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Spotlight Features

Teaming Up with Tech Firms: Deutsche Bank’s Multifaceted Approach to Cash Management Solutions

Money Is Time: How TIS Simplified One Treasurer’s Bank Connectivity

Connecting to Data to Drive Insights: Ed Barrie on Tech and Finance

The former treasurer of Tableau Software on what questions today’s treasurers need to ask before investing in tech solutions.

In a treasury career that includes positions at Microsoft, Itron and Tableau Software—where he built treasury from scratch—Ed Barrie has made it his mission to dive deep into how corporate finance teams can better leverage technology to connect to data, analyze it and extract insights that drive strategic decisions.

  • In the interview below with NeuGroup CEO Joseph Neu, Mr. Barrie does what he did for years as a NeuGroup member: shares his valuable knowledge of systems and data analytics with other finance professionals, recommending several key questions treasurers need to ask themselves when evaluating tech solutions.
  • You’ll also hear Mr. Barrie’s insights on the challenges facing legacy treasury management systems going up against cloud-based solutions as well as his thoughts on why internal IT departments don’t—and perhaps shouldn’t—prioritize treasury projects and internal financial systems.

The former treasurer of Tableau Software on what questions today’s treasurers need to ask before investing in tech solutions.

In a treasury career that includes positions at Microsoft, Itron and Tableau Software—where he built treasury from scratch—Ed Barrie has made it his mission to dive deep into how corporate finance teams can better leverage technology to connect to data, analyze it and extract insights that drive strategic decisions.

  • In the interview below with NeuGroup CEO Joseph Neu, Mr. Barrie does what he did for years as a NeuGroup member: shares his valuable knowledge of systems and data analytics with other finance professionals, recommending several key questions treasurers need to ask themselves when evaluating tech solutions.
  • You’ll also hear Mr. Barrie’s insights on the challenges facing legacy treasury management systems going up against cloud-based solutions as well as his thoughts on why internal IT departments don’t—and perhaps shouldn’t—prioritize treasury projects and internal financial systems.

Please be on the lookout for future portions of Mr. Barrie’s interview, including details of his latest tech endeavor: Treasury4, a fintech he cofounded where he serves as chief product officer and treasurer.

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Pain You Can Manage and Pain You Can’t: Separately Managed Accounts

SMAs mean accepting KYC and legal dept. pain, but clear communication can save plenty of heartache with managers.

Members joined forces for a panel discussion on the pain points associated with setting up, maintaining and reporting for separately managed accounts (SMAs) at a recent meeting of NeuGroup for Cash Investment. Not surprisingly, the most painful parts are the know-your-customer (KYC) obligations and the legal agreement tug-of-war needed for account setup.

  • The encouraging, somewhat unexpected takeaway: Effective communication and a strong relationship with your asset manager go a long way toward easing the pain of misalignment with the manager.
  • Clear definitions of terms, well-understood parameters and monitoring of execution and performance, along with regular and open communication with asset managers, are critical elements of the SMA relationship.

SMAs mean accepting KYC and legal dept. pain, but clear communication can save plenty of heartache with managers.
 
Members joined forces for a panel discussion on the pain points associated with setting up, maintaining and reporting for separately managed accounts (SMAs) at a recent meeting of NeuGroup for Cash Investment. Not surprisingly, the most painful parts are the know-your-customer (KYC) obligations and the legal agreement tug-of-war needed for account setup.

  • The encouraging, somewhat unexpected takeaway: Effective communication and a strong relationship with your asset manager go a long way toward easing the pain of misalignment with the manager.
  • Clear definitions of terms, well-understood parameters and monitoring of execution and performance, along with regular and open communication with asset managers, are critical elements of the SMA relationship.

Prioritize clarity and dialogue. All members stressed that SMA guidelines shouldn’t be subject to interpretation and warned peers against learning the hard way that managers may have different definitions or understandings than what treasury expects.

