Staying ahead in the rate race

Janet Yellen has done it again. Yesterday’s quarter point rate hike, the third one in 15 months, is a sign of the US economy’s robustness. But how can IROs at companies with rate-sensitive businesses keep investors interested in their long-term equity story?

• Consider your industry

Traditionally, cyclical sectors such as consumer discretionary, IT, materials and industrials face the biggest impact from a rate hike and may therefore be subject to higher volatility and pressure for performance, explains Dan Romito from Nasdaq Corporate Solutions. ‘I would also be concerned if a notable percentage of a US company’s revenue derived from overseas: with increased discount rates and decreased conversion rates, it just puts additional pressure on valuation.’

• Know your investors

In a rising rate environment, it’s more crucial than ever for IROs to keep abreast of what their firm’s current and potential investor base will be looking for and to be ‘fully aware of how investment perspectives might change,’ says an IRO from a US healthcare technology firm. ‘Identify the shareholders within the company’s top 50 that are most inclined to take profits and analyze how the investor has managed its portfolio: what does its sells look like and what common denominator do they share from both a fundamental and industry standpoint?’ advises Romito.

•  Fine-tune your outreach

A successful outreach will require a deep understanding of not just the fund house that’s targeted but also the specific investing criteria of each fund manager, adds the healthcare IRO. Furthermore, Romito advises IROs to pinpoint the generalist or stock picker fund that would remain interested in the company’s shares and to extend opportunity by seeking out sector-agnostic investors ‘that are not concerned about the space you operate in, but focus on the specific risk/return profile your company offers. Understanding where your company’s fundamental profile parallels with the appetite of the generalist will help broaden tighter pools of capital,’ he says.

• Identify your risk profile

A risk/return profile is mainly a function of balance sheet flexibility and management’s efficiency in allocating capital towards the creation of shareholder value. ‘Particularly, the manner in which free cash is deployed will be closely monitored by investors, who will be more inclined to hold on to stock from companies having a track record of allocating cash to growing the dividend or repurchasing shares,’ according to Romito.

•  Ramp up the financial literature

Financial services companies in particular should incorporate into their disclosure some case scenarios explaining the impact of different levels of rate change on top and bottom-line figures. As an example, a senior IRO at a North American bank includes in her IR literature the after-tax impact of a 1 percent increase on net interest income, as well as the impact of changes in interest rates on the economic value of shareholders’ equity.

• Focus on the debt

Companies with a highly leveraged business can provide a yearly outlook complete with assumptions on interest costs and the economic environment, as does the CFO of a US-based REIT. ‘In our IR books we always include our balance sheet, which goes over our debt maturities and current rates, in order to make it easy for investors to understand and ask the right questions,’ he stresses, adding that he offers a three-year view of the perspective.

• Frame the bigger picture

IROs from more defensive sectors should keep in mind that their audience may also be interested in the indirect impact of actual and potential rate increases, as an IRO from a global pharmaceutical firm points out: ‘Investors and analysts want to discuss the rate hike but only in the context that it actually influences whether the US dollar continues to strengthen and therefore continues to depress our earnings and cash flows.’