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Tapping the Power of In-house Banks to Turn Cash Puddles into Pools

Mega-cap treasurers and PwC discuss multiple benefits of IHBs and some complexities of structuring them. 

Treasurers not sold on the value of in-house banks (IHBs) often tell Damien McMahon, a partner at PwC, “We have cash pooling already, and therefore we have a kind of in-house bank,” he recently told a group of NeuGroup members from mega-cap companies.

  • In reality, though, many of the treasurers may have what Mr. McMahon called “cash puddles,” not cash pools.
  • PwC and treasurers from two member companies described turning dozens of small puddles into large cash pools by implementing truly global in-house banks at each company.
  • Among the takeaways from one of the treasurers: The cost savings made possible by the IHB are an added benefit to the bigger goal of achieving the increased efficiency and control IHBs bring to liquidity management.

Mega-cap treasurers and PwC discuss multiple benefits of IHBs and some complexities of structuring them. 

Treasurers not sold on the value of in-house banks (IHBs) often tell Damien McMahon, a partner at PwC, “We have cash pooling already, and therefore we have a kind of in-house bank,” he recently told a group of NeuGroup members from mega-cap companies.

  • In reality, though, many of the treasurers may have what Mr. McMahon called “cash puddles,” not cash pools.
  • PwC and treasurers from two member companies described turning dozens of small puddles into large cash pools by implementing truly global in-house banks at each company.
  • Among the takeaways from one of the treasurers: The cost savings made possible by the IHB are an added benefit to the bigger goal of achieving the increased efficiency and control IHBs bring to liquidity management.

IHB objectives. Mr. McMahon said one of the treasurers was adamant that the IHB maximize the centralization of the company’s liquidity “back to the US,” a key, but often elusive, goal for most treasurers. The company’s other objectives included:

  • Simplifying cash pooling structures to address cash fragmented throughout the company.
    • The other treasurer that worked with PwC said the biggest driver for establishing the IHB was turning more than 50 “puddles” into two large, centralized cash pools, allowing the investment team to achieve higher yields. “That dwarfed from a value point of view all the other benefits.”
  • Minimizing the number of banks and bank accounts by insourcing services, reducing the fees paid to banks.
    • “A lot of this is to pull away the reliance on third-party banks and bring most of that back in-house,” the first member said. Doing that will produce an 80% reduction in the number of banks the company uses and a 30% drop in physical banks accounts (see graphic below).
  • Centralizing global FX exposures. “There were some trades happening in opposite directions on different sides of the Atlantic and that wasn’t efficient,” Mr. McMahon said about the first client.
    • The other client’s treasurer said, “We ended up with a lower set of exposures we needed to hedge, so it reduced the notional on our balance sheet hedging program,” reducing fees and raising efficiency.
    • “And we reduced the number and volume of spot FX trades we did because of all the intercompany settlement,” another source of savings.
  • Building a scalable and future-proof infrastructure to automate and streamline processes, critical for large, high-growth companies.

Icing on the cake. “When I went into this project it wasn’t really about a cost savings overall; it was mostly looking for efficiencies and control,” the treasurer who reduced bank accounts by 30% said. “But what we did get was a big dollar savings and I think that came holistically, which was a great way to look at it.”

Other IHB benefits. Other members shared additional benefits their companies have reaped from IHBs:

  • Reduced credit exposure. One member called the reduction of credit exposure to banks made possible by his company’s IHB structure one of the biggest benefits. The company, he explained, has higher ratings than a majority of its banking partners.
    • “We’ve eliminated significant counterparty credit exposure” by being able to invest excess cash in US treasuries or prime funds, for example, He said. The company’s alternatives in countries including Argentina and Indonesia aren’t as “robust,” he added.
  • Tax. “There can be some huge tax synergies from this, depending on how it’s structured, where it’s located, etc.,” this treasurer said. “We have found this to be a real value-add both on a pre-tax as well as a tax basis.”
  • Cash ownership. Another treasurer noted that cash is a corporate asset managed by treasury, not business units. “By centralizing and aggregating everything up into an in-house bank or pooling structure, it kind of removes that business unit sense of ownership of that cash,” he said.

One big pool? One of the treasurers listening to the presentation asked what Mr. McMahon called the million-dollar question: “We have two cash concentration structures, one in the US and one offshore. And my big question is how do I get to one pool? How do I move that liquidity daily from our international pool? But if tax law changes I want to be able to unwind it quickly.”

Complexity. The answer is not simple, given that multiple tax, accounting, banking and legal considerations must be evaluated and the exact answer will depend on each companies’ unique facts and circumstances, Mr. McMahon said.

  • However, the two PwC clients found that the complexity could be reduced by establishing an international IHB entity and an overarching US IHB entity, he explained. Each consolidates the positions and settlements for their participants.
    • Liquidity flows can then be settled across these two entities, and participants can also settle global intercompany flows between each other in a controlled way via the IHB entities.
  • Both entities and their positions are managed using one single system and a standard set of processes and automations to take care of the detailed position keeping, accounting and reporting required to manage one combined global liquidity structure.
  • “It should be noted that a careful modelling and tax compliance study should be carried out to understand how much liquidity can be shared and what guardrails are needed to avoid adverse tax and accounting consequences,” Mr. McMahon said.
  • The added advantage of the two IHBs is that treasury can also have a ‘follow the sun” model of treasury support for the business as well as for global liquidity management.

Flexibility. As one treasurer remarked, this structure can also give the flexibility to efficiently manage tax compliance under both the existing tax rules enacted in 2017 and also any reversal or amendment of those rules passed during the Biden administration.

Good, not perfect. And the PwC client said while his company did not opt for the most efficient structure possible from a treasury perspective, “This is what makes legal happy, treasury happy and tax happy.”

  • Treasury and PwC evaluated three structures, each with sub-options. “We came to a realization that option 1 is the best. But within option 1, we have option 1a and option 1b that can still both work and that’s what we’re [working on] today.
  • “And we’re very close. We’re just about there to having the full structure in place.”

 

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Making the Devil’s Advocate an Angel on Your Shoulder

NeuGroup risk managers make space for contrarians to question decisions and combat overconfidence.

Rather than shunning contrarians for challenging conventional thinking, corporates need to make sure their decision-making processes always include a constructive devil’s advocate—someone who forces teams to consider all the ramifications of whatever action—or inaction—a company is contemplating.

  • This was among the key pieces of advice given by Michael Zuraw, head of enterprise risk management at ON Semiconductor, during a presentation on decision-making at a recent ERM-focused NeuGroup meeting. He said this best practice applies to all collaborative teams.
  • “Cognitive biases can occur at any link in the [decision-making] chain,” Mr. Zuraw said. “When you’re making a big decision, you need a contrarian thinker who says, ‘Why do we believe that? What if we’re wrong?’”

NeuGroup risk managers make space for contrarians to question decisions and combat overconfidence.

Rather than shunning contrarians for challenging conventional thinking, corporates need to make sure their decision-making processes always include a constructive devil’s advocate—someone who forces teams to consider all the ramifications of whatever action—or inaction—a company is contemplating.

  • This was among the key pieces of advice given by Michael Zuraw, head of enterprise risk management at ON Semiconductor, during a presentation on decision-making at a recent ERM-focused NeuGroup meeting. He said this best practice applies to all collaborative teams.
  • “Cognitive biases can occur at any link in the [decision-making] chain,” Mr. Zuraw said. “When you’re making a big decision, you need a contrarian thinker who says, ‘Why do we believe that? What if we’re wrong?’”

Designate the devil’s advocate. Mr. Zuraw recommends team leaders designate a team member to play devil’s advocate in meetings. “You need to be able to identify, and provide space for, the realist in the room,” he said.

  • “This is the one who’s going to do a check and keep you honest with yourself and is going to help you identify and recognize biases that can creep into your decision.”
  • One member had worked at a company whose culture discouraged contrarian positions, going so far as to not invite staff members who always added a wrinkle to the latest plan with an objection or contrary opinion.
  • To combat this, the company implemented an idea endorsed by Mr. Zuraw: A devil’s advocate rotation that allows everyone on staff to play the role. “So everyone learns the skill of asking those questions, and everyone recognizes that it’s not frowned upon, it’s a value-add to the process.”

Learn from mistakes. One member said his company had once passed on making an acquisition, a decision the team is still “haunted” by. The problem: a failure to consider the risk of not doing the deal left the corporate too hesitant to pull the trigger.

  • When opportunity arose again, a willingness to question themselves—as a devil’s advocate would—prepared the team to make a better decision, resulting in the company’s largest acquisition ever.
  • “It was an enormous risk,” the member said, but by considering all sides, he believes the company made the right decision. “We would not be able to be as effective and efficient for our customers without the acquisition,” he said.

An object in motion. Many teams with established processes have what one member called a “bias toward inertia,” where teams are set in their ways and have a resistance to making any changes—another reason to include contrarians unafraid to voice doubts and bring up any potential risk.

  • To further combat inertia and paralysis, Mr. Zuraw also recommends what he calls a “pre-mortem” meeting right in the midst of a process to take stock, challenge key assumptions and prevent overconfidence.
    • “Making no decision is as big of a risk as any decision you could make,” he said.
  • “I think the concept of a gray rhino is a good one, and that speaks to the need for a pre-mortem,” one member said. “There are natural disasters, but a lot of things that do happen people thought about [and] knew was on the horizon, but nobody spoke up.”
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Talking Shop: Who Is Allowed to Open Bank Accounts at Your Company?

Editor’s note: The NeuGroup Process brings members together to solve problems and answer each other’s questions in a variety of forums, including online communities for specific groups—one of many benefits of membership. Talking Shop shares valuable insights from these members-only exchanges (anonymously) with all members and NeuGroup Insights readers. We welcome your responses—and any questions you want answered: insights@neugroup.com.


Member question: “We are trying to do some benchmarking: Do your board resolutions allow the treasurer (and others?) to open bank accounts or is it just limited to the CEO and CFO?”

Editor’s note: The NeuGroup Process brings members together to solve problems and answer each other’s questions in a variety of forums, including online communities for specific groups—one of many benefits of membership. Talking Shop shares valuable insights from these members-only exchanges (anonymously) with all members and NeuGroup Insights readers. We welcome your responses—and any questions you want answered: insights@neugroup.com.


Member question: “We are trying to do some benchmarking: Do your board resolutions allow the treasurer (and others?) to open bank accounts or is it just limited to the CEO and CFO?”

Peer answer 1: “Our resolutions, and in some cases powers of attorney (depending on the locale/type of entity), all point to the treasurer as having this authority.

  • “I suppose technically our CFO could also, but in practice it just isn’t realistic for [the CFO] to be involved in those activities.
  • “We also took it a step further and implemented a specific policy statement as well stating that, in effect, only the treasurer can do (or delegate) treasury related things with the typical list of what those are.
  • “We did this to cover ourselves in those challenging geographies where local entity board members claim they cannot legally abdicate their authority to others to do things like open bank accounts.
  • “So our policy [basically provides air cover to prevent local management executives from doing anything that we have decided to limit to the treasurer].”

Peer answer 2: “We have a treasury committee comprised of our CFO, controller and me. For bank accounts, we need approval from two members of the committee.”

Peer answer 3: “Resolutions empower me and my cash management directors in addition to key executive officers. Two signatures, like others. Almost never CFO or CEO involvement.”

Peer answer 4: “Ours specifies the treasurer can open bank accounts, and we no longer even put the CEO or CFO as signatories to our bank accounts.”

Peer answer 5: “Our company only allows the CFO to open bank accounts.”

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Pricing Loans Using SOFR: Wait for Banks or Take the Initiative?

Members discuss the Libor-SOFR transition, including contracts and other non-treasury Libor exposures.

Regulators want corporates and their banks to price new loans and other financial exposures using a USD Libor-replacement rate such as SOFR by the year-end deadline—just nine months away. But who should take the lead in this transition—the banks or the corporates?

  • That question and other issues that companies confront relating to the move away from Libor arose at a recent meeting of NeuGroup for Capital Markets sponsored by Wells Fargo.
  • The bottom line: Members and banks still have a lot to do and must face some big unknowns.

Members discuss the Libor-SOFR transition, including contracts and other non-treasury Libor exposures.

Regulators want corporates and their banks to price new loans and other financial exposures using a USD Libor-replacement rate such as SOFR by the year-end deadline—just nine months away. But who should take the lead in this transition—the banks or the corporates?

  • That question and other issues that companies confront relating to the move away from Libor arose at a recent meeting of NeuGroup for Capital Markets sponsored by Wells Fargo.
  • The bottom line: Members and banks still have a lot to do and must face some big unknowns.

First movers. In terms of pricing loans over SOFR, members said banks were in the best position to move first, given the size of their balance sheets and the large number of loans they hold.

  • But while it may seem perfectly logical that banks should take the lead because lending is what they do, discussions among bankers at NeuGroup meetings make clear that it’s not that simple.
  • The banks say they aren’t ready, one member said. He added that banks in the UK voiced similar sentiments about pricing his firm’s debt over SONIA, the UK equivalent of SOFR.
  • “We just said, ‘We’re doing it, here are the terms,’ and they all signed up for it.”

Follow the leaders. Proactively searching for and resolving Libor-related issues can devour treasury resources, and members agreed that other market participants with broader and deeper exposures have greater incentive to lead the charge.

  • Among the players and participants seen as appropriate leaders are other corporates, banks, custodians and trustees.
  • “So we can be fast followers,” said one member, adding, “But as the date gets closer my anxiety is starting to build.”
  • Another member is actively pushing for a solution in the securitization market where his company is a major player. “The leaders in specific segments have to be thoughtful and help solve issues,” he said.

Non-treasury exposures. One member raised the issue of who beside treasury has been involved with determining companies’ total exposure to Libor.

  • One member said his treasury is coordinating the effort but, “We’re relying on support from other functionaries to go through the contracts.”
  • Another member said his team had anticipated finding USD Libor exposure in leases and procurement contracts across the company but was pleasantly surprised to find it limited mostly to treasury.
  • A corporate restructuring by one company prompted it to search for Libor among tens of thousands of contracts. Only a few involved Libor issues, including late fee rates on one-off supply contracts. The issue for peers, the member said, “is whether to find them or deal with the small tail risk when it comes up.”
  • Two companies found employee stock ownership plans (ESOP) with Libor-priced loans spanning decades that will likely have to be negotiated bilaterally, and another found exposure in its captive financing unit.

Term SOFR? One member brought up banks that recommend a daily average of SOFR with observation shift, adding wistfully, “It would be really nice if there was a [forward-looking] term SOFR.” Other members agreed but expressed some doubts.

  • One member mentioned insufficient liquidity supporting a term SOFR raising concerns about renewing a revolving credit over a daily-average SOFR, since “flip” clauses in credit agreements could change the rate to the term version before enough liquidity emerges. “An opaque market is what got Libor into trouble in the first place,” he said.
  • Another member recalled a Fed official saying at a recent ARRC meeting that a term SOFR could increase banks’ hedging costs, prompting them to avoid such transactions or pass on costs to corporate clients.
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Cut the Static: An FX Risk Manager Transitions to Dynamic Hedging

Standard Chartered guides a client to hedging that requires more analytics but aligns more with risk management goals.

The increased frequency of so-called black swan (or gray rhino) events roiling currency markets recently has more corporates establishing or revamping FX hedging programs designed to minimize earnings volatility. They face a host of decisions involving which exposures to hedge, timing, instruments and overall approach—static, dynamic or somewhere in the middle.

  • At a recent meeting of FX risk managers, sponsor Standard Chartered, along with a NeuGroup member that is a client of the bank, explained how and why the corporate shifted from a static hedging program to one that is dynamic—as well as the pros and cons of the company’s move and those of other approaches.

Standard Chartered guides a client to hedging that requires more analytics but aligns more with risk management goals.

The increased frequency of so-called black swan (or gray rhino) events roiling currency markets recently has more corporates establishing or revamping FX hedging programs designed to minimize earnings volatility. They face a host of decisions involving which exposures to hedge, timing, instruments and overall approach—static, dynamic or somewhere in the middle.

  • At a recent meeting of FX risk managers, sponsor Standard Chartered, along with a NeuGroup member that is a client of the bank, explained how and why the corporate shifted from a static hedging program to one that is dynamic—as well as the pros and cons of the company’s move and those of other approaches.

Static scorecard. Standard Chartered’s presentation described a static hedge execution style as one where a corporate hedges all its exposures at the beginning of the year, a simple approach with minimal execution costs.

  • The major downside of static strategies, though, is the year-over-year volatility they create, the bank said.
  • The NeuGroup member said the rigidity of the static approach also left the company “fully at the mercy” of markets and bank counterparties because hedging needed to be completed by a certain time each year.

Defining dynamism. To reduce volatility, better manage FX risk and allow treasury to take advantage of favorable markets, in the last year Standard Chartered has helped guide the corporate to a more dynamic approach.

  • The policy for forecasted cash flows prescribes hedge coverage levels for up to one year out. Now, though, the company is transitioning to a quarterly, layered hedging strategy, which also extends to forecasts beyond the one-year horizon.
  • In its presentation, Standard Chartered illustrated how a layered approach reduces quarter-over-quarter gains and losses from FX volatility.
  • The disadvantage of a dynamic approach is that it is more time consuming to track exposure changes and execute the resulting more frequent hedges. And the more flexibility you build into the program, the more time-consuming it becomes—which is why a decision framework is important.

Exception, not the rule. Today, the member is able to take several factors into account when deciding what to hedge, how much and when to meet established risk tolerance levels. That puts him among the one-third of members who said in an in-meeting poll that they can dynamically hedge their exposures; two-thirds of respondents have either no flexibility on timing hedge execution or some flexibility, but only within a month or quarter (see chart).

Exposure and confidence. The most important factor is confidence in the exposure forecast. For risk managers, higher confidence in exposure data allows a higher hedge ratio without risking over-hedging (important to avoid for hedge accounting reasons).

  • The company’s hedge ratios take into account the degree of certainty of forecasted exposures, while contractual exposures by their nature are more certain but may instead have some timing variances.
  • Balance sheet exposures should be “majority hedged,” according to the company’s presentation.
  • Its instrument tool kit includes outright forwards, swaps and NDFs, as well as options (calls, puts and collars).

A decision framework. Under the member’s new program, a decision framework helps determine which instrument or combination of instruments will be chosen to hedge at any given time.

  • Treasury has built a spreadsheet “monitor” that looks at market spot and forward rates, forward points (carry), at-the-money options premium and the 25-delta skew (call-vs.-put volatility differential), which can be compared to their three-year historical levels.
  • Backtesting shows how instruments have performed under different circumstances and can be used to support the instrument decision.
  • The team is allowed to take in-house views on currencies, supported by purchasing-power-parity (the long-term fair value of currencies) and other factors, tempered by bank forecasts. A caveat on research is to pay extra attention to very divergent views to see if the publishing date of the bank’s forecast might explain it.
  • Depending on the strength of the in-house view, collar strikes may be set to incur some premium cost (vs. a zero-cost collar) to capture potential for upside participation.
  • The performance or success of instrument choices is benchmarked against a strategy using only forwards.
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Fight and Flight: Bank Fee on SEPA Payments From UK Sparks Pushback

Corporates respond by moving accounts to other countries, pushing banks to drop the fee and lobbying regulators.

The number of banks charging corporates a fee for payments going from the UK to countries in the single euro payments area (SEPA) is growing, and some NeuGroup members are taking action to minimize the impact.

  • Echoing what treasurers in Europe reported at a recent meeting, the head of cash product at a UK-based bank said that “a lot more banks in Europe are now charging” the fee, including some large institutions.
  • One member is working with a bank (that does not charge the fee) to lobby regulatory bodies to limit these types of fees and deductions. “We view this as a fee grab in a post-Brexit world of financial services,” he said.

Corporates respond by moving accounts to other countries, pushing banks to drop the fee and lobbying regulators.

The number of banks charging corporates a fee for payments going from the UK to countries in the single euro payments area (SEPA) is growing, and some NeuGroup members are taking action to minimize the impact.

  • Echoing what treasurers in Europe reported at a recent meeting, the head of cash product at a UK-based bank said that “a lot more banks in Europe are now charging” the fee, including some large institutions.
  • One member is working with a bank (that does not charge the fee) to lobby regulatory bodies to limit these types of fees and deductions. “We view this as a fee grab in a post-Brexit world of financial services,” he said.

Quick background. Corporates began seeing these so-called fees for receipt in January, following the last-second Brexit deal finalizing the UK’s exit from the EU and the European Economic Area (EEA). Withdrawal from the EEA meant banks could start charging for receipt of SEPA payments from non-EEA accounts. 

  • This put the UK in the same category as Switzerland, which is also a member of SEPA but not in the EU.

Unacceptable or fair? In some cases, the receipt fee is deducted from the principal payment by the beneficiary bank. As SEPA payments are mostly used for payroll and suppliers, members said they find this “unacceptable.” When the UK was still in the EU, payments were protected from deduction by a regulation called the Payment Services Directive 2.

  • The receiving banks for payroll and supplier payments are chosen by beneficiaries, making it very difficult to change banks. That gives the existing banks pricing power, at least in the short-term, to charge new fees.
  • “What does SEPA membership mean, if it doesn’t mean the absence of fees?” said NeuGroup senior executive advisor and former banker Paul Dalle Molle. “Why should Switzerland and the UK be a member of SEPA if this is the result? It doesn’t make sense.”
  • One bank with a large European presence told NeuGroup Insights that these “new fees are likely being applied to compensate for the increased costs caused by Brexit for the banking system.” The bank did not say whether it charges the fee.

Fighting back. In some cases, members report success contesting the SEPA payment fee. “I advise [you] to challenge the fee with the bank, or find another bank,” one member said. He acknowledged that is an unsustainable solution for corporates that may use a UK-based account for payroll across the continent.

  • To get around the fees, multiple members who once used UK-based accounts for payroll have opened accounts in other locations across Europe, with Dublin and Luxembourg emerging as hot spots. However, migration could prove costly for a company with a limited number of accounts.
  • Another member has resorted to issuing wire transfers, which incur higher fees than SEPA payments but are more predictable and guarantee protection of the principal payment.
  • “Lobbying, using wires, switching to EEA-based remitting accounts and switching banks are all smart things to do,” said Mr. Dalle Molle. “When the European regulators hear complaints and see a drop in SEPA volume, they’ll go back to the banks and say, ‘What are you doing?’” 
  • US and UK-based banks are also developing solutions to resolve the issue. For example, one member is working with a bank to develop a technical solution—a monthly subscription in which the bank guarantees protection of the principal and eats the cost of SEPA fees.

Varying fee sizes. As the fees are applied in a case-by-case basis, the amount charged can also vary. Depending on the bank, this could be applied as a fixed fee or a percentage.

  • One NeuGroup member said the fee charged was around three euros. But another member said he was told a large payment would incur a fee of 600 euros, which he called “bordering on the completely ludicrous.”
  • Another member said that his company is also seeing a charge based on volume, which he called “outrageous,” though he is only seeing it from “a select few [banks], it’s not yet across the board.”
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Talking Shop: Payment Platforms; Supply Chain Finance; Bank Capital

Member question 1 (payment platforms): “We are having discovery calls with FIS, TIS and Fides to understand their value propositions.

  • “Our main pain points are having all sorts of e-banking portals, and arise when we onboard new entities (recently acquired) and penetrate new countries.
  • “Anybody having any experiences with the vendors listed? And suggestions how to best select (did you RFP this business?).”

Member question 1 (payment platforms): “We are having discovery calls with FIS, TIS and Fides to understand their value propositions.

  • “Our main pain points are having all sorts of e-banking portals, and arise when we onboard new entities (recently acquired) and penetrate new countries.
  • “Anybody having any experiences with the vendors listed? And suggestions how to best select (did you RFP this business?).”

Peer answer 1: “We have used TIS for some years now and are quite happy. They have a large number of banks in the system and it’s pretty easy to connect to these.”

Case study: NeuGroup Insights published an article on how TIS helped The Adecco Group. And watch this space for details about a NeuGroup virtual interactive session in May featuring TIS.

  • “However, we did make an amendment to the buyer joinder agreement to narrow the terms under which the direct debit may occur.
  • “It specifies that the debit is limited to amount in the payment instruction, or any obligation to pay an amount equal to any payment obligation, and so on.
  • “The SSC-A/P function then uses a clearing account process in SAP to ensure 1:1 matching to expectations.”

Member question 2 (supply chain finance): “[Our bank] is telling us that companies permit them to direct debit their accounts for supply chain finance (SCF) in EMEA due to ECB rules, and that that it is common practice.

  • “Is anyone else allowing direct debt in EMEA for SCF?”

Peer answer 1: “Yes, we are rolling out SCF in Europe and are allowing direct debit under [that same bank’s] process.

  • “However, we did make an amendment to the buyer joinder agreement to narrow the terms under which the direct debit may occur.
  • “It specifies that the debit is limited to amount in the payment instruction, or any obligation to pay an amount equal to any payment obligation, and so on.
  • “The SSC-A/P function then uses a clearing account process in SAP to ensure 1:1 matching to expectations.”

Member question 3 (bank capital): “I’m interested in getting some peer feedback regarding the internal monitoring of capital ratios beyond just the standard regulatory minimums.

  • “What types of reporting/tracking are people using? Are they utilizing multiple points of escalation based on various internal targets? Are the internal levels based on actuals, forecasts, both?
  • “If forecasts, what time frames are being used? How proscriptive is everyone when it comes to taking action based on dropping below an internal threshold?”

Peer answer 1: “We do monthly forecasts and ALCO where we report out actuals and provide an outlook for a few quarters (depending on the time during the year). 

  • “Our focus tends to be common equity tier 1 and tangible common equity ratios, although we also show ALCO leverage, tier 1 and total risk-based. Our TCE ratio limit is self-imposed at [a certain percentage].
  • “For all other ratios we set the limits at the defined ‘well capitalized levels’ plus 1.0% to serve as an early warning limit. 
  • “We also share our typical operating range of the ratio, which is higher. If we were to break a ratio, there is a process in place to discuss with the enterprise risk committee of the board and settle on a course of action to bring it back under compliance. This hasn’t happened since I’ve been here.”
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Beyond Deposits: An FDIC Fund Aims to Boost Equity Capital at MDIs, CDFIs

Mission-Driven Bank Fund will offer corporates a way to infuse equity capital in banks serving minority communities.

Corporations looking to make impactful investments in minority communities, but not through bank deposits, may want to consider a new partner: the Federal Deposit Insurance Corporation (FDIC)—the federal agency that insures deposits.

  • Representatives from the FDIC and a large asset manager that is acting in an advisory role described what’s being called the Mission-Driven Bank Fund (MDBF) at a recent meeting of NeuGroup’s diversity and inclusion (D&I) working group.
  • The fund, slated to launch later this year, will offer corporates a path to provide equity capital to minority depository institutions (MDIs) and community development financial institutions (CDFIs) that serve low- and moderate-income communities at higher rates than mainstream banks, the FDIC said.

Mission-Driven Bank Fund will offer corporates a way to infuse equity capital in banks serving minority communities.

Corporations looking to make impactful investments in minority communities, but not through bank deposits, may want to consider a new partner: the Federal Deposit Insurance Corporation (FDIC)—the federal agency that insures deposits.

  • Representatives from the FDIC and a large asset manager that is acting in an advisory role described what’s being called the Mission-Driven Bank Fund (MDBF) at a recent meeting of NeuGroup’s diversity and inclusion (D&I) working group.
  • The fund, slated to launch later this year, will offer corporates a path to provide equity capital to minority depository institutions (MDIs) and community development financial institutions (CDFIs) that serve low- and moderate-income communities at higher rates than mainstream banks, the FDIC said.

Equity capital’s multiplier effect. One advantage of infusing equity capital into MDIs and CDFIs is that an equity investment “helps mission-driven banks far more than deposits,” according to an FDIC slide (see chart, below).

  • Every dollar of equity capital invested, the FDIC says, can increase lending by a multiple of the original investment, while every dollar of deposits can only increase lending up to the amount of the deposit.  
  • The treasurer of a large technology company that is an anchor investor in the fund said, “We’ve looked at a lot of different ways [to invest], we looked at deposits, but we wanted impact. We feel like we’ve moved up.”
  • Because of regulatory requirements governing capital ratios, many MDIs and CDFIs need equity far more than deposits so they can increase the amount of loans they make to borrowers.

Facts and figures. Once the MDBF launches, the FDIC says, it will be run by an independent fund manager selected by the fund’s founding investors. The FDIC will not be an investor and will play no role in fund management.

  • The FDIC’s goals for the MDBF are initial capital commitments in the range of $100 million to $250 million and a target of $500 million to $1 billion when fully established.
  • Once selected, the fund manager will work with an investment committee to hear quarterly proposals from MDIs and CDFIs for potential investments. Those could include:
    • Direct equity
    • Structured transactions
    • Funding commitments
    • Loss-share arrangements
  • The FDIC says it is targeting “a minimal rate of return to investors, who can reinvest any returns in the fund or in aligned non-profit enterprises that support mission-driven banks.”

Investment policy changes? One NeuGroup member from a corporate that worked with the FDIC said the fund meets the company’s priorities. “Our primary focuses are risk, then impact, and then return, in that order,” he said. “The beauty is you get to do it all in one product. They do all the work for you instead of needing to hire a team.”

  • The company did have to change its investment policy to accommodate investment of equity capital. “Lots of corporations are unable to do equity, but it’s an important part of [our] portfolio,” the member said.
  • Another member said that as long as the investment aligns with the company’s stated values and mission, this kind of change isn’t too difficult.
  • But in a survey at the meeting, half the members responding said it would be either somewhat or very difficult to change investment guidelines to allow or create exceptions to make investments in MDIs or CDFIs in the form of equity capital.
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A Push in the Right Direction to Simplify Bank Fee Analysis

As bank fee statements slowly standardize, corporates and banks can work together to make the analysis process simpler.

Analyzing bank fees to uncover outliers remains a thorn in the side of treasury teams—in no small part because the banks code their fees and transmit the files to corporates in many different ways. And while standardization is improving, companies should keep the pressure on banks to bring more clarity to the opaque world of bank fees.

As bank fee statements slowly standardize, corporates and banks can work together to make the analysis process simpler.

Analyzing bank fees to uncover outliers remains a thorn in the side of treasury teams—in no small part because the banks code their fees and transmit the files to corporates in many different ways. And while standardization is improving, companies should keep the pressure on banks to bring more clarity to the opaque world of bank fees.

  • That was among the takeaways at a recent NeuGroup meeting of assistant treasurers who were joined by Larry Williamson, head of healthcare, corporate and investment banking at Societe Generale and Tonette Palencia, a cash management sales manager at the bank.

Forcing the issue. “It’s perfectly appropriate to guide banks in the right direction,” Mr. Williamson said. “In the context of selecting service providers, I would be highlighting that a key criteria and consideration is for banks to provide their billing information in the forms that work for you and in line with more of a universal standard.”

  • He added, “If I’m a corporate client, I’d be saying ‘We want our billing to look like this, are you able to do that?’”
  • Ms. Palencia cited the example of a client that requested the corresponding service codes to the products on their billing statement as part of their analysis to evaluate and compare their banking fees.

State of play. As it stands, many reports from banks in the US come in what’s called EDI 822 statements, an e-billing file standard that one member described as “pretty raw.” The member said companies “have to have special programs to ingest it, or some pretty sharp programmers to decode it.”

  • Ms. Palencia said that many banks base these statements on AFP service codes, but some might classify products differently from others, so it is “a lot to reconcile, and it takes a bit more on [a company’s] side to analyze it more in-depth.”

Hope in BSB reporting? Bank Service Billing (BSB), including the Twist and ISO 20022 standards (camt.086), offer more standardization globally, since EDI 822 is used only in the US.

  • “At some point, you want to get to a common utility, and Twist may be a part of that, with one single electronic database providing inputs from banks instantly,” Mr. Williamson said.
  • One member said some of the international banks he works with use the Twist format, which “is almost like an XML format, it’s a little more standard.” The member said Twist files still need to be run through a software tool “to make heads or tails,” though it can be as simple as analysis in Microsoft Excel.
  • Twist is based on AFP’s service codes but has closer to 800 options, which offers a measure of simplicity.
  • SocGen is working on a project to roll out BSB files more broadly. “Because we’re a European bank, that’s where most of our availability is,” Ms. Palencia said. “But a lot of the banks have also rolled it out.”

Third-party solutions. Members spoke highly of solutions from Redbridge and Fiserv, which can make the analysis process simpler but whose costs need to be evaluated in the context of how much savings they bring.

  • One member that uses Weiland BRMedge from Fiserv said the system is effective in tracking “pops” in fees. “We rely on it to find anomalies, and we go back to the banks to get those fees reduced,” he said. “It’s been helpful, but it takes a lot of time and effort to maintain and get up and running.”
  • Another member, after researching the market for a few months, has a contract to implement Redbridge’s HawkeyeBSB later this year. “We’re expecting to be able to see 60% to 70% of our bank fees globally,” he said. “It does almost all the work with all the statements, and we just take a look at the analysis.”
  • Mr. Williamson expressed surprise that corporates need these tools to navigate around bank billing systems. “In this world of digitization, we’ve still got banks thinking of requiring corporate clients to work around the inefficiencies of billing, which surprises me,” he said.  
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A Goldman Risk Management Tool Flying Under the Radar

FX risk managers talk up a Goldman Sachs solution called Capital Markets Atlas to measure value at risk.

To no one’s surprise, a recent meeting of NeuGroup FX risk managers included plenty of talk about well-known vendors of exposure identification solutions like FireApps and AtlasFX, FX trading platforms including FxAll and 360T, and a variety of ERPs and TMSs.

  • But not everyone in the large virtual room had heard of a self-service tool from Goldman Sachs that some members are using to measure value at risk (VaR). Making matters a bit confusing: the name of the solution includes the word “atlas.” As in Goldman Sachs Capital Markets Atlas, which is part of the firm’s broader Marquee platform.

FX risk managers talk up a Goldman Sachs solution called Capital Markets Atlas to measure value at risk.

To no one’s surprise, a recent meeting of NeuGroup FX risk managers included plenty of talk about well-known vendors of exposure identification solutions like FireApps and AtlasFX, FX trading platforms including FxAll and 360T, and a variety of ERPs and TMSs.

  • But not everyone in the large virtual room had heard of a self-service tool from Goldman Sachs that some members are using to measure value at risk (VaR). Making matters a bit confusing: the name of the solution includes the word “atlas.” As in Goldman Sachs Capital Markets Atlas, which is part of the firm’s broader Marquee platform.

Self-service VaR. Goldman marketing materials say Capital Markets Atlas provides clients with “independent access” to the bank’s risk and pricing models with tools that help them understand how “active markets impact exposures and solutions” using a web-based application that is free for the bank’s clients.

  • The first member to mention Goldman’s tool at the meeting emphasized the benefit for risk managers of being able to perform VaR analysis without waiting for a bank to do it for them.
  • “You can run it on a real time basis on your own,” he said. “You run analysis whenever you need.”
  • In an interview after the meeting, Ketan Vyas, managing director in Goldman’s corporate risk analytics business, said, “What’s new is that you can do it yourself.”

More member buzz. Another member said he was impressed by a demo of the tool late last year. “I perform a lot of risk analysis monthly and it seems like the [Goldman] tool may be more user-friendly/point and click,” he said. “I am not sure it is as robust as the tools I use, but seems like a solid starting place for analysis if nothing else.”

  • One risk manager asked peers to contact him if they are using the Goldman Atlas tool for VaR. “I’m super interested in your thoughts on it. We just started using it, and it has come very far from where it was two years ago,” he said.
    • Goldman added the VaR tool to Atlas in 2018; Atlas debuted in 2015.
  • “The GS Atlas system is about value at risk, which is modeling that helps to quantify the risk,” the member said.  So given risk profile A, what is the potential impact of B if nothing is done? This helps a corporate decide what risk to manage (helps us decide what to do),” he said after the meeting.

Risk decomposition. The tool includes what Goldman calls a “risk decomposition model” that uses “market forwards, volatility and historical correlation parameters to quantify VaR on an individual and portfolio level.” Goldman says this allows corporates to:

  • Identify optimal hedge portfolios to meet risk and hedging cost goals.
  • Track the key drivers of currency risk to target hedges more efficiently.
  • Compare multiple hedging strategies across an array of risk metrics.

Sample portfolio. Goldman’s marketing material shows how VaR provides valuable insights for risk managers about their portfolios.

  • As the table above shows, the Canadian dollar (CAD) and the Mexican peso (MXN) contribute the largest amount of risk on an individual basis to a sample portfolio. See the figures marked 1.
  • “But when considered in the context of the broader portfolio of FX exposures, CAD actually represents a much lesser risk (~24% of the sample company’s total risk instead of ~38% if calculated on an individual basis),” Goldman’s slide says. “And MXN represents a much larger risk (70% in the context of the portfolio vs ~39% on an individual basis).”
  • The large difference in the figures marked 2 is explained by the differing levels of volatility of the two currencies.
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Spring and Derisking in the Air for Defined Benefit Pension Plans

A strong stock market and higher interest rates plus regulatory relief bring smiles to some DB plan managers.

An upbeat mood befitting the beginning of spring prevailed at this week’s meeting of NeuGroup for Pensions and Benefits. With the yield on the 10-year US Treasury note rebounding to pre-Covid levels and equities trading in the vicinity of all-time highs, a summer of full funding is within sight for many plans.

A strong stock market and higher interest rates plus regulatory relief bring smiles to some DB plan managers.

An upbeat mood befitting the beginning of spring prevailed at this week’s meeting of NeuGroup for Pensions and Benefits. With the yield on the 10-year US Treasury note rebounding to pre-Covid levels and equities trading in the vicinity of all-time highs, a summer of full funding is within sight for many plans.

  • Below are takeaways distilled by NeuGroup executive advisor Roger Heine, who helped lead the meeting.

Derisking in fashion. Members at several companies did not stay on the sidelines—they jumped into the game by sticking to established policies to derisk as financial markets moved in their favor. More than one said their moves came after hitting glide path triggers.

  • These pension fund managers reduced equity exposure and increased fixed income, in some cases by using derivatives to move quickly with minimal transaction costs. 
  • Members are also well aware that some of the stocks within the big market indices such as the S&P 500 trade at bubble-level multiples, with investment managers steering clear of these potential reefs.

American Rescue Plan Act. More spring thawing arrived following the passage this month of the American Rescue Plan Act (ARPA).  Kevin McLaughlin, of meeting sponsor Insight Investment, described how alterations to complex funding calculations effectively mean no required pension funding for years to come.  

  • While this will particularly aid highly leveraged companies with big pension deficits, most of the NeuGroup participants with better funded plans really won’t be impacted.
  • These members indicated that their funding decisions are more driven by avoiding steep variable rate PBGC fees or potentially triggering tax deductions should corporate tax rates increase in the future.  
  • The ARPA also provides $86 billion to bail out qualifying multiemployer pension funds; but again, this has little impact on members except that these funds might compete for investment-grade fixed-income product down the road.

Covid mortality. In response to a member question, Mr. McLaughlin also addressed whether Covid mortality—approaching 550,000 in the US—will have any impact on mortality tables used to calculate pension liabilities.  

  • While there is a likely a onetime impact on liabilities, he said it is unlikely that there will be any material shift in life expectancy as negative factors such as deferred health screenings and weakened Covid survivors may be offset by better health practices and pharmaceutical breakthroughs following Covid vaccine innovations.
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Talking Shop: How Do You Use Counterparty Exposure Information?

Member question: “Does your organization review counterparty exposure? If so, how do you use this information?

  • “What exposure types do you include? Cash, bank products, derivative contracts, other?
  • “I understand that there are some organizations that set limits to how much exposure can be outstanding per counterparty. Does anyone have this practice in place?”

Member question: “Does your organization review counterparty exposure? If so, how do you use this information?

  • “What exposure types do you include? Cash, bank products, derivative contracts, other?
  • “I understand that there are some organizations that set limits to how much exposure can be outstanding per counterparty. Does anyone have this practice in place?”

Peer answer 1: “I monitor this frequently and have limits tied to my overall assets. Here are some items we look at for our liquidity providers:

  • Jurisdiction
  • Regulatory environment and views
  • Settlement process
  • Liquidity on their platform
  • Any policies and procedures that are shared; shared financials when applicable
  • Customer service, which is always a big one.”

Peer answer 2:  “We monitor our counterparty exposure closely, and formally review it at a leadership level at least once a quarter (part of our policy). We bucket our exposures into three different categories: operating cash, investments and derivatives.

  • “We have a pretty strict policy on investments/excess cash; so when monitoring/reporting, we’re making sure we’re within our global limits and call out any issues we have experienced or potentially could occur in the near future. We have many local markets that manage their cash directly, so we’re making sure we’re within limits from a global perspective.
  • “The derivative exposures are monitored from a collateral perspective and help when looking at new derivatives and deciding which banks we may choose to execute with. We don’t have a limit on the amount outstanding for derivatives; we just monitor to make sure CSAs are working as intended.
  • “The operating cash exposures are monitored differently as we’re required to have various bank accounts due to local market regulations. We don’t have a policy we’re adhering to for this section of cash but make sure we know where all our cash is—and where to focus first if something were to occur globally (Covid pandemic, financial crisis, etc).”
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A Risk Manager Leveraging Flexibility to Benefit from Volatility

FX meeting sponsor Standard Chartered: Hedge policy flexibility may decide if volatility is treasury’s friend or foe.

Volatility in foreign exchange, commodity and other markets sparked by the pandemic presented risk managers with challenges to their hedging programs. And while some corporates ended up with financial pain, others turned the volatility to their advantage.

FX meeting sponsor Standard Chartered: Hedge policy flexibility may decide if volatility is treasury’s friend or foe.

Volatility in foreign exchange, commodity and other markets sparked by the pandemic presented risk managers with challenges to their hedging programs. And while some corporates ended up with financial pain, others turned the volatility to their advantage.

  • At a recent meeting of NeuGroup for Foreign Exchange sponsored by Standard Chartered, a representative of the bank used the positive experience of one member to underscore the benefits of hedging policies that give risk managers flexibility in how and how much to hedge, and for how long.

What you need to take advantage. “The volatility we’ve seen has been advantageous,” said the member. “We’re coming at it from a different perspective.” Unlike many members who have long exposures, in most countries, the company “is short, selling dollars, buying local currencies,” she explained.

  • The member described her company’s hedging policy as “very flexible; we use forwards and options—zero cost collars.” Treasury also has flexibility in how much to hedge, all the way up to 100% of the company’s exposures.
  • There are “no stipulations,” and the company’s traders “develop their own strategies” for hedging, she said.
  • “Right now we’re experiencing positive OCI (other comprehensive income) and mark-to-market gains,” the member told peers. “This is a good story for us.”

Nimble and quick. Standard Chartered’s head of client analytics said that policy flexibility like what exists at the member company gives corporates the ability to be “nimble and quick,” adding that, “Volatility can be your enemy or your friend depending on your flexibility.”

  • In addition to a flexible policy, an efficient trade approval process for trades also allow risk managers to add “interesting hedges to capture the volatility and momentum” of markets roiled by news and events, she said.

Options in theory, not practice. It appears that most risk management teams have the policy approval to use options in their hedging strategies but do not use them. As the chart below shows, about two-thirds of the companies surveyed at the meeting said options are allowed at their companies but are not in use.

Why not options? In response to questions from Standard Chartered, members gave several reasons why they are not currently using options to hedge risk other than the cost of option premiums:

  • We have approval to use from an accounting, auditor and policy perspective. But there still seems to be a stigma against them internally. We are self-insured, and options often feel like insurance, so it’s a culture thing.  We just need a good business case to help us get to the finish line!”
  • “It’s a corporate governance issue; it takes time and effort to get approval, but we want to.”
  • “We’re trying to find the right time and haven’t found the right opportunity to dip our toes in.”
  • “Showing the value [to senior management] is the hurdle.”

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Racing to Change Horses: A Risk Manager’s Quick Switch to AtlasFX

An FX risk manager changed exposure ID systems and implemented the new solution in just three months.

Changing horses in midstream is never easy, but sometimes it’s the right move. One FX risk manager who did it explained to members of NeuGroup for Foreign Exchange the benefits of jumping off his existing exposure identification system and hopping onto AtlasFX—in an extremely compressed timeline of three months.

An FX risk manager changed exposure ID systems and implemented the new solution in just three months.

Changing horses in midstream is never easy, but sometimes it’s the right move. One FX risk manager who did it explained to members of NeuGroup for Foreign Exchange the benefits of jumping off his existing exposure identification system and hopping onto AtlasFX—in an extremely compressed timeline of three months.  

  • The time and effort spent making the switch under pressure paid off big-time. “We now have our dream state,” he said at a March meeting sponsored by Standard Chartered.  
  • The new solution has boosted the company’s exposure accuracy, leaving the FX team more time for “value-add” activities, he said. Changing vendors also resulted in significant cost savings.
  • The member started his presentation by thanking peers at two companies he called “early AtlasFX explorers.”

Quick pivot. One day last year, the member told AtlasFX that he needed to stick with his company’s existing exposure ID vendor for at least another year.

  • The next day, for various reasons, he reversed course, set up a meeting with AtlasFX and explained exactly what he wanted, after the company asked him to describe his ideal state.
  • About five days later, the member told AtlasFX that he was all in. Key to the decision was having confidence in the AtlasFX team’s ability to deliver the dream state and “confidence they could pull this off in three months,” the member said.
    • He had to make a go-no-go decision immediately or would have to renew the contract with the existing vendor.

Making the dream real. His dream included opening up AtlasFX to see foreign exchange exposure data from his ERP, SAP, and current hedges from his TMS, Reval. And he wanted the ability to click a button to approve and move trade actions to his trading platform, FXall.

  • Further, after trade execution, he wanted the info straight-through processed to both Reval (to book external trades) and AtlasFX, where intercompany trades would be automatically generated and sent to Reval.
  • “To pull it off, there needed to be connectivity between all systems,” he said. “SAP, AtlasFX, Reval and FXall—and a new, novel connection between AtlasFX and Reval to automate back-to-back hedging at FXall trade rates.”
  • AtlasFX made it all happen, giving the member the ability to execute the company’s balance sheet hedge program (see chart below) the way he envisioned.
    • “I honestly thought that dream would be impossible to achieve,” he said.
  • He said the extent of the exposure discovery and automation the FX team has with AtlasFX was not possible with the previous vendor.
  • The solution AtlasFX devised to solve the member’s connectivity and automation issues can now be used by other corporates that use the same ERP, trading platform and TMS, he added.

Domain expertise. The member’s presentation listed several other reasons his company decided on AtlasFX, including “domain expertise provided routinely throughout implementation.” He noted that the fintech’s founders have experience as treasury practitioners, and said its representatives “are risk managers like us, they speak the language.”

  • The reps, he added, “learn a company’s process when implementing the solution.” This paid off when the AtlasFX team suggested a simplification of the company’s settlement strategy for derivatives, helping the FX team better “distribute our workload,” he said.

Exposure determination technology. The member said AtlasFX has so-called query software that “adapts to changes immediately” in the company’s general ledger, saving hours of maintenance time each month compared to what was required before.

  • He said delays in making this type of change can mean treasury misses exposures, potentially resulting in insufficient or incorrect hedges.
  • While exposure determination is faster using AtlasFX, setting up the automation, interfaces and workflows making that speed possible “was definitely more complex,” the member said.
    • “That took some deep thinking and partnership between fintech vendors, and we had to involve our IT team for the connection to SAP data.”

Performance analysis. Using its previous vendor’s solution, the company was not able to successfully configure end-of-month hedging analysis to determine how well its hedges performed relative to actual accounting losses and expectations. “With our prior vendor, we were only able to get 25% of the process working,” the member said.

  • He said that with AtlasFX, 80% of the process was working within a month. His presentation read, “AtlasFX: In process of configuring and testing—we will get there!”
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Where Captives Fit in the Insurance Puzzle Corporates Want to Solve

Captives offer tax advantages and flexibility, but treasury teams must make sure trapping cash in them is worth the benefits.

Rising insurance costs are putting more focus on captives, a solution that offers tax advantages, flexibility and lower costs than traditional insurance.

  • For those reasons and others, several members at a recent meeting of NeuGroup for Retail Treasury said they plan to expand their captives to cover more risk.
  • Other members say captives are not a good use of capital for their companies.

Captives offer tax advantages and flexibility, but treasury teams must make sure trapping cash in them is worth the benefits.

Rising insurance costs are putting more focus on captives, a solution that offers tax advantages, flexibility and lower costs than traditional insurance.

  • For those reasons and others, several members at a recent meeting of NeuGroup for Retail Treasury said they plan to expand their captives to cover more risk.
  • Other members say captives are not a good use of capital for their companies.

The case for captives. “A captive brings a few benefits, and a few challenges,” one member said. “From a financial standpoint, managing the risk within the captive brings a lower general cost than translating those risks to a third party. There are some limits, but the day-to-day expenses for, say, worker’s compensation, can be lower.”

  • One retail treasurer whose company works on a franchise model said she had success with an offshore captive, which did a “bang-up job,” and proved a boon as insurance costs began to rise.
  • “Instead of paying premiums to the insurance company and the insurer keeping those profits, we are able to charge our stores individually for our expected losses; and when we didn’t reach those expected losses, we kept those profits,” the member said.
    • “Over a 10 year period, we were able to build up capital to increase our retentions, which minimizes the actual risk transfer insurance that we’re buying from an insurer, and we’re able to weather market swings much better.”
  • Members also discussed the non-financial benefits of captives, including a faster claims process and control over the standards used to handle claims.

Capital concerns. Saving on taxes and speeding up the claims process “may or may not be sufficient reasons to start up a captive,” one member warned. The big reason: captives trap capital.

  • “From a P&L perspective, [a captive] looks good, as it lowers tax expense,” another member said. “However, from a capital allocation perspective, we have trapped capital and it returns less than our WACC, and much less than the targeted ROIC we expect the business to return. So it’s not a good use of capital for us.
  • “It’s a capital allocation decision at the end-of-the-day,” she added. “You can allocate capital to the captive, to the business or back to shareholders. This would be a circumstance specific to each company.
  • “For instance, for us, many states do not allow us to self-insure workers’ comp without an insurance company backing the self-insurance. In this case, the captive acts in that capacity. We would need to analyze whether it’s worth the capital.”

Monitoring performance. To combat capital inefficiency, multiple members recommended incorporating routine strategic reviews, measuring a captive’s benefits against its cost.

  • During one of these reviews, one treasurer saw that a captive established before he had the job had more cash trapped than he found justifiable reduced the “static” balance in the captive by one-third without significantly impacting the captive’s tax benefit.
  • Another member learned during an internal review that the location of the company’s international captive was no longer viable due to recent regulation.
  • “The captive was set up because it could provide direct policies to some companies, saving us some fronting costs,” the member said. “Since recent policy has been implemented [in this country], we’ve found the capital requirements and solvency requirements overly burdensome.
    • “We undertook a study to see if there is a different domicile that we should be using for that risk and opened a new captive and shifted those policies over.”
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Talking Shop: Do You Have One Banking Partner for AR and AP?

Member question: “In the US, do you have one banking partner for AR and AP, or do you split the business, with one bank for AR and a separate bank for AP?

  • “For those that split the business, is this a share of wallet decision or an operational decision? Are there any operational pain points associated with having two banking partners?”

Member question: “In the US, do you have one banking partner for AR and AP, or do you split the business, with one bank for AR and a separate bank for AP?

  • “For those that split the business, is this a share of wallet decision or an operational decision? Are there any operational pain points associated with having two banking partners?”

Peer survey results: The majority of survey respondents use a single bank, with about one-third splitting the business.

Peer answer 1: “We have historically had two AR banks (two different business units), and one of those was different than our AP bank. Recently, we awarded the other AR business to the same bank and now we are fully concentrated.

  • “This was more due to the other bank leaving the AR space. From a share of wallet perspective, it has created an issue for us where we are too concentrated with one bank relative to the credit participation.”

Peer answer 2: “We currently have our US AR and AP with the same bank, but we are in the middle of an RFP for the US AP business. The share of wallet is an important factor for us, but technological capabilities of the bank (e.g., supporting POBO) is an even larger factor in the RFP.”

Peer answer 3: “We use one US AR/AP banking partner. We actually had one banking partner for our global cash management operations, but transitioned to a regional strategy through an RFP about five years ago.”

Peer answer 4: “In the US, we split the business, one bank for AR and one for AP. This was driven by a share of wallet decision but also a risk diversification and business continuity decision, which has proven to be helpful for us.”

  • Response to another peer’s question: “[There are] no manual transfers [between AR and AP], everything’s automated. Frankly, there are so many ways to do so—you just need to be creative and ask your bank the right questions.”

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No Sale: Convertibles at Great Prices Fail to Impress IG Corporates

Companies rated investment grade expressed reluctance to issue convertible bonds, despite favorable conditions.

It can be a nonstarter to raise the topic of convertible bonds with treasurers at investment-grade companies that can already issue debt with very low interest rates and don’t want their stock diluted when investors convert bonds to equity.

  • But many NeuGroup members whose companies have high credit ratings, including some at a recent meeting of NeuGroup for Capital Markets, say all their banks have pitched convertibles. And some treasury teams are also getting questions internally from CFOs and board members.
  • One member, echoing others, said 0% coupons and conversion premiums in the range of 50% to 70%, along with updated FASB accounting standards (see chart) that could simplify the process, makes convertible bonds “more attractive, but it’s an odd gamble when rates [for straight debt] are below 3%.”

Companies rated investment grade expressed reluctance to issue convertible bonds, despite favorable conditions.

It can be a nonstarter to raise the topic of convertible bonds with treasurers at investment-grade companies that can already issue debt with very low interest rates and don’t want their stock diluted when investors convert bonds to equity.

  • But many NeuGroup members whose companies have high credit ratings, including some at a recent meeting of NeuGroup for Capital Markets, say all their banks have pitched convertibles. And some treasury teams are also getting questions internally from CFOs and board members.
  • One member, echoing others, said 0% coupons and conversion premiums in the range of 50% to 70%, along with updated FASB accounting standards (see chart) that could simplify the process, makes convertible bonds “more attractive, but it’s an odd gamble when rates [for straight debt] are below 3%.”

Ideal conditions. One member with experience issuing convertibles before his company became investment grade said the most difficult part of the process was documentation, so the simplification by FASB is significant.

  • The FASB changes come amid market factors that have historically been good for convertible bond issuance:
    • Low interest rates
    • High equity prices and high valuations such as PE (pricing/earnings) ratios
    • High volatility levels
  • These condition have sparked a flood of companies with non-investment grade ratings, or no ratings, to issue convertibles. The Financial Times, citing Refinitiv, reported that in January and February, companies raised almost $34 billion, 68% more than in the first two months of 2020.

Dilution. The big downside to convertible instruments, NeuGroup members said, is dilution of a company’s common stock, which potentially makes the shares less valuable to shareholders.

  • “If the stock price goes to 10% above my strike price, my upper bounds, I’m diluting myself $4 billion, is that really worth 20 basis points of savings?” one member asked. “Your base is much higher because your company has doubled the wealth, but you still have to explain why you’ve taken $4 billion of dilution.”
  • The same member said, “As much as banks love to pitch convertibles because they can charge [more than for straight debt deals], some of our closest banks have been honest and been like, ‘You’ve heard about convertibles a lot I’m sure, but we don’t recommend them for investment-grade companies.’”
    • Another member added, “Some [banks] said, ‘If your stock goes up by a hundred percent, are you really still going to be worried about dilution?’ Economically, yes, I will.”
    • “I’ll echo those thoughts,” another member said. “Although there is great headline attractiveness, 50 basis points is not worth the risk of dilution.”

Pair convertible with a buyback? One member raised the intriguing idea of pairing a convertible issue with a stock repurchase plan to offset or hedge the dilution of additional stock. The member, however, said he’s still too skeptical of convertibles to embrace the strategy.

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Future State: Data Lakes, Straight-Through Processing and APIs

Takeaways from NeuGroup’s TMS working group featuring discussion of automation, consolidation of ERPs and more.

Straight-through processing (STP) that involves several systems, including payments and bank connectivity, sounds great. But members at a recent NeuGroup TMS Tuesday working group session agreed that efforts to accelerate STP first require a more detailed plan for the overall technology end state of treasury infrastructure.

  • For example, one member said his company is still unsure if it would be best to further integrate all payment processes into the ERP, or create a payment factory, which may sound like a nuance but requires technology process decisions.

Takeaways from NeuGroup’s TMS working group featuring discussion of automation, consolidation of ERPs and more.

Straight-through processing (STP) that involves several systems, including payments and bank connectivity, sounds great. But members at a recent NeuGroup TMS Tuesday working group session agreed that efforts to accelerate STP first require a more detailed plan for the overall technology end state of treasury infrastructure.

  • For example, one member said his company is still unsure if it would be best to further integrate all payment processes into the ERP, or create a payment factory, which may sound like a nuance but requires technology process decisions.  

Consolidation of ERPs. Members also discussed whether it is worthwhile to migrate all ERPs to one point, or to leverage the TMS to bridge several different ERPs. Conglomerates and serial acquirers usually end up with more ERPs than they want; but consolidating many into fewer or just one can be a slog.

  • A self-described “portfolio of companies” is leveraging its Kyriba implementation to connect multiple ERPs to it to enable all its vendor payments. 

Data lakes and one source of truth. For some very large companies in the NeuGroup Network, the number of ERPs and the enormous volume of payment transactions expose the vulnerabilities of a file-based process underpinning their payment execution.

  • More and more companies are driving initiatives to centralize all the data in a repository—a data lake—that can be the “source of truth” for a variety of systems tools supporting treasury processes like payments, rather than having data sent around in files.

Automating payments and compliance. Payment automation is a big challenge, but another is regulatory compliance, a job nobody gets a kick out of but that can cause problems in a complex world.

  • Managing bank account signers, FBAR reporting and KYC-related processes is high on the list of desired automation for members. Both FIS and ION have built bank account management tools; two members mentioned ION and said they were pleased with IBAM, its tool.

You have to start somewhere. With systems like FXall for FX trading and a TMS, the key is that all systems work together seamlessly.

  • Does that mean that the FX trading process, for example, needs to always start in one place for it to work? Not necessarily.
  • One member noted that the process can start either in FXall or in Reval, their TMS, and it will work either way. Other members concurred that both 360T and FXall have worked out the integration processes well.

With APIs, the key word is consolidator. APIs remain a hot topic, but MNCs with a large number of banking partners cannot have one API for each one. Similar to the service bureau concept, members agreed that they would not move from a direct connection like SWIFT unless there were some consolidator as a service-type vendor to reduce the APIs.

  • Separately, adopting APIs is something most members assume they will eventually do as part of another transformation or implementation, not as a standalone project.
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Do Stock Buybacks Create Value or Just Return Capital to Investors?

Members at companies with excess cash discuss whether share repurchases generate economic value for shareholders.

ConocoPhillips on Wednesday announced it is resuming its share repurchase program, citing its “long-standing priority to return greater than 30% of cash from operations to shareholders annually.” The company is not alone:

  • A recent NeuGroup Peer Research Survey showed that 82% of respondents consider the return of excess capital the primary objective of their company’s share repurchase program. Only 9% said creating shareholder value was the primary goal.
  • However, 59% of respondents said they believe share repurchases generate economic value for shareholders (see chart) and another 27% agreed—but only if the share purchase price is below the company’s intrinsic value.

Members at companies with excess cash discuss whether share repurchases generate economic value for shareholders.

ConocoPhillips on Wednesday announced it is resuming its share repurchase program, citing its “long-standing priority to return greater than 30% of cash from operations to shareholders annually.” The company is not alone:

  • A recent NeuGroup Peer Research Survey showed that 82% of respondents consider the return of excess capital the primary objective of their company’s share repurchase program. Only 9% said creating shareholder value was the primary goal.
  • However, 59% of respondents said they believe share repurchases generate economic value for shareholders (see chart) and another 27% agreed—but only if the share purchase price is below the company’s intrinsic value.

Surprising result? The NeuGroup member who requested the survey expressed surprise at the number of his peers who believe buybacks generate economic value.

  • He told the group that when his company asks banks do analyses of its total shareholder return (TSR), “They ascribe zero value to repurchases and dividends. Their rationale is that this is capital that the shareholders have a claim on regardless of whether it’s in the company or in their pocket.”
  • “My view is that repurchases might create value if they are below intrinsic value, but as people said, intrinsic value can be tough to define,” he said in a follow-up email. “And the reality is that a company’s shares probably don’t trade below it very often anyway.”
  • In his follow-up, he also cited a white paper that he wrote: “There is no certainty that any gap between intrinsic and market value will ultimately close; additionally, a study by Fortuna Advisors, a strategic advisory firm, indicates that ‘over time the market sees through this engineered EPS growth and typically drives down the P/E multiple for companies that rely heavily on buybacks.’” 
  • The white paper also says, “There is evidence to suggest that newly announced repurchase authorizations cause at least temporary share price bumps, but this is due to the signaling effect (of companies indicating they are bullish on their future), not repurchases themselves.”

In the yes camp. One of the members who believe share repurchases create value for investors if the price is below intrinsic value said his company “beats VWAP (volume weighted average price) more than we don’t.” He explained his strategy for executing buybacks and emphasized the goal is not to be a day trader but to “buy back as many shares as I possibly can” using the amount allocated for buybacks by the board.

  • Another member in the yes camp explained some of his reasoning in a follow-up email, writing, “Part of adding shareholder value is minimizing agency costs (arising from a lot of things but fundamentally to misaligned incentives and interests between management and shareholders). 
  • “So distributing excess cash is a way to reduce this, with the idea that when you get rid of excess cash by buybacks, in addition to a neutral cash distribution, you’re minimizing agency costs.”

Not convinced. The treasurer who requested the survey said the discussion at the meeting did not prove to him that repurchases generate economic value.

  • “The arguments mostly seemed to circle back to whether repurchases are beating VWAP, which in itself does not indicate they’re creating economic value,” he said.
  • That said, he does agree that the “avoidance of agency costs, i.e., the risk of making bad investments just because the cash is available” is one of the valid reasons to do a buyback.

Other reasons to do buybacks. This treasurer’s other main reasons to do repurchases include moving “inefficient capital off the balance sheet. Excess cash is inefficient capital; bank deposits, money market funds, etc. earn well below WACC (weighted average cost of capital).”

  • His white paper offers another reason to buy back stock: “Investors frequently redeploy the proceeds of stock sales to other investments in the economy, essentially shifting capital from companies that have more than they need to companies that need capital to grow. 
  • “This cycling of capital is healthy for the economy. According to Lloyd Blankfein, former CEO of Goldman Sachs, the proceeds investors receive from selling shares get ‘reinvested in higher growth businesses that boost the economy and jobs.’”

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Counting Cash: Many Companies Will Maintain or Up Cash Levels in H1

An ICD survey also shows steady and growing use of money market funds and higher interest in ESG products.

Cash on corporate balance sheets reached a record in 2020, topping $2 trillion, as companies responded to economic uncertainty created by the pandemic. New data from money market fund portal ICD suggests that a majority of corporates do not plan to cut cash levels in the first half of 2021.

  • 61% of the 150 treasury clients surveyed by ICD plan to maintain or increase their cash balances in the first half, with 39% expecting to reduce cash levels.

An ICD survey also shows steady and growing use of money market funds and higher interest in ESG products.

Cash on corporate balance sheets reached a record in 2020, topping $2 trillion, as companies responded to economic uncertainty created by the pandemic. New data from money market fund portal ICD suggests that a majority of corporates do not plan to cut cash levels in the first half of 2021.

  • 61% of the 150 treasury clients surveyed by ICD plan to maintain or increase their cash balances in the first half, with 39% expecting to reduce cash levels.

Prime funds. The survey also showed fewer than half (47%) of the companies are invested in or plan to invest in prime money market funds in 2021. That’s down from 64% in 2019, ICD said. Many companies moved out of prime funds and into government funds before and during the pandemic.

  • But as the first chart below shows, nearly all respondents (86%) plan to maintain or increase their overall money market fund investments this year.

Growing interest in ESG. The second chart shows that 41% of respondents expressed interest in ESG products. That’s up from 32% in 2020, according to ICD. In Europe, about half (49%) of the treasury professionals ICD surveyed plan to invest in ESG or socially responsible investing products.

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Green Discount: Treasury Wins With a Sustainability-Linked Revolver

After a corporate successfully launched a sustainability-linked revolver, the treasurer’s phone started ringing.

When it came time for one NeuGroup member to renew an existing five-year revolver, he saw an opportunity to improve pricing and generate positive PR by leveraging the ESG goals that the company had recently put in place.

  • The member’s company worked with BNP Paribas and Unicredit to structure a multibillion-dollar sustainability-linked revolver, the first one in its industry sector.
  • “I’ve received a lot of calls from other treasurers in the last few months asking how we did it and what it entailed,” the member said. “So I’m sure you’re going to see more in the next few months.”

After a corporate successfully launched a sustainability-linked revolver, the treasurer’s phone started ringing.

When it came time for one NeuGroup member to renew an existing five-year revolver, he saw an opportunity to improve pricing and generate positive PR by leveraging the ESG goals that the company had recently put in place.

  • The member’s company worked with BNP Paribas and Unicredit to structure a multibillion-dollar sustainability-linked revolver, the first one in its industry sector.
  • “I’ve received a lot of calls from other treasurers in the last few months asking how we did it and what it entailed,” the member said. “So I’m sure you’re going to see more in the next few months.”

Link to realistic goals.  Sustainability-linked loans incur cost penalties in the form of higher rates or fees if companies do not meet agreed-upon goals. That’s one reason that Martin Rogez, vice president of sustainable finance at BNP Paribas, said banks work with corporates to identify goals the company can realistically achieve and still have a measurable impact.

  • These vary from sustainability-focused key performance indicators to the company’s official ESG rating. The member’s company had two linked goals, based on a five-year plan for reducing greenhouse gas emissions and workplace injuries.
  • Mr. Rogez said these deals typically do not require much time investment on the corporate’s end, as long as it already has an ESG strategy in place. He said he recommends the company appoint a “sustainability coordinator” to help manage and monitor its ESG goals, someone the bank works with throughout the process.

Setting the rate framework. Mr. Rogez said the interest rate for the revolver is determined by starting with the classic lending criteria of the borrower’s credit profile and a corresponding base rate.

  • The bank and the company then agree on a pricing adjustment, which he said is typically a handful of basis points (the same amount for discount and penalty) and depends on the ambition of the goals set, among other factors.
  • The pricing impact of meeting the ESG goals could be applied to the loan’s interest rate, its commitment fee or both, he said.
  • Each year, a company reports whether it met the goals, and the impact is applied. If the company meets its goal, the discounted rate will apply. If not, the penalty or premium amount will be added to the base rate.

Sending a message. The amount of the impact for the member was ±5 basis points on the interest rate for the revolver’s drawn price, and ±1 basis point on the undrawn fee. The member suggested that before the pandemic these numbers could have been higher.

  • And while the pandemic and the company’s credit rating will keep the ESG discount from having much impact on the company’s bottom line, the member said the deal was worthwhile. “Even though it’s not a huge number, symbolically it’s an important message to send.”
  • The member said that his company’s revolving credit facility is typically not used; so only having a discount on the revolver’s drawn price “would not be as compelling.” A smaller discount or premium applies to the undrawn price for the company’s revolver as well.

European banks. The member said European banks have more experience working with ESG loans, which is why he chose BNP and Unicredit to be the deal’s primary ESG banks.

  • Because there is so much public interest in ESG, the member said it was easy to attract banks. He had the opportunity to choose between 10 banks vying to be partners on the ESG component of the loan.
  • The member said he used this opportunity to help one bank to tier one of the credit facility.
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Talking Shop: A Fintech Collects Capital Markets Pricing Data

Background: Members of NeuGroup for Capital Markets recently heard a presentation from InterPrice Technologies, a woman-owned fintech that collects pricing data for issuers. The company says its platform gives corporates access to their costs of capital “at any point in time and streamlines their communication with financing partners.”

  • The technology “automatically aggregates bond, commercial paper and loan indications into intuitive dashboards across currencies and financing products,” InterPrice says.
  • InterPrice on Monday announced it has raised $2.5 million in seed money led by Bowery Capital.

Background: Members of NeuGroup for Capital Markets recently heard a presentation from InterPrice Technologies, a woman-owned fintech that collects pricing data for issuers. The company says its platform gives corporates access to their costs of capital “at any point in time and streamlines their communication with financing partners.”

  • The technology “automatically aggregates bond, commercial paper and loan indications into intuitive dashboards across currencies and financing products,” InterPrice says.
  • InterPrice on Monday announced it has raised $2.5 million in seed money led by Bowery Capital.

Member question: “Has anyone signed on with InterPrice? We worked through a demo and it looked interesting. As we look for ways to work more efficiently, curious if anyone has found the offering to be worth exploring further?”

Peer answer 1: “We haven’t signed up for it yet, but have looked at it more thoroughly and have been advising [InterPrice] on functionality that I think would be helpful for corporates.

  • “They are still early in their process, but so far I think there a lot of value to what they are trying to create. They are also very open to product suggestions if there is specific functionality that you think would be beneficial.”

Peer answer 2: “I’m a bit reluctant to sign up now because I don’t know how much it’s going to cost when they start charging for it. I don’t want to get everything set up and then [reverse course].”

InterPrice response. Asked for comment, InterPrice CEO Olga Chin responded, “We are incredibly appreciative of the support we have gotten from multiple treasury teams in building the InterPrice platform.

  • “In the last few months, InterPrice has attracted some of the top corporate issuers in the market. As part of our rollout, we have offered a free trial to every corporate treasury team.
  • “Based on feedback from corporate treasury teams, we anticipate a fee model that is based on issuance versus a subscription fee after the trial period.
  • “If you would like to discuss a suggested fee schedule or schedule a demo, please reach out to olga@interpricetech.com.”

Peer answer 3: “We are using the platform on a pilot basis. The setup has actually been fairly painless, as we were already tracking much of this information in Excel and were able to upload our history.

  • “Banks are starting to fall in line with onboarding, though we are still sending the bulk of our pricing indications to the email parsing inbox for upload. The use case for commercial paper is also quite compelling.”

Member response: “Our Excel record-keeping system is lacking; part of the appeal of the offering. Understood on historical data—that is a great data point.”

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Insurance and the Efficient Frontier: What Happens in a Soft Market?

NeuGroup members respond to Willis Towers Watson’s risk strategy of using modern portfolio theory for insurance. 

Willis Towers Watson recently presented to NeuGroup members an approach to modernizing how corporates buy insurance. As NeuGroup Insights explained last week, it involves modern portfolio theory and the efficient frontier.

NeuGroup members respond to Willis Towers Watson’s risk strategy of using modern portfolio theory for insurance. 

Willis Towers Watson recently presented to NeuGroup members an approach to modernizing how corporates buy insurance. As NeuGroup Insights explained last week, it involves modern portfolio theory and the efficient frontier.

  • The presentation intrigued many members, including one who said WTW provided a great overview of the central idea. He wondered how treasury would effectively convey this new way of managing risk to the CFO and the board, including the idea of buying less or none of some coverage.
  • WTW said the process requires a lot of preparatory meetings, ideally face-to-face, and that no one answer fits all companies.

What if insurance market softens? In a follow-up interview, another member who attended raised some questions about the approach if the current, hard insurance market were to soften. Among her comments:

  • “My guess is that this strategy is popping up right now due to the fact that the market is tougher in certain spaces than it has been in the past.  Without a firm policy on what you’re buying insurance on and what you’re seeking to protect, this is something that will fall on its face if the market softens.
  • “I agree that insurance is a method of risk management that is likely not being used effectively relative to a company’s desired outcome. This approach is one way to solve it. 
    •  “But without goal setting and benchmarking, when the correlations break down, there will be a lot of 20/20 hindsight on this methodology. It only works if you have the right infrastructure in place.
  • “I’m not sure I would be interested in buying on the efficient frontier, as correlations work until they don’t. That being said, I find there is little guidance or understanding internally as to why we’re buying insurance and what we’re really trying to protect. 
  • “For us, this session was helpful, as I think we would approach it as a goal-setting exercise. What is our goal? What are we trying to protect? What is our anticipated outcome? How do we benchmark our results?
  • “Then we would look to [WTW] to analyze our exposures and tell us which strategy best achieves our goals, and where we should be investing in insurance, regardless of market conditions.”

WTW’s responses. A spokeswoman for WTW provided these responses:

  • “It is Willis Towers Watson’s position that this is a market correction. Due to climate change, social inflation and many other factors, we do not expect insurance prices to fall. [See] our 2021 Marketplace Realities.
  • “While it is true that the cost component will matter less if the market softens, the risk component is much bigger. Considering all risks together in portfolio is the only way to get an accurate picture of the risk an organization faces, and only then can they make decisions aligned with their corporate financial goals.
    • “It’s still valuable to take a portfolio view regardless of the cost of insurance.
  • “There are certainly good reasons for organizations not to move all the way to the efficient frontier. Not every insurance decision is a financial decision based on the numbers; there are qualitative considerations as well.
  • “We have seen organizations decide that moving toward the efficient frontier (reducing risk and cost, but not to their minimums) works for them.
  • “The assumption of no correlation is an assumption of 0 correlation, or independence of every risk. Our position is that we know that the assumption of total independence, or zero correlation, is wrong. While any assumption about correlation is also possibly wrong, it’s ‘less wrong.’”
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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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Tapping the Power of In-house Banks to Turn Cash Puddles into Pools

Mega-cap treasurers and PwC discuss multiple benefits of IHBs and some complexities of structuring them. 

Treasurers not sold on the value of in-house banks (IHBs) often tell Damien McMahon, a partner at PwC, “We have cash pooling already, and therefore we have a kind of in-house bank,” he recently told a group of NeuGroup members from mega-cap companies.

  • In reality, though, many of the treasurers may have what Mr. McMahon called “cash puddles,” not cash pools.
  • PwC and treasurers from two member companies described turning dozens of small puddles into large cash pools by implementing truly global in-house banks at each company.
  • Among the takeaways from one of the treasurers: The cost savings made possible by the IHB are an added benefit to the bigger goal of achieving the increased efficiency and control IHBs bring to liquidity management.

Mega-cap treasurers and PwC discuss multiple benefits of IHBs and some complexities of structuring them. 

Treasurers not sold on the value of in-house banks (IHBs) often tell Damien McMahon, a partner at PwC, “We have cash pooling already, and therefore we have a kind of in-house bank,” he recently told a group of NeuGroup members from mega-cap companies.

  • In reality, though, many of the treasurers may have what Mr. McMahon called “cash puddles,” not cash pools.
  • PwC and treasurers from two member companies described turning dozens of small puddles into large cash pools by implementing truly global in-house banks at each company.
  • Among the takeaways from one of the treasurers: The cost savings made possible by the IHB are an added benefit to the bigger goal of achieving the increased efficiency and control IHBs bring to liquidity management.

IHB objectives. Mr. McMahon said one of the treasurers was adamant that the IHB maximize the centralization of the company’s liquidity “back to the US,” a key, but often elusive, goal for most treasurers. The company’s other objectives included:

  • Simplifying cash pooling structures to address cash fragmented throughout the company.
    • The other treasurer that worked with PwC said the biggest driver for establishing the IHB was turning more than 50 “puddles” into two large, centralized cash pools, allowing the investment team to achieve higher yields. “That dwarfed from a value point of view all the other benefits.”
  • Minimizing the number of banks and bank accounts by insourcing services, reducing the fees paid to banks.
    • “A lot of this is to pull away the reliance on third-party banks and bring most of that back in-house,” the first member said. Doing that will produce an 80% reduction in the number of banks the company uses and a 30% drop in physical banks accounts (see graphic below).
  • Centralizing global FX exposures. “There were some trades happening in opposite directions on different sides of the Atlantic and that wasn’t efficient,” Mr. McMahon said about the first client.
    • The other client’s treasurer said, “We ended up with a lower set of exposures we needed to hedge, so it reduced the notional on our balance sheet hedging program,” reducing fees and raising efficiency.
    • “And we reduced the number and volume of spot FX trades we did because of all the intercompany settlement,” another source of savings.
  • Building a scalable and future-proof infrastructure to automate and streamline processes, critical for large, high-growth companies.

Icing on the cake. “When I went into this project it wasn’t really about a cost savings overall; it was mostly looking for efficiencies and control,” the treasurer who reduced bank accounts by 30% said. “But what we did get was a big dollar savings and I think that came holistically, which was a great way to look at it.”

Other IHB benefits. Other members shared additional benefits their companies have reaped from IHBs:

  • Reduced credit exposure. One member called the reduction of credit exposure to banks made possible by his company’s IHB structure one of the biggest benefits. The company, he explained, has higher ratings than a majority of its banking partners.
    • “We’ve eliminated significant counterparty credit exposure” by being able to invest excess cash in US treasuries or prime funds, for example, He said. The company’s alternatives in countries including Argentina and Indonesia aren’t as “robust,” he added.
  • Tax. “There can be some huge tax synergies from this, depending on how it’s structured, where it’s located, etc.,” this treasurer said. “We have found this to be a real value-add both on a pre-tax as well as a tax basis.”
  • Cash ownership. Another treasurer noted that cash is a corporate asset managed by treasury, not business units. “By centralizing and aggregating everything up into an in-house bank or pooling structure, it kind of removes that business unit sense of ownership of that cash,” he said.

One big pool? One of the treasurers listening to the presentation asked what Mr. McMahon called the million-dollar question: “We have two cash concentration structures, one in the US and one offshore. And my big question is how do I get to one pool? How do I move that liquidity daily from our international pool? But if tax law changes I want to be able to unwind it quickly.”

Complexity. The answer is not simple, given that multiple tax, accounting, banking and legal considerations must be evaluated and the exact answer will depend on each companies’ unique facts and circumstances, Mr. McMahon said.

  • However, the two PwC clients found that the complexity could be reduced by establishing an international IHB entity and an overarching US IHB entity, he explained. Each consolidates the positions and settlements for their participants.
    • Liquidity flows can then be settled across these two entities, and participants can also settle global intercompany flows between each other in a controlled way via the IHB entities.
  • Both entities and their positions are managed using one single system and a standard set of processes and automations to take care of the detailed position keeping, accounting and reporting required to manage one combined global liquidity structure.
  • “It should be noted that a careful modelling and tax compliance study should be carried out to understand how much liquidity can be shared and what guardrails are needed to avoid adverse tax and accounting consequences,” Mr. McMahon said.
  • The added advantage of the two IHBs is that treasury can also have a ‘follow the sun” model of treasury support for the business as well as for global liquidity management.

Flexibility. As one treasurer remarked, this structure can also give the flexibility to efficiently manage tax compliance under both the existing tax rules enacted in 2017 and also any reversal or amendment of those rules passed during the Biden administration.

Good, not perfect. And the PwC client said while his company did not opt for the most efficient structure possible from a treasury perspective, “This is what makes legal happy, treasury happy and tax happy.”

  • Treasury and PwC evaluated three structures, each with sub-options. “We came to a realization that option 1 is the best. But within option 1, we have option 1a and option 1b that can still both work and that’s what we’re [working on] today.
  • “And we’re very close. We’re just about there to having the full structure in place.”

 

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Making the Devil’s Advocate an Angel on Your Shoulder

NeuGroup risk managers make space for contrarians to question decisions and combat overconfidence.

Rather than shunning contrarians for challenging conventional thinking, corporates need to make sure their decision-making processes always include a constructive devil’s advocate—someone who forces teams to consider all the ramifications of whatever action—or inaction—a company is contemplating.

  • This was among the key pieces of advice given by Michael Zuraw, head of enterprise risk management at ON Semiconductor, during a presentation on decision-making at a recent ERM-focused NeuGroup meeting. He said this best practice applies to all collaborative teams.
  • “Cognitive biases can occur at any link in the [decision-making] chain,” Mr. Zuraw said. “When you’re making a big decision, you need a contrarian thinker who says, ‘Why do we believe that? What if we’re wrong?’”

NeuGroup risk managers make space for contrarians to question decisions and combat overconfidence.

Rather than shunning contrarians for challenging conventional thinking, corporates need to make sure their decision-making processes always include a constructive devil’s advocate—someone who forces teams to consider all the ramifications of whatever action—or inaction—a company is contemplating.

  • This was among the key pieces of advice given by Michael Zuraw, head of enterprise risk management at ON Semiconductor, during a presentation on decision-making at a recent ERM-focused NeuGroup meeting. He said this best practice applies to all collaborative teams.
  • “Cognitive biases can occur at any link in the [decision-making] chain,” Mr. Zuraw said. “When you’re making a big decision, you need a contrarian thinker who says, ‘Why do we believe that? What if we’re wrong?’”

Designate the devil’s advocate. Mr. Zuraw recommends team leaders designate a team member to play devil’s advocate in meetings. “You need to be able to identify, and provide space for, the realist in the room,” he said.

  • “This is the one who’s going to do a check and keep you honest with yourself and is going to help you identify and recognize biases that can creep into your decision.”
  • One member had worked at a company whose culture discouraged contrarian positions, going so far as to not invite staff members who always added a wrinkle to the latest plan with an objection or contrary opinion.
  • To combat this, the company implemented an idea endorsed by Mr. Zuraw: A devil’s advocate rotation that allows everyone on staff to play the role. “So everyone learns the skill of asking those questions, and everyone recognizes that it’s not frowned upon, it’s a value-add to the process.”

Learn from mistakes. One member said his company had once passed on making an acquisition, a decision the team is still “haunted” by. The problem: a failure to consider the risk of not doing the deal left the corporate too hesitant to pull the trigger.

  • When opportunity arose again, a willingness to question themselves—as a devil’s advocate would—prepared the team to make a better decision, resulting in the company’s largest acquisition ever.
  • “It was an enormous risk,” the member said, but by considering all sides, he believes the company made the right decision. “We would not be able to be as effective and efficient for our customers without the acquisition,” he said.

An object in motion. Many teams with established processes have what one member called a “bias toward inertia,” where teams are set in their ways and have a resistance to making any changes—another reason to include contrarians unafraid to voice doubts and bring up any potential risk.

  • To further combat inertia and paralysis, Mr. Zuraw also recommends what he calls a “pre-mortem” meeting right in the midst of a process to take stock, challenge key assumptions and prevent overconfidence.
    • “Making no decision is as big of a risk as any decision you could make,” he said.
  • “I think the concept of a gray rhino is a good one, and that speaks to the need for a pre-mortem,” one member said. “There are natural disasters, but a lot of things that do happen people thought about [and] knew was on the horizon, but nobody spoke up.”
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Talking Shop: Who Is Allowed to Open Bank Accounts at Your Company?

Editor’s note: The NeuGroup Process brings members together to solve problems and answer each other’s questions in a variety of forums, including online communities for specific groups—one of many benefits of membership. Talking Shop shares valuable insights from these members-only exchanges (anonymously) with all members and NeuGroup Insights readers. We welcome your responses—and any questions you want answered: insights@neugroup.com.


Member question: “We are trying to do some benchmarking: Do your board resolutions allow the treasurer (and others?) to open bank accounts or is it just limited to the CEO and CFO?”

Editor’s note: The NeuGroup Process brings members together to solve problems and answer each other’s questions in a variety of forums, including online communities for specific groups—one of many benefits of membership. Talking Shop shares valuable insights from these members-only exchanges (anonymously) with all members and NeuGroup Insights readers. We welcome your responses—and any questions you want answered: insights@neugroup.com.


Member question: “We are trying to do some benchmarking: Do your board resolutions allow the treasurer (and others?) to open bank accounts or is it just limited to the CEO and CFO?”

Peer answer 1: “Our resolutions, and in some cases powers of attorney (depending on the locale/type of entity), all point to the treasurer as having this authority.

  • “I suppose technically our CFO could also, but in practice it just isn’t realistic for [the CFO] to be involved in those activities.
  • “We also took it a step further and implemented a specific policy statement as well stating that, in effect, only the treasurer can do (or delegate) treasury related things with the typical list of what those are.
  • “We did this to cover ourselves in those challenging geographies where local entity board members claim they cannot legally abdicate their authority to others to do things like open bank accounts.
  • “So our policy [basically provides air cover to prevent local management executives from doing anything that we have decided to limit to the treasurer].”

Peer answer 2: “We have a treasury committee comprised of our CFO, controller and me. For bank accounts, we need approval from two members of the committee.”

Peer answer 3: “Resolutions empower me and my cash management directors in addition to key executive officers. Two signatures, like others. Almost never CFO or CEO involvement.”

Peer answer 4: “Ours specifies the treasurer can open bank accounts, and we no longer even put the CEO or CFO as signatories to our bank accounts.”

Peer answer 5: “Our company only allows the CFO to open bank accounts.”

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Pricing Loans Using SOFR: Wait for Banks or Take the Initiative?

Members discuss the Libor-SOFR transition, including contracts and other non-treasury Libor exposures.

Regulators want corporates and their banks to price new loans and other financial exposures using a USD Libor-replacement rate such as SOFR by the year-end deadline—just nine months away. But who should take the lead in this transition—the banks or the corporates?

  • That question and other issues that companies confront relating to the move away from Libor arose at a recent meeting of NeuGroup for Capital Markets sponsored by Wells Fargo.
  • The bottom line: Members and banks still have a lot to do and must face some big unknowns.

Members discuss the Libor-SOFR transition, including contracts and other non-treasury Libor exposures.

Regulators want corporates and their banks to price new loans and other financial exposures using a USD Libor-replacement rate such as SOFR by the year-end deadline—just nine months away. But who should take the lead in this transition—the banks or the corporates?

  • That question and other issues that companies confront relating to the move away from Libor arose at a recent meeting of NeuGroup for Capital Markets sponsored by Wells Fargo.
  • The bottom line: Members and banks still have a lot to do and must face some big unknowns.

First movers. In terms of pricing loans over SOFR, members said banks were in the best position to move first, given the size of their balance sheets and the large number of loans they hold.

  • But while it may seem perfectly logical that banks should take the lead because lending is what they do, discussions among bankers at NeuGroup meetings make clear that it’s not that simple.
  • The banks say they aren’t ready, one member said. He added that banks in the UK voiced similar sentiments about pricing his firm’s debt over SONIA, the UK equivalent of SOFR.
  • “We just said, ‘We’re doing it, here are the terms,’ and they all signed up for it.”

Follow the leaders. Proactively searching for and resolving Libor-related issues can devour treasury resources, and members agreed that other market participants with broader and deeper exposures have greater incentive to lead the charge.

  • Among the players and participants seen as appropriate leaders are other corporates, banks, custodians and trustees.
  • “So we can be fast followers,” said one member, adding, “But as the date gets closer my anxiety is starting to build.”
  • Another member is actively pushing for a solution in the securitization market where his company is a major player. “The leaders in specific segments have to be thoughtful and help solve issues,” he said.

Non-treasury exposures. One member raised the issue of who beside treasury has been involved with determining companies’ total exposure to Libor.

  • One member said his treasury is coordinating the effort but, “We’re relying on support from other functionaries to go through the contracts.”
  • Another member said his team had anticipated finding USD Libor exposure in leases and procurement contracts across the company but was pleasantly surprised to find it limited mostly to treasury.
  • A corporate restructuring by one company prompted it to search for Libor among tens of thousands of contracts. Only a few involved Libor issues, including late fee rates on one-off supply contracts. The issue for peers, the member said, “is whether to find them or deal with the small tail risk when it comes up.”
  • Two companies found employee stock ownership plans (ESOP) with Libor-priced loans spanning decades that will likely have to be negotiated bilaterally, and another found exposure in its captive financing unit.

Term SOFR? One member brought up banks that recommend a daily average of SOFR with observation shift, adding wistfully, “It would be really nice if there was a [forward-looking] term SOFR.” Other members agreed but expressed some doubts.

  • One member mentioned insufficient liquidity supporting a term SOFR raising concerns about renewing a revolving credit over a daily-average SOFR, since “flip” clauses in credit agreements could change the rate to the term version before enough liquidity emerges. “An opaque market is what got Libor into trouble in the first place,” he said.
  • Another member recalled a Fed official saying at a recent ARRC meeting that a term SOFR could increase banks’ hedging costs, prompting them to avoid such transactions or pass on costs to corporate clients.
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Cut the Static: An FX Risk Manager Transitions to Dynamic Hedging

Standard Chartered guides a client to hedging that requires more analytics but aligns more with risk management goals.

The increased frequency of so-called black swan (or gray rhino) events roiling currency markets recently has more corporates establishing or revamping FX hedging programs designed to minimize earnings volatility. They face a host of decisions involving which exposures to hedge, timing, instruments and overall approach—static, dynamic or somewhere in the middle.

  • At a recent meeting of FX risk managers, sponsor Standard Chartered, along with a NeuGroup member that is a client of the bank, explained how and why the corporate shifted from a static hedging program to one that is dynamic—as well as the pros and cons of the company’s move and those of other approaches.

Standard Chartered guides a client to hedging that requires more analytics but aligns more with risk management goals.

The increased frequency of so-called black swan (or gray rhino) events roiling currency markets recently has more corporates establishing or revamping FX hedging programs designed to minimize earnings volatility. They face a host of decisions involving which exposures to hedge, timing, instruments and overall approach—static, dynamic or somewhere in the middle.

  • At a recent meeting of FX risk managers, sponsor Standard Chartered, along with a NeuGroup member that is a client of the bank, explained how and why the corporate shifted from a static hedging program to one that is dynamic—as well as the pros and cons of the company’s move and those of other approaches.

Static scorecard. Standard Chartered’s presentation described a static hedge execution style as one where a corporate hedges all its exposures at the beginning of the year, a simple approach with minimal execution costs.

  • The major downside of static strategies, though, is the year-over-year volatility they create, the bank said.
  • The NeuGroup member said the rigidity of the static approach also left the company “fully at the mercy” of markets and bank counterparties because hedging needed to be completed by a certain time each year.

Defining dynamism. To reduce volatility, better manage FX risk and allow treasury to take advantage of favorable markets, in the last year Standard Chartered has helped guide the corporate to a more dynamic approach.

  • The policy for forecasted cash flows prescribes hedge coverage levels for up to one year out. Now, though, the company is transitioning to a quarterly, layered hedging strategy, which also extends to forecasts beyond the one-year horizon.
  • In its presentation, Standard Chartered illustrated how a layered approach reduces quarter-over-quarter gains and losses from FX volatility.
  • The disadvantage of a dynamic approach is that it is more time consuming to track exposure changes and execute the resulting more frequent hedges. And the more flexibility you build into the program, the more time-consuming it becomes—which is why a decision framework is important.

Exception, not the rule. Today, the member is able to take several factors into account when deciding what to hedge, how much and when to meet established risk tolerance levels. That puts him among the one-third of members who said in an in-meeting poll that they can dynamically hedge their exposures; two-thirds of respondents have either no flexibility on timing hedge execution or some flexibility, but only within a month or quarter (see chart).

Exposure and confidence. The most important factor is confidence in the exposure forecast. For risk managers, higher confidence in exposure data allows a higher hedge ratio without risking over-hedging (important to avoid for hedge accounting reasons).

  • The company’s hedge ratios take into account the degree of certainty of forecasted exposures, while contractual exposures by their nature are more certain but may instead have some timing variances.
  • Balance sheet exposures should be “majority hedged,” according to the company’s presentation.
  • Its instrument tool kit includes outright forwards, swaps and NDFs, as well as options (calls, puts and collars).

A decision framework. Under the member’s new program, a decision framework helps determine which instrument or combination of instruments will be chosen to hedge at any given time.

