Insights

Peer-Validated Insight Distilled by NeuGroup

Sign up to get NeuGroup Insights by email—and share what you learn.

Rightsizing and Reshaping: What Post-Covid Corporates May Look Like

Internal auditors assess risks as companies shift where and how employees work.

Members of NeuGroup’s Internal Auditors’ Peer Group (IAPG) agreed that the pandemic will quite literally reshape the physical look of companies—mostly large technology firms—as well as introduce a host of new risk concerns that are just starting to be considered.

  • Companies’ real estate is bound to shrink as they consider how and when to support the significant number of fully remote and hybrid employees—those coming to office less frequently—that are certain to remain post-pandemic.
  • This shift away from physical offices introduces cultural and legal implications as well as new risks.
  • Employee turnover has slowed during the pandemic but is likely to pick up again when economies reopen more assertively, bringing these issues and risks front and center.

Internal auditors assess risks as companies shift where and how employees work.
 

Members of NeuGroup’s Internal Auditors’ Peer Group (IAPG) agreed that the pandemic will quite literally reshape the physical look of companies—mostly large technology firms—as well as introduce a host of new risk concerns that are just starting to be considered.

  • Companies’ real estate is bound to shrink as they consider how and when to support the significant number of fully remote and hybrid employees—those coming to office less frequently—that are certain to remain post-pandemic.
  • This shift away from physical offices introduces cultural and legal implications as well as new risks.
  • Employee turnover has slowed during the pandemic but is likely to pick up again when economies reopen more assertively, bringing these issues and risks front and center.

Should I stay or should I go? The hybrid approach appears to be gaining favor, partly because some employees want in-person interaction, and because companies may believe such interaction generates creativity and more effectively enables onboarding new employees.

  • “We’re finding a want or even a need for them to be in proximity to peers,” one member said, adding that it is less important for others, “So we’re looking into how we can group employees and make sure their professional development is taking place.”
  • Hybrid employees must travel to the office now and again. “Are there parameters we can provide in terms of distance and travel time to the office for different categories of employees?” one member asked. “And who foots the bill?”

Remote benefits. Sheltering in place has also revealed the benefits of remote work, both to companies and their employees.

  • Functions, including audit, for which there was concern initially about their effectiveness without face-to-face meetings have proved to be resilient and even conducted better remotely. “Our sales team is now able to work with customers any time of the day, so working remotely is easier for them,” one internal auditor said.
  • Several NeuGroup members agreed that working remotely has enabled them to hire talent that previously was out of reach.

Challenges. Potential hires are making their own demands. “We’re seeing candidates saying that unless we give them an ironclad guarantee that they can work from wherever, they’re not interested,” one member said.  

  • Some current employees have decided they prefer working remotely and have relocated permanently to other geographies, creating potential administrative and legal risks.
  • “If an employee moves to a different state, now there are payroll implications, different cost centers, etc.,” a member said.

The incredible shrinking office. One IAPG member said her company will permanently close half its offices around the globe, a statement eliciting little surprise among peers. A significant reduction in employees coming to the office means a “rightsizing” of corporate real estate is coming. This also means new areas where management will need assurance that i’s are dotted and t’s crossed and all dotted and crossed properly.

  • For instance, what of leases that were signed just before the pandemic? “Do we want to carry the burden of those leases on our balance sheet, or treat them with a special disclosure or some other way?” another member asked. “There’s risk there with respect how companies will address that problem going forward.”
  • Another member said 80% of his company’s leases are coming due in the next 18 months. “There’s a huge assessment happening now,” he said. “We have 190 globally, so how do we reduce those and what will be the outcome from the cost savings?” he said.
  • After accumulating numerous offices worldwide, another member said his company is “starting to look at that and say, ‘If there are fewer than 50 people in them, we’re going to close them and consolidate our footprint in larger offices.’”
0
0
Read More Read Less
Contact Us
0
0

Pension Puzzle: Insights for Managers Putting the Pieces Together

Willis Towers Watson weighs in on WACC, the efficient frontier and pension financing alternatives.

Pension fund managers evaluating alternative funding strategies should not necessarily use their companies’ weighted average cost of capital (WAAC) as a discount rate; the risks of the pension should be viewed differently than a normal project investment considered by the company.

  • That was among the key takeaways from a recent NeuGroup Virtual Interactive Session sponsored by Willis Towers Watson, “Relative Value: Pension De-risking in a Post-Covid World.”

Willis Towers Watson weighs in on WACC, the efficient frontier and pension financing alternatives.

Pension fund managers evaluating alternative funding strategies should not necessarily use their companies’ weighted average cost of capital (WAAC) as a discount rate; the risks of the pension should be viewed differently than a normal project investment considered by the company.

  • That was among the key takeaways from a recent NeuGroup Virtual Interactive Session sponsored by Willis Towers Watson, “Relative Value: Pension De-risking in a Post-Covid World.”

Example. Roger Heine, senior executive advisor at NeuGroup, illustrated the point: “The cost of paying an insurance company to accept risk transfer of low-balance participants above the participants’ strict annuity liability would be weighed against the present value of saved PBGC fees and other operating-type costs discounted at the company’s cost of debt.

  • “This would be lower than its WACC, since saved fees and costs are essentially riskless.”

Risk and reward. Willis Towers Watson presented the graphic below to make the point that companies evaluating pension options strictly using the company’s WACC as the hurdle rate may reject investments and miss out on opportunities that are relatively low risk or may make investments that look attractive but are “risk inefficient.”

Speed matters. Companies should also be prepared to act quickly on different funding strategies because opportunities that arise can quickly disappear. Mr. Heine gave these two examples from 2020:

  • The widening of corporate spreads in the spring meant that insurance companies would potentially reduce their cost to execute risk transfer of pension liabilities due to their ability to source corporate bonds at lower cost.
  • The sudden decline in interest rates combined with a recovery in the corporate bond market meant that companies could offer lump sum buyouts discounted at higher average historical interest rates funded by corporate debt based upon current, lower rates.
    • One member whose company considered this said the HR department opposed the move over concerns that recipients of the lump sum would spend it instead of investing.

Debt and taxes. An in-session poll of members in attendance revealed that a large majority are not inclined to issue debt to fund the pension, with just 20% saying it’s likely in the next five years (see above). One participant did it right before tax rates went down under tax reform to capture the deduction from the contribution at the expiring higher corporate tax rate.  

  • “But right now, with 80% of participants thinking that corporate tax rates are going to increase in the next couple of years, it makes more sense to try to defer contributions until the tax rates rise,” Mr. Heine observed.
  • “The possibility of further government funding relief also argues for deferring funding along with the fact that the recently rising stock market and tightening corporate spreads have returned many pension funds to the funding status where they began the year.”
  • Participants in one breakout session agreed that creditors and the rating agencies view a pension deficit as less “debt-like” than straight corporate debt despite published metrics equating the two.
    • Mr. Heine added that issuing corporate debt to fund the pension “secures pension creditors ahead of unsecured corporate creditors.”

0
0
Read More Read Less
Contact Us
0
0

The ESG Halo Effect, Insurance Pain and Financing Lessons Learned

Key takeaways from the 2020 H2 Life Sciences Treasurers’ Peer Group meeting sponsored by Societe Generale. 

By Joseph Neu

A halo effect from the business we are in. In an exchange on ESG-related financing and ESG scores, our life sciences treasurers noted that sustaining life is core to their business; hence, sustainability is part of their companies’ DNA. Why then should they need to issue a green bond or execute some other sort of sustainability-linked financing to earn a so-called ESG halo effect?

Key takeaways from the 2020 H2 Life Sciences Treasurers’ Peer Group meeting sponsored by Societe Generale. 

By Joseph Neu

A halo effect from the business we are in. In an exchange on ESG-related financing and ESG scores, our life sciences treasurers noted that sustaining life is core to their business; hence, sustainability is part of their companies’ DNA. Why then should they need to issue a green bond or execute some other sort of sustainability-linked financing to earn a so-called ESG halo effect? 

  • In comparison to the ESG impact of the underlying business, if correctly measured, a financing instrument should not be required to create a halo. Instead, treasurers should look to have the business better reflected in ESG ratings to get full access to ESG-mandated investors.

Risk transfer transformation needed. The insurance renewal market coming out of the Covid-19 crisis points to the continued need for risk transfer transformation. At a time when life science firms are being encouraged to move fast and break us out of a pandemic, insurers are seeing risk, so they are taking a pound of flesh in premium.

  • Treasurers are left wondering how much of this is their own product or liability risk and how much of it is insurers recouping losses on their investment portfolios. Traditional insurance is overripe for transformation and it’s a matter of when, not if.

Transaction shop-talk. Treasurers love to share and learn from each other’s funding transaction experience, be it a bank loan, convertible or bond deal.

  • Akin to a morbidity and mortality conference in the medical profession, life sciences treasurers benefit from identifying adverse outcomes from financings to exchange with peers, yet they are even more inclined to share what went well to secure needed funding.
0
0
Read More Read Less
Contact Us
0
0

Monetization Magic: How Using a Hybrid Solved an Asset Riddle

MUFG helps one mega-cap use structured preferred shares to monetize a “difficult” asset.

In a session at the recent NeuGroup Tech20 annual meeting—the 20th annual no less—a guest speaker from a mega-cap communications company shared how his treasury found a great deal of success using structured preferred shares to monetize previously untapped assets on its balance sheet. All while managing its net debt within a target leverage ratio, with the assistance of meeting sponsor MUFG.

MUFG helps one mega-cap use structured preferred shares to monetize a “difficult” asset.

In a session at the recent NeuGroup Tech20 annual meeting—the 20th annual no less—a guest speaker from a mega-cap communications company shared how his treasury found a great deal of success using structured preferred shares to monetize previously untapped assets on its balance sheet. All while managing its net debt within a target leverage ratio, with the assistance of meeting sponsor MUFG.

  • Structured preferred shares are a type of hybrid instrument that can be used to achieve multiple corporate objectives, in this case deleveraging and asset monetization.
  • With MUFG’s assistance, the presenter, the treasurer of a company with one of the largest debt portfolios of any non-financial institution, said the deal was “a real success story” for the company.

Asset monetization. When the company entered a 30+ year deal to lease out some of its assets for a one-time fee, it faced a dilemma: what could it do with an essentially dead asset on the balance sheet?

  • “We couldn’t really securitize these things, and it would’ve taken us years to see any cash,” the presenter said. “So we looked around at different solutions and came to the idea of working with MUFG to (issue) structured preferred (shares). We liked it, it allowed us to monetize what was otherwise a difficult asset.”

A shared structure. The presenter worked with MUFG to reassign the assets into a separate legal entity and issued preferred shares, in which eight banks were buyers of a multibillion dollar facility.

  • “Ordinarily, when you think about preferred, you think about it being issued at a parent company,” said Terry McKay, head of Global Financial Solutions at MUFG. “But in the case of structured preferred shares, the issuer is a subsidiary.”
  • “The legal form of this subsidiary can be a corporation, a partnership or a trust, so there is a lot of flexibility,” he said.  “And in terms of the assets, there is also a lot of flexibility, and it’s critical to select the right assets; investors are focused on the critical assets.”
    • Thanks to this flexibility, the asset types can vary from core assets to inventory to even intellectual property.
  • Mr. McKay continued that structured preferred stock, though it is more expensive than a senior bond and does not include the ratings agency credit of traditional preferred stock, can be useful because of its tax deductible coupons, added liquidity and the ability to be strategic in financing and adapt to meet specific objectives.

Story of success. “It had a lot of benefits to it,” the presenter said. “It helped us really meet our objectives and gave us a chance to reward banks we’ve done significant business with.”

  • In its work with MUFG to issue structured preferred shares, the company was able to meet these three core objectives:
  1. Managing its debt tolerance, reducing its net debt by about 17% in the span of a year and a half.
  2. Achieving a target leverage metric which was contingent upon asset sales to be met.
  3. Acquiring an incremental source of liquidity and reducing the pressure on refinancing its bonds.
0
0
Read More Read Less
Contact Us
0
0

Right on Target: Tracking Companies’ Changing Risks

One member’s “risk radar” facilitates explaining evolving risks to audit committees.

Corporate risk is no easy concept to convey, especially when risks are numerous and shifting in intensity over time. Equally challenging is explaining a risk’s evolving urgency to board members, who must concurrently digest reams of information.

  • Responding to a query about how peers justify urgent audit-plan changes to audit committees, a member of NeuGroup’s Internal Auditors’ Peer Group described the “risk radar” he presents quarterly to illustrate dynamically the comparative urgency of his company’s top 20 risks and mitigation efforts.
  • His description received raves from peers, with one quipping, “That’s very comprehensive. It makes the rest of us feel inadequate.”

One member’s “risk radar” facilitates explaining evolving risks to audit committees.
 

Corporate risk is no easy concept to convey, especially when risks are numerous and shifting in intensity over time. Equally challenging is explaining a risk’s evolving urgency to board members, who must concurrently digest reams of information.

  • Responding to a query about how peers justify urgent audit-plan changes to audit committees, a member of NeuGroup’s Internal Auditors’ Peer Group described the “risk radar” he presents quarterly to illustrate dynamically the comparative urgency of his company’s top 20 risks and mitigation efforts.
  • His description received raves from peers, with one quipping, “That’s very comprehensive. It makes the rest of us feel inadequate.”

Red, yellow, green. Split into four quadrants—strategic, compliance, financial and operational—the graphic’s red center (see chart below) signifies the most urgent issues and is surrounded by yellow and then green halos for less urgent matters.

  • The closer the stars representing the company’s risk issues—such as cybersecurity, sales growth and trade compliance—are positioned to the center of the round radar screen, the greater the risk urgency.
  • The stars change position quarterly, displaying not just each category’s inherent risk but the company’s evolving risk-mitigation efforts.
  • Built through the member’s enterprise risk management (ERM) process, the radar incorporates feedback from management. “So the board gets a very real perspective on risk, and it has all the context for why risks are moving closer to or away from the center,” the member said.

Customer impact. The executive noted Europe’s changing regulatory environment and privacy rules, including the July Schrems II ruling relating to transatlantic personal data flows, could dramatically change his company’s compliance requirements.

  • The risk is that uncertainty could unnerve potential clients concerned about ending up on the wrong side of the regulation. From the start of the year, the uncertainty has moved the regulatory star close to the radar’s center.
  • “But it’s not the end of the world,” the member told the group, because it opens the door for management to explain its road map to deal with the risk going forward. “We can say, ‘Given all the good work we’ve done, we’ve mitigated this risk.’”
  • He added, “The audit committee has what we consider a very frequent, very fresh review of all the risks associated with everything we do from a value chain perspective.”

Beneath the graphic. The committee can now visualize internal audit’s risk assessment, including the impact likelihood, the velocity of onset and management’s risk tolerance. And it can explore the five categories used to assess each risk and its overall priority.

  • Judgment plays an important role, but the audit committee can review the appendix to understand precisely how his team arrived at its conclusions.
  • And top management, he said, from the chief legal officer to the CFO and heads of engineering and data security, have “all bought off on the stars.”
  • The risk radar prioritizes the company’s 20 most significant risks, and while the board may be concerned with the top three, “from management’s perspective the top 20 is fantastic.”

The proof? “Our head of human resources has built her own risk radar for HR, our CFO now has his own risk radar for finance, and the head of engineering is talking about creating his own risk radar,” the member said.

0
0
Read More Read Less
Contact Us
0
0

Counterparty Transparency: ‘Looking Through’ Money Market Funds

How a treasury investment manager finds out what assets are owned by the MMFs he owns.

For treasury investment managers, visibility into the credit and counterparty risks of their portfolios is essential, especially during times of heightened volatility and uncertainty—like the last nine months.

  • One member of NeuGroup’s Treasury Investment Managers’ Peer Group 2 told peers at a recent meeting sponsored by DWS that part of his assessment of counterparty risk involves “looking through” money market funds (MMFs) to see their underlying exposures.

How a treasury investment manager finds out what assets are owned by the MMFs he owns.

For treasury investment managers, visibility into the credit and counterparty risks of their portfolios is essential, especially during times of heightened volatility and uncertainty—like the last nine months.

  • One member of NeuGroup’s Treasury Investment Managers’ Peer Group 2 told peers at a recent meeting sponsored by DWS that part of his assessment of counterparty risk involves “looking through” money market funds (MMFs) to see their underlying exposures.

Going the extra step. One DWS executive found it intriguing that the member goes beyond examining the credit ratings of MMF managers. “You are taking it to another level,” he said. Many investment managers rely on the work done by the rating agencies, he said.

  • In response to a question from a peer, the member explained that he gets the data on the funds’ holdings by using Transparency Plus, a tool that’s part of the ICD money market portal. The data is then put in Excel.
  • He said extracting and analyzing hundreds of names is “challenging,” adding that he’d like to know if others “have a better way to do it.”

Not just prime funds. The member does not only look through prime funds that have credit risk, but those of government money market funds which own a lot of repos. “It’s interesting to see who the repo sponsors are,” he said, adding that the investments are “supersafe and over-collateralized.”

Big picture. For perspective on looking through MMFs, NeuGroup Insights checked in with Peter Crane, president of Crane Data and an authority on the MMF industry. Here are some of his insights:

  • “Almost all money fund portals and platforms offer transparency modules, which became popular after the 2008 financial crisis. ICD and BNY Mellon pioneered the trend, but State Street, FIS and many of the Cachematrix-powered portals soon followed.
  • “It wasn’t until the SEC mandated disclosure of monthly portfolio holdings for money funds in 2010 that they became useful and used. They tweaked these disclosure requirements in 2014 too.
  • “While most investors only are interested in looking through when something blows up, many need to check what their funds invest in more often.”
0
0
Read More Read Less
Contact Us
0
0

Game Plan: Opportunistic Buybacks on the Open Market vs ASRs

Meeting sponsor SocGen sees corporates growing comfortable with flexible, open market buybacks amid recovery.

During the global pandemic, many corporates have slammed the breaks on share repurchase programs to save cash and avoid criticism from politicians as Americans lost jobs and some companies sought government bailouts.

  • At a recent NeuGroup meeting of treasurers at life sciences companies, Societe Generale’s David Getzler, head of equity capital markets for the Americas, forecast an increase in share buybacks in 2021 as the economy recovers and political scrutiny declines.
  • “From our perspective, it looks like people are more comfortable,” Mr Getzler said. Below are his forecasts for dividends and buybacks.

Meeting sponsor SocGen sees corporates growing comfortable with flexible, open market buybacks amid recovery.

During the global pandemic, many corporates have slammed the breaks on share repurchase programs to save cash and avoid criticism from politicians as Americans lost jobs and some companies sought government bailouts.

  • At a recent NeuGroup meeting of treasurers at life sciences companies, Societe Generale’s David Getzler, head of equity capital markets for the Americas, forecast an increase in share buybacks in 2021 as the economy recovers and political scrutiny declines.
  • “From our perspective, it looks like people are more comfortable,” Mr Getzler said. Below are his forecasts for dividends and buybacks.

Open market flexibility. Several members affirmed that their companies are buying back shares when the timing and price is right. “As long as you’re not taking government money,” said one treasurer. “We are looking at it opportunistically.”

  • SocGen’s Mr. Getzler expects more companies to use open market stock repurchases as opposed to accelerated share repurchase (ASR) programs.
  • Volatility and continued uncertainty about the pandemic and the economy are factors explaining corporates’ preference for open market purchases, he added. “Companies want to maintain flexibility in case the economy retreats.”

Open market vs ASR. In an open market purchase, a company buys its shares at the going rate. With an ASR, a company can transfer the risk of buying back stock to an investment bank.

  • “The banks give a guaranteed discount to VWAP over the period, typically two to three months, when they buy the shares in the market to cover their position,” Mr. Getzler explained. “The banks borrow the shares on day one and deliver to the company and then will cover the borrowed position by buying in the market over the period agreed.”

The debt factor. The level of share repurchases going forward depends in part on how companies manage their balance sheets. Many have issued debt in recent years to buy back stock, a trend that could resume as the economy improves, according to SocGen’s debt capital markets team. In addition:

  • Companies that raised liquidity during Covid may decide they have excess cash and buy back shares if and when the economy returns to normal.
  • Companies that added gross leverage may decide it’s more prudent to pay down debt than buy back shares. 
  • Leverage is up across the investment-grade space, so it could take a year for companies to get back down to pre-Covid levels before they look to re-engage in share buybacks.
  • Companies may choose to live with higher leverage so they can return cash to shareholders.
0
0
Read More Read Less
Contact Us
0
0

Replacing Libor: No Criticism for Banks That Say ‘No Thanks’ to SOFR

Regulators say banks can price loans using any appropriate reference rate as they prepare for Libor’s end.

You may possibly have missed a development that happened three days after the presidential election: US banking regulators gave banks more confidence they can decide to use Libor-replacement rates other than the secured overnight financing rate (SOFR), which the Federal Reserve has endorsed but that some regional banks view as problematic.

Regulators say banks can price loans using any appropriate reference rate as they prepare for Libor’s end.

You may possibly have missed a development that happened three days after the presidential election: US banking regulators gave banks more confidence they can decide to use Libor-replacement rates other than the secured overnight financing rate (SOFR), which the Federal Reserve has endorsed but that some regional banks view as problematic.

  • “Examiners will not criticize banks solely for using a reference rate, including a credit-sensitive rate, other than SOFR for loans,” guidance from the Fed, the FDIC and the Office of the Comptroller of the Currency stated.

It’s OK to be different. The guidance bolsters Fed Chair Jerome Powell’s May statement recognizing Ameribor, an alternative to Libor published by the American Financial Exchange (AFX), as a “fully appropriate” alternative for banks.

  • “This is another step on the march toward the legitimacy of alternative benchmarks and for the market to decide what the replacements for Libor will be,” said Reed Whitman, treasurer at Brookline Bancorp.
    • He added that this gives more confidence that “products we develop tied to a non-SOFR rate will be accepted; it’s an additional accelerant.”
  • If regulators had warned banks against “using a different benchmark, that effectively would have shut down alternatives.” said Alexey Surkov, a partner with Deloitte Risk and Financial Advisory and a co-chair of a working group under the Alternative Rates Reference Committee (ARRC), a private group convened by the Fed to help guide the Libor transition.

The regional view. Regional banks have concerns about pricing their floating-rate products and funding over SOFR, based on the secured overnight repurchase agreement (repo) market, because it does not reflect their cost of funds.

  • Ameribor is instead generated from the rates at which financial institutions lend to one another over the AFX, an exchange launched in 2015 by Richard Sandor, an innovator in the futures market.
  • In an interview with NeuGroup Insights, Mr. Sandor called the guidance a “big step forward” since now all the banking regulators are “opining together.” He added that for those who thought Libor might sustain itself, “this is another nail in the coffin.”

Alternatives. Some institutions have considered the prime rate and Fed Funds as Libor alternatives, at least until transaction-based benchmarks become sufficiently robust. 

  • Some bank products currently reference those rates, Mr. Surkov said, and lenders may choose to stick with them. Credit cards, for example, often reference prime.
  • Similarly, mortgages priced over Libor are widely expected to transition to SOFR, but adjustable rate mortgages (ARMs) based on Constant Maturity Treasury (CMT) rates have existed for a long time, he said, and may very well continue.
  • Mr. Whitman said he foresees a combination of benchmarks, including SOFR, Ameribor and perhaps other indices that will be “repurposed for specific uses.”

Good timing. The ARRC recommends ceasing to use Libor to price floating rate notes by year-end and business loans and structured products by June 30, 2021.

  • “So this helps ready us for the next phase of the transition, where banks stop booking Libor deals and start booking SOFR or Ameribor deals,” Mr. Whitman said.
0
0
Read More Read Less
Contact Us
0
0

Talking Shop: Applying the End-User Exception From Dodd-Frank’s Swap Clearing Mandate

Context: In 2013, section 723 of The Dodd-Frank Act went into effect, which required all commercial end users of swaps to submit the swap to a derivatives clearing organization. A so-called “end-user exception” allows parties to claim exemption from the clearing mandate and continue executing uncleared swaps with their dealer counterparties if one of them:

  • Is not a financial entity
  • Is using the swap to hedge or mitigate commercial risk
  • Provides certain information to the CFTC, including how it generally meets its financial obligations associated with entering into non-cleared swaps.

Context: In 2013, section 723 of The Dodd-Frank Act went into effect, which required all commercial end users of swaps to submit the swap to a derivatives clearing organization. A so-called “end-user exception” allows parties to claim exemption from the clearing mandate and continue executing uncleared swaps with their dealer counterparties if one of them:

  • Is not a financial entity.
  • Is using the swap to hedge or mitigate commercial risk.
  • Provides certain information to the CFTC, including how it generally meets its financial obligations associated with entering into non-cleared swaps.

Member question: “We’re looking into our annual application of the Dodd-Frank end-user exception. Curious to know which other corporates are using the end-user exception. For those that are not and are reporting trades, what drove that decision and how heavy of a lift is it? Appreciate any perspectives you have on this!”

Peer answer: “We have elected the DF EUE. The CFTC has not issued a clearing mandate for FX instruments as many initially feared, but there is still a clearing mandate for various IRS and CDS products. We seek BOD (board of directors) renewal annually to provide us the option to trade these instruments bilaterally without clearing, should the need arise.”

Expert opinion: NeuGroup Insights reached out to derivatives expert Amol Dhargalkar, global head of corporates at Chatham Financial. He said that its clients mostly do opt to use the end-user exception.

  • “Well over 95% of our corporate clients are using the end-user exception,” he said. “The only ones that aren’t are those who didn’t really qualify for it because they are a financial institution of some sort per the definitions.”
  • Other analysis: “While we have a few clients that have collateralized their trades, that’s often been out of necessity rather than choice. I know that some large corporates do trade on a cleared basis, though that tends to be those companies who have significant excess cash on their balance sheets.”
0
0
Read More Read Less
Contact Us
0
0

Mismatched Hedge Risk: Derivative Values May Change as Libor Ends

Standard Chartered, helping corporates prepare for risk-free rates, describes the potential risk of “valuation jump.”

The replacement of Libor by risk-free rates (RFRs) like the secured overnight financing rate (SOFR) in the US and the sterling overnight indexed average (SONIA) in the UK has been a hot topic at NeuGroup fall meetings where banks, regulators and other experts have been helping members prepare for Libor’s planned demise at the end of 2021.

Standard Chartered, helping corporates prepare for risk-free rates, describes the potential risk of “valuation jump.”

The replacement of Libor by risk-free rates (RFRs) like the secured overnight financing rate (SOFR) in the US and the sterling overnight indexed average (SONIA) in the UK has been a hot topic at NeuGroup fall meetings where banks, regulators and other experts have been helping members prepare for Libor’s planned demise at the end of 2021.

  • At a second-half meeting of the Asia Treasurers’ Peer Group, sponsor Standard Chartered brought to light a topic that has received less attention than other issues: Corporates switching to SOFR for over-the-counter derivatives face the “potential risk of valuation jump”—meaning the size of their derivative books may change, creating mismatched hedges.

Basis risk. Standard Chartered’s presentation included two scenarios where valuation changes create the potential for basis risk—when a hedge is imperfect because the derivative does not move in correlation with the price of the underlying asset.  

  • Case 1: A corporate has GBP fixed-rate bonds and entered into multiple fixed to floating-rate interest rate swap contracts to convert the bonds from fixed to floating (GBP 3M Libor +spread).
  • Case 2: An institution invested in a portfolio of GBP fixed-income instruments. In managing the interest rate risk, it entered into multiple fixed to floating-rate swap contracts to convert the return of the underlying bonds from fixed to floating (GBP 3M Libor +spread).
  • Problem: “The Libor discontinuation presents a potential risk of valuation jump in both cases,” Standard Chartered states. “Depending on the final transition methodology and levels being agreed upon after the transition, the cash flows and valuation of the swaps are likely to be based on the prevailing SONIA swap curve.”
  • Solution: “Corporates can consider a Libor/SONIA basis swap to hedge against the risk of valuation jump.”

Discount rates, PV math. A risk of hedging mismatches also arises from the use of a different discount rate, such as SOFR, to determine the present value (PV) of a derivative that a corporate is using to hedge an exposure.

  • The change in the discount rate index can impact hedging if it is inconsistent between the underlying exposure and the hedge instrument.
  • For an over-simplified example, consider a $100 million asset discounted at a 2% risk-free rate to a PV of $98 million. To hedge, the corporate could have a derivative on its books with an exact, matching notional value of $100 million. But if that amount is discounted at a different risk-free rate of 1%, the derivative would have a PV of $99 million, creating a hedging mismatch.

Be prepared. Standard Chartered’s recommendations to prepare for the end of Libor include reviews of systems, documentation, processes and pricing—where it says to develop pricing mechanisms based on RFRs.

  • The bank says to consider changes to systems and processes, such as incorporating new interest rate curves, historical RFR data, RFR methodologies and market conventions, and new pricing and valuation methodologies.
  • In October, Chatham Financial, which helps corporates manage hedging programs, switched to using SOFR discounting on valuations for cleared swaps that trade on exchanges. It says that if your portfolio includes cleared swaps, you may need to take action to switch the valuation methodology from OIS to SOFR discounting.
  • Chatham expects that all uncleared USD transactions will move to be discounted on SOFR soon.
    • The firm notes that many corporates are initially focusing on the operational impacts of ASC 848 elections and disclosures, determining whether ISDA Protocol adherence is appropriate, and ensuring they have access to accurate payment calculations, valuations and journal entries.
0
0
Read More Read Less
Contact Us
0
0

Retailers Connect With Customers Using Touchless Payments

Smartphone apps, some using QR codes, give customers another way to pay without touching keypads or swiping a card.

Members at a recent meeting of NeuGroup for Retail Treasury reported a significant drop in cash transactions since the start of the pandemic, and some are turning to what they’re calling touchless methods of payment to meet consumers’ needs.

  • These innovations depend on using smartphone apps and the internet instead of so-called contactless payments including Apple Pay and Google Pay. Those require a device or card which then charges the transaction to a digital wallet or bank account.
  • Contactless methods, though, require retailers to invest in technology that most US consumers do not yet use.

Smartphone apps, some using QR codes, give customers another way to pay without touching keypads or swiping a card.

Members at a recent meeting of NeuGroup for Retail Treasury reported a significant drop in cash transactions since the start of the pandemic, and some are turning to what they’re calling touchless methods of payment to meet consumers’ needs.

  • These innovations depend on using smartphone apps and the internet instead of so-called contactless payments including Apple Pay and Google Pay. Those require a device or card which then charges the transaction to a digital wallet or bank account.
  • Contactless methods, though, require retailers to invest in technology that most US consumers do not yet use.

Finding new paths. Some members have embraced a simple approach: allowing customers to pay with the company’s own, so-called first-party app and then pick up their goods in person, while others sought out partners to allow smartphone payments at the register.

  • One of those partners is a member who works for a digital payments company that worked with retailers to introduce QR code-based payments. These allow a customer to pay by scanning a custom code on the retailer’s screen with their phone, accessing a credit or debit account.
    • “We worked with existing ecosystem partners, so we don’t have to have the merchant install a new terminal or have specific hardware or software to enable solutions,” the member said. “We’re integrating within the solution.”
  • One member, who heads electronic payments at a US-based global retailer’s treasury team, said his company partnered with third-party payment apps in Asian markets for in-store checkouts, which “have really taken off.

A gift. Another member said he has found success in encouraging customers to purchase gift cards and load them into the retailer’s first-party app, eliminating fees paid to card issuers while enabling a touchless experience.

  • “Pre-Covid, our app had been about 40% of our [customer payments]; now we have about 50%,” he said. “I’m a true believer, and it may take a while, but we are going to go from that 50% to an 80% mark in the next few years.”
0
0
Read More Read Less
Contact Us
0
0

Talking Shop: Making Interactive Dashboards With Power BI and SQL

Member 1: “I was encouraged to hear that others are using SQL (structured query language) + Power BI tools to automate reporting and develop interactive dashboards. We have been on a journey the last three years to do the same and would welcome a breakout discussion on best practices and forward looking vision for using these tools.”

Member 1: “I was encouraged to hear that others are using SQL (structured query language) + Power BI tools to automate reporting and develop interactive dashboards. We have been on a journey the last three years to do the same and would welcome a breakout discussion on best practices and forward looking vision for using these tools.”

Member 2: “I’d be more than happy to share what we’ve developed and are working on! SQL is a great way to start in BI; it’s easy to see how your code manipulates data.

  • “Basically what we do is develop data warehouses (SQL) that we get data into, then distribute and manage access to that data in the Power BI workspace. If anyone is interested in learning how to make dashboards in Power BI, SQLBI is widely considered to be the best there is.
  • “Going forward, I have a lot of interest in using APIs more often. Large banks typically have their own developer portals, so you can basically build your own reports out of their systems, which you could integrate and distribute to users in the Power BI workspace. I believe this is best practice.
  • “I’m trying to connect with developers to learn how to navigate developer portals. I imagine that using them would reduce bank portal administration tasks significantly, which would be a huge time-saver.
  • “There’s tons of resources out there and I hope I can help anyone that wants to push themselves in that direction.”
0
0
Read More Read Less
Contact Us
0
0

Navigating Prime Funds and Social Impact Investing

Key takeaways from the Treasury Investment Managers’ Peer Group 2 2020 second-half meeting, sponsored by DWS. 

By Joseph Neu

Reclaiming prime funds. Members are still skeptical of prime funds, yet they would not have been sorry had they kept their cash in them through the Covid crisis.

Key takeaways from the Treasury Investment Managers’ Peer Group 2 2020 second-half meeting, sponsored by DWS. 

By Joseph Neu

Reclaiming prime funds. Members are still skeptical of prime funds, yet they would not have been sorry had they kept their cash in them through the Covid crisis.

  • Prime funds could be helped going forward by some tweaks to the money market reform regulations concerning gates and fees, plus a pickup in CP issuance next year. However, what prime funds may really need is a publicity campaign highlighting how well they did in the Covid crisis and detailing the sources of liquidity at their disposal, including the Fed.
  • SMAs (separately managed accounts) to screen holdings for unique corporate risk preferences, meanwhile, will continue to proliferate.

Social impact screens on debt. The sophistication of ESG investment options—including social—continues to grow.

  • For corporates able to extend their cash investments to asset classes such as muni bonds or mortgage- or other asset-backed securities, asset managers are making it easier for you to select bonds or securities tied to specific social impact projects or communities.
  • In the past, this cherry-picking was employed to maximize risk-adjusted return or to mitigate credit risk. Now it can be used to micro-target communities and projects that companies want to support in line with ESG, diversity and inclusion (D&I) or corporate social responsibility (CSR) initiatives with their excess cash.
  • Credit risk concerns don’t disappear, especially under CECL. While yield benchmarks are easier to beat, preservation of principal is still a priority.

Balancing finance with impact metrics. Corporate cash investors continue to care deeply about their fiduciary responsibilities as they look to invest cash for positive social impacts.

  • Needed are better standards and consensus on frameworks and metrics for social impact investments. Then, corporate treasuries will need to incorporate them into policies and procedures governing cash investment.
  • It will be interesting to see what, if any, ESG metrics rise to the level of financial benchmarks after policy and procedures projects—that many members are launching or planning to launch next year—are completed.
0
0
Read More Read Less
Contact Us
0
0

Taking a Hard Look at Structure, Resources and Where to Rationalize

A cash manager with staff across the globe considers how technology may reshape and resize his team.  

Strategically important goals are the new organizational focus for one NeuGroup member who leads a cash management team of nearly 50 people at a sprawling global company that has a new CEO.

  • At a recent meeting, the member described the structure and responsibilities of his staff today and how rationalization and an increased focus on technology may change his use of resources in the future.

A cash manager with staff across the globe considers how technology may reshape and resize his team.  

Strategically important goals are the new organizational focus for one NeuGroup member who leads a cash management team of nearly 50 people at a sprawling global company that has a new CEO.

  • At a recent meeting, the member described the structure and responsibilities of his staff today and how rationalization and an increased focus on technology may change his use of resources in the future.

Centralized control, regional expertise. The member explained that the company’s current “centralized control structure” consists of regional treasury centers in Asia, Europe and the Western Hemisphere along with a central technology and accounting solutions team. 

  • A table he presented showed the number of directors, managers, supervisors, analysts and admins or interns in these areas.
  • The regional centers focus on supporting the business, optimizing liquidity, and protecting the cash held at the company’s 1000+ bank accounts across 125 banks in about 80 countries.

The importance of audits. “We spend a lot of time and energy on audits,” the member said. Peers were intrigued by a slide he showed indicating whether a given activity performed by cash management required a low, medium or high “resource requirement” in each of the three regions and the solutions group.

  • Audits of electronic banking platforms, signatories, and self-audits drive “high” resource requirements in each of the four groups.
  • In response to a question, the member said the requirements mandated by Sarbanes-Oxley (SOX) partly explain the intensity of the audit process. Also:
    •  “We’re very controlling as an organization, so we’re going to audit the heck out of everything,” he said.
  • Other categories on the resource requirement table include accounting, analytics, core treasury, cash concentration and settlements, and special projects.

How to rationalize? “There are a lot of things we want to do differently,” the member said. The driving factors in figuring out what will change involve the increased focus on technology, consolidating tasks and eliminating non-value added activities. A summary of initiatives along these focal points was shared with the group, including:

  • Automation: The treasury solutions team is piloting robotic process automation (RPA) to minimize or eliminate human touch points in daily processes.  RPA coding will be done within treasury with assistance from the company’s robotics center of excellence within the IT function.
  • Consolidation: Opportunities exist to consolidate same or similar tasks done in all regional treasury centers, yielding efficiency and expertise benefits. Examples include administration of electronic banking platforms and of bank guarantee and trade letters of credit.
    • The company did mapping with a consultant to determine if and how areas can be consolidated and asked, “Why can’t we do this in one spot?” he said.
  • Elimination: An emphasis on truly important goals creates an opportunity to review all existing work to determine what is absolutely necessary. This means “challenging every process” and asking, “Can we turn this off?” he said.

Feedback. In a great example of how the NeuGroup Process works best, the member made clear he wanted feedback from his peers on the structure and staffing of his cash management organization.

  • One member said while his company has a similar number of people in cash management, there is no accounting arm within treasury.
  • Another member said of the staffing levels, “These numbers look a little high,” adding that accounting at her company is part of shared services.
  • A third person said she found reviewing the presenter’s staffing levels “extremely valuable” and that looking at the time and resource intensity of various processes is a “good starting point” to leverage going forward.
0
0
Read More Read Less
Contact Us
0
0

Time to Talk Revolving Credit as Signs of Recovery Emerge

Banks are eager for business as loan markets improve and more M&A dialogue takes place.

Debt and loan markets are still in repair mode as they were back in April, so it’s time for corporates to talk to their relationship banks about their credit needs, particularly as it relates to revolving credit. That’s according to Jeff Stuart, EVP and head of capital markets at U.S. Bank.

Banks are eager for business as loan markets improve and more M&A dialogue takes place.

Debt and loan markets are still in repair mode as they were back in April, so it’s time for corporates to talk to their relationship banks about their credit needs, particularly as it relates to revolving credit. That’s according to Jeff Stuart, EVP and head of capital markets at U.S. Bank.

Revolver trends. Mr. Stuart, presenting his view of revolvers and more at NeuGroup’s Assistant Treasurers’ Leadership Group second-half meeting, said companies had paid down most of their “Covid crisis drawdowns” of revolving credit lines over the course of the pandemic. Nonetheless, they were keeping those lines of liquidity open just in case.

  • Borrowers are paying down revolver draws and refinancing incremental loans with longer-dated bond issuances, which is a positive trend, Mr. Stewart noted in his presentation.
  • As for keeping the lines open, Mr. Stuart told members that it’s “not time to cancel your liquidity yet,” particularly as another growing wave of Covid-19 infections sweeps across the world.
  • Mr. Stuart also noted that for higher-rated issuers, pricing has returned to pre-pandemic levels. “Five-year tenors are coming back; that’s a good sign.”

Don’t wait. If company revolvers are to be extended, right after the election might be a good time to do it, Mr. Stuart said. He added that even if your current revolver doesn’t need attention until next year, most banks have fresh budgets in January and are looking to book new loans in the first quarter. “Don’t wait until your revolver matures,” he said.

  • He also encouraged companies to use the revolver as they see fit, because banks and rating agencies aren’t giving drawdowns the negative weight they used to. “The stigma of drawing down your revolver is over,” he said.

Deal debt. Following a big decline in M&A loan issuance, there more recently has been “a lot of dialogue about M&A in the last few months” between banks and corporates, Mr. Stuart said.

  • The deal market is building, he added, “so much so that the election might not matter.”
  • Despite the M&A dialogue, many companies “haven’t pulled the trigger” yet, awaiting clarity around Covid, Mr. Stuart said.
0
0
Read More Read Less
Contact Us
0
0

Talking Shop: Should You Bank Where Your Customers Bank?

Member question: “This question is about the cultural practice of banking where our customers bank. With today’s technological abilities this makes no sense to me. Do other companies have this practice? Has anyone had success in changing this behavior pattern of banking where your customer banks?

  • “The example I am currently dealing with is in Korea, where large customers use [a particular bank] and although they are not a preferred bank partner, we seem to be using them because these customers bank there and insist their vendors bank there (or at least that is what I am being told).
  • “Anyone else having this experience and/or had success with changing?”

Member question: “This question is about the cultural practice of banking where our customers bank. With today’s technological abilities this makes no sense to me. Do other companies have this practice? Has anyone had success in changing this behavior pattern of banking where your customer banks?

  • “The example I am currently dealing with is in Korea, where large customers use [a particular bank] and although they are not a preferred bank partner, we seem to be using them because these customers bank there and insist their vendors bank there (or at least that is what I am being told).
  • “Anyone else having this experience and/or had success with changing?”

Peer answer 1: “I would agree with you. The only place where we used to do this was in Mexico, to facilitate payments by our customers, given dual currency usage in the country and the absence of interbank payments in USD (in the past).

  • “With regulatory changes a few years back, this need has also vanished, so we moved away from this, albeit with some customer communication.”

Peer answer 2: “If you follow this practice you might end up changing banks often or end up with many accounts or banking partners which will translate into more BAM and further costs.”

Peer answer 3: “We do not follow that practice either.”

0
0
Read More Read Less
Contact Us
0
0

The Benefits for Tech of Having More Than One Headquarters

Key takeaways from the Tech20 Treasurers’ Peer Group 20th Annual Meeting, sponsored by MUFG. 

By Joseph Neu

Treasury at multiple headquarters. Technology companies, whether megacaps or midsized, are experimenting with multiple headquarters which will resume as work from home phases out.

Key takeaways from the Tech20 Treasurers’ Peer Group 20th Annual Meeting, sponsored by MUFG. 

By Joseph Neu

Treasury at multiple headquarters. Technology companies, whether megacaps or midsized, are experimenting with multiple headquarters which will resume as work from home phases out.

  • Treasury will be represented across them, even within the US. Cost and competition for talent are drivers, but also diversity; it can be more challenging to get people of color to move to expensive and majority-white communities where US tech firms tend to be located.

ESG less of a credit rating driver in tech. Credit ratings from the three major agencies are likely less influenced by ESG factors in tech, according to analysts, than most sectors. This suggests a disconnect between the ESG initiatives in which many tech companies have invested significantly. And perhaps these efforts are not swaying their traditional credit ratings.

  • Since businesses with good ESG scores are touted by ESG proponents as better investment risks, the credit rating considerations are worth contemplating further.

More time to sort out decoupling. A significant capital and liquidity concern in key tech sub-sectors has been the cost and cash flow implications caused by shifting supply chains and distribution to customers in and out of China.

  • While a Biden presidency may not shift policy that’s driving US-China decoupling, it is anticipated to slow its pace, allowing for a smoother transition, which would be good news for tech capital budgets and cash flow forecasts exiting Covid.
0
0
Read More Read Less
Contact Us
0
0

Data-Driven Decisions Aided by Dashboards and Scorecards

A NeuGroup member describes his money market fund dashboard and investment manager scorecards.

Dynamic dashboards that help corporates leverage data to make better decisions are becoming essential tools for finance teams committed to tapping technology to transform.

  • Some companies in the NeuGroup Network are generating envy by using in-house tech talent skilled in programs such as Python to create dashboards, while other members are turning to Power BI or Tableau to ramp up.
  • But a recent meeting of treasury investment managers underscored that it’s the data in a dashboard and the decisions it prompts that matter most, whether the dashboard showcases liquidity, cash flow, ESG ratings or—in this case—money market funds (MMFs).

A NeuGroup member describes his money market fund dashboard and investment manager scorecards.

Dynamic dashboards that help corporates leverage data to make better decisions are becoming essential tools for finance teams committed to tapping technology to transform.

  • Some companies in the NeuGroup Network are generating envy by using in-house tech talent skilled in programs such as Python to create dashboards, while other members are turning to Power BI or Tableau to ramp up.
  • But a recent meeting of treasury investment managers underscored that it’s the data in a dashboard and the decisions it prompts that matter most, whether the dashboard showcases liquidity, cash flow, ESG ratings or—in this case—money market funds (MMFs).

An MMF dashboard. One member’s MMF dashboard intrigued peers, who asked not about its whiz-bang technology (it’s compiled in Excel using mostly ICD data) but how it’s set up and how often the company refreshes the data in it.

  • The company’s treasury team designed the dashboard internally about five years ago and included metrics to help assess any vulnerability in funds given the then-pending impact of reforms involving gates and fees.
  • “It provided some early warning signals that in one case allowed us to exit a fund which ultimately folded,” the treasury investment manager said.
  • These days, the dashboard is updated every two weeks, except when there is market stress or other reasons to review funds more closely. It’s used by the member to monitor risk and positioning and by team members who make buy/sell fund decisions.
  • “It serves as an early warning system for any fund-related issues, which allows us to proactively position ourselves and optimize risk/reward,” he said.

Facts and figures. The member’s dashboard contains about 25 MMFs, mostly prime and some government, both US and offshore. In the future, he said, it may be automated using RPA to save time and perhaps “allow us to add more variables without manual work.” It currently shows:

  1. Balances
  2. Yields
  3. NAV volatility
  4. Fund AUM/trending
  5. Fund concentration
  6. Key stats, e.g., 7-day liquidity

Fund manager scorecards. The same member described to peers another way his team makes use of data generated on spreadsheets—fund manager scorecards that are turned into PDFs.

  • Among other criteria, managers are rated on trade settlement, compliance and the value they add through research, events and idea generation. And, of course, performance:
  • “We try to look at sources of performance and see how that might translate into our policy guidelines,” the member said. “For instance, a manager who relies heavily on derivatives might not perform as well when the tool is not available to them.”  Other key factors:
    • Annualized returns vs. a benchmark (net of fees)
    • Tracking error/difference vs. benchmark
    • Volatility
    • Qualitative; five P’s: people, philosophy, process, performance, price

Value added. “The real benefit I see from manager scorecards is that they ensure a consistent and structured two-way conversation with our managers,” the member said.

  • “It surfaces issues for discussion and everyone knows where they stand.  So when we are adding or, unfortunately, subtracting assets, it’s typically not a surprise because they’ve seen some consistency of feedback.”
0
0
Read More Read Less
Contact Us
0
0

A Technology Tool to Help Corporate Bond Issuers

BondCliQ’s solution can give companies more insight into which dealers are supporting secondary trading. 

A lack of liquidity in the secondary market for investment-grade corporate bonds remains a source of frustration for many corporates that have issued record amounts of debt in the wake of the financial crisis and, more recently, during the pandemic.

  • A key reason for the liquidity problem is that broker dealers, including underwriters, have reduced their inventories of investment-grade corporate debt, in part because of regulations mandating higher bank capital ratios.
  • And despite improved transparency on corporate bond pricing and institutional investor portfolio holdings, information about which banks are making secondary markets for debt issues remains opaque.

BondCliQ’s solution can give companies more insight into which dealers are supporting secondary trading. 

A lack of liquidity in the secondary market for investment-grade corporate bonds remains a source of frustration for many corporates that have issued record amounts of debt in the wake of the financial crisis and, more recently, during the pandemic.

  • A key reason for the liquidity problem is that broker dealers, including underwriters, have reduced their inventories of investment-grade corporate debt, in part because of regulations mandating higher bank capital ratios.
  • And despite improved transparency on corporate bond pricing and institutional investor portfolio holdings, information about which banks are making secondary markets for debt issues remains opaque.

Enter BondCliQ. This fall, NeuGroup members had the opportunity to hear about one company’s technology solution that’s designed to provide more transparency and liquidity to this market by providing real-time data from over 35 dealers giving more than 40,000 price quotes daily.

  • BondCliQ founder and CEO Chris White described to members how his company’s analytics can help corporates reduce future funding costs.
  • The company says that by using performance metrics, treasury teams can review statistics on how corporate bond market makers support a company’s debt in the secondary market and improve their selection of underwriters, driving the best possible outcome on a new issue.
  • BondCliQ’s value proposition rests on the idea that if more investors perceive a company’s bonds to be fungible and liquid, demand for the bonds rises and the cost of debt capital falls.

Data combo. BondCliQ says that if leveraged properly, the information in its issuer performance reports can help lower an issuer’s cost of capital. The report combines traditional and proprietary data sets in the following categories:

  1. Pre-trade data. Bids and offers are directly derived from the company’s community of bond dealers, letting users know the market value of their debt.
  2. Post-trade data. Transaction information is sourced directly from FINRA’s Trade Reporting and Compliance Engine (TRACE), allowing issuers to monitor trading in their bonds.
  3. BondCliQ performance data. Comparative analytics for illustrating the performance of corporate bond dealers lets issuers evaluate potential underwriters.

Technology in the toolbox. “There are several factors which go into the selection of underwriters,” Mr. White said. “We view our product as a technology-driven solution that treasurers can add to their toolbox to make the best decisions possible for their companies.”

0
0
Read More Read Less
Contact Us
0
0

Talking Shop: Taking the Pulse on Forward Points in Balance Sheet Hedging Programs

Member question: “How do those with balance sheet hedging programs account for forward points—are they included in earnings before interest and taxes (EBIT), below the line, etc.?

  • “We are considering implementing a balance sheet hedging program for net liabilities that are not part of our cash flow hedging program. ​Forward points are a concern since i) they work against us and ii) they may introduce volatility if the hedge is not valued at spot while the underlying exposure is. Any insight you can provide is much appreciated.”

Member question: “How do those with balance sheet hedging programs account for forward points—are they included in earnings before interest and taxes (EBIT), below the line, etc.?

  • “We are considering implementing a balance sheet hedging program for net liabilities that are not part of our cash flow hedging program. ​Forward points are a concern since i) they work against us and ii) they may introduce volatility if the hedge is not valued at spot while the underlying exposure is. Any insight you can provide is much appreciated.”

Peer answer 1: “For our balance sheet hedging program, we recently started including them in our budgeting process but only for the one currency (RUB) that’s had a big impact. After they settle, the points are just lumped in in the overall Gain/Loss hitting other income and expenses (OI&E).

  • “We’ll calculate them at the quarter-end to explain the G/L, but just for discussion. Our hedge timing is not perfect, so we suffer from a difference between spot of the hedge and spot of the underlying exposure regardless.”

Peer answer 2: “At my company, all forward points related to our balance sheet programs are recorded to FX OI&E and we do it on a monthly basis.”

Peer answer 3: “Our balance sheet hedge forward points are marked-to-market in OI&E. The underlying remeasurement of the monetary assets and liabilities we’re hedging is booked automatically to OI&E whether we hedge or not, so while the forward points do contribute some volatility, it is much smaller than the volatility of the spot-to-spot remeasurement we’re hedging. We are fortunate in that forward points are income for us, but it hasn’t always been that way and it won’t always be that way.”

Peer answer 4: “We’ll factor in average forward points cost for B/S hedges into our quarterly forecast of B/S remeasurement if material. Our B/S remeasurement and associated hedges used to book to OPEX, but changed geography this year to OI&E as we were making other changes to hedge geography associated with adoption of new hedge accounting guidelines. Volatility from remeasurement is a little better tolerated in OI&E than OPEX.”

Peer answer 5: “Our balance sheet hedging is mostly of liabilities. The hedging results, which includes mismatch and forward points, are recorded in other income. We track separately what the forward points are by currency so that we can back it out to calculate our true mismatch. Forward points have gotten expensive.”

Peer answer 6: “At my company all forward points to OI&E as well, with hedges that average about 3 months tenor. We break down our results monthly to understand them, isolating forward points (as if amortized) vs. the true mark-to-market volatility. We find the market-to-market component quite small.”

0
0
Read More Read Less
Contact Us
0
0

Policies Resembling Guardrails That Withstand Trigger Events

Key takeaways from the Assistant Treasurers’ Leadership Group 2020 H2 meeting, sponsored by Chatham Financial.

By Joseph Neu

Policy and procedures off the back burner.  The pandemic put a wide range of policy and procedure review projects on the back burner and more members are starting to refocus on them now as immediate liquidity concerns recede.

Key takeaways from the Assistant Treasurers’ Leadership Group 2020 H2 meeting, sponsored by Chatham Financial.

By Joseph Neu

Policy and procedures off the back burner.  The pandemic put a wide range of policy and procedure review projects on the back burner and more members are starting to refocus on them now as immediate liquidity concerns recede.

  • A session on risk policy reviews, for instance, highlighted how valuable a review can be after an event trigger from a change in business, such as a major acquisition; a change in personnel, like a new treasurer or CFO; or a market change, including the impact of Covid on interest rates, FX, etc.
  • The more a policy resembles a set of guardrails that can be separated from tactics and procedures filled with prescriptive language, the easier it is to maintain a two-pager that remains valid through trigger events.
  • This allows the details, perhaps spanning 100 pages, to adapt to business change, process improvements, new technology and tools, people and other trigger events. It also allows strategies and tactics to be flexible enough to allow treasury to respond quickly, especially to changes in market conditions.

Covid crisis advancing cash forecasting.  Exponential improvements in cash forecasting are a huge silver lining in the Covid-19 crisis.

  • Member sharing during the projects and priorities discussion strongly suggests that two years from now, Excel will be replaced as the most important cash forecasting tool by business intelligence and other analytics applications alongside specialty forecasting modules that automatically pull data from the ERP and bank systems.
0
0
Read More Read Less
Contact Us
0
0

No More Offices? Corporates Debate Making Work from Home Permanent

NeuGroup members face a future where some workers may never return to office buildings. 

NeuGroup members have learned to adapt to working from home (WFH) during the pandemic. Some like it, some don’t. But nine months into Covid, many remain uncertain about what role actual, old-school offices will play moving forward. Several discussed their thinking at a recent meeting of the Assistant Treasurers’ Leadership Group.

NeuGroup members face a future where some workers may never return to office buildings. 

NeuGroup members have learned to adapt to working from home (WFH) during the pandemic. Some like it, some don’t. But nine months into Covid, many remain uncertain about what role actual, old-school offices will play moving forward. Several discussed their thinking at a recent meeting of the Assistant Treasurers’ Leadership Group.

  • Two members work for companies that have announced plans to close all office buildings, although many details, including existing leases, need to be resolved.
  • Some corporates are following Google’s lead: The tech company plans to return to its offices in July 2021.
    • Microsoft last month announced plans for a “flexible workplace” that includes allowing some employees to work from home permanently.
  • Though some members are embracing the possibilities of an office-free future, others are skeptical, voicing concerns about the sustainability and side effects of this approach.

WFA: work from anywhere. The transition to permanently working from home is forcing some companies to take a hard look at themselves and make tough choices.

  • “We are going through a little bit of an identity crisis right now as a company,” one member said. “We’re experiencing a bit of a culture shift.”
  • As part of the shift, the member’s company is closing its headquarters in an area with a high cost of living, encouraging employees to find residence in lower-cost areas.
    • “We are incentivizing people to move out of high-cost locations and take a salary adjustment,” she said. “All future hires will be in low-cost areas.”
    • Because other corporates have offered employees a hybrid WFH/office arrangement, the member’s company had to be “very explicit that there is not going to be an option to go in.”

It’s about culture. A transition to working from home on a permanent basis also widely broadens the field of candidates to hire, which one member sees as a positive opportunity to advance inclusion.

  • The member whose company will only be hiring in low-cost areas said this provides it with the opportunity to be much more thoughtful when it comes to what she described as “equity.”
    • “I don’t think it’s any secret that women have really been struggling in this Covid economy,” she said. “We can now be really conscientious about how bias can creep into any corporate environment. It’s about culture.”
    • Though this is a positive for employees, the member said there can be drawbacks. “People are a lot less loyal to their company, and more willing to leave,” she said. “When they don’t have to be there every day, they will leave if they’re not compensated the way they want to be.”
  • Another member sees the benefits this can bring an employer who already seeks candidates from across the country: “If you’re working virtually, you don’t have to cover moving costs.”

Diverging opinions. Others at the meeting said they did not see a worthwhile tradeoff, placing a high premium on the bond built by in-person interaction.

  • “What about the learning that’s done by osmosis—mentorship, learning opportunities?” one member asked. “I just couldn’t imagine never being in an environment with my colleagues. I think it’s a very quick jump, based on very specific circumstances, that hopefully will not exist forever.”
  • Another member said not all employees are thrilled about no offices. “There’s a split between people who are older and have already established relationships outside of work versus those who are young and rely on work for socialization.”
  • One member acknowledged that there are no easy answers to whether completely virtual offices offer a real advantage for companies. “I think that’s a question that’s not going to be answered right away. There’s certainly a social aspect of being together in an office that was always big when you were young.”
0
0
Read More Read Less
Contact Us
0
0

Walk Before You Run: Using Derivatives in Pension Funds

The value of educating stakeholders on why using derivatives can make sense.

During a recent NeuGroup for Pension and Benefits session sponsored by Insight Investment and BNY Mellon, a pair of members shared their knowledge and experience using derivatives in managing corporate pension plans. Two highlights:

  • Walk before you run” emerged as a key piece of advice to members, most of whom do not make extensive use of derivatives.
  • Educating stakeholders including finance committees, C-Suite executives and accountants on derivatives and their potential benefits is an essential step for companies walking toward using futures, swaps, options and other instruments.

The value of educating stakeholders on why using derivatives can make sense.

During a recent NeuGroup for Pension and Benefits session sponsored by Insight Investment and BNY Mellon, a pair of members shared their knowledge and experience using derivatives in managing corporate pension plans. Two highlights:

  • Walk before you run” emerged as a key piece of advice to members, most of whom do not make extensive use of derivatives.
  • Educating stakeholders including finance committees, C-Suite executives and accountants on derivatives and their potential benefits is an essential step for companies walking toward using futures, swaps, options and other instruments.

Four levels. After hearing each of the pension group participants say if and how they use derivatives, NeuGroup’s Roger Heine categorized them in four groups:

  1. No use of derivatives. One member in this category said the pension plan at her company is not allowed to use derivatives but that she is interested to hear how people have managed what she described as a “big undertaking,” adding that the human capital needed is one key issue. Another member said his company does not use them, preferring the “physical approach” of using cash securities to rebalance, if necessary.
  2. Outside manager use. Several members allow external asset managers to use derivative overlays, for example, to help achieve liability-driven investing (LDI) targets.
  3. Dipping in their toes. These companies limit direct use of derivatives to specific situations, maintaining simplicity, straightforward controls and transparency. Examples include going long equity index futures against a cash position, maintaining both cash liquidity and equity exposure.
  4. Extensive use.  These corporates use derivatives to expand their opportunities to enhance returns around myriad risk limit parameters with more complex controls. They have generally arrived at this level incrementally over a number of years.

Benefits: strategic and tactical. One of the two members who uses derivatives extensively said his company uses them for strategic purposes, such as eliminating the need to move money physically between investment managers.

  • He and the other member also described using derivatives for tactical asset allocation to get exposure to an asset class. One said derivatives offer “the most liquid way to express our views; we can quickly change risk targets and allocations and achieve the goal of avoiding drawdown risk.”

Helping hands. One of the members described using third-party firms to monitor collateral for the company when it uses over-the-counter derivatives. That’s especially useful, he said, during periods of extreme volatility.

  • Another recommended that members getting their feet wet with derivatives use so-called completion account managers, who in some cases coordinate the steps necessary to implement a pension de-risking process.
0
0
Read More Read Less
Contact Us
0
0

Talking Shop: How to Respond to a New Rule on ESG Funds in 401(k) Plans?

Context:  On Friday, Oct. 30, the Department of Labor (DOL) issued a final rule clarifying the use by fiduciaries of investments in environmental, social and governance (ESG) funds. The regulation, according to some analysts, will end up limiting the use of ESG funds by some 401(k) and pension plans.

  • Proposed in June, the change was opposed by many asset managers and investment advisors; DOL says the final rule was changed in response to comments.

Member question: “Has anyone thought about this DOL regulation that effectively limits adding ESG funds to a 401(k) plan?”

Context:  On Friday, Oct. 30, the Department of Labor (DOL) issued a final rule clarifying the use by fiduciaries of investments in environmental, social and governance (ESG) funds. The regulation, according to some analysts, will end up limiting the use of ESG funds by some 401(k) and pension plans.

  • Proposed in June, the change was opposed by many asset managers and investment advisors; DOL says the final rule was changed in response to comments.

Member question: “Has anyone thought about this DOL regulation that effectively limits adding ESG funds to a 401(k) plan?”

Peer answer 1: “Yes, working on adding ESG in some form to our plans while not tripping the reg. More to come. Also pending election outcome.”

Peer answer 2: “Yes, in our fiduciary capacity we and our advisors are looking at this carefully, especially with regard to trying to balance the DOL’s stance against the requests of the vocal subset of our employees who would like more ESG choices beyond the self-directed brokerage option.”

Peer answer 3: “Yes, at our last 401(k) committee meeting this was presented and discussed. We think the ESG funds could show stronger performance than non-ESG peers, so that would pass the test in the reg.”

Peer answer 4: “Yes we’re very focused on exploring this, but conscious of the guardrails. Curious to hear how others are navigating.”

Peer answer 5: “Even before the reg announcement, our committee considered whether addition of ESG fund choices made sense and we decided against it, based mainly on limited employee demand.

  • “We felt that given the risks, it made more sense to allow employees to go the self-directed brokerage route if they felt that strongly about ESG. I’m not aware of any significant pushback from our employees since. Now with this DOL reg being issued, I doubt our position will change and probably only reinforces the decision we made earlier.”
0
0
Read More Read Less
Contact Us
0
0

Preparing for More China-US Tension, New Current Account Rules in India

Key takeaways from the Asia Treasurers’ Peer Group fall meetings sponsored by Standard Chartered.

By Joseph Neu

India ties current accounts closer to credit relationships. Members wanted clarity on a Reserve Bank of India (RBI) circular released over the summer that seeks to restrict current accounts to banks with which companies have a local credit relationship—subject to thresholds.

Key takeaways from the Asia Treasurers’ Peer Group fall meetings sponsored by Standard Chartered.

By Joseph Neu

India ties current accounts closer to credit relationships. Members wanted clarity on a Reserve Bank of India (RBI) circular released over the summer that seeks to restrict current accounts to banks with which companies have a local credit relationship—subject to thresholds.

  • Standard Chartered’s presentation explained that going forward, banks cannot open a current account for a customer who has “availed” a cash credit or overdraft facility from others in the banking system. From now on, all transactions will have to be routed through the cash credit or overdraft account.
  • The good news, for some banks and corporates, is that the RBI this week extended the deadline for compliance with this part of the guidelines, from Nov. 5 to Dec. 15, 2020.
    • The RBI said it had been contacted by “banks seeking clarifications on operational issues regarding maintenance of current accounts already opened by the banks. These references are being examined by the Reserve Bank and will be clarified separately by means of a FAQ.”
  • The stated objective of the circular is improved transparency on client cash flows, but it also seems like an attempt to help banks in India maintain liquidity and share of wallet by tying assets to liabilities. In this crisis, visibility over liquidity is important to everyone.

All entity cash visibility and access. Indeed, MNC regional treasurers in Asia have been focused on cash visibility, including better forecasting, just like everyone else.

  • The regional treasury focus, however, is much more at the entity level in each country of the region and involves looking at liquidity as seen by their parent at headquarters. More than ever, there has been a focus on upstreaming liquidity and tweaking the cash plumbing to maximize assurance that the ability to upstream will remain.
  • Covid-19 and its economic impact have been a big driver, plus US MNCs have the added incentive to repatriate cash ahead of potential tax changes with a changing of the guard in Washington.

China bank scenario planning. Speaking of access and cash plumbing, another project members shared is looking at the potential for US-China tensions to result in sanctions or other formal and informal restrictions on banking operations in China.

  • This is especially important when it involves US or other international banks that MNCs rely on for transaction banking in China and cross-border.
  • It’s time for some to evaluate the pros and cons of shifting business to a local bank from a US or international one.
  • While adverse scenarios impacting treasury operations are deemed unlikely, having a contingency plan is always better than not.
0
0
Read More Read Less
Contact Us
0
0
Recent Stories

Rightsizing and Reshaping: What Post-Covid Corporates May Look Like

Internal auditors assess risks as companies shift where and how employees work.

Members of NeuGroup’s Internal Auditors’ Peer Group (IAPG) agreed that the pandemic will quite literally reshape the physical look of companies—mostly large technology firms—as well as introduce a host of new risk concerns that are just starting to be considered.

  • Companies’ real estate is bound to shrink as they consider how and when to support the significant number of fully remote and hybrid employees—those coming to office less frequently—that are certain to remain post-pandemic.
  • This shift away from physical offices introduces cultural and legal implications as well as new risks.
  • Employee turnover has slowed during the pandemic but is likely to pick up again when economies reopen more assertively, bringing these issues and risks front and center.

Internal auditors assess risks as companies shift where and how employees work.
 

Members of NeuGroup’s Internal Auditors’ Peer Group (IAPG) agreed that the pandemic will quite literally reshape the physical look of companies—mostly large technology firms—as well as introduce a host of new risk concerns that are just starting to be considered.

  • Companies’ real estate is bound to shrink as they consider how and when to support the significant number of fully remote and hybrid employees—those coming to office less frequently—that are certain to remain post-pandemic.
  • This shift away from physical offices introduces cultural and legal implications as well as new risks.
  • Employee turnover has slowed during the pandemic but is likely to pick up again when economies reopen more assertively, bringing these issues and risks front and center.

Should I stay or should I go? The hybrid approach appears to be gaining favor, partly because some employees want in-person interaction, and because companies may believe such interaction generates creativity and more effectively enables onboarding new employees.

  • “We’re finding a want or even a need for them to be in proximity to peers,” one member said, adding that it is less important for others, “So we’re looking into how we can group employees and make sure their professional development is taking place.”
  • Hybrid employees must travel to the office now and again. “Are there parameters we can provide in terms of distance and travel time to the office for different categories of employees?” one member asked. “And who foots the bill?”

Remote benefits. Sheltering in place has also revealed the benefits of remote work, both to companies and their employees.

  • Functions, including audit, for which there was concern initially about their effectiveness without face-to-face meetings have proved to be resilient and even conducted better remotely. “Our sales team is now able to work with customers any time of the day, so working remotely is easier for them,” one internal auditor said.
  • Several NeuGroup members agreed that working remotely has enabled them to hire talent that previously was out of reach.

Challenges. Potential hires are making their own demands. “We’re seeing candidates saying that unless we give them an ironclad guarantee that they can work from wherever, they’re not interested,” one member said.  

  • Some current employees have decided they prefer working remotely and have relocated permanently to other geographies, creating potential administrative and legal risks.
  • “If an employee moves to a different state, now there are payroll implications, different cost centers, etc.,” a member said.

The incredible shrinking office. One IAPG member said her company will permanently close half its offices around the globe, a statement eliciting little surprise among peers. A significant reduction in employees coming to the office means a “rightsizing” of corporate real estate is coming. This also means new areas where management will need assurance that i’s are dotted and t’s crossed and all dotted and crossed properly.

  • For instance, what of leases that were signed just before the pandemic? “Do we want to carry the burden of those leases on our balance sheet, or treat them with a special disclosure or some other way?” another member asked. “There’s risk there with respect how companies will address that problem going forward.”
  • Another member said 80% of his company’s leases are coming due in the next 18 months. “There’s a huge assessment happening now,” he said. “We have 190 globally, so how do we reduce those and what will be the outcome from the cost savings?” he said.
  • After accumulating numerous offices worldwide, another member said his company is “starting to look at that and say, ‘If there are fewer than 50 people in them, we’re going to close them and consolidate our footprint in larger offices.’”
0
0
Read More Read Less
Contact Us
0
0

Pension Puzzle: Insights for Managers Putting the Pieces Together

Willis Towers Watson weighs in on WACC, the efficient frontier and pension financing alternatives.

Pension fund managers evaluating alternative funding strategies should not necessarily use their companies’ weighted average cost of capital (WAAC) as a discount rate; the risks of the pension should be viewed differently than a normal project investment considered by the company.

  • That was among the key takeaways from a recent NeuGroup Virtual Interactive Session sponsored by Willis Towers Watson, “Relative Value: Pension De-risking in a Post-Covid World.”

Willis Towers Watson weighs in on WACC, the efficient frontier and pension financing alternatives.

Pension fund managers evaluating alternative funding strategies should not necessarily use their companies’ weighted average cost of capital (WAAC) as a discount rate; the risks of the pension should be viewed differently than a normal project investment considered by the company.

  • That was among the key takeaways from a recent NeuGroup Virtual Interactive Session sponsored by Willis Towers Watson, “Relative Value: Pension De-risking in a Post-Covid World.”

Example. Roger Heine, senior executive advisor at NeuGroup, illustrated the point: “The cost of paying an insurance company to accept risk transfer of low-balance participants above the participants’ strict annuity liability would be weighed against the present value of saved PBGC fees and other operating-type costs discounted at the company’s cost of debt.

  • “This would be lower than its WACC, since saved fees and costs are essentially riskless.”

Risk and reward. Willis Towers Watson presented the graphic below to make the point that companies evaluating pension options strictly using the company’s WACC as the hurdle rate may reject investments and miss out on opportunities that are relatively low risk or may make investments that look attractive but are “risk inefficient.”

Speed matters. Companies should also be prepared to act quickly on different funding strategies because opportunities that arise can quickly disappear. Mr. Heine gave these two examples from 2020:

  • The widening of corporate spreads in the spring meant that insurance companies would potentially reduce their cost to execute risk transfer of pension liabilities due to their ability to source corporate bonds at lower cost.
  • The sudden decline in interest rates combined with a recovery in the corporate bond market meant that companies could offer lump sum buyouts discounted at higher average historical interest rates funded by corporate debt based upon current, lower rates.
    • One member whose company considered this said the HR department opposed the move over concerns that recipients of the lump sum would spend it instead of investing.

Debt and taxes. An in-session poll of members in attendance revealed that a large majority are not inclined to issue debt to fund the pension, with just 20% saying it’s likely in the next five years (see above). One participant did it right before tax rates went down under tax reform to capture the deduction from the contribution at the expiring higher corporate tax rate.  

  • “But right now, with 80% of participants thinking that corporate tax rates are going to increase in the next couple of years, it makes more sense to try to defer contributions until the tax rates rise,” Mr. Heine observed.
  • “The possibility of further government funding relief also argues for deferring funding along with the fact that the recently rising stock market and tightening corporate spreads have returned many pension funds to the funding status where they began the year.”
  • Participants in one breakout session agreed that creditors and the rating agencies view a pension deficit as less “debt-like” than straight corporate debt despite published metrics equating the two.
    • Mr. Heine added that issuing corporate debt to fund the pension “secures pension creditors ahead of unsecured corporate creditors.”

0
0
Read More Read Less
Contact Us
0
0

The ESG Halo Effect, Insurance Pain and Financing Lessons Learned

Key takeaways from the 2020 H2 Life Sciences Treasurers’ Peer Group meeting sponsored by Societe Generale. 

By Joseph Neu

A halo effect from the business we are in. In an exchange on ESG-related financing and ESG scores, our life sciences treasurers noted that sustaining life is core to their business; hence, sustainability is part of their companies’ DNA. Why then should they need to issue a green bond or execute some other sort of sustainability-linked financing to earn a so-called ESG halo effect?

Key takeaways from the 2020 H2 Life Sciences Treasurers’ Peer Group meeting sponsored by Societe Generale. 

By Joseph Neu

A halo effect from the business we are in. In an exchange on ESG-related financing and ESG scores, our life sciences treasurers noted that sustaining life is core to their business; hence, sustainability is part of their companies’ DNA. Why then should they need to issue a green bond or execute some other sort of sustainability-linked financing to earn a so-called ESG halo effect? 

  • In comparison to the ESG impact of the underlying business, if correctly measured, a financing instrument should not be required to create a halo. Instead, treasurers should look to have the business better reflected in ESG ratings to get full access to ESG-mandated investors.

Risk transfer transformation needed. The insurance renewal market coming out of the Covid-19 crisis points to the continued need for risk transfer transformation. At a time when life science firms are being encouraged to move fast and break us out of a pandemic, insurers are seeing risk, so they are taking a pound of flesh in premium.

  • Treasurers are left wondering how much of this is their own product or liability risk and how much of it is insurers recouping losses on their investment portfolios. Traditional insurance is overripe for transformation and it’s a matter of when, not if.

Transaction shop-talk. Treasurers love to share and learn from each other’s funding transaction experience, be it a bank loan, convertible or bond deal.

  • Akin to a morbidity and mortality conference in the medical profession, life sciences treasurers benefit from identifying adverse outcomes from financings to exchange with peers, yet they are even more inclined to share what went well to secure needed funding.
0
0
Read More Read Less
Contact Us
0
0

Monetization Magic: How Using a Hybrid Solved an Asset Riddle

MUFG helps one mega-cap use structured preferred shares to monetize a “difficult” asset.

In a session at the recent NeuGroup Tech20 annual meeting—the 20th annual no less—a guest speaker from a mega-cap communications company shared how his treasury found a great deal of success using structured preferred shares to monetize previously untapped assets on its balance sheet. All while managing its net debt within a target leverage ratio, with the assistance of meeting sponsor MUFG.

MUFG helps one mega-cap use structured preferred shares to monetize a “difficult” asset.

In a session at the recent NeuGroup Tech20 annual meeting—the 20th annual no less—a guest speaker from a mega-cap communications company shared how his treasury found a great deal of success using structured preferred shares to monetize previously untapped assets on its balance sheet. All while managing its net debt within a target leverage ratio, with the assistance of meeting sponsor MUFG.

  • Structured preferred shares are a type of hybrid instrument that can be used to achieve multiple corporate objectives, in this case deleveraging and asset monetization.
  • With MUFG’s assistance, the presenter, the treasurer of a company with one of the largest debt portfolios of any non-financial institution, said the deal was “a real success story” for the company.

Asset monetization. When the company entered a 30+ year deal to lease out some of its assets for a one-time fee, it faced a dilemma: what could it do with an essentially dead asset on the balance sheet?

  • “We couldn’t really securitize these things, and it would’ve taken us years to see any cash,” the presenter said. “So we looked around at different solutions and came to the idea of working with MUFG to (issue) structured preferred (shares). We liked it, it allowed us to monetize what was otherwise a difficult asset.”

A shared structure. The presenter worked with MUFG to reassign the assets into a separate legal entity and issued preferred shares, in which eight banks were buyers of a multibillion dollar facility.

  • “Ordinarily, when you think about preferred, you think about it being issued at a parent company,” said Terry McKay, head of Global Financial Solutions at MUFG. “But in the case of structured preferred shares, the issuer is a subsidiary.”
  • “The legal form of this subsidiary can be a corporation, a partnership or a trust, so there is a lot of flexibility,” he said.  “And in terms of the assets, there is also a lot of flexibility, and it’s critical to select the right assets; investors are focused on the critical assets.”
    • Thanks to this flexibility, the asset types can vary from core assets to inventory to even intellectual property.
  • Mr. McKay continued that structured preferred stock, though it is more expensive than a senior bond and does not include the ratings agency credit of traditional preferred stock, can be useful because of its tax deductible coupons, added liquidity and the ability to be strategic in financing and adapt to meet specific objectives.

Story of success. “It had a lot of benefits to it,” the presenter said. “It helped us really meet our objectives and gave us a chance to reward banks we’ve done significant business with.”

  • In its work with MUFG to issue structured preferred shares, the company was able to meet these three core objectives:
  1. Managing its debt tolerance, reducing its net debt by about 17% in the span of a year and a half.
  2. Achieving a target leverage metric which was contingent upon asset sales to be met.
  3. Acquiring an incremental source of liquidity and reducing the pressure on refinancing its bonds.
0
0
Read More Read Less
Contact Us
0
0

Right on Target: Tracking Companies’ Changing Risks

One member’s “risk radar” facilitates explaining evolving risks to audit committees.

Corporate risk is no easy concept to convey, especially when risks are numerous and shifting in intensity over time. Equally challenging is explaining a risk’s evolving urgency to board members, who must concurrently digest reams of information.

  • Responding to a query about how peers justify urgent audit-plan changes to audit committees, a member of NeuGroup’s Internal Auditors’ Peer Group described the “risk radar” he presents quarterly to illustrate dynamically the comparative urgency of his company’s top 20 risks and mitigation efforts.
  • His description received raves from peers, with one quipping, “That’s very comprehensive. It makes the rest of us feel inadequate.”

One member’s “risk radar” facilitates explaining evolving risks to audit committees.
 

Corporate risk is no easy concept to convey, especially when risks are numerous and shifting in intensity over time. Equally challenging is explaining a risk’s evolving urgency to board members, who must concurrently digest reams of information.

  • Responding to a query about how peers justify urgent audit-plan changes to audit committees, a member of NeuGroup’s Internal Auditors’ Peer Group described the “risk radar” he presents quarterly to illustrate dynamically the comparative urgency of his company’s top 20 risks and mitigation efforts.
  • His description received raves from peers, with one quipping, “That’s very comprehensive. It makes the rest of us feel inadequate.”

Red, yellow, green. Split into four quadrants—strategic, compliance, financial and operational—the graphic’s red center (see chart below) signifies the most urgent issues and is surrounded by yellow and then green halos for less urgent matters.

  • The closer the stars representing the company’s risk issues—such as cybersecurity, sales growth and trade compliance—are positioned to the center of the round radar screen, the greater the risk urgency.
  • The stars change position quarterly, displaying not just each category’s inherent risk but the company’s evolving risk-mitigation efforts.
  • Built through the member’s enterprise risk management (ERM) process, the radar incorporates feedback from management. “So the board gets a very real perspective on risk, and it has all the context for why risks are moving closer to or away from the center,” the member said.

Customer impact. The executive noted Europe’s changing regulatory environment and privacy rules, including the July Schrems II ruling relating to transatlantic personal data flows, could dramatically change his company’s compliance requirements.

  • The risk is that uncertainty could unnerve potential clients concerned about ending up on the wrong side of the regulation. From the start of the year, the uncertainty has moved the regulatory star close to the radar’s center.
  • “But it’s not the end of the world,” the member told the group, because it opens the door for management to explain its road map to deal with the risk going forward. “We can say, ‘Given all the good work we’ve done, we’ve mitigated this risk.’”
  • He added, “The audit committee has what we consider a very frequent, very fresh review of all the risks associated with everything we do from a value chain perspective.”

Beneath the graphic. The committee can now visualize internal audit’s risk assessment, including the impact likelihood, the velocity of onset and management’s risk tolerance. And it can explore the five categories used to assess each risk and its overall priority.

  • Judgment plays an important role, but the audit committee can review the appendix to understand precisely how his team arrived at its conclusions.
  • And top management, he said, from the chief legal officer to the CFO and heads of engineering and data security, have “all bought off on the stars.”
  • The risk radar prioritizes the company’s 20 most significant risks, and while the board may be concerned with the top three, “from management’s perspective the top 20 is fantastic.”

The proof? “Our head of human resources has built her own risk radar for HR, our CFO now has his own risk radar for finance, and the head of engineering is talking about creating his own risk radar,” the member said.

0
0
Read More Read Less
Contact Us
0
0

Counterparty Transparency: ‘Looking Through’ Money Market Funds

How a treasury investment manager finds out what assets are owned by the MMFs he owns.

For treasury investment managers, visibility into the credit and counterparty risks of their portfolios is essential, especially during times of heightened volatility and uncertainty—like the last nine months.

  • One member of NeuGroup’s Treasury Investment Managers’ Peer Group 2 told peers at a recent meeting sponsored by DWS that part of his assessment of counterparty risk involves “looking through” money market funds (MMFs) to see their underlying exposures.

How a treasury investment manager finds out what assets are owned by the MMFs he owns.

For treasury investment managers, visibility into the credit and counterparty risks of their portfolios is essential, especially during times of heightened volatility and uncertainty—like the last nine months.

  • One member of NeuGroup’s Treasury Investment Managers’ Peer Group 2 told peers at a recent meeting sponsored by DWS that part of his assessment of counterparty risk involves “looking through” money market funds (MMFs) to see their underlying exposures.

Going the extra step. One DWS executive found it intriguing that the member goes beyond examining the credit ratings of MMF managers. “You are taking it to another level,” he said. Many investment managers rely on the work done by the rating agencies, he said.

  • In response to a question from a peer, the member explained that he gets the data on the funds’ holdings by using Transparency Plus, a tool that’s part of the ICD money market portal. The data is then put in Excel.
  • He said extracting and analyzing hundreds of names is “challenging,” adding that he’d like to know if others “have a better way to do it.”

Not just prime funds. The member does not only look through prime funds that have credit risk, but those of government money market funds which own a lot of repos. “It’s interesting to see who the repo sponsors are,” he said, adding that the investments are “supersafe and over-collateralized.”

Big picture. For perspective on looking through MMFs, NeuGroup Insights checked in with Peter Crane, president of Crane Data and an authority on the MMF industry. Here are some of his insights:

  • “Almost all money fund portals and platforms offer transparency modules, which became popular after the 2008 financial crisis. ICD and BNY Mellon pioneered the trend, but State Street, FIS and many of the Cachematrix-powered portals soon followed.
  • “It wasn’t until the SEC mandated disclosure of monthly portfolio holdings for money funds in 2010 that they became useful and used. They tweaked these disclosure requirements in 2014 too.
  • “While most investors only are interested in looking through when something blows up, many need to check what their funds invest in more often.”
0
0
Read More Read Less
Contact Us
0
0

Game Plan: Opportunistic Buybacks on the Open Market vs ASRs

Meeting sponsor SocGen sees corporates growing comfortable with flexible, open market buybacks amid recovery.

During the global pandemic, many corporates have slammed the breaks on share repurchase programs to save cash and avoid criticism from politicians as Americans lost jobs and some companies sought government bailouts.

  • At a recent NeuGroup meeting of treasurers at life sciences companies, Societe Generale’s David Getzler, head of equity capital markets for the Americas, forecast an increase in share buybacks in 2021 as the economy recovers and political scrutiny declines.
  • “From our perspective, it looks like people are more comfortable,” Mr Getzler said. Below are his forecasts for dividends and buybacks.

Meeting sponsor SocGen sees corporates growing comfortable with flexible, open market buybacks amid recovery.

During the global pandemic, many corporates have slammed the breaks on share repurchase programs to save cash and avoid criticism from politicians as Americans lost jobs and some companies sought government bailouts.

  • At a recent NeuGroup meeting of treasurers at life sciences companies, Societe Generale’s David Getzler, head of equity capital markets for the Americas, forecast an increase in share buybacks in 2021 as the economy recovers and political scrutiny declines.
  • “From our perspective, it looks like people are more comfortable,” Mr Getzler said. Below are his forecasts for dividends and buybacks.

Open market flexibility. Several members affirmed that their companies are buying back shares when the timing and price is right. “As long as you’re not taking government money,” said one treasurer. “We are looking at it opportunistically.”

  • SocGen’s Mr. Getzler expects more companies to use open market stock repurchases as opposed to accelerated share repurchase (ASR) programs.
  • Volatility and continued uncertainty about the pandemic and the economy are factors explaining corporates’ preference for open market purchases, he added. “Companies want to maintain flexibility in case the economy retreats.”

Open market vs ASR. In an open market purchase, a company buys its shares at the going rate. With an ASR, a company can transfer the risk of buying back stock to an investment bank.

  • “The banks give a guaranteed discount to VWAP over the period, typically two to three months, when they buy the shares in the market to cover their position,” Mr. Getzler explained. “The banks borrow the shares on day one and deliver to the company and then will cover the borrowed position by buying in the market over the period agreed.”

The debt factor. The level of share repurchases going forward depends in part on how companies manage their balance sheets. Many have issued debt in recent years to buy back stock, a trend that could resume as the economy improves, according to SocGen’s debt capital markets team. In addition:

  • Companies that raised liquidity during Covid may decide they have excess cash and buy back shares if and when the economy returns to normal.
  • Companies that added gross leverage may decide it’s more prudent to pay down debt than buy back shares. 
  • Leverage is up across the investment-grade space, so it could take a year for companies to get back down to pre-Covid levels before they look to re-engage in share buybacks.
  • Companies may choose to live with higher leverage so they can return cash to shareholders.
0
0
Read More Read Less
Contact Us
0
0

Replacing Libor: No Criticism for Banks That Say ‘No Thanks’ to SOFR

Regulators say banks can price loans using any appropriate reference rate as they prepare for Libor’s end.

You may possibly have missed a development that happened three days after the presidential election: US banking regulators gave banks more confidence they can decide to use Libor-replacement rates other than the secured overnight financing rate (SOFR), which the Federal Reserve has endorsed but that some regional banks view as problematic.

Regulators say banks can price loans using any appropriate reference rate as they prepare for Libor’s end.

You may possibly have missed a development that happened three days after the presidential election: US banking regulators gave banks more confidence they can decide to use Libor-replacement rates other than the secured overnight financing rate (SOFR), which the Federal Reserve has endorsed but that some regional banks view as problematic.

  • “Examiners will not criticize banks solely for using a reference rate, including a credit-sensitive rate, other than SOFR for loans,” guidance from the Fed, the FDIC and the Office of the Comptroller of the Currency stated.

It’s OK to be different. The guidance bolsters Fed Chair Jerome Powell’s May statement recognizing Ameribor, an alternative to Libor published by the American Financial Exchange (AFX), as a “fully appropriate” alternative for banks.

  • “This is another step on the march toward the legitimacy of alternative benchmarks and for the market to decide what the replacements for Libor will be,” said Reed Whitman, treasurer at Brookline Bancorp.
    • He added that this gives more confidence that “products we develop tied to a non-SOFR rate will be accepted; it’s an additional accelerant.”
  • If regulators had warned banks against “using a different benchmark, that effectively would have shut down alternatives.” said Alexey Surkov, a partner with Deloitte Risk and Financial Advisory and a co-chair of a working group under the Alternative Rates Reference Committee (ARRC), a private group convened by the Fed to help guide the Libor transition.

The regional view. Regional banks have concerns about pricing their floating-rate products and funding over SOFR, based on the secured overnight repurchase agreement (repo) market, because it does not reflect their cost of funds.

  • Ameribor is instead generated from the rates at which financial institutions lend to one another over the AFX, an exchange launched in 2015 by Richard Sandor, an innovator in the futures market.
  • In an interview with NeuGroup Insights, Mr. Sandor called the guidance a “big step forward” since now all the banking regulators are “opining together.” He added that for those who thought Libor might sustain itself, “this is another nail in the coffin.”