  • Avoiding misinterpretations of instructions requires precise language describing types of securities, duration, credit ratings and, for some corporates, ESG ratings.
  • One member said different managers have different styles and recommended using more than one manager in a space to better understand differences and recognize what works best for your organization.
  • Regular, open communication is essential and valuable. One member said the biggest benefit they get from SMAs flows from the relationships with portfolio managers and the intelligence those managers provide.

Lay the groundwork. Don’t get stuck being the net in the frequent ping pong matches between the legal departments of your company and the asset manager. Sometimes it’s a disagreement on boilerplate language that may be resolved by the lawyers communicating directly. Scheduling a conference call is your best and fastest option for legal resolutions.

  • Communicate needs and expectations with both your asset manager and custodial team from the start, beginning with accounting and reporting requirements. Agree to cadence and deadlines for data so month- and quarter-end reporting will be received quickly and without a lot of back-and-forth with managers and custodians.
  • One panelist in the midst of an SMA RFP is using a scorecard to evaluate the operational efficiencies of different managers. For his company, there must be clean connectivity with the trustee, Clearwater, and key treasury technology systems to avoid headaches down the line.
  • Buyer beware: members noted that using different systems for valuations requires reconciliations. One member flagged that it’s often an issue on structured products: “Our SMA managers use Bloomberg, we use Clearwater.” Numbers don’t always match, and minor discrepancies are found that need follow-up.

Time-consuming KYC and legal agreements. Unfortunately, to realize the benefits of separately managed accounts, you must buckle up for the frustrating tasks associated with KYC requirements. Keep in mind that you are tending to two relationships: the asset manager and custodial team; each one has nuances and different areas may mean different requirements.

  • It is pretty rewarding to check off items on your to-do list. However, even when you think you’ve completed everything, banks usually come back and need more. Their requirements change over time.
    • You may have filled out something a year ago, but additional requirements may come into play, or changes have occurred with authorized signers or those allowed to direct or redeem funds. Once you get an SMA in place, assume that it requires constant maintenance.
  • In a perfect world, account opening times with custodians range from 10 days to 15 days before connections, accounting, privilege and cash and trading authorities may be applied. One panelist said, there is a lot more paperwork today than 10 years ago.

Is there an ideal time to shop for SMA managers? Not necessarily, but just make sure they aren’t distracted by M&A, one member said. Looking at the track record of the investing team and leadership helps. And remember that sometimes the large size of a given firm doesn’t get you the attention you want.

  • One member said that with SMAs, you are ultimately betting on people and whether they will they be incentivized to work their best for you. There has been a huge compression across the board, which is a benefit for the buy side: 2021 is better than 2011.
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Cashing in on AI to Boost Accuracy in Forecasting Receivables

Danone North America took an overly manual process, added artificial intelligence, and now gets close to 100% accuracy.

Cash collection during the pandemic has been a big issue for corporates, with many facing uncertainty and lower cash flows. That’s why cash forecasting, and one of its main components, receivables calculations, have become more important than ever. And it’s also why more companies are turning to automation and artificial intelligence (AI) to improve the accuracy of those forecasts.

Fewer lumps and errors. At a recent NeuGroup meeting sponsored by cloud-based autonomous software company HighRadius, Jacob Whetstone, director of invoice to cash for Danone North America, described his company’s journey from a labor-intensive collection forecasting process to a more accurate, automated approach (see graphic).

Danone North America took an overly manual process, added artificial intelligence, and now gets close to 100% accuracy.
 
Cash collection during the pandemic has been a big issue for corporates, with many facing uncertainty and lower cash flows. That’s why cash forecasting, and one of its main components, receivables calculations, have become more important than ever. And it’s also why more companies are turning to automation and artificial intelligence (AI) to improve the accuracy of those forecasts.
 
Fewer lumps and errors. At a recent NeuGroup meeting sponsored by cloud-based autonomous software company HighRadius, Jacob Whetstone, director of invoice to cash for Danone North America, described his company’s journey from a labor-intensive collection forecasting process to a more accurate, automated approach (see graphic).

