issue and needed interim financing, they could provide a bridge loan or some other kind of temporary financial support. “Banks have ample capital and they may be looking to improve and foster the strategic relationship to gain some goodwill,” Jankovic says.
(WellCare’s business has not been affected by the federal government shutdown, he adds, because funding for Medicaid has been set aside until the end of 2013 and Medicare will continue to be funded in the short term.)