Page 104 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Unit 6: Managing Collection and Disbursement of Working Capital

6.3.7 Yields Notes

All the characteristics we discussed above – default risk, maturity, and marketability – affect
yield. In general, lower the default risk and better the marketability, lower the yield. Securities
with these desirable characteristics have higher prices, and since price and yield are inversely
related lower yields.

The relationship between maturity and yields is more complex and changes over time. On an
average, short maturity securities yield less, other factors being equal, because they are subject
to less interest rate risk. Rates on short maturities, however, are more volatile than those on
longer maturities, and at times exceed the latter.
At any point in time, rates on the major types of money-market securities discussed above are
fairly close to one another. For equal maturities, the differentials usually are small and are due
to small differences in default risk and marketability. Over time, the entire structure of short-
term rates varies significantly. Such variations are related to the business and monetary cycles,
the demand for funds by individuals and firms, and the credit policies of the RBI.

Case Study Cytec Industries

ytec Industries Inc. is a global specialty chemicals and Materials Company focused
on developing, manufacturing and selling value-added products. Its products serve
Ca diverse range of end markets including aerospace, adhesive, automotive and
industrial coatings, chemical intermediates, inks, mining and plastics. Headquartered in
New Jersey, Cytec has operations in more than 35 countries.
Funding Future Growth
In the second half of 2008, Cytec foresaw a strong downward trend in the economy and its
business activity. Cytec’s businesses tend to be cyclical, although not all fit in the same part
of the economic cycle. Senior management knew that focusing on cash would be critical to
riding out the coming downturn and positioning the company for an eventual recovery.
The market having reduced its share price; Cytec needed to amend its bank facility covenants
and wanted to take the proactive step of refinancing senior debt due in 2010 by the end of the
third quarter of 2009. So the pressure was on to demonstrate to the capital markets that Cytec
could continue to generate cash through the downturn in the business cycle.
Cytec’s working capital levels had been increasing year-over-year as a result of growth and
acquisitions. The company compared poorly to the industry peer group. Cytec’s own analysis
showed excess working capital of more than $200 million. When markets were strong, the
focus had been on earnings rather than the balance sheet. Understanding the downward
trend in the business cycle, the company’s management team realized that better working
capital management would be the most effective lever to boost cash generation.

“We recognized the opportunity to tap excess working capital to invest in the businesses
that will shape our future,” says David Drillock, Cytec’s vice president and Chief Financial
Officer. “When the economy began to deteriorate in 2008, we decided to accelerate this
effort.”
Furthermore, to sustain the changes, Cytec would need better metrics and reporting
capabilities. Importantly, it would need to change its culture, effectively embedding a focus
on working capital into decision-making throughout the organization. “We want our people
Contd...

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