International Treasurer®Practical Intelligence for Treasury Innovation

Risk Appetite Returning

Peer Insight: GCBG Winter 2010 Meeting

As the Economy Recovers, Cash Managers Get Back to Basics

Evaluating External Managers—a Scorecard Approach

By Bryan Richardson and Dwight Cass

Raw performance figures are not the only benchmark—or the most important—for determining whether a manager is world class.

Treasury Prepares for the Unexpected

By Dwight Cass and Bryan Richardson

With a growing consensus that benchmark rates could rise and sovereign debt woes could have a knock-on effect, many in treasury are taking a conservative approach.

Credit Analysis Comes Home

With rating agencies discredited, companies are taking matters into their own hands. Investors have outsourced credit analysis for decades. But the financial crisis has shown that this leaves them at the mercy of ratings firms that may not be doing a proper job. In response, companies have increasingly developed internal approaches to credit analysis for their portfolio holdings or prospective purchases.

FI Junk in the Trunk?

The recent headlines concerning CIT Group’s struggle to stay afloat are probably a good reminder for treasuries to continue reviews of their outsourced investment managers and possibly collateral agreements.

Expanding the Indicator Toolkit

Treasury investment managers eyeing re-entry points into the market have been looking at all manner of indicators to guide their decision.

Portfolio Benchmark Relativity

Anyone holding their external asset managers to previously agreed upon benchmarks has certainly realized there has been a growing disparity between benchmark and portfolio performance over the past 18 months.

Asia Dumping GSE’s

The US government continues its efforts to shore up the banking industry through its explicit guarantee of bank debt issuance via the TLGP program, which was further expanded last month. However, it is showing no interest in giving the same level of guarantee to debt issued by government-sponsored entities (GSEs) such as Freddie Mac. For treasury investment managers still seeking to fulfill their extreme safety mandate, this calls into question GSEs as an asset class. It certainly has for Asian investors that are pulling back from investments in GSE debt.

Is it Prime Time Again?

With treasurers making it clear that there is no upside in seeking yield on cash investments, many treasury investment managers have been wondering, in pure practical terms: Where do you go when your options for investing your short-term cash dry up?

New Disclosure Requirements for Impaired Securities Proposed with Immediate Effect

By Bryan Richardson

On Christmas Eve, the FASB gave the accounting equivalent of last year’s fruitcake to all companies with any securities as assets by issuing a “Proposed Staff Position” to amend FASB Statement No. 107 (circulated as FSP FAS 107-a) with a response window of 22 days (over the Christmas and New Year’s holiday) versus the normal 30 days. A similar proposal from the IASB ( Proposed Amendments to IFRS 7, Financial Instruments: Disclosures) carried the same comment deadline: January 15.

Something New For The Cash Portfolio

There’s a new security on the block and guess what—it’s “perfectly safe”—and pays something over Treasuries. In an environment where few cash investors have been comfortable investing in anything other than government paper and time deposits, the growing range of government-guaranteed paper in the US and elsewhere, along with better details on the guarantees, has finally prompted some moves toward diversification.

Investment Opps in Government Bailouts

The recent bail out of two of the largest US-government sponsored enterprises (GSE’s), Fannie Mae and Freddie Mac, has underscored the point of why entities with government backing are favored by conservative investors. With issuers of most other securities, mounting losses, continually widening credit spreads, dramatic slowing of the mortgage market and nervousness setting in among key holders would send corporate cash investors running to sell. But that’s not necessarily so.

ARSs Made Whole?

After months of media reporting on the lost fortunes of those who were seduced into purchasing Auction Rate Securities (ARSs) their advisers knew would go bad, Andrew Cuomo, the New York Attorney General, has intervened to suddenly “make a market” for a security that has been illiquid since February. Banks that had brought the ARS market to its knees by failing to provide backstop liquidity for auctions gone bad, are now being forced to provide this liquidity after the fact in settlement agreements with the New York AG.