  • Treasury has built a spreadsheet “monitor” that looks at market spot and forward rates, forward points (carry), at-the-money options premium and the 25-delta skew (call-vs.-put volatility differential), which can be compared to their three-year historical levels.
  • Backtesting shows how instruments have performed under different circumstances and can be used to support the instrument decision.
  • The team is allowed to take in-house views on currencies, supported by purchasing-power-parity (the long-term fair value of currencies) and other factors, tempered by bank forecasts. A caveat on research is to pay extra attention to very divergent views to see if the publishing date of the bank’s forecast might explain it.
  • Depending on the strength of the in-house view, collar strikes may be set to incur some premium cost (vs. a zero-cost collar) to capture potential for upside participation.
  • The performance or success of instrument choices is benchmarked against a strategy using only forwards.
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Fight and Flight: Bank Fee on SEPA Payments From UK Sparks Pushback

Corporates respond by moving accounts to other countries, pushing banks to drop the fee and lobbying regulators.

The number of banks charging corporates a fee for payments going from the UK to countries in the single euro payments area (SEPA) is growing, and some NeuGroup members are taking action to minimize the impact.

  • Echoing what treasurers in Europe reported at a recent meeting, the head of cash product at a UK-based bank said that “a lot more banks in Europe are now charging” the fee, including some large institutions.
  • One member is working with a bank (that does not charge the fee) to lobby regulatory bodies to limit these types of fees and deductions. “We view this as a fee grab in a post-Brexit world of financial services,” he said.

Corporates respond by moving accounts to other countries, pushing banks to drop the fee and lobbying regulators.

The number of banks charging corporates a fee for payments going from the UK to countries in the single euro payments area (SEPA) is growing, and some NeuGroup members are taking action to minimize the impact.

  • Echoing what treasurers in Europe reported at a recent meeting, the head of cash product at a UK-based bank said that “a lot more banks in Europe are now charging” the fee, including some large institutions.
  • One member is working with a bank (that does not charge the fee) to lobby regulatory bodies to limit these types of fees and deductions. “We view this as a fee grab in a post-Brexit world of financial services,” he said.

Quick background. Corporates began seeing these so-called fees for receipt in January, following the last-second Brexit deal finalizing the UK’s exit from the EU and the European Economic Area (EEA). Withdrawal from the EEA meant banks could start charging for receipt of SEPA payments from non-EEA accounts. 

  • This put the UK in the same category as Switzerland, which is also a member of SEPA but not in the EU.

Unacceptable or fair? In some cases, the receipt fee is deducted from the principal payment by the beneficiary bank. As SEPA payments are mostly used for payroll and suppliers, members said they find this “unacceptable.” When the UK was still in the EU, payments were protected from deduction by a regulation called the Payment Services Directive 2.

  • The receiving banks for payroll and supplier payments are chosen by beneficiaries, making it very difficult to change banks. That gives the existing banks pricing power, at least in the short-term, to charge new fees.
  • “What does SEPA membership mean, if it doesn’t mean the absence of fees?” said NeuGroup senior executive advisor and former banker Paul Dalle Molle. “Why should Switzerland and the UK be a member of SEPA if this is the result? It doesn’t make sense.”
  • One bank with a large European presence told NeuGroup Insights that these “new fees are likely being applied to compensate for the increased costs caused by Brexit for the banking system.” The bank did not say whether it charges the fee.

Fighting back. In some cases, members report success contesting the SEPA payment fee. “I advise [you] to challenge the fee with the bank, or find another bank,” one member said. He acknowledged that is an unsustainable solution for corporates that may use a UK-based account for payroll across the continent.

  • To get around the fees, multiple members who once used UK-based accounts for payroll have opened accounts in other locations across Europe, with Dublin and Luxembourg emerging as hot spots. However, migration could prove costly for a company with a limited number of accounts.
  • Another member has resorted to issuing wire transfers, which incur higher fees than SEPA payments but are more predictable and guarantee protection of the principal payment.
  • “Lobbying, using wires, switching to EEA-based remitting accounts and switching banks are all smart things to do,” said Mr. Dalle Molle. “When the European regulators hear complaints and see a drop in SEPA volume, they’ll go back to the banks and say, ‘What are you doing?’” 
  • US and UK-based banks are also developing solutions to resolve the issue. For example, one member is working with a bank to develop a technical solution—a monthly subscription in which the bank guarantees protection of the principal and eats the cost of SEPA fees.

Varying fee sizes. As the fees are applied in a case-by-case basis, the amount charged can also vary. Depending on the bank, this could be applied as a fixed fee or a percentage.

  • One NeuGroup member said the fee charged was around three euros. But another member said he was told a large payment would incur a fee of 600 euros, which he called “bordering on the completely ludicrous.”
  • Another member said that his company is also seeing a charge based on volume, which he called “outrageous,” though he is only seeing it from “a select few [banks], it’s not yet across the board.”
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Talking Shop: Payment Platforms; Supply Chain Finance; Bank Capital

Member question 1 (payment platforms): “We are having discovery calls with FIS, TIS and Fides to understand their value propositions.

  • “Our main pain points are having all sorts of e-banking portals, and arise when we onboard new entities (recently acquired) and penetrate new countries.
  • “Anybody having any experiences with the vendors listed? And suggestions how to best select (did you RFP this business?).”

Member question 1 (payment platforms): “We are having discovery calls with FIS, TIS and Fides to understand their value propositions.

  • “Our main pain points are having all sorts of e-banking portals, and arise when we onboard new entities (recently acquired) and penetrate new countries.
  • “Anybody having any experiences with the vendors listed? And suggestions how to best select (did you RFP this business?).”

Peer answer 1: “We have used TIS for some years now and are quite happy. They have a large number of banks in the system and it’s pretty easy to connect to these.”

Case study: NeuGroup Insights published an article on how TIS helped The Adecco Group. And watch this space for details about a NeuGroup virtual interactive session in May featuring TIS.

  • “However, we did make an amendment to the buyer joinder agreement to narrow the terms under which the direct debit may occur.
  • “It specifies that the debit is limited to amount in the payment instruction, or any obligation to pay an amount equal to any payment obligation, and so on.
  • “The SSC-A/P function then uses a clearing account process in SAP to ensure 1:1 matching to expectations.”

Member question 2 (supply chain finance): “[Our bank] is telling us that companies permit them to direct debit their accounts for supply chain finance (SCF) in EMEA due to ECB rules, and that that it is common practice.

  • “Is anyone else allowing direct debt in EMEA for SCF?”

Peer answer 1: “Yes, we are rolling out SCF in Europe and are allowing direct debit under [that same bank’s] process.

  • “However, we did make an amendment to the buyer joinder agreement to narrow the terms under which the direct debit may occur.
  • “It specifies that the debit is limited to amount in the payment instruction, or any obligation to pay an amount equal to any payment obligation, and so on.
  • “The SSC-A/P function then uses a clearing account process in SAP to ensure 1:1 matching to expectations.”

Member question 3 (bank capital): “I’m interested in getting some peer feedback regarding the internal monitoring of capital ratios beyond just the standard regulatory minimums.

  • “What types of reporting/tracking are people using? Are they utilizing multiple points of escalation based on various internal targets? Are the internal levels based on actuals, forecasts, both?
  • “If forecasts, what time frames are being used? How proscriptive is everyone when it comes to taking action based on dropping below an internal threshold?”

Peer answer 1: “We do monthly forecasts and ALCO where we report out actuals and provide an outlook for a few quarters (depending on the time during the year). 

  • “Our focus tends to be common equity tier 1 and tangible common equity ratios, although we also show ALCO leverage, tier 1 and total risk-based. Our TCE ratio limit is self-imposed at [a certain percentage].
  • “For all other ratios we set the limits at the defined ‘well capitalized levels’ plus 1.0% to serve as an early warning limit. 
  • “We also share our typical operating range of the ratio, which is higher. If we were to break a ratio, there is a process in place to discuss with the enterprise risk committee of the board and settle on a course of action to bring it back under compliance. This hasn’t happened since I’ve been here.”
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Beyond Deposits: An FDIC Fund Aims to Boost Equity Capital at MDIs, CDFIs

Mission-Driven Bank Fund will offer corporates a way to infuse equity capital in banks serving minority communities.

Corporations looking to make impactful investments in minority communities, but not through bank deposits, may want to consider a new partner: the Federal Deposit Insurance Corporation (FDIC)—the federal agency that insures deposits.

  • Representatives from the FDIC and a large asset manager that is acting in an advisory role described what’s being called the Mission-Driven Bank Fund (MDBF) at a recent meeting of NeuGroup’s diversity and inclusion (D&I) working group.
  • The fund, slated to launch later this year, will offer corporates a path to provide equity capital to minority depository institutions (MDIs) and community development financial institutions (CDFIs) that serve low- and moderate-income communities at higher rates than mainstream banks, the FDIC said.

Mission-Driven Bank Fund will offer corporates a way to infuse equity capital in banks serving minority communities.

Corporations looking to make impactful investments in minority communities, but not through bank deposits, may want to consider a new partner: the Federal Deposit Insurance Corporation (FDIC)—the federal agency that insures deposits.

  • Representatives from the FDIC and a large asset manager that is acting in an advisory role described what’s being called the Mission-Driven Bank Fund (MDBF) at a recent meeting of NeuGroup’s diversity and inclusion (D&I) working group.
  • The fund, slated to launch later this year, will offer corporates a path to provide equity capital to minority depository institutions (MDIs) and community development financial institutions (CDFIs) that serve low- and moderate-income communities at higher rates than mainstream banks, the FDIC said.

Equity capital’s multiplier effect. One advantage of infusing equity capital into MDIs and CDFIs is that an equity investment “helps mission-driven banks far more than deposits,” according to an FDIC slide (see chart, below).

  • Every dollar of equity capital invested, the FDIC says, can increase lending by a multiple of the original investment, while every dollar of deposits can only increase lending up to the amount of the deposit.  
  • The treasurer of a large technology company that is an anchor investor in the fund said, “We’ve looked at a lot of different ways [to invest], we looked at deposits, but we wanted impact. We feel like we’ve moved up.”
  • Because of regulatory requirements governing capital ratios, many MDIs and CDFIs need equity far more than deposits so they can increase the amount of loans they make to borrowers.

Facts and figures. Once the MDBF launches, the FDIC says, it will be run by an independent fund manager selected by the fund’s founding investors. The FDIC will not be an investor and will play no role in fund management.

  • The FDIC’s goals for the MDBF are initial capital commitments in the range of $100 million to $250 million and a target of $500 million to $1 billion when fully established.
  • Once selected, the fund manager will work with an investment committee to hear quarterly proposals from MDIs and CDFIs for potential investments. Those could include:
    • Direct equity
    • Structured transactions
    • Funding commitments
    • Loss-share arrangements
  • The FDIC says it is targeting “a minimal rate of return to investors, who can reinvest any returns in the fund or in aligned non-profit enterprises that support mission-driven banks.”

Investment policy changes? One NeuGroup member from a corporate that worked with the FDIC said the fund meets the company’s priorities. “Our primary focuses are risk, then impact, and then return, in that order,” he said. “The beauty is you get to do it all in one product. They do all the work for you instead of needing to hire a team.”

  • The company did have to change its investment policy to accommodate investment of equity capital. “Lots of corporations are unable to do equity, but it’s an important part of [our] portfolio,” the member said.
  • Another member said that as long as the investment aligns with the company’s stated values and mission, this kind of change isn’t too difficult.
  • But in a survey at the meeting, half the members responding said it would be either somewhat or very difficult to change investment guidelines to allow or create exceptions to make investments in MDIs or CDFIs in the form of equity capital.
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A Push in the Right Direction to Simplify Bank Fee Analysis

As bank fee statements slowly standardize, corporates and banks can work together to make the analysis process simpler.

Analyzing bank fees to uncover outliers remains a thorn in the side of treasury teams—in no small part because the banks code their fees and transmit the files to corporates in many different ways. And while standardization is improving, companies should keep the pressure on banks to bring more clarity to the opaque world of bank fees.

As bank fee statements slowly standardize, corporates and banks can work together to make the analysis process simpler.

Analyzing bank fees to uncover outliers remains a thorn in the side of treasury teams—in no small part because the banks code their fees and transmit the files to corporates in many different ways. And while standardization is improving, companies should keep the pressure on banks to bring more clarity to the opaque world of bank fees.

  • That was among the takeaways at a recent NeuGroup meeting of assistant treasurers who were joined by Larry Williamson, head of healthcare, corporate and investment banking at Societe Generale and Tonette Palencia, a cash management sales manager at the bank.

Forcing the issue. “It’s perfectly appropriate to guide banks in the right direction,” Mr. Williamson said. “In the context of selecting service providers, I would be highlighting that a key criteria and consideration is for banks to provide their billing information in the forms that work for you and in line with more of a universal standard.”

  • He added, “If I’m a corporate client, I’d be saying ‘We want our billing to look like this, are you able to do that?’”
  • Ms. Palencia cited the example of a client that requested the corresponding service codes to the products on their billing statement as part of their analysis to evaluate and compare their banking fees.

State of play. As it stands, many reports from banks in the US come in what’s called EDI 822 statements, an e-billing file standard that one member described as “pretty raw.” The member said companies “have to have special programs to ingest it, or some pretty sharp programmers to decode it.”

  • Ms. Palencia said that many banks base these statements on AFP service codes, but some might classify products differently from others, so it is “a lot to reconcile, and it takes a bit more on [a company’s] side to analyze it more in-depth.”

Hope in BSB reporting? Bank Service Billing (BSB), including the Twist and ISO 20022 standards (camt.086), offer more standardization globally, since EDI 822 is used only in the US.

  • “At some point, you want to get to a common utility, and Twist may be a part of that, with one single electronic database providing inputs from banks instantly,” Mr. Williamson said.
  • One member said some of the international banks he works with use the Twist format, which “is almost like an XML format, it’s a little more standard.” The member said Twist files still need to be run through a software tool “to make heads or tails,” though it can be as simple as analysis in Microsoft Excel.
  • Twist is based on AFP’s service codes but has closer to 800 options, which offers a measure of simplicity.
  • SocGen is working on a project to roll out BSB files more broadly. “Because we’re a European bank, that’s where most of our availability is,” Ms. Palencia said. “But a lot of the banks have also rolled it out.”

Third-party solutions. Members spoke highly of solutions from Redbridge and Fiserv, which can make the analysis process simpler but whose costs need to be evaluated in the context of how much savings they bring.

  • One member that uses Weiland BRMedge from Fiserv said the system is effective in tracking “pops” in fees. “We rely on it to find anomalies, and we go back to the banks to get those fees reduced,” he said. “It’s been helpful, but it takes a lot of time and effort to maintain and get up and running.”
  • Another member, after researching the market for a few months, has a contract to implement Redbridge’s HawkeyeBSB later this year. “We’re expecting to be able to see 60% to 70% of our bank fees globally,” he said. “It does almost all the work with all the statements, and we just take a look at the analysis.”
  • Mr. Williamson expressed surprise that corporates need these tools to navigate around bank billing systems. “In this world of digitization, we’ve still got banks thinking of requiring corporate clients to work around the inefficiencies of billing, which surprises me,” he said.  
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A Goldman Risk Management Tool Flying Under the Radar

FX risk managers talk up a Goldman Sachs solution called Capital Markets Atlas to measure value at risk.

To no one’s surprise, a recent meeting of NeuGroup FX risk managers included plenty of talk about well-known vendors of exposure identification solutions like FireApps and AtlasFX, FX trading platforms including FxAll and 360T, and a variety of ERPs and TMSs.

  • But not everyone in the large virtual room had heard of a self-service tool from Goldman Sachs that some members are using to measure value at risk (VaR). Making matters a bit confusing: the name of the solution includes the word “atlas.” As in Goldman Sachs Capital Markets Atlas, which is part of the firm’s broader Marquee platform.

FX risk managers talk up a Goldman Sachs solution called Capital Markets Atlas to measure value at risk.

To no one’s surprise, a recent meeting of NeuGroup FX risk managers included plenty of talk about well-known vendors of exposure identification solutions like FireApps and AtlasFX, FX trading platforms including FxAll and 360T, and a variety of ERPs and TMSs.

  • But not everyone in the large virtual room had heard of a self-service tool from Goldman Sachs that some members are using to measure value at risk (VaR). Making matters a bit confusing: the name of the solution includes the word “atlas.” As in Goldman Sachs Capital Markets Atlas, which is part of the firm’s broader Marquee platform.

Self-service VaR. Goldman marketing materials say Capital Markets Atlas provides clients with “independent access” to the bank’s risk and pricing models with tools that help them understand how “active markets impact exposures and solutions” using a web-based application that is free for the bank’s clients.

  • The first member to mention Goldman’s tool at the meeting emphasized the benefit for risk managers of being able to perform VaR analysis without waiting for a bank to do it for them.
  • “You can run it on a real time basis on your own,” he said. “You run analysis whenever you need.”
  • In an interview after the meeting, Ketan Vyas, managing director in Goldman’s corporate risk analytics business, said, “What’s new is that you can do it yourself.”

More member buzz. Another member said he was impressed by a demo of the tool late last year. “I perform a lot of risk analysis monthly and it seems like the [Goldman] tool may be more user-friendly/point and click,” he said. “I am not sure it is as robust as the tools I use, but seems like a solid starting place for analysis if nothing else.”

  • One risk manager asked peers to contact him if they are using the Goldman Atlas tool for VaR. “I’m super interested in your thoughts on it. We just started using it, and it has come very far from where it was two years ago,” he said.
    • Goldman added the VaR tool to Atlas in 2018; Atlas debuted in 2015.
  • “The GS Atlas system is about value at risk, which is modeling that helps to quantify the risk,” the member said.  So given risk profile A, what is the potential impact of B if nothing is done? This helps a corporate decide what risk to manage (helps us decide what to do),” he said after the meeting.

Risk decomposition. The tool includes what Goldman calls a “risk decomposition model” that uses “market forwards, volatility and historical correlation parameters to quantify VaR on an individual and portfolio level.” Goldman says this allows corporates to:

  • Identify optimal hedge portfolios to meet risk and hedging cost goals.
  • Track the key drivers of currency risk to target hedges more efficiently.
  • Compare multiple hedging strategies across an array of risk metrics.

Sample portfolio. Goldman’s marketing material shows how VaR provides valuable insights for risk managers about their portfolios.

  • As the table above shows, the Canadian dollar (CAD) and the Mexican peso (MXN) contribute the largest amount of risk on an individual basis to a sample portfolio. See the figures marked 1.
  • “But when considered in the context of the broader portfolio of FX exposures, CAD actually represents a much lesser risk (~24% of the sample company’s total risk instead of ~38% if calculated on an individual basis),” Goldman’s slide says. “And MXN represents a much larger risk (70% in the context of the portfolio vs ~39% on an individual basis).”
  • The large difference in the figures marked 2 is explained by the differing levels of volatility of the two currencies.
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Spring and Derisking in the Air for Defined Benefit Pension Plans

A strong stock market and higher interest rates plus regulatory relief bring smiles to some DB plan managers.