  • After years of tracking lumpy and error-prone payments from customers, it improved its accounts receivables forecasting to 96% accuracy.
  • “It was a very manual process,” Mr. Whetstone said about the previous AR process. “Sometimes it looked like were accurate, but a lot of the time we were really off.”
  • One issue that contributed to inaccuracy was that it was so time-consuming that the company only forecasted AR twice a year. “June and December,” Mr. Whetstone said, “and not much more than that.”

Putting the focus where it belongs. Savvy companies for years have realized there is cash to be had in some formerly untapped areas and processes and have been slowly incorporating them into their working capital management programs.

  • Nonetheless, companies still are sitting on billions of cash, according to research by The Hackett Group, which calculated companies “were sitting on $1.3 trillion in unused working capital at the end of 2019, including nearly $4 billion” in AR.
  • But instead of collecting that cash, companies are often bogged down collecting the data and doing calculations manually. Mr. Whetstone said this was true at his company. “We spent all this time pulling data together” instead of working with customers to get paid sooner. “We were spending too much time on non-value add activities.” 

Too many variables. One of the issues of trying to accurately predict payments from customers is that there are too many variables to figure out.

  • For instance, one transaction can have more than 60 invoice and customer-level variables to contend with, like invoice dates, customer-specific days payable, and invoice amounts among others. Accounting for all these in a spreadsheet would be nearly impossible or at least take a very long time.

Success through streamlining. After partnering with HighRadius and its AI-based automated cloud cash forecasting tool, the company was able to streamline the process.

  • This meant it was able to take those 60-plus variables, correlate them to reduce that number to about 30, and create more than a dozen algorithms to come up with a predictable payment date. This can then be uploaded into the company’s automated cash forecasting tool.
  • With the automation, Danone has more time to work on the algorithms and tweak them when necessary. And to work with the collections team in its dealings with customers. The automation also allows the company to do monthly forecasts instead of just twice a year.
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Trading with Real Money: Good Schooling for Future Finance Talent

Corporates give high marks to a University of Idaho program where students learn real-world lessons by trading.

Treasury and finance teams searching for talent with the right stuff—and an edge in this tight labor market—might want to take a page from Starbucks and Micron Technology by strengthening their ties to colleges and universities that are finding innovative ways to teach students financial decision-making skills.

  • Micron treasurer Greg Routin and Melanie Canto, a former Starbucks treasurer who is now a senior business transformation leader at the company, spoke at a recent meeting of NeuGroup for Tech Treasurers where they described the value of a program at the University of Idaho where students are given real money to trade.
  • With the dual objectives of capital appreciation and financial education, the Barker Capital Management and Trading Program teaches students high-level academic risk management and trading theory to develop their own strategy for trading individual, funded accounts.

Corporates give high marks to a University of Idaho program where students learn real-world lessons by trading.

Treasury and finance teams searching for talent with the right stuff—and an edge in this tight labor market—might want to take a page from Starbucks and Micron Technology by strengthening their ties to colleges and universities that are finding innovative ways to teach students financial decision-making skills.

  • Micron treasurer Greg Routin and Melanie Canto, a former Starbucks treasurer who is now a senior business transformation leader at the company, spoke at a recent meeting of NeuGroup for Tech Treasurers where they described the value of a program at the University of Idaho where students are given real money to trade.
  • With the dual objectives of capital appreciation and financial education, the Barker Capital Management and Trading Program teaches students high-level academic risk management and trading theory to develop their own strategy for trading individual, funded accounts.

Getting real. “It takes a lot of time to learn the fundamentals of treasury, like market sentiment and money flows,” said Dr. Darek Nalle, the program’s director, who also attended the virtual meeting. “But I believe in learning through real money, in real markets, in real time.”

