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Solving the Insurance Problem With an Efficient Frontier for Risk

Willis Towers Watson advocates an approach that makes use of modern portfolio theory to assess the true value of insurance.

For more than a year, buying and renewing insurance policies has been a severe pain point for many finance teams, all suffering through a hard market of rising premiums, higher retentions and lower capacity. And the pandemic.

  • That makes now a good time to consider a modernized approach to insurance and risk finance strategy that takes what Willis Towers Watson (WTW) calls a portfolio view of risk, making use of technology and data analytics to arrive at an efficient frontier of cost and risk.

Willis Towers Watson advocates an approach that makes use of modern portfolio theory to assess the true value of insurance.

For more than a year, buying and renewing insurance policies has been a severe pain point for many finance teams, all suffering through a hard market of rising premiums, higher retentions and lower capacity. And the pandemic.

  • That makes now a good time to consider a modernized approach to insurance and risk finance strategy that takes what Willis Towers Watson (WTW) calls a portfolio view of risk, making use of technology and data analytics to arrive at an efficient frontier of cost and risk.
  • Sean Rider, head of client development in North America for WTW, explained the firm’s solution to NeuGroup members attending a recent presentation titled “The Modernization of Risk and Financial Strategies.”
  • At the outset of his remarks, Mr. Rider said, “Insurance is a problem to solve,” a sentiment shared by many of the roughly 60 members in the virtual room.

Taking a page from insurance carriers. A key goal of WTW’s more strategic, less tactical and transactional approach to solving that problem is to bridge the gap between how corporates buy insurance and how insurers price risk, a gap that gives the carriers an information advantage, the firm said.

  • That advantage arises in part because corporates often manage insurance in silos, assessing coverage lines individually and placing insurance outside the many other risks finance and treasury teams manage.  
  • Insurers, meanwhile, underwrite risk in the context of a portfolio, holistically, employing technology for modelling and other functions.
  • In the past two years, WTW developed a dynamic analytic platform called Connected Risk Intelligence for its consulting clients that provides data visualization and access to the same statistical framework and stochastic analysis available to insurance companies that use software sold by WTW.

The payoff. Armed with better information and the ability to “map and model and test all the potential transactions” available to them, Mr. Rider said, corporates can optimize their risk financing strategy and move to the efficient frontier, making data-driven decisions that he called courageous and “rooted around your priorities.”

  • This approach, WTW’s presentation said, allows corporates to “exploit arbitrage opportunities among mitigation, transfer and retention levers.”
  • This may result in buying less of some coverage and more of others as a company maximizes efficiency by analyzing its financial risk weighed against other risks and the cost for mitigating them to various degrees.

A portfolio review. In the graphic above, shown at the NeuGroup presentation, each point in the “cloud” represents one of tens of thousands of combinations of insurance options, such as buying D&O, workers compensation and liability coverage at various costs and levels of coverage.

  • The x-axis represents the average cost of those strategies and the y-axis shows the corresponding amount of risk the corporate will retain net of insurance in a severely adverse year.
  • “B” represents the example company’s exposure if it is entirely uninsured: $225 million in the adverse scenario, $11 million in a typical year. With its actual strategy, marked “A,” the company has reduced its exposure or residual risk to $120 million for the incremental cost of $5 million.
  • The green points represent the efficient frontier, where the corporate can no longer reduce risk without taking on more cost; and can no longer reduce cost without taking more risk.
  • That means the vast majority of combinations of insurance coverage decisions shown are inefficiently priced, including the company’s current strategy.
    • “X” shows that the company could achieve the same risk mitigation for less cost: about $14.75 million vs. $16 million.
    • “Z” shows the company could reduce its residual risk to $80 million (vs. $120 million) for the same $16 million. And “Y” falls between X and Z on the efficient frontier.
  • “In the example, let’s say the organization’s tolerance for insurable risk is $80 million at the one in 100-year probability level,” Mr. Rider said.
    • “Then the current approach (and any combination above Z) is not just inefficient, it fails the fundamental purpose of insurance: protecting against loss that imperils financial resilience.”

The difference. The discussion this portfolio review makes possible is “what’s not happening in how insurance decision making happens today,” Mr. Rider said.

  • Now, though, the conversation is shifting to meet the needs of corporates facing new challenges. “We are talking about risk, we are talking about value, we’re talking about efficiency. We’re recognizing the complexity of these decisions. And this approach is something that we’re not going to unlearn.”
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AtlasFX and FiREapps: How Two FX Risk Management Systems Stack Up

NeuGroup members share what they need from FX risk management solutions, what they get and what could be better.

A need for automation, a user-friendly interface and consistent accuracy were among the highest priorities in selecting an FX risk management platform for members at a recent NeuGroup meeting that zeroed in on FiREapps and AtlasFX.

AtlasFX ‘dream state.’ One member who recently worked with AtlasFX to adopt the platform lauded the firm’s flexibility and willingness to meet his company’s requests.

NeuGroup members share what they need from FX risk management solutions, what they get and what could be better.

A need for automation, a user-friendly interface and consistent accuracy were among the highest priorities in selecting an FX risk management platform for members at a recent NeuGroup meeting that zeroed in on FiREapps and AtlasFX.

AtlasFX ‘dream state.’ One member who recently worked with AtlasFX to adopt the platform lauded the firm’s flexibility and willingness to meet his company’s requests.

  • “We came up with a list of must-haves: ‘If we can build this, we are future-proof,’” the member said, and complimented the vendor on its accommodations. “It got built. Some of it’s still falling into place, though we did have the capacity to have a team member spend most of their time on it for three months.”
  • The member’s system now features automated calculations for complex business-to-business trading, as well as automated connections to the company’s ERP system, its TMS and its FX trading platform.
    • The member said that before this, his team was making these calculations manually, and he had to upload data to the other platforms.
  • “[AtlasFX] helped get us to a dream state,” the member said. “When I think about the solution they helped us build, it just makes me happy.”

Watching the clock. Though members using AtlasFX said they appreciate the company’s commitment to customization, users did agree that it took more time and effort for FX teams to implement than other systems. Asked to comment, an AtlasFX spokesperson responded:

  • “A typical deployment from beginning to end would be three to four months, but can vary in either direction based on complexity. However, with that time frame, the customer typically will have partial access to much improved data and analysis in just a few weeks.
  • “We are laser-focused on automating whatever is manual wherever we can, so we try to save them time in the FX workflow early on during the deployment, and ultimately free up a lot of time once everything is completed. We’re quite familiar with their pain points and can quickly implement some time-saving best practices.”

FiREapps: rock solid. When one user of FiREapps, Kyriba’s FX risk management solution, was asked why he choose the system, his answer was simple: it was very user-friendly, and “completely bulletproof.”

  • One member said the platform “works great” for measuring exposure on balance sheet and portfolio hedging and trade decisions. The member does not hedge cash flows.
  • Another member, who has used FiREapps in the past, called it a “one-size-fits-all” solution that won’t suit some companies’ needs. “The configuration time is a bit shorter, but it’s a vanilla solution,” he said.
    • A Kyriba spokesman said, “Now that FiREapps is a part of Kyriba, there are numerous additional features and functions available for clients to take advantage of. Kyriba is investing significantly in our products and there are always new and innovative solutions to explore with us.”
  • “We’ve never had an issue with errors, it’s very efficient,” one member said. However, he said he wished FiREapps offered more functionality for visualizing data and looking at trends.
    • “FiREapps has lots of data, but can be light on information,” he said. “If you’re trying to look into trends or do some visualization, FiREapps just doesn’t have the capability, you have to put it in something else to really analyze it.”
  • A Kyriba spokesman said the company “provides a number of different ways to help clients visualize their data.” He said the platform has “powerful analytics for creating trend analysis, variance analysis, hedge performance analysis as well as a variety of powerful business intelligence analytics related to data integrity, exposure and risk views.
    • “We are also working closely with several of our clients to design powerful business intelligence views that provide a comprehensive understanding of their FX program.”
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Talking Shop: Italy’s New Way to Make Public Administration Payments

Member question: “As of the end of Feb., it is mandatory to pay the public administration in Italy through a payment system called PagoPA. To my knowledge, none of the big banks support this. We currently use a local Italian partner bank for this purpose.

  • “Does anybody know if it is also mandatory to pay the public administration through this PagoPA system when paying from a nonresident legal entity outside Italy?”

Member question: “As of the end of Feb., it is mandatory to pay the public administration in Italy through a payment system called PagoPA. To my knowledge, none of the big banks support this. We currently use a local Italian partner bank for this purpose.

  • “Does anybody know if it is also mandatory to pay the public administration through this PagoPA system when paying from a nonresident legal entity outside Italy?”

Peer answer 1: “We are in the process of opening an account with [a European bank] in Italy for this sole purpose. So maybe you can inquire with [them]?”

Member response: “We’ve been in contact with [them] as well, having the impression that some investments still needed to be made at their end to support PagoPA. Notes from our call:

  • “Segregation of duties is not possible yet, i.e., one person entering and one other person approving the payment.
  • “No file upload functionality, it is only feasible to manually enter the payment.”

Peer answer 2: “I have been advised that for certain types of payment e.g., waste water or local taxes, PagoPA is required. However, in the main, the Italian government will accept different payment options, e.g., F24.

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A Third Path for Stock Buybacks: Enhanced Open Market Repurchases

Some NeuGroup members have turned to eOMRs to get the flexibility of OMRs and pricing below VWAP, like ASRs.

Many NeuGroup members across groups at recent meetings agreed they have enough excess liquidity and trust in market stability to restart share repurchases; but there has been a range of views about how much emphasis to place on the price per share a corporate pays for its own stock.

Some NeuGroup members have turned to eOMRs to get the flexibility of OMRs and pricing below VWAP, like ASRs.

Many NeuGroup members across groups at recent meetings agreed they have enough excess liquidity and trust in market stability to restart share repurchases; but there has been a range of views about how much emphasis to place on the price per share a corporate pays for its own stock.

  • Where companies fall on the spectrum of answers may determine if they opt for open market repurchases (OMRs) or accelerated share repurchases (ASRs). And then there’s what’s called an enhanced OMR (eOMR).

Vanilla OMRs. A member in a meeting of large-cap companies said, in his experience, “All the Street ever cares is ‘did you buy back $100 million or $500 million or a billion?’ As long as it’s not egregiously over-market, it seems like there’s not much value given to the price paid, just the amount purchased.”

  • This member uses a traditional OMR that offers corporates relatively more flexibility than an ASR program, a strategy that allows companies to make opportunistic share repurchases at below-market prices but requires them to commit to the program.
  • Another member who also uses OMRs said he communicates with his company’s finance team every three months but has never been asked how he performed against volume weighted average price (VWAP).
  • The member added that although treasury typically tries to be as opportunistic as it can, “the primary objective is to get a certain amount done.”

eOMRs: The best of both worlds? Other members shared their success using so-called enhanced open market (eOMR) repurchases, a strategy that uses an algorithm to determine daily purchases, maximizing the discount to VWAP. This approach offers both flexibility and pricing advantages.

  • One member who uses eOMRs said he was pitched the strategy by his bank, which “uses a lot of the same trading algorithms and approaches that it uses for an ASR, except the bank doesn’t take the cash up front,” the practice in ASR deals.
    • He said the company doesn’t get the shares delivered upfront but that isn’t a high priority anyway.
  • The member said that the return to the company is a cut of whatever the trading performance is. “So if they outperform by a buck a share, you might get 75 cents of that and the bank will keep 25 cents, or whatever the mechanism is,” he said.
    • “We like using that when we know we’re trying to hit a target for the quarter.”
  • As an example, the member said, if his company wanted to do $500 million in repurchases for the quarter and isn’t price sensitive, an eOMR makes sense because the company can capture the volatility while definitely hitting its target.
  • Another member said he balances his use of ASRs with eOMRs. “We will take a look at implied volatility, and if volatility is high, an ASR allows us to lock in that volatility at a higher discount. Otherwise, an eOMR gives us some flexibility, still enjoying the opportunity for better than VWAP.”
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Getting Granular on Green Bond Proceeds: Capex? Opex? Both?

Some investors prefer that green bonds finance capex projects, but corporates use proceeds for opex, too—with caveats.

How a corporate intends to spend the proceeds from a green bond is integral to deciding whether to issue the bond in the first place. You need to have sufficient uses to create a deal that is large enough to make the costs worthwhile and ensure that investors will participate.

Some investors prefer that green bonds finance capex projects, but corporates use proceeds for opex, too—with caveats.

How a corporate intends to spend the proceeds from a green bond is integral to deciding whether to issue the bond in the first place. You need to have sufficient uses to create a deal that is large enough to make the costs worthwhile and ensure that investors will participate.

  • NeuGroup members at a recent ESG working group meeting addressed a related, more granular issue of using green bond proceeds for operating expenses (opex) in addition to capital expenditures (capex).
  • Members also discussed the benefits of using the proceeds on fewer, big-ticket items rather than for multiple, smaller expenditures.

A case for big capex. One member said his company chose to use the proceeds from a recent green bond for large capital expenditures, excluding operating expenses and smaller capex opportunities.

  • “This made the post-transaction reporting less onerous,” he said. The company did not want to create a “big workload” in terms of reporting, he added.
  • Following the meeting, another member said, “I think there was fairly broad agreement that capex was preferable to opex,” all else being equal.
  • One reason for that is the preference by investors, especially in Europe, that proceeds from green bonds be used to create new assets that support sustainability.

Capex and opex. Another member’s company is looking into using the proceeds from a sustainable debt issuance for a combination of capex and opex. “Specific to capex, we are exploring how to tie R&D expenditures to particular product offerings,” she said.

  • After the meeting, this member said, “A key takeaway from the meeting from other members who have tied proceeds to capex and [opex] is the importance of clearly articulating the specific ESG value add derived from the service or product funded with green proceeds.
    • “Investors want to know that the proceeds are not simply being used to fund normal business operations.”
  • Another member’s company plans to use proceeds from a multi-tranche sustainable debt deal for both capex and opex. He noted that while investors like to know, companies are not required to reveal the ratio of capex to opex in use of proceeds disclosures.
  • That said, it’s likely “that we’ll allocate proceeds on the longer-dated tranches to longer-lived assets such as green buildings,” he said. That means that shorter-term tranches may fund operating expenses.
    • “I understand that some investors are sensitive to seeing a reasonable match between the tenor of bonds to the life of the eligible projects funded,” he said. He added that his company received different advice from different banks on whether this particular issue mattered.

What about PPAs? Many companies use green bond proceeds to finance power purchase agreements (PPAs) that allow a corporate to buy renewable energy from a third party. PPAs are considered operating expenses, one member explained.

  • He said investors, especially in Europe, “generally consider them lower quality—or even inappropriate—use of proceeds for a green bond.” That’s relevant, he said, is in cases where a corporate is buying power from an existing renewables project.
  • For that reason, this company included so-called additionality in its bond framework. “Our PPAs need to be catalyzing net new renewable energy onto electrical grids—which is partly the goal for investors who are capex focused,” he said.
  • “This additionality theme is a key focus for investors, and you heard several other members mention it during the session,” he said after the working group meeting.

EU green bond standard. A proposed green bond standard in Europe may offer corporates more guidance on which operating expenditures will pass muster:

  • “Green expenditures can include any capital expenditure…and selected operating expenditures…such as maintenance costs related to green assets, that either increase the lifetime or the present or future value of the assets, as well as research and development (R&D) costs.
  • For the avoidance of doubt, OpEx such as purchasing costs and certain leasing costs would not normally be eligible.”

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Talking Shop: Holding Physical Cash ‘Under the Mattress’

Member question: For business continuity or emergency use purposes, are you holding any physical cash on hand at one of your sites?

Peer Survey Results: “No” wins in a landslide.

Member question: For business continuity or emergency use purposes, are you holding any physical cash on hand at one of your sites?

Peer Survey Results: “No” wins in a landslide.

Peer answer: “Our US company does not currently keep any cash ‘under the mattress,’ however I do think there are some places around the globe that do have some [a country in Latin America].

“I’m assuming you are asking this post-Fedwire disruption? Was anyone negatively impacted by that? I am wondering if anyone is preparing any sort of BCP plan for an extended Fedwire disruption.

“We did not have any negative impact – everything was able to be pushed through the systems. I am having some follow-up conversations with my primary US banking partner to talk through potential BCP scenarios in the event another outage occurs that extends beyond the business day.”

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Treasury’s Key Role in ServiceNow’s Commitment to Racial Equity

ServiceNow has turned to RBC to create a $100 million fund to support Black homebuyers and communities.

ServiceNow in late January unveiled a $100 million “racial equity fund”—in the form of a separately managed account— that will be managed by RBC Global Asset Management’s impact investing team.

  • In mid-February, during Black History Month, ServiceNow senior treasury director Tim Muindi, who played a leading role in the process, described the project to other NeuGroup members who work at high-growth tech firms. ServiceNow runs a software platform to help companies manage workflows.
  • The company is among corporates paving the way by taking concrete action aimed at improving diversity and inclusion (D&I) and promoting racial justice in society.

ServiceNow has turned to RBC to create a $100 million fund to support Black homebuyers and communities.

ServiceNow in late January unveiled a $100 million “racial equity fund”—in the form of a separately managed account— that will be managed by RBC Global Asset Management’s impact investing team.

  • In mid-February, during Black History Month, ServiceNow senior treasury director Tim Muindi, who played a leading role in the process, described the project to other NeuGroup members who work at high-growth tech firms. ServiceNow runs a software platform to help companies manage workflows.
  • The company is among corporates paving the way by taking concrete action aimed at improving diversity and inclusion (D&I) and promoting racial justice in society.
  • These businesses are often focusing impact investing efforts on communities where their employees live and work. To target specific geographic areas, some others have also chosen to work with RBC.

Take the initiative, identify a goal. A decision by ServiceNow to focus on boosting home ownership in Black communities began with Mr. Muindi asking himself what he could do personally, on a professional level, to effect social change given treasury manages about half of ServiceNow’s balance sheet. Finding the answer included reading “The Color of Money: Black Banks and the Racial Wealth Gap” and a Citi GPS report on the economic cost of Black inequality in the US ($16 trillion in the last 20 years).

  • To explain why his treasury team wanted to focus its efforts on Black communities, Mr. Muindi told senior executives, “The reason we’re going to start in Black communities is that’s what’s on fire. The house is on fire, let’s go and start working on that. And over time there will be other opportunities.”
  • At the meeting, he told members that home ownership has a multiplier effect by indirectly helping ancillary businesses supported by homeowners. Deposits alone in Black-owned banks are just a part of the solution, he said.
  • “We have many more roles to play in addition to deposits,” he said. “We have to be part of this entire ecosystem of capital movement, enabling the flow of capital.”
Tim Muindi, Senior Treasury Director, ServiceNow

A solution and a carve-out. Mr. Muindi needed a way to keep capital flowing to lenders in Black communities to enable them to have the capacity to continue generating new loans; in some instances where the banks securitize loans, the loans are too small to interest institutional investors, he said.

  • He decided, “Let’s become a catalyst so there’s an outlet on the other side” where banks can “have additional loan origination capacity” and create an income stream, which is extremely vital for Black-owned banks.
  • To do that, he worked with RBC to create the separately managed account, which buys agency mortgage-backed securities (MBS), Small Business Administration (SBA)-backed loans and taxable municipal securities. Black communities are the beneficiaries of the loans in 10 US cities where ServiceNow staff work and reside.
  • That required creating a “complete carve-out” within ServiceNow’s investment policy and shifting from a focus on duration limitations to weighted average life metrics, because of the assets in the account.
  • “We couldn’t invest in MBSs before this,” Mr. Muindi said.
  • The company’s $1 million minimum individual security investment amount has been waived for the RBC account.

The approval process. Before establishing the account and the carve-out, of course, Mr. Muindi needed the support of the company’s senior leadership and the audit committee (AC) of the board of directors. He said this involved educating people on historical context and how the company could best respond to fast-moving current events.

  • He answered lots of questions about impact, outcomes and other topics. He won approval, in part, he said, by emphasizing the positive impact the company’s investments would have on people in underserved communities.
  • He said the AC was very receptive to the recommendation. “So why didn’t we do this before,” he asked himself.

Slow down and communicate. Once he had the green light, Mr. Muindi’s attitude was, “Let’s get this started, let’s get going on it” by putting the money to work. His colleagues on the company’s communications team had to slow him down and helped him realize “there’s a lot more to it,” he said.

  • He ultimately learned the importance of both internal and external communications on a project of this nature, the need to carefully consider the messaging to both employees and the investor community. He recommends starting early and using all resources available, including FAQ sheets.
  • The communications process helped prepare him for a flood of questions following the announcements, including an employee who asked why the company chose RBC instead of a Black-owned firm. The response included RBC’s capabilities and track record in impact investing relative to other banks.

Measuring success.  At the NeuGroup meeting, another member asked Mr. Muindi how the company is measuring success. He said impact reporting is a work in progress that will include both stories about business creation and data on mortgages, among other elements.

  • The company plans to deploy the entire $100 million by the end of the year, Mr. Muindi said, adding, “There is a need.”
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Bridging the Gap With A Hybrid Solution for Cash Flow Forecasting

One NeuGroup member’s solution for more accurate quarterly forecasting combines old school and new school.

Accurate long-term cash flow forecasting may be treasury’s white whale, and while the hunt is certainly far from over, assistant treasurers at recent NeuGroup meeting heard about a solution for producing medium-term forecasts.

Lack of balance. At the meeting, one AT told the group he is having issues balancing two standard methods for cash forecasting in the short- and long-term.

One NeuGroup member’s solution for more accurate quarterly forecasting combines old school and new school.

Accurate long-term cash flow forecasting may be treasury’s white whale, and while the hunt is certainly far from over, assistant treasurers at recent NeuGroup meeting heard about a solution for producing medium-term forecasts.

Lack of balance. At the meeting, one AT told the group he is having issues balancing two standard methods for cash forecasting in the short- and long-term.

  • The short-term system forecasts two weeks in advance for AP purposes, based on a direct model of “cash positioning” that analyzes upcoming payments and receipts. It has a high degree of accuracy.
  • But his yearly long-term forecast, a top-down approach based on high-level revenue and expense forecasts from FP&A, has a higher margin of error.

The power of a hybrid. In response, another AT shared that his company’s treasury and shared service center teams worked together to build a hybrid between the two models, a tool that generates far more accurate cash flow forecasts over the coming six to 12 weeks.

  • He said the tool works by “looking into the system of AR and AP for what you see within your current terms.” Think of that as old school.
  • It then “uses some AI and machine learning techniques to figure out historically where the rest of that period is going,” and makes extrapolations about the next three-month period. New school.

Bridging the gap. The tool helps to bridge a gap the member’s company had when “planning around how much we need for AP, share repurchases, and other outflows for the whole quarter, not just the next week.”

  • “If you’re managing an investment portfolio that you’re using for liquidity you need to know your position on the curve in relation to your cash needs,” the member said.
  • Another member who uses a similar medium-term forecasting model said that this method is typically far more accurate over a single quarter than the one-year forecast.
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Talking Shop: Allowing Direct Debits for Payroll Tax

Member question: “For those of you who use ADP for payroll in the US, do you allow them to do direct debits on your bank accounts, specifically for payroll tax payments?”

Member question: “For those of you who use ADP for payroll in the US, do you allow them to do direct debits on your bank accounts, specifically for payroll tax payments?”
 
Peer answer 1: “We just converted to direct debit with ADP in the US. Happy to put you in touch with the team that evaluated and executed the project.”
 
Peer answer 2: “We allow direct debits for both payroll and payroll tax. We fund to a separate, stand-alone payroll bank account that is solely used for this activity.”
 
Peer answer 3: “We reverse wire and direct debit for payroll tax and payroll respectively.”
 
Peer answer 4: “We allow ADP to reverse wire from a dedicated payroll account. ADP offered no other option (‘take it or leave it’), and we only got comfortable by establishing a stand-alone account.”

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Risk Managers Who Seek Gray Rhinos and Don’t Call Them Black Swans

Some enterprise risk managers call unexpected but predictable events gray rhinos and avoid the term black swan.

As awful, disruptive and devastating as the Covid-19 pandemic has been, it’s not worthy of being called a black swan, according to more than one pundit. They include the man who made the term famous: Nassim Taleb, author of “The Black Swan,” whose subtitle is “The Impact of the Highly Improbable.”

  • Unlike a black swan event—unpredictable, with massive impact— the argument goes, the pandemic, along with some other recent examples that felt cataclysmic, was both predictable and predicted.

Some enterprise risk managers call unexpected but predictable events gray rhinos and avoid the term black swan.

As awful, disruptive and devastating as the Covid-19 pandemic has been, it’s not worthy of being called a black swan, according to more than one pundit. They include the man who made the term famous: Nassim Taleb, author of “The Black Swan,” whose subtitle is “The Impact of the Highly Improbable.”

  • Unlike a black swan event—unpredictable, with massive impact— the argument goes, the pandemic, along with some other recent examples that felt cataclysmic, was both predictable and predicted.

Gray rhinos. Consistent with this theme, at a recent meeting of NeuGroup’s enterprise risk management group, members advised identifying and preparing for foreseeable major threats. Some of them used a term for them found in another book: gray rhinos.

  • Its subtitle: “How to Recognize and Act on the Obvious Dangers We Ignore.”
  • The idea, author Michele Wucker writes, is that a highly probable, high-impact threat is “something we ought to see coming, like a two-ton rhinoceros aiming its horn in our direction and preparing to charge.”

Failure of imagination? One member said he doesn’t like the term black swan, in part because it can be used as an excuse for conveniently ignoring risks that are actually foreseeable and therefore require companies and other institutions to take action before it’s too late.

  • He argued that failing to plan properly for Covid-19 may reflect a “failure of the imagination” about how widespread the damage of a pandemic could be to the economy and the world.
  • Calling something a black swan, he said, can also suggest there was “nothing we could do about” a particular problem, when that is often not the case.

What to do about the rhino? One ERM practitioner who tries to find gray rhinos warned that identifying major, predictable threats does not mean it’s easy “to pick off pieces that are actionable.”

  • For example, a gray rhino like climate change, members agreed, is a threat almost everyone can see coming but is attacking on many different fronts. That raises the question of where you start.
  • “It’s a challenging topic, easy to kick the can down the road,” the member said.

Fighting off the beasts. To plan and prepare for other, multiheadedthreats that can upend business models, several ERM practitioners are war-gaming various scenarios that could result in serious damage or the end of the company.

  • One member said his company was not “doing anything specific [in terms of black swan scenarios]” but has done “war-gaming for inflection points in our markets,” trying to ferret out “key technologies that could break the business model.”
  • Another member mentioned using war-gaming to mitigate risk around cyberattacks.
  • A third risk manager said that after this company successfully dealt with the pandemic and a hostile takeover attempt, senior management decided to stop scenario planning for now.
    • This company, the member said, also “got away from fighting about what color or animal” a threat represented. Now they call something that’s “low likelihood and high impact” simply an “unexpected event.”
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Squeezed for Time: Internal Auditors Presenting to Audit Committees

How auditors make sure their voices are heard when their time before the AC is limited.

Internal auditors often get squeezed for time when it comes time to appear before the audit committee (AC) of the board of directors.

  • Given that reality, some members of NeuGroup’s Internal Auditors’ Peer Group (IAPG) have devised other ways to make sure their views are heard—or read—by members of the AC. Following are some takeaways on the subject discussed at a recent IAPG meeting.

How auditors make sure their voices are heard when their time before the AC is limited.

Internal auditors often get squeezed for time when it comes time to appear before the audit committee (AC) of the board of directors.

  • Given that reality, some members of NeuGroup’s Internal Auditors’ Peer Group (IAPG) have devised other ways to make sure their views are heard—or read—by members of the AC. Following are some takeaways on the subject discussed at a recent IAPG meeting.

Short shrift. NeuGroup members say their appearances before the AC may be limited to just 15-20 minutes. In one member’s case, the AC also is the finance committee—and finance presents first.

  • This means the audit report comes at the end of the session and becomes more of a quick overview “on themes and trends.” Thus, this auditor struggles to promote the continuous improvements the internal audit function has accomplished.

Readers make leaders. Another member says her AC is “very diligent” about reading the material audit sends the committee ahead of time. This includes reading the appendices, slides and other supporting documents. That gives her confidence the AC sees the audit function’s accomplishments.

  • Otherwise, the auditor said it is “hard to put all we’ve accomplished into 20 minutes,” adding that she still has to “speed talk” her way through the presentation.
  • Another member intersperses his report with bullets “here and there” showing what the audit team has accomplished.

Pole position. Some companies rotate the sequence of reporting. If yours doesn’t, consider suggesting it. Because if you’re at the beginning of the AC’s session, which can include financial reporting, cyber, tech and other operational issues, you can get more time.

Work-arounds. Several members said they have good relationships with AC members and can follow up with them after the meetings (or between AC meetings) to go into more detail about what the audit team is up to.

  • One lucky member said that audit meets with the AC beyond the typical quarterly meetings. She said she meets with the committee nine times in a year, which means at five of those meetings she can share more of what audit is doing.
  • Another member said they do “four plus 10-K” for a total of five AC meetings.
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Talking Shop: Yes or No When Moody’s Asks for Dealer Agreements?

Member question: “Moody’s is asking us to provide our dealer agreements for our commercial paper program. Historically we have not provided private agreements. Are you seeing this also and if so, are you providing the agreements?

  • “For what it’s worth, Moody’s is saying they want it to see the settlement period language in the document. We have provided the private placement memorandum which contains the binding settlement language.
  • “We have not provided the dealer agreement and are pushing back on the basis it is a confidential bilateral agreement. But curious to know if we are a total outlier here.”

Member question: “Moody’s is asking us to provide our dealer agreements for our commercial paper program. Historically we have not provided private agreements. Are you seeing this also and if so, are you providing the agreements?

  • “For what it’s worth, Moody’s is saying they want it to see the settlement period language in the document. We have provided the private placement memorandum which contains the binding settlement language.
  • “We have not provided the dealer agreement and are pushing back on the basis it is a confidential bilateral agreement. But curious to know if we are a total outlier here.”

Peer answer 1: “We have not provided, but would have no concerns. I suppose the reason for asking is more or less to ensure that there’s actually an agreement in place, versus the agency wanting to diligence any of the specific features in the contract. If we were asked to provide it, we’d probably make the agency explain why they needed to see it, just from a ‘less is more’ principle.”

Peer answer 2: “​We received the request and provided. When I was with a previous company, this had been requested years back and always provided. I believe it’s to support the short-term rating.”

Peer answer 3: “They reached out to us requesting this information [last fall]. We provided the agreements to them.”

Peer answer 4: “We have not been asked for them. Did they say why they were looking for them or what they were looking for?”

A spokeswoman said Moody’s declined to comment on dealer agreements. If you have answers or comments on anything you read in Talking Shop, please send them to insights@neugroup.com.

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Swap Rates and the C-Suite: Making the Case for Floating-Rate Debt

Low fixed interest rates may make it harder—but not impossible—to convince management to swap to floating.

Interest rates may be ticking up, but their historically low level is one reason some treasury teams may face difficulty convincing senior management to swap more of their company’s debt stack to floating rates from fixed.

  • “It’s a hard time to argue to do it given where long-term rates are,” one NeuGroup member said at a recent meeting.
  • “When the fixed-rate environment is this attractive, it’s hard to convince a CFO to ignore locking in a < 3% coupon for 30 years so we can swap into a floating-rate instrument to save another few %, but because it’s floating, it’s not guaranteed,” he added in a follow-up interview.

Low fixed interest rates may make it harder—but not impossible—to convince management to swap to floating.

Interest rates may be ticking up, but their historically low level is one reason some treasury teams may face difficulty convincing senior management to swap more of their company’s debt stack to floating rates from fixed.

  • “It’s a hard time to argue to do it given where long-term rates are,” one NeuGroup member said at a recent meeting.
  • “When the fixed-rate environment is this attractive, it’s hard to convince a CFO to ignore locking in a < 3% coupon for 30 years so we can swap into a floating-rate instrument to save another few %, but because it’s floating, it’s not guaranteed,” he added in a follow-up interview.

Glass half full. Another member took the view that a “swap may not look ridiculous right now” because of “positive carry across the curve—there is generally enough positive carry, so it may not look like a bad time to start legging in some swaps.”

  • He suggested that it may make sense for companies to set a “bogey” whereby they would swap to floating if they had a “certain amount of positive carry.”

Earnings optics. This member said “optics” and “EPS sensitivity” can be obstacles to getting a swap approved, especially for companies like his that “don’t have a long history of having meaningful interest expense on our P&L.”

  • “There is always hesitancy to add volatility to earnings that floating-rate exposure layers on,” he said, referring specifically to “situations where the swap may have negative carry,” as was the case in Q4 2019.
    • “So not only is a newly issued bond EPS dilutive because of the added interest expense, but then the swap makes it even further dilutive because of the negative carry.”
  • However, this member said, “Once we spent time with management on the benefits of [asset liability management], we have had very constructive conversations.”

Taking time; avoid timing. One member said that to counter the reality that “it’s never going to seem easy to enter into swaps,” companies need to have an “institutional goal” about the mix of fixed- to floating-rate debt that allows them to enter swaps over time—and not look at them on a standalone basis.

  • That message resonated with another member who observed, “They are more focused on absolute rates vs. initial carry; you have to have a long-term, fixed-float execution plan, meaning you continuously swap into floating at some %/target per year vs. trying to time the market.”

Eye-opening savings. Another member said treasury succeeded in convincing management at his company to swap a portion of every debt issue to floating to achieve a mix of 75% fixed and 25% floating. The key to adopting this systematic approach was showing management the “triple-digit millions” the company would have saved historically under that approach—what he called an “eye-opener.”

  • That has allowed the company to “be agnostic about the entry point” to a swap because, “over time, floating rate wins.”
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Cash Cushions and Covid: Retailers Not Yet Ready To Declare Victory

Retail treasurers returning to offense with share repurchases and dividends are proceeding with caution.

A growing number of retailers in the NeuGroup Network are spending or preparing to spend some of the excess cash they raised at the beginning of the pandemic on share repurchases and dividends.

  • But most treasurers at these retailers remain cautious and conservative as they return to playing offense—not surprising given that these companies were among the worst impacted by lockdowns and social distancing.

Retail treasurers returning to offense with share repurchases and dividends are proceeding with caution.

A growing number of retailers in the NeuGroup Network are spending or preparing to spend some of the excess cash they raised at the beginning of the pandemic on share repurchases and dividends.

  • But most treasurers at these retailers remain cautious and conservative as they return to playing offense—not surprising given that these companies were among the worst impacted by lockdowns and social distancing.

Declare victory? “One interesting conversation we’ve been grappling with is ‘Is it too early to claim victory?’” one member of NeuGroup for Retail Treasury said at a recent meeting. His company is carrying 2.5 times its normal cash cushion in case of what he called “a shock-type scenario.” Among the questions he’s asking:

  • “Should we be repaying all those credit facilities we put in place at the onset for insurance?
  • “Should we do a big share repurchase and utilize all of our excess cash today and get back to a more normalized amount?
  • “Or do we want to wait another quarter to see if the virus doesn’t come back and stores don’t close again?”

Middle Ground. One treasurer said his forecast model assumes a middle ground between expecting a return to normal and anticipating “another Covid scenario.”

  • Another member said a cause for concern is that it is “a little tricky” to define the degree of downside that exists at this moment. “Is it just 10%, or could it be another full Covid resurgence?” she asked.

Dividend dynamics. Most of the members whose companies are paying dividends—some halted them and have restarted—said that, although they have additional cash on hand, they have no plans to increase the dividend yet, although some expect to do it this year (see chart).

  • One member said there is “only so much you want to do with dividends,” when a company has a temporary cash surplus, since investors view dividend increases as permanent. He said that he leans toward a one-time share repurchase.
  • Other treasurers gearing up for buybacks are looking into the opportunistic possibilities offered by ASRs. But they stressed the need for caution because of the optics and politics of buybacks as millions of Americans continue to struggle financially because of Covid.
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Talking Shop: Handling Grant and Expense Payments for a Foundation

Member question: “How is your company handling grant and expense payments for its foundation? Is this handled leveraging existing company processes, tools and teams or outsourced to service providers, such as Foundation Source, etc.?

  • “We’ve outgrown the manual check process and need to scale up here and are curious to learn how you manage this.”

Member question: “How is your company handling grant and expense payments for its foundation? Is this handled leveraging existing company processes, tools and teams or outsourced to service providers, such as Foundation Source, etc.?

  • “We’ve outgrown the manual check process and need to scale up here and are curious to learn how you manage this.”

Peer answer 1: “Our foundation accounts are with our concentration bank and managed by specific individuals in our corporate team.

  • “We have raised the question of providing electronic payment (wire) access to the team but checks still seem to be favored.”

Peer answer 2: “Our foundation operates pretty independently. We offer some support with our relationship banks, but they operate their own ERP and accounts.

  • “Our investment team advises them on long term cash investments, but I believe they partner with an outsourced provider, YourCause, who processes the payments.”

Peer answer 3: “Our foundation operates fairly independently, except that our shared service center processes all payments from the foundation’s Fidelity account. With Covid-19, all payments were migrated from check to EFT (electronic funds transfer).

  • “The beneficiary account for any charity getting a payment greater than $5K, or ongoing donations, is prenoted (an anti-fraud measure) and the charity must confirm the test amount. Unfortunately, some of our charities are charged $15-$25 for incoming EFTs, but we think this is worth the cost to avoid fraud.”

Peer answer 4: “Our foundation is also independent. Nearly all of our foundation cash activity flows through our foundation’s cash account at our custodial bank.

  • “Related to grant payments, several years ago our foundation hired a third-party, Benevity, to manage all of its grant payments. Foundation staff use the Benevity tool to approve grants and schedule/make payments to the grant recipients. Once a month, Benevity bills the foundation for all grant payments to be made by them in the upcoming month and we pay Benevity from our foundation’s cash account.
  • “The only grant payments that run through the local checking account are typically grants awarded to non-501 (c) (3) organizations, as Benevity is only equipped to handle 501 (c) (3) grant payments.”
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Impact Investing: A Fintech Connecting Corporates with Communities

CNote helps companies including Mastercard connect with community development financial institutions.

Community development financial institutions (CDFIs) have emerged as an effective and attractive tool for corporates initiating or accelerating their commitments to impact investing amid the broader push for diversity and inclusion (D&I).

  • Members of NeuGroup’s Treasurers’ Group of Mega-Caps (tMega) recently heard how a women-led fintech called CNote is simplifying the process of connecting with CDFIs that, in turn, lend capital to borrowers in underserved communities.
  • “CNote is moving money where it’s needed the most,” CEO Catherine Berman said at the meeting. “Since we work with so many institutions, we get the deposits where they’re needed when they’re needed.”
  • Among the corporates making use of CNote’s platform is Mastercard. Representatives of the company joined CNote for the tMega presentation, part of a NeuGroup series designed to connect treasury and finance teams with innovative fintechs.

CNote helps companies including Mastercard connect with community development financial institutions.

Community development financial institutions (CDFIs) have emerged as an effective and attractive tool for corporates initiating or accelerating their commitments to impact investing amid the broader push for diversity and inclusion (D&I).

  • Members of NeuGroup’s Treasurers’ Group of Mega-Caps (tMega) recently heard how a women-led fintech called CNote is simplifying the process of connecting with CDFIs that, in turn, lend capital to borrowers in underserved communities.
  • “CNote is moving money where it’s needed the most,” CEO Catherine Berman said at the meeting. “Since we work with so many institutions, we get the deposits where they’re needed when they’re needed.”
  • Among the corporates making use of CNote’s platform is Mastercard. Representatives of the company joined CNote for the tMega presentation, part of a NeuGroup series designed to connect treasury and finance teams with innovative fintechs.

Mitigating risk, preserving capital. CNote says it streamlines community investment for corporates by removing common friction points, minimizing risk and simplifying administration and data collection processes.

  • Using a network of federally certified CDFIs, its system allows companies to deploy capital at scale, increasing access and funding loans that have a tangible impact, CNote says.
  • CNote’s technology services make it more cost-effective for corporates to directly support community organizations and lenders by simplifying the identifying, servicing and impact reporting efforts through data and automation, the fintech says.
  • CNote also offers customized impact investments, allowing corporates to construct offerings tailored to specific goals and objectives.

Insured deposits. Mastercard originally supported CNote through its start-up engagement program, and more recently—with contributions from Mastercard and the Mastercard Impact Fund—made a $20 million commitment to CNote’s Promise Account.

  • The account is a cash management solution that’s structured to provide FDIC and NCUA depository insurance coverage of all funds while giving institutional investors a single place to put their cash to work.
  • CNote says this single point of management reduces the administrative burden that would exist when manually monitoring and opening deposit accounts across numerous CDFIs and makes it easy to scale investments on demand.
  • Recognizing the critical role CDFIs can play in providing access to funding and pathways to financial security for underserved communities, the Mastercard Center for Inclusive Growth partners with many leading CDFIs and innovative firms like CNote operating in the community finance ecosystem.

Measuring impact. To show how investments are put to use, CNote provides reports to corporates and publishes borrower stories on its website highlighting the personal tales of success of people impacted firsthand by the financial support provided by CDFIs and companies’ deposits in them.

  • “In the reports there are some examples of the women entrepreneurs or the black-owned businesses that have grown or started because of these deposits,” Ms. Berman said at the meeting. “We show that we are making sure your deposits are going toward the areas [that companies target].”
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Biden Tax Priorities May Fuel Shifts in Corporate Capital Structure

The effects of raising the corporate income tax rate and setting a global minimum tax on book income.

Treasury and tax teams trying to plan for potential changes to US corporate tax policy will be looking for more clarity when President Biden addresses a joint session of Congress in one week, on Feb. 23.

  • For a look at what corporates should have on the radar screen, NeuGroup Insights reached out to Justin Weiss, a partner in KPMG’s Washington national tax financial institutions and products group.

The effects of raising the corporate income tax rate and setting a global minimum tax on book income.
 
Treasury and tax teams trying to plan for potential changes to US corporate tax policy will be looking for more clarity when President Biden addresses a joint session of Congress in one week, on Feb. 23.

  • For a look at what corporates should have on the radar screen, NeuGroup Insights reached out to Justin Weiss, a partner in KPMG’s Washington national tax financial institutions and products group.

Big picture. Democrats want to pass a rescue package to aid people struggling during the pandemic, using the filibuster-proof budget reconciliation process if necessary, and follow that with a recovery package to reignite the economy.

  • Next week, the president may expand on several tax-related proposals that would provide revenue to fund infrastructure and other initiatives.
  • The administration could push for such changes to become effective by Jan. 1, 2022, and Democrats could potentially use budget reconciliation a second time in 2021 should Republicans remain opposed, Mr. Weiss said.

The big gun. The Tax Cuts & Jobs Act (TCJA) of 2017 slashed the corporate tax rate to 21% from 35%, reducing the interest rate deduction benefit that encourages issuing debt over equity. President Biden says he intends to increase the rate to 28%.

  • That would increase debt’s luster in corporate capital structures, but a rule stemming from TCJA that limits interest deductions for tax purposes gets further restricted on Jan. 1, 2022.
  • “There’s been some talk about whether to postpone or eliminate changes that are scheduled to go into effect in 2022, given the economy,” Mr. Weiss said. So watch out for this in upcoming legislation.

A global minimum alternative. More complex would be a 15% global minimum tax on the book income of certain multinationals—technology and pharmaceuticals may be the target—that record significant profits in their financial statements but pay relatively little US tax.

  • A US company paying taxes abroad but recognizing that income in the US must already consider differences between US and local tax laws to efficiently avoid double taxation, especially after the TJCA eliminated multi-year tax credit pools, Mr. Weiss explained.
  • So a US multinational executing a hedge in a treasury center in the Netherlands would have to look at the US and Dutch tax treatment of such a derivative, and it could lose the US tax credit if they’re misaligned in a given year, Mr. Weiss said. He added that a minimum tax on booked earnings would add yet another layer of complexity.  
  • “That could be a real challenge when a company has a high volume of complicated financial transactions,” he said.

GILTI changes and centralizing treasury. The TJCA’s global intangible low-taxed income (GILTI) provision now effectively taxes overseas income at 10.5% and President Biden has said he wants to raise it to 21%. He has also floated a proposal to shift from calculating the GILTI tax on a pooled basis, where income and losses across the countries in which a company operates are netted, to a country-by-country calculation.

  • This could dramatically impact intercompany lending and hedging transactions, Mr. Weiss said, adding that income/gain on one side of a transaction could be taxable, but expense/loss on the other side may provide no benefit.

More to look out for. Besides the big ticket legislative items President Biden has mentioned, there are many regulatory projects that are likely to impact treasury functions.

  • Examples include pending regulations directly related to the taxation of intercompany treasury centers and the transition away from Libor.
  • “While the major legislative proposals get a lot of the attention, it’s important to also plan for a number of other upcoming changes, from the finalization of important regulations [in the US], to the evolving OECD guidance on financial transactions,” Mr. Weiss said. He added that in recent years taxing authorities have renewed their focus on the “unique aspects of treasury transactions.”  
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Talking Shop: Looking for Solutions To Optimize Global Tax Payments

Member question: “We are working to centralize and optimize global statutory and tax payments. What kind of solutions do you have in place?

“Entities will have unique tax restrictions, so we will need various solutions depending on the region and country. We’re hoping to understand what kind of solutions you may have uncovered or already have in place.

Member question: “We are working to centralize and optimize global statutory and tax payments. What kind of solutions do you have in place?

“Entities will have unique tax restrictions, so we will need various solutions depending on the region and country. We’re hoping to understand what kind of solutions you may have uncovered or already have in place.

  • “Does your company have a centralized process for managing global tax payments?
  • “What types of applications or payment types are used for processing tax payments (centralized or not)?
  • “For countries with no tax payment solutions through your primary or local banking portal, or regulations requiring payments via check or mandated to be made by local employees, what solutions have you come up with to try and streamline the process?”

Peer answer 1: “We do not, but it has been a space that we have also looked to incorporate more into our standard payment processes. Today, they still tend to make payments through bank portals or even use checks when wanting to combine with a document.

  • “We have explored how to include the documents with an electronic payment as well as how to link the electronic payment with the underlying document submission. We have not found any great solutions so I will be watching for other ideas.”

Peer answer 2: “Our US tax department is looking into an improved process—currently they use a bank portal that is quite manual. They heard about a provider called Anybill that we are going to research further.

  • “Coincidentally, I just heard that our Brazil tax team is also looking to find some efficiencies in this space. They have identified Dootax as a potential service provider. A global provider would be ideal, but not sure yet if one exists. Definitely interested in hearing what others have to say.”

Peer answer 3: “We have a decentralized process. We use a combination of checks, ACH debits by some taxing authority and ACH credits initiated from our banking portals, for tax payments in the US.

  • “For countries where no tax payment solutions exist, we leverage PwC or other such providers that offer tax payments on behalf of clients. It’s a lot more disjointed than we’d like, as all our divisions make their own tax payments, and we don’t have a common solution for any given tax authority.”
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Supporting—Not Leading—the Green Charge: Defining Treasury’s Role

A discussion of green bonds includes the view that treasury “can’t push the cart up the hill” on sustainability.

The steady drumbeat of enthusiasm about ESG from bankers, investors, rating agencies and the media has failed to convince some treasury teams to push their companies to jump on the green finance bandwagon. For one reason, these treasury practitioners say that issuing green bonds or using other forms of sustainability-linked finance does not currently make economic sense for them.

A discussion of green bonds includes the view that treasury “can’t push the cart up the hill” on sustainability.

The steady drumbeat of enthusiasm about ESG from bankers, investors, rating agencies and the media has failed to convince some treasury teams to push their companies to jump on the green finance bandwagon. For one reason, these treasury practitioners say that issuing green bonds or using other forms of sustainability-linked finance does not currently make economic sense for them.

  • More importantly, these NeuGroup members say treasury’s role is to support, not drive, corporate sustainability efforts that must be embraced by the C-Suite and embedded into the business before treasury teams help assist and finance those efforts.
  • Those takeaways emerged at a recent ESG working group meeting NeuGroup organized to discuss topics including the use of proceeds from green bond issues.

Pricing and PR. One member, who said every bank has pitched green bonds to his company multiple times, said he sees very little benefit from a pricing perspective, meaning the main value or return would be from public relations.

  • “Green Bonds don’t necessarily provide a pricing benefit to non-green bonds,” he said. “While you are expanding your investor base, the issuances aren’t generally all that large and I’m not sure it would impact your overall bond pricing.”
  • Another member said his company has high ESG ratings, thanks in part to investments in renewable energy projects, and doesn’t need the positive PR from issuing a green bond. He told others, “Don’t do green [bonds] for the sake of doing green,” particularly if a company, like his, does not have enough uses for the bond proceeds.

Supporting, not leading. A consensus emerged that whatever the motivations for making use of sustainability-linked finance, treasury needs to act in response to initiatives and messaging driven by the company’s senior leadership, not the finance function.

  • “Treasury is the tail, not the dog,” said one member whose CEO has pushed sustainability and social responsibility into the company’s business operations and culture. As part of that vision, treasury did the hard, time-consuming work of issuing a green bond for the first time.
    • The goal of that initial deal, the member said, was generating publicity and telling the story of the company’s commitment to sustainability.
  • But for another member, pushing a green bond would put treasury “way ahead of the rest of the organization.” He said he would be “loath to jump in without a more comprehensive plan. If you don’t have the projects to spend money on, it doesn’t feel authentic.”
  • He added, “A bond deal, which would generate lots of PR, needs to be one component of an overall green strategy which would include external communication. If we’re going to do it, it needs to be led by the sustainability team. We don’t want treasury pushing the cart up the hill on green.”

An ideal world? Another member whose company has issued sustainability bonds for both capital expenditures and operating expenses (a topic we’ll dive into in a future post) said he’d like to know if his peers viewed sustainability as a “bolt-on” or “can we do things we’re doing in a more sustainable way.”

  • Put another way, is sustainability a “core mandate of treasury on an ongoing basis and less “pushing the cart up the hill,” he asked.
  • A member of the treasury team at a large technology company that issues sustainability bonds offered a clear and compelling perspective on treasury’s role within a company committed to ESG principles:
  • “In an ideal world, when a clear corporate strategy exists, I think treasury has an important role to play in partnering with the sustainability team to understand the art of the possible around linking financial tools to sustainability initiatives,” he said.
  • “We have a very sophisticated sustainability team, but they are not avid followers of the capital markets; so it’s on treasury to push the envelope for how we can embed sustainability themes into our investment/financing activities.”
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Sending a Strong Signal: Accelerated Share Repurchase Programs

As more companies resume stock buybacks, some treasurers are feeling pressure to use ASRs.

Corporates eager to send a clear signal to investors about their financial health are brushing the dust off stock buyback plans and weighing—if not committing to—accelerated share repurchase (ASR) programs. That was among the takeaways from a NeuGroup meeting of treasurers this week.

As more companies resume stock buybacks, some treasurers are feeling pressure to use ASRs.

Corporates eager to send a clear signal to investors about their financial health are brushing the dust off stock buyback plans and weighing—if not committing to—accelerated share repurchase (ASR) programs. That was among the takeaways from a NeuGroup meeting of treasurers this week.

  • It’s the latest development in a journey that began in the spring when the pandemic slammed the brakes on many share repurchase programs. In the fall, some companies got more confident about the future and returned to doing buybacks, often opting for the flexibility and relatively lower profile offered by open market repurchases (OMRs).
  • Corporates that opt for ASRs have to make a firm commitment to the program but may benefit by sending a stronger message to the market, members agreed.

Time for ASRs? One member, whose company has performed well in the pandemic, has an influx of cash and is restarting a repurchase program, said he is feeling some pressure to use ASRs, not his preferred method.

  • Another member with experience using ASRs said his goal as treasurer is to be opportunistic and “take whatever the board offers me to spend in buybacks, and buy back as many shares as I possibly can.” That means using ASRs, which offer corporates a way to buy shares at a discount to market prices, unlike an OMR.
  • The member said he essentially uses ASRs as a volatility hedge. “In a period of high volatility that we don’t think or aren’t sure is going to continue, we can lock it in with the ASR,” he said.
  • “On the back of that, we put a price grid in,” he said. This allows the company to purchase even more if there’s a significant decline in the share price.

Playing it safe. The commitment inherent in ASRs can come back to bite. The member noted another company’s recent experience going “pretty big” with an ASR and seeing huge run-up in the stock price, which will be factored into the price per share they will ultimately pay.

  • He warned others to stay short on the strategy. “We typically don’t go out more than a couple months, because we don’t like the uncertainty out there,” he said.
  • A member who is currently using an ASR program added, “The ASRs we engage on are only within the quarter, shorter in tenor and smaller in size than OMRs.”
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Talking Shop: Do You Use Barra Beta or Bloomberg To Calculate WACC?

Member question: “Is anyone using Barra to calculate WACC (weighted average cost of capital) or do you use another service provider?

  • “To calculate cost of equity, we use our beta available from Bloomberg. Over the last year, our beta has decreased. The lower beta results in a lower calculated cost of equity and then WACC.
  • “We think this could be a short-term impact and need to be very thoughtful about how to apply it in various analysis. In recent conversations, we have learned about Barra beta. My question: Is anyone using Barra beta and if so, how do you calculate it, or do you use a service provider to obtain this data?”

Member question: “Is anyone using Barra to calculate WACC (weighted average cost of capital) or do you use another service provider?

  • “To calculate cost of equity, we use our beta available from Bloomberg. Over the last year, our beta has decreased. The lower beta results in a lower calculated cost of equity and then WACC.
  • “We think this could be a short-term impact and need to be very thoughtful about how to apply it in various analysis. In recent conversations, we have learned about Barra beta. My question: Is anyone using Barra beta and if so, how do you calculate it, or do you use a service provider to obtain this data?”

Peer answer 1: “We use Barra beta. My understanding is that they use a black box model to create a ‘predictive’ beta. We subscribe to the service to have access to the data.”

Peer answer 2: “We use Barra beta but we’re evaluating switching from Barra to Bloomberg in the future. Here are several considerations for comparing Barra beta and Bloomberg’s beta:

  • “Barra ‘predictive’ lacks transparency. When we use the Barra betas of peers [in one country] as another data point to guide our own cost of equities estimation, they have very low Barra betas.
    • “I suspect the Barra method is probably running these companies’ correlation with a MSCI global index instead of [the country’s] domestic equity index.
  • “The Bloomberg beta method is transparent and allows customizing the index to correct such noise. Barra beta, I was told, also has an issue with new companies lacking trading history.
  • “We have introduced a moving-average tweak to our beta estimation to smooth out the noise.
  • “You may want to consider asking one of your bankers to provide a one-time look of several Barra betas and their history before signing up for the service.”

Peer answer 3: “We use Bloomberg’s five-year weekly adjusted beta. We look at Barra, but don’t like the lack of transparency.”

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Spin-off Class: Perspective From a NeuGroup Member Pedaling Hard

Spin-offs mean complex, time-consuming work on capital structure, bank accounts, credit facilities and more.

Spin-offs are huge strategic undertakings for corporations looking to part ways with a subsidiary or business. And finance teams, including treasury, do a lot of the heavy lifting to manage a complex process that can take years to complete.

  • At a recent NeuGroup meeting, one member in the midst of a spin-off described the process as an “all-consuming activity.”
  • Afterward, he agreed to share some insights and perspective he’s gained from experiencing a spin-off firsthand.

Spin-offs mean complex, time-consuming work on capital structure, bank accounts, credit facilities and more.
 
Spin-offs are huge strategic undertakings for corporations looking to part ways with a subsidiary or business. And finance teams, including treasury, do a lot of the heavy lifting to manage a complex process that can take years to complete.

  • At a recent NeuGroup meeting, one member in the midst of a spin-off described the process as an “all-consuming activity.”
  • Afterward, he agreed to share some insights and perspective he’s gained from experiencing a spin-off firsthand.

Treasury’s role in untangling. To the extent the to-be-spun business is highly entangled, treasury support will be required to establish new entities, new banking operations (accounts and services like pooling and trade finance), and supporting policies and procedures. 

  • New authorities will need to be delegated, new signatories identified and likely changed more than once as colleagues are selected to support the spin company.
  • Credit facilities will need to be split between companies prior to all information about the spin company’s capital structure and credit rating. 

Degree of difficulty. Among other factors, the difficulty in executing a spin-off will be driven by the degree of entanglement of the operations with the broader business. 

  • That entanglement includes systems, people and processes; and a decision must be taken on how those systems and processes will be established at the spin company.
  • You can simply “lift-and-shift” what’s required or create new or optimized systems and processes that may allow a greater degree of customization and refinement.  

Capital structure: critical. Establishing the right capital structure for the spin company is a critical step in ensuring the right operational and strategic flexibility post-spin. 

  • Projecting the cash flow generation of the spin company in the critical months leading up to and immediately after spin is a complicated exercise, but required to deliver that desired flexibility. 
  • This will likely require cash flow forecasting at the entity level for any significant operations around the globe.

Talent task. In attempting to find the right talent for the spin-off company’s treasury team, there are options along a continuum. You can choose to identify staff to move to the spin company or engage staff to understand interest and capabilities that will serve the spin company well. 

  • A mix of internal and external talent will likely be required, and finding the right mix of capabilities will affect the spin company’s ability to hit the ground running. 
  • Of course there are local labor laws that must be followed in establishing the new team, and striking the right balance between appointment and self-selection is a challenge given minimum required staffing levels and budgetary constraints. 
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Why Spin-offs Are Complex, Time-Consuming Affairs: A Lawyer’s View

The legal perspective on spin-offs from attorneys at Gibson, Dunn & Crutcher.

Spin-offs are intricate, multifaceted endeavors for corporates that decide to take a subsidiary and make it an independent public company. In addition to internal finance and tax teams, they can involve scores of investment bankers, auditors and lawyers.

  • At a recent NeuGroup meeting, one member in the midst of a spin-off described the process as an “all-consuming activity.”
  • For a look at some of what’s involved, NeuGroup Insights turned to Andrew Fabens and Steve Glover, partners at the law firm Gibson, Dunn & Crutcher, who work on spin-off transactions. Below are some of their insights along with some information from the firm’s presentation, “The Art of the Spin-off.”

The legal perspective on spin-offs from attorneys at Gibson, Dunn & Crutcher.

Spin-offs are intricate, multifaceted endeavors for corporates that decide to take a subsidiary and make it an independent public company. In addition to internal finance and tax teams, they can involve scores of investment bankers, auditors and lawyers.

  • At a recent NeuGroup meeting, one member in the midst of a spin-off described the process as an “all-consuming activity.”
  • For a look at some of what’s involved, NeuGroup Insights turned to Andrew Fabens and Steve Glover, partners at the law firm Gibson, Dunn & Crutcher, who work on spin-off transactions. Below are some of their insights along with some information from the firm’s presentation, “The Art of the Spin-off.”

“Spin-offs are complicated undertakings. The process is significantly more demanding than the process associated with a debt financing, and in many cases is more complicated than the IPO process.  Just a quick list of some of the tasks that need to be accomplished highlights this: 

  • The transaction planners need to move all of the assets and liabilities associated with the business being spun into a subsidiary.  
  • They need to prepare audited financial statements for the business and draft a disclosure document. 
  • They need to confirm that the spin-off will be tax free, which can take many months if the company seeks a letter ruling from the IRS. 
  • They have to decide on governance for the spin-off company and develop a capital structure. 
  • They need to decide on a management team, identify members of the new board of directors and develop compensation plans.  

“Treasury has a significant role to play in developing the spin-off company’s capital structure and anticipating adjustments of the parent’s structure. These are mixed economic and strategic decisions, with a healthy dose of legal work if the spin-off is of such significance that there are ‘all-or-substantially all’ (AOSA) debt covenant compliance questions at the parent level.”

  • An AOSA covenant can prohibit the disposal of “all or substantially all” of the assets of the parent unless all assets are conveyed to a single acquirer that assumes the debt obligation.

Keep one eye on the market. “The transactions that rebalance the capital structures must be executed with precision just as the other components of the separation all are finalized. You need to have one eye on the market and the other on the separation workstreams to get that timing right.” The methods used to do this typically include some combination of the following:

  1. New issue + repurchase. Elements include: new bonds issued by the spin-off company for cash; a special dividend paid to the parent; redemption and/or tender offer by parent for existing bonds; redemption or offer to purchase.
  2. Par-for-par exchange offer. Elements include: spin-off company offers to exchange new bonds for existing parent bonds; cash premium paid to participating bondholders; no cash proceeds to the spin-off company.
  3. Intermediated exchange. Elements include: tender offer by underwriters for existing parent bonds; underwriters agree to exchange tendered bonds for new spin-off company bonds; new spin-off company bonds sold by underwriters for cash; no cash proceeds to the spin-off company.

“When the pandemic struck, many companies put M&A and other significant strategic undertakings like spin-offs on hold. They wanted to understand better what implications the pandemic would have for their business, the capital markets and the broader economy before they proceeded with their plans. 

  • “To the extent companies had been facing pressure from stockholder activists or other investors to engage in spins, some of this pressure became less intense during the first several months of the pandemic.  Activists and investors also wanted to get better perspective on the impact of Covid-19.”
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Buzzer Beater: A Treasurer’s Last-Second Debt Deal Scores Big Savings

One member cut his company’s tax bill by beating the clock to complete a debt refinancing.  

As one NeuGroup member’s fiscal year began to draw to a close, he saw an opportunity to save his company millions of dollars in taxes by completing a debt refinancing deal—but he had to race the clock get it done before the calendar changed.

  • Because of the pandemic’s impact, the company needed to save money, so it was critical that the debt deal go through in 2020.

One member cut his company’s tax bill by beating the clock to complete a debt refinancing.  

As one NeuGroup member’s fiscal year began to draw to a close, he saw an opportunity to save his company millions of dollars in taxes by completing a debt refinancing deal—but he had to race the clock get it done before the calendar changed.

  • Because of the pandemic’s impact, the company needed to save money, so it was critical that the debt deal go through in 2020.

Roller coaster. At the start of the year, the member’s company wanted to reduce its relatively high leverage ratio through a refinancing. The pandemic delayed the deal by freezing the debt markets.

  • The eventual thaw created a renewed capacity to get deals done and convinced the company to go through with its transaction “to get the risk off the table,” he said.
  • The member’s deal was an amend-and-exchange refinancing of a high-yield bond, which he said was economically favorable as “high yield markets are very hot right now.”

Dramatic ending. The member said the refinancing took considerable time to prepare and was “not easy” to do under tight deadline pressure. Executing the deal came down to the last day of the fiscal year, creating a bit of drama.

  • The close meeting started at 5:30 a.m. for the member. At the last minute, a lawyer had an issue with an area in credit agreements, and his team had to scramble.

After applying pressure and some back-and-forth with the lawyers throughout the day, the deal was able to get out the door with 90 seconds to spare before the end of the fiscal year. “I’ve never experienced such a harrowing close meeting,” the treasurer said.

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Talking Shop: How to Set Rates on Intercompany Lending Agreements

Member question: “We are in the process of reevaluating our intercompany (IC) loan rate-setting policy. I’m trying to benchmark to understand how this is managed at other companies. What is your company’s approach to setting rates on any intercompany lending agreements?

  • “I know reference rates are in flux with the Libor transition but I am specifically trying to understand, from a transfer pricing standpoint, if you set rates with a standard mark-up or based on the entity’s creditworthiness similar to a bank.”

Member question: “We are in the process of reevaluating our intercompany (IC) loan rate-setting policy. I’m trying to benchmark to understand how this is managed at other companies. What is your company’s approach to setting rates on any intercompany lending agreements?

  • “I know reference rates are in flux with the Libor transition but I am specifically trying to understand, from a transfer pricing standpoint, if you set rates with a standard mark-up or based on the entity’s creditworthiness similar to a bank.”

Peer answer: “For long-term IC loans, our internal funding team works with tax to determine an appropriate arm’s-length spread over benchmark. 

  • “That process has varied over the years, but typically involves either getting some local bank indicative loan rates for comparison or doing other local market research on comparable companies’ public debt issuance and/or credit indicators. 
  • “This would all be documented and retained as supporting evidence of the arms-length rate.

“For revolving (short-term) IC loans, we may use comfort letters and/or parent guarantees to backstop the subsidiary IC debt. 

  • “This has allowed us (in most cases) to have a fixed credit spread for our short-term IC loan portfolio. Obviously, that type of approach would need to be well established with tax.

“With the upcoming Libor replacement, there is an expectation that the credit component backed into Libor will need to be reflected in the updated rates plus the spread we use. 

  • “These details are still being worked out by our Libor replacement team.”

Using SOFR for IC. The Alternative Reference Rates Committee (ARRC) recently released recommendations for IC loans based on the Secured Overnight Financing Rate (SOFR). ARRC’s announcement does not specifically address transfer pricing.

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Solving the Insurance Problem With an Efficient Frontier for Risk

Willis Towers Watson advocates an approach that makes use of modern portfolio theory to assess the true value of insurance.

For more than a year, buying and renewing insurance policies has been a severe pain point for many finance teams, all suffering through a hard market of rising premiums, higher retentions and lower capacity. And the pandemic.

  • That makes now a good time to consider a modernized approach to insurance and risk finance strategy that takes what Willis Towers Watson (WTW) calls a portfolio view of risk, making use of technology and data analytics to arrive at an efficient frontier of cost and risk.

Willis Towers Watson advocates an approach that makes use of modern portfolio theory to assess the true value of insurance.

For more than a year, buying and renewing insurance policies has been a severe pain point for many finance teams, all suffering through a hard market of rising premiums, higher retentions and lower capacity. And the pandemic.

  • That makes now a good time to consider a modernized approach to insurance and risk finance strategy that takes what Willis Towers Watson (WTW) calls a portfolio view of risk, making use of technology and data analytics to arrive at an efficient frontier of cost and risk.
  • Sean Rider, head of client development in North America for WTW, explained the firm’s solution to NeuGroup members attending a recent presentation titled “The Modernization of Risk and Financial Strategies.”
  • At the outset of his remarks, Mr. Rider said, “Insurance is a problem to solve,” a sentiment shared by many of the roughly 60 members in the virtual room.

Taking a page from insurance carriers. A key goal of WTW’s more strategic, less tactical and transactional approach to solving that problem is to bridge the gap between how corporates buy insurance and how insurers price risk, a gap that gives the carriers an information advantage, the firm said.

  • That advantage arises in part because corporates often manage insurance in silos, assessing coverage lines individually and placing insurance outside the many other risks finance and treasury teams manage.  
  • Insurers, meanwhile, underwrite risk in the context of a portfolio, holistically, employing technology for modelling and other functions.
  • In the past two years, WTW developed a dynamic analytic platform called Connected Risk Intelligence for its consulting clients that provides data visualization and access to the same statistical framework and stochastic analysis available to insurance companies that use software sold by WTW.

The payoff. Armed with better information and the ability to “map and model and test all the potential transactions” available to them, Mr. Rider said, corporates can optimize their risk financing strategy and move to the efficient frontier, making data-driven decisions that he called courageous and “rooted around your priorities.”

  • This approach, WTW’s presentation said, allows corporates to “exploit arbitrage opportunities among mitigation, transfer and retention levers.”
  • This may result in buying less of some coverage and more of others as a company maximizes efficiency by analyzing its financial risk weighed against other risks and the cost for mitigating them to various degrees.

A portfolio review. In the graphic above, shown at the NeuGroup presentation, each point in the “cloud” represents one of tens of thousands of combinations of insurance options, such as buying D&O, workers compensation and liability coverage at various costs and levels of coverage.

  • The x-axis represents the average cost of those strategies and the y-axis shows the corresponding amount of risk the corporate will retain net of insurance in a severely adverse year.
  • “B” represents the example company’s exposure if it is entirely uninsured: $225 million in the adverse scenario, $11 million in a typical year. With its actual strategy, marked “A,” the company has reduced its exposure or residual risk to $120 million for the incremental cost of $5 million.
  • The green points represent the efficient frontier, where the corporate can no longer reduce risk without taking on more cost; and can no longer reduce cost without taking more risk.
  • That means the vast majority of combinations of insurance coverage decisions shown are inefficiently priced, including the company’s current strategy.
    • “X” shows that the company could achieve the same risk mitigation for less cost: about $14.75 million vs. $16 million.
    • “Z” shows the company could reduce its residual risk to $80 million (vs. $120 million) for the same $16 million. And “Y” falls between X and Z on the efficient frontier.
  • “In the example, let’s say the organization’s tolerance for insurable risk is $80 million at the one in 100-year probability level,” Mr. Rider said.
    • “Then the current approach (and any combination above Z) is not just inefficient, it fails the fundamental purpose of insurance: protecting against loss that imperils financial resilience.”

The difference. The discussion this portfolio review makes possible is “what’s not happening in how insurance decision making happens today,” Mr. Rider said.

  • Now, though, the conversation is shifting to meet the needs of corporates facing new challenges. “We are talking about risk, we are talking about value, we’re talking about efficiency. We’re recognizing the complexity of these decisions. And this approach is something that we’re not going to unlearn.”
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AtlasFX and FiREapps: How Two FX Risk Management Systems Stack Up

NeuGroup members share what they need from FX risk management solutions, what they get and what could be better.

A need for automation, a user-friendly interface and consistent accuracy were among the highest priorities in selecting an FX risk management platform for members at a recent NeuGroup meeting that zeroed in on FiREapps and AtlasFX.

AtlasFX ‘dream state.’ One member who recently worked with AtlasFX to adopt the platform lauded the firm’s flexibility and willingness to meet his company’s requests.

NeuGroup members share what they need from FX risk management solutions, what they get and what could be better.

A need for automation, a user-friendly interface and consistent accuracy were among the highest priorities in selecting an FX risk management platform for members at a recent NeuGroup meeting that zeroed in on FiREapps and AtlasFX.

AtlasFX ‘dream state.’ One member who recently worked with AtlasFX to adopt the platform lauded the firm’s flexibility and willingness to meet his company’s requests.

  • “We came up with a list of must-haves: ‘If we can build this, we are future-proof,’” the member said, and complimented the vendor on its accommodations. “It got built. Some of it’s still falling into place, though we did have the capacity to have a team member spend most of their time on it for three months.”
  • The member’s system now features automated calculations for complex business-to-business trading, as well as automated connections to the company’s ERP system, its TMS and its FX trading platform.
    • The member said that before this, his team was making these calculations manually, and he had to upload data to the other platforms.
  • “[AtlasFX] helped get us to a dream state,” the member said. “When I think about the solution they helped us build, it just makes me happy.”

Watching the clock. Though members using AtlasFX said they appreciate the company’s commitment to customization, users did agree that it took more time and effort for FX teams to implement than other systems. Asked to comment, an AtlasFX spokesperson responded:

  • “A typical deployment from beginning to end would be three to four months, but can vary in either direction based on complexity. However, with that time frame, the customer typically will have partial access to much improved data and analysis in just a few weeks.
  • “We are laser-focused on automating whatever is manual wherever we can, so we try to save them time in the FX workflow early on during the deployment, and ultimately free up a lot of time once everything is completed. We’re quite familiar with their pain points and can quickly implement some time-saving best practices.”

FiREapps: rock solid. When one user of FiREapps, Kyriba’s FX risk management solution, was asked why he choose the system, his answer was simple: it was very user-friendly, and “completely bulletproof.”

  • One member said the platform “works great” for measuring exposure on balance sheet and portfolio hedging and trade decisions. The member does not hedge cash flows.
  • Another member, who has used FiREapps in the past, called it a “one-size-fits-all” solution that won’t suit some companies’ needs. “The configuration time is a bit shorter, but it’s a vanilla solution,” he said.
    • A Kyriba spokesman said, “Now that FiREapps is a part of Kyriba, there are numerous additional features and functions available for clients to take advantage of. Kyriba is investing significantly in our products and there are always new and innovative solutions to explore with us.”
  • “We’ve never had an issue with errors, it’s very efficient,” one member said. However, he said he wished FiREapps offered more functionality for visualizing data and looking at trends.
    • “FiREapps has lots of data, but can be light on information,” he said. “If you’re trying to look into trends or do some visualization, FiREapps just doesn’t have the capability, you have to put it in something else to really analyze it.”
  • A Kyriba spokesman said the company “provides a number of different ways to help clients visualize their data.” He said the platform has “powerful analytics for creating trend analysis, variance analysis, hedge performance analysis as well as a variety of powerful business intelligence analytics related to data integrity, exposure and risk views.
    • “We are also working closely with several of our clients to design powerful business intelligence views that provide a comprehensive understanding of their FX program.”
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A Third Path for Stock Buybacks: Enhanced Open Market Repurchases

Some NeuGroup members have turned to eOMRs to get the flexibility of OMRs and pricing below VWAP, like ASRs.

Many NeuGroup members across groups at recent meetings agreed they have enough excess liquidity and trust in market stability to restart share repurchases; but there has been a range of views about how much emphasis to place on the price per share a corporate pays for its own stock.

Some NeuGroup members have turned to eOMRs to get the flexibility of OMRs and pricing below VWAP, like ASRs.

Many NeuGroup members across groups at recent meetings agreed they have enough excess liquidity and trust in market stability to restart share repurchases; but there has been a range of views about how much emphasis to place on the price per share a corporate pays for its own stock.

  • Where companies fall on the spectrum of answers may determine if they opt for open market repurchases (OMRs) or accelerated share repurchases (ASRs). And then there’s what’s called an enhanced OMR (eOMR).

Vanilla OMRs. A member in a meeting of large-cap companies said, in his experience, “All the Street ever cares is ‘did you buy back $100 million or $500 million or a billion?’ As long as it’s not egregiously over-market, it seems like there’s not much value given to the price paid, just the amount purchased.”

  • This member uses a traditional OMR that offers corporates relatively more flexibility than an ASR program, a strategy that allows companies to make opportunistic share repurchases at below-market prices but requires them to commit to the program.
  • Another member who also uses OMRs said he communicates with his company’s finance team every three months but has never been asked how he performed against volume weighted average price (VWAP).
  • The member added that although treasury typically tries to be as opportunistic as it can, “the primary objective is to get a certain amount done.”

eOMRs: The best of both worlds? Other members shared their success using so-called enhanced open market (eOMR) repurchases, a strategy that uses an algorithm to determine daily purchases, maximizing the discount to VWAP. This approach offers both flexibility and pricing advantages.

  • One member who uses eOMRs said he was pitched the strategy by his bank, which “uses a lot of the same trading algorithms and approaches that it uses for an ASR, except the bank doesn’t take the cash up front,” the practice in ASR deals.
    • He said the company doesn’t get the shares delivered upfront but that isn’t a high priority anyway.
  • The member said that the return to the company is a cut of whatever the trading performance is. “So if they outperform by a buck a share, you might get 75 cents of that and the bank will keep 25 cents, or whatever the mechanism is,” he said.
    • “We like using that when we know we’re trying to hit a target for the quarter.”
  • As an example, the member said, if his company wanted to do $500 million in repurchases for the quarter and isn’t price sensitive, an eOMR makes sense because the company can capture the volatility while definitely hitting its target.
  • Another member said he balances his use of ASRs with eOMRs. “We will take a look at implied volatility, and if volatility is high, an ASR allows us to lock in that volatility at a higher discount. Otherwise, an eOMR gives us some flexibility, still enjoying the opportunity for better than VWAP.”
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Getting Granular on Green Bond Proceeds: Capex? Opex? Both?

Some investors prefer that green bonds finance capex projects, but corporates use proceeds for opex, too—with caveats.

How a corporate intends to spend the proceeds from a green bond is integral to deciding whether to issue the bond in the first place. You need to have sufficient uses to create a deal that is large enough to make the costs worthwhile and ensure that investors will participate.

Some investors prefer that green bonds finance capex projects, but corporates use proceeds for opex, too—with caveats.

How a corporate intends to spend the proceeds from a green bond is integral to deciding whether to issue the bond in the first place. You need to have sufficient uses to create a deal that is large enough to make the costs worthwhile and ensure that investors will participate.

  • NeuGroup members at a recent ESG working group meeting addressed a related, more granular issue of using green bond proceeds for operating expenses (opex) in addition to capital expenditures (capex).
  • Members also discussed the benefits of using the proceeds on fewer, big-ticket items rather than for multiple, smaller expenditures.

A case for big capex. One member said his company chose to use the proceeds from a recent green bond for large capital expenditures, excluding operating expenses and smaller capex opportunities.

  • “This made the post-transaction reporting less onerous,” he said. The company did not want to create a “big workload” in terms of reporting, he added.
  • Following the meeting, another member said, “I think there was fairly broad agreement that capex was preferable to opex,” all else being equal.
  • One reason for that is the preference by investors, especially in Europe, that proceeds from green bonds be used to create new assets that support sustainability.

Capex and opex. Another member’s company is looking into using the proceeds from a sustainable debt issuance for a combination of capex and opex. “Specific to capex, we are exploring how to tie R&D expenditures to particular product offerings,” she said.

  • After the meeting, this member said, “A key takeaway from the meeting from other members who have tied proceeds to capex and [opex] is the importance of clearly articulating the specific ESG value add derived from the service or product funded with green proceeds.
    • “Investors want to know that the proceeds are not simply being used to fund normal business operations.”
  • Another member’s company plans to use proceeds from a multi-tranche sustainable debt deal for both capex and opex. He noted that while investors like to know, companies are not required to reveal the ratio of capex to opex in use of proceeds disclosures.
  • That said, it’s likely “that we’ll allocate proceeds on the longer-dated tranches to longer-lived assets such as green buildings,” he said. That means that shorter-term tranches may fund operating expenses.
    • “I understand that some investors are sensitive to seeing a reasonable match between the tenor of bonds to the life of the eligible projects funded,” he said. He added that his company received different advice from different banks on whether this particular issue mattered.

What about PPAs? Many companies use green bond proceeds to finance power purchase agreements (PPAs) that allow a corporate to buy renewable energy from a third party. PPAs are considered operating expenses, one member explained.

  • He said investors, especially in Europe, “generally consider them lower quality—or even inappropriate—use of proceeds for a green bond.” That’s relevant, he said, is in cases where a corporate is buying power from an existing renewables project.
  • For that reason, this company included so-called additionality in its bond framework. “Our PPAs need to be catalyzing net new renewable energy onto electrical grids—which is partly the goal for investors who are capex focused,” he said.
  • “This additionality theme is a key focus for investors, and you heard several other members mention it during the session,” he said after the working group meeting.

EU green bond standard. A proposed green bond standard in Europe may offer corporates more guidance on which operating expenditures will pass muster:

  • “Green expenditures can include any capital expenditure…and selected operating expenditures…such as maintenance costs related to green assets, that either increase the lifetime or the present or future value of the assets, as well as research and development (R&D) costs.
  • For the avoidance of doubt, OpEx such as purchasing costs and certain leasing costs would not normally be eligible.”

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Talking Shop: Holding Physical Cash ‘Under the Mattress’

Member question: For business continuity or emergency use purposes, are you holding any physical cash on hand at one of your sites?

Peer Survey Results: “No” wins in a landslide.

Member question: For business continuity or emergency use purposes, are you holding any physical cash on hand at one of your sites?

Peer Survey Results: “No” wins in a landslide.

Peer answer: “Our US company does not currently keep any cash ‘under the mattress,’ however I do think there are some places around the globe that do have some [a country in Latin America].

“I’m assuming you are asking this post-Fedwire disruption? Was anyone negatively impacted by that? I am wondering if anyone is preparing any sort of BCP plan for an extended Fedwire disruption.

“We did not have any negative impact – everything was able to be pushed through the systems. I am having some follow-up conversations with my primary US banking partner to talk through potential BCP scenarios in the event another outage occurs that extends beyond the business day.”

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Treasury’s Key Role in ServiceNow’s Commitment to Racial Equity

ServiceNow has turned to RBC to create a $100 million fund to support Black homebuyers and communities.

ServiceNow in late January unveiled a $100 million “racial equity fund”—in the form of a separately managed account— that will be managed by RBC Global Asset Management’s impact investing team.

  • In mid-February, during Black History Month, ServiceNow senior treasury director Tim Muindi, who played a leading role in the process, described the project to other NeuGroup members who work at high-growth tech firms. ServiceNow runs a software platform to help companies manage workflows.
  • The company is among corporates paving the way by taking concrete action aimed at improving diversity and inclusion (D&I) and promoting racial justice in society.

ServiceNow has turned to RBC to create a $100 million fund to support Black homebuyers and communities.

ServiceNow in late January unveiled a $100 million “racial equity fund”—in the form of a separately managed account— that will be managed by RBC Global Asset Management’s impact investing team.

  • In mid-February, during Black History Month, ServiceNow senior treasury director Tim Muindi, who played a leading role in the process, described the project to other NeuGroup members who work at high-growth tech firms. ServiceNow runs a software platform to help companies manage workflows.
  • The company is among corporates paving the way by taking concrete action aimed at improving diversity and inclusion (D&I) and promoting racial justice in society.
  • These businesses are often focusing impact investing efforts on communities where their employees live and work. To target specific geographic areas, some others have also chosen to work with RBC.

Take the initiative, identify a goal. A decision by ServiceNow to focus on boosting home ownership in Black communities began with Mr. Muindi asking himself what he could do personally, on a professional level, to effect social change given treasury manages about half of ServiceNow’s balance sheet. Finding the answer included reading “The Color of Money: Black Banks and the Racial Wealth Gap” and a Citi GPS report on the economic cost of Black inequality in the US ($16 trillion in the last 20 years).

  • To explain why his treasury team wanted to focus its efforts on Black communities, Mr. Muindi told senior executives, “The reason we’re going to start in Black communities is that’s what’s on fire. The house is on fire, let’s go and start working on that. And over time there will be other opportunities.”
  • At the meeting, he told members that home ownership has a multiplier effect by indirectly helping ancillary businesses supported by homeowners. Deposits alone in Black-owned banks are just a part of the solution, he said.
  • “We have many more roles to play in addition to deposits,” he said. “We have to be part of this entire ecosystem of capital movement, enabling the flow of capital.”
Tim Muindi, Senior Treasury Director, ServiceNow

A solution and a carve-out. Mr. Muindi needed a way to keep capital flowing to lenders in Black communities to enable them to have the capacity to continue generating new loans; in some instances where the banks securitize loans, the loans are too small to interest institutional investors, he said.

  • He decided, “Let’s become a catalyst so there’s an outlet on the other side” where banks can “have additional loan origination capacity” and create an income stream, which is extremely vital for Black-owned banks.
  • To do that, he worked with RBC to create the separately managed account, which buys agency mortgage-backed securities (MBS), Small Business Administration (SBA)-backed loans and taxable municipal securities. Black communities are the beneficiaries of the loans in 10 US cities where ServiceNow staff work and reside.
  • That required creating a “complete carve-out” within ServiceNow’s investment policy and shifting from a focus on duration limitations to weighted average life metrics, because of the assets in the account.
  • “We couldn’t invest in MBSs before this,” Mr. Muindi said.
  • The company’s $1 million minimum individual security investment amount has been waived for the RBC account.

The approval process. Before establishing the account and the carve-out, of course, Mr. Muindi needed the support of the company’s senior leadership and the audit committee (AC) of the board of directors. He said this involved educating people on historical context and how the company could best respond to fast-moving current events.

  • He answered lots of questions about impact, outcomes and other topics. He won approval, in part, he said, by emphasizing the positive impact the company’s investments would have on people in underserved communities.
  • He said the AC was very receptive to the recommendation. “So why didn’t we do this before,” he asked himself.

Slow down and communicate. Once he had the green light, Mr. Muindi’s attitude was, “Let’s get this started, let’s get going on it” by putting the money to work. His colleagues on the company’s communications team had to slow him down and helped him realize “there’s a lot more to it,” he said.

  • He ultimately learned the importance of both internal and external communications on a project of this nature, the need to carefully consider the messaging to both employees and the investor community. He recommends starting early and using all resources available, including FAQ sheets.
  • The communications process helped prepare him for a flood of questions following the announcements, including an employee who asked why the company chose RBC instead of a Black-owned firm. The response included RBC’s capabilities and track record in impact investing relative to other banks.