An upbeat mood befitting the beginning of spring prevailed at this week’s meeting of NeuGroup for Pensions and Benefits. With the yield on the 10-year US Treasury note rebounding to pre-Covid levels and equities trading in the vicinity of all-time highs, a summer of full funding is within sight for many plans.

A strong stock market and higher interest rates plus regulatory relief bring smiles to some DB plan managers.

An upbeat mood befitting the beginning of spring prevailed at this week’s meeting of NeuGroup for Pensions and Benefits. With the yield on the 10-year US Treasury note rebounding to pre-Covid levels and equities trading in the vicinity of all-time highs, a summer of full funding is within sight for many plans.

  • Below are takeaways distilled by NeuGroup executive advisor Roger Heine, who helped lead the meeting.

Derisking in fashion. Members at several companies did not stay on the sidelines—they jumped into the game by sticking to established policies to derisk as financial markets moved in their favor. More than one said their moves came after hitting glide path triggers.

  • These pension fund managers reduced equity exposure and increased fixed income, in some cases by using derivatives to move quickly with minimal transaction costs. 
  • Members are also well aware that some of the stocks within the big market indices such as the S&P 500 trade at bubble-level multiples, with investment managers steering clear of these potential reefs.

American Rescue Plan Act. More spring thawing arrived following the passage this month of the American Rescue Plan Act (ARPA).  Kevin McLaughlin, of meeting sponsor Insight Investment, described how alterations to complex funding calculations effectively mean no required pension funding for years to come.  

  • While this will particularly aid highly leveraged companies with big pension deficits, most of the NeuGroup participants with better funded plans really won’t be impacted.
  • These members indicated that their funding decisions are more driven by avoiding steep variable rate PBGC fees or potentially triggering tax deductions should corporate tax rates increase in the future.  
  • The ARPA also provides $86 billion to bail out qualifying multiemployer pension funds; but again, this has little impact on members except that these funds might compete for investment-grade fixed-income product down the road.

Covid mortality. In response to a member question, Mr. McLaughlin also addressed whether Covid mortality—approaching 550,000 in the US—will have any impact on mortality tables used to calculate pension liabilities.  

  • While there is a likely a onetime impact on liabilities, he said it is unlikely that there will be any material shift in life expectancy as negative factors such as deferred health screenings and weakened Covid survivors may be offset by better health practices and pharmaceutical breakthroughs following Covid vaccine innovations.
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Talking Shop: How Do You Use Counterparty Exposure Information?

Member question: “Does your organization review counterparty exposure? If so, how do you use this information?

  • “What exposure types do you include? Cash, bank products, derivative contracts, other?
  • “I understand that there are some organizations that set limits to how much exposure can be outstanding per counterparty. Does anyone have this practice in place?”

Member question: “Does your organization review counterparty exposure? If so, how do you use this information?

  • “What exposure types do you include? Cash, bank products, derivative contracts, other?
  • “I understand that there are some organizations that set limits to how much exposure can be outstanding per counterparty. Does anyone have this practice in place?”

Peer answer 1: “I monitor this frequently and have limits tied to my overall assets. Here are some items we look at for our liquidity providers:

  • Jurisdiction
  • Regulatory environment and views
  • Settlement process
  • Liquidity on their platform
  • Any policies and procedures that are shared; shared financials when applicable
  • Customer service, which is always a big one.”

Peer answer 2:  “We monitor our counterparty exposure closely, and formally review it at a leadership level at least once a quarter (part of our policy). We bucket our exposures into three different categories: operating cash, investments and derivatives.

  • “We have a pretty strict policy on investments/excess cash; so when monitoring/reporting, we’re making sure we’re within our global limits and call out any issues we have experienced or potentially could occur in the near future. We have many local markets that manage their cash directly, so we’re making sure we’re within limits from a global perspective.
  • “The derivative exposures are monitored from a collateral perspective and help when looking at new derivatives and deciding which banks we may choose to execute with. We don’t have a limit on the amount outstanding for derivatives; we just monitor to make sure CSAs are working as intended.
  • “The operating cash exposures are monitored differently as we’re required to have various bank accounts due to local market regulations. We don’t have a policy we’re adhering to for this section of cash but make sure we know where all our cash is—and where to focus first if something were to occur globally (Covid pandemic, financial crisis, etc).”
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A Risk Manager Leveraging Flexibility to Benefit from Volatility

FX meeting sponsor Standard Chartered: Hedge policy flexibility may decide if volatility is treasury’s friend or foe.

Volatility in foreign exchange, commodity and other markets sparked by the pandemic presented risk managers with challenges to their hedging programs. And while some corporates ended up with financial pain, others turned the volatility to their advantage.

FX meeting sponsor Standard Chartered: Hedge policy flexibility may decide if volatility is treasury’s friend or foe.

Volatility in foreign exchange, commodity and other markets sparked by the pandemic presented risk managers with challenges to their hedging programs. And while some corporates ended up with financial pain, others turned the volatility to their advantage.

  • At a recent meeting of NeuGroup for Foreign Exchange sponsored by Standard Chartered, a representative of the bank used the positive experience of one member to underscore the benefits of hedging policies that give risk managers flexibility in how and how much to hedge, and for how long.

What you need to take advantage. “The volatility we’ve seen has been advantageous,” said the member. “We’re coming at it from a different perspective.” Unlike many members who have long exposures, in most countries, the company “is short, selling dollars, buying local currencies,” she explained.

  • The member described her company’s hedging policy as “very flexible; we use forwards and options—zero cost collars.” Treasury also has flexibility in how much to hedge, all the way up to 100% of the company’s exposures.
  • There are “no stipulations,” and the company’s traders “develop their own strategies” for hedging, she said.
  • “Right now we’re experiencing positive OCI (other comprehensive income) and mark-to-market gains,” the member told peers. “This is a good story for us.”

Nimble and quick. Standard Chartered’s head of client analytics said that policy flexibility like what exists at the member company gives corporates the ability to be “nimble and quick,” adding that, “Volatility can be your enemy or your friend depending on your flexibility.”

  • In addition to a flexible policy, an efficient trade approval process for trades also allow risk managers to add “interesting hedges to capture the volatility and momentum” of markets roiled by news and events, she said.

Options in theory, not practice. It appears that most risk management teams have the policy approval to use options in their hedging strategies but do not use them. As the chart below shows, about two-thirds of the companies surveyed at the meeting said options are allowed at their companies but are not in use.

Why not options? In response to questions from Standard Chartered, members gave several reasons why they are not currently using options to hedge risk other than the cost of option premiums:

  • We have approval to use from an accounting, auditor and policy perspective. But there still seems to be a stigma against them internally. We are self-insured, and options often feel like insurance, so it’s a culture thing.  We just need a good business case to help us get to the finish line!”
  • “It’s a corporate governance issue; it takes time and effort to get approval, but we want to.”
  • “We’re trying to find the right time and haven’t found the right opportunity to dip our toes in.”
  • “Showing the value [to senior management] is the hurdle.”

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Racing to Change Horses: A Risk Manager’s Quick Switch to AtlasFX

An FX risk manager changed exposure ID systems and implemented the new solution in just three months.

Changing horses in midstream is never easy, but sometimes it’s the right move. One FX risk manager who did it explained to members of NeuGroup for Foreign Exchange the benefits of jumping off his existing exposure identification system and hopping onto AtlasFX—in an extremely compressed timeline of three months.

An FX risk manager changed exposure ID systems and implemented the new solution in just three months.

Changing horses in midstream is never easy, but sometimes it’s the right move. One FX risk manager who did it explained to members of NeuGroup for Foreign Exchange the benefits of jumping off his existing exposure identification system and hopping onto AtlasFX—in an extremely compressed timeline of three months.  

  • The time and effort spent making the switch under pressure paid off big-time. “We now have our dream state,” he said at a March meeting sponsored by Standard Chartered.  
  • The new solution has boosted the company’s exposure accuracy, leaving the FX team more time for “value-add” activities, he said. Changing vendors also resulted in significant cost savings.
  • The member started his presentation by thanking peers at two companies he called “early AtlasFX explorers.”

Quick pivot. One day last year, the member told AtlasFX that he needed to stick with his company’s existing exposure ID vendor for at least another year.

  • The next day, for various reasons, he reversed course, set up a meeting with AtlasFX and explained exactly what he wanted, after the company asked him to describe his ideal state.
  • About five days later, the member told AtlasFX that he was all in. Key to the decision was having confidence in the AtlasFX team’s ability to deliver the dream state and “confidence they could pull this off in three months,” the member said.
    • He had to make a go-no-go decision immediately or would have to renew the contract with the existing vendor.

Making the dream real. His dream included opening up AtlasFX to see foreign exchange exposure data from his ERP, SAP, and current hedges from his TMS, Reval. And he wanted the ability to click a button to approve and move trade actions to his trading platform, FXall.

  • Further, after trade execution, he wanted the info straight-through processed to both Reval (to book external trades) and AtlasFX, where intercompany trades would be automatically generated and sent to Reval.
  • “To pull it off, there needed to be connectivity between all systems,” he said. “SAP, AtlasFX, Reval and FXall—and a new, novel connection between AtlasFX and Reval to automate back-to-back hedging at FXall trade rates.”
  • AtlasFX made it all happen, giving the member the ability to execute the company’s balance sheet hedge program (see chart below) the way he envisioned.
    • “I honestly thought that dream would be impossible to achieve,” he said.
  • He said the extent of the exposure discovery and automation the FX team has with AtlasFX was not possible with the previous vendor.
  • The solution AtlasFX devised to solve the member’s connectivity and automation issues can now be used by other corporates that use the same ERP, trading platform and TMS, he added.

Domain expertise. The member’s presentation listed several other reasons his company decided on AtlasFX, including “domain expertise provided routinely throughout implementation.” He noted that the fintech’s founders have experience as treasury practitioners, and said its representatives “are risk managers like us, they speak the language.”

  • The reps, he added, “learn a company’s process when implementing the solution.” This paid off when the AtlasFX team suggested a simplification of the company’s settlement strategy for derivatives, helping the FX team better “distribute our workload,” he said.

Exposure determination technology. The member said AtlasFX has so-called query software that “adapts to changes immediately” in the company’s general ledger, saving hours of maintenance time each month compared to what was required before.

  • He said delays in making this type of change can mean treasury misses exposures, potentially resulting in insufficient or incorrect hedges.
  • While exposure determination is faster using AtlasFX, setting up the automation, interfaces and workflows making that speed possible “was definitely more complex,” the member said.
    • “That took some deep thinking and partnership between fintech vendors, and we had to involve our IT team for the connection to SAP data.”

Performance analysis. Using its previous vendor’s solution, the company was not able to successfully configure end-of-month hedging analysis to determine how well its hedges performed relative to actual accounting losses and expectations. “With our prior vendor, we were only able to get 25% of the process working,” the member said.

  • He said that with AtlasFX, 80% of the process was working within a month. His presentation read, “AtlasFX: In process of configuring and testing—we will get there!”
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Where Captives Fit in the Insurance Puzzle Corporates Want to Solve

Captives offer tax advantages and flexibility, but treasury teams must make sure trapping cash in them is worth the benefits.

Rising insurance costs are putting more focus on captives, a solution that offers tax advantages, flexibility and lower costs than traditional insurance.

  • For those reasons and others, several members at a recent meeting of NeuGroup for Retail Treasury said they plan to expand their captives to cover more risk.
  • Other members say captives are not a good use of capital for their companies.

Captives offer tax advantages and flexibility, but treasury teams must make sure trapping cash in them is worth the benefits.

Rising insurance costs are putting more focus on captives, a solution that offers tax advantages, flexibility and lower costs than traditional insurance.

  • For those reasons and others, several members at a recent meeting of NeuGroup for Retail Treasury said they plan to expand their captives to cover more risk.
  • Other members say captives are not a good use of capital for their companies.

The case for captives. “A captive brings a few benefits, and a few challenges,” one member said. “From a financial standpoint, managing the risk within the captive brings a lower general cost than translating those risks to a third party. There are some limits, but the day-to-day expenses for, say, worker’s compensation, can be lower.”

  • One retail treasurer whose company works on a franchise model said she had success with an offshore captive, which did a “bang-up job,” and proved a boon as insurance costs began to rise.
  • “Instead of paying premiums to the insurance company and the insurer keeping those profits, we are able to charge our stores individually for our expected losses; and when we didn’t reach those expected losses, we kept those profits,” the member said.
    • “Over a 10 year period, we were able to build up capital to increase our retentions, which minimizes the actual risk transfer insurance that we’re buying from an insurer, and we’re able to weather market swings much better.”
  • Members also discussed the non-financial benefits of captives, including a faster claims process and control over the standards used to handle claims.

Capital concerns. Saving on taxes and speeding up the claims process “may or may not be sufficient reasons to start up a captive,” one member warned. The big reason: captives trap capital.

  • “From a P&L perspective, [a captive] looks good, as it lowers tax expense,” another member said. “However, from a capital allocation perspective, we have trapped capital and it returns less than our WACC, and much less than the targeted ROIC we expect the business to return. So it’s not a good use of capital for us.
  • “It’s a capital allocation decision at the end-of-the-day,” she added. “You can allocate capital to the captive, to the business or back to shareholders. This would be a circumstance specific to each company.
  • “For instance, for us, many states do not allow us to self-insure workers’ comp without an insurance company backing the self-insurance. In this case, the captive acts in that capacity. We would need to analyze whether it’s worth the capital.”

Monitoring performance. To combat capital inefficiency, multiple members recommended incorporating routine strategic reviews, measuring a captive’s benefits against its cost.

  • During one of these reviews, one treasurer saw that a captive established before he had the job had more cash trapped than he found justifiable reduced the “static” balance in the captive by one-third without significantly impacting the captive’s tax benefit.
  • Another member learned during an internal review that the location of the company’s international captive was no longer viable due to recent regulation.
  • “The captive was set up because it could provide direct policies to some companies, saving us some fronting costs,” the member said. “Since recent policy has been implemented [in this country], we’ve found the capital requirements and solvency requirements overly burdensome.
    • “We undertook a study to see if there is a different domicile that we should be using for that risk and opened a new captive and shifted those policies over.”
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Talking Shop: Do You Have One Banking Partner for AR and AP?

Member question: “In the US, do you have one banking partner for AR and AP, or do you split the business, with one bank for AR and a separate bank for AP?

  • “For those that split the business, is this a share of wallet decision or an operational decision? Are there any operational pain points associated with having two banking partners?”

Member question: “In the US, do you have one banking partner for AR and AP, or do you split the business, with one bank for AR and a separate bank for AP?

  • “For those that split the business, is this a share of wallet decision or an operational decision? Are there any operational pain points associated with having two banking partners?”

Peer survey results: The majority of survey respondents use a single bank, with about one-third splitting the business.

Peer answer 1: “We have historically had two AR banks (two different business units), and one of those was different than our AP bank. Recently, we awarded the other AR business to the same bank and now we are fully concentrated.

  • “This was more due to the other bank leaving the AR space. From a share of wallet perspective, it has created an issue for us where we are too concentrated with one bank relative to the credit participation.”

Peer answer 2: “We currently have our US AR and AP with the same bank, but we are in the middle of an RFP for the US AP business. The share of wallet is an important factor for us, but technological capabilities of the bank (e.g., supporting POBO) is an even larger factor in the RFP.”

Peer answer 3: “We use one US AR/AP banking partner. We actually had one banking partner for our global cash management operations, but transitioned to a regional strategy through an RFP about five years ago.”

Peer answer 4: “In the US, we split the business, one bank for AR and one for AP. This was driven by a share of wallet decision but also a risk diversification and business continuity decision, which has proven to be helpful for us.”

  • Response to another peer’s question: “[There are] no manual transfers [between AR and AP], everything’s automated. Frankly, there are so many ways to do so—you just need to be creative and ask your bank the right questions.”

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No Sale: Convertibles at Great Prices Fail to Impress IG Corporates

Companies rated investment grade expressed reluctance to issue convertible bonds, despite favorable conditions.

It can be a nonstarter to raise the topic of convertible bonds with treasurers at investment-grade companies that can already issue debt with very low interest rates and don’t want their stock diluted when investors convert bonds to equity.

  • But many NeuGroup members whose companies have high credit ratings, including some at a recent meeting of NeuGroup for Capital Markets, say all their banks have pitched convertibles. And some treasury teams are also getting questions internally from CFOs and board members.
  • One member, echoing others, said 0% coupons and conversion premiums in the range of 50% to 70%, along with updated FASB accounting standards (see chart) that could simplify the process, makes convertible bonds “more attractive, but it’s an odd gamble when rates [for straight debt] are below 3%.”

Companies rated investment grade expressed reluctance to issue convertible bonds, despite favorable conditions.

It can be a nonstarter to raise the topic of convertible bonds with treasurers at investment-grade companies that can already issue debt with very low interest rates and don’t want their stock diluted when investors convert bonds to equity.

  • But many NeuGroup members whose companies have high credit ratings, including some at a recent meeting of NeuGroup for Capital Markets, say all their banks have pitched convertibles. And some treasury teams are also getting questions internally from CFOs and board members.
  • One member, echoing others, said 0% coupons and conversion premiums in the range of 50% to 70%, along with updated FASB accounting standards (see chart) that could simplify the process, makes convertible bonds “more attractive, but it’s an odd gamble when rates [for straight debt] are below 3%.”

Ideal conditions. One member with experience issuing convertibles before his company became investment grade said the most difficult part of the process was documentation, so the simplification by FASB is significant.

  • The FASB changes come amid market factors that have historically been good for convertible bond issuance:
    • Low interest rates
    • High equity prices and high valuations such as PE (pricing/earnings) ratios
    • High volatility levels
  • These condition have sparked a flood of companies with non-investment grade ratings, or no ratings, to issue convertibles. The Financial Times, citing Refinitiv, reported that in January and February, companies raised almost $34 billion, 68% more than in the first two months of 2020.

Dilution. The big downside to convertible instruments, NeuGroup members said, is dilution of a company’s common stock, which potentially makes the shares less valuable to shareholders.