  • Dr. Nalle said “trading is the hook and the shiny thing” that attracts students to the sought-after program, which has grown from 20 enrollees two years ago to 100 this year from the College of Business and Economics and the College of Agriculture.
  • Equities, foreign exchange, commodities, futures, junk bonds—everything is on the table, but the focus is on learning decision-making. Speculation is discouraged.
  • Students participate in group accounts, each led by an industry professional, which execute about 500 trades per semester; individual accounts start with $15,000.
  • The program takes the “training wheels” off to teach students to “be more comfortable being uncomfortable” and make decisions with “imperfect information,” Dr. Nalle said. In addition, students need to get Bloomberg certified, another helpful tool in the belt for new treasury recruits.

Developing a world view. “I’ve never seen anything like the Barker program,” said Ms. Canto, a University of Idaho alumnus who recruits from the program. Students are “very actively looking outside at what’s going on in the world just by the nature of trading. This isn’t normally taught in schools.”

  • She added, “They’re reading news all day, they know what the trends are, they see them coming down the pipe; that’s unique in early talent. They’re also learning to make decisions with the right amount of information, and that’s usually a gap you see [with recent graduates].”
  • A bonus benefit: Because the program is co-sponsored by the agriculture college, some students possess very real knowledge of the factors influencing the value of certain commodities like dairy, which is a significant risk to manage for a company like Starbucks.

On the map. The program also helps fill talent gaps for companies that lie outside the nation’s major tech and finance hubs, including Micron Technologies, based in Boise, Idaho. Mr. Routin at Micron has employed “roughly a half-dozen” Barker grads, has two on staff now and plans to continue recruiting them. “I have been proactive in developing deep relationships with local universities,” he said

  • “The University of Idaho has differentiated itself in terms of the caliber of students and their willingness to work,” he told peers. “I encourage everyone to develop strategic relationships with a select group of universities to expand your talent pipeline, if you’re not doing so already.”
  • Dr. Nalle added another reason treasurers may want to connect with “real-world” programs like his: cost savings. He said it typically “takes 18-24 months and $300,000 to bring a diploma to usefulness,” but hands-on training can cut that down significantly.

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Using a Framework to Level a Fixed- vs. Floating-Rate Debt Imbalance

The case for having a programmatic, market-agnostic approach to keep floating-rate debt at a desired level.

The vast majority (88%) of corporates polled (see below) at a recent NeuGroup for Capital Markets meeting sponsored by Deutsche Bank are above their target percentage of fixed-rate debt relative to floating-rate; but nearly two-thirds (63%) of the companies either don’t plan to make significant changes (42%) to their fixed-to-floating-rate ratio in response to the current market environment, or they aren’t sure about it (21%).

  • The poll revealed some context that helps explain this seeming disconnect. Members said that the biggest factors influencing the percentages of fixed- and floating-rate debt are the level of cash on their balance sheets (63%), the risk tolerance of management (58%) and the current level of interest rates (58%).
  • The meeting also featured members and Deutsche Bank explaining the value of adopting an internally approved framework to help maintain floating-rate debt at a predetermined ratio to fixed-rate.

The case for having a programmatic, market-agnostic approach to keep floating-rate debt at a desired level.

The vast majority (88%) of corporates polled (see below) at a recent NeuGroup for Capital Markets meeting sponsored by Deutsche Bank are above their target percentage of fixed-rate debt relative to floating-rate; but nearly two-thirds (63%) of the companies either don’t plan to make significant changes (42%) to their fixed-to-floating-rate ratio in response to the current market environment, or they aren’t sure about it (21%).

  • The poll revealed some context that helps explain this seeming disconnect. Members said that the biggest factors influencing the percentages of fixed- and floating-rate debt are the level of cash on their balance sheets (63%), the risk tolerance of management (58%) and the current level of interest rates (58%).
  • The meeting also featured members and Deutsche Bank explaining the value of adopting an internally approved framework to help maintain floating-rate debt at a predetermined ratio to fixed-rate.

Why the fixed-rate cup is overflowing. Many member companies have issued large amounts of fixed-rate debt since the beginning of the pandemic, taking advantage of rock-bