You’ve got to fight for your right to …

… roll 1 month.

If you’re a Beastie Boys fan, I apologise for the click bait.

Just prior to me starting my first stint at Macquarie Bank the PUMA treasury team had begun issuing their securitised bonds on a 1 month roll. It was 2005, the market was strong, and the investors didn’t even flinch – no increased margin was requested or offered. Maybe they didn’t even notice. It was a genius move.

Why? Because the 1/3 basis swap was trading at 2 points. In fact, as I recall it was stuck at 2 points for years. So the PUMA team had just snuck through a 2 point discount in their margin. On a A$20bn book, that was the equivalent of $4M – per year.

As the spread graph below indicates (source: Bloomberg), there seems to be a systemic move in the 1/3 basis, that peaked in December 2015.

HS BBSW

 

As illustrated above, in the context of the last 5 years, the spread between 1 and 3 month BBSW is in the 90th percentile. Whilst I am a believer in mean reversion, in this case I believe that the mean will increase to the new normal, rather than the other way around.

I have heard on the grapevine recently that there is some chatter from some banks about cutting the 1 month roll option from the companies’ facility agreements because the basis has blown out. The reason for that movement, as I understand, relates to the treatment of 1 month money under Basel III liquidity rules. As always, the banks have all interpreted the rules differently, but there certainly seems to be a systemic move despite the different interpretations.

Whilst this is all well and good, the reality is that the banks source funding from many sources. I certainly don’t see them giving more on my cash because they’re picking up extra margin on companies who continue to roll for 3 months!

So, for the sake of your corporate treasury peers please resist any call to remove or penalise 1 month rolls in your loan documents. We don’t want this to get any momentum!