Measuring success.  At the NeuGroup meeting, another member asked Mr. Muindi how the company is measuring success. He said impact reporting is a work in progress that will include both stories about business creation and data on mortgages, among other elements.

  • The company plans to deploy the entire $100 million by the end of the year, Mr. Muindi said, adding, “There is a need.”
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Bridging the Gap With A Hybrid Solution for Cash Flow Forecasting

One NeuGroup member’s solution for more accurate quarterly forecasting combines old school and new school.

Accurate long-term cash flow forecasting may be treasury’s white whale, and while the hunt is certainly far from over, assistant treasurers at recent NeuGroup meeting heard about a solution for producing medium-term forecasts.

Lack of balance. At the meeting, one AT told the group he is having issues balancing two standard methods for cash forecasting in the short- and long-term.

One NeuGroup member’s solution for more accurate quarterly forecasting combines old school and new school.

Accurate long-term cash flow forecasting may be treasury’s white whale, and while the hunt is certainly far from over, assistant treasurers at recent NeuGroup meeting heard about a solution for producing medium-term forecasts.

Lack of balance. At the meeting, one AT told the group he is having issues balancing two standard methods for cash forecasting in the short- and long-term.

  • The short-term system forecasts two weeks in advance for AP purposes, based on a direct model of “cash positioning” that analyzes upcoming payments and receipts. It has a high degree of accuracy.
  • But his yearly long-term forecast, a top-down approach based on high-level revenue and expense forecasts from FP&A, has a higher margin of error.

The power of a hybrid. In response, another AT shared that his company’s treasury and shared service center teams worked together to build a hybrid between the two models, a tool that generates far more accurate cash flow forecasts over the coming six to 12 weeks.

  • He said the tool works by “looking into the system of AR and AP for what you see within your current terms.” Think of that as old school.
  • It then “uses some AI and machine learning techniques to figure out historically where the rest of that period is going,” and makes extrapolations about the next three-month period. New school.

Bridging the gap. The tool helps to bridge a gap the member’s company had when “planning around how much we need for AP, share repurchases, and other outflows for the whole quarter, not just the next week.”

  • “If you’re managing an investment portfolio that you’re using for liquidity you need to know your position on the curve in relation to your cash needs,” the member said.
  • Another member who uses a similar medium-term forecasting model said that this method is typically far more accurate over a single quarter than the one-year forecast.
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Talking Shop: Allowing Direct Debits for Payroll Tax

Member question: “For those of you who use ADP for payroll in the US, do you allow them to do direct debits on your bank accounts, specifically for payroll tax payments?”

Member question: “For those of you who use ADP for payroll in the US, do you allow them to do direct debits on your bank accounts, specifically for payroll tax payments?”
 
Peer answer 1: “We just converted to direct debit with ADP in the US. Happy to put you in touch with the team that evaluated and executed the project.”
 
Peer answer 2: “We allow direct debits for both payroll and payroll tax. We fund to a separate, stand-alone payroll bank account that is solely used for this activity.”
 
Peer answer 3: “We reverse wire and direct debit for payroll tax and payroll respectively.”
 
Peer answer 4: “We allow ADP to reverse wire from a dedicated payroll account. ADP offered no other option (‘take it or leave it’), and we only got comfortable by establishing a stand-alone account.”

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Risk Managers Who Seek Gray Rhinos and Don’t Call Them Black Swans

Some enterprise risk managers call unexpected but predictable events gray rhinos and avoid the term black swan.

As awful, disruptive and devastating as the Covid-19 pandemic has been, it’s not worthy of being called a black swan, according to more than one pundit. They include the man who made the term famous: Nassim Taleb, author of “The Black Swan,” whose subtitle is “The Impact of the Highly Improbable.”

  • Unlike a black swan event—unpredictable, with massive impact— the argument goes, the pandemic, along with some other recent examples that felt cataclysmic, was both predictable and predicted.

Some enterprise risk managers call unexpected but predictable events gray rhinos and avoid the term black swan.

As awful, disruptive and devastating as the Covid-19 pandemic has been, it’s not worthy of being called a black swan, according to more than one pundit. They include the man who made the term famous: Nassim Taleb, author of “The Black Swan,” whose subtitle is “The Impact of the Highly Improbable.”

  • Unlike a black swan event—unpredictable, with massive impact— the argument goes, the pandemic, along with some other recent examples that felt cataclysmic, was both predictable and predicted.

Gray rhinos. Consistent with this theme, at a recent meeting of NeuGroup’s enterprise risk management group, members advised identifying and preparing for foreseeable major threats. Some of them used a term for them found in another book: gray rhinos.

  • Its subtitle: “How to Recognize and Act on the Obvious Dangers We Ignore.”
  • The idea, author Michele Wucker writes, is that a highly probable, high-impact threat is “something we ought to see coming, like a two-ton rhinoceros aiming its horn in our direction and preparing to charge.”

Failure of imagination? One member said he doesn’t like the term black swan, in part because it can be used as an excuse for conveniently ignoring risks that are actually foreseeable and therefore require companies and other institutions to take action before it’s too late.

  • He argued that failing to plan properly for Covid-19 may reflect a “failure of the imagination” about how widespread the damage of a pandemic could be to the economy and the world.
  • Calling something a black swan, he said, can also suggest there was “nothing we could do about” a particular problem, when that is often not the case.

What to do about the rhino? One ERM practitioner who tries to find gray rhinos warned that identifying major, predictable threats does not mean it’s easy “to pick off pieces that are actionable.”

  • For example, a gray rhino like climate change, members agreed, is a threat almost everyone can see coming but is attacking on many different fronts. That raises the question of where you start.
  • “It’s a challenging topic, easy to kick the can down the road,” the member said.

Fighting off the beasts. To plan and prepare for other, multiheadedthreats that can upend business models, several ERM practitioners are war-gaming various scenarios that could result in serious damage or the end of the company.

  • One member said his company was not “doing anything specific [in terms of black swan scenarios]” but has done “war-gaming for inflection points in our markets,” trying to ferret out “key technologies that could break the business model.”
  • Another member mentioned using war-gaming to mitigate risk around cyberattacks.
  • A third risk manager said that after this company successfully dealt with the pandemic and a hostile takeover attempt, senior management decided to stop scenario planning for now.
    • This company, the member said, also “got away from fighting about what color or animal” a threat represented. Now they call something that’s “low likelihood and high impact” simply an “unexpected event.”
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Squeezed for Time: Internal Auditors Presenting to Audit Committees

How auditors make sure their voices are heard when their time before the AC is limited.

Internal auditors often get squeezed for time when it comes time to appear before the audit committee (AC) of the board of directors.

  • Given that reality, some members of NeuGroup’s Internal Auditors’ Peer Group (IAPG) have devised other ways to make sure their views are heard—or read—by members of the AC. Following are some takeaways on the subject discussed at a recent IAPG meeting.

How auditors make sure their voices are heard when their time before the AC is limited.

Internal auditors often get squeezed for time when it comes time to appear before the audit committee (AC) of the board of directors.

  • Given that reality, some members of NeuGroup’s Internal Auditors’ Peer Group (IAPG) have devised other ways to make sure their views are heard—or read—by members of the AC. Following are some takeaways on the subject discussed at a recent IAPG meeting.

Short shrift. NeuGroup members say their appearances before the AC may be limited to just 15-20 minutes. In one member’s case, the AC also is the finance committee—and finance presents first.

  • This means the audit report comes at the end of the session and becomes more of a quick overview “on themes and trends.” Thus, this auditor struggles to promote the continuous improvements the internal audit function has accomplished.

Readers make leaders. Another member says her AC is “very diligent” about reading the material audit sends the committee ahead of time. This includes reading the appendices, slides and other supporting documents. That gives her confidence the AC sees the audit function’s accomplishments.

  • Otherwise, the auditor said it is “hard to put all we’ve accomplished into 20 minutes,” adding that she still has to “speed talk” her way through the presentation.
  • Another member intersperses his report with bullets “here and there” showing what the audit team has accomplished.

Pole position. Some companies rotate the sequence of reporting. If yours doesn’t, consider suggesting it. Because if you’re at the beginning of the AC’s session, which can include financial reporting, cyber, tech and other operational issues, you can get more time.

Work-arounds. Several members said they have good relationships with AC members and can follow up with them after the meetings (or between AC meetings) to go into more detail about what the audit team is up to.

  • One lucky member said that audit meets with the AC beyond the typical quarterly meetings. She said she meets with the committee nine times in a year, which means at five of those meetings she can share more of what audit is doing.
  • Another member said they do “four plus 10-K” for a total of five AC meetings.
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Talking Shop: Yes or No When Moody’s Asks for Dealer Agreements?

Member question: “Moody’s is asking us to provide our dealer agreements for our commercial paper program. Historically we have not provided private agreements. Are you seeing this also and if so, are you providing the agreements?

  • “For what it’s worth, Moody’s is saying they want it to see the settlement period language in the document. We have provided the private placement memorandum which contains the binding settlement language.
  • “We have not provided the dealer agreement and are pushing back on the basis it is a confidential bilateral agreement. But curious to know if we are a total outlier here.”

Member question: “Moody’s is asking us to provide our dealer agreements for our commercial paper program. Historically we have not provided private agreements. Are you seeing this also and if so, are you providing the agreements?

  • “For what it’s worth, Moody’s is saying they want it to see the settlement period language in the document. We have provided the private placement memorandum which contains the binding settlement language.
  • “We have not provided the dealer agreement and are pushing back on the basis it is a confidential bilateral agreement. But curious to know if we are a total outlier here.”

Peer answer 1: “We have not provided, but would have no concerns. I suppose the reason for asking is more or less to ensure that there’s actually an agreement in place, versus the agency wanting to diligence any of the specific features in the contract. If we were asked to provide it, we’d probably make the agency explain why they needed to see it, just from a ‘less is more’ principle.”

Peer answer 2: “​We received the request and provided. When I was with a previous company, this had been requested years back and always provided. I believe it’s to support the short-term rating.”

Peer answer 3: “They reached out to us requesting this information [last fall]. We provided the agreements to them.”

Peer answer 4: “We have not been asked for them. Did they say why they were looking for them or what they were looking for?”

A spokeswoman said Moody’s declined to comment on dealer agreements. If you have answers or comments on anything you read in Talking Shop, please send them to insights@neugroup.com.

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Swap Rates and the C-Suite: Making the Case for Floating-Rate Debt

Low fixed interest rates may make it harder—but not impossible—to convince management to swap to floating.

Interest rates may be ticking up, but their historically low level is one reason some treasury teams may face difficulty convincing senior management to swap more of their company’s debt stack to floating rates from fixed.

  • “It’s a hard time to argue to do it given where long-term rates are,” one NeuGroup member said at a recent meeting.
  • “When the fixed-rate environment is this attractive, it’s hard to convince a CFO to ignore locking in a < 3% coupon for 30 years so we can swap into a floating-rate instrument to save another few %, but because it’s floating, it’s not guaranteed,” he added in a follow-up interview.

Low fixed interest rates may make it harder—but not impossible—to convince management to swap to floating.

Interest rates may be ticking up, but their historically low level is one reason some treasury teams may face difficulty convincing senior management to swap more of their company’s debt stack to floating rates from fixed.

  • “It’s a hard time to argue to do it given where long-term rates are,” one NeuGroup member said at a recent meeting.
  • “When the fixed-rate environment is this attractive, it’s hard to convince a CFO to ignore locking in a < 3% coupon for 30 years so we can swap into a floating-rate instrument to save another few %, but because it’s floating, it’s not guaranteed,” he added in a follow-up interview.

Glass half full. Another member took the view that a “swap may not look ridiculous right now” because of “positive carry across the curve—there is generally enough positive carry, so it may not look like a bad time to start legging in some swaps.”

  • He suggested that it may make sense for companies to set a “bogey” whereby they would swap to floating if they had a “certain amount of positive carry.”

Earnings optics. This member said “optics” and “EPS sensitivity” can be obstacles to getting a swap approved, especially for companies like his that “don’t have a long history of having meaningful interest expense on our P&L.”

  • “There is always hesitancy to add volatility to earnings that floating-rate exposure layers on,” he said, referring specifically to “situations where the swap may have negative carry,” as was the case in Q4 2019.
    • “So not only is a newly issued bond EPS dilutive because of the added interest expense, but then the swap makes it even further dilutive because of the negative carry.”
  • However, this member said, “Once we spent time with management on the benefits of [asset liability management], we have had very constructive conversations.”

Taking time; avoid timing. One member said that to counter the reality that “it’s never going to seem easy to enter into swaps,” companies need to have an “institutional goal” about the mix of fixed- to floating-rate debt that allows them to enter swaps over time—and not look at them on a standalone basis.

  • That message resonated with another member who observed, “They are more focused on absolute rates vs. initial carry; you have to have a long-term, fixed-float execution plan, meaning you continuously swap into floating at some %/target per year vs. trying to time the market.”

Eye-opening savings. Another member said treasury succeeded in convincing management at his company to swap a portion of every debt issue to floating to achieve a mix of 75% fixed and 25% floating. The key to adopting this systematic approach was showing management the “triple-digit millions” the company would have saved historically under that approach—what he called an “eye-opener.”

  • That has allowed the company to “be agnostic about the entry point” to a swap because, “over time, floating rate wins.”
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Cash Cushions and Covid: Retailers Not Yet Ready To Declare Victory

Retail treasurers returning to offense with share repurchases and dividends are proceeding with caution.

A growing number of retailers in the NeuGroup Network are spending or preparing to spend some of the excess cash they raised at the beginning of the pandemic on share repurchases and dividends.

  • But most treasurers at these retailers remain cautious and conservative as they return to playing offense—not surprising given that these companies were among the worst impacted by lockdowns and social distancing.

Retail treasurers returning to offense with share repurchases and dividends are proceeding with caution.

A growing number of retailers in the NeuGroup Network are spending or preparing to spend some of the excess cash they raised at the beginning of the pandemic on share repurchases and dividends.

  • But most treasurers at these retailers remain cautious and conservative as they return to playing offense—not surprising given that these companies were among the worst impacted by lockdowns and social distancing.

Declare victory? “One interesting conversation we’ve been grappling with is ‘Is it too early to claim victory?’” one member of NeuGroup for Retail Treasury said at a recent meeting. His company is carrying 2.5 times its normal cash cushion in case of what he called “a shock-type scenario.” Among the questions he’s asking:

  • “Should we be repaying all those credit facilities we put in place at the onset for insurance?
  • “Should we do a big share repurchase and utilize all of our excess cash today and get back to a more normalized amount?
  • “Or do we want to wait another quarter to see if the virus doesn’t come back and stores don’t close again?”

Middle Ground. One treasurer said his forecast model assumes a middle ground between expecting a return to normal and anticipating “another Covid scenario.”

  • Another member said a cause for concern is that it is “a little tricky” to define the degree of downside that exists at this moment. “Is it just 10%, or could it be another full Covid resurgence?” she asked.

Dividend dynamics. Most of the members whose companies are paying dividends—some halted them and have restarted—said that, although they have additional cash on hand, they have no plans to increase the dividend yet, although some expect to do it this year (see chart).

  • One member said there is “only so much you want to do with dividends,” when a company has a temporary cash surplus, since investors view dividend increases as permanent. He said that he leans toward a one-time share repurchase.
  • Other treasurers gearing up for buybacks are looking into the opportunistic possibilities offered by ASRs. But they stressed the need for caution because of the optics and politics of buybacks as millions of Americans continue to struggle financially because of Covid.
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Talking Shop: Handling Grant and Expense Payments for a Foundation

Member question: “How is your company handling grant and expense payments for its foundation? Is this handled leveraging existing company processes, tools and teams or outsourced to service providers, such as Foundation Source, etc.?

  • “We’ve outgrown the manual check process and need to scale up here and are curious to learn how you manage this.”

Member question: “How is your company handling grant and expense payments for its foundation? Is this handled leveraging existing company processes, tools and teams or outsourced to service providers, such as Foundation Source, etc.?

  • “We’ve outgrown the manual check process and need to scale up here and are curious to learn how you manage this.”

Peer answer 1: “Our foundation accounts are with our concentration bank and managed by specific individuals in our corporate team.

  • “We have raised the question of providing electronic payment (wire) access to the team but checks still seem to be favored.”

Peer answer 2: “Our foundation operates pretty independently. We offer some support with our relationship banks, but they operate their own ERP and accounts.

  • “Our investment team advises them on long term cash investments, but I believe they partner with an outsourced provider, YourCause, who processes the payments.”

Peer answer 3: “Our foundation operates fairly independently, except that our shared service center processes all payments from the foundation’s Fidelity account. With Covid-19, all payments were migrated from check to EFT (electronic funds transfer).

  • “The beneficiary account for any charity getting a payment greater than $5K, or ongoing donations, is prenoted (an anti-fraud measure) and the charity must confirm the test amount. Unfortunately, some of our charities are charged $15-$25 for incoming EFTs, but we think this is worth the cost to avoid fraud.”

Peer answer 4: “Our foundation is also independent. Nearly all of our foundation cash activity flows through our foundation’s cash account at our custodial bank.

  • “Related to grant payments, several years ago our foundation hired a third-party, Benevity, to manage all of its grant payments. Foundation staff use the Benevity tool to approve grants and schedule/make payments to the grant recipients. Once a month, Benevity bills the foundation for all grant payments to be made by them in the upcoming month and we pay Benevity from our foundation’s cash account.
  • “The only grant payments that run through the local checking account are typically grants awarded to non-501 (c) (3) organizations, as Benevity is only equipped to handle 501 (c) (3) grant payments.”
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Impact Investing: A Fintech Connecting Corporates with Communities

CNote helps companies including Mastercard connect with community development financial institutions.

Community development financial institutions (CDFIs) have emerged as an effective and attractive tool for corporates initiating or accelerating their commitments to impact investing amid the broader push for diversity and inclusion (D&I).

  • Members of NeuGroup’s Treasurers’ Group of Mega-Caps (tMega) recently heard how a women-led fintech called CNote is simplifying the process of connecting with CDFIs that, in turn, lend capital to borrowers in underserved communities.
  • “CNote is moving money where it’s needed the most,” CEO Catherine Berman said at the meeting. “Since we work with so many institutions, we get the deposits where they’re needed when they’re needed.”
  • Among the corporates making use of CNote’s platform is Mastercard. Representatives of the company joined CNote for the tMega presentation, part of a NeuGroup series designed to connect treasury and finance teams with innovative fintechs.

CNote helps companies including Mastercard connect with community development financial institutions.

Community development financial institutions (CDFIs) have emerged as an effective and attractive tool for corporates initiating or accelerating their commitments to impact investing amid the broader push for diversity and inclusion (D&I).

  • Members of NeuGroup’s Treasurers’ Group of Mega-Caps (tMega) recently heard how a women-led fintech called CNote is simplifying the process of connecting with CDFIs that, in turn, lend capital to borrowers in underserved communities.
  • “CNote is moving money where it’s needed the most,” CEO Catherine Berman said at the meeting. “Since we work with so many institutions, we get the deposits where they’re needed when they’re needed.”
  • Among the corporates making use of CNote’s platform is Mastercard. Representatives of the company joined CNote for the tMega presentation, part of a NeuGroup series designed to connect treasury and finance teams with innovative fintechs.

Mitigating risk, preserving capital. CNote says it streamlines community investment for corporates by removing common friction points, minimizing risk and simplifying administration and data collection processes.

  • Using a network of federally certified CDFIs, its system allows companies to deploy capital at scale, increasing access and funding loans that have a tangible impact, CNote says.
  • CNote’s technology services make it more cost-effective for corporates to directly support community organizations and lenders by simplifying the identifying, servicing and impact reporting efforts through data and automation, the fintech says.
  • CNote also offers customized impact investments, allowing corporates to construct offerings tailored to specific goals and objectives.

Insured deposits. Mastercard originally supported CNote through its start-up engagement program, and more recently—with contributions from Mastercard and the Mastercard Impact Fund—made a $20 million commitment to CNote’s Promise Account.

  • The account is a cash management solution that’s structured to provide FDIC and NCUA depository insurance coverage of all funds while giving institutional investors a single place to put their cash to work.
  • CNote says this single point of management reduces the administrative burden that would exist when manually monitoring and opening deposit accounts across numerous CDFIs and makes it easy to scale investments on demand.
  • Recognizing the critical role CDFIs can play in providing access to funding and pathways to financial security for underserved communities, the Mastercard Center for Inclusive Growth partners with many leading CDFIs and innovative firms like CNote operating in the community finance ecosystem.

Measuring impact. To show how investments are put to use, CNote provides reports to corporates and publishes borrower stories on its website highlighting the personal tales of success of people impacted firsthand by the financial support provided by CDFIs and companies’ deposits in them.

  • “In the reports there are some examples of the women entrepreneurs or the black-owned businesses that have grown or started because of these deposits,” Ms. Berman said at the meeting. “We show that we are making sure your deposits are going toward the areas [that companies target].”
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Biden Tax Priorities May Fuel Shifts in Corporate Capital Structure

The effects of raising the corporate income tax rate and setting a global minimum tax on book income.

Treasury and tax teams trying to plan for potential changes to US corporate tax policy will be looking for more clarity when President Biden addresses a joint session of Congress in one week, on Feb. 23.

  • For a look at what corporates should have on the radar screen, NeuGroup Insights reached out to Justin Weiss, a partner in KPMG’s Washington national tax financial institutions and products group.

The effects of raising the corporate income tax rate and setting a global minimum tax on book income.
 
Treasury and tax teams trying to plan for potential changes to US corporate tax policy will be looking for more clarity when President Biden addresses a joint session of Congress in one week, on Feb. 23.

  • For a look at what corporates should have on the radar screen, NeuGroup Insights reached out to Justin Weiss, a partner in KPMG’s Washington national tax financial institutions and products group.

Big picture. Democrats want to pass a rescue package to aid people struggling during the pandemic, using the filibuster-proof budget reconciliation process if necessary, and follow that with a recovery package to reignite the economy.

  • Next week, the president may expand on several tax-related proposals that would provide revenue to fund infrastructure and other initiatives.
  • The administration could push for such changes to become effective by Jan. 1, 2022, and Democrats could potentially use budget reconciliation a second time in 2021 should Republicans remain opposed, Mr. Weiss said.

The big gun. The Tax Cuts & Jobs Act (TCJA) of 2017 slashed the corporate tax rate to 21% from 35%, reducing the interest rate deduction benefit that encourages issuing debt over equity. President Biden says he intends to increase the rate to 28%.

  • That would increase debt’s luster in corporate capital structures, but a rule stemming from TCJA that limits interest deductions for tax purposes gets further restricted on Jan. 1, 2022.
  • “There’s been some talk about whether to postpone or eliminate changes that are scheduled to go into effect in 2022, given the economy,” Mr. Weiss said. So watch out for this in upcoming legislation.

A global minimum alternative. More complex would be a 15% global minimum tax on the book income of certain multinationals—technology and pharmaceuticals may be the target—that record significant profits in their financial statements but pay relatively little US tax.

  • A US company paying taxes abroad but recognizing that income in the US must already consider differences between US and local tax laws to efficiently avoid double taxation, especially after the TJCA eliminated multi-year tax credit pools, Mr. Weiss explained.
  • So a US multinational executing a hedge in a treasury center in the Netherlands would have to look at the US and Dutch tax treatment of such a derivative, and it could lose the US tax credit if they’re misaligned in a given year, Mr. Weiss said. He added that a minimum tax on booked earnings would add yet another layer of complexity.  
  • “That could be a real challenge when a company has a high volume of complicated financial transactions,” he said.

GILTI changes and centralizing treasury. The TJCA’s global intangible low-taxed income (GILTI) provision now effectively taxes overseas income at 10.5% and President Biden has said he wants to raise it to 21%. He has also floated a proposal to shift from calculating the GILTI tax on a pooled basis, where income and losses across the countries in which a company operates are netted, to a country-by-country calculation.

  • This could dramatically impact intercompany lending and hedging transactions, Mr. Weiss said, adding that income/gain on one side of a transaction could be taxable, but expense/loss on the other side may provide no benefit.

More to look out for. Besides the big ticket legislative items President Biden has mentioned, there are many regulatory projects that are likely to impact treasury functions.

  • Examples include pending regulations directly related to the taxation of intercompany treasury centers and the transition away from Libor.
  • “While the major legislative proposals get a lot of the attention, it’s important to also plan for a number of other upcoming changes, from the finalization of important regulations [in the US], to the evolving OECD guidance on financial transactions,” Mr. Weiss said. He added that in recent years taxing authorities have renewed their focus on the “unique aspects of treasury transactions.”  
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Talking Shop: Looking for Solutions To Optimize Global Tax Payments

Member question: “We are working to centralize and optimize global statutory and tax payments. What kind of solutions do you have in place?

“Entities will have unique tax restrictions, so we will need various solutions depending on the region and country. We’re hoping to understand what kind of solutions you may have uncovered or already have in place.

Member question: “We are working to centralize and optimize global statutory and tax payments. What kind of solutions do you have in place?

“Entities will have unique tax restrictions, so we will need various solutions depending on the region and country. We’re hoping to understand what kind of solutions you may have uncovered or already have in place.

  • “Does your company have a centralized process for managing global tax payments?
  • “What types of applications or payment types are used for processing tax payments (centralized or not)?
  • “For countries with no tax payment solutions through your primary or local banking portal, or regulations requiring payments via check or mandated to be made by local employees, what solutions have you come up with to try and streamline the process?”

Peer answer 1: “We do not, but it has been a space that we have also looked to incorporate more into our standard payment processes. Today, they still tend to make payments through bank portals or even use checks when wanting to combine with a document.

  • “We have explored how to include the documents with an electronic payment as well as how to link the electronic payment with the underlying document submission. We have not found any great solutions so I will be watching for other ideas.”

Peer answer 2: “Our US tax department is looking into an improved process—currently they use a bank portal that is quite manual. They heard about a provider called Anybill that we are going to research further.

  • “Coincidentally, I just heard that our Brazil tax team is also looking to find some efficiencies in this space. They have identified Dootax as a potential service provider. A global provider would be ideal, but not sure yet if one exists. Definitely interested in hearing what others have to say.”

Peer answer 3: “We have a decentralized process. We use a combination of checks, ACH debits by some taxing authority and ACH credits initiated from our banking portals, for tax payments in the US.

  • “For countries where no tax payment solutions exist, we leverage PwC or other such providers that offer tax payments on behalf of clients. It’s a lot more disjointed than we’d like, as all our divisions make their own tax payments, and we don’t have a common solution for any given tax authority.”
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Supporting—Not Leading—the Green Charge: Defining Treasury’s Role

A discussion of green bonds includes the view that treasury “can’t push the cart up the hill” on sustainability.

The steady drumbeat of enthusiasm about ESG from bankers, investors, rating agencies and the media has failed to convince some treasury teams to push their companies to jump on the green finance bandwagon. For one reason, these treasury practitioners say that issuing green bonds or using other forms of sustainability-linked finance does not currently make economic sense for them.

A discussion of green bonds includes the view that treasury “can’t push the cart up the hill” on sustainability.

The steady drumbeat of enthusiasm about ESG from bankers, investors, rating agencies and the media has failed to convince some treasury teams to push their companies to jump on the green finance bandwagon. For one reason, these treasury practitioners say that issuing green bonds or using other forms of sustainability-linked finance does not currently make economic sense for them.

  • More importantly, these NeuGroup members say treasury’s role is to support, not drive, corporate sustainability efforts that must be embraced by the C-Suite and embedded into the business before treasury teams help assist and finance those efforts.
  • Those takeaways emerged at a recent ESG working group meeting NeuGroup organized to discuss topics including the use of proceeds from green bond issues.

Pricing and PR. One member, who said every bank has pitched green bonds to his company multiple times, said he sees very little benefit from a pricing perspective, meaning the main value or return would be from public relations.

  • “Green Bonds don’t necessarily provide a pricing benefit to non-green bonds,” he said. “While you are expanding your investor base, the issuances aren’t generally all that large and I’m not sure it would impact your overall bond pricing.”
  • Another member said his company has high ESG ratings, thanks in part to investments in renewable energy projects, and doesn’t need the positive PR from issuing a green bond. He told others, “Don’t do green [bonds] for the sake of doing green,” particularly if a company, like his, does not have enough uses for the bond proceeds.

Supporting, not leading. A consensus emerged that whatever the motivations for making use of sustainability-linked finance, treasury needs to act in response to initiatives and messaging driven by the company’s senior leadership, not the finance function.

  • “Treasury is the tail, not the dog,” said one member whose CEO has pushed sustainability and social responsibility into the company’s business operations and culture. As part of that vision, treasury did the hard, time-consuming work of issuing a green bond for the first time.
    • The goal of that initial deal, the member said, was generating publicity and telling the story of the company’s commitment to sustainability.
  • But for another member, pushing a green bond would put treasury “way ahead of the rest of the organization.” He said he would be “loath to jump in without a more comprehensive plan. If you don’t have the projects to spend money on, it doesn’t feel authentic.”
  • He added, “A bond deal, which would generate lots of PR, needs to be one component of an overall green strategy which would include external communication. If we’re going to do it, it needs to be led by the sustainability team. We don’t want treasury pushing the cart up the hill on green.”

An ideal world? Another member whose company has issued sustainability bonds for both capital expenditures and operating expenses (a topic we’ll dive into in a future post) said he’d like to know if his peers viewed sustainability as a “bolt-on” or “can we do things we’re doing in a more sustainable way.”

  • Put another way, is sustainability a “core mandate of treasury on an ongoing basis and less “pushing the cart up the hill,” he asked.
  • A member of the treasury team at a large technology company that issues sustainability bonds offered a clear and compelling perspective on treasury’s role within a company committed to ESG principles:
  • “In an ideal world, when a clear corporate strategy exists, I think treasury has an important role to play in partnering with the sustainability team to understand the art of the possible around linking financial tools to sustainability initiatives,” he said.
  • “We have a very sophisticated sustainability team, but they are not avid followers of the capital markets; so it’s on treasury to push the envelope for how we can embed sustainability themes into our investment/financing activities.”
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Sending a Strong Signal: Accelerated Share Repurchase Programs

As more companies resume stock buybacks, some treasurers are feeling pressure to use ASRs.

Corporates eager to send a clear signal to investors about their financial health are brushing the dust off stock buyback plans and weighing—if not committing to—accelerated share repurchase (ASR) programs. That was among the takeaways from a NeuGroup meeting of treasurers this week.

As more companies resume stock buybacks, some treasurers are feeling pressure to use ASRs.

Corporates eager to send a clear signal to investors about their financial health are brushing the dust off stock buyback plans and weighing—if not committing to—accelerated share repurchase (ASR) programs. That was among the takeaways from a NeuGroup meeting of treasurers this week.

  • It’s the latest development in a journey that began in the spring when the pandemic slammed the brakes on many share repurchase programs. In the fall, some companies got more confident about the future and returned to doing buybacks, often opting for the flexibility and relatively lower profile offered by open market repurchases (OMRs).
  • Corporates that opt for ASRs have to make a firm commitment to the program but may benefit by sending a stronger message to the market, members agreed.

Time for ASRs? One member, whose company has performed well in the pandemic, has an influx of cash and is restarting a repurchase program, said he is feeling some pressure to use ASRs, not his preferred method.

  • Another member with experience using ASRs said his goal as treasurer is to be opportunistic and “take whatever the board offers me to spend in buybacks, and buy back as many shares as I possibly can.” That means using ASRs, which offer corporates a way to buy shares at a discount to market prices, unlike an OMR.
  • The member said he essentially uses ASRs as a volatility hedge. “In a period of high volatility that we don’t think or aren’t sure is going to continue, we can lock it in with the ASR,” he said.
  • “On the back of that, we put a price grid in,” he said. This allows the company to purchase even more if there’s a significant decline in the share price.

Playing it safe. The commitment inherent in ASRs can come back to bite. The member noted another company’s recent experience going “pretty big” with an ASR and seeing huge run-up in the stock price, which will be factored into the price per share they will ultimately pay.

  • He warned others to stay short on the strategy. “We typically don’t go out more than a couple months, because we don’t like the uncertainty out there,” he said.
  • A member who is currently using an ASR program added, “The ASRs we engage on are only within the quarter, shorter in tenor and smaller in size than OMRs.”
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Talking Shop: Do You Use Barra Beta or Bloomberg To Calculate WACC?

Member question: “Is anyone using Barra to calculate WACC (weighted average cost of capital) or do you use another service provider?

  • “To calculate cost of equity, we use our beta available from Bloomberg. Over the last year, our beta has decreased. The lower beta results in a lower calculated cost of equity and then WACC.
  • “We think this could be a short-term impact and need to be very thoughtful about how to apply it in various analysis. In recent conversations, we have learned about Barra beta. My question: Is anyone using Barra beta and if so, how do you calculate it, or do you use a service provider to obtain this data?”

Member question: “Is anyone using Barra to calculate WACC (weighted average cost of capital) or do you use another service provider?

  • “To calculate cost of equity, we use our beta available from Bloomberg. Over the last year, our beta has decreased. The lower beta results in a lower calculated cost of equity and then WACC.
  • “We think this could be a short-term impact and need to be very thoughtful about how to apply it in various analysis. In recent conversations, we have learned about Barra beta. My question: Is anyone using Barra beta and if so, how do you calculate it, or do you use a service provider to obtain this data?”

Peer answer 1: “We use Barra beta. My understanding is that they use a black box model to create a ‘predictive’ beta. We subscribe to the service to have access to the data.”

Peer answer 2: “We use Barra beta but we’re evaluating switching from Barra to Bloomberg in the future. Here are several considerations for comparing Barra beta and Bloomberg’s beta:

  • “Barra ‘predictive’ lacks transparency. When we use the Barra betas of peers [in one country] as another data point to guide our own cost of equities estimation, they have very low Barra betas.
    • “I suspect the Barra method is probably running these companies’ correlation with a MSCI global index instead of [the country’s] domestic equity index.
  • “The Bloomberg beta method is transparent and allows customizing the index to correct such noise. Barra beta, I was told, also has an issue with new companies lacking trading history.
  • “We have introduced a moving-average tweak to our beta estimation to smooth out the noise.
  • “You may want to consider asking one of your bankers to provide a one-time look of several Barra betas and their history before signing up for the service.”

Peer answer 3: “We use Bloomberg’s five-year weekly adjusted beta. We look at Barra, but don’t like the lack of transparency.”

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Spin-off Class: Perspective From a NeuGroup Member Pedaling Hard

Spin-offs mean complex, time-consuming work on capital structure, bank accounts, credit facilities and more.

Spin-offs are huge strategic undertakings for corporations looking to part ways with a subsidiary or business. And finance teams, including treasury, do a lot of the heavy lifting to manage a complex process that can take years to complete.

  • At a recent NeuGroup meeting, one member in the midst of a spin-off described the process as an “all-consuming activity.”
  • Afterward, he agreed to share some insights and perspective he’s gained from experiencing a spin-off firsthand.

Spin-offs mean complex, time-consuming work on capital structure, bank accounts, credit facilities and more.
 
Spin-offs are huge strategic undertakings for corporations looking to part ways with a subsidiary or business. And finance teams, including treasury, do a lot of the heavy lifting to manage a complex process that can take years to complete.

  • At a recent NeuGroup meeting, one member in the midst of a spin-off described the process as an “all-consuming activity.”
  • Afterward, he agreed to share some insights and perspective he’s gained from experiencing a spin-off firsthand.

Treasury’s role in untangling. To the extent the to-be-spun business is highly entangled, treasury support will be required to establish new entities, new banking operations (accounts and services like pooling and trade finance), and supporting policies and procedures. 

  • New authorities will need to be delegated, new signatories identified and likely changed more than once as colleagues are selected to support the spin company.
  • Credit facilities will need to be split between companies prior to all information about the spin company’s capital structure and credit rating. 

Degree of difficulty. Among other factors, the difficulty in executing a spin-off will be driven by the degree of entanglement of the operations with the broader business. 

  • That entanglement includes systems, people and processes; and a decision must be taken on how those systems and processes will be established at the spin company.
  • You can simply “lift-and-shift” what’s required or create new or optimized systems and processes that may allow a greater degree of customization and refinement.  

Capital structure: critical. Establishing the right capital structure for the spin company is a critical step in ensuring the right operational and strategic flexibility post-spin. 

  • Projecting the cash flow generation of the spin company in the critical months leading up to and immediately after spin is a complicated exercise, but required to deliver that desired flexibility. 
  • This will likely require cash flow forecasting at the entity level for any significant operations around the globe.

Talent task. In attempting to find the right talent for the spin-off company’s treasury team, there are options along a continuum. You can choose to identify staff to move to the spin company or engage staff to understand interest and capabilities that will serve the spin company well. 

  • A mix of internal and external talent will likely be required, and finding the right mix of capabilities will affect the spin company’s ability to hit the ground running. 
  • Of course there are local labor laws that must be followed in establishing the new team, and striking the right balance between appointment and self-selection is a challenge given minimum required staffing levels and budgetary constraints. 
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Why Spin-offs Are Complex, Time-Consuming Affairs: A Lawyer’s View

The legal perspective on spin-offs from attorneys at Gibson, Dunn & Crutcher.

Spin-offs are intricate, multifaceted endeavors for corporates that decide to take a subsidiary and make it an independent public company. In addition to internal finance and tax teams, they can involve scores of investment bankers, auditors and lawyers.

  • At a recent NeuGroup meeting, one member in the midst of a spin-off described the process as an “all-consuming activity.”
  • For a look at some of what’s involved, NeuGroup Insights turned to Andrew Fabens and Steve Glover, partners at the law firm Gibson, Dunn & Crutcher, who work on spin-off transactions. Below are some of their insights along with some information from the firm’s presentation, “The Art of the Spin-off.”

The legal perspective on spin-offs from attorneys at Gibson, Dunn & Crutcher.

Spin-offs are intricate, multifaceted endeavors for corporates that decide to take a subsidiary and make it an independent public company. In addition to internal finance and tax teams, they can involve scores of investment bankers, auditors and lawyers.

  • At a recent NeuGroup meeting, one member in the midst of a spin-off described the process as an “all-consuming activity.”
  • For a look at some of what’s involved, NeuGroup Insights turned to Andrew Fabens and Steve Glover, partners at the law firm Gibson, Dunn & Crutcher, who work on spin-off transactions. Below are some of their insights along with some information from the firm’s presentation, “The Art of the Spin-off.”

“Spin-offs are complicated undertakings. The process is significantly more demanding than the process associated with a debt financing, and in many cases is more complicated than the IPO process.  Just a quick list of some of the tasks that need to be accomplished highlights this: 

  • The transaction planners need to move all of the assets and liabilities associated with the business being spun into a subsidiary.  
  • They need to prepare audited financial statements for the business and draft a disclosure document. 
  • They need to confirm that the spin-off will be tax free, which can take many months if the company seeks a letter ruling from the IRS. 
  • They have to decide on governance for the spin-off company and develop a capital structure. 
  • They need to decide on a management team, identify members of the new board of directors and develop compensation plans.  

“Treasury has a significant role to play in developing the spin-off company’s capital structure and anticipating adjustments of the parent’s structure. These are mixed economic and strategic decisions, with a healthy dose of legal work if the spin-off is of such significance that there are ‘all-or-substantially all’ (AOSA) debt covenant compliance questions at the parent level.”

  • An AOSA covenant can prohibit the disposal of “all or substantially all” of the assets of the parent unless all assets are conveyed to a single acquirer that assumes the debt obligation.

Keep one eye on the market. “The transactions that rebalance the capital structures must be executed with precision just as the other components of the separation all are finalized. You need to have one eye on the market and the other on the separation workstreams to get that timing right.” The methods used to do this typically include some combination of the following:

  1. New issue + repurchase. Elements include: new bonds issued by the spin-off company for cash; a special dividend paid to the parent; redemption and/or tender offer by parent for existing bonds; redemption or offer to purchase.
  2. Par-for-par exchange offer. Elements include: spin-off company offers to exchange new bonds for existing parent bonds; cash premium paid to participating bondholders; no cash proceeds to the spin-off company.
  3. Intermediated exchange. Elements include: tender offer by underwriters for existing parent bonds; underwriters agree to exchange tendered bonds for new spin-off company bonds; new spin-off company bonds sold by underwriters for cash; no cash proceeds to the spin-off company.

“When the pandemic struck, many companies put M&A and other significant strategic undertakings like spin-offs on hold. They wanted to understand better what implications the pandemic would have for their business, the capital markets and the broader economy before they proceeded with their plans. 

  • “To the extent companies had been facing pressure from stockholder activists or other investors to engage in spins, some of this pressure became less intense during the first several months of the pandemic.  Activists and investors also wanted to get better perspective on the impact of Covid-19.”
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Buzzer Beater: A Treasurer’s Last-Second Debt Deal Scores Big Savings

One member cut his company’s tax bill by beating the clock to complete a debt refinancing.  

As one NeuGroup member’s fiscal year began to draw to a close, he saw an opportunity to save his company millions of dollars in taxes by completing a debt refinancing deal—but he had to race the clock get it done before the calendar changed.

  • Because of the pandemic’s impact, the company needed to save money, so it was critical that the debt deal go through in 2020.

One member cut his company’s tax bill by beating the clock to complete a debt refinancing.  

As one NeuGroup member’s fiscal year began to draw to a close, he saw an opportunity to save his company millions of dollars in taxes by completing a debt refinancing deal—but he had to race the clock get it done before the calendar changed.

  • Because of the pandemic’s impact, the company needed to save money, so it was critical that the debt deal go through in 2020.

Roller coaster. At the start of the year, the member’s company wanted to reduce its relatively high leverage ratio through a refinancing. The pandemic delayed the deal by freezing the debt markets.

  • The eventual thaw created a renewed capacity to get deals done and convinced the company to go through with its transaction “to get the risk off the table,” he said.
  • The member’s deal was an amend-and-exchange refinancing of a high-yield bond, which he said was economically favorable as “high yield markets are very hot right now.”

Dramatic ending. The member said the refinancing took considerable time to prepare and was “not easy” to do under tight deadline pressure. Executing the deal came down to the last day of the fiscal year, creating a bit of drama.

  • The close meeting started at 5:30 a.m. for the member. At the last minute, a lawyer had an issue with an area in credit agreements, and his team had to scramble.

After applying pressure and some back-and-forth with the lawyers throughout the day, the deal was able to get out the door with 90 seconds to spare before the end of the fiscal year. “I’ve never experienced such a harrowing close meeting,” the treasurer said.

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Talking Shop: How to Set Rates on Intercompany Lending Agreements

Member question: “We are in the process of reevaluating our intercompany (IC) loan rate-setting policy. I’m trying to benchmark to understand how this is managed at other companies. What is your company’s approach to setting rates on any intercompany lending agreements?

  • “I know reference rates are in flux with the Libor transition but I am specifically trying to understand, from a transfer pricing standpoint, if you set rates with a standard mark-up or based on the entity’s creditworthiness similar to a bank.”

Member question: “We are in the process of reevaluating our intercompany (IC) loan rate-setting policy. I’m trying to benchmark to understand how this is managed at other companies. What is your company’s approach to setting rates on any intercompany lending agreements?

  • “I know reference rates are in flux with the Libor transition but I am specifically trying to understand, from a transfer pricing standpoint, if you set rates with a standard mark-up or based on the entity’s creditworthiness similar to a bank.”

Peer answer: “For long-term IC loans, our internal funding team works with tax to determine an appropriate arm’s-length spread over benchmark. 

  • “That process has varied over the years, but typically involves either getting some local bank indicative loan rates for comparison or doing other local market research on comparable companies’ public debt issuance and/or credit indicators. 
  • “This would all be documented and retained as supporting evidence of the arms-length rate.

“For revolving (short-term) IC loans, we may use comfort letters and/or parent guarantees to backstop the subsidiary IC debt. 

  • “This has allowed us (in most cases) to have a fixed credit spread for our short-term IC loan portfolio. Obviously, that type of approach would need to be well established with tax.

“With the upcoming Libor replacement, there is an expectation that the credit component backed into Libor will need to be reflected in the updated rates plus the spread we use. 

  • “These details are still being worked out by our Libor replacement team.”

Using SOFR for IC. The Alternative Reference Rates Committee (ARRC) recently released recommendations for IC loans based on the Secured Overnight Financing Rate (SOFR). ARRC’s announcement does not specifically address transfer pricing.

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Questions About Answers: Moody’s Cybersurvey Raises a Few Concerns

NeuGroup members want to know how the credit rating agency will use survey responses about cyber risk.

High-profile corporate cyberattacks have many companies reevaluating how they mitigate cyber risk. And over the past few months, some NeuGroup members have received a lengthy survey from Moody’s asking questions about their companies’ approaches to cybersecurity.

  • The survey, which Moody’s says has about 60 questions, has raised questions—and a few concerns—about what Moody’s will do with the answers.
  • Below is some of what members said about the survey at recent meetings and, where appropriate, the responses NeuGroup Insights received from Jim Hempstead, managing director of cyber risk at Moody’s.

NeuGroup members want to know how the credit rating agency will use survey responses about cyber risk.

High-profile corporate cyberattacks have many companies reevaluating how they mitigate cyber risk. And over the past few months, some NeuGroup members have received a lengthy survey from Moody’s asking questions about their companies’ approaches to cybersecurity.

  • The survey, which Moody’s says has about 60 questions, has raised questions—and a few concerns—about what Moody’s will do with the answers.
  • Below is some of what members said about the survey at recent meetings and, where appropriate, the responses NeuGroup Insights received from Jim Hempstead, managing director of cyber risk at Moody’s.

What’s in it? One member said the survey includes questions about the amount of money the company spends on cybersecurity, about cyber risk governance, how much oversight the board has and whether someone reports to the board on cyber risk.

  • One treasurer who received the survey said she had to collaborate with many different teams in the company to ensure accurate answers, in what ended up as a time-consuming process.
  • “Treasury contributed to questions about risk insurance,” the member said. “The bulk of [the survey] had to go to other offices, it was quite wide-ranging. I had to farm it out to several people.”

What happens with the answers? Moody’s, some members said, told corporates their answers would not affect their credit ratings. But one member said she was told that if the company’s cyber risk protocols or structures were “way out of line” with others, it might have an impact.

  • Moody’s purpose for collecting this data is to provide anonymized and aggregated information, so analysts at the agency can ask better questions of companies they cover and understand the answers better, Mr. Hempstead said.
  • Consistent with Moody’s best practices, if a company reveals something important in its survey responses that Moody’s did not know, the company’s credit rating will surely come up, he said. But he emphasized that the survey is only research and a starting point for more in-depth discussions with companies.
    • It is not meant to result in an overall cyber score, and Moody’s is not changing its rating methodology as it did with ESG.
  • Moody’s views cyber risk as rising, and says analysts need to deepen their understanding of the critical ways it impacts credit quality. And to also understand the practices used to mitigate the impact of cyber risk on credit— beyond the limited information companies disclose.
  • He also said that for issuers, the surveys are meant to raise awareness on cyber risk and how it relates to credit.

Voluntary or obligatory? Two members said the rating agency told them the survey was obligatory, while two were told it was voluntary. Mr. Hempstead said completing the survey is entirely optional, but the data will be more useful as more corporates complete the survey.

  • Moody’s sent the survey to thousands of global issuers over nearly a year, and has received well over a thousand responses, covering a wide range of companies by size, regional and industry sector, he said.

What’s next? After distributing the survey to electric utilities early last year, Moody’s published its findings. When the remaining surveys are collected by March, Moody’s plans to publish its findings for other sectors as well, provided that a diverse and large enough group of companies respond, Mr. Hempstead said.

  • After the sector data is analyzed, analysts will have metrics so they can compare the risk posed by individual companies’ cybersecurity policies and practices to other companies and a broader universe of peers.
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Cash Pools in Asia for Corporates Trying to Access Funds in China

NeuGroup members describe cash pools designed to overcome obstacles and minimize taxes.

Several members of NeuGroup’s Life Sciences Treasury Peer Group have set up cash pools in China relatively recently, a topic they discussed at their fall meeting in 2020 and in follow-up email exchanges with NeuGroup Insights.

  • The pools are generally a means to an end: getting access to the funds in a country where that can be difficult and expensive.

NeuGroup members describe cash pools designed to overcome obstacles and minimize taxes.

Several members of NeuGroup’s Life Sciences Treasury Peer Group have set up cash pools in China relatively recently, a topic they discussed at their fall meeting in 2020 and in follow-up email exchanges with NeuGroup Insights.

  • The pools are generally a means to an end: getting access to the funds in a country where that can be difficult and expensive.

Two-way sweep. One member is using what she described as “a simple RMB cross-border two-way sweep under the nationwide scheme (not the Shanghai Free Trade Zone scheme).” The goal: “To get access to surplus funds that cannot otherwise be repatriated via a dividend without withholding tax implications,” the member explained.

  • “We started operating the pool in mid-2020 and have built up the pooled funds over time to the equity limit that applies to the national structure (50% of aggregate equities of all onshore participating entities).
  • “We took action in the fall to comply with the rule that the continuous net lending/borrowing cannot exceed one year.”
  • The pools are in both Singapore and China. There is an “in-country pool for several entities [tied] to a header account which is swept to a special RMB account,” the member said.
  • “Funds are then lent cross-border to an offshore header account in Singapore. The funds can then go onward from there.”

An in-house bank and hedging. Another member at the meeting described what his company is doing in China as follows:

  • “We set up a cross-border pool between our entities in China and Singapore last year. The objective was to access China cash on a temporary basis. The bank is only acting as an agent; our entity in China is the lender. The entity in Singapore is the borrower in the pool and the in-house bank that funds other entities in Asia and Europe.
  • “It is very challenging to get cash out of China and this pool partially solves that problem.  
  • “The funds are pooled in Singapore from our China entity. Singapore is USD functional and China is RMB functional.  So we hedge the RMB that needs to be converted in USD when they arrive to Singapore.  
  • “Because the functional currency is different for the two entities (USD and RMB), hedging is necessary to avoid losses when the loans in the pool are made and prepaid.”

Context on pools. For some perspective, NeuGroup Insights reached out to Susan A. Hillman, a partner at Treasury Alliance Group and an expert on cash pooling. “The ability to ‘pool’ in China has been around for a long time through a mechanism called an ‘entrusted loan’—whereby an enterprise with excess cash (RMB) puts money on deposit with its bank and receives a rate of interest on this deposit,” she said.

  • “These funds are then loaned by the same bank to an affiliate company at a higher rate. Newer cross-border arrangements are usually managed through a bank loan from an RMB account which allows excess funds to be utilized in the offshore bank account (same bank) in Singapore as a ‘loan’ to the parent,” Ms. Hillman added.
  • The funds can be used “onward from there” with some restrictions on tenor and amounts, she said.
  • “Trying to utilize excess funds in a restricted country without issuing a dividend and the withholding tax consequences has long been a problem and using a bank as an intermediary in the situation through a loan arrangement is common in such countries as Brazil.
  • “So rather than a cash management service, like pooling in Europe, it becomes a bank financing tool subject to the tax rules of any restricted country.”
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Walking the Talk on Diversity and Inclusion: One Company’s Steps

A member of NeuGroup’s European Treasury Peer Group outlines what his company is doing to promote D&I.

The push for increased diversity, inclusion and social justice following the murder of George Floyd last year has rippled far beyond US borders.

  • At a meeting of NeuGroup’s European Treasury Peer Group this fall, one member discussed his company’s conviction that now more than ever is the time “to further strengthen [the company’s] commitment to diversity and inclusion everywhere,” as his presentation put it.
  • This company’s efforts, the member said, have taken D&I “to a new level and given it the traction it deserves,” he said. Some of the steps his company has taken may provide direction to other MNCs.

A member of NeuGroup’s European Treasury Peer Group outlines what his company is doing to promote D&I.

The push for increased diversity, inclusion and social justice following the murder of George Floyd last year has rippled far beyond US borders.

  • At a meeting of NeuGroup’s European Treasury Peer Group this fall, one member discussed his company’s conviction that now more than ever is the time “to further strengthen [the company’s] commitment to diversity and inclusion everywhere,” as his presentation put it.
  • This company’s efforts, the member said, have taken D&I “to a new level and given it the traction it deserves,” he said. Some of the steps his company has taken may provide direction to other MNCs.

Context on targets. Before the member’s presentation, attendees were polled on whether treasury has specific targets to meet D&I objectives. As the chart below shows, only five percentage points separated those companies with targets (47%) from those without (42%).

  • Only a fifth (21%) of the respondents said their companies have specific investment targets to support underprivileged communities through affordable housing and other means.

Build a senior structure to support D&I efforts. The member’s company has a CEO diversity and inclusion council comprised of senior leaders (SVPs and above) across the corporation whose aim is to accelerate progress in D&I efforts. The treasurer is on the council.

  • The council advocates for solutions that support a culture of belonging and inclusion, both internally and externally.
  • The council focuses on several key strategic pillars, including transparency and representation.

Consider using employee resource groups. So-called ERGs are voluntary, employee-led groups whose aim is to foster a diverse, inclusive workplace aligned with the organizations they serve. 

  • ERGs at the member’s company are “key partners in our work to cultivate an inclusive culture for all employees around the world,” the company’s presentation said.
  • “These passionate employees offer their time, expertise and cultural insights to help us improve the workplace and be innovative in the marketplace.”
  • The company refers to the employees as “cultural carriers” who represent “all dimensions of diversity,” including Asian/Pacific Islander, Black, Hispanic, LGBTQ as well as people with disabilities, veterans and women.

Coffee talk. The company’s efforts include holding informal coffee chats with no agenda where employees feel safe to voice their views on racism, inequality and well-being in a confidential and compassionate forum.

  • The goal, the presentation said, is to foster an environment where “everyone feels heard, supported and, most importantly, where these issues can be discussed openly.”
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Carbon Credits 101: Introduction to Voluntary Emissions Reduction

BNP Paribas shares a guide for corporates looking into carbon emission markets.

A NeuGroup member at a large technology company recently asked peers on an online forum, “Does anyone have experience in purchasing carbon credits in voluntary markets?”

  • For guidance, NeuGroup Insights reached out to BNP Paribas, which has a long-standing presence in this area and is committed to developing origination capabilities in carbon offset markets.
  • The bank shared a presentation to help clients better understand the dynamics of the voluntary emission reduction (VER) market.
  • Understanding carbon markets can only help corporates ramping up their efforts to address environmental, social and governance (ESG) issues as pressures to embrace sustainability grow even stronger.

BNP Paribas shares a guide for corporates looking into carbon emission markets.

A NeuGroup member at a large technology company recently asked peers on an online forum, “Does anyone have experience in purchasing carbon credits in voluntary markets?”

  • For guidance, NeuGroup Insights reached out to BNP Paribas, which has a long-standing presence in this area and is committed to developing origination capabilities in carbon offset markets.
  • The bank shared a presentation to help clients better understand the dynamics of the voluntary emission reduction (VER) market.
  • Understanding carbon markets can only help corporates ramping up their efforts to address environmental, social and governance (ESG) issues as pressures to embrace sustainability grow even stronger.

Three carbon pricing mechanisms. The BNP Paribas presentation describes three main ways carbon is priced. Governments have been using the first two to reach carbon reduction goals.

  1. Carbon taxes. Applying a flat and predefined rate on all carbon usage.
  2. Cap and trade. Regulated entities are subject to an emission cap and can freely buy and sell carbon allowances, which are rights to emit carbon. BNP Paribas says that to some extent these entities can also use carbon offsets if deemed compliant by the regulator.
  3. Voluntary markets. At the same time, BNP Paribas explains, the creation of so-called voluntary markets has allowed companies to buy on a voluntary basis a certain type of carbon credits or offsets and redeem them to offset their emissions. The goal is to demonstrate the corporate’s business activity is carbon neutral.
    1. By buying carbon offsets, a company could voluntarily compensate for its residual emissions and support the transition to a low-carbon economy,” the presentation states.
    2. Carbon offsets are units of carbon dioxide-equivalent that are reduced, avoided or sequestered to compensate for emissions occurring elsewhere through emission reduction projects (see below).
    3. BNP Paribas channels money to the emission reduction project developer to operate, perform and generate emissions reductions.

How to use VERs. The presentation explains that the first step is for a company to measure its carbon emissions and define reduction targets as part of its commitment to corporate social responsibility (CSR). VERs are one of the instruments of a comprehensive carbon offset strategy. The other steps include:

  • Reducing greenhouse gas emissions as much as possible as part of the CSR strategy.
  • Reporting on greenhouse gas emissions.
  • Compensating for emissions that cannot be avoided with carbon offsets and through verified emission reduction.

Carbon footprint offsetting process. The presentation notes that BNP Paribas holds carbon offset certificates and provides liquidity to this market, offering “a simple and cost-efficient setup to its clients to buy the necessary offsets to it remaining emissions.”

  • “VER is paying for past performance,” the presentation states. “A VER certificate is only issued when the carbon avoidance has already been achieved.”
  • Clients buy selected carbon offsets (spot and forward) from BNP Paribas via ad hoc negotiated documentation.
  • Each VER has a unique serial number with the objective to mitigate the risk of fraud and double counting.
  • At the time of the purchase the client can request BNP Paribas cancel the VERs on its behalf directly from the BNP Paribas registry. A certificate of cancellation is issued by the registry (Markit) and provided to the client.
    • Or the VERs can be transferred to and retained on the client’s registry, which needs to be set up.
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Under the Hood: How Banks Price FX Swaps With Corporates

Wells Fargo explains credit and capital charges for corporate counterparties on derivative transactions.

Corporates that are using or considering using long-dated hedges such as five-year FX forwards or swaps can benefit from understanding the way banks price derivatives using a combination of credit and capital charges. That idea surfaced during a recent meeting sponsored by Wells Fargo for NeuGroup members who manage foreign exchange risk.

Wells Fargo explains credit and capital charges for corporate counterparties on derivative transactions.

Corporates that are using or considering using long-dated hedges such as five-year FX forwards or swaps can benefit from understanding the way banks price derivatives using a combination of credit and capital charges. That idea surfaced during a recent meeting sponsored by Wells Fargo for NeuGroup members who manage foreign exchange risk.

  • Credit and capital costs can impact unwinds and restructurings as well as new transactions, Wells Fargo said. The extent to which hedges are in or out of the money, and the remaining tenor of the hedges, drives these calculations.
  • The presentation included explanations of the relevant acronyms CVA (credit value adjustment), DVA (debit value adjustment) and FVA (funding valuation adjustment) used to calculate the charges.
  • Wells Fargo also addressed how companies may deal with these adjustments from an accounting perspective.

Why this is relevant now. The presentation made the case that credit and capital charges are relevant now by citing the results of a 2020 FX Risk Management Survey the bank conducted.

  • Almost half of public companies report hedging long-dated FX exposures. “Widening FX carry in recent years has been a driver in some cases,” Wells Fargo reported.
  • Also, “Changes in the accounting rules (see ASU 2017-12) and decreased cost of funding in foreign currency vs. USD has increased usage of net investment hedges.”

Understanding the acronyms. CVA is priced off of what is called “positive exposure”—the risk that the bank’s counterparty, the corporate, defaults. The higher the corporate’s credit default swaps (CDS) level is, the higher the CVA cost, the presentation explained. And the larger the potential exposure, the higher the CVA cost.

  • The CVA fee is embedded in the FX or interest rate quoted by the bank to the corporate for the derivative trade.
  • DVA is priced off of “negative exposure” and takes into account the credit risk of the bank, its likelihood of default. The credit fee would in part represent a netting of CVA and DVA.
  • The presentation noted that the “worst case” exposure from a $100 million, five-year cross-currency swap, where the company pays EUR fixed rates and receives USD fixed, could be “quite large”: $37.8 million (see below).
  • FVA is priced off of both positive and negative exposure and takes into account the bank’s funding cost.
  • Most banks, the presentation said, have made a policy decision to consistently use either DVA or FVA.

The capital factor. Banks are bound by regulators to hold equity capital for derivative transactions, one reason banks also charge corporates a capital charge.

  • The presentation included a graphic explaining three common methods of calculating derivative capital requirements, plus the standardized approach for counterparty credit risk (SA-CCR), the capital requirement framework under Basel III.
  • Credit and capital costs can vary from bank to bank, a Wells presenter explained. Most of this variation reflects differences in capital costs as banks have different return on equity (ROE) targets and different capital constraints given the makeup of their balance sheets.

What about credit support annexes? A Wells Fargo presenter explained that while corporate clients could avoid credit and capital charges by constructing a “perfect CSA,” one downside is the company must be confident it can come up with the necessary cash collateral at any time.

  • So corporates should consider the benefits of not having to post collateral when structuring hedging programs and when considering whether to unwind or restructure derivatives, he added.
  • Corporates that do have CSAs tend be companies on either end of the credit spectrum: the highest quality credits or those with the weakest credit profiles, the presenter said.
  • The presenter also noted that bank capital rules don’t provide for as much pricing benefit for most CSAs, other than “perfect” ones. And those have daily margining, low minimum transfer amounts and only allow for USD cash as collateral.”

Accounting. Wells Fargo made the point that for credit and capital charges, “We believe the accounting guidance indicates to include these charges in effectiveness tests, but as a matter of practice, many clients do not, or only include these charges for longer dated hedges where they’re material.”

  • The presentation noted that because market participants consider counterparty credit risk in pricing a derivative contract, a company’s valuation methodology should incorporate counterparty risk in its determination of fair value.
  • It noted that derivatives are unique “in the fact that they can potentially be in both an asset and liability position.”
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Unpleasant Surprise Post-Brexit: A New Bank Fee for SEPA Payments

NeuGroup members confront a fee for payments from UK to EU accounts that lands on beneficiaries.

Treasurers are still learning the full impact of the UK’s recent Brexit deal, and several who attended a recent NeuGroup European Treasury meeting shared their reaction to a banking fee that took some of them by surprise.

  • Some corporates making SEPA (single euro payments area) payments from accounts in the UK to the EU are now experiencing an additional fee for receipt, as some banks in the EU slap the fee on payments from accounts outside the EU to beneficiaries in their banks. That’s even though the UK remains a part of SEPA.

NeuGroup members confront a fee for payments from UK to EU accounts that lands on beneficiaries.

Treasurers are still learning the full impact of the UK’s recent Brexit deal, and several who attended a recent NeuGroup European Treasury meeting shared their reaction to a banking fee that took some of them by surprise.

  • Some corporates making SEPA (single euro payments area) payments from accounts in the UK to the EU are now experiencing an additional fee for receipt, as some banks in the EU slap the fee on payments from accounts outside the EU to beneficiaries in their banks. That’s even though the UK remains a part of SEPA.

Fighting fees. Members said the SEPA payment fee is an issue particularly with smaller banks in Spain, Italy and Portugal. One treasurer said this issue presented a challenge since he “hadn’t seen this one coming.”

  • Another member, who had dealt with the same problem when making SEPA payments out of an account in Switzerland, also a part of SEPA but not the EU, advised the member to ask that the beneficiary banks reimburse the charge and request that the beneficiary also challenge the fee, so “there is pressure on both sides.”
  • “Our interpretation of SEPA is that this wouldn’t happen,” the member said. “But apparently there is this loophole that can be used” by EU-based banks.

In-house bank? The member said the alternative to paying the fee, if it is not reimbursed by the bank, is to make payments via an in-house bank in the EU if you have one.

  • Otherwise, it may be just as cost-effective to ignore the charges or reimburse the beneficiaries for it, as a company might do if the payments are for employee T&E expenses, for example.
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Documentation Overload: Internal Controls Over Financial Reporting

A survey of financial executives includes complaints of excessive documentation required by external auditors.

Finance executives at large US companies are finding it increasingly difficult to document internal controls over financial reporting (ICFR) to the satisfaction of their internal and external auditors, according to a study recently published by the Financial Executives International’s research arm.

A survey of financial executives includes complaints of excessive documentation required by external auditors.

Finance executives at large US companies are finding it increasingly difficult to document internal controls over financial reporting (ICFR) to the satisfaction of their internal and external auditors, according to a study recently published by the Financial Executives International’s research arm.

  • Several of the most difficult controls to design, implement and operate are common in corporate treasury.

Pain points. Controls around non-routine transactions—bond issuances, significant one-off payments and others endemic to treasury—topped the list of challenging ICFR, according to responses from 123 large public companies and interviews with 16 financial executives. Controls over access to data, fraud risk assessment and processing of data also made the top five.

  • “Controls tend to be one-off and the underlying data and structures vary from transaction to transaction and company to company, depending on their systems,” said Jeff Wilks, EY professor of accounting at Brigham Young University and part of the research team that conducted the two-year study.

Excessive documentation. A general complaint emerging from the study is excessive documentation required by external auditors, especially if auditors have recently received negative reviews from the Public Company Accounting Oversight Board (PCAOB).

  • Executives say ICFR guidance in the COSO framework is good, but auditors often make highly specific demands—particularly as it relates to documentation—that the guidance does not address, Mr.  Wilks said, “leaving financial executives with little redress.
    • “And they’re doing it because the PCAOB is hovering over them,” he added.

Technology to the rescue? Study respondents pointed to technology’s help in addressing ICFR challenges, although for cost centers like finance, insufficient funding is an issue. Mr. Wilks noted that in addition to purchasing the technology itself, corporate finance teams’ often ad hoc processes must be cleaned up. 

  • “What treasury may not understand and what we’re hearing from controllers is that if you want to improve the technology around controls you have to first fund improving the controls,” he said. “Once those processes are cleaned up, the technology can automate them.”

Mostly plusses, a few big minuses. Implementing a treasury management system (TMS) to more efficiently track treasury activities may be an early step on the way to reducing ICFR risks, and other, emerging technologies like AI and blockchain may play a role.

  • Some of the ICFR risks that technology could reduce, according to survey respondents, include failures to detect material misstatements, internally and by external auditors; unauthorized alterations of accounting information; and failures to prevent material misstatements.
  • The biggest challenge in adopting new technologies is finding personnel qualified to use the technology. “Executives tell us everyone is looking for people with accounting and IT talent,” Mr. Wilks said.
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Cutting the Cord: When Banks Plan to Stop Making Libor Loans

A NeuGroup survey shows SOFR is the replacement rate for most banks, and many accounting systems aren’t yet ready.

The opportunity to give feedback on a plan announced in December to allow legacy USD Libor contracts to stretch to June 30, 2023—18 months beyond the initial deadline—ended Monday. Almost everyone expects Libor’s administrator to make it official and is planning accordingly.

  • At a recent meeting of the Bank Treasurers’ Peer Group, NeuGroup members reviewed the results of a survey on their plans for the transition away from Libor.

A NeuGroup survey shows SOFR is the replacement rate for most banks, and many accounting systems aren’t yet ready.

The opportunity to give feedback on a plan announced in December to allow legacy USD Libor contracts to stretch to June 30, 2023—18 months beyond the initial deadline—ended Monday. Almost everyone expects Libor’s administrator to make it official and is planning accordingly.

  • At a recent meeting of the Bank Treasurers’ Peer Group, NeuGroup members reviewed the results of a survey on their plans for the transition away from Libor.
  • The survey showed that most members (62%) said their bank is most likely to use SOFR in place of Libor, while 28% expect to use a mix of rates.
  • On the key question of when the banks will stop originating loans priced off of Libor, none of the respondents said they’ll cease this quarter. As the first pie chart below shows, 86% of the banks will cut the cord in the second half of 2021, split evenly between the third and fourth quarters.

The calculation conundrum. The second pie chart reveals that only one-third (34%) of the banks responding said their loan accounting systems are currently able to handle SOFR calculated in arrears. System readiness for the transition is among the the most challenging issues facing both banks and corporates.

How to bill customers? The final question of the survey asked treasurers how their banks plan to bill customers for loans set in arrears. Here are excerpts from some of the written responses, edited for length and clarity.

  • “The bank will send an interest bill about two weeks before the payment date, with an estimated amount due using the last daily reset variable rate, plus a credit spread for an estimated interest rate. Any difference between the interest actually accrued and paid (based on the estimate) will be adjusted in the next period.”
  • “We plan to give them an estimated amount assuming flat rates mid-month, then bill them in arrears using actual rates. This will at least give them a ballpark estimate of what to expect.”
  • “By using an outsourced solution until vendor readiness is reached.”
  • “We are hoping that a forward SOFR rate develops and is widely accepted.”
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Pension Endgames: Insights for Managers Mulling Moves

A session sponsored by Insight Investment probes pros, cons and timing of transferring liabilities to insurers.

A key consideration for corporates with traditional defined benefit plans is whether to transfer pension liabilities to insurance companies as funding deficits narrow or plans go into surplus. The primary benefits of risk transfer are eliminating PBGC fees, which have escalated substantially in the last few years, and removing all risk from the company’s balance sheet—both interest rate and longevity risk.

A session sponsored by Insight Investment probes pros, cons and timing of transferring liabilities to insurers.

A key consideration for corporates with traditional defined benefit plans is whether to transfer pension liabilities to insurance companies as funding deficits narrow or plans go into surplus. The primary benefits of risk transfer are eliminating PBGC fees, which have escalated substantially in the last few years, and removing all risk from the company’s balance sheet—both interest rate and longevity risk.

  • Half of the members surveyed at a recent meeting of NeuGroup for Pension and Benefits sponsored by Insight Investment are undecided on the desired end-state of their plans (see chart below).
  • NeuGroup senior executive advisor Roger Heine moderated a discussion of the advantages and drawbacks of liability transfers and provided the key takeaways and analysis that follow.

Cost is the key concern. How much insurance companies charge corporates to take liabilities off their hands is the primary consideration for pension fund managers.

  • The amount charged reflects the insurer’s expected return on equity (ROE), and that typically leads to pricing that exceeds the accounting valuation of the pension liability used by the corporate.
  • Insight Investment says the “spread premium” insurers are currently charging to generate adequate ROE ranges from about 60 basis points for older, retired participants to up to 100 basis points for active employees.
    • So non-retiree pools can look prohibitively expensive to transfer relative to holding a matching fixed income portfolio.
  • Members are aware that risk transfers in many cases are more expensive than managing a plan in-house, which is also called taking a hibernation or self-sufficiency approach.

Be ready for opportunities to lower costs. Companies may have the potential to transfer risk at a lower cost when corporate bond spreads widen, as they did briefly in early 2020 following the spread of Covid-19. That makes bonds cheaper for insurers to buy and increases the discount rates they apply to the pension liability.

  • Heightened competition makes insurers hungry to win risk transfer deals, which can also reduce pricing.
  • So it may make sense for corporates to complete all the work necessary before a risk transfer so the company is ready to move forward quickly if and when pricing becomes more favorable.

Lessons learned. The session benefited from one member who has recently executed a significant risk transfer and another who is seriously considering one and has many questions. This brought out several interesting observations:

  • The entire exercise is complex and can take six to seven months to complete after board approval.
  • There are experienced third party advisors and experts that can do the heavy lifting, know the other players and will execute well, avoiding the need for additional company staffing for the project.
  • Cleaning up the participant database is key, but records are generally already in good shape where participants are already receiving benefits.
  • Hiring a bank to hedge the execution cost makes the transaction feasible despite market volatility.   
  • Surprisingly, the only retirees who complained at the company that did a partial transfer were those who did not make the transfer pool; they would have preferred exposure to an insurance company with a household name.
  • The company took a charge on writing off unamortized losses but the market and equity analysts disregarded it.
  • The liabilities typically get transferred into a separate account within the insurance company where the plan assets directly protect the participants should the insurance company get into trouble.

Intermediate steps towards risk transfer. Risk transfer of participants with small balances—roughly a benefit of less than $500 a month—has been popular because of tangible positive NPVs from saving per-participant PBC fees (now $86 annually).

  • Voluntary lump sum offers to retirees or terminated-vested participants can be more economical than insurance company risk transfer because participants don’t get additional premium for a required return on equity. 
  • A lump sum offer can also provide an alternative to participants who may not want to be transferred to an insurance company.  But companies need to be careful not to offer lump sums too frequently, or they may be deemed a component part of the plan requiring regular offers.
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Libor Transition Puzzle: FASB Provides Clarity, Relief to Corporates

Guidance from FASB clarifies accounting for all hedges impacted by the discounting transition.

The Financial Accounting Standards Board (FASB) started 2021 by clarifying accounting guidance aimed at facilitating the transition of corporate floating-rate transactions away from the Libor reference rate. The standard setter is also expected to resume progress this year on issues it had set aside to address the Libor transition.
 
Background. On Jan. 7, FASB issued ASU 2021-01, an accounting standards update that clarifies issues stemming from Topic 848, titled Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The Topic 848 guidance, issued in March 2020, eased the potential accounting burden arising from reference rate reform. The clarifications provide corporates with operational relief as they pursue transactions.

Guidance from FASB clarifies accounting for all hedges impacted by the discounting transition.

The Financial Accounting Standards Board (FASB) started 2021 by clarifying accounting guidance aimed at facilitating the transition of corporate floating-rate transactions away from the Libor reference rate. The standard setter is also expected to resume progress this year on issues it had set aside to address the Libor transition.
 
Background. On Jan. 7, FASB issued ASU 2021-01, an accounting standards update that clarifies issues stemming from Topic 848, titled Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The Topic 848 guidance, issued in March 2020, eased the potential accounting burden arising from reference rate reform. The clarifications provide corporates with operational relief as they pursue transactions.
 
Discounting relief. Last October, the CME and LCH swap clearing houses changed the rate used for discounting, margining and calculating price alignment to the Secured Overnight Financing Rate (SOFR), which has been referred to as the “discounting transition.” That provided a major boost to SOFR, which regulators and major financial institutions have promoted as the replacement for USD Libor.

  • However, concerns arose among market participants that the discounting transition impacted trades that did not reference Libor. They questioned the scope of Topic 848 and whether there were possible hedge accounting consequences.
  • For example, the index is not expected to change for centrally cleared Federal Funds interest rate swaps. However, they were impacted by the discounting transition, prompting questions whether those contracts required reassessment.
  • In ASU 2021-01, “The FASB clarified that trades affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848,” said Brittany Jervis, head of Chatham Financial’s corporate accounting advisory practice.

Saving net investment hedges. Stakeholders also raised concerns that “float-to-float” cross-currency swaps involving receive-variable rate and pay-variable rate legs could, under reference-rate reform, lead to a difference in repricing dates and intervals, disqualifying certain net investment hedges. The recent ASU clarifies that the discrepancy can be disregarded.

  • “The ASU allows companies to make an optional election that permits them to continue with the original designation,” Ms. Jervis said.  “So any of these trades that previously qualified as net investment hedges would continue to qualify and would not need to be de-designated and marked to market.”

What to watch out for. Under the original Libor cessation date, FASB’s Topic 848 guidance had a sunset date of Dec. 31, 2022. The ICE Benchmark Administration’s current proposal to extend support of Libor to June 30, 2023 would give corporate treasury more time to transition existing financial products priced over Libor to SOFR or other alternative reference rates. FASB is expected to consider pushing the sunset date of its guidance past that. 

Another hedging issue. With accounting changes around reference rate reform completed, other issues may advance. One is accounting for changing the hedged risk in a cash flow hedge, say, from one-month Libor to three-month Libor. Prior to ASU 2017-12, guidance triggered a de-designation of the hedging relationship and potential forecasting considerations when the hedged risk changed, putting hedge accounting treatment at risk.

  • FASB issued a proposal in 2019 to help clarify guidance allowing hedge accounting to continue when the hedged risk changed, as long as the hedge met the criteria to remain “highly effective,” raising concerns about the proposal’s application.
  • “FASB has been working on further clarifications based on feedback, and they’re hoping to issue that this year, now that they’ve wrapped up the ASU on reference rate reform,” Ms. Jervis said.
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Talking Shop: What is Your Cash Flow Coverage Target?

Member question: “Looking to take a quick pulse of the group. What is your cash flow coverage target for your current fiscal year period? Coverage can be defined as hedges placed vs. earnings exposure estimate or maximum hedge accounting capacity.

  • “Our cash flow hedges are currently covering ~70% of our entire estimated earnings exposure (which closely aligns with our max hedge accounting capacity). This is up significantly from two years ago and is the culmination of a huge effort. Wanting to understand if this is within a normal range since I’m [being asked] to push coverage higher.

Member question: “Looking to take a quick pulse of the group. What is your cash flow coverage target for your current fiscal year period? Coverage can be defined as hedges placed vs. earnings exposure estimate or maximum hedge accounting capacity.

  • “Our cash flow hedges are currently covering ~70% of our entire estimated earnings exposure (which closely aligns with our max hedge accounting capacity). This is up significantly from two years ago and is the culmination of a huge effort. Wanting to understand if this is within a normal range since I’m [being asked] to push coverage higher.

Peer answer 1: “Our policy allows us to hedge up to 80% of the current year’s exposure in a cash flow program.”

Peer answer 2: “We target 40-60% but can go as high at 75%, one year and in.”

Peer answer 3: “Our coverage targets depend on our position (long or short) and our views on if the currency is expected to come our way or if it is moving against us. We are allowed to hedge up to 100% of our rolling 12-month net cash flow currency exposures. We watch very closely if we get between 70%-80% of our accounting cash flow exposures.”

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Tear Down, Rebuild: A Treasurer Lays a Foundation for Best Practices

How a newly hired treasurer revamped her company’s capital structure, banking group and her team. 

Soon after arriving at a fast-growing midsized multinational company, a newly-hired treasurer with extensive experience in loan restructurings and amendments launched a loan compliance cleanup. That was the first step on the path to establishing best practices at a company that had never had a treasurer with experience in treasury.

  • The treasurer described what she did and her thinking at a recent meeting of NeuGroup’s Treasurers’ Group of Thirty and in a follow-up interview.
  • While each company’s situation is different, this member’s experience provides insights for peers committed to implementing new treasury practices, policies and procedures that meet an expanding business’s rapidly changing needs and help set it on a course for more growth.

How a newly hired treasurer revamped her company’s capital structure, banking group and her team. 

Soon after arriving at a fast-growing midsized multinational company, a newly-hired treasurer with extensive experience in loan restructurings and amendments launched a loan compliance cleanup. That was the first step on the path to establishing best practices at a company that had never had a treasurer with experience in treasury.

  • The treasurer described what she did and her thinking at a recent meeting of NeuGroup’s Treasurers’ Group of Thirty and in a follow-up interview.
  • While each company’s situation is different, this member’s experience provides insights for peers committed to implementing new treasury practices, policies and procedures that meet an expanding business’s rapidly changing needs and help set it on a course for more growth.

Triage, fixes, goals. The treasurer’s knowledge of loan covenants, operational limitations in credit agreements, technical defaults and compliance certificates allowed her to quickly conclude that the loan compliance situation needed immediate attention. “I saw there were some things that we needed to fix,” she said. The good news: “There was an understanding at the company that this was an area that needed an upgrade and a fresh set of eyes,” she said.

  • Following a relatively “easy negotiation” with banks over cleaning up the credit agreement, the treasurer set about stress test modeling on the company’s credit facility and reviewing existing covenants.
  • She then seized the moment to initiate significant changes as she engaged with senior management and the board to focus their attention on the strategic importance of capital structure.
  • Before embarking on projects of this scale, “You have to be mindful of the time frame to achieve your goals,” the treasurer advises. Ask yourself, “What can you realistically accomplish within the first 12 to 24 months to get some quick wins?
  • “And thinking to the future, what is it you need over the next couple years to really expand what you’re doing? When you go into these new situations and you’re in a rebuilding mode, you’ve got to show some accomplishments.”

New terms, new flexibility. Her goals set, the treasurer realizedwe needed to have more flexibility within our capital structure given the size of the company and the fact that we were much more global than we had been several years prior. And I knew that we needed to work with more than just two banks.

  • “It was all about crafting a credit agreement that would work with not only where the company was, but where it’s going,” she said. “The company had very good financial performance so it was really the right time to lay out what it is we needed, what were the exact terms that we were looking for.”
  • The revamped capital structure now features a five-year credit facility and a seven-year term loan. “It was really structuring this so we could have a good runway for the next couple of years.”
  • As a result, “Our pricing went down and our flexibility went up because I took it out to four or five different banks who came back and presented term sheets to us. We also bid out the international banking business at the same time.” The company used its newfound flexibility relatively soon, she said, declining to elaborate.

The people part. The member also put her stamp on the treasury team. “The positions needed to be reworked, the personnel needed to be switched out, essentially,” the treasurer said. Among her moves:

  • The elimination of an assistant treasurer position, in part because of overlapping capabilities with the treasurer.
  • An “opportunistic hire” of a senior manager of treasury with international experience at a large tech company looking for broader treasury experience.
  • The creation of a cash manager position staffed by someone in the company’s accounts receivable area who had treasury experience.
  • “What worked out well for me is I was able to use a combination of internal and external people. I didn’t go 100% external, and that was important, at least within our organization,” the treasurer said.

In focus now. Having laid a solid foundation for treasury, the member has her team focused on investment policy, cash forecasting and position, assessing foreign exchange risk and other areas requiring “some more refinement,” she said.

  • After tackling big areas like capital structure and bank groups, treasurers have to meet the challenge of showing senior management the value of addressing other areas that may seem less exciting or important.
  • The engagement this requires is made more difficult by the pandemic, working from home and the absence of “informal communication,” the member noted.

Needed: support, hard work. Not surprisingly, the feasibility of entering a new company and revamping the capital structure and the banking group and making other major changes requires the support of senior management.

  • “You’ve got to have the support from your manager to really go in and assess what is existing, what are the positions, what is the structure, what do you need immediately to accomplish your goals,” the treasurer said.
  • Don’t underestimate the amount of work involved in pushing a company to shift gears and adopt best practices. And then make the most of the opportunity.
  • The treasurer told herself, “You don’t get to do this a lot. It’s kind of an unusual experience and even though it’s a lot of work I’m going to take advantage of it.”
  • Sure enough, “It was a lot of work, it took a lot of energy,” she said. “But I think it has paid a lot of dividends for the company.”
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Borrowing Authority and the Board: How Often Do You Renew?

NeuGroup’s survey results on the frequency of borrowing authority renewals, use of carve-outs for M&A and more.

Nearly two-thirds of the treasurers responding to a recent NeuGroup survey renew their borrowing authority with the board on an ad hoc or as-needed basis, while about one-third do it every year. That’s shown in the first pie chart below.

  • But at a follow-up meeting to discuss the results, the general consensus seemed to be that an annual review made the most sense, as it can be part of the overall conversation with the board regarding capital structure.
  • The second chart shows that for the majority (59%) of companies that responded, the full board grants borrowing authority, with the finance committee of the board playing that role at 29% of the companies.

NeuGroup’s survey results on the frequency of borrowing authority renewals, use of carve-outs for M&A and more.

Nearly two-thirds of the treasurers responding to a recent NeuGroup survey renew their borrowing authority with the board on an ad hoc or as-needed basis, while about one-third do it every year. That’s shown in the pie chart on the left, below.

  • But at a follow-up meeting to discuss the results, the general consensus seemed to be that an annual review made the most sense, as it can be part of the overall conversation with the board regarding capital structure.
  • The second chart shows that for the majority (59%) of companies that responded, the full board grants borrowing authority, with the finance committee of the board playing that role at 29% of the companies.

Context. The importance of borrowing authority flexibility was underscored at another NeuGroup meeting in 2019. The takeaways then included:

  • Winning authority from the board to go to capital markets opportunistically is a best practice. Treasury needs to have authority from the finance committee to refinance or issue debt when market stars are in alignment. This provides the flexibility to act fast, and members agreed it’s ideal for everyone as long as there’s full transparency between treasury and the board of directors.

Other observations from the more recent meeting:

  • Some companies with a specified dollar amount ceiling for borrowing have carve-outs which do not require additional approval for purposes such as M&A financing, where borrowing needs are discussed during the normal evaluation and approval process.
  • Members do not share details of their borrowing authority with the rating agencies, but rather provide a range of borrowing which might occur in the upcoming year.
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Learning New Strokes: A Treasurer Adds Tax to Her Skill Set

One NeuGroup member has “had to learn from doing” to tackle tax—and also tap internal and external experts.

When the head of tax at a midsized multinational company left to take another job a couple of years ago, the CFO tapped the treasurer to run tax, too. The treasurer shared some of the challenges she faced and how she addressed them at a recent meeting of the Treasurers’ Group of Thirty and in a follow-up interview.

A difficult beginning. Three of four junior tax staffers also ended up departing, leaving the treasurer with only one other tax person after being in the tax job for just a month. “That was obviously pretty difficult,” she said. “I literally had to do two jobs because we didn’t have many people at first.”

One NeuGroup member has “had to learn from doing” to tackle tax—and also tap internal and external experts.

When the head of tax at a midsized multinational company left to take another job a couple of years ago, the CFO tapped the treasurer to run tax, too. The treasurer shared some of the challenges she faced and how she addressed them at a recent meeting of the Treasurers’ Group of Thirty and in a follow-up interview.

A difficult beginning. Three of four junior tax staffers also ended up departing, leaving the treasurer with only one other tax person after being in the tax job for just a month. “That was obviously pretty difficult,” she said. “I literally had to do two jobs because we didn’t have many people at first.”

  • The exodus also changed the nature of the role senior management had initially intended the treasurer to play in tax. “At the time, they thought that it would be more of a management role for me; whereas with the departure of all those people and a new set of eyes, it became much more of a rebuilding cleanup exercise than a pure managerial exercise,” she said.

A key hire with an accounting background. Senior management combined the roles in part because “there was enough crossover between the two disciplines that it made sense to have a more unified approach,” the treasurer said. But when it comes to matters of tax compliance, GAAP tax provision, tax returns and audit defense, there is little crossover with treasury, she said.

  • “I ended up going out and hiring a really ‘heavyweight’ director of tax,” she said. “And one of my requirements was that they had to have a CPA. Because there’s two types of people out there in the tax world. There’s the CPAs and then the lawyers. We didn’t have enough structuring going on at our company to warrant a legal background. We really needed the accounting background.”
  • Her advice to peers building in-house tax teams: “If you are going to build internally, you need to get someone very heavy underneath you.”

Scaling the learning curve. To learn what she needed to know about tax, the treasurer posed lots of questions to her tax director and, when necessary, the company’s outside tax auditor. And, like a lot of learning, much is done on the job. “I had to learn from doing,” she said, including the analysis of the implications of a tax and legal structure proposed by the company’s outside auditor.

  • “I felt like I was really good at asking questions. And I felt like I could sort of think the way tax people think. But when you just don’t have the fundamental subject matter expertise, that’s where it gets difficult because you haven’t done the tax return yourself.”

The need to pick your spots. Making the transition to running tax and treasury requires deciding how much effort to devote to mastering tax concepts. “The tricky thing as a manager going from treasury to tax is how much time do you invest in that stuff,” the member said. “Because learning about these tax concepts is complicated and most things are not 10-minute discussions, it’s 20- or 30-minute discussions, at a minimum.

  • “I have to pick and choose how much I want to learn. I’m never going to be a tax professional and sit and do a tax return for a multinational company. I have no desire to do that and I won’t do that,” she added.

When wearing two hats pays off. The treasurer’s knowledge of repatriation of cash, global cash forecasting and cross-border investments has proven valuable in her management of this multinational’s tax team.

  • “Whenever there is cross-border, you have to involve tax,” she said. “So as we look at cross-border investments around the world and repatriating cash, now that I know more about the tax elements, I can really represent both areas at meetings and we don’t have to have yet another tax person on the call.
    • “So our tax director can focus on the stuff he needs to be working on and then I can go back to him for clarification or ask him to work on certain things.”

When outsourcing makes sense. The company does most of its domestic tax work in-house, but outsources transfer pricing studies to its outside auditor in addition to having the firm review other complicated, international tax matters. In response to a question from a peer at the meeting, she said, “Outsourcing is very expensive when you talk to the big four firms.”

  • The company outsources more in its operations abroad, including the preparation of tax returns and value-added tax (VAT) payments.

Dividing her time. When the treasurer took over tax, the company was in the midst of a global tax restructuring that required her to spend 80% to 90% of her time on tax. Her goal for 2021 is to spend 20% to 30% on tax and the rest on treasury.

  • “But I’d be happy if I could get down to 50% on average,” she said.
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Sign of the Times: Retailers Say Coin Shortage Worries Persist

Burned by a dearth of coins during the pandemic, many retailers are cautious despite some signs of stability.

“Cash-mageddon” is how one member at a recent meeting of NeuGroup for Retail Treasury described the havoc wreaked by the coin shortage that made life hellish for many retailers last year. And despite signs of normalization and increased production by the US Mint (see below), some members remain unconvinced that the coin supply disruption caused by the pandemic is truly over.

Burned by a dearth of coins during the pandemic, many retailers are cautious despite some signs of stability.

“Cash-mageddon” is how one member at a recent meeting of NeuGroup for Retail Treasury described the havoc wreaked by the coin shortage that made life hellish for many retailers last year. And despite signs of normalization and increased production by the US Mint (see below), some members remain unconvinced that the coin supply disruption caused by the pandemic is truly over.

Cautious about outlook. “The Fed hasn’t really given any new updates, so I would not take your sign down,” one member said, referring to the ubiquitous signs asking customers to use exact change or telling them to use credit or debit cards. One company resorted to giving out gift cards as change.

  • Another member whose company sometimes went weeks without a new coin delivery echoed the caution voiced by her peer.  “I’m uber-sensitive to coin; it was incredibly draining for our stores,” she said. “We’re at a point where it’s stable, but given all the uncertainty, keep your signs up, maybe to save you from having to reprint them.”
  • A third treasurer remarked that because the coin shortage stems from a circulation issue, if Covid protocols send consumers back online and away from physical stores, he “doesn’t see us being through it.”
    • The member said his company is completely reliant on courier services to deliver new coin to brick-and-mortal locations, and if for some reason there is an issue with the courier, the coin shortage would return. “It feels like they don’t have enough built-up inventory, they’re just using up what they have for that day,” he said.

Courier issues. Other members who use couriers for cash pickup and delivery said they share similar worries after years of inconsistent service, even before the pandemic.

  • When the coin shortage worsened last summer, couriers were hit hard as well, sometimes going up to 10 days without service for retailers. Though delivery has improved to a level that one member called “stable,” it still is not meeting some corporates’ needs.
  • “I’m being incredibly frustrated by the quality and level of service of these companies,” one member said. “I’m trying to be sensitive to their situation, I’m guessing their business is declining. They’re claiming there are driver shortages due to Covid, but sometimes we are going weeks without pickup.”

An unplanned stress test. One member said because the coin shortage became a large pain point, it served as something of a stress test, showing companies just how much they could take and providing a warning to prepare for all scenarios.

  • Another member said she is now preparing buffers and sensitivity analysis for her company, planning for the possibility of another lockdown.
  • “We’re thinking through a lot of the things we probably thought would never happen,” she said. “I don’t think anyone ever thought that we wouldn’t have coin, so when it stopped showing up, that was devastating to our stores. We had to be nimble and quick.”
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Calmer Seas: Revolvers Recover, Return to Pre-Covid Pricing, Tenor

Upfront fees are higher, but treasurers renewing facilities see reason for optimism; U.S. Bank is also positive.

Multiyear tenors for revolving credit facilities are now available to investment-grade (IG) corporate borrowers, according to several NeuGroup members who have been talking to their bankers recently. This week, one treasurer said, “Things have normalized a fair amount for solid credits,” citing a large bank.

Upfront fees are higher, but treasurers renewing facilities see reason for optimism; U.S. Bank is also positive.

Multiyear tenors for revolving credit facilities are now available to investment-grade (IG) corporate borrowers, according to several NeuGroup members who have been talking to their bankers recently. This week, one treasurer said, “Things have normalized a fair amount for solid credits,” citing a large bank.

  • This member, who was in the process of renewing his company’s revolver last year when Covid hit, is now deciding when to “pick it back up” and wanted to know what his peers have heard.
  • “Multiyear is back,” said one of them.

Longer tenors. “It sounds like five years is back on the table,” said another treasurer. She works for a company that postponed extending the tenor and raising the amount of its revolver last year.

  • This treasurer—whose company is a “new IG credit”—recently circled back with traditional lenders and said, “The reception’s been good,” noting that she got very little pushback to her plans to restructure the revolver.

Is the price right? The company did not get quotes, but “pricing appears to have settled down,” the member said. Another treasurer said upfront fees remain higher than before Covid, adding “how much you can push that” depends on your relationship with the banks and, of course, the size of your wallet.

  • This treasurer said some banks want funded facilities now that revolver drawdowns have been repaid. They are eager to increase assets and have a healthy risk appetite, he said, adding that they all want higher fees.

U.S. Bank’s analysis. NeuGroup Insights reached out to Jeff Stuart, head of capital markets at U.S. Bank, who keeps close tabs on the revolver market. Here are his observations:

  • The market for large-cap investment-grade revolving credit facilities has largely recovered to pre-Covid levels in terms of both pricing and tenor, with many borrowers executing five-year renewals at pre-Covid pricing levels.
  • U.S. Bank is seeing higher upfront fees pretty much across the board, one to three basis points for the higher-rated names.
  • The market is a bit sector- and ratings-specific, with higher impacted sectors still exacting a pricing premium, and more bank caution around lower investment-grade borrowers.
  • Some sectors, like utilities, have been slower to normalize despite their relative credit quality, with discussions going to five-year tenors only just recently.
  • On the bank side, there seems to be a higher post-Covid emphasis on returns, with a specific focus on available ancillary business, particularly by smaller regional banks.
  • U.S. Bank expects the trend toward a full return to pre-Covid terms on revolving credits to continue amid recovery overall during the first half of 2021. But it will continue to vary by situation and sector.

Sustainability-linked revolvers anyone? Back at the meeting, one treasurer raised the issue of revolving credit facilities whose terms are linked to the company achieving sustainability goals, unlike green bonds or loans whose proceeds must be used for sustainable purposes (see next story).

  • He has not seen the value in the idea, saying the savings for hitting the targets are minimal, a few basis points at most. “The net benefit is not good enough” given the incremental cost, he said. Another treasurer agreed that “treasury is not driving” the move by some companies to use sustainability-linked revolvers.
  • One treasurer drew laughs when he said his efforts to research “green revolvers” with a Google search turned up images of green handguns.

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Green Hedges: What You Need to Know About ESG Derivatives

Standard Chartered explains the potential value of “use of proceeds” and performance-linked ESG derivatives.

The flood of money pouring into ESG finance—everything from green bonds to sustainability-linked revolving credit facilities—has washed up on the shores of derivatives markets. At a recent NeuGroup meeting of European treasurers, sponsor Standard Chartered dove beneath the surface to reveal what value ESG derivatives may offer. The bank described two types:

  • “Use of proceeds” ESG derivatives that hedge FX or interest rate risks arising from ESG financing and are ring-fenced as hedges referencing a specific loan or bond.
  • ESG performance-linked derivatives that link a payoff with ESG metrics or key performance indicators (KPIs).
    • The sustainability metrics are determined by a third party’s score or index or by the corporate itself.

Standard Chartered explains the potential value of “use of proceeds” and performance-linked ESG derivatives.

The flood of money pouring into ESG finance—everything from green bonds to sustainability-linked revolving credit facilities—has washed up on the shores of derivatives markets. At a recent NeuGroup meeting of European treasurers, sponsor Standard Chartered dove beneath the surface to reveal what value ESG derivatives may offer. The bank described two types:

  • “Use of proceeds” ESG derivatives that hedge FX or interest rate risks arising from ESG financing and are ring-fenced as hedges referencing a specific loan or bond.
  • ESG performance-linked derivatives that link a payoff with ESG metrics or key performance indicators (KPIs).
    • The sustainability metrics are determined by a third party’s score or index or by the corporate itself.

Case studies. Standard Chartered’s presentation included several examples of how ESG derivatives can be used.

  • A company using an FX forward to hedge export pricing in Asia that will receive a discounted FX rate if it meets ESG targets which support the United Nations Sustainable Development Goals.
  • A company enters into an interest rate swap where the credit spread is linked to the corporate’s sustainability performance as measured annually by Sustainalytics.
  • A company enters into a cross-currency basis swap with a bank where either party’s interest rate payments can rise if they don’t meet their sustainability targets.

Any takers? While NeuGroup members expressed interest in the topic, it’s unclear if treasury teams are ready to embrace ESG derivatives since many companies are still figuring out where green bonds or sustainability-linked loans or revolvers fit in their sustainability plans.

A poll at the meeting revealed the low percentage of companies that have given treasury a specific sustainability mandate or have linked ESG to performance (see below).

One of the Standard Chartered bankers said the fact that almost half of those polled expect performance to be tied to ESG initiatives within one to three years was better than he expected and was “encouraging.”

  • An outside risk management consultant asked by NeuGroup Insights about the firm’s clients said, “It’s actually a new enough market development that we haven’t seen a lot of corporates exploring the use of ESG derivatives just yet.” Stay tuned.
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Fertile Ground: Capital Markets Look Good for Growing Tech Companies

Bank of the West/BNP Paribas sees inviting conditions for young companies raising capital in 2021.

Capital markets bounced back strongly in the second half of 2020, with soaring levels of convertible bond deals and a healthy climate for IPOs and high-yield bonds. Favorable conditions will continue to benefit emerging technology companies this year, according to Bank of the West/BNP Paribas, sponsor of the fall meeting of the Tech20 High-Growth Treasurers’ Peer Group.

Bank of the West/BNP Paribas sees inviting conditions for young companies raising capital in 2021.

Capital markets bounced back strongly in the second half of 2020, with soaring levels of convertible bond deals and a healthy climate for IPOs and high-yield bonds. Favorable conditions will continue to benefit emerging technology companies this year, according to Bank of the West/BNP Paribas, sponsor of the fall meeting of the Tech20 High-Growth Treasurers’ Peer Group. Highlights:

Low high-yields. Volatility due to political tensions and a second wave of Covid cases worldwide put a damper on the high-yield market at the start of the fourth quarter, but the market quickly strengthened following the November election.

  • High-yield deals had reached a record $453 billion through mid-December, nearly twice the levels of 2019.
  • Yields are in record low territory, around 4.3% vs. 2019-2020 average of 6.41%, Bank of the West/BNP Paribas said, a favorable environment for high-growth companies.

Cool convertibles. The US convertible bond market hit near-record issuance levels in 2020, reaching over $100 billion, with tech companies issuing nearly half of all convertible debt (see below).

  • Even with investor-friendly deals made at the onset of the pandemic, last year had the highest conversion premium and the lowest average coupon in the last decade, creating an ideal environment for issuers.
  • The bankers said market confidence has sparked the return of 24-hour marketing periods, as opposed to pre-market launches for same day pricings.

IPOs made easier. Constructive market conditions and a faster, easier process have made initial public offerings increasingly attractive for developing companies.

  • Many members shared their positive experiences with virtual roadshows, which can take under an hour and require no travel expenses. They also give growth companies access to a broad range of US and international investors.
  • “It’s hard to see a world post-Covid where investors fly to Europe to attend investor meetings,” one member said. “I think it’s here to stay.”
  • The lag between public filing and pricing an IPO rose to a month or more, a growing pipeline that the bankers described as “a sign that issuers have more confidence in the stability of markets.”

SPACs surge. Special-purpose acquisition companies (SPACs), an alternative to IPOs, surged last year, a trend that some analysts say is likely to continue in 2021.

  • Hedge funds looking for money market alternatives in a low-yield environment boosted demand for SPACs, a positive for growing tech companies.
  • Between the high-profile success story of Virgin Galactic and a willingness of target companies to go public via a “de-SPACing” acquisition rather than a traditional IPO, SPAC issuance in 2020 alone exceeded the previous decade combined.
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Bridging a Skills Gap Facing Finance Teams as Businesses Transform

Data from The Hackett Group show more companies plan to launch talent development initiatives this year. 

The good news is that more finance teams are placing a higher priority on aligning the skills and talents of their members with changing business needs amid digital transformation. The somewhat bad news is that many of those teams currently lack the abilities necessary to make that alignment a reality.

Data from The Hackett Group show more companies plan to launch talent development initiatives this year. 

The good news is that more finance teams are placing a higher priority on aligning the skills and talents of their members with changing business needs amid digital transformation. The somewhat bad news is that many of those teams currently lack the abilities necessary to make that alignment a reality.

  • Those are among the takeaways from survey data collected and analyzed by The Hackett Group and presented at several NeuGroup 2020 second-half meetings by Nilly Essaides, senior research director for Hackett’s finance advisory practice.

Progress report. Finance teams looking ahead ranked aligning skills and talent with changing business needs among their top 10 priorities in Hackett’s 2021 Key Issues Study. That’s a sign of progress, Ms. Essaides said, given that talent development did not crack the top 10 a year earlier.

  • That fact provides context in which to evaluate the significance of 42% of finance organizations reporting they plan to launch a talent development initiative in 2021—one of several findings presented in the graphic below.
  • “I see more and more finance teams that want to own staff development rather than hanging on the coattails of HR,” Ms. Essaides said. “There’s more interest by CFOs to develop these programs.”

Pushed by the pandemic. The prioritization of skills development is also significant as it comes amid the pandemic and plans by many finance teams to cut costs and enable remote work through process automation—the number one initiative on the function’s transformation agenda for this year. 

  • “Covid has really intensified the need to go digital,” Ms. Essaides said, adding that Hackett is seeing increased use of robotic process automation (RPA) and cloud-based applications, among other signs.
  • More than 20% of the organizations surveyed plan to hire more RPA specialists, data architects and scientists, and digital transformation managers.

Falling short. The graphic also shows that more than half of those surveyed (54%) see a big gap between current and desired analytic skills. More broadly, Hackett data show that finance organizations ranked their staffs’ lack or deficiency of critical skills second among the hurdles to making “transformation progress,” Ms. Essaides noted.

  • Those critical skills include analytics, emerging technologies, process redesign, design thinking and change management.
  • Technology and process complexity ranked first on the list of hurdles and organizational resistance to change came in third.

It’s not all about analytics. It’s critical to remember that in addition to technical and analytical skills, finance team members must possess the “ability to tell a story,” as one NeuGroup member put it.

  • Other NeuGroup members and Ms. Essaides agreed on the need for so-called soft skills that form the basis of communication, the ability to negotiate and influence and bring groups together.
  • Hackett calls these “core skills,” in part to counteract the perception that soft is somehow less important than the hard skills that often overshadow qualities that are essential for leaders in finance and every other function.
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Locking Up: Preventing Cyberfraud Attacks by Identifying Weaknesses

NeuGroup members share successes and failures keeping their companies secure amid the shift to an all-digital workforce.

The all-digital work from home environment has left treasury teams more connected to their devices than ever, but also left them—and their companies—more vulnerable to fraud. But by identifying weaknesses early, teams can resolve issues before fraudsters even have a chance to strike.

NeuGroup members share successes and failures keeping their companies secure amid the shift to an all-digital workforce.

The all-digital work from home environment has left treasury teams more connected to their devices than ever, but also left them—and their companies—more vulnerable to fraud. But by identifying weaknesses early, teams can resolve issues before fraudsters even have a chance to strike.

  • Members at a recent meeting of NeuGroup’s Treasurers’ Group of Thirty discussed their approaches to prevent the threat, one that continues to worsen.
  • Fatigue caused by working from home led to a communication breakdown for one member’s company, but others reported success through their preparation.

Success stories. Many NeuGroup members reported recent close calls with cyber breaches and have implemented processes to prevent future issues.

  • One member nearly fell prey to a fraud scheme when a phishing email included highly detailed information about the company, which could have fooled an employee into providing secure information.
    • This happened because one employee innocuously posted an update on LinkedIn about the company’s goings-on, and the scammers are growing more and more advanced.
    • The member suggests encouraging employees to only share what is necessary on social media to keep malicious third parties in the dark.
  • Another member had an issue with hackers accessing the company’s internal instant messaging system, allowing them to imitate employees with “no way to verify it was them.”
    • Some members use a series of steps to authenticate accounts before accessing sensitive information, including callbacks from verified phone numbers.

“A breakdown in communication.” One NeuGroup member had this type of system in place, but a series of internal mistakes led to a loss of nearly $10,000; thankfully, the member said they were able to recover the stolen cash.

  • When a new employee was hired at the member’s company, fraudsters hacked the digital account of an actual vendor that the company uses and corresponded with the new employee from a seemingly authentic  email address.
  • Though the member’s company does use a callback authentication process, he said there were application errors “on multiple levels” and plans more frequent audits and training to identify and prevent these weaknesses in the future.
    • “Fatigue is a real issue,” another member said, recommending smaller, “bite-size” trainings for employees to prevent burnout and ensure employees apply the knowledge they learn.
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Why Internal Audit Needs to Blow Its Own Horn

Like other functions, internal audit needs to publicize its value to senior executives and the broader corporation.

After the completion of a lengthy process audit at a multinational company, the chief audit executive (CAE) reported results to the owner of that process. After a cursory review, the process owner, also a senior executive, asked, “What else have you done?”

  • The CAE was somewhat taken aback. The audit took several months and ate up lots of FTE hours. But since it only resulted in a few findings, the audited executive thought there must be more that audit was working on.

Like other functions, internal audit needs to publicize its value to senior executives and the broader corporation.

After the completion of a lengthy process audit at a multinational company, the chief audit executive (CAE) reported results to the owner of that process. After a cursory review, the process owner, also a senior executive, asked, “What else have you done?”

  • The CAE was somewhat taken aback. The audit took several months and ate up lots of FTE hours. But since it only resulted in a few findings, the audited executive thought there must be more that audit was working on.

A need for self-promotion. This led the CAE to question how familiar management is with audit’s work. “We have not done a good job of selling audit” to management, he said, adding that his task now was to “reeducate the management team about the value of internal audit.”

  • To be sure, audit departments do not need to prove or explain themselves to management. Most, if not all, report directly to the audit committee of the company’s board. Their budgets in most cases are growing and not shrinking.
  • Still, administratively they typically report to the CFO, so there is some explaining to do when it comes to budget allocations. Nonetheless, this auditor felt that management needed to know more about what internal audit (IA) does and the benefits it can bring.

Stepping up. At another company, the auditor has seemingly cracked the code when it comes to showing IA’s benefits. This company, a serial acquirer with a tight fist when it comes to budgets across the company, wanted to cut its external auditor budget by 15%. When its external auditor balked at the request, IA stepped up to fill in any gaps. This saved the company millions of dollars.

  • This same auditor took a close look at the company’s licensing relationships and found many of the deals out of date or companies out of compliance with the terms of their contracts. Thus, the IA team was able to claw back several million dollars in fees. The same was done with supplier performance agreements.
  • All of these efforts were well received by senior management and, best of all, the chief executive.

Best foot forward. While some IAs have struggled with promoting their skills and value to the rest of the company, in some cases, Covid has allowed them to shine. Many IAs, forced to change audit plans at the outset of the pandemic (not stopping or canceling audits, but slowing timelines), have been able to do extra work outside of their purview.

  • This includes assisting with Covid response, data analytics, accounting or lending out FTEs to help in other functions where there is a need. This showed other parts of the organization all the good IA can do.
  • Consulting is on the docket in 2021 for the first auditor. He said IA is going to work on and highlight “what the value is we can bring beyond the X amount of audits and findings,” which he hopes to accomplish by doing more consultative projects. 
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Talking Shop: Derivative Regulatory Compliance in Hedging Programs

Member question: “Our hedging programs have trading entities in multiple jurisdictions requiring continual monitoring of derivative regulatory compliance regulation. This is mostly handled internally, leveraging external counsel to advise on specific topics and questions.

  • “How do others manage derivative regulatory compliance such as EMIR (European Market Infrastructure Regulation), FMIA (Financial Market Infrastructure Act) and others? Do you outsource, handle internally, hybrid solution or is it not applicable? Are there advisors that you would recommend?”

Member question: “Our hedging programs have trading entities in multiple jurisdictions requiring continual monitoring of derivative regulatory compliance regulation. This is mostly handled internally, leveraging external counsel to advise on specific topics and questions.

  • “How do others manage derivative regulatory compliance such as EMIR (European Market Infrastructure Regulation), FMIA (Financial Market Infrastructure Act) and others? Do you outsource, handle internally, hybrid solution or is it not applicable? Are there advisors that you would recommend?”

Peer answer 1: “My company is similar; predominantly navigated internally with legal’s assistance as needed.”

Peer answer 2: “Response from our derivatives manager:

  • “We monitor internally in treasury and at our regulated financial units (typically through either internal legal or accounting/compliance groups, and this in the past has sometimes been a reactive position rather than proactive).
  • “Sometimes the banks may notify us of a change; I’ve seen this in the onshore highly regulated markets due to the local complexities/language/access to regulation, etc.—Brazil, India, China, Thailand.
  • “For the US and European market regulations, there are a few representatives that have actively participated in the Coalition for Derivatives End-Users run by Gibson Dunn.”
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Learning a New Language: Tax Experts Who Become Treasurers

Insights and advice from a tax professional who left her comfort zone to become treasurer. 

A “steep learning curve” is how one member of NeuGroup’s Treasurers’ Group of Thirty (T30) who has extensive experience in tax described what she encountered in taking on the added responsibility of treasury at her company at a recent meeting sponsored by Standard Chartered.

Insights and advice from a tax professional who left her comfort zone to become treasurer. 

A “steep learning curve” is how one member of NeuGroup’s Treasurers’ Group of Thirty (T30) who has extensive experience in tax described what she encountered in taking on the added responsibility of treasury at her company at a recent meeting sponsored by Standard Chartered.

  • She is one of several members in the group who previously led tax teams and are relatively new to leading treasury. Below is a Q&A the treasurer had with NeuGroup Insights following the meeting, edited for space and clarity.

Q: What has made taking over treasury a tall order for someone with a deep background in tax?

A: While both are financial disciplines, a different language can be spoken and there can be different norms for various interactions, aside from the difference in general education for the roles.

  • I remind myself that I didn’t earn the treasurer role based on my finance background, but rather my ability to build and motivate teams, learn quickly and distill complex topics into understandable language for stakeholders—along with strong communication and leadership qualities.

Q: What are the biggest challenges you’ve faced moving to treasury from tax?

A: Being entirely out of my comfort zone. When presenting to our board on tax matters, I know I’m the expert in the room, which allows a certain confidence.

  • With treasury topics, I’m not the expert and have realized I second-guess myself, which can impact confidence in leading the discussion.
  • And given that I took on treasury in January 2020, Covid was a huge challenge in March/April/May and continues to require ongoing focus.  

Q: How have you scaled the learning curve to get a grip on treasury—peers, colleagues, other sources of information?

A: I was extremely clear with my CFO when agreeing to take on treasury that it was not my wheelhouse and his support and expertise would be critical.

  • He and I work closely together and I also have a very bright and steady assistant treasurer with a finance background. Our styles mesh well and his background is complementary to mine.
  • T30 has been helpful to meet others in similar roles; I’ve sought advice from others which has been very helpful. Our banking group has provided valuable insight and support, too.

Q: How has your tax background aided your transition to running treasury? How do the two areas complement each other?

A: In tax, I learned to be comfortable making decisions with partial (but best available!) information; avoiding analysis paralysis. This arises extremely often in treasury as well, be it cash management, insurance renewals, debt.

  • I work to keep things simple in both areas; if I can’t explain it to the CFO and others clearly and concisely, we need to simplify.

Q: Is there an example of something you’re working on now that allows you to leverage your knowledge of both tax and treasury?

A: Consolidated cash planning/forecasting and cash repatriation. I have a new appreciation of bank account complexity and KYC queries that can arise and have been able to share additional insight from a tax perspective with the treasury team regarding specific structures and nuances.

Q: What advice do you have for other treasurers who have a tax background; and what advice for treasury folks who find themselves running tax? Which is the harder transition in your view?

A:I don’t think one is harder than the other, both have a steep learning curve! A lot of treasurers may have had exposure to tax concepts through cash repatriation work, intercompany loan documentation or structuring external debt.

  • My advice for both sides of the coin: Ask questions—there is no such thing as a stupid question. Your team and advisors are paid to answer your questions, so leverage their expertise!
    • I’ve found a lot of the questions I have are similar to what others want to ask as well.
  • My other piece of advice is around each team—build and maintain a strong team that meshes and communicates well. I rebuilt the tax team and it was critical to eliminate some bad apples; the treasury team I joined works very well together and we recently added an analyst, too.
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Raising the Bar: How AI, ML and Big Data Could Fix Cash Forecasts

Asia Treasury members discuss how advanced technology may boost satisfaction with forecasting tools. 

A quick poll at a fall meeting of the Asia Treasury Peer Group sponsored by Standard Chartered underscored both the dissatisfaction of members with their cash forecasting tools and the intensifying scrutiny of cash positions by senior management since the beginning of the pandemic.

  • None of the treasurers polled are highly satisfied with their current set of tools: 60% have low satisfaction and 40% said medium. All of the treasurers said they’re fielding more questions about cash from the C-Suite.

Asia Treasury members discuss how advanced technology may boost satisfaction with forecasting tools. 

A quick poll at a fall meeting of the Asia Treasury Peer Group sponsored by Standard Chartered underscored both the dissatisfaction of members with their cash forecasting tools and the intensifying scrutiny of cash positions by senior management since the beginning of the pandemic.

  • None of the treasurers polled are highly satisfied with their current set of tools: 60% have low satisfaction and 40% said medium. All of the treasurers said they’re fielding more questions about cash from the C-Suite.

Building better tools. In a presentation by Kyriba arranged by Standard Chartered, members heard about the potential for big data, artificial intelligence (AI) and machine learning (ML) to “move treasury into true management of working capital” and improve the accuracy of cash forecasts.

  • As the chart below shows, this vision for building a so-called behavioral model of working capital depends heavily on extracting huge amounts of data from a multitude of sources and collecting it in a data lake.
  • ML allows the model to learn patterns based on innumerable variables—and the effects of one upon another—and then predict future flows with more precision.
  • In breakout discussions, members discussed their data management challenges, including the need to standardize exogenous data before it is fed into a model.

Addressing the AR problem. The presentation included discussion of pain points experienced when forecasting invoice payment dates. “We do not know when our customers are going to finally pay their invoices,” read one example.

  • Another said cash collection “is very blurry,” resulting in a “manual and time-consuming process” to build a cash position for future days, weeks and months.
  • The presentation identified the value proposition as creating an automated process to forecast the payment date of each invoice.
  • Using AI in pilot programs with two corporates, Kyriba said, helped reduce payment forecast variances from 25 days to five days.

Other use cases. In addition to forecasting invoice payment dates, the presentation identified these use cases for companies that use systems built with AI and ML:

  • Assign budget codes to bank movements.
  • Reduce manual cash reconciliations made by users.
  • Detect payment anomalies compared to history.
  • Detect abnormal FX transactions.
  • Suggest financing request to suppliers.
  • Forecast investment and debt.
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The Post-Covid Playbook: WFH Flexibility and Office Collaboration

The goal is keeping the good parts of work from home, replacing the bad with the benefits of office teamwork.

Corporates looking ahead to a post-Covid world are taking stock of how the shift to work from home (WFH) has changed the ways that teams function—for better and worse. This requires weighing the beneficial flexibility offered by remote work against the detrimental loss of collaboration that is only possible when people are in the same building.

The goal is keeping the good parts of work from home, replacing the bad with the benefits of office teamwork.

Corporates looking ahead to a post-Covid world are taking stock of how the shift to work from home (WFH) has changed the ways that teams function—for better and worse. This requires weighing the beneficial flexibility offered by remote work against the detrimental loss of collaboration that is only possible when people are in the same building.

  • As some companies consider abandoning offices altogether, many practitioners at recent NeuGroup meetings shared how they hope to retain the conveniences that have come with WFH while reestablishing a positive office culture that cannot be replicated virtually.

Technology benefits. The near-universal shift to WFH has accelerated companies’ embrace of technology that can boost efficiency and encourage collaboration, albeit virtually. Those tech solutions are here to stay.

  • Messaging apps and video conferencing platforms such as Slack and Microsoft Teams became crucial for uniting team members spread far and wide. One member said they also “work really well for broader organizations too,” connecting employees who may not have interacted in a physical office, including members of different finance teams.
  • Members also found success with project management tools like Asana and WorkBoard, which they plan to keep using. “They can be really helpful to put specific structure to the workflows you’re tracking,” one member said.
    • “The best part is they provide great visibility to the entire team for what others are working on, and the facets of their work.”

The productivity puzzle. One member, echoing others, reported a rise in productivity at the start of the shift to WFH. But as fatigue set in, brought about in many cases by too many hours working, that productivity declined at some companies.

  • Some companies have established specific virtual work hours, but members said they ran into challenges enforcing this, especially after the early days of the pandemic.
  • “Some people just work until midnight because they’re at home and they can have dinner and still be at the office,” one member said.
  • That said, many members are planning to allow part of their workforce to continue working from home to some degree. “We learned that you don’t necessarily need everyone together all the time,” one treasurer said.

Returning to the office. Many members see physical offices as irreplaceable, capable of fostering innovation that can only come through unplanned interactions in real-life spaces.

  • One member said it has become difficult to get employees to think outside the box without in-person collaboration. She looks forward to restarting the company’s whiteboard sessions.
  • “It is really challenging to recreate inter-team communications,” another member said. “Cross-functional problem solving is even harder to replicate.”
  • A third member remarked that “lots of conversations get funneled through management” in the WFH environment, preventing the creative solutions that can come from spontaneity.
  • When it comes to onboarding new employees virtually, one member reported “really uneven” results, saying that many new employees do not settle into the company without interpersonal instruction.
    • In the long-term, the member said, a return to offices will benefit the onboarding process, even if the employee ends up working virtually most of the time.

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Talking Shop: Allowing Vendors to Directly Debit Bank Accounts

Member question: “What are your policies with respect to allowing vendors to direct debit your bank accounts for invoices due?

  • “Our policy does not support vendor direct debit of our bank accounts. We do have an exception process for situations where vendor stoppage may have material impact (i.e. utilities for a manufacturing plant) or the vendor requires DD and there are no other alternatives (i.e. postal service).”

Member question: “What are your policies with respect to allowing vendors to direct debit your bank accounts for invoices due?

  • “Our policy does not support vendor direct debit of our bank accounts. We do have an exception process for situations where vendor stoppage may have material impact (i.e. utilities for a manufacturing plant) or the vendor requires DD and there are no other alternatives (i.e. postal service).
  • “I think part of our position is a historical perception that it is ‘bad’ to allow another entity to have access to debit your bank account. I am starting to question in today’s technology world if we need to think about this differently. I think we could tighten up our payment processes and gain efficiencies by leveraging vendor DDs more.
  • “When we set up the DD exception with the bank, it has very specific parameters and we are establishing a control processes to monitor to ensure DDs exceptions are current and valid. And we do encourage our customers to allow us to DD their bank accounts! Looking for policies and/or perspective from other companies.”

Peer answer 1: “We recently added an addendum to our global payout policy in which we labeled direct debit as a high risk payout method, and defined our process by which this payment method could be requested.

  • “We have a workflow tool for the request, once approved by financial operations it feeds to treasury for debit filters or mandates or any action needed to allow the debit to our account. We struggled with timely recons with DD, comprehensive payments reporting, and accountability on matured contracts and debit authorizations.”

Peer answer 2: “Direct debit is a hot button item at my company also. Treasury has always had the point of view to not allow direct debits unless it is not profitable or if the risk is high not allowing them (i.e. utilities or certain governmental payments). We have it listed in our internal financial controls to avoid direct debits unless there is good reason for them.

  • Our AP teams are constantly challenging treasury on this topic and we have always been open to discussion. We now have a process where a treasury leader and a controller of the business must both sign off before a direct debit can be initiated.

Peer answer 3: “We’ve recently discussed this as well, mostly related to an ADP process which is daily and manual for the team. We don’t have specific policy but have historically avoided it. We’re also revisiting though due to the efficiencies it can provide. For example:

  • SCF: Our provider wanted us to open an account at their bank. We prefer they auto debit our treasury accounts rather than have another account to monitor and fund.
  • Government/utility: We’ve had instances where we do not need to provide a LC or BG if the utility can auto debit our account.
  • ADP: Currently, a manual wire process; we are investigating whether it’s worth the manual effort versus allowing ADP to auto debit our accounts.”

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Getting Granular: A Tool to Dig Deeper and Improve Cash Forecasts

How Cashforce built a stronger foundation for one member’s cash flow forecasting and working capital optimization.

Covid-19 shook the foundations of cash flow forecasting and working capital management for companies facing uncertainty about revenues, vendor payments, appropriate inventory levels and adequate cash reserves.

  • At a recent NeuGroup virtual interactive session, one participant impressed others by describing how a fintech solution provided by Cashforce a year earlier allowed his company to dig into the weeds of business operations, examining line-item details of cash flows to prepare for and absorb shocks to liquidity.
  • That ability helped treasury provide real value to the company when the internal spotlight landed on the team during the pandemic.

How Cashforce built a stronger foundation for one member’s cash flow forecasting and working capital optimization.

Covid-19 shook the foundations of cash flow forecasting and working capital management for companies facing uncertainty about revenues, vendor payments, appropriate inventory levels and adequate cash reserves.

  • At a recent NeuGroup virtual interactive session, one participant impressed others by describing how a fintech solution provided by Cashforce a year earlier allowed his company to dig into the weeds of business operations, examining line-item details of cash flows to prepare for and absorb shocks to liquidity. 
  • That ability helped treasury provide real value to the company when the internal spotlight landed on the team during the pandemic.

Digging into details. Cashforce opened a window to a more accurate cash picture by revealing what was going on across the business and how various moving ‘levers’ were rapidly changing, the treasurer said.

  • The technology tracked the granular details of cash flows and highlighted respective drivers that helped identify areas of business behaving normally and those under greater stress from delays in customer receipts.
  • The resulting insights facilitate setting baseline expectations and seeing potential roadblocks so that treasury teams can have productive conversations with operations teams about changes, new products, etc. so that business intelligence is layered into forecasts appropriately.

The velocity and veracity of data. Covid-19 has called more attention to the need for banking APIs and the harmonization of data feeds into a single analytical source. Real-time mandates are now the norm: Everyone wants payment information in real time, with consolidated cash positions at the press of a button. This greater level of urgency has driven the need for cash flow forensics and analytics.

  • 82% of participants polled have accelerated plans to automate and digitize treasury operations since the pandemic (see chart above for details).
  • Cashforce stressed that all processes surrounding cash flow and working capital optimization must be revisited to accomplish real-time goals. Across companies, they are seeing an emergence of a cash culture away from the heavy focus solely on earnings.
  • This shift requires links to AI models so treasury practitioners can determine cash flow drivers not easily spotted by the human eye because they are in the weeds of massive amounts of data.

The data is there; why can’t we get to it? Simply put by one member: Most treasury management systems (TMSs) are not designed to house the magnitude of transaction-level data nor provide the analytic capabilities needed for transparent cash forecasting and best-in-breed working capital analytics.

  • For example, not all TMSs are able to take in various data streams or extrapolate trends to build cash flow patterns into a cash forecast. For companies with multiple ERPs, the complexity and volume of data becomes exponentially difficult to manage and impossible to analyze manually.
  • Algorithms designed to roll up your sleeves for you and dig into transaction-level detail to predict trends and flag anomalies provide a structure for cash optimization and a safeguard for deviations that threaten liquidity. 
  • Measure KPIs to move the needle. Automated calculations and daily reporting on key indicators through Cashforce tools allow for expedited metrics that enable smart decision making and facilitate improving working capital through analytics.

Wedded bliss: Marrying short-term direct to long-term indirect cash forecasts! Treasury and FP&A forecast disconnects are common sources of reconciliation tension across companies.

  • Cashforce uses a “rules engine” that takes ERP data to transform the indirect P&L components into direct cash flow drivers and calculate timing parameters based on historical trends.
  • One member inquired about the possibility of forecasting by purchase order and was pleased to hear that once the purchase order details were transferred into the system, algorithms calculate cash amounts and timing for both “open ended or closed” purchase orders, taking the headache out of what is often a guessing game.

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The Right Steps on the Path to Optimizing Working Capital Management

MUFG presents a working capital road map for technology companies at NeuGroup’s AsiaTech20 pilot meeting. 

At the inaugural meeting of NeuGroup’s AsiaTech20 Treasurers’ Peer Group, sponsor MUFG led a session titled “Optimizing Working Capital (in Uncertain Times)” and participants discussed challenges including how to get vendors to extend payment terms, the need for efficient collections processes and developing KPIs around working capital.

MUFG presents a working capital road map for technology companies at NeuGroup’s AsiaTech20 pilot meeting. 

At the inaugural meeting of NeuGroup’s AsiaTech20 Treasurers’ Peer Group, sponsor MUFG led a session titled “Optimizing Working Capital (in Uncertain Times)” and participants discussed challenges including how to get vendors to extend payment terms, the need for efficient collections processes and developing KPIs around working capital.

Working capital cycle. MUFG’s presentation identified four areas, and goals for each, in the working capital cycle.

Big Picture. The presentation also set down a path for companies starting on the path to optimizing their working capital management programs. It requires:

Senior attention.

  • Working capital improvement is an ongoing process led by the most senior stakeholders within the company.
  • Holistic organizational transformation requires close cross-functional coordination.
  • Change in culture and organizational buy-in by all stakeholders is necessary.

Organizational change management.

  • Buy-in is needed across various departments, including treasury, sales and procurement teams.
  • Working capital solutions require a deep understanding of systems and processes supporting the company, legal contracts and payment terms affecting working capital, and financial tools used to improve and gain efficiency.

Steps. Here are four steps to take on the path to an optimized working capital management approach, according to MUFG:

Observations from North America. MUFG’s presentation said that over the course of 2020, “companies have seen substantially higher amounts tied up in working capital. Furthermore, several key working capital metrics deteriorated during the year.” In addition:

Pricing pressure.

  • With liquidity scarce and credit concerns, we have seen significant repricing movement across the broader market.
  • Pricing levels have varied from program to program with new pricing around 25 to 50 basis points higher.
  • The industry segments hit hardest by Covid-19 faced the most pressure with significant premiums needed to maintain funding.

Term or tenor extension.

  • Buyers are delaying payments and/or forcing extension of terms to preserve cash.
  • Terms continue to get extended with 90- to 120-day terms becoming more common and customers absorbing higher product costs from suppliers in exchange. In some cases, terms have approached 360 days

Usage and volume.

  • Seller-led programs have had growth in usage over LTM due to longer tenors while volume has decreased.
  • Buyer-led (payable) programs have had an increase in usage as volumes have increased as suppliers are looking for more liquidity.
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Banks Craving Yield Hear Case for Lightly Structured Corporate Notes

An option for members of the Bank Treasurers’ Peer Group coping with excess liquidity amid rock-bottom rates.

Many members of the Bank Treasurers’ Peer Group (BTPG) find themselves looking to their investment portfolios as they search for yield in a manner that complies with policy risk parameters—a theme heard at other NeuGroup meetings in the second half as interest rates fell.

An option for members of the Bank Treasurers’ Peer Group coping with excess liquidity amid rock-bottom rates.

Many members of the Bank Treasurers’ Peer Group (BTPG) find themselves looking to their investment portfolios as they search for yield in a manner that complies with policy risk parameters—a theme heard at other NeuGroup meetings in the second half as interest rates fell.

  • Banks face the added challenge of tepid loan growth amid a surge in deposits driven by a flight to safe havens and businesses parking cash received through the Paycheck Protection Program.
  • “We have all this cash and nowhere to invest,” one bank treasurer said.
  • One suggestion from the sponsor of the BTPG H2 meeting: Buy lightly structured investment-grade corporate bonds, in addition to US treasuries, federal agency debt, MBS, ABS and municipal bonds.

Structured notes. According to the sponsor, lightly structured bonds can offer a significant yield pickup and be customized to meet portfolio needs. Structured correctly, these securities can be a capital-efficient investment from a risk-weighting perspective. Structured notes issued by US depositary institutions or qualifying foreign banks can have the same risk-weighting as a federal agency or MBS investment.

  • The sponsor was that clear structured notes, if appropriate, would still only comprise a relatively small percentage of a bank’s securities portfolio, primarily because they can be less liquid than other investments, especially during times of high volatility and stress in the financial markets.
  • That said, these investments can be customized by issuer, tenor, rating, fixed versus variable interest payments and call feature.
  • Additionally, more highly structured notes can allow the portfolio manager to express views on inflation or the shape of the yield curve, again, if appropriate.

Caveat emptor. The search for yield does not come without risk, of course. But for investment portfolios that have a buy and hold approach to at least a small portion of their holdings, they may have merit.

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Talking Shop: Remittance Verification Options for Treasury Payments

Member question: “How do others handle remittance instruction verification for treasury payments? Callback? Third-party service? Any ML or technology?

  • “We are reviewing our verification process for remittance instructions for payments processed through treasury. Today, we require it to be on the bene’s letterhead, or bank letter, or imbedded in the contract, but have not implemented a callback. Who does the verification in your organization? Are you looking at any third-party services or ML-type models for additional controls?”

Member question: “How do others handle remittance instruction verification for treasury payments? Callback? Third-party service? Any ML or technology?

  • “We are reviewing our verification process for remittance instructions for payments processed through treasury. Today, we require it to be on the bene’s letterhead, or bank letter, or imbedded in the contract, but have not implemented a callback. Who does the verification in your organization? Are you looking at any third-party services or ML-type models for additional controls?”

Peer answer 1: “We conduct a callback for all new or changes to existing beneficiary payment instructions.”

Peer answer 2: “Our company also does a callback verification.”

Peer answer 3: “My company does callback verifications for changes to existing beneficiary instructions or new beneficiary instructions for treasury payments.”

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Best of NeuGroup Insights 2020

2020 was a year to remember—even if it left us with much we would rather forget. 

Editor’s note:
The power to move forward is the best gift any of us will receive this year. In 2021, our team will use that gift to redouble our efforts to bring you valuable insights that help you thrive in an uncertain world. You can read those insights here on our website or by signing up for our email newsletter (click here).

2020 was a year to remember—even if it left us with much we would rather forget. 

Editor’s note:
The power to move forward is the best gift any of us will receive this year. In 2021, our team will use that gift to redouble our efforts to bring you valuable insights that help you thrive in an uncertain world. You can read those insights here on our website or by signing up for our email newsletter (click here).

This week’s newsletter, our last of 2020, revisits a range of posts that resonated with readers, reflecting a year when ESG gained force, the pandemic forced finance teams to act fast and smart, and the country grappled with issues of race, social injustice and political strife.

To read it, please click here.

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M&A Deals Reveal Growing Power of ESG Ratings, Research

In a recent NeuGroup Virtual Interactive Session, Deutsche Bank weighed in on the changing face of the players doling out ESG ratings which are increasingly important to investors and issuers.

  • As the graphic below makes clear, credit rating agencies and other companies are racing to get in on the action through acquisitions.

In a recent NeuGroup Virtual Interactive Session, Deutsche Bank weighed in on the changing face of the players doling out ESG ratings which are increasingly important to investors and issuers.

  • As the graphic below makes clear, credit rating agencies and other companies are racing to get in on the action through acquisitions.

Trisha Taneja, Deutsche Bank’s head of ESG advisory, identified MSCI and Morningstar as two popular ratings providers, adding that Moody’s and S&P are growing.

  • “The two current main ones are MSCI and Morningstar,” she said. “Those drive the most amount of capital total, not just fixed income, but across asset classes.
    • “MSCI’s data feeds into the ESG indexes which are licensed to a lot of asset capital.
    • “With Morningstar, Sustainalytics data feeds into their fund ratings, but also their standard research, so that also provides a lot of capital.”
  • Ms. Taneja said S&P and Moody’s are coming up fast because their “ESG ratings are more issuer-friendly, so there’s more engagement there.
  • “It’s more forward-looking because they’re based on interviews with management,” she added. “However, because they’re issuer-solicited, it is hard for investors to use it for portfolio construction.”
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Wild Rides: Three Treasurers Rise to the 2020 Financing Challenge

Lessons from three companies whose equity, debt and bank credit transactions required flexibility, speed and more.

The scramble for liquidity during the pandemic underscored the need for treasury to be prepared—at any point—to snap into action and access capital or credit. And while each company’s circumstances are different, there are some lessons that emerged from this year’s financings that should interest almost any treasury team.

Lessons from three companies whose equity, debt and bank credit transactions required flexibility, speed and more.

The scramble for liquidity during the pandemic underscored the need for treasury to be prepared—at any point—to snap into action and access capital or credit. And while each company’s circumstances are different, there are some lessons that emerged from this year’s financings that should interest almost any treasury team.

  • At a second-half meeting of NeuGroup’s Life Sciences Treasurers’ Peer Group, three members described funding transactions involving debt, equity and a revolving credit facility. Larry Williamson, head of healthcare coverage at Societe Generale—the meeting sponsor—moderated their discussion.
    • “Companies took appropriate actions in terms of managing their underlying business and undertaking financing to reinforce their balance sheets and ensure adequate liquidity,” Mr. Williamson said.

Be flexible, patient, unafraid. Volatile capital markets, illiquidity, fluctuating pricing and terms for revolvers created situations for some treasurers that required patience and flexibility.

  • One treasurer needed to ensure his company’s acquisition strategy would not be jeopardized by a lack of funding. He had counted on expanding the company’s bank group in a previous year to provide a deep pool of incremental credit commitments. However, the pandemic undermined the critical size of that option and “we had to go back to the drawing board,” he said.
  • The company “explored all corners of debt capital markets to see if we could structure something to preemptively reduce potential M&A execution risk” before initially moving toward a delayed draw term loan, to balance critical size objectives and the cost of carry.
    • Then other corporates starting paying down revolvers, a positive for banks. Ultimately, the company decided on a “massive short-term revolver,” but had to pivot a number of times. After first being told banks wouldn’t do anything longer than 364 days, the company ended up with a two-year revolver with commitments 100% larger than the required facility size.
  • Reaching what the treasurer called “an extraordinary outcome given prevailing market conditions” required going back to the board as the market outlook changed. “Don’t be afraid to go back if you can get a better deal,” he advises. “Don’t feel you’re locked into something and be willing to push internally if you can get a better outcome,” he said.

Don’t rule anything out. In March, as markets shuddered, another company’s senior management decided to say “no go” on a deal to refinance a security maturing in the fall. Waiting until May, the treasurer said he “threw all the spaghetti on the wall” as he looked at the cost of capital of multiple options and worked under a mandate not to affect the P&L.

  • In the end, the company “fell back to something we had done,” a convertible bond that the treasurer described as pretty vanilla but required treasury to be flexible and do a seven-year deal instead of a five-year.

Be prepared, fast, coordinated and aligned. A third treasurer’s financing demonstrated the value of being prepared to act fast to take advantage of an opportunity by working closely and intensely with other finance functions and leaning on bankers and lawyers to get a deal done when time is tight. The multifaceted deal, which the treasurer called “grueling,” involved equity, debt and bridge financing. Takeaways:

  • Don’t underestimate the amount of time it will take to produce and review multiple versions of documents. “We started as early as we could,” the treasurer said. “Thanks to the pandemic, everyone whose input was needed to get the financing done, including board members, was at home and available.”
  • Get internal buy-in and work closely in cross-functional teams. “That’s the only way to do this,” he said. Real trust emerged between the team members as they came together virtually, led by legal and treasury.
  • Be prepared to learn about the strength of your relationship with banks as you make them part of the deal team. When it came to bond allocations, “my goal was to make banks as least unhappy as possible,” the treasurer said, adding that everyone except the lead bookrunner ends up unhappy to some degree.
  • Align on bank roles and titles with senior executives before they field calls from banks, making sure everyone internally agrees that the decisions are fair and equitable. “The management team stood firm,” he said, adding that through it all, “I was really thick-skinned.”

More lessons on banks and boards. Don’t rely solely on your existing banks and service providers for a deal that meets your needs but may not be to their liking, one member said. For his financing, the treasurer broadened his bank group, bringing in several new, non-U.S.-based banks to diversify lender behaviors.

  • The same treasurer advised peers that members of your board may talk to members of other boards and could develop a fear of missing out—FOMO. That means treasury has to combat “doing something for the sake of doing it” (such as a bond offering) by having a lot of discussions about why “others are doing what they’re doing.” He added, “Always be prepared to talk about markets in general and relevant reference deals in particular.”
  • Another treasurer remarked that “the board dynamic is interesting to navigate,” requiring treasury to align on expectations with the C-Suite and “hold the line” on decisions about the banking group and other matters.

Keep it quiet. More than one treasurer emphasized the benefits of keeping information under wraps until it has to be shared with a broader audience.

  • “Confidentiality was key; if information leaked ahead of announcing to the market, there would have likely been negative impact on the execution of the transaction,” one member said.
  • Another only kept the “lead left” informed up until the morning of issuance, saying, “We had been burned before when leaking affected pricing.”
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Laddering: FX Risk Management with Less Work, Fewer Transactions

Wells Fargo explains an alternative to layering for corporates hedging cash flow exposures. 

Who doesn’t want to get more for less? As in less work, more efficiency and fewer transactions, all while still meeting risk management goals. To take advantage, though, you have to be willing to look closer at the shortcomings of the very common cash flow hedging approach known as layering.

Wells Fargo explains an alternative to layering for corporates hedging cash flow exposures. 

Who doesn’t want to get more for less? As in less work, more efficiency and fewer transactions, all while still meeting risk management goals. To take advantage, though, you have to be willing to look closer at the shortcomings of the very common cash flow hedging approach known as layering.

  • During a recent interim meeting of NeuGroup’s two FX managers’ peer groups, the quantitative solutions team at Wells Fargo laid out an alternative to layering called laddering.

Layering rationale. A Wells Fargo survey in 2018 found 63% of the public companies that responded use layering in their cash flow hedge programs.

  • By adding in hedges over time to achieve a higher hedge ratio as the exposure gets closer and exposure forecasts get more accurate, the rationale is that the resulting dollar-cost averaging smooths out gains and losses from FX volatility. This achieves a more stable outcome year-over-year or quarter-over-quarter.  

The downside. The disadvantage of this approach is that it requires the ongoing execution of a large number of hedges, with all the accompanying process work from trade initiation, confirmation and accounting through reconciliation and settlement, not to mention the transaction costs.

  • Wells Fargo’s analysis demonstrates that for a monthly layered cash flow program with a 12-month hedge horizon, a company would have 78 outstanding hedges at any given time per currency, or 300 for a two-year hedge horizon.
  • Many companies choose quarterly layering programs, but that’s still a big number to keep track of, especially when also considering the hedge accounting documentation requirements. Automation helps, but not all companies have achieved that level of automation yet.

Another way. Laddering, by contrast, means hedging a higher percentage of the exposure earlier and for longer per hedge, i.e., “more notional but less frequently” or “sort of an infrequent layering program,” as Wells Fargo’s presenter put it.

  • The example uses a third of the exposure hedged from two years out with an added third starting a year out. This cuts down significantly on the number of hedge executions required and outstanding hedges per currency at any given time, especially as compared to a monthly layering program, of course.

Volatility. But does this increase volatility? Intuitively, if the rationale for frequent layering to increase the hedge ratio over time is to reduce volatility, less frequent would increase volatility. But Wells Fargo’s backtesting analysis for EUR, GBP, CAD and MXN, for example, shows that volatility reduction is better with this tenor extension than with more frequent execution, and lower still for a two-year program.

  • Why is that? Laddered hedging “maximizes the overlap of the rates you are picking up” for the currencies involved as compared to the classical smoothing of layering, the presenter explained.

Converts. So laddering, anyone? One member noted that by conducting similar analysis, her company has indeed transitioned to a laddering (sometimes called staggering) approach to reduce the operational burden of frequent layering while still achieving similar levels of volatility reduction.

  • Another member, however, has a dual mandate of volatility reduction and opportunism to do better than a fully systematic program. So her team needs flexibility to increase (or not) their hedge ratios (above a required minimum prescribed in the policy), and the layered program provides that.  
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