SEC Short-Sale Rule Good for SEC Lending

The SEC’s recent emergency order to prevent "naked" short selling in the securities of Fannie Mae, Freddie Mac, and primary dealers at commercial and investment banks will help fuel securities lending. The SEC’s order, to take effect on July 21, will require that short sellers arrange beforehand to borrow the securities and deliver them at settlement. The SEC also said that it plans to "undertake a rule making to address these issues across the entire market."

Re-Assessing Outside Managers’ Value

The turmoil in the fixed-income markets has sparked a reassessment of the value added by working with external managers. For many treasury managers of corporate cash, the lesson learned is that if they use external managers, they cannot assume they are on the same page regarding which assets can be sold, which names are too toxic for the portfolio from a headline risk standpoint and the paramount importance of quarterly EPS risk, as opposed to the risk versus the benchmark paramount to external managers. Thus, these takeaways:

• Frequent dialogue is needed. To have a successful relationship with external managers, corporate investors need to be much more proactive in discussing the details and risk parameters of the investment mandates they give to each external manager and revisit them in frequent dialogue.
• Do your own due diligence. To inform the dialogue with external managers, treasury investment managers should perform their own due diligence into what each manager is investing in, or what unacceptable credits might be there, in order to ask better questions.

More than one corporate cash investment manager participating in the NeuGroup’s recent peer groups meetings, for example, was surprised not only to find distressed credits like Countrywide or Bear Stearns in their “safe” portfolios, but also by the responses from their managers when queried about them.

Corporates were as likely to be encouraged to keep such paper in their portfolios by benchmark-adhering managers as they were to be warned about such paper, even when asking about potential issues in the portfolio.

ARS’ Silver Lining

The ARS market has gotten a lot of flack recently, as demand dried up because of credit concerns, and the banks that had initially sold the paper as foolproof, short-term liquid investments proved unable or unwilling to step up and save failed auctions.

However, the ARS story is not all bad. An April 2008 survey of the NeuGroup’s Tech20 Group of Treasurers and the Treasury Investment Managers’ Peer Group (in advance of the groups’ May meetings) revealed that very few had any ARS on their books.

Meanwhile, the ones that did keep some paper reported that they indeed have had some failed auctions but the end result was far from negative.

Bristol OTTI Gets Treasurer Fired

When Bristol-Myers Squibb wrote down nearly half a billion dollars in losses in its investment portfolio for Q4/07, it promptly fired the treasurer, Ed Dwyer, and the tremors were felt throughout the corporate investment community. Bristol’s story raised several questions for treasury practitioners:

1) Should corporate investors seek to enhance yield at the risk of impairment or even principal loss, and if they do, what’s the yield-to-career risk embedded in getting 10-20 extra basis points?

2) What specifically forced Bristol and its auditors to impair the securities? and

3) Are there more “Bristols” out there?

Compensating Ops for Greater Cash Focus

Treasurers report that their senior management is more concerned than ever about cash and liquidity. That’s no surprise, given that even the tried and true MMFs proved to be a lot less liquid than many companies had assumed.

As a result, treasury’s long-term effort to improve cash forecasting and WCM is getting greater support and certainly more focus from the top. As such, treasurers reported that they either are implementing now or have just implemented several initiatives designed to:

1) Improve accuracy of CF forecasts;

2) At least, prop up the BUs interest in maximizing the generation and utility of free cash flows

Over 60 Failed Auctions Shake ARS Market

It was not long ago (2005) that corporate investors battled with their auditors about the balance-sheet classification of auction-rate securities: the auditors pushed back on the C&CE selection, given that the underlying securities, while auctioned frequently, often have 20- or 30-year final maturities.

In the end, companies had to reclassify their holdings (as they did for certain MMFs and VRDNs) into short-term investments and other current assets, or something similar.

This was bad news for many treasuries (and indeed, some decided to pull out of the auction rate market entirely, at least at the time). For years prior, the higher-yielding investments had been a favorite of the cash-rich corporate investor crowd because: (1) they offered a yield pick-up in a very low-yield environment; and (2) the auction mechanism appeared to make them very liquid.