  • “If the stock price goes to 10% above my strike price, my upper bounds, I’m diluting myself $4 billion, is that really worth 20 basis points of savings?” one member asked. “Your base is much higher because your company has doubled the wealth, but you still have to explain why you’ve taken $4 billion of dilution.”
  • The same member said, “As much as banks love to pitch convertibles because they can charge [more than for straight debt deals], some of our closest banks have been honest and been like, ‘You’ve heard about convertibles a lot I’m sure, but we don’t recommend them for investment-grade companies.’”
    • Another member added, “Some [banks] said, ‘If your stock goes up by a hundred percent, are you really still going to be worried about dilution?’ Economically, yes, I will.”
    • “I’ll echo those thoughts,” another member said. “Although there is great headline attractiveness, 50 basis points is not worth the risk of dilution.”

Pair convertible with a buyback? One member raised the intriguing idea of pairing a convertible issue with a stock repurchase plan to offset or hedge the dilution of additional stock. The member, however, said he’s still too skeptical of convertibles to embrace the strategy.

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Future State: Data Lakes, Straight-Through Processing and APIs

Takeaways from NeuGroup’s TMS working group featuring discussion of automation, consolidation of ERPs and more.

Straight-through processing (STP) that involves several systems, including payments and bank connectivity, sounds great. But members at a recent NeuGroup TMS Tuesday working group session agreed that efforts to accelerate STP first require a more detailed plan for the overall technology end state of treasury infrastructure.

  • For example, one member said his company is still unsure if it would be best to further integrate all payment processes into the ERP, or create a payment factory, which may sound like a nuance but requires technology process decisions.

Takeaways from NeuGroup’s TMS working group featuring discussion of automation, consolidation of ERPs and more.

Straight-through processing (STP) that involves several systems, including payments and bank connectivity, sounds great. But members at a recent NeuGroup TMS Tuesday working group session agreed that efforts to accelerate STP first require a more detailed plan for the overall technology end state of treasury infrastructure.

  • For example, one member said his company is still unsure if it would be best to further integrate all payment processes into the ERP, or create a payment factory, which may sound like a nuance but requires technology process decisions.  

Consolidation of ERPs. Members also discussed whether it is worthwhile to migrate all ERPs to one point, or to leverage the TMS to bridge several different ERPs. Conglomerates and serial acquirers usually end up with more ERPs than they want; but consolidating many into fewer or just one can be a slog.

  • A self-described “portfolio of companies” is leveraging its Kyriba implementation to connect multiple ERPs to it to enable all its vendor payments. 

Data lakes and one source of truth. For some very large companies in the NeuGroup Network, the number of ERPs and the enormous volume of payment transactions expose the vulnerabilities of a file-based process underpinning their payment execution.

  • More and more companies are driving initiatives to centralize all the data in a repository—a data lake—that can be the “source of truth” for a variety of systems tools supporting treasury processes like payments, rather than having data sent around in files.

Automating payments and compliance. Payment automation is a big challenge, but another is regulatory compliance, a job nobody gets a kick out of but that can cause problems in a complex world.

  • Managing bank account signers, FBAR reporting and KYC-related processes is high on the list of desired automation for members. Both FIS and ION have built bank account management tools; two members mentioned ION and said they were pleased with IBAM, its tool.

You have to start somewhere. With systems like FXall for FX trading and a TMS, the key is that all systems work together seamlessly.

  • Does that mean that the FX trading process, for example, needs to always start in one place for it to work? Not necessarily.
  • One member noted that the process can start either in FXall or in Reval, their TMS, and it will work either way. Other members concurred that both 360T and FXall have worked out the integration processes well.

With APIs, the key word is consolidator. APIs remain a hot topic, but MNCs with a large number of banking partners cannot have one API for each one. Similar to the service bureau concept, members agreed that they would not move from a direct connection like SWIFT unless there were some consolidator as a service-type vendor to reduce the APIs.

  • Separately, adopting APIs is something most members assume they will eventually do as part of another transformation or implementation, not as a standalone project.
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Do Stock Buybacks Create Value or Just Return Capital to Investors?

Members at companies with excess cash discuss whether share repurchases generate economic value for shareholders.

ConocoPhillips on Wednesday announced it is resuming its share repurchase program, citing its “long-standing priority to return greater than 30% of cash from operations to shareholders annually.” The company is not alone:

  • A recent NeuGroup Peer Research Survey showed that 82% of respondents consider the return of excess capital the primary objective of their company’s share repurchase program. Only 9% said creating shareholder value was the primary goal.
  • However, 59% of respondents said they believe share repurchases generate economic value for shareholders (see chart) and another 27% agreed—but only if the share purchase price is below the company’s intrinsic value.

Members at companies with excess cash discuss whether share repurchases generate economic value for shareholders.

ConocoPhillips on Wednesday announced it is resuming its share repurchase program, citing its “long-standing priority to return greater than 30% of cash from operations to shareholders annually.” The company is not alone:

  • A recent NeuGroup Peer Research Survey showed that 82% of respondents consider the return of excess capital the primary objective of their company’s share repurchase program. Only 9% said creating shareholder value was the primary goal.
  • However, 59% of respondents said they believe share repurchases generate economic value for shareholders (see chart) and another 27% agreed—but only if the share purchase price is below the company’s intrinsic value.

Surprising result? The NeuGroup member who requested the survey expressed surprise at the number of his peers who believe buybacks generate economic value.

  • He told the group that when his company asks banks do analyses of its total shareholder return (TSR), “They ascribe zero value to repurchases and dividends. Their rationale is that this is capital that the shareholders have a claim on regardless of whether it’s in the company or in their pocket.”
  • “My view is that repurchases might create value if they are below intrinsic value, but as people said, intrinsic value can be tough to define,” he said in a follow-up email. “And the reality is that a company’s shares probably don’t trade below it very often anyway.”
  • In his follow-up, he also cited a white paper that he wrote: “There is no certainty that any gap between intrinsic and market value will ultimately close; additionally, a study by Fortuna Advisors, a strategic advisory firm, indicates that ‘over time the market sees through this engineered EPS growth and typically drives down the P/E multiple for companies that rely heavily on buybacks.’” 
  • The white paper also says, “There is evidence to suggest that newly announced repurchase authorizations cause at least temporary share price bumps, but this is due to the signaling effect (of companies indicating they are bullish on their future), not repurchases themselves.”

In the yes camp. One of the members who believe share repurchases create value for investors if the price is below intrinsic value said his company “beats VWAP (volume weighted average price) more than we don’t.” He explained his strategy for executing buybacks and emphasized the goal is not to be a day trader but to “buy back as many shares as I possibly can” using the amount allocated for buybacks by the board.

  • Another member in the yes camp explained some of his reasoning in a follow-up email, writing, “Part of adding shareholder value is minimizing agency costs (arising from a lot of things but fundamentally to misaligned incentives and interests between management and shareholders). 
  • “So distributing excess cash is a way to reduce this, with the idea that when you get rid of excess cash by buybacks, in addition to a neutral cash distribution, you’re minimizing agency costs.”

Not convinced. The treasurer who requested the survey said the discussion at the meeting did not prove to him that repurchases generate economic value.

  • “The arguments mostly seemed to circle back to whether repurchases are beating VWAP, which in itself does not indicate they’re creating economic value,” he said.
  • That said, he does agree that the “avoidance of agency costs, i.e., the risk of making bad investments just because the cash is available” is one of the valid reasons to do a buyback.

Other reasons to do buybacks. This treasurer’s other main reasons to do repurchases include moving “inefficient capital off the balance sheet. Excess cash is inefficient capital; bank deposits, money market funds, etc. earn well below WACC (weighted average cost of capital).”

  • His white paper offers another reason to buy back stock: “Investors frequently redeploy the proceeds of stock sales to other investments in the economy, essentially shifting capital from companies that have more than they need to companies that need capital to grow. 
  • “This cycling of capital is healthy for the economy. According to Lloyd Blankfein, former CEO of Goldman Sachs, the proceeds investors receive from selling shares get ‘reinvested in higher growth businesses that boost the economy and jobs.’”

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Counting Cash: Many Companies Will Maintain or Up Cash Levels in H1

An ICD survey also shows steady and growing use of money market funds and higher interest in ESG products.

Cash on corporate balance sheets reached a record in 2020, topping $2 trillion, as companies responded to economic uncertainty created by the pandemic. New data from money market fund portal ICD suggests that a majority of corporates do not plan to cut cash levels in the first half of 2021.

  • 61% of the 150 treasury clients surveyed by ICD plan to maintain or increase their cash balances in the first half, with 39% expecting to reduce cash levels.

An ICD survey also shows steady and growing use of money market funds and higher interest in ESG products.

Cash on corporate balance sheets reached a record in 2020, topping $2 trillion, as companies responded to economic uncertainty created by the pandemic. New data from money market fund portal ICD suggests that a majority of corporates do not plan to cut cash levels in the first half of 2021.

  • 61% of the 150 treasury clients surveyed by ICD plan to maintain or increase their cash balances in the first half, with 39% expecting to reduce cash levels.

Prime funds. The survey also showed fewer than half (47%) of the companies are invested in or plan to invest in prime money market funds in 2021. That’s down from 64% in 2019, ICD said. Many companies moved out of prime funds and into government funds before and during the pandemic.

  • But as the first chart below shows, nearly all respondents (86%) plan to maintain or increase their overall money market fund investments this year.

Growing interest in ESG. The second chart shows that 41% of respondents expressed interest in ESG products. That’s up from 32% in 2020, according to ICD. In Europe, about half (49%) of the treasury professionals ICD surveyed plan to invest in ESG or socially responsible investing products.

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Green Discount: Treasury Wins With a Sustainability-Linked Revolver

After a corporate successfully launched a sustainability-linked revolver, the treasurer’s phone started ringing.

When it came time for one NeuGroup member to renew an existing five-year revolver, he saw an opportunity to improve pricing and generate positive PR by leveraging the ESG goals that the company had recently put in place.

  • The member’s company worked with BNP Paribas and Unicredit to structure a multibillion-dollar sustainability-linked revolver, the first one in its industry sector.
  • “I’ve received a lot of calls from other treasurers in the last few months asking how we did it and what it entailed,” the member said. “So I’m sure you’re going to see more in the next few months.”

After a corporate successfully launched a sustainability-linked revolver, the treasurer’s phone started ringing.

When it came time for one NeuGroup member to renew an existing five-year revolver, he saw an opportunity to improve pricing and generate positive PR by leveraging the ESG goals that the company had recently put in place.

  • The member’s company worked with BNP Paribas and Unicredit to structure a multibillion-dollar sustainability-linked revolver, the first one in its industry sector.
  • “I’ve received a lot of calls from other treasurers in the last few months asking how we did it and what it entailed,” the member said. “So I’m sure you’re going to see more in the next few months.”

Link to realistic goals.  Sustainability-linked loans incur cost penalties in the form of higher rates or fees if companies do not meet agreed-upon goals. That’s one reason that Martin Rogez, vice president of sustainable finance at BNP Paribas, said banks work with corporates to identify goals the company can realistically achieve and still have a measurable impact.

  • These vary from sustainability-focused key performance indicators to the company’s official ESG rating. The member’s company had two linked goals, based on a five-year plan for reducing greenhouse gas emissions and workplace injuries.
  • Mr. Rogez said these deals typically do not require much time investment on the corporate’s end, as long as it already has an ESG strategy in place. He said he recommends the company appoint a “sustainability coordinator” to help manage and monitor its ESG goals, someone the bank works with throughout the process.

Setting the rate framework. Mr. Rogez said the interest rate for the revolver is determined by starting with the classic lending criteria of the borrower’s credit profile and a corresponding base rate.

  • The bank and the company then agree on a pricing adjustment, which he said is typically a handful of basis points (the same amount for discount and penalty) and depends on the ambition of the goals set, among other factors.
  • The pricing impact of meeting the ESG goals could be applied to the loan’s interest rate, its commitment fee or both, he said.
  • Each year, a company reports whether it met the goals, and the impact is applied. If the company meets its goal, the discounted rate will apply. If not, the penalty or premium amount will be added to the base rate.

Sending a message. The amount of the impact for the member was ±5 basis points on the interest rate for the revolver’s drawn price, and ±1 basis point on the undrawn fee. The member suggested that before the pandemic these numbers could have been higher.

  • And while the pandemic and the company’s credit rating will keep the ESG discount from having much impact on the company’s bottom line, the member said the deal was worthwhile. “Even though it’s not a huge number, symbolically it’s an important message to send.”
  • The member said that his company’s revolving credit facility is typically not used; so only having a discount on the revolver’s drawn price “would not be as compelling.” A smaller discount or premium applies to the undrawn price for the company’s revolver as well.

European banks. The member said European banks have more experience working with ESG loans, which is why he chose BNP and Unicredit to be the deal’s primary ESG banks.

  • Because there is so much public interest in ESG, the member said it was easy to attract banks. He had the opportunity to choose between 10 banks vying to be partners on the ESG component of the loan.
  • The member said he used this opportunity to help one bank to tier one of the credit facility.
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Talking Shop: A Fintech Collects Capital Markets Pricing Data

Background: Members of NeuGroup for Capital Markets recently heard a presentation from InterPrice Technologies, a woman-owned fintech that collects pricing data for issuers. The company says its platform gives corporates access to their costs of capital “at any point in time and streamlines their communication with financing partners.”

  • The technology “automatically aggregates bond, commercial paper and loan indications into intuitive dashboards across currencies and financing products,” InterPrice says.
  • InterPrice on Monday announced it has raised $2.5 million in seed money led by Bowery Capital.

Background: Members of NeuGroup for Capital Markets recently heard a presentation from InterPrice Technologies, a woman-owned fintech that collects pricing data for issuers. The company says its platform gives corporates access to their costs of capital “at any point in time and streamlines their communication with financing partners.”

  • The technology “automatically aggregates bond, commercial paper and loan indications into intuitive dashboards across currencies and financing products,” InterPrice says.
  • InterPrice on Monday announced it has raised $2.5 million in seed money led by Bowery Capital.

Member question: “Has anyone signed on with InterPrice? We worked through a demo and it looked interesting. As we look for ways to work more efficiently, curious if anyone has found the offering to be worth exploring further?”

Peer answer 1: “We haven’t signed up for it yet, but have looked at it more thoroughly and have been advising [InterPrice] on functionality that I think would be helpful for corporates.

  • “They are still early in their process, but so far I think there a lot of value to what they are trying to create. They are also very open to product suggestions if there is specific functionality that you think would be beneficial.”

Peer answer 2: “I’m a bit reluctant to sign up now because I don’t know how much it’s going to cost when they start charging for it. I don’t want to get everything set up and then [reverse course].”

InterPrice response. Asked for comment, InterPrice CEO Olga Chin responded, “We are incredibly appreciative of the support we have gotten from multiple treasury teams in building the InterPrice platform.

  • “In the last few months, InterPrice has attracted some of the top corporate issuers in the market. As part of our rollout, we have offered a free trial to every corporate treasury team.
  • “Based on feedback from corporate treasury teams, we anticipate a fee model that is based on issuance versus a subscription fee after the trial period.
  • “If you would like to discuss a suggested fee schedule or schedule a demo, please reach out to olga@interpricetech.com.”

Peer answer 3: “We are using the platform on a pilot basis. The setup has actually been fairly painless, as we were already tracking much of this information in Excel and were able to upload our history.

  • “Banks are starting to fall in line with onboarding, though we are still sending the bulk of our pricing indications to the email parsing inbox for upload. The use case for commercial paper is also quite compelling.”

Member response: “Our Excel record-keeping system is lacking; part of the appeal of the offering. Understood on historical data—that is a great data point.”

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Insurance and the Efficient Frontier: What Happens in a Soft Market?

NeuGroup members respond to Willis Towers Watson’s risk strategy of using modern portfolio theory for insurance. 

Willis Towers Watson recently presented to NeuGroup members an approach to modernizing how corporates buy insurance. As NeuGroup Insights explained last week, it involves modern portfolio theory and the efficient frontier.

NeuGroup members respond to Willis Towers Watson’s risk strategy of using modern portfolio theory for insurance. 

Willis Towers Watson recently presented to NeuGroup members an approach to modernizing how corporates buy insurance. As NeuGroup Insights explained last week, it involves modern portfolio theory and the efficient frontier.

  • The presentation intrigued many members, including one who said WTW provided a great overview of the central idea. He wondered how treasury would effectively convey this new way of managing risk to the CFO and the board, including the idea of buying less or none of some coverage.
  • WTW said the process requires a lot of preparatory meetings, ideally face-to-face, and that no one answer fits all companies.

What if insurance market softens? In a follow-up interview, another member who attended raised some questions about the approach if the current, hard insurance market were to soften. Among her comments:

  • “My guess is that this strategy is popping up right now due to the fact that the market is tougher in certain spaces than it has been in the past.  Without a firm policy on what you’re buying insurance on and what you’re seeking to protect, this is something that will fall on its face if the market softens.
  • “I agree that insurance is a method of risk management that is likely not being used effectively relative to a company’s desired outcome. This approach is one way to solve it. 
    •  “But without goal setting and benchmarking, when the correlations break down, there will be a lot of 20/20 hindsight on this methodology. It only works if you have the right infrastructure in place.
  • “I’m not sure I would be interested in buying on the efficient frontier, as correlations work until they don’t. That being said, I find there is little guidance or understanding internally as to why we’re buying insurance and what we’re really trying to protect. 
  • “For us, this session was helpful, as I think we would approach it as a goal-setting exercise. What is our goal? What are we trying to protect? What is our anticipated outcome? How do we benchmark our results?
  • “Then we would look to [WTW] to analyze our exposures and tell us which strategy best achieves our goals, and where we should be investing in insurance, regardless of market conditions.”

WTW’s responses. A spokeswoman for WTW provided these responses:

  • “It is Willis Towers Watson’s position that this is a market correction. Due to climate change, social inflation and many other factors, we do not expect insurance prices to fall. [See] our 2021 Marketplace Realities.
  • “While it is true that the cost component will matter less if the market softens, the risk component is much bigger. Considering all risks together in portfolio is the only way to get an accurate picture of the risk an organization faces, and only then can they make decisions aligned with their corporate financial goals.
    • “It’s still valuable to take a portfolio view regardless of the cost of insurance.
  • “There are certainly good reasons for organizations not to move all the way to the efficient frontier. Not every insurance decision is a financial decision based on the numbers; there are qualitative considerations as well.
  • “We have seen organizations decide that moving toward the efficient frontier (reducing risk and cost, but not to their minimums) works for them.
  • “The assumption of no correlation is an assumption of 0 correlation, or independence of every risk. Our position is that we know that the assumption of total independence, or zero correlation, is wrong. While any assumption about correlation is also possibly wrong, it’s ‘less wrong.’”
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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.