Alternatives. Some institutions have considered the prime rate and Fed Funds as Libor alternatives, at least until transaction-based benchmarks become sufficiently robust. 

  • Some bank products currently reference those rates, Mr. Surkov said, and lenders may choose to stick with them. Credit cards, for example, often reference prime.
  • Similarly, mortgages priced over Libor are widely expected to transition to SOFR, but adjustable rate mortgages (ARMs) based on Constant Maturity Treasury (CMT) rates have existed for a long time, he said, and may very well continue.
  • Mr. Whitman said he foresees a combination of benchmarks, including SOFR, Ameribor and perhaps other indices that will be “repurposed for specific uses.”

Good timing. The ARRC recommends ceasing to use Libor to price floating rate notes by year-end and business loans and structured products by June 30, 2021.

  • “So this helps ready us for the next phase of the transition, where banks stop booking Libor deals and start booking SOFR or Ameribor deals,” Mr. Whitman said.
0
0
Read More Read Less
Contact Us
0
0

Talking Shop: Applying the End-User Exception From Dodd-Frank’s Swap Clearing Mandate

Context: In 2013, section 723 of The Dodd-Frank Act went into effect, which required all commercial end users of swaps to submit the swap to a derivatives clearing organization. A so-called “end-user exception” allows parties to claim exemption from the clearing mandate and continue executing uncleared swaps with their dealer counterparties if one of them:

  • Is not a financial entity
  • Is using the swap to hedge or mitigate commercial risk
  • Provides certain information to the CFTC, including how it generally meets its financial obligations associated with entering into non-cleared swaps.

Context: In 2013, section 723 of The Dodd-Frank Act went into effect, which required all commercial end users of swaps to submit the swap to a derivatives clearing organization. A so-called “end-user exception” allows parties to claim exemption from the clearing mandate and continue executing uncleared swaps with their dealer counterparties if one of them:

  • Is not a financial entity.
  • Is using the swap to hedge or mitigate commercial risk.
  • Provides certain information to the CFTC, including how it generally meets its financial obligations associated with entering into non-cleared swaps.

Member question: “We’re looking into our annual application of the Dodd-Frank end-user exception. Curious to know which other corporates are using the end-user exception. For those that are not and are reporting trades, what drove that decision and how heavy of a lift is it? Appreciate any perspectives you have on this!”

Peer answer: “We have elected the DF EUE. The CFTC has not issued a clearing mandate for FX instruments as many initially feared, but there is still a clearing mandate for various IRS and CDS products. We seek BOD (board of directors) renewal annually to provide us the option to trade these instruments bilaterally without clearing, should the need arise.”

Expert opinion: NeuGroup Insights reached out to derivatives expert Amol Dhargalkar, global head of corporates at Chatham Financial. He said that its clients mostly do opt to use the end-user exception.

  • “Well over 95% of our corporate clients are using the end-user exception,” he said. “The only ones that aren’t are those who didn’t really qualify for it because they are a financial institution of some sort per the definitions.”
  • Other analysis: “While we have a few clients that have collateralized their trades, that’s often been out of necessity rather than choice. I know that some large corporates do trade on a cleared basis, though that tends to be those companies who have significant excess cash on their balance sheets.”
0
0
Read More Read Less
Contact Us
0
0

Mismatched Hedge Risk: Derivative Values May Change as Libor Ends

Standard Chartered, helping corporates prepare for risk-free rates, describes the potential risk of “valuation jump.”

The replacement of Libor by risk-free rates (RFRs) like the secured overnight financing rate (SOFR) in the US and the sterling overnight indexed average (SONIA) in the UK has been a hot topic at NeuGroup fall meetings where banks, regulators and other experts have been helping members prepare for Libor’s planned demise at the end of 2021.

Standard Chartered, helping corporates prepare for risk-free rates, describes the potential risk of “valuation jump.”

The replacement of Libor by risk-free rates (RFRs) like the secured overnight financing rate (SOFR) in the US and the sterling overnight indexed average (SONIA) in the UK has been a hot topic at NeuGroup fall meetings where banks, regulators and other experts have been helping members prepare for Libor’s planned demise at the end of 2021.

  • At a second-half meeting of the Asia Treasurers’ Peer Group, sponsor Standard Chartered brought to light a topic that has received less attention than other issues: Corporates switching to SOFR for over-the-counter derivatives face the “potential risk of valuation jump”—meaning the size of their derivative books may change, creating mismatched hedges.

Basis risk. Standard Chartered’s presentation included two scenarios where valuation changes create the potential for basis risk—when a hedge is imperfect because the derivative does not move in correlation with the price of the underlying asset.  

  • Case 1: A corporate has GBP fixed-rate bonds and entered into multiple fixed to floating-rate interest rate swap contracts to convert the bonds from fixed to floating (GBP 3M Libor +spread).
  • Case 2: An institution invested in a portfolio of GBP fixed-income instruments. In managing the interest rate risk, it entered into multiple fixed to floating-rate swap contracts to convert the return of the underlying bonds from fixed to floating (GBP 3M Libor +spread).
  • Problem: “The Libor discontinuation presents a potential risk of valuation jump in both cases,” Standard Chartered states. “Depending on the final transition methodology and levels being agreed upon after the transition, the cash flows and valuation of the swaps are likely to be based on the prevailing SONIA swap curve.”
  • Solution: “Corporates can consider a Libor/SONIA basis swap to hedge against the risk of valuation jump.”

Discount rates, PV math. A risk of hedging mismatches also arises from the use of a different discount rate, such as SOFR, to determine the present value (PV) of a derivative that a corporate is using to hedge an exposure.

  • The change in the discount rate index can impact hedging if it is inconsistent between the underlying exposure and the hedge instrument.
  • For an over-simplified example, consider a $100 million asset discounted at a 2% risk-free rate to a PV of $98 million. To hedge, the corporate could have a derivative on its books with an exact, matching notional value of $100 million. But if that amount is discounted at a different risk-free rate of 1%, the derivative would have a PV of $99 million, creating a hedging mismatch.

Be prepared. Standard Chartered’s recommendations to prepare for the end of Libor include reviews of systems, documentation, processes and pricing—where it says to develop pricing mechanisms based on RFRs.

  • The bank says to consider changes to systems and processes, such as incorporating new interest rate curves, historical RFR data, RFR methodologies and market conventions, and new pricing and valuation methodologies.
  • In October, Chatham Financial, which helps corporates manage hedging programs, switched to using SOFR discounting on valuations for cleared swaps that trade on exchanges. It says that if your portfolio includes cleared swaps, you may need to take action to switch the valuation methodology from OIS to SOFR discounting.
  • Chatham expects that all uncleared USD transactions will move to be discounted on SOFR soon.
    • The firm notes that many corporates are initially focusing on the operational impacts of ASC 848 elections and disclosures, determining whether ISDA Protocol adherence is appropriate, and ensuring they have access to accurate payment calculations, valuations and journal entries.
0
0
Read More Read Less
Contact Us
0
0

Retailers Connect With Customers Using Touchless Payments

Smartphone apps, some using QR codes, give customers another way to pay without touching keypads or swiping a card.

Members at a recent meeting of NeuGroup for Retail Treasury reported a significant drop in cash transactions since the start of the pandemic, and some are turning to what they’re calling touchless methods of payment to meet consumers’ needs.

  • These innovations depend on using smartphone apps and the internet instead of so-called contactless payments including Apple Pay and Google Pay. Those require a device or card which then charges the transaction to a digital wallet or bank account.
  • Contactless methods, though, require retailers to invest in technology that most US consumers do not yet use.

Smartphone apps, some using QR codes, give customers another way to pay without touching keypads or swiping a card.

Members at a recent meeting of NeuGroup for Retail Treasury reported a significant drop in cash transactions since the start of the pandemic, and some are turning to what they’re calling touchless methods of payment to meet consumers’ needs.

  • These innovations depend on using smartphone apps and the internet instead of so-called contactless payments including Apple Pay and Google Pay. Those require a device or card which then charges the transaction to a digital wallet or bank account.
  • Contactless methods, though, require retailers to invest in technology that most US consumers do not yet use.

Finding new paths. Some members have embraced a simple approach: allowing customers to pay with the company’s own, so-called first-party app and then pick up their goods in person, while others sought out partners to allow smartphone payments at the register.

  • One of those partners is a member who works for a digital payments company that worked with retailers to introduce QR code-based payments. These allow a customer to pay by scanning a custom code on the retailer’s screen with their phone, accessing a credit or debit account.
    • “We worked with existing ecosystem partners, so we don’t have to have the merchant install a new terminal or have specific hardware or software to enable solutions,” the member said. “We’re integrating within the solution.”
  • One member, who heads electronic payments at a US-based global retailer’s treasury team, said his company partnered with third-party payment apps in Asian markets for in-store checkouts, which “have really taken off.

A gift. Another member said he has found success in encouraging customers to purchase gift cards and load them into the retailer’s first-party app, eliminating fees paid to card issuers while enabling a touchless experience.

  • “Pre-Covid, our app had been about 40% of our [customer payments]; now we have about 50%,” he said. “I’m a true believer, and it may take a while, but we are going to go from that 50% to an 80% mark in the next few years.”
0
0
Read More Read Less
Contact Us
0
0

Talking Shop: Making Interactive Dashboards With Power BI and SQL

Member 1: “I was encouraged to hear that others are using SQL (structured query language) + Power BI tools to automate reporting and develop interactive dashboards. We have been on a journey the last three years to do the same and would welcome a breakout discussion on best practices and forward looking vision for using these tools.”

Member 1: “I was encouraged to hear that others are using SQL (structured query language) + Power BI tools to automate reporting and develop interactive dashboards. We have been on a journey the last three years to do the same and would welcome a breakout discussion on best practices and forward looking vision for using these tools.”

Member 2: “I’d be more than happy to share what we’ve developed and are working on! SQL is a great way to start in BI; it’s easy to see how your code manipulates data.

  • “Basically what we do is develop data warehouses (SQL) that we get data into, then distribute and manage access to that data in the Power BI workspace. If anyone is interested in learning how to make dashboards in Power BI, SQLBI is widely considered to be the best there is.
  • “Going forward, I have a lot of interest in using APIs more often. Large banks typically have their own developer portals, so you can basically build your own reports out of their systems, which you could integrate and distribute to users in the Power BI workspace. I believe this is best practice.
  • “I’m trying to connect with developers to learn how to navigate developer portals. I imagine that using them would reduce bank portal administration tasks significantly, which would be a huge time-saver.
  • “There’s tons of resources out there and I hope I can help anyone that wants to push themselves in that direction.”
0
0
Read More Read Less
Contact Us
0
0

Navigating Prime Funds and Social Impact Investing

Key takeaways from the Treasury Investment Managers’ Peer Group 2 2020 second-half meeting, sponsored by DWS. 

By Joseph Neu

Reclaiming prime funds. Members are still skeptical of prime funds, yet they would not have been sorry had they kept their cash in them through the Covid crisis.

Key takeaways from the Treasury Investment Managers’ Peer Group 2 2020 second-half meeting, sponsored by DWS. 

By Joseph Neu

Reclaiming prime funds. Members are still skeptical of prime funds, yet they would not have been sorry had they kept their cash in them through the Covid crisis.

  • Prime funds could be helped going forward by some tweaks to the money market reform regulations concerning gates and fees, plus a pickup in CP issuance next year. However, what prime funds may really need is a publicity campaign highlighting how well they did in the Covid crisis and detailing the sources of liquidity at their disposal, including the Fed.
  • SMAs (separately managed accounts) to screen holdings for unique corporate risk preferences, meanwhile, will continue to proliferate.

Social impact screens on debt. The sophistication of ESG investment options—including social—continues to grow.

  • For corporates able to extend their cash investments to asset classes such as muni bonds or mortgage- or other asset-backed securities, asset managers are making it easier for you to select bonds or securities tied to specific social impact projects or communities.
  • In the past, this cherry-picking was employed to maximize risk-adjusted return or to mitigate credit risk. Now it can be used to micro-target communities and projects that companies want to support in line with ESG, diversity and inclusion (D&I) or corporate social responsibility (CSR) initiatives with their excess cash.
  • Credit risk concerns don’t disappear, especially under CECL. While yield benchmarks are easier to beat, preservation of principal is still a priority.

Balancing finance with impact metrics. Corporate cash investors continue to care deeply about their fiduciary responsibilities as they look to invest cash for positive social impacts.

  • Needed are better standards and consensus on frameworks and metrics for social impact investments. Then, corporate treasuries will need to incorporate them into policies and procedures governing cash investment.
  • It will be interesting to see what, if any, ESG metrics rise to the level of financial benchmarks after policy and procedures projects—that many members are launching or planning to launch next year—are completed.
0
0
Read More Read Less
Contact Us
0
0

Taking a Hard Look at Structure, Resources and Where to Rationalize

A cash manager with staff across the globe considers how technology may reshape and resize his team.  

Strategically important goals are the new organizational focus for one NeuGroup member who leads a cash management team of nearly 50 people at a sprawling global company that has a new CEO.

  • At a recent meeting, the member described the structure and responsibilities of his staff today and how rationalization and an increased focus on technology may change his use of resources in the future.

A cash manager with staff across the globe considers how technology may reshape and resize his team.  

Strategically important goals are the new organizational focus for one NeuGroup member who leads a cash management team of nearly 50 people at a sprawling global company that has a new CEO.

  • At a recent meeting, the member described the structure and responsibilities of his staff today and how rationalization and an increased focus on technology may change his use of resources in the future.

Centralized control, regional expertise. The member explained that the company’s current “centralized control structure” consists of regional treasury centers in Asia, Europe and the Western Hemisphere along with a central technology and accounting solutions team. 

  • A table he presented showed the number of directors, managers, supervisors, analysts and admins or interns in these areas.
  • The regional centers focus on supporting the business, optimizing liquidity, and protecting the cash held at the company’s 1000+ bank accounts across 125 banks in about 80 countries.

The importance of audits. “We spend a lot of time and energy on audits,” the member said. Peers were intrigued by a slide he showed indicating whether a given activity performed by cash management required a low, medium or high “resource requirement” in each of the three regions and the solutions group.

  • Audits of electronic banking platforms, signatories, and self-audits drive “high” resource requirements in each of the four groups.
  • In response to a question, the member said the requirements mandated by Sarbanes-Oxley (SOX) partly explain the intensity of the audit process. Also:
    •  “We’re very controlling as an organization, so we’re going to audit the heck out of everything,” he said.
  • Other categories on the resource requirement table include accounting, analytics, core treasury, cash concentration and settlements, and special projects.

How to rationalize? “There are a lot of things we want to do differently,” the member said. The driving factors in figuring out what will change involve the increased focus on technology, consolidating tasks and eliminating non-value added activities. A summary of initiatives along these focal points was shared with the group, including:

  • Automation: The treasury solutions team is piloting robotic process automation (RPA) to minimize or eliminate human touch points in daily processes.  RPA coding will be done within treasury with assistance from the company’s robotics center of excellence within the IT function.
  • Consolidation: Opportunities exist to consolidate same or similar tasks done in all regional treasury centers, yielding efficiency and expertise benefits. Examples include administration of electronic banking platforms and of bank guarantee and trade letters of credit.
    • The company did mapping with a consultant to determine if and how areas can be consolidated and asked, “Why can’t we do this in one spot?” he said.
  • Elimination: An emphasis on truly important goals creates an opportunity to review all existing work to determine what is absolutely necessary. This means “challenging every process” and asking, “Can we turn this off?” he said.

Feedback. In a great example of how the NeuGroup Process works best, the member made clear he wanted feedback from his peers on the structure and staffing of his cash management organization.

  • One member said while his company has a similar number of people in cash management, there is no accounting arm within treasury.
  • Another member said of the staffing levels, “These numbers look a little high,” adding that accounting at her company is part of shared services.
  • A third person said she found reviewing the presenter’s staffing levels “extremely valuable” and that looking at the time and resource intensity of various processes is a “good starting point” to leverage going forward.
0
0
Read More Read Less
Contact Us
0
0

Time to Talk Revolving Credit as Signs of Recovery Emerge

Banks are eager for business as loan markets improve and more M&A dialogue takes place.

Debt and loan markets are still in repair mode as they were back in April, so it’s time for corporates to talk to their relationship banks about their credit needs, particularly as it relates to revolving credit. That’s according to Jeff Stuart, EVP and head of capital markets at U.S. Bank.

Banks are eager for business as loan markets improve and more M&A dialogue takes place.

Debt and loan markets are still in repair mode as they were back in April, so it’s time for corporates to talk to their relationship banks about their credit needs, particularly as it relates to revolving credit. That’s according to Jeff Stuart, EVP and head of capital markets at U.S. Bank.

Revolver trends. Mr. Stuart, presenting his view of revolvers and more at NeuGroup’s Assistant Treasurers’ Leadership Group second-half meeting, said companies had paid down most of their “Covid crisis drawdowns” of revolving credit lines over the course of the pandemic. Nonetheless, they were keeping those lines of liquidity open just in case.

  • Borrowers are paying down revolver draws and refinancing incremental loans with longer-dated bond issuances, which is a positive trend, Mr. Stewart noted in his presentation.
  • As for keeping the lines open, Mr. Stuart told members that it’s “not time to cancel your liquidity yet,” particularly as another growing wave of Covid-19 infections sweeps across the world.
  • Mr. Stuart also noted that for higher-rated issuers, pricing has returned to pre-pandemic levels. “Five-year tenors are coming back; that’s a good sign.”

Don’t wait. If company revolvers are to be extended, right after the election might be a good time to do it, Mr. Stuart said. He added that even if your current revolver doesn’t need attention until next year, most banks have fresh budgets in January and are looking to book new loans in the first quarter. “Don’t wait until your revolver matures,” he said.

  • He also encouraged companies to use the revolver as they see fit, because banks and rating agencies aren’t giving drawdowns the negative weight they used to. “The stigma of drawing down your revolver is over,” he said.

Deal debt. Following a big decline in M&A loan issuance, there more recently has been “a lot of dialogue about M&A in the last few months” between banks and corporates, Mr. Stuart said.

  • The deal market is building, he added, “so much so that the election might not matter.”
  • Despite the M&A dialogue, many companies “haven’t pulled the trigger” yet, awaiting clarity around Covid, Mr. Stuart said.
0
0
Read More Read Less
Contact Us
0
0

Talking Shop: Should You Bank Where Your Customers Bank?

Member question: “This question is about the cultural practice of banking where our customers bank. With today’s technological abilities this makes no sense to me. Do other companies have this practice? Has anyone had success in changing this behavior pattern of banking where your customer banks?

  • “The example I am currently dealing with is in Korea, where large customers use [a particular bank] and although they are not a preferred bank partner, we seem to be using them because these customers bank there and insist their vendors bank there (or at least that is what I am being told).
  • “Anyone else having this experience and/or had success with changing?”

Member question: “This question is about the cultural practice of banking where our customers bank. With today’s technological abilities this makes no sense to me. Do other companies have this practice? Has anyone had success in changing this behavior pattern of banking where your customer banks?

  • “The example I am currently dealing with is in Korea, where large customers use [a particular bank] and although they are not a preferred bank partner, we seem to be using them because these customers bank there and insist their vendors bank there (or at least that is what I am being told).
  • “Anyone else having this experience and/or had success with changing?”

Peer answer 1: “I would agree with you. The only place where we used to do this was in Mexico, to facilitate payments by our customers, given dual currency usage in the country and the absence of interbank payments in USD (in the past).

  • “With regulatory changes a few years back, this need has also vanished, so we moved away from this, albeit with some customer communication.”

Peer answer 2: “If you follow this practice you might end up changing banks often or end up with many accounts or banking partners which will translate into more BAM and further costs.”

Peer answer 3: “We do not follow that practice either.”

0
0
Read More Read Less
Contact Us
0
0

The Benefits for Tech of Having More Than One Headquarters

Key takeaways from the Tech20 Treasurers’ Peer Group 20th Annual Meeting, sponsored by MUFG. 

By Joseph Neu

Treasury at multiple headquarters. Technology companies, whether megacaps or midsized, are experimenting with multiple headquarters which will resume as work from home phases out.

Key takeaways from the Tech20 Treasurers’ Peer Group 20th Annual Meeting, sponsored by MUFG. 

By Joseph Neu

Treasury at multiple headquarters. Technology companies, whether megacaps or midsized, are experimenting with multiple headquarters which will resume as work from home phases out.

  • Treasury will be represented across them, even within the US. Cost and competition for talent are drivers, but also diversity; it can be more challenging to get people of color to move to expensive and majority-white communities where US tech firms tend to be located.

ESG less of a credit rating driver in tech. Credit ratings from the three major agencies are likely less influenced by ESG factors in tech, according to analysts, than most sectors. This suggests a disconnect between the ESG initiatives in which many tech companies have invested significantly. And perhaps these efforts are not swaying their traditional credit ratings.

  • Since businesses with good ESG scores are touted by ESG proponents as better investment risks, the credit rating considerations are worth contemplating further.

More time to sort out decoupling. A significant capital and liquidity concern in key tech sub-sectors has been the cost and cash flow implications caused by shifting supply chains and distribution to customers in and out of China.

  • While a Biden presidency may not shift policy that’s driving US-China decoupling, it is anticipated to slow its pace, allowing for a smoother transition, which would be good news for tech capital budgets and cash flow forecasts exiting Covid.
0
0
Read More Read Less
Contact Us
0
0

Data-Driven Decisions Aided by Dashboards and Scorecards

A NeuGroup member describes his money market fund dashboard and investment manager scorecards.

Dynamic dashboards that help corporates leverage data to make better decisions are becoming essential tools for finance teams committed to tapping technology to transform.

  • Some companies in the NeuGroup Network are generating envy by using in-house tech talent skilled in programs such as Python to create dashboards, while other members are turning to Power BI or Tableau to ramp up.
  • But a recent meeting of treasury investment managers underscored that it’s the data in a dashboard and the decisions it prompts that matter most, whether the dashboard showcases liquidity, cash flow, ESG ratings or—in this case—money market funds (MMFs).

A NeuGroup member describes his money market fund dashboard and investment manager scorecards.

Dynamic dashboards that help corporates leverage data to make better decisions are becoming essential tools for finance teams committed to tapping technology to transform.

  • Some companies in the NeuGroup Network are generating envy by using in-house tech talent skilled in programs such as Python to create dashboards, while other members are turning to Power BI or Tableau to ramp up.
  • But a recent meeting of treasury investment managers underscored that it’s the data in a dashboard and the decisions it prompts that matter most, whether the dashboard showcases liquidity, cash flow, ESG ratings or—in this case—money market funds (MMFs).

An MMF dashboard. One member’s MMF dashboard intrigued peers, who asked not about its whiz-bang technology (it’s compiled in Excel using mostly ICD data) but how it’s set up and how often the company refreshes the data in it.

  • The company’s treasury team designed the dashboard internally about five years ago and included metrics to help assess any vulnerability in funds given the then-pending impact of reforms involving gates and fees.
  • “It provided some early warning signals that in one case allowed us to exit a fund which ultimately folded,” the treasury investment manager said.
  • These days, the dashboard is updated every two weeks, except when there is market stress or other reasons to review funds more closely. It’s used by the member to monitor risk and positioning and by team members who make buy/sell fund decisions.
  • “It serves as an early warning system for any fund-related issues, which allows us to proactively position ourselves and optimize risk/reward,” he said.

Facts and figures. The member’s dashboard contains about 25 MMFs, mostly prime and some government, both US and offshore. In the future, he said, it may be automated using RPA to save time and perhaps “allow us to add more variables without manual work.” It currently shows:

  1. Balances
  2. Yields
  3. NAV volatility
  4. Fund AUM/trending
  5. Fund concentration
  6. Key stats, e.g., 7-day liquidity

Fund manager scorecards. The same member described to peers another way his team makes use of data generated on spreadsheets—fund manager scorecards that are turned into PDFs.

  • Among other criteria, managers are rated on trade settlement, compliance and the value they add through research, events and idea generation. And, of course, performance:
  • “We try to look at sources of performance and see how that might translate into our policy guidelines,” the member said. “For instance, a manager who relies heavily on derivatives might not perform as well when the tool is not available to them.”  Other key factors:
    • Annualized returns vs. a benchmark (net of fees)
    • Tracking error/difference vs. benchmark
    • Volatility
    • Qualitative; five P’s: people, philosophy, process, performance, price

Value added. “The real benefit I see from manager scorecards is that they ensure a consistent and structured two-way conversation with our managers,” the member said.

  • “It surfaces issues for discussion and everyone knows where they stand.  So when we are adding or, unfortunately, subtracting assets, it’s typically not a surprise because they’ve seen some consistency of feedback.”
0
0
Read More Read Less
Contact Us
0
0

A Technology Tool to Help Corporate Bond Issuers

BondCliQ’s solution can give companies more insight into which dealers are supporting secondary trading. 

A lack of liquidity in the secondary market for investment-grade corporate bonds remains a source of frustration for many corporates that have issued record amounts of debt in the wake of the financial crisis and, more recently, during the pandemic.

  • A key reason for the liquidity problem is that broker dealers, including underwriters, have reduced their inventories of investment-grade corporate debt, in part because of regulations mandating higher bank capital ratios.
  • And despite improved transparency on corporate bond pricing and institutional investor portfolio holdings, information about which banks are making secondary markets for debt issues remains opaque.

BondCliQ’s solution can give companies more insight into which dealers are supporting secondary trading. 

A lack of liquidity in the secondary market for investment-grade corporate bonds remains a source of frustration for many corporates that have issued record amounts of debt in the wake of the financial crisis and, more recently, during the pandemic.

  • A key reason for the liquidity problem is that broker dealers, including underwriters, have reduced their inventories of investment-grade corporate debt, in part because of regulations mandating higher bank capital ratios.
  • And despite improved transparency on corporate bond pricing and institutional investor portfolio holdings, information about which banks are making secondary markets for debt issues remains opaque.

Enter BondCliQ. This fall, NeuGroup members had the opportunity to hear about one company’s technology solution that’s designed to provide more transparency and liquidity to this market by providing real-time data from over 35 dealers giving more than 40,000 price quotes daily.

  • BondCliQ founder and CEO Chris White described to members how his company’s analytics can help corporates reduce future funding costs.
  • The company says that by using performance metrics, treasury teams can review statistics on how corporate bond market makers support a company’s debt in the secondary market and improve their selection of underwriters, driving the best possible outcome on a new issue.
  • BondCliQ’s value proposition rests on the idea that if more investors perceive a company’s bonds to be fungible and liquid, demand for the bonds rises and the cost of debt capital falls.

Data combo. BondCliQ says that if leveraged properly, the information in its issuer performance reports can help lower an issuer’s cost of capital. The report combines traditional and proprietary data sets in the following categories:

  1. Pre-trade data. Bids and offers are directly derived from the company’s community of bond dealers, letting users know the market value of their debt.
  2. Post-trade data. Transaction information is sourced directly from FINRA’s Trade Reporting and Compliance Engine (TRACE), allowing issuers to monitor trading in their bonds.
  3. BondCliQ performance data. Comparative analytics for illustrating the performance of corporate bond dealers lets issuers evaluate potential underwriters.

Technology in the toolbox. “There are several factors which go into the selection of underwriters,” Mr. White said. “We view our product as a technology-driven solution that treasurers can add to their toolbox to make the best decisions possible for their companies.”

0
0
Read More Read Less
Contact Us
0
0

Policies Resembling Guardrails That Withstand Trigger Events

Key takeaways from the Assistant Treasurers’ Leadership Group 2020 H2 meeting, sponsored by Chatham Financial.

By Joseph Neu

Policy and procedures off the back burner.  The pandemic put a wide range of policy and procedure review projects on the back burner and more members are starting to refocus on them now as immediate liquidity concerns recede.

Key takeaways from the Assistant Treasurers’ Leadership Group 2020 H2 meeting, sponsored by Chatham Financial.

By Joseph Neu

Policy and procedures off the back burner.  The pandemic put a wide range of policy and procedure review projects on the back burner and more members are starting to refocus on them now as immediate liquidity concerns recede.

  • A session on risk policy reviews, for instance, highlighted how valuable a review can be after an event trigger from a change in business, such as a major acquisition; a change in personnel, like a new treasurer or CFO; or a market change, including the impact of Covid on interest rates, FX, etc.
  • The more a policy resembles a set of guardrails that can be separated from tactics and procedures filled with prescriptive language, the easier it is to maintain a two-pager that remains valid through trigger events.
  • This allows the details, perhaps spanning 100 pages, to adapt to business change, process improvements, new technology and tools, people and other trigger events. It also allows strategies and tactics to be flexible enough to allow treasury to respond quickly, especially to changes in market conditions.

Covid crisis advancing cash forecasting.  Exponential improvements in cash forecasting are a huge silver lining in the Covid-19 crisis.

  • Member sharing during the projects and priorities discussion strongly suggests that two years from now, Excel will be replaced as the most important cash forecasting tool by business intelligence and other analytics applications alongside specialty forecasting modules that automatically pull data from the ERP and bank systems.
0
0
Read More Read Less
Contact Us
0
0

No More Offices? Corporates Debate Making Work from Home Permanent

NeuGroup members face a future where some workers may never return to office buildings. 

NeuGroup members have learned to adapt to working from home (WFH) during the pandemic. Some like it, some don’t. But nine months into Covid, many remain uncertain about what role actual, old-school offices will play moving forward. Several discussed their thinking at a recent meeting of the Assistant Treasurers’ Leadership Group.

NeuGroup members face a future where some workers may never return to office buildings. 

NeuGroup members have learned to adapt to working from home (WFH) during the pandemic. Some like it, some don’t. But nine months into Covid, many remain uncertain about what role actual, old-school offices will play moving forward. Several discussed their thinking at a recent meeting of the Assistant Treasurers’ Leadership Group.

  • Two members work for companies that have announced plans to close all office buildings, although many details, including existing leases, need to be resolved.
  • Some corporates are following Google’s lead: The tech company plans to return to its offices in July 2021.
    • Microsoft last month announced plans for a “flexible workplace” that includes allowing some employees to work from home permanently.
  • Though some members are embracing the possibilities of an office-free future, others are skeptical, voicing concerns about the sustainability and side effects of this approach.

WFA: work from anywhere. The transition to permanently working from home is forcing some companies to take a hard look at themselves and make tough choices.

  • “We are going through a little bit of an identity crisis right now as a company,” one member said. “We’re experiencing a bit of a culture shift.”
  • As part of the shift, the member’s company is closing its headquarters in an area with a high cost of living, encouraging employees to find residence in lower-cost areas.
    • “We are incentivizing people to move out of high-cost locations and take a salary adjustment,” she said. “All future hires will be in low-cost areas.”
    • Because other corporates have offered employees a hybrid WFH/office arrangement, the member’s company had to be “very explicit that there is not going to be an option to go in.”

It’s about culture. A transition to working from home on a permanent basis also widely broadens the field of candidates to hire, which one member sees as a positive opportunity to advance inclusion.

  • The member whose company will only be hiring in low-cost areas said this provides it with the opportunity to be much more thoughtful when it comes to what she described as “equity.”
    • “I don’t think it’s any secret that women have really been struggling in this Covid economy,” she said. “We can now be really conscientious about how bias can creep into any corporate environment. It’s about culture.”
    • Though this is a positive for employees, the member said there can be drawbacks. “People are a lot less loyal to their company, and more willing to leave,” she said. “When they don’t have to be there every day, they will leave if they’re not compensated the way they want to be.”
  • Another member sees the benefits this can bring an employer who already seeks candidates from across the country: “If you’re working virtually, you don’t have to cover moving costs.”

Diverging opinions. Others at the meeting said they did not see a worthwhile tradeoff, placing a high premium on the bond built by in-person interaction.

  • “What about the learning that’s done by osmosis—mentorship, learning opportunities?” one member asked. “I just couldn’t imagine never being in an environment with my colleagues. I think it’s a very quick jump, based on very specific circumstances, that hopefully will not exist forever.”
  • Another member said not all employees are thrilled about no offices. “There’s a split between people who are older and have already established relationships outside of work versus those who are young and rely on work for socialization.”
  • One member acknowledged that there are no easy answers to whether completely virtual offices offer a real advantage for companies. “I think that’s a question that’s not going to be answered right away. There’s certainly a social aspect of being together in an office that was always big when you were young.”
0
0
Read More Read Less
Contact Us
0
0

Walk Before You Run: Using Derivatives in Pension Funds

The value of educating stakeholders on why using derivatives can make sense.

During a recent NeuGroup for Pension and Benefits session sponsored by Insight Investment and BNY Mellon, a pair of members shared their knowledge and experience using derivatives in managing corporate pension plans. Two highlights:

  • Walk before you run” emerged as a key piece of advice to members, most of whom do not make extensive use of derivatives.
  • Educating stakeholders including finance committees, C-Suite executives and accountants on derivatives and their potential benefits is an essential step for companies walking toward using futures, swaps, options and other instruments.

The value of educating stakeholders on why using derivatives can make sense.

During a recent NeuGroup for Pension and Benefits session sponsored by Insight Investment and BNY Mellon, a pair of members shared their knowledge and experience using derivatives in managing corporate pension plans. Two highlights:

  • Walk before you run” emerged as a key piece of advice to members, most of whom do not make extensive use of derivatives.
  • Educating stakeholders including finance committees, C-Suite executives and accountants on derivatives and their potential benefits is an essential step for companies walking toward using futures, swaps, options and other instruments.

Four levels. After hearing each of the pension group participants say if and how they use derivatives, NeuGroup’s Roger Heine categorized them in four groups:

  1. No use of derivatives. One member in this category said the pension plan at her company is not allowed to use derivatives but that she is interested to hear how people have managed what she described as a “big undertaking,” adding that the human capital needed is one key issue. Another member said his company does not use them, preferring the “physical approach” of using cash securities to rebalance, if necessary.
  2. Outside manager use. Several members allow external asset managers to use derivative overlays, for example, to help achieve liability-driven investing (LDI) targets.
  3. Dipping in their toes. These companies limit direct use of derivatives to specific situations, maintaining simplicity, straightforward controls and transparency. Examples include going long equity index futures against a cash position, maintaining both cash liquidity and equity exposure.
  4. Extensive use.  These corporates use derivatives to expand their opportunities to enhance returns around myriad risk limit parameters with more complex controls. They have generally arrived at this level incrementally over a number of years.

Benefits: strategic and tactical. One of the two members who uses derivatives extensively said his company uses them for strategic purposes, such as eliminating the need to move money physically between investment managers.

  • He and the other member also described using derivatives for tactical asset allocation to get exposure to an asset class. One said derivatives offer “the most liquid way to express our views; we can quickly change risk targets and allocations and achieve the goal of avoiding drawdown risk.”

Helping hands. One of the members described using third-party firms to monitor collateral for the company when it uses over-the-counter derivatives. That’s especially useful, he said, during periods of extreme volatility.

  • Another recommended that members getting their feet wet with derivatives use so-called completion account managers, who in some cases coordinate the steps necessary to implement a pension de-risking process.
0
0
Read More Read Less
Contact Us
0
0

Talking Shop: How to Respond to a New Rule on ESG Funds in 401(k) Plans?

Context:  On Friday, Oct. 30, the Department of Labor (DOL) issued a final rule clarifying the use by fiduciaries of investments in environmental, social and governance (ESG) funds. The regulation, according to some analysts, will end up limiting the use of ESG funds by some 401(k) and pension plans.

  • Proposed in June, the change was opposed by many asset managers and investment advisors; DOL says the final rule was changed in response to comments.

Member question: “Has anyone thought about this DOL regulation that effectively limits adding ESG funds to a 401(k) plan?”

Context:  On Friday, Oct. 30, the Department of Labor (DOL) issued a final rule clarifying the use by fiduciaries of investments in environmental, social and governance (ESG) funds. The regulation, according to some analysts, will end up limiting the use of ESG funds by some 401(k) and pension plans.

  • Proposed in June, the change was opposed by many asset managers and investment advisors; DOL says the final rule was changed in response to comments.

Member question: “Has anyone thought about this DOL regulation that effectively limits adding ESG funds to a 401(k) plan?”

Peer answer 1: “Yes, working on adding ESG in some form to our plans while not tripping the reg. More to come. Also pending election outcome.”

Peer answer 2: “Yes, in our fiduciary capacity we and our advisors are looking at this carefully, especially with regard to trying to balance the DOL’s stance against the requests of the vocal subset of our employees who would like more ESG choices beyond the self-directed brokerage option.”

Peer answer 3: “Yes, at our last 401(k) committee meeting this was presented and discussed. We think the ESG funds could show stronger performance than non-ESG peers, so that would pass the test in the reg.”

Peer answer 4: “Yes we’re very focused on exploring this, but conscious of the guardrails. Curious to hear how others are navigating.”

Peer answer 5: “Even before the reg announcement, our committee considered whether addition of ESG fund choices made sense and we decided against it, based mainly on limited employee demand.

  • “We felt that given the risks, it made more sense to allow employees to go the self-directed brokerage route if they felt that strongly about ESG. I’m not aware of any significant pushback from our employees since. Now with this DOL reg being issued, I doubt our position will change and probably only reinforces the decision we made earlier.”
0
0
Read More Read Less
Contact Us
0
0

Preparing for More China-US Tension, New Current Account Rules in India

Key takeaways from the Asia Treasurers’ Peer Group fall meetings sponsored by Standard Chartered.

By Joseph Neu

India ties current accounts closer to credit relationships. Members wanted clarity on a Reserve Bank of India (RBI) circular released over the summer that seeks to restrict current accounts to banks with which companies have a local credit relationship—subject to thresholds.

Key takeaways from the Asia Treasurers’ Peer Group fall meetings sponsored by Standard Chartered.

By Joseph Neu

India ties current accounts closer to credit relationships. Members wanted clarity on a Reserve Bank of India (RBI) circular released over the summer that seeks to restrict current accounts to banks with which companies have a local credit relationship—subject to thresholds.

  • Standard Chartered’s presentation explained that going forward, banks cannot open a current account for a customer who has “availed” a cash credit or overdraft facility from others in the banking system. From now on, all transactions will have to be routed through the cash credit or overdraft account.
  • The good news, for some banks and corporates, is that the RBI this week extended the deadline for compliance with this part of the guidelines, from Nov. 5 to Dec. 15, 2020.
    • The RBI said it had been contacted by “banks seeking clarifications on operational issues regarding maintenance of current accounts already opened by the banks. These references are being examined by the Reserve Bank and will be clarified separately by means of a FAQ.”
  • The stated objective of the circular is improved transparency on client cash flows, but it also seems like an attempt to help banks in India maintain liquidity and share of wallet by tying assets to liabilities. In this crisis, visibility over liquidity is important to everyone.

All entity cash visibility and access. Indeed, MNC regional treasurers in Asia have been focused on cash visibility, including better forecasting, just like everyone else.

  • The regional treasury focus, however, is much more at the entity level in each country of the region and involves looking at liquidity as seen by their parent at headquarters. More than ever, there has been a focus on upstreaming liquidity and tweaking the cash plumbing to maximize assurance that the ability to upstream will remain.
  • Covid-19 and its economic impact have been a big driver, plus US MNCs have the added incentive to repatriate cash ahead of potential tax changes with a changing of the guard in Washington.

China bank scenario planning. Speaking of access and cash plumbing, another project members shared is looking at the potential for US-China tensions to result in sanctions or other formal and informal restrictions on banking operations in China.

  • This is especially important when it involves US or other international banks that MNCs rely on for transaction banking in China and cross-border.
  • It’s time for some to evaluate the pros and cons of shifting business to a local bank from a US or international one.
  • While adverse scenarios impacting treasury operations are deemed unlikely, having a contingency plan is always better than not.
0
0
Read More Read Less
Contact Us
0
0

Nice Fit: A Matched Portfolio With a Hybrid Management Model

The benefits for one corporate of matching portfolio cash flows to debt payments and using internal and external managers.

Matching assets and liabilities, a staple of pension fund managers, is central to how one NeuGroup member runs his technology company’s treasury investment portfolio—or at least a big chunk of it.

  • At a recent NeuGroup meeting, the member explained the benefits of the matched portfolio strategy as well as the advantages of what the company calls a hybrid management model—using internal managers for segments of its total investments and external managers for other segments.

The benefits for one corporate of matching portfolio cash flows to debt payments and using internal and external managers.

Matching assets and liabilities, a staple of pension fund managers, is central to how one NeuGroup member runs his technology company’s treasury investment portfolio—or at least a big chunk of it.

  • At a recent NeuGroup meeting, the member explained the benefits of the matched portfolio strategy as well as the advantages of what the company calls a hybrid management model—using internal managers for segments of its total investments and external managers for other segments.

Playing the match game. Treasury currently uses about half of its total portfolio to create an asset-liability match for its future debt maturities, helping to reduce interest rate exposure and eliminate refinancing needs, the member said, adding that, “It’s really an ALM portfolio.” The company calls the other main segment its strategic portfolio, which has its own objectives.

  • Matching various characteristics, including duration, key rates and the mix of fixed and floating-rate debt produces a consistent stream of net income and provides “natural” maturities in advance of pending debt repayments. 
    • “We don’t need to rely on liquidating bonds to pay our debt,” the member said. “We have that steady stream of maturities providing the cash to pay it off.”
  • The matching strategy also covers interest payments. “So when interest rates were rising, our floating-rate debt payments were rising, but so was our income,” he said.  “That was very helpful in smoothing out cash flows and P&L impacts.”
    • “Some of our peers issued fixed-rate debt at what they thought were low rates, but got whipsawed when rates dropped on their cash and they suddenly had a negative net interest margin,” he added.
  • The member showed a slide indicating that both yields and durations are about equal between the assets and liabilities. But at any particular point in time, the asset duration could be equal or slightly below the debt duration.
    • “It’s impractical to find bonds that mature on the exact same day as a debt repayment, so we would typically hold bonds that might mature a few weeks or months beforehand and sit on the cash temporarily until it goes to pay off the debt,” he explained. The company excludes long-term debt, including 30-year bonds, from the matched portfolio.

When matching makes sense. The strategy works best for companies that have more cash than debt and intend to pay down the debt, the member said, drawing a comparison with pensions.

  • “Pensions that are still open and growing liabilities are going to invest differently (more growth assets) than pensions that are winding down,” he said. “The ones winding down are going to de-risk and immunize by investing in matching bonds. That’s what we’ve done thus far.” 
  • An investment manager at another corporate told NeuGroup Insights, “That approach would make sense if I expected to be paying down debt and the maturities didn’t stretch too far into the future (maybe five or six years?). Many companies (including mine) are not paying down debt.”

What’s inside. Most of the matched portfolio is invested in short and intermediate-term credit managed by external fund managers in “target maturity” term funds.

  • For example, the company might have debt maturing in late 2023 and could set up a target maturity fund to be managed externally with bonds that would mature in 2023 or leading up to that date.
  • Part of the matched portfolio is invested in US Treasuries, which the company manages internally. 
  • “I think high quality corporate bonds and treasuries are the best way to match a portfolio with a debt payment schedule,” the member said.

The hybrid model. The company splits the management of its total portfolio—matched and strategic—roughly equally between internal and external managers. The decision of who will manage which asset classes is based on:

  1. Resource intensity—Does the company need in-depth credit research and full-time traders?
  2. Trading dynamics—Can the company get price transparency and best execution with online systems?
  3. Stability of balances—The company believes outsourcing is less effective when fund balances fluctuate.
  4. Fees

Hybrid highlights. The hybrid management model, as used by the member company, may be best suited to companies that have reasonably robust internal and external management capabilities.

  • The model “creates a fluidity of knowledge, where we can learn and share best practices and get partnership value from world leading fund managers,” the member said.  
  • As for any relationship between using a hybrid model and managing a matched portfolio: “I would say matching opens up some opportunities to use your internal capabilities to fine-tune what the managers are doing in the target maturity funds.”
0
0
Read More Read Less
Contact Us
0
0

Time for Bonds: A Growth Company Learns the Ropes of Issuing Debt

A debut bond offering reveals the benefits of preparation in working with rating agencies, banks and the C-Suite.

Eight years after going public, one NeuGroup member company planned to refinance equity-linked capital with straight debt—in the middle of the pandemic. It successfully completed the issuance, and at a recent NeuGroup meeting the company’s treasurer described a process that was challenging at times but ultimately proved rewarding.

  • Along the way, the treasury team—which had never issued straight bonds—learned valuable lessons, including the need for consistent, clear communication with partners, vendors and the C-Suite.

A debut bond offering reveals the benefits of preparation in working with rating agencies, banks and the C-Suite.

Eight years after going public, one NeuGroup member company planned to refinance equity-linked capital with straight debt—in the middle of the pandemic. It successfully completed the issuance, and at a recent NeuGroup meeting the company’s treasurer described a process that was challenging at times but ultimately proved rewarding.

  • Along the way, the treasury team—which had never issued straight bonds—learned valuable lessons, including the need for consistent, clear communication with partners, vendors and the C-Suite.

The credit ratings tango. A few months before the bond issuance, the company worked with Moody’s and S&P, and found the former easier to work with than the latter.

  • The member said that in a three-hour Zoom meeting, Moody’s was “well-prepared with a lot of very thoughtful questions. You could tell they were trying to find information that they could use for their research.”
  • S&P’s level of preparation left a different impression. “There was a lot of editing we had to do. We had to provide extra guidance prior to the final opinion being published.”
    • In response to a question, the member said he saw no need to secure a rating from Fitch at this time, given the time necessary to engage with S&P and Moody’s.

Making your case. The actual debt issuance taught the member the value of preparation and anticipating questions before communicating with both internal and external stakeholders.

  • The member’s preparation before discussing the proposed offering with the company’s new CFO—specifically, the reasons behind the timing of the deal—paid off and moved the ball forward.
    • The treasurer said that in addition to the economic benefits, straight debt aligned with the goal of transitioning from an emerging growth company to a stable, more established corporate.
    • Treasury kept the CFO in the loop throughout the process, communicating through a project manager.
  • The treasury team also benefitted by going through the process of helping prepare the CEO and CFO ahead of conversations with potential investors, which required working closely with the company’s investor relations team.
    • “From ratings, to the marketing people, the bond issuance, treasury prepared talking points for each of the slides, so we had the IR team really helping us in this process,” the treasurer said.

Managing bank relationships. The treasury team selected a lead bank it knew well, a decision that paid off in terms of a smooth and successful offering, the treasurer said.

  • “The process itself went fairly smoothly,” he said. “The bank did a lot of the heavy lifting including preparing for investor calls and doing a lot of due diligence in terms of all the documentation that we needed to complete.”
  • But the treasury team learned the challenges of managing the expectations of more than 10 banks, some of which were not happy with not landing a lead role.
  • That brought home the need for better communication with non-lead banks early in the process, preparing them for their role on the present deal and conveying what they might expect in future transactions.
1
0
Read More Read Less
Contact Us
1
0

Will You Be Ready When Libor Is No Longer “Representative”?

Preparing for fallback language that could be triggered when a UK regulator deems Libor non-representative.

The global pandemic has not slowed the march toward Libor’s demise, scheduled for the end of 2021. And corporates have a lot to do long before then.

  • Just last week, ISDA launched a fallback supplement and protocol, marking what it called a “major step” in reducing the impact of Libor becoming unavailable “while market participants continue to have exposure” to it.
  • The supplement includes “robust fallbacks for derivatives linked to certain [interbank offered rates],” and the protocol lets participants incorporate the changes into legacy “non-cleared derivatives trades with other counterparties that choose to adhere to the protocol,” according to ISDA.

Preparing for fallback language that could be triggered when a UK regulator deems Libor non-representative.

The global pandemic has not slowed the march toward Libor’s demise, scheduled for the end of 2021. And corporates have a lot to do long before then.

  • Just last week, ISDA launched a fallback supplement and protocol, marking what it called a “major step” in reducing the impact of Libor becoming unavailable “while market participants continue to have exposure” to it.
  • The supplement includes “robust fallbacks for derivatives linked to certain [interbank offered rates],” and the protocol lets participants incorporate the changes into legacy “non-cleared derivatives trades with other counterparties that choose to adhere to the protocol,” according to ISDA.

The FCA and fallback triggers. At a recent meeting of NeuGroup for Capital Markets sponsored by Deutsche Bank, members heard Matthew Tilove, the bank’s co-head of risk management solutions, say that the UK Financial Conduct Authority (FCA), the administrator for Libor, could determine that Libor is “non-representative” before the end of 2021.

  • In a follow-up interview, Mr. Tilove said, “Under the ISDA fallbacks protocol, as well as under the ARRC-recommended fallback language for bonds and loans, such a determination could trigger the fallback to SOFR-based rates, even though Libor continues to published.”
  • He noted that earlier this year, FCA officials indicated a non-representative announcement could come as early as the end of 2020; the ISDA fallbacks supplement and protocol become effective on Jan. 25, 2021.
  • The law firm Michael Best & Friedrich observed that Libor-based derivatives contracts executed on and after Jan. 25 that incorporate 2006 ISDA definitions “will automatically be replaced by term-adjusted SOFR plus a spread when [Intercontinental Exchange] permanently stops publishing Libor, or when Libor is deemed to be ‘non-representative’ by the FCA.”

Preparedness. “Companies may need to be operationally ready to support SOFR-linked contracts, including daily compounding and resets in arrears, long before the end of 2021,” Mr. Tilove said, referring to the Secured Overnight Financing Rate endorsed by the Federal Reserve and the Alternative Rates Reference Committee (ARRC).

  • “Companies should also review their existing hedge relationships to identify potential situations where the hedge and the hedged item may be subject to differing fallback provisions,” he added.

Worst case scenarios. Other risk management experts told NeuGroup Insights that if documentation is in place and contracts fall back to SOFR-based rates, most of the very worst outcomes can be avoided. However:

  • If documentation is not in place, so that ISDAs, bonds and loans do not include suitable fallback provisions, the potential risks include a breakdown of economic terms and disputes with counterparties, including litigation.
  • If corporates are not prepared operationally to deal with the fallback rates, including daily resets and fixings in arrears, unfavorable outcomes include operational payment errors (and resulting reputational and legal risks), potential cash flow forecasting errors, accounting errors for interest accruals, lots of operational time and effort spent monitoring and fixing things.
  • If corporates do not adequately understand the economics of the various fallback provisions, possible problems include introducing mismatches in hedging relationships because of differences between the way the fallbacks apply to the hedge and the hedged item.
    • For example, a floating-rate note might fall back to term SOFR set in advance while the swap falls back to daily compounded SOFR set in arrears, introducing some risk between those two fixings.
0
0
Read More Read Less
Contact Us
0
0

Looking Into the Capital Markets Crystal Ball: Trump vs. Biden

Uncertainty over the outcome after election day means more volatility, potential opportunities. 

Whether it’s Donald Trump or Joe Biden sitting in the Oval Office next year, many capital markets prognosticators expect the US economic recovery to remain on track and the Federal Reserve to keep interest rates low—relatively good news for investment-grade companies selling more debt, but troublesome for treasury investment managers searching for yield. Beyond that, things get more complicated.

  • A European bank that recently sponsored a NeuGroup meeting of treasurers from large-cap companies told members that corporates may have some short-term opportunities created by volatility if the election outcome is delayed. Longer-term considerations include the impact of a higher corporate tax rate should Biden win.

Uncertainty over the outcome after election day means more volatility, potential opportunities. 

Whether it’s Donald Trump or Joe Biden sitting in the Oval Office next year, many capital markets prognosticators expect the US economic recovery to remain on track and the Federal Reserve to keep interest rates low—relatively good news for investment-grade companies selling more debt, but troublesome for treasury investment managers searching for yield. Beyond that, things get more complicated.

  • A European bank that recently sponsored a NeuGroup meeting of treasurers from large-cap companies told members that corporates may have some short-term opportunities created by volatility if the election outcome is delayed. Longer-term considerations include the impact of a higher corporate tax rate should Biden win.

Dollar decline. The bank said that a disputed election will be bearish for the US dollar, noting that in 2000, when it took Al Gore a month to concede to George W. Bush, USD fell by 3.5%. The bank is also bearish on the dollar long-term.

  • A so-called blue wave resulting in greater government spending, the Fed likely expanding its balance sheet further, and US interest rates falling closer to Europe’s and Japan’s will all fuel depreciation of the dollar, the bank said.
    • Democrats winning the presidency but not the Senate, or vice versa, would be slightly dollar positive.
  • The bank sees the euro at the low end of its range against the dollar and likely to strengthen, an outlook that should prompt corporates to consider scaling back on euro liabilities.
  • “Many corporates have issued debt in euros or swapped dollars to euros to benefit from lower coupons, and while the coupons are still lower in euros, loading up on euro debt will inflate their balance sheets,” one of the bankers said.
  • Companies may also want to adjust their balance sheets or cash flow hedging policies, perhaps incorporating options to benefit from a potential euro appreciation.

Stock-drop opportunities. During the disputed presidential election in 2000, the S&P 500 dropped 12% between Election Day and Dec. 13, then rebounded 9% by the end of January 2001.

  • If an uncertain election outcome this year results in a sell-off of 10% to 15%, companies considering raising equity will have to wait until markets rebound.
  • Companies that have continued to buy back shares during the pandemic may want to set up programs with steep grid levels to allow for opportunistic repurchases, the bank said.

Higher corporate taxes? Most participants polled at the meeting saw a Biden win resulting in the corporate tax rate rising to between 25% to 30% from 21% now.

  • One member asked peers if the market had already “baked-in” higher taxes. He noted that as prospects for the Trump tax cut gained momentum his company’s stock price bumped up, but it only saw the full impact after the bill passed.
  • “It feels like we’re in the very early stages of that on the reverse side,” he said.

Not so fast. One of the bankers advised considering the amount of liquidity in the markets now compared to the last time the tax rate was adjusted. Higher corporate taxes might adversely impact stock prices normally, but these aren’t normal times. 

  • “The fundamentals are a bit out the window in most markets,” he said, “So until liquidity gets pulled out of the market a bit by the central banks, I wonder whether things like adjusting the tax rates will have less impact on individual stocks just because of the hunt for yield and returns.”
0
0
Read More Read Less
Contact Us
0
0

The ESG Evolution: Finding Each Corporate’s Starting Point

Treasury’s role is critical as ratings agencies translate financial soundness into ESG readiness.

Credit rating agencies face daunting challenges, not only with old-fashioned credit ratings, but also their efforts to gauge corporates’ environmental, social and governmental (ESG) status. In fact, corporate treasury’s approach to the former can significantly impact the agencies’ views on the latter, according to Karl Pettersen, managing director and chief sustainability officer and the head of ratings advisory at Societe Generale.

  • ESG rating and scoring firms, some of which the credit rating agencies have recently acquired, all use very different data and methodologies, leaving companies uncertain about their standings.
  • “The language for ESG is changing fast, because of evolving taxonomies, market developments such as carbon pricing, and because social questions are becoming more pressing,” Mr. Pettersen said.

Treasury’s role is critical as ratings agencies translate financial soundness into ESG readiness.

Credit rating agencies face daunting challenges, not only with old-fashioned credit ratings, but also their efforts to gauge corporates’ environmental, social and governmental (ESG) status. In fact, corporate treasury’s approach to the former can significantly impact the agencies’ views on the latter, according to Karl Pettersen, managing director and chief sustainability officer and the head of ratings advisory at Societe Generale.

  • ESG rating and scoring firms, some of which the credit rating agencies have recently acquired, all use very different data and methodologies, leaving companies uncertain about their standings.
  • “The language for ESG is changing fast, because of evolving taxonomies, market developments such as carbon pricing, and because social questions are becoming more pressing,” Mr. Pettersen said.

Find a starting point. Mr. Pettersen presented a graphic with quadrants representing higher and lower levels of ESG risk and readiness and different starting points for companies to approach an ESG strategy

  • Those in the bottom left have lower ESG risk and a higher willingness to be a first mover (i.e. higher ESG readiness), so issuing a public green or social bond makes sense.
  • Those with a low risk/low readiness profile may be best served in engaging proactively in the social conversation, first through internal policy changes, and then through external relationships with diversity partners.
  • “When you’ve figured out your starting point, because ESG is a response to societal needs, it needs to be public and it should also be permanent,” Mr. Pettersen said. “Something that becomes part and parcel with what the company does and is consequential to its business.”

Treasury’s role. Given that ESG standards are still forming, traditional financial tools remain the most reliable, Mr. Pettersen said, noting SocGen’s research imbedding ESG into equity recommendations.

  • The “trust factor” has become increasingly important for credit ratings as the agencies navigate challenges to their traditional credit methodologies, and that trust carries over to ESG.
  • The more aggressively the rating agencies view a company’s financial policies, he said, the less likely they are to view it as less ESG ready—a “clear correlation.”
  • “And if they like your financial-policy track record, they’re more likely to trust you on ESG,” he said.

Unfair controversy. A treasurer noted skeptically that ESG rating firms disproportionally rely on independent sources reporting controversies, and Mr. Pettersen acknowledged such controversies may be unfounded but nevertheless affect a company’s ESG score.

  • As a former credit rating analyst, Mr. Pettersen said he advised companies to take control of the narrative. Noting an earlier NeuGroup poll indicating corporate America expresses sustainability as building a better world, he said companies should focus on what they can do to improve.
  • “That allows you to take control of the narrative a bit and define better what your actual starting point is,” he said. “And because not a lot of companies are doing this now, it may give you a first mover advantage.”

Evolving ESG conversation. A few years ago, the market wanted companies to show they were thinking about ESG and doing something about it, Mr. Pettersen said. “Now, it’s turning into, ‘Show me that when you’re taking risk, you’re doing it in a responsible and balanced fashion across your stakeholders.’”

0
0
Read More Read Less
Contact Us
0
0

Why Parking Cash on the Balance Sheet May Trump Bigger Revolvers

Key takeaways from the NeuGroup for Capital Markets 2020 H2 meeting, sponsored by Deutsche Bank.

By Joseph Neu

Bond issues are the new RCF.  Discussion on the topic of how to divvy up extra liquidity in terms of cash on the balance sheet vs. a bigger revolving credit facility (RCF) yielded the recommendation that most firms with the ratings capacity are better off issuing bonds and parking cash on their balance sheet.

  • The bond market is supportive, and bank credit pricing is going to be more stingy unless, ironically, it’s paired with bond economics and the promise of a substantial wallet to pay for it.

Key takeaways from the NeuGroup for Capital Markets 2020 H2 meeting, sponsored by Deutsche Bank.

By Joseph Neu

Bond issues are the new RCF.  Discussion on the topic of how to divvy up extra liquidity in terms of cash on the balance sheet vs. a bigger revolving credit facility (RCF) yielded the recommendation that most firms with the ratings capacity are better off issuing bonds and parking cash on their balance sheet.

  • The bond market is supportive, and bank credit pricing is going to be more stingy unless, ironically, it’s paired with bond economics and the promise of a substantial wallet to pay for it.

Sustainability-linked finance about to rocket.  Finding qualifying use of proceeds limits green bond and related issuance that require direct linkage on how the funds raised are used.

  • Sustainability-linked finance rewards firms for meeting smart targets (that are scientifically measurable) across the full ESG spectrum, which will increasingly include diversity and inclusion (D&I) and social impact goals.
  • This is why a major asset manager in the fixed income space is excited about sustainability-linked finance products as an asset class and a $10 trillion market megatrend.

Six major ESG rating agencies? In a meeting where capital markets professionals from top corporate issuers expressed frustration about the pricing practices of credit rating agencies, we learned that the top three are about to be joined by three or four more.

  • This will be the result of ESG scores becoming both fully mainstream and integrated into credit ratings. Moody’s, S&P and Fitch are rapidly growing and acquiring ESG scoring specialists in anticipation of this outcome.
  • ESG scorers including MSCI, Sustainalytics, Bloomberg and ISS are vying to join them in the top tier of raters.
0
0
Read More Read Less
Contact Us
0
0

Cash Pooling: What Treasury Teams at Multinationals Need to Know Now

An update of a story—one of NeuGroup’s most-read articles—about physical and notional cash pooling.

By Susan A. Hillman, Partner, Treasury Alliance Group LLC

Eight months into the global pandemic, liquidity and cash remain top-of-mind for many multinational corporations coping with uncertainty over the shape and timing of economic recovery. That makes this an opportune time to reexamine a critical liquidity management tool that has been around for decades but has always required careful evaluation before implementation: cash pooling.

An update of a story—one of NeuGroup’s most-read articles—about physical and notional cash pooling.

By Susan A. Hillman, Partner, Treasury Alliance Group LLC

Eight months into the global pandemic, liquidity and cash remain top-of-mind for many multinational corporations coping with uncertainty over the shape and timing of economic recovery. That makes this an opportune time to reexamine a critical liquidity management tool that has been around for decades but has always required careful evaluation before implementation: cash pooling.

  • Further due diligence is in order now in given tax and regulatory changes in the past few years that may bring more scrutiny of the objectives of a company’s cash pool structure and affect the ability of banks to offer cash pooling services.

Cash pooling defined. Cash pooling is a short-term cash management tool whose objective is to eliminate idle cash and reduce overdrafts among subsidiary operations that have varying daily cash positions. There are two approaches: physical and notional.

Physical pooling allows funds in separate subaccounts—at the same bank—to be automatically swept to and from a header account. The participating entities’ bank (sub)accounts are either in surplus or deficit position on an end-of-day basis. The physical concentration to the designated header account effectively zero balances the subaccounts. Physical pooling can be used across multiple legal entities, located in the same or different countries—but on a currency by currency basis.

  • Movements between accounts are categorized as intercompany loans to and from the header entity and the participating subsidiaries. Specific loan documentation related to the pool structure is prepared in advance. The holding entity should be designated as an agent for the group which allows the interest paid and earned to be treated as bank interest and is not subject to withholding tax.
  • The sweeping entries are documented daily through the bank transactions and arm’s length interest is paid or charged either monthly or quarterly. Physical cash pooling is a transparent and efficient liquidity management tool. The documentation and bank transaction detail leaves a sufficient audit trail that is appreciated by corporate tax and would satisfy even a conservative interpretation in a tax audit.

Notional pooling achieves a similar result but is accomplished by creating a shadow or notional position resulting from an aggregate of all the accounts, which can be held in multiple currencies. Interest is paid or charged on the consolidated position. There is no actual movement or commingling of funds.

  • The bank (or system) managing the notional pool provides an interest statement reflecting the net offset that is similar to what would have been achieved with physical pooling. As there is no physical movement of money, intercompany loans are not required to account for the offset.
  • Notional pooling across multiple currencies requires that these currencies are brought to a common basis (usually EUR or USD) before the pooling and interest offset can take place. In essence, a short-dated swap is executed by the pooling bank. This makes the process more problematic and not as cost effective, as treasury has no control over the rates or the timing of the swaps.
  • The multicurrency appeal of notional pooling is somewhat negated due to the complexity arising from the cross- jurisdictional nature of the arrangements and the need to accommodate multiple regulatory regimes. If accounts are maintained across several banks in different countries, there are complications with cutoff times to say nothing of extra transaction costs and bank fees. Due to the opaque nature of the arrangement, it can trigger tax scrutiny.

Tax reform.  US tax reform in 2017 meant multinationals had less tax inducement to have profits booked outside the US in a lower tax jurisdiction—a significant disincentive to tax inversion through an offshore location of regional headquarters. Initially, treasurers wondered if tax reform would affect current or planned cash pooling structures.

  • The short answer is no, in part because the US Treasury said the new law would not impact short-term arrangements such as physical and notional pooling.
  • Cash pooling is an arrangement to facilitate the management of daily working capital fluctuations between related subsidiaries—it is not used to keep large cash profits offshore.
  • The entity holding the pool header account is usually an offshore company and this continues to be advisable from both a tax and practical perspective.
    • Currency accounts are not used in the US, there are reserve requirements, overdrafts aren’t permitted and interest can only be earned through sweeps—not on current accounts.
    • From a time-zone perspective, the subaccounts will be held in other countries, so an end of day concentration is not logistically efficient.
    • A US company is not allowed to be a borrower in a cash pooling arrangement.
    • Europe remains the ideal geographic location for a pool structure due to access to financial and currency markets. Singapore is often used as an Asian center; Hong Kong’s attractiveness is declining due to uncertainty and Chinese political repression.

Regulatory scrutiny. Initiatives by the OECD (Organization for Economic Co-operation and Development) and BCBS (Basel Committee on Banking Supervision) within the past few years may impact cash pooling. That said, the actual adoption of these pronouncements is undertaken separately by participating countries and their central banks or regulators.

  • The OECD’s BEPS (base erosion and profit shifting) initiative addresses tax treaties, transfer pricing and any perceived financial sleight of hand. For treasurers, it means that now is not the time to push the envelope with complicated treasury structures that involve intercompany transactions—particularly with transfer pricing which may come under scrutiny.
    • Does this mean cash pooling is threatened? Not really, because it a well-established short-term cash management tool. However, it is important that treasury has good documentation in place, particularly related to the intercompany arrangements created by cash pooling.
  • BCBS’s Basel regulations impact banking services and costs. Basel III (2017) addresses the liquidity ratios banks need to meet, so banks are scrutinizing how business is allocated between transaction services and credit.
    • Basel IV (2023) will require banks to meet even higher maximum leverage ratios—particularly larger global banks. There will also be more detailed disclosure of reserves and other financial statistics required.
    • The Basel conditions will impact certain services that were previously standard and transaction costs will likely increase—this may affect both the availability and costs of cash pooling services, especially for notional pools.

Takeaways. The benefit of cash pooling arises from allowing separate subsidiaries to use internal corporate cash instead of bank borrowing for day-to-day working capital. A few caveats have always been important, but require closer adherence given tax and regulatory updates.

  • Pooling is not an arrangement to aggregate excess offshore cash in an attempt to earn a higher rate of return as interest rates are at zero or negative in Europe—and this also may draw scrutiny from regulators.
  • Banks must consider liquidity ratio requirements, so concentrating transactional business with the pooling bank is a good idea. Keep in mind that there are only a handful of global banks that offer cash pooling.
  • Clear intercompany loan documentation is essential and rates applied must be arm’s length.
  • Excess cash should be repatriated—the 2017 tax law makes this more palatable. So it’s important that aggregate pooled balances are not excessively high.
  • Long-term deficit cash in offshore subsidiaries should be handled through separate intercompany loans or other funding—not with cash pooling.
0
0
Read More Read Less
Contact Us
0
0

Digital Signatures Deliver Relief and a Few Frustrations Amid Pandemic

Corporates report success using DocuSign with many banks, but Latin America presents challenges.

“Has anyone successfully used DocuSign with banks?” one NeuGroup member asked at a recent virtual meeting. “Yes” was the resounding answer from peers—more evidence that the pandemic has accelerated automation and digitization in finance. And one goal for many treasury teams is to make “wet” signatures a thing of the past.

Corporates report success using DocuSign with many banks, but Latin America presents challenges.

“Has anyone successfully used DocuSign with banks?” one NeuGroup member asked at a recent virtual meeting. “Yes” was the resounding answer from peers—more evidence that the pandemic has accelerated automation and digitization in finance. And one goal for many treasury teams is to make “wet” signatures a thing of the past.

  • The member who posed the question wants to use DocuSign’s electronic signature solution internally and externally—for intercompany loans, signatory changes and to open, close or change bank accounts.
  • One pain point that several members brought up: difficulties using DocuSign in Latin America. See the table below.
  • The takeaway is that corporates should keep applying pressure to financial institutions and regulators to allow broad use of digital signatures across the globe.

The good news. Members reported success in using DocuSign with banks including Bank of America, JPMorgan Chase, Citi, Wells Fargo and Societe Generale.

  • “We have used it in lots of places,” said one member.
  • “The banks will do it if they want your business,” another said, recommending that others push institutions to accept digital signatures. “Unless they can produce a regulatory reason, use DocuSign.”

The problem. Regulatory issues and how banks interpret different rules and laws in dozens of countries are one reason using digital signatures can prove challenging for corporates.

  • Many companies at the meeting use Citi to bank in Latin America and most of them reported having difficulties using DocuSign in the region.
  • “They’re requiring originals for everything,” one member said.
  • “We’re hearing it’s more the regulatory environment,” said another, adding that it may also may reflect a more conservative approach by Citi.
  • Another said, “My assumption is that it is banks’ interpretation of country-specific regulatory rules that drive the compliance/non-compliance with digital signatures. But I don’t have clarity from the banks on why they will or will not accept DocuSign.” This member’s company also uses a stylus to sign documents on an iPad.

Citi and DocuSign.  Driss Temsamani, Citi’s head of digital channels and data for Latin America, told NeuGroup Insights that DocuSign is embedded in the CitiDirect BE Digital Onboarding platform, adding that onboarding is the key priority in the bank’s digital transformation strategy. In Latin America, the platform was introduced in Brazil in 2019.

  • The platform is now in use in 12 Latin American countries and Citi clients can use digital signatures in all but four of them. The exceptions include Mexico and Uruguay, where regulatory approval is pending.
  • El Salvador and Panama do not have laws covering digital signatures and the DocuSign feature on Citi’s platform is disabled in those countries.
  • Asked how he would respond to corporates expressing frustration with using e-signatures in Latin America, Mr. Temsamani said he would need each client to tell him more about its specific issue so he could better understand and address their feedback. “Whenever a client tells me something, it’s always valid and a top priority,” he added.

Editor’s Note: The table below was provided by a NeuGroup member company and is the treasury team’s documentation of its experience with various banks.

The table is not based on any information provided to NeuGroup by the banks listed and does not claim to represent the banks’ policies or the experience of any other company.

“Digital Signature” refers to the member company signing a document using a stylus on a tablet; DocuSign is its preferred method.

0
0
Read More Read Less
Contact Us
0
0

A Homegrown ESG Dashboard in Search of Better Data

A tech company builds its own tool to get a holistic view of ESG ratings but bemoans social data quality.

Many companies in the NeuGroup Network are devoting significant resources to better address environmental, social and governmental (ESG) issues that are increasingly critical to how investors and other stakeholders view corporates.

  • But not many treasury teams have access to an ESG dashboard, something one member who works at a large technology company described to peers at a recent meeting of treasury investment managers

A tech company builds its own tool to get a holistic view of ESG ratings but bemoans social data quality.

Many companies in the NeuGroup Network are devoting significant resources to better address environmental, social and governmental (ESG) issues that are increasingly critical to how investors and other stakeholders view corporates.

  • But not many treasury teams have access to an ESG dashboard, something one member who works at a large technology company described to peers at a recent meeting of treasury investment managers.
  • The company built the dashboard itself, thanks in part to “people good on Python,” the member said. “We are lucky.”
  • The dashboard offers a “holistic” view of the ESG ratings of all the company’s investments—those managed internally as well as assets managed in separate accounts.
  • The member said one goal is to make sense of managers who “all have different ways of measuring ESG.” The company wants investments that are consistent with its goals of reducing carbon emissions and promoting more representation of women and minorities, among others aims.
  • The dashboard uses ESG ratings data from MSCI and the company plans to add other sources as it implements targets for its ESG investments.

Data deficit. The problem, the member said, “is that there is not that much data out there,” especially regarding social metrics. The only information some companies provide about women is how many of them are on the board of directors, she added.

  • An ESG asset manager for Morgan Stanley, sponsor of the meeting, agreed that compared to data on environmental records, there is “a massive gap on the social side.” He mentioned difficulty getting information on how companies ensure the safety of employees.
  • The manager said investors—whether or not they have a dashboard—need to take ESG scores with “a pinch of salt.” His team tries to re-rate companies and look at them through “our own lens” to make the ratings “more relevant.”
0
0
Read More Read Less
Contact Us
0
0

How Corporates Are Measuring Counterparty Risk as Cash Builds

Companies reviewing limits amid Covid have varied approaches to calculating risk thresholds.

The abundance of cash corporates have collected on their balance sheets to deal with pandemic-related volatility has prompted some to review their counterparty risk limits.

Participants at a recent NeuGroup meeting of large-cap companies described a variety of approaches to the issue, which should remain especially relevant for treasury teams reducing the size of bank groups, a trend discussed in recent meetings.

Companies reviewing limits amid Covid have varied approaches to calculating risk thresholds.

The abundance of cash corporates have collected on their balance sheets to deal with pandemic-related volatility has prompted some to review their counterparty risk limits.

Participants at a recent NeuGroup meeting of large-cap companies described a variety of approaches to the issue, which should remain especially relevant for treasury teams reducing the size of bank groups, a trend discussed in recent meetings. 

  • A member explained that higher deposit rates at one bank prompted his team to consider whether to exceed the $100 million ceiling in its policy. It turned out that only the CFO had to be alerted; no approval was needed from the board or senior management.
  • The company was entering longer-term exposures, including derivative transactions, in which relatively few banks were experts and offered reasonable fees. That resulted in a concentration of business that could hit exposure ceilings. 
    • “The more of this we do, we’re faced with the issue of which banks do we execute with and how much with each bank,” the treasurer said.  

Notional vs. marked to market. The session leader said that his team updates the marked-to-market derivatives exposures monthly but has relied on notional limits. The company’s exposures have traditionally been seven days or less, but the longer-term hedges may require a more dynamic approach.

  • A peer said his company relies on mark-to-market limits and stress tests them using a third-party service offered by Reval. Initial trades shouldn’t exceed the limits, and ratings downgrades and market-moving events such as Covid halt additional trades unless the CFO approves them. 
  • The company separates derivatives from deposits because the latter don’t have a stress scenario. The derivative limit is much smaller.
  • Another member said his company also includes commodity trades, adjusts all exposures according to their remaining lifespans, then aggregates and measures them daily. His team also tracks ratings and credit default swap (CDS) spreads to capture any real-time market moves, such as news about fraud at a bank. 

Scrutinizing the banks. The member added that a vendor performing his company’s customer-credit analysis also provides an annual analysis of the net worth of each relationship bank, and along with a bank’s credit rating his team will assign a limit to it. 

  • He added that rather than a $500 million or other arbitrary limit, “It’s actually based on the balance sheet of each bank.”
  • His team has sought to automate that process and eliminate much of the “check-the-box” analysis based on financial statements that often can be stale, adding, “We’ve found you can spend a lot of time on things that 99% of the time add little value.”

Common ground. Two other members said their firms set notional limits, separating deposits from derivatives. One noted entering into a long-term interest-rate swap. “This discussion is really timely,” she said, “As I’ve been talking to my derivatives team about how we can better manage those exposures.”

  • The other member uses notional thresholds “only because it’s easier” but acknowledged that marking positions to market provides the “real exposure.” His firm has increased its investment and derivative thresholds to accommodate more cash held at banks. 
  • In terms of investments, “We can go up to a certain amount, but it also has to be diversified within the portfolio,” the treasurer said. “So as the cash balance grows we have the capacity to go higher, but the mix of the portfolio is limited as well, both with the instrument and the counterparty.”
0
0
Read More Read Less
Contact Us
0
0

Helping Treasury See Beneath the Payment Iceberg

TIS makes the case for treasury as gatekeeper of payment processes.

Nearly half the members at a recent meeting of NeuGroup’s Global Cash and Banking Group (GCBG) said treasury at their companies is responsible for treasury payments only—not for, say, accounts payable (AP) or payroll. Just 15% of those surveyed said treasury completely owns payment processes and tools.

  • Treasury Intelligence Solutions (TIS), sponsor of the meeting, made a case for making treasury the overall “gatekeeper” of all payment processes—with the help of its technology solution.
  • The crux of the case is that treasurers are responsible for the entire liquidity picture of an organization and can’t afford to see only the tip of the iceberg. “You can only manage what you see,” the TIS presentation said.

TIS makes the case for treasury as gatekeeper of payment processes.

Nearly half the members at a recent meeting of NeuGroup’s Global Cash and Banking Group (GCBG) said treasury at their companies is responsible for treasury payments only—not for, say, accounts payable (AP) or payroll. Just 15% of those surveyed said treasury completely owns payment processes and tools.

  • Treasury Intelligence Solutions (TIS), sponsor of the meeting, made a case for making treasury the overall “gatekeeper” of all payment processes—with the help of its technology solution.
  • The crux of the case is that treasurers are responsible for the entire liquidity picture of an organization and can’t afford to see only the tip of the iceberg. “You can only manage what you see,” the TIS presentation said. 

Map your payment processes. This first step will reveal the number of channels to make payments, expose risks and allow for a more holistic management approach. 

  • Rolling out a payment system for various finance partners to use creates a business opportunity to collaborate across the organization, help colleagues reduce risk and increase transparency to key drivers of a fluctuating cash position. 
  • Accumulating data is the goal of inserting treasury in payment processes; it benefits treasury directly and, by yielding more accurate cash positions, can be of value for the C-Suite as well. 

Don’t get laughed out of the room. One member challenged the concept of treasury taking control of what are non-treasury payments, saying, “If I go to the treasurer and ask for those AP payments, I’ll get laughed out of the room.” 

  • TIS said the point is not that treasury should be doing the work, it’s that treasury should roll out and oversee a system that others work in for standardization of payment processes and reduction of bank portal access across the organization.
    • A presenter from TIS said, “Let them do the work, but ask them to run a standardized process” that funnels through one system.
  • Another member agreed with TIS’s logic because “if something goes wrong [with a payment/bank access], it’s treasury” that fixes the problem and needs to be in the know. 
    • If treasury is truly the gatekeeper to the banks, treasury should have authority to govern related processes. “The more you see the more you can control,” one TIS presenter said.

Payment fraud detection and the help of AI. Using machine learning and artificial intelligence to detect fraud is a hot topic in the treasury world now.

  • Whether treasury centralizes payments or divides control with accounts payable, tax departments, etc., it is important to find ways—including technology solutions—of leveraging data lakes to identify unusual behavior across networks to tighten security and reduce organizational weak points and risks. 
0
0
Read More Read Less
Contact Us
0
0

Talking Shop: For a Bank KYC Refresh, Do You Complete a Beneficial Ownership Form With SSN?

Member question: “One of our banks does a biannual KYC [know your customer] refresh and asks us to complete the US Client Certification of Beneficiary Ownership (a FinCEN form).

  • “Is this something that your company also provides, and do you include Social Security number info?”

Member question: “One of our banks does a biannual KYC [know your customer] refresh and asks us to complete the US Client Certification of Beneficiary Ownership (a FinCEN form).

  • “Is this something that your company also provides, and do you include Social Security number info?”

Peer answer 1: “You do not need to provide SSN for a non-US person and you need to provide only one such person.”

Peer answer 2: “We always put the parent US company as the UBO [ultimate beneficial owner], and we would use the TIN [taxpayer identification number] number as SSN. If they don’t accept the parent company, we would use a foreign board member, which would avoid the need to provide SSN. We never ask for anyone’s SSN or provide them.”

Peer answer 3: “Our company worked out a process with our major relationship banks whereby we created our own ‘non-standard’ FinCEN CDD [customer due diligence] form identifying our beneficial owners. This form does include their SSN #.

  • “We provide the form to our US relationship contact and ask them to keep it secure and distribute internally within the bank on an as-needed basis any time FinCEN CDD requests need to be satisfied. It has worked very well for us and has eliminated providing this information multiple times.”

Peer answer 4: “We typically refuse to provide SSNs and work with the counterparty to find an alternative.”

Peer answer 5: “We do share a SSN. I believe our bank requests an update every three years; maybe you can encourage this bank to do the same.”

Peer answer 6: “I have a request right now from a bank. They won’t let us use the parent company as the BO [beneficial owner]; they insist on an individual. I pushed back, asking them to show me the regulation that calls for the SSN or work with me on an alternative.”

0
0
Read More Read Less
Contact Us
0
0

Pandemic Shows Corporates Which Credit Analysts See Beyond the Crisis

Volatility and uncertainty boost the importance of analysts with experience and perspective.

The pandemic has been a first-of-its-kind challenge for corporates, their banks and investors, each trying to make sense of extreme circumstances and forecast what it all might mean. Credit rating agencies face their own challenges and are taking different approaches to the crisis that, according to participants in a recent NeuGroup meeting for large-cap companies, reflect relative strengths and weaknesses.

  • One member whose company had plenty of liquidity to weather the storm opined that Moody’s Investors Service had a “more mature attitude, looking through the crisis and not panicking,” while S&P Global was “crunching numbers and not treating this as a unique short-term situation.”
  • That corresponded with what one portfolio manager said at a different NeuGroup meeting. He called Moody’s approach more measured, the agency more willing to give companies a “Covid mulligan.”

Volatility and uncertainty boost the importance of analysts with experience and perspective.

The pandemic has been a first-of-its-kind challenge for corporates, their banks and investors, each trying to make sense of extreme circumstances and forecast what it all might mean. Credit rating agencies face their own challenges and are taking different approaches to the crisis that, according to participants in a recent NeuGroup meeting for large-cap companies, reflect relative strengths and weaknesses.  

  • One member whose company had plenty of liquidity to weather the storm opined that Moody’s Investors Service had a “more mature attitude, looking through the crisis and not panicking,” while S&P Global was “crunching numbers and not treating this as a unique short-term situation.”
  • That corresponded with what one portfolio manager said at a different NeuGroup meeting. He called Moody’s approach more measured, the agency more willing to give companies a “Covid mulligan.”
  • Several peer group members said S&P tends to rotate lead analysts regularly, whereas senior analysts at Moody’s often had followed their companies for years, even decades.

People vs. methodologies. Much about credit analysis depends on the person behind it. A member’s company whose business includes two sectors struggled with an S&P analyst who only focused on one sector and maintained the same rating for a decade. When the analyst retired early, “It was a game changer for us,” the treasurer said.

  • The Moody’s rating, however, was still a couple of notches lower, so the treasury team engaged with the rating agency, which ultimately replaced its analyst with someone who brought new perspective. The treasurer made a concerted effort over the next 18 months to educate the analyst, and the rating climbed to investment grade.
  • The company was already investment grade with Fitch Ratings and S&P, so “by the time we got our second-notch movement, spreads tightened by a good 10 basis points, and with the last move we probably saw another 10,” he said.
  • “It’s the analyst that matters; not the agency,” a peer added. “You need to get someone you click with and has a good understanding of your industry.” 

Methodologies at crossroads.  Indeed, the analyst’s understanding has become ever more important, according to a former ratings analyst now at a major bank. He told members that the rating agencies have struggled since the onset of the pandemic because debt is now dirt cheap, shareholder buybacks have grown in importance and business profiles are being disrupted.

  • “A lot of the standard ratings methodologies simply don’t work that well anymore,” he said, adding that treasurers have likely seen ratings that differ significantly from what the methodology inputs would dictate.
  • “It’s very perception-based at the moment, and a lot of it relies on how experienced the analyst is. So there are wide variations because the methodologies don’t work,” he said.

Time to negotiate. Change can provide leverage to negotiate. One member cited success negotiating fees with Moody’s but not S&P, although the latter agency indicated it may be open to negotiating the ratings fee on large offerings—probably in the range of $5 billion—if not the annual fee.

  • “Moody’s was the other way around,” he added. “They’ve been willing to work with us on the annual fee.”
0
0
Read More Read Less
Contact Us
0
0

Taking A Second Look: Corporates Reconsider Cryptocurrencies

Members share their curiosity about embracing cryptocurrency amid more regulation.

Efforts by central banks and finance ministers to block the widespread use of digital currencies until strong regulation is in place—along with the emergence of new types of currencies—are leading some corporates to reconsider earlier decisions to avoid accepting cryptocurrencies as payment.

  • That is among the takeaways from a discussion at a recent meeting of NeuGroup for Retail Treasury, sponsored by U.S. Bank, during which one member said her company, encouraged by the outlook for regulation, is actively considering options to accept digital currency in the future.

Members share their curiosity about embracing cryptocurrency amid more regulation.

Efforts by central banks and finance ministers to block the widespread use of digital currencies until strong regulation is in place—along with the emergence of new types of currencies—are leading some corporates to reconsider earlier decisions to avoid accepting cryptocurrencies as payment.

  • That is among the takeaways from a discussion at a recent meeting of NeuGroup for Retail Treasury, sponsored by U.S. Bank, during which one member said her company, encouraged by the outlook for regulation, is actively considering options to accept digital currency in the future.

In the news. On Tuesday, the Financial Stability Board issued recommendations for the regulation, supervision and oversight of global stablecoins—such as Libra, a stablecoin proposed by Facebook—which aim to counter the high volatility of crypto assets like Bitcoin by tying the stablecoin’s value to other assets, including sovereign currencies.

  • On the same day, financial leaders of the world’s seven biggest economies reiterated their opposition to unregulated digital payment services, stating that “no global stablecoin project should begin operation until it adequately addresses relevant legal, regulatory, and oversight requirements.”
  • “You’re going to see a lot more government-related actions, and a lot more focus on that area,” the NeuGroup member whose company is now interested cryptocurrency said late last month.
    • “I think governments are taking a more detailed look at what this really needs and how that could complement their financial systems.”
  • Another member agreed that recent developments—including news about Libra—have piqued their interest, saying, “It’s something we’re keeping our eye on, but haven’t pulled the trigger yet. It’s worth watching closely.”

Mixed reactions and experiences. To be sure, not all the treasurers at the meeting had the same level of interest, with some expressing a cautious curiosity and one saying the issue “isn’t even on our radar.”

  • One member said their company attempted to accept cryptocurrency payments nearly ten years ago. “Merchants did not necessarily want to adopt because it was so volatile,” she said. “One day it could be worth $10, another day it could be a thousand. You didn’t know what you were getting on any specific day. So we shut that down as an option.”
  • Another treasurer said an online-only competitor needed to implement a workaround to accept bitcoin. “They were accepting it through a wallet that would access intermediaries that the customer wanted to use, and they would flip it to US dollars that would actually transact on site,” he said. “They were also keeping a portion of it, which created some accounting issues on their balance sheet.”
  • The member whose company stopped accepting cryptocurrency agreed that there are complications having digital currency on a balance sheet. “Accounting regulations-wise, how you deal with a crypto asset or liability isn’t that straightforward,” she said. “Depending on who you are, where you are, you have to take your own rules and decide how you deal with it.”

0
0
Read More Read Less
Contact Us
0
0

A Virgin Bond Deal, Community Investment and Frustration With Banks

Takeaways from the Tech20 High-Growth Treasurers’ Peer Group 2020 H2 meeting, sponsored by Bank of the West / BNP Paribas. 

By Joseph Neu

Wanted: A better bank user experience. The user interface (UI) and user experience (UX) is a key success driver for high-growth technology companies. So when their banks fail to deliver a quality UI/UX, growth tech treasurers get frustrated. Work from home, of course, has made what used to be digital nice-to-haves into must-haves.

Takeaways from the Tech20 High-Growth Treasurers’ Peer Group 2020 H2 meeting, sponsored by Bank of the West / BNP Paribas. 

By Joseph Neu

Wanted: A better bank user experience. The user interface (UI) and user experience (UX) is a key success driver for high-growth technology companies. So when their banks fail to deliver a quality UI/UX, growth tech treasurers get frustrated. Work from home, of course, has made what used to be digital nice-to-haves into must-haves.

  • Electronic bank account management (eBAM) promises are seen by members as mostly a lie—banks seem to roll out products in line with their own agenda rather than that of their clients. So a bank that asks, “What can I do for you?” and listens and delivers on what they learn can go far with treasurers in growth tech.

Community impact appeals to a growth-tech mindset. In a session on ESG, sustainability and impact investment solutions, members said that having a positive community impact is part of their growth-company DNA and what makes employees feel good about working for an employer.

  • That means treasury needs to make room for impact investment best practices in policy early on. And that includes guiding cash toward minority and community development financial institutions (CDFIs) active in geographies where these companies have a significant presence.

A pandemic is a good time for a virgin bond. It turns out, based on a member case study, that the Covid-19 crisis is an ideal time for a virgin bond deal. Zoom sessions make it efficient to get a credit rating and work with banks as well as outside counsel.

  • It still proved time-consuming and challenging for one small treasury team, but with the help of a project manager, they were able to bring it all together and capitalize on great debt capital market conditions.
  • Add a huge appetite for tech company debt and getting lucky with the issue window, and the bond transaction ended up being a very satisfying experience. You never forget your first debt deal.
0
0
Read More Read Less
Contact Us
0
0

The Cup Runneth Over: Corporates Awash in Cash Mull Options

Treasurers discuss concerns about companies rushing to deploy cash too quickly.

When uncertainty abounded at the start of the pandemic, companies drew down revolvers, issued debt, cut capital expenditures (capex), halted share repurchases—whatever it took to conserve cash for the troubling times ahead.

  • A few months later, after massive government stimulus and a recovering economy, many are awash in cash and trying to figure out what to do with it—or not do with it.
  • At a recent NeuGroup meeting for large-cap companies, several treasurers said their companies’ cash balances are several times higher than normal, echoing a refrain being heard across the NeuGroup Network this fall.

Treasurers discuss concerns about companies rushing to deploy cash too quickly.

When uncertainty abounded at the start of the pandemic, companies drew down revolvers, issued debt, cut capital expenditures (capex), halted share repurchases—whatever it took to conserve cash for the troubling times ahead. 

  • A few months later, after massive government stimulus and a recovering economy, many are awash in cash and trying to figure out what to do with it—or not do with it.
  • At a recent NeuGroup meeting for large-cap companies, several treasurers said their companies’ cash balances are several times higher than normal, echoing a refrain being heard across the NeuGroup Network this fall.

Temptation and perspective. Among the fresh insights about excess cash voiced at the large-cap meeting: Treasury’s role in keeping corporates from making potentially rash short-term decisions designed to keep activists and Wall Street analysts happy. 

  •  “I worry about the temptation for senior management and the board to deploy cash as quickly as possible,” one treasurer said. 
  • As a result, treasury may need to add perspective when C-Suite leaders who previously considered an M&A deal out of reach reconsider as cash balances rise.
  • One member said his team seeks to keep management focused more on the company’s net debt level and less on reducing cash. “That’s what we actually talk about in earnings calls—the change in net debt year to date, and when we think about deleveraging,” he said.

Better safe than sorry. The size and timing of more federal aid to address the pandemic and anticipated rise in infections remains uncertain, prompting treasurers to recommend caution.

  • “Enough uncertainty remains that we can tell the story: We’ll continue to monitor cash and slowly drift [the level] back down,” a treasurer at a large manufacturer said.
    • “That’s absorbing a lot of time and thought around just what is that strategy, and how does it look over the next year or so.”

Step out on the yield curve? Terming out cash to pick up extra basis points is the approach one member’s team is contemplating. Other treasury teams are considering alternative asset classes (see this story). 

  • Some corporates, though, may want to reduce at least some cash, especially those with higher revenues expected during the holiday season.
  • That’s not so easy when capex has already been slashed, and the social justice movement poses political risks for companies rewarding investors before employees and their communities during a pandemic. 
  • “We’ve seen some companies turn on share repurchases with the caveat that they’re increasing wages,” one member said, adding his company is thinking through when to resume repurchases given that Covid looks far from over. 

Street pressure. Some Wall Street firms are pushing liability management to take advantage of historically low rates. 

  • But one treasurer said that after paying up to issue precautionary liquidity, some companies must now pay a premium to buy back the debt, making it better to hold on to the cash in case the pandemic worsens and the extra funds are needed. “We’re in wait and see mode,” the treasurer said.
  • Another member described a recent exercise in which his team reviewed peers’ capital structures and had to explain to the board why a competitor has lower weighted average coupons and maturities. 
  • “We had to remind the board that the company had to pay up for that, put cash upfront in order to refinance into a longer term,” he said.
0
0
Read More Read Less
Contact Us
0
0

Hunting Yield: Investment Managers Weigh TIPS, Munis, Credit Risk

Treasury investment managers weigh options for finding returns in a low-rate environment.

Treasury investment managers looking to boost returns in the current low interest-rate environment discussed a range of options at a recent NeuGroup meeting sponsored by Morgan Stanley, including Treasury inflation-protected securities (TIPS) and municipal bonds.

  • “We’re looking for alternative investment ideas to get attractive yield,” one member said. Her company is looking to return to investing overseas cash in low volatility net asset value (LVNAV) money market funds, an asset class it exited in March.
  • Another investment manager said, “We are flooded with short-term cash, which is not great,” adding that her company is trying “to figure out how to deal with low rates.”

Treasury investment managers weigh options for finding returns in a low-rate environment.

Treasury investment managers looking to boost returns in the current low interest-rate environment discussed a range of options at a recent NeuGroup meeting sponsored by Morgan Stanley, including Treasury inflation-protected securities (TIPS) and municipal bonds. 

  • “We’re looking for alternative investment ideas to get attractive yield,” one member said. Her company is looking to return to investing overseas cash in low volatility net asset value (LVNAV) money market funds, an asset class it exited in March.
  • Another investment manager said, “We are flooded with short-term cash, which is not great,” adding that her company is trying “to figure out how to deal with low rates.”

Why not reach for yield? In a discussion about credit risk, one member asked why investors who believe in the idea of a “Fed put” would not reach for yield during “a carry trade environment” where it “feels like fundamental research matters less and less.”

  • Earlier, a Morgan Stanley portfolio manager said that it is “hard to think credit is wildly attractive here” given the contraction in spreads since March and that recovery “will mean tighter spreads than today.”
  • In response to the member’s question, he agreed with the idea of a Fed backstop and said he has a hard time seeing a scenario where “spreads blow back out.”
  • He said that if spreads widened from about 130 now to 145 to 150, “we would buy.” But he said that things may not go as the market expects and recommends investors be selective. 

Tri-party repos, anyone? One manager is using tri-party repos, where a clearing bank acts as an intermediary and alleviates the administrative burden between two parties engaging in a repo. She said her company “disregards collateral” and proceeds if her team is “comfortable with the bank risk.” 

  • The company is also investing in three-to-five year financial and nonfinancial corporate bonds.
  • It holds short-term government paper, including some Swiss and Japanese issues swapped back into dollars and yielding about 40 basis points.
  • The manager is considering buying muni bonds, in part because she believes the timing is likely better now for investors than issuers.

Mulling munis. Other members asked about munis and one who invests in them offered to discuss offline the approach the company takes. 

  • The member who owns munis believes that another round of fiscal stimulus could benefit the asset class.  
  • A Morgan Stanley portfolio manager said munis may make sense for some corporates, depending on their tax situation and what happens to corporate tax rates after the election. 
  • A municipal strategist at Morgan Stanley estimates states will lose $180 billion and local governments $90 billion in revenue through mid-2021 because of the pandemic and recession.
  • He said while there may be downgrades and different states will make different choices affecting credit ratings, “I don’t think default is the way to frame the discussion.”

TIPS debate. In response to one member who expressed interest in TIPS but has not figured out how they fit it to the company’s overall strategy, another member offered to put the first in touch with a “TIPS expert” who has done internal modelling with machine learning.

  • A Morgan Stanley manager, who said TIPS had performed poorly in March and April, warned that “TIPS aren’t Treasuries” and that they have a “huge liquidity premium.” He said TIPS have a high correlation to high-quality corporates and “the extra yield doesn’t look that attractive.”
0
0
Read More Read Less
Contact Us
0
0

Talking Shop: How Well Does Quantum Manage Interest Rate Swap Accounting?

Member question: “For those who use Quantum as their TMS, do you also leverage Quantum for hedge accounting, and if you do, does Quantum (in your opinion) manage interest rate swap accounting well?

  • “We have been using Reval for a while, but just wanted to know if people have been able to leverage Quantum V6+ for hedge accounting, including interest rate swaps.”

Member question: “For those who use Quantum as their TMS, do you also leverage Quantum for hedge accounting, and if you do, does Quantum (in your opinion) manage interest rate swap accounting well?

  • “We have been using Reval for a while, but just wanted to know if people have been able to leverage Quantum V6+ for hedge accounting, including interest rate swaps.”

Peer answer 1: “When we put our interest rate forward starting swaps in place a few years back, Quantum did not have the accounting capabilities to handle what we needed so it was kept offline in Excel. That could be different now in 6.9, but we have not explored what is possible in the new version.”

Peer answer 2: “When we deployed Quantum, we were ‘sold’ the IRS functionality, but it never materialized. We had previously used Reval for IRS and FIS’s Sungard for our TMS. We hoped Quantum would bring it under one roof, but we had to stick with Reval for the IRS piece.

  • “We ultimately moved away from Reval and to Chatham. We are very pleased with Chatham and use them for FSSs, IRSs, and XCSs.”

NeuGroup Insights offered FIS Quantum the opportunity to comment. A spokeswoman for FIS declined.

12
0
Read More Read Less
Contact Us
12
0

Taking the Right Steps on the Road to Robotic Process Automation

A risk manager warns that RPA should not be used a Band-Aid.

One NeuGroup member recently described to peers the benefits and challenges of using robotic process automation (RPA) and robotic desktop automation (RDA), a form of RPA that requires humans to trigger an action performed by a bot.

  • The member adopted automation to document trades his team previously input manually into its treasury management system (TMS), a time-consuming task that also introduces the possibility of human error.
  • The new process, using software from UiPath, has required hours of training, programming and documentation, but has led to faster, more reliable tracking of data, the member said.
  • His presentation showed the steps involved in the process of documenting a cash flow hedge in the TMS.

A risk manager warns that RPA should not be used a Band-aid.

One NeuGroup member recently described to peers the benefits and challenges of using robotic process automation (RPA) and robotic desktop automation (RDA), a form of RPA that requires humans to trigger an action performed by a bot.

  • The member adopted automation to document trades his team previously input manually into its treasury management system (TMS), a time-consuming task that also introduces the possibility of human error. 
  • The new process, using software from UiPath, has required hours of training, programming and documentation, but has led to faster, more reliable tracking of data, the member said.
  • His presentation showed the steps involved in the process of documenting a cash flow hedge in the TMS.

The next stage. The member explained some of his vision for RPA use: “Right now, that bot is on a desktop, the real benefit is pushing that to the server. The long-term ambition is the trades go into our TMS, they get picked up by the bot that creates all the trade deals, and then creates the validation reports.”

  • Moving to RPA on the server will free up more time for the team.

Not so fast. Like other NeuGroup sessions on RPA, this one included a healthy dose of warning about automating a flawed process. The presenting member advises companies considering RPA first look at how their own processes can be made more efficient.

  • “Come in with the basic principle that RPA/RDA shouldn’t be used as a Band-Aid,” he said.
  • “These systems shouldn’t be used to mend a broken process. You need to go back first and look at the process itself and see if the process can be fixed rather than creating this as a patch.”
  • Custom-made bots require extensive programming to create and training to use, so the member said the first step is to evaluate if the process that they automate is truly valuable. 

Documentation and understanding. The member stressed the importance of creating documentation alongside bots, so new employees can understand the actual process itself, an additional resource commitment.  

  • “There needs to be a standard approach on how these are put together,” he said. “It’s a relatively heavy lift in terms of documentation, and what will allow us to make changes like this to the underlying systems.” 
  • Another member who uses similar software has concerns about overreliance on bots. “When I transition out of my role and someone comes in, I can familiarize them to some degree, but they have to go out there and really understand what everything is created to do,” he said. 
    • “You’re really just pushing a couple of buttons rather than performing the work in-house—you lose some of the understanding of the process.” 

The resource commitment. Though some members have had positive experiences with automation, one warned that, depending on what you are automating, it might not be worth it.  

  • “Automation needs prioritization from a senior level and buy-in on the system resource side, as it takes up a lot of time to train the users who ultimately use the process,” he said. “The initial training is time-consuming, and the resource challenge for IT is massive.” 
  • Another member found that the annual cost of creating the system and paying for a server to implement full-process automation was equivalent to the salary of two full-time employees and couldn’t justify the trade-off. “It’s not going to help me two FTE’s worth. I could never make that pay off,” he said.

Inside job. Another member who implemented RPA uses internally developed tools rather than a platform like UiPath. “We’re also implementing a lot of automatic processes that comply with our audit procedures with very intentional human intervention,” he said. “We have tools built in-house through software engineers in treasury. When it comes to interfacing, we code it directly in-house.” 

0
0
Read More Read Less
Contact Us
0
0

Why Some Bankers May Root for a Democratic Sweep

Founder’s takeaways from the Bank Treasurers’ Peer Group’s first fall meeting.
 
By Joseph Neu

Members of the BTPG have been meeting in the spring for 16 years running, and debuted their Fall Edition meeting this week, sponsored by Morgan Stanley. Here are a few takeaways I want to share.

Founder’s takeaways from the Bank Treasurers’ Peer Group’s first fall meeting.
 
By Joseph Neu

Members of the BTPG have been meeting in the spring for 16 years running, and debuted their Fall Edition meeting this week, sponsored by Morgan Stanley. Here are a few takeaways I want to share.
 
Banks have enough capital. The expectation is that US banks will pass the next two stress tests, even with with Covid-19 inspired stress scenarios, indicating everyone is well capitalized.

  • This will free up buybacks and dividends for those that halted them for political reasons. 

War for deposits is over.  The massive liquidity infusion by the Fed, stimulus and an unfriendly rate environment has ended the war for deposits that banks in the US were waging pre-Covid.

  • Instead, US banks are turning away deposits, especially by adjusting pricing and fee to discourage them.
  • Indeed, if you take a close look at ECR and other fees, you may already be paying your bank to hold your money, or effective negative pricing,

A Democratic sweep is NIM (net interest margin) friendly. The outlook for the banking sector will be much improved if the Democrats take the White House and the Senate in the upcoming election.

  • This would end the logjam on fiscal stimulus, making bank reserves for credit losses suddenly excessive.
    • With infrastructure spending likely as well, this will push up inflation expectations to the point where the long end of the curve may rise and become more NIM-friendly—all good news for banks.
  • The bad news is that the regulatory edicts that raise their cost of capital and liquidity will tick up, too, and banks are already losing their competitive edge to less-regulated funding platforms.
0
0
Read More Read Less
Contact Us
0
0

Tonic for Zoom Fatigue: Shorter Meetings—and a Day Without Them

NeuGroup Members discussed their approaches to making WFH situations more palatable.

“Six hours on Zoom is like 10 hours in the office,” one treasurer of a mega-cap company said during a recent NeuGroup meeting (yes, a Zoom meeting), quantifying a feeling about the side effects of virtual meetings. Almost everyone who has been working from home for seven months knows what she means.

  • At the same meeting, another treasurer said he is encouraging his team “not to book 30-minute calls, to make them 25 minutes instead. If you can, put headphones in, do one-on-ones while walking.”

NeuGroup Members discussed their approaches to making WFH situations more palatable.

“Six hours on Zoom is like 10 hours in the office,” one treasurer of a mega-cap company said during a recent NeuGroup meeting (yes, a Zoom meeting), quantifying a feeling about the side effects of virtual meetings. Almost everyone who has been working from home for seven months knows what she means.

  • At the same meeting, another treasurer said he is encouraging his team “not to book 30-minute calls, to make them 25 minutes instead. If you can, put headphones in, do one-on-ones while walking.”

Shaving time. At another meeting, of FX risk managers, members compared notes on how their companies are trying to fight virtual meeting fatigue.

  • One member kicked off the conversation, saying, “One of the things I implemented is if I’m scheduling a meeting for longer than 30 minutes, I only schedule them for 45 to 50 minutes to give people time to get up between meetings.”
    • Many other members have similar policies. “We start meetings 5 or 10 minutes after the hour or half-hour to allow for breaks and parents to help their children log into class,” one member said.
    • Another responded that “some people are going to be late anyway, why fight it?”
    • “We also implemented 25- and 50-minute internal meetings,” a third member commented.

Meeting moratoriums. In addition to shorter meetings, one member told the group, “We also have no meeting Fridays. It has been nice.” Another said his company has a no meeting Wednesday rule.

  • No surprise, the idea of a day without meetings struck a chord with peers who don’t currently have them. One said, “The no meetings on Fridays must be so nice.” Another said she “will have to implement” the policy at her company.
  • But one member, speaking on a Thursday, had a warning: His company has a no-Friday meeting rule “but somehow I have seven meetings tomorrow.”
0
0
Read More Read Less
Contact Us
0
0

Retailers Assess Capital Structure Amid Signs of Rebound

As the economy revives, companies pay down revolvers, resume buybacks and assess counterparty risk. 

At a recent NeuGroup meeting of treasurers at retailers, sponsored by U.S. Bank, members discussed stock repurchase programs, paying down revolvers and monitoring the impact of capital structure changes on leverage ratios and credit ratings.

  • Members discussed moving from preparing for worst case scenarios in April and May (by increasing liquidity, initiating new revolvers) to more recent moves made in anticipation of returning to more normal operations.

As the economy revives, companies pay down revolvers, resume buybacks and assess counterparty risk. 

At a recent NeuGroup meeting of treasurers at retailers, sponsored by U.S. Bank, members discussed stock repurchase programs, paying down revolvers and monitoring the impact of capital structure changes on leverage ratios and credit ratings.

  • Members discussed moving from preparing for worst case scenarios in April and May (by increasing liquidity, initiating new revolvers) to more recent moves made in anticipation of returning to more normal operations.

Stock repurchase programs. After almost every company suspended ongoing or planned stock buyback programs, some have started up again while others are contemplating not if, but when their plans will resume. 

  • One member’s company announced the resumption of a buyback program in September which had been suspended in March.
  • There was widespread acknowledgement that restarting buyback programs can send a signal to the market that requires consistency with messaging by investor relations and other stakeholders.

Repaying revolvers. Most companies responded to the pandemic by quickly drawing down revolvers to increase liquidity in the late spring and early summer.

  • One member asked the group, “How many of you have publicly stated leverage targets, and how much did it impact the strategies you selected to respond in this environment?”
  • The end of lockdowns and signs of recovery have prompted most companies to largely pay back these defensive draws as concerns have abated.

Counterparty policies. Some members need to adjust counterparty risk policies after bumping up against volume and proportion limits with some of the banks they were using to deploy the excess cash.

  • This has kicked off critical decisions about how to balance maintaining banking relationships while increasing the scrutiny of the credit risk exposure to their most important counterparties.
0
0
Read More Read Less
Contact Us
0
0

Transforming Treasury: The Power of a Data Warehouse and BI Tool

How one tech company is making use of better centralized data to improve forecasting.

Better data makes for better forecasts, reporting and data analysis. At a recent NeuGroup meeting, one member of a large technology company’s treasury team described the results of a two-year project to create a global treasury data warehouse to raise its data game.

  • The company’s vision: a centralized data repository with BI reporting that integrates and organizes bank statement, market, ERP and forecasting data.
  • The benefits of warehouses: data can be more readily viewed, analyzed with business intelligence (BI) tools and fed into dashboards for on-demand reporting.
    • Once the data is in one place, machines, algos and artificial intelligence (AI) can learn from it.

How one tech company is making use of better centralized data to improve forecasting.

Better data makes for better forecasts, reporting and data analysis. At a recent NeuGroup meeting, one member of a large technology company’s treasury team described the results of a two-year project to create a global treasury data warehouse to raise its data game.

  • The company’s vision: a centralized data repository with BI reporting that integrates and organizes bank statement, market, ERP and forecasting data.
  • The benefits of warehouses: data can be more readily viewed, analyzed with business intelligence (BI) tools and fed into dashboards for on-demand reporting.
    • Once the data is in one place, machines, algos and artificial intelligence (AI) can learn from it.

Challenges. Treasury at the company uses data from more than 25 internal and external systems with over 100 datasets.

  • Multiple applications need access to common datasets.
  • Individual teams have unique data reporting needs that may require more robust functionality than available with the TMS or other systems. Not everyone has access to all datasets, making permissions a problem.
  • Forecasting requires significant custom configuration.

Solution. An illustration of the system’s basic architecture showed that most data flows through the company’s TMS into the data warehouse, with the exception of Bloomberg market data. The member said it was “better to start with this than do everything at once.” The data from the TMS includes:

  • Incoming trade requests
  • Trade data
  • Bank statement data
  • Core treasury data

Use cases for the BI tool. Toturn the data into actionable information, treasury makes use of an internally-developed BI reporting tool that supplements TMS reporting and can embed reports in web apps. The member described three use cases:

  • Cash forecasting takes bank data from US bank partners loaded into the warehouse and makes use of machine learning (ML), a process the member said took considerable time to develop. 
    • The dashboard shows the forecast by cash flow type and by various models.  
    • The company’s future plans include using ML forecasts internationally.
    • A lesson learned: you need three years of historical data for ML.
  • Counterparty exposure uses data from the TMS and Bloomberg market data and involves numerous calculations in order to set maximum exposure levels for each bank. The tool was built with the company’s fintech team. 
    • The limits can change based on the credit perspective and the size of the company’s cash level as well as changes in the bank’s tier 1 capital.. 
    • Treasury’s cash management team gets involved if the limits are exceeded and senior leaders receive the information as well.
  • FX settlements helped address challenges faced by the company’s middle office, which can now see if the cash management team has held up settlements looking at a dashboard comparing the amount of FX trades settling to the amount of debit matching cashflows found.

Lessons and plans. In addition to the data requirements for ML, the member said treasury needs to limit data in the warehouse because a lot is “not clean” and needs to be properly categorized. “We need to be careful of the systems we integrate and make sure the data is actually useful,” he said. 

  • That said, the company plans to integrate new datasets and use new BI tools going forward. Other lessons and plans:
  • Technical program managers or data engineers are needed for data integrations. Another member at the company said the engineers are more efficient at getting data on the site. 
  • Work with the information security team to build a timeline for security reviews.
  • The company plans to add training on the systems to improve the user experience. Thus far, use by treasury has all been self-taught, the member said. 
0
0
Read More Read Less
Contact Us
0
0

Impact Investing: Supporting Underserved Communities with Customized Loans

RBC’s customized investments help corporates reach specific groups and areas.

Increased attention on persistent racial disparities in wealth, income and home ownership in minority communities is motivating many corporates to look for new ways to make a difference through investments and deposits.

  • At a recent Visual Interactive Session, one NeuGroup member described the benefits of impact investing using a tailored and targeted approach offered by RBC Access Capital, part of RBC Global Asset Management.
  • “With the RBC team, we were able to develop a program that uses the money we have allocated to fund loans made by community development financial institutions and other lenders in traditionally underserved areas in support of affordable housing,” the treasurer of the member company said.

RBC’s customized investments help corporates reach specific groups and areas.

Increased attention on persistent racial disparities in wealth, income and home ownership in minority communities is motivating many corporates to look for new ways to make a difference through investments and deposits.

  • At a recent Visual Interactive Session, one NeuGroup member described the benefits of impact investing using a tailored and targeted approach offered by RBC Access Capital, part of RBC Global Asset Management. 
  • “With the RBC team, we were able to develop a program that uses the money we have allocated to fund loans made by community development financial institutions and other lenders in traditionally underserved areas in support of affordable housing,” the treasurer of the member company said. 
  • RBC’s strategy—which involves mortgage-backed securities—allows the company to “support the communities in which our employees live and work, but do it in a way that gives us confidence to ensure that we’re going to have preservation of capital consistent with our needs,” the member said.

How it works. At the core of RBC’s offering are separately managed accounts (SMAs) and mutual funds that primarily invest in pools of loans in the form of mortgage-backed securities (MBS) or other government guaranteed securities.

  • Ronald Homer, RBC’s chief strategist of US impact investing, said the firm incentivizes originators to make loans in communities targeted and specified by the investors. Those loans are then bundled into securities.
  • Not only have we found that these securities perform as well as securities made of the same type of loans in broader communities,” Mr. Homer said, “In many instances they perform better than the generic securities because of the idiosyncratic nature of the performance of the borrowers.” 
  • The minimum investment for an SMA, which the NeuGroup member is using, is $25 million. Lesser amounts are invested in mutual funds that also allow investors to target specific communities and geographies as well as those the fund already supports.
  • RBC’s strategies support low- and moderate-income individuals and communities, but can also be targeted specifically to Black, Indigenous and people of color (BIPOC) communities.

Customization. RBC Access Capital can customize for criteria including businesses owned by women, minorities and veterans. And the securities can reflect a company’s investment criteria in terms of liquidity, duration and credit quality.

  • “The client chooses the risk benchmarks and parameters,” Mr Homer said. “And we find the securities to match up to that benchmark and perform well.” 
  • In the case of the NeuGroup member, RBC designed a strategy to maximize liquidity and minimize volatility. The focus of the SMA investments are affordable housing in the San Francisco Bay Area. The member’s investments also support small businesses.
  • Whatever the focus, Mr. Homer said that to affect change, a program must have scale and sustainability. That is achieved with home loans and MBS, he said, because of the access to a liquid secondary market.
0
0
Read More Read Less
Contact Us
0
0

A Green Bond Deal With Environmental and Social Benefits

Founder’s takeaways from the Treasurers’ Group of Mega-Caps 2020 H2 meeting.

By Joseph Neu

A green bond that moves the needle on E&S. One member shared insight from his company’s recent green bond offering that included a pair of African-American-owned investment banking firms among the four lead underwriters.

Founder’s takeaways from the Treasurers’ Group of Mega-Caps 2020 H2 meeting.

By Joseph Neu

A green bond that moves the needle on E&S. One member shared insight from his company’s recent green bond offering that included a pair of African-American-owned investment banking firms among the four lead underwriters.  

  • Not only is this member company breaking new ground with its second green bond, leveraging the experience and reporting infrastructure established with the first, but it is paving the way for further diversity firm involvement in this important issuance segment by bringing in firms from day one and making them true partners in the deal.
  • His company also asked the two bulge-bracket lead underwriters to assign minority bankers to leading roles on their deal teams to further promote professional diversity on the part of its vendors.
  • Few have gone farther to meaningfully tick the E and S box at the same time—well done. The economics of the bond were also groundbreaking, suggesting that it does pay to do good. 

Contingency plans for an election year. With US Presidential elections less than 40 days out, members have been working on contingency plans, including those on the outlook for the dollar, US interest rates and especially those involving a retroactive corporate tax increase well as other measures impacting multinational tax planning.  

  • Liability management trades have picked up as a result, as has analysis of global liquidity management structures including in-house banks and where to locate them. A close and contested election could also trigger market events that treasury teams should be ready for.
0
0
Read More Read Less
Contact Us
0
0

Dangling Carrots in Supply Chain Finance to Boost Sustainability

HSBC’s SCF incentives help a big retailer make progress on sustainability goals.

The pandemic has prompted companies to pay more attention to their supply chains, to support key suppliers and make them more resilient and sustainable.

  • A recent HSBC survey found that 70% of companies want to improve control over supply chains, half seek more transparency, and a third want to accelerate making them more environmentally sustainable, planning investments over the next 12 to 18 months to do so.
  • The assistant treasurer (AT) of a major retailer explained to peers at a recent NeuGroup virtual meeting how his company teamed up with HSBC to use the corporate’s existing supply chain finance (SCF) programs to motivate suppliers to meet sustainability goals.
  • He noted HSBC’s publicly announced targets to provide sustainable financing and power the bank using only renewable energy, saying, “We knew the bank had strong commitments around sustainability, so we wanted to see if they wanted to put some skin in the game around our suppliers.”

HSBC’s SCF incentives help a big retailer make progress on sustainability goals.

The pandemic has prompted companies to pay more attention to their supply chains, to support key suppliers and make them more resilient and sustainable.

  • A recent HSBC survey found that 70% of companies want to improve control over supply chains, half seek more transparency, and a third want to accelerate making them more environmentally sustainable, planning investments over the next 12 to 18 months to do so.
  • The assistant treasurer (AT) of a major retailer explained to peers at a recent NeuGroup virtual meeting how his company teamed up with HSBC to use the corporate’s existing supply chain finance (SCF) programs to motivate suppliers to meet sustainability goals.
  • He noted HSBC’s publicly announced targets to provide sustainable financing and power the bank using only renewable energy, saying, “We knew the bank had strong commitments around sustainability, so we wanted to see if they wanted to put some skin in the game around our suppliers.”

Dangling carrots. The retailer had also announced significant greenhouse gas reduction goals. Working with the bank, using the existing SCF programs, it created two tiers—green and greener—in which suppliers can receive discounted invoice financing.

  • Participants must “set smart goals for sustainability, and then agree to share them publicly, because we think that’s a really important step—not just making the commitment but telling the world about it,” the AT said.
  • Partnering with a firm leveraging big data across the entire supply chain to score the sustainability of different products, the company and HSBC created a mechanism to determine if suppliers’ have succeeded in meeting their goals.
  • “So depending on the supplier’s percentage improvement, it would qualify for the better or best financing rate,” the AT said.
  • The carrots are attractive: tiers provide discounts ranging from 20% to 30% from the base rate.
  • “So not just a rounding error,” said Tom Foley, head of consumer/retail coverage, HSBC, adding, “If the pricing tiers are big enough, these are really significant savings for the green and greener suppliers.”

Suppliers give thumbs up. Among the company’s hundreds of suppliers already onboarded on to the SCF program, about 10% qualified for discount pricing, Mr. Foley said, adding that the incentives have increased the number of suppliers in the program by 40%, with 20% qualifying for the discounts.

  • “This program has seen the fastest growth of all our programs globally,” the AT said.
  • As a buyer-based program, it is “KYC light” to join, requiring relatively little data. “It’s easier to handle, and easier and faster for suppliers to be onboarded into the program,” Mr. Foley said.
  • The company ultimately worked out the supplier tiers and retains the flexibility to manage its own supplier network—HSBC at arm’s length.

Challenges? The toughest issue, Mr. Foley said, was getting far-flung bank and treasury executives to agree to the tiering concept and its benefits. Once the parties signed off, it took fewer than four months to make the necessary changes to the existing program, and the KYC-light nature made it easy to bolt on new suppliers.

  • Building the program on the existing SCF rails required minimal technology development.
  • “The bank had to make an investment into the business, and once we convinced everyone it was the right thing to do, getting it up and running didn’t take as long as one might think,” Mr. Foley said, adding that the bank anticipates making up over the long term any upfront financial losses.
0
0
Read More Read Less
Contact Us
0
0

Tough Love Is What You Want From a Career Sponsor

Takeaways from the latest Women in NeuGroup event, sponsored by Deutsche Bank.

Women—and men—who seek sponsorship to help them advance professionally should expect the relationship—if it’s a good one—to involve some tough love.

  • That insight was among the key takeaways from a Women in NeuGroup virtual meeting held this week.

Takeaways from the latest Women in NeuGroup event, sponsored by Deutsche Bank.

Women—and men—who seek sponsorship to help them advance professionally should expect the relationship—if it’s a good one—to involve some tough love.

  • That insight was among the key takeaways from a Women in NeuGroup virtual meeting held this week.

Sponsorship is not mentorship. Tough love is one way to distinguish sponsors from mentors—a difference addressed at the spring WiNG event as well.

  • While mentors may offer you a shoulder to cry on and help vet your ideas, sponsors won’t sugarcoat your weaknesses. They will tell you what you need to work on to get to that next level in your career. You want someone who will talk you up to others but challenge you and help you develop.
  • A sponsor is someone who wields power over decisions at your organization and will provide unyielding promotion on your behalf when you’re not in the room, helping pave the way for advancement.

Give to get. The most effective sponsor relationships are built on the idea that you’ve got to give to get (a central tenet of NeuGroup peer groups). In other words, you need to bring value to the table to receive what you want.

  • One speaker suggests asking yourself if there something you can do for the sponsor that matters to them? Do you have insights on anything, can they learn something new from you? Also:
  • You can’t just wait for a sponsor to find you, but you can’t just target anyone either. Be strategic and think about what you’re going to contribute to a relationship.
  • Be truthful with yourself when you need a sponsor versus a mentor. If a sponsor’s advocacy is going to present a “jetpack” for your career, make sure that you’re ready to seize all opportunities that result.

Timing is everything. One panelist observed that many executives who are no longer travelling have more time to work and breathe. That means more opportunity for you to talk to them. However, since you won’t be running into them in the cafeteria anytime soon, you have to be more deliberate about asking for their time.

  • Just make sure to be specific about what you want to talk about. Provide background and questions to show that you are mindful of their time and why you are coming to them and not someone else.
  • One panelist, a treasurer, said that in one-on-one meetings, 99% of men bring a “talk sheet” to highlight their accomplishments and 95% of women don’t. However, for her it’s more important to “help me see what you are thinking” and to see that the person is forward thinking, sees the big picture and their role in it.

Hedge your bets. Beware of changing circumstances: A sponsor might leave the company or otherwise lose power so don’t have just one; this advice was from a panelist at a bank where turnover is likely higher than in your company. Other insights and advice:

  • Many meeting participants said they only realized they had a sponsor in hindsight, and they don’t know if they currently do! You won’t always know who your sponsors are, so be prepared to shine and seize opportunities when they’re presented.
  • You might think your work speaks for itself, and of course it’s very important to get the work done. But don’t be only focused on execution—also put your head up and take credit where credit is due.  
  • And don’t just execute the work, but take time to prepare for meetings you will participate in. If your boss’s presentation includes your work, ask for time to speak about that piece to get visibility.
0
0
Read More Read Less
Contact Us
0
0

Sharing a Bloomberg Terminal From Home: How Long Will It Last?

Treasury teams relying on Bloomberg’s Disaster Recovery services face uncertainty.

During the pandemic, many treasury teams accustomed to sharing a Bloomberg Terminal in the office have made the most of Bloomberg’s so-called Disaster Recovery services (DRS), which has allowed multiple users, working from home, to access a Terminal subscription from different computers.

  • The value of that access has some NeuGroup members worrying about the expiration of their company’s ability to activate DRS as some workers—but not all—return to offices.
  • One member at a recent meeting of risk managers said using DRS has been very helpful, but was told their access would expire within the next month, forcing them to return to their previous workarounds.
  • Another NeuGroup member expressed frustration with the monthly renewal process and the need to prove the company still deserved access to DRS.
  • One member reported having no problems renewing the service.
  • Another, hearing about the option for the first time, saw it as a natural solution for the team’s short-term needs.

Treasury teams relying on Bloomberg’s Disaster Recovery services face uncertainty.

During the pandemic, many treasury teams accustomed to sharing a Bloomberg Terminal in the office have made the most of Bloomberg’s so-called Disaster Recovery services (DRS), which has allowed multiple users, working from home, to access a Terminal subscription from different computers. 

  • The value of that access has some NeuGroup members worrying about the expiration of their company’s ability to activate DRS as some workers—but not all—return to offices. 
  • One member at a recent meeting of risk managers said using DRS has been very helpful, but was told their access would expire within the next month, forcing them to return to their previous workarounds.
  • Another NeuGroup member expressed frustration with the monthly renewal process and the need to prove the company still deserved access to DRS.
  • One member reported having no problems renewing the service. 
  • Another, hearing about the option for the first time, saw it as a natural solution for the team’s short-term needs. 

Bloomberg’s response. A Bloomberg spokesperson, in an email, told NeuGroup Insights, “During this time, Bloomberg is extending the use of DRS for the duration of office closures or ‘work from home’ scenarios that are the result of government mandates in regards to the COVID-19 outbreak.

  • “We continue to revisit limitations to this use case in light of evolving guidance from authorities. We suggest firms contact their Bloomberg reps to understand their options.”
  • The spokesperson also wrote that DRS is intended as a temporary solution to enable remote access for “short periods of time.” 
  • Also, they said, “Bloomberg Anywhere (BBA) is the most appropriate option for long-term remote Terminal access,” confirming that BBA subscribers in effect always have DRS in place, in contrast to shared Terminal users.  
  • In May, NeuGroup Insights reported that Bloomberg had extended DRS use for users sharing a Terminal during the pandemic until the end of June and that it cost $35 per subscriber. 
  • The spokesperson this week did not comment on any end date or the price. 

2
0
Read More Read Less
Contact Us
2
0

Talking Shop: Exploring Minority Bank Deposits Amid Increased Public Interest

Question: “Minority bank deposits: Is your organization active or exploring given increased public interest?”

  • “I’m looking to connect with those with experience in this area and discuss best practices. In addition, I’m looking to identify contacts at any recommend [Minority Depository Institutions].”
  • The member included a link to a Fortune article, which discusses Black-owned financial institutions amplifying the call for racial justice by drawing more private capital into their communities.

Question: “Minority bank deposits: Is your organization active or exploring given increased public interest?” 

  • “I’m looking to connect with those with experience in this area and discuss best practices. In addition, I’m looking to identify contacts at any recommend [Minority Depository Institutions].” 
  • The member included a link to a Fortune article, which discusses Black-owned financial institutions amplifying the call for racial justice by drawing more private capital into their communities. 

Peer Answer: “Hi, we are close to finalizing agreement/structure with a start-up (CNote) which works with credit unions serving disadvantaged communities. 

  • “They basically facilitate a placement of $250K deposits at CUs that they work with, which makes it risk free considering these deposits benefit from FDIC/NCUA insurance. If you want, we can connect on it, and I can provide a bit more background.”
0
0
Read More Read Less
Contact Us
0
0

Talking Shop: Taking the Temperature of Today’s Credit Facilities Market

Member question: “Is anyone extending their credit facilities in this current market? Specifically, facilities with tenors of 3 or 5 years.”

Peer answer 1: “In early Sept., we closed the renewal of a 364-day facility. Given the large size of our overall facility, planning and lender discussion start months ahead of the renewal. At the time we kicked that project off, markets weren’t supportive of longer-dated renewals (none had occurred for jumbo facilities like ours). Good luck with your renewal!”

Member question: “Is anyone extending their credit facilities in this current market? Specifically, facilities with tenors of 3 or 5 years.”

Peer answer 1: “In early Sept., we closed the renewal of a 364-day facility. Given the large size of our overall facility, planning and lender discussion start months ahead of the renewal. At the time we kicked that project off, markets weren’t supportive of longer-dated renewals (none had occurred for jumbo facilities like ours). Good luck with your renewal!”

Peer answer 2: “I asked our capital markets team and they confirmed that, yes, credit facilities are being extended three to five years (based on the latest updates from BofA/JPM).”

Smooth segue to a deeper dive: Find more insights on the state of the revolving credit facility market here.

0
0
Read More Read Less
Contact Us
0
0

The Revolving Credit Dance: Banks Step Out Cautiously

Bank capital challenges and economic recovery are calling the tune on revolver tenors, pricing.

The bank loan market is back in action, but even strong, investment-grade (IG) companies may want to step lightly since lenders still face challenges.

  • Bankers explained in a recent NeuGroup meeting that during the onset of the pandemic, banks’ internal credit ratings for clients often fell further than public rating agencies’, requiring lenders to set aside more capital and potentially shore it up by raising equity or selling assets.
  • Rolling over a 364-day facility should now be a walk in the park, the head of bank loan capital markets at a major global bank told members. Some borrowers with five-year credit facilities that aren’t coming due are avoiding the market, “not wanting to walk into elevated pricing and/or shorter tenors,” he said.

Bank capital challenges and economic recovery are calling the tune on revolver tenors, pricing.

The bank loan market is back in action, but even strong, investment-grade (IG) companies may want to step lightly since lenders still face challenges. 

  • Bankers explained in a recent NeuGroup meeting that during the onset of the pandemic, banks’ internal credit ratings for clients often fell further than public rating agencies’, requiring lenders to set aside more capital and potentially shore it up by raising equity or selling assets.
  • Rolling over a 364-day facility should now be a walk in the park, the head of bank loan capital markets at a major global bank told members. Some borrowers with five-year credit facilities that aren’t coming due are avoiding the market, “not wanting to walk into elevated pricing and/or shorter tenors,” he said.

The tone has changed. Just a few months ago, the banker would have told even highly rated IG companies that the five-year market was not in reach.

  • Now, the five-year market may be available, but banks are “respectfully” requesting borrowers to hold off re-upping longer-term facilities annually unless they are coming due, the banker said. 
  • The capital requirement on a new five-year facility is 100% on day one and steps down each year, “So pushing [out loan tenors] now when there’s still stress in the financial system makes it more difficult for banks,” the banker said.

The brighter side. Most IG borrowers, except those in the travel, oil and gas, and retail sectors, have repaid most of their drawdowns, and consequently pricing has come down. One example:

  • A low IG borrower put in place an eight-month, $1 billion revolver at the height of the crisis, with covenant protections including duration fees and spread steps.
  • Pricing was 40 basis points over Libor undrawn, 200 basis points drawn, and 40 basis points in upfront fees; its recent redo was priced at 25 undrawn, 162.5 drawn, and 20 basis points upfront. Pricing on its core facility before the amendments was 11 basis points undrawn and 112.5 drawn.
  • Banks will now overcommit for attractive credits and participate in syndications, with Chinese banks the exception, the banker said, adding, “We’re seeing declines from them on every capital request and we’ve been told it’s a capital issue, but I believe it’s also a political issue.”

Going forward. Longer tenors will gradually return on a case-by-case basis, the banker said, but when remains uncertain given the pandemic’s unknowns. “To come back entirely, I think we need to see earnings stability with borrowers, and that’s going to be sector by sector,” the banker said.

  • On the pricing front, wallets still count. For the highest-quality companies with large global wallets and minimal Covid-19 impact, there will be plenty of capacity, the banker said, and little if any change in pricing from pre-Covid levels, except maybe a few more basis points upfront. 
    • “Banks will request borrowers to stay at maturities of three years and under, but five years will always get done” for high-quality borrowers, the banker added.
  • In terms of loan size, best not to upsize and if necessary, supplement in the bond market. “Bank facilities are already underpriced, so upsizing them increases that pressure,” the banker said.  

Next summer. Companies skipping the annual re-upping of their five-year facilities may want two-year extensions—a challenge today—come next summer. Banks will still face capital pressure, but given their desire to please clients in hopes of ancillary business, “I wouldn’t be surprised if we get back to the five-year market completely,” the banker said.

  • The banker’s colleague suggested borrowers with that intent start signaling the relationship managers of their lead banks well in advance. “That gives everybody enough time to do their client plans, socialize it internally, and go to their capital committees,” he said.
1
0
Read More Read Less
Contact Us
1
0

SOX-Like Framework Needed for ESG/Sustainability Disclosures

Moving ESG/sustainability information from the web to the 10-K warrants attention.

By Joseph Neu

Members of our group for treasurers at mega-cap companies recently heard a partner from the law firm White & Case share the findings of the firm’s latest annual survey of ESG disclosures in SEC filings by the top 50 companies by revenue in the Fortune 100.

  • The presentation built on a topic raised by the head of ESG at a member company in a NeuGroup session last month.

Moving ESG/sustainability information from the web to the 10-K warrants attention.

By Joseph Neu

Members of our group for treasurers at mega-cap companies recently heard a partner from the law firm White & Case share the findings of the firm’s latest annual survey of ESG disclosures in SEC filings by the top 50 companies by revenue in the Fortune 100.

  • The presentation built on a topic raised by the head of ESG at a member company in a NeuGroup session last month. 

From website to 10-K. Maia Gez, partner in the firm’s public company advisory group based in Silicon Valley, said the volume of ESG disclosures is rising to the extent that more of the information normally found on the corporate website is now finding its way into the 10-K. 

  • “The two tracks are merging,” Ms. Gez noted, “and there is not much clarity on how to blend the two.” 
  • Normally, bringing information from the corporate website to SEC reporting automatically elevates the level of governance required on what is disclosed. 

Disclosure debate. Institutional investors seem to be content with having ESG and sustainability information disclosed on the website, where 11 of the surveyed companies said they follow SASB or TCFD.

  • However, other constituents, starting with the Human Capital Management Coalition, have pressed for disclosures to be made in SEC reporting, emphasizing quantitative measures and the need for greater assurance. 
  • The Commission, however, has thus far been reluctant to impose a mandatory ESG framework or other prescriptive sustainability disclosure requirements for SEC filings. It preferers instead to stay with a more principles-based approach. 
  • SEC Chairman Jay Clayton has noted, for example, that E, S and G are “quite different baskets of disclosure matters and that lumping them together diminishes the usefulness, including investor understanding, of such disclosures.” They vary significantly from sector to sector and by country. 

Due diligence. Still, the trend to incorporate the website information directly or by reference in SEC reporting, including with green or sustainability bond issuance, is already increasing the due diligence on it by financial market counsel. 

  • Any section that remains on the website should have every line vetted and properly backed up.
  • Ms. Gez noted the trend is on the radar screen at her firm and that lawyers dealing with SEC reporting and equity or debt offerings (and 10b-5 opinions) are being brought up to speed quickly on this topic. 
  • ESG and sustainability releases should likely be reviewed by counsel now.
  • Eventually, an expansion of SOX or creating a SOX-like governance and control framework to provide assurance for ESG and sustainability controls will be needed.

Control and compliance. The growing use and importance of ESG and sustainability disclosures will force more companies to bring more of a legal or control and compliance mindset to their ESG/sustainability teams.

  • Internal and outside legal counsel and SOX control and audit teams will likely start playing catch-up quickly to establish governance frameworks around ESG-related disclosures. 

Human capital. First on the list is likely to be human capital management statements, where the SEC has offered specific guidance (90% of companies surveyed make disclosures on this and 70% increased them). Also important:

  • Employee welfare, health and safety and BCP, where 76% included such disclosures.
  • Board oversight of E and S risk is a factor (88% disclosed, 44% increased disclosure).

Materiality. Of course, information on websites is also going to be subjected to additional scrutiny. There, as well as in SEC reporting, treasurers should be advising their companies to be consistent and accurate. 

  • The more material that the information is to the financial picture and value of the firm, the more important it is to get right.
  • If the information is less material, then perhaps leave it out of SEC reporting or even off the website. 
  • Also, ask about the controls and procedures you have in place for incorporating ESG/sustainability information into SEC reporting/offering documents. 
0
0
Read More Read Less
Contact Us
0
0

Busting Talent Silos and Reading the Signs on Hong Kong

Highlights from the Assistant Treasurers’ Group of Thirty 2020 H2 meeting sponsored by HSBC.

By Joseph Neu

Talent development is focused on silo busting. There are two silos in focus for AT members at the moment. The first is the diversity of hires, especially Black and Hispanic professionals along with women, into finance roles.

Highlights from the Assistant Treasurers’ Group of Thirty 2020 H2 meeting sponsored by HSBC.

By Joseph Neu

Talent development is focused on silo busting. There are two silos in focus for AT members at the moment. The first is the diversity of hires, especially Black and Hispanic professionals along with women, into finance roles. 

  • There is also a mandate to make this a long-term effort to build up the capacities and pool of potential candidates for corporate finance roles.
  • The other silo to bust open (though some in treasury are reluctant) is the one dividing treasury, at some companies, from the rest of finance on leadership development rotational programs. This is being evaluated at multiple levels—undergrads, MBA graduates and more senior positions. 
  • Both efforts are made more challenging by the duration of the current work from home environment. Working remotely poses more general challenges, too, for training and development and, with that, succession planning. Both are a perennial talent priority. 
  • However, one member noted a pre-pandemic initiative that is paying dividends working from home: it involves an internal website where employees from across all functions can post projects and needs, even just to have someone do in their spare time, to which anyone in the company can volunteer to help.
    • This uncovers new talent from a diverse pool across any silo to uncover hidden interest in finance or anything else.

Hong Kong signs. Having Hong Kong in its name (and Shanghai), HSBC was asked by a member what corporates should look for to signal that Hong Kong’s role as a capital market center in Asia might be about to sunset. 

  • The answer has to be seen in the context that Hong Kong’s capital market role is not easy to replace and benefits China and the international community; so there is reason to remain optimistic.
  • Financial sanctions, as opposed to carefully worded threats by the US, obviously wouldn’t help the situation.
  • But significant commercial law changes made by China, even if done in response to US moves, would probably be the best signal to indicate when capital flight moves from a contingency plan to an action plan for the majority now still committed to Hong Kong and its capital markets.
0
0
Read More Read Less
Contact Us
0
0

Payments Ownership by Treasury and Other Founder KTAs from GCBG 2020 H2 Meeting

By Joseph Neu

During NeuGroup’s second meeting of the fall season, Global Cash and Banking Group members discussed a variety of cash and payment topics in sessions sponsored by TIS. Below are a few takeaways I wanted to share.

Cash forecasting: one size doesn’t fit all. One member shared the conclusion reached after six months of benchmarking to find an appropriate third-party vendor to improve cash forecasting, that there is no one-size-fits-all solution.

By Joseph Neu

During NeuGroup’s second meeting of the fall season, Global Cash and Banking Group members discussed a variety of cash and payment topics in sessions sponsored by TIS. Below are a few takeaways I wanted to share.

Cash forecasting: one size doesn’t fit all. One member shared the conclusion reached after six months of benchmarking to find an appropriate third-party vendor to improve cash forecasting, that there is no one-size-fits-all solution.

  • The approach has to be tailored to each company and how simple or complex their cash flow model is, how many legal entities they have, etc. This realization has driven the member’s company to approach cash forecasting in a more detailed way for the first time.
  • Their aim, like that of most, is to lower the resource burden and get the same or better forecasting accuracy. This means much-improved access to data to model their cash flows.
  • Once you have the data, you can find the algo, through backtesting, that fits the cash flow stream you want to forecast using AI. A portfolio of different cash flows will logically require a portfolio of algos to get the forecast right–a point driven home in another member’s sharing about the implementation of an AI-cash forecasting tool.

Remote work for higher pay.  Several members from companies based in lower cost of living locations noted a visible trend of top talent choosing to work from home at a new company that pays more. This is particularly pronounced with West Coast tech companies poaching talent.

  • The war for talent is no longer limited to geography, nor by relocation packages to equalize the cost of housing and other costs to maintain an employee’s standard of living.

Own all your payments. While treasury may not own the processing of all payments flowing in and out of the enterprise, the idea of getting more oversight and control over them is compelling.

  • Global transaction banks, meanwhile, are increasingly adding payment solutions of all kinds, especially digital offerings. Covid-19 has just accelerated the trend.
  • Technology firms like TIS and others recognized it early and for years have been building gateways to bridge the divide between banks and their enterprise customers. 

Take full advantage of the opportunity.  Treasury, as the primary bank relationship manager, needs to rethink how it interacts with internal payment functions (AR/AP) to coordinate or manage teams to procure, implement and integrate payment and related data solutions from banks and technology solution providers in a smarter way. 

  • This is important as banks revamp transaction banking services to incorporate merchant services (serving B2C, B2B and the omnichannels in between), into treasury and trade/payment solutions.
  • Looking across the procure-to-pay-cycle for all payment forms and incorporating payment data will make treasury that much better at cash and exposure forecasting/management. That includes by deploying ML, algos and AI on the data.
  • New ideas bred from these efficiencies will flow to supply chain and customer delivery models to open new business opportunities. 
  • And of course, a global bank/digital technology overlay on all transactions, will help keep payments more secure from fraud and other cyber and security risks. 
0
0
Read More Read Less
Contact Us
0
0

Transforming Data Reporting and Analytics With a BI Tool

Qlik Sense has made one treasury risk manager’s team more efficient and nimble.

A financial risk manager at a manufacturer with a decentralized global treasury told peers at a recent NeuGroup meeting that the self-service BI analytics platform Qlik Sense has transformed the company’s data reporting and analysis.

  • A comprehensive report that used to take the member’s team several days to prepare can now be done in a matter of hours with Qlik Sense.
  • “[The data] impacts recommendations to leadership for currencies and commodities,” the member said. “The on-the-fly app creation can lead to on-the-fly analysis.”

Qlik Sense has made one treasury risk manager’s team more efficient and nimble.

A financial risk manager at a manufacturer with a decentralized global treasury told peers at a recent NeuGroup meeting that the self-service BI analytics platform Qlik Sense has transformed the company’s data reporting and analysis.

  • A comprehensive report that used to take the member’s team several days to prepare can now be done in a matter of hours with Qlik Sense.
  • “[The data] impacts recommendations to leadership for currencies and commodities,” the member said. “The on-the-fly app creation can lead to on-the-fly analysis.”

More efficient. “We became a lot more efficient,” she said. “This has made us a lot more nimble and provided additional value to the organization as well.”

  • The BI tool has made the difficult task of melding data from different regions for reporting far less cumbersome, in part by transforming data from the company’s multiple treasury management systems (TMSs) into a format that’s easy to use.
  • “It helps us organize, show rankings, visualize and pull basically any analytics,” the member said.
  • That’s especially important because the manager’s team is being asked to do more analysis and management reporting, including knowing the drivers of FX exposures down to specific product models and volumes.

How it works: inputs. In broad terms, Qlik Sense takes data inputs from a variety of sources and allows the company to analyze and output the data in a multitude of reports. The inputs include:

  • FXall
  • The company’s TMS
  • Exposure templates
  • Essbase (product volume data)
  • SAP

How it works: outputs. Once the data has been processed by Qlik Sense, the risk manager can “slice and dice” information using multiple parameters and filters to produce reports and dashboards showing:

  • Exposure analysis. Qlik Sense allows the team to monitor monthly product volume forecasts to identify potential exposure changes between collection periods, a feature the member called extremely useful.
    • Filters include countries of production, and dashboard pages show the country of sale.
  • Hedge position on a forward, 12-month, forward basis. Dashboards can be exported for management presentations.
  • Counterparty performance.
  • Share of wallet.
  • Volume analysis.
  • Cash flow at risk (CFaR)—period to period analysis, including which currencies and commodities contributed the most to CFaR.
  • SOX control performance.

Learning curve. The risk manager taking advantage of Qlik Sense has a technical background which has made learning and using the tool relatively easier than for some members of treasury who find it intimidating. A small subset of people within treasury use Qlik Sense, the member said.

  • This underscores the need for companies to provide appropriate training to employees who have a range of technical skills.
    • Treasury professionals will in all likelihood need to learn how to use self-service BI analytic tools to stay relevant as more finance teams are asked to do more work with fewer resources.
  • The risk manager is trying to learn more about other BI tools, including those used by many NeuGroup members: Power BI and Tableau.
  • Another member whose treasury team will be using Alteryx, said everyone the company is hiring seems to have a deep knowledge of Python, a programming language.
  • The member using Qlik Sense said she is teaching herself to use Python to keep up, saying, “I don’t think you’re going to get out of Python.”
0
0
Read More Read Less
Contact Us
0
0

Looking Beyond Libor: Engage Vendors, Expect Some Frustrations

Corporates preparing for a transition to SOFR may need to push some systems vendors.

NeuGroup members appear to be making headway to transition floating-rate exposures to the secured overnight financing rate (SOFR) or an alternative Libor replacement. However, in a meeting in which two members detailed their preparations, a major concern arose about third-party vendors’ progress and the need to push them along.

  • Responding to polling questions during the meeting session, 70% said they have compared notes with peer companies about their efforts and progress toward the transition.
  • In terms of their current status, 57% said they were in decent shape, 13% far along, and 30% behind for various reasons.

Corporates preparing for a transition to SOFR may need to push some systems vendors.

NeuGroup members appear to be making headway to transition floating-rate exposures to the secured overnight financing rate (SOFR) or an alternative Libor replacement. However, in a meeting in which two members detailed their preparations, a major concern arose about third-party vendors’ progress and the need to push them along.  

  • Responding to polling questions during the meeting session, 70% said they have compared notes with peer companies about their efforts and progress toward the transition. 
  • In terms of their current status, 57% said they were in decent shape, 13% far along, and 30% behind for various reasons.  

Finding Libor. Systems involving Libor must be upgraded, including treasury management systems (TMSs) and asset systems, if a company has a captive financing arm.  It’s a process one member estimated taking 10 months.  

  • There may also be exposures to Libor, anticipated to no longer function as a benchmark after 2021, that are buried in late fees, intercompany agreements and other contractual arrangements. 
  • “So we’re working with our legal services team and general counsel to identify any agreement that may mention Libor,” an assistant treasurer said.  

Tight timetable. Given the time to implement systems changes and test them, the timetable is already tight, according to one member in discussions with regulators about large multinationals’ challenges, especially if new requirements such as the recently discussed credit-sensitive spread are introduced. 

  • “If market parameters change, and we’re not on that upgrade, that’s a challenge for us,” the member said. “So we’ve been very vocal with regulators about the time it takes to implement those systems.” 

Vendor concerns. No matter how vigilant corporates may be, much depends on vendors upgrading their systems, not just to accommodate using the new benchmarks, but also by transitioning legacy agreements and transactions.   

  • Noting “good engagement” with its vendor, one member said, “We’ve tried to engage them early and often, because a big part of our success will be around getting the consultants we want” to help with the upgrade. 
    • Another peer group member seconded the importance of reserving a consultant who understands the company’s systems. 
  • And good engagement doesn’t mean the upgraded system will solve all the issues. The AT said the TMS will still require treasury to terminate and re-enter new financial instruments, “and that’s a major undertaking.”  

Frustration rising. Another AT said attempts to seek updates on system upgrades from a different TMS vendor went unanswered for months. When the vendor responded to questions about fallback language to transition legacy transactions, it became clear this upgraded system would also require closing and re-entering every contract.  

  • “They claim that they have not been in contact with the ARRC (Alternative Reference Rates Committee, which is guiding the transition to SOFR), which was surprising to me, and they’ve been relying on auditors and customers for feedback on how to implement this,” the AT said.
  • Another member using the same vendor said his team had heard something similar. “There’s not a way to easily make the transition today,” the member said.  
  • Said the first member: “I don’t know who else is using [this vendor], but I would encourage you to get on the phone and push them as hard as possible.”  
0
0
Read More Read Less
Contact Us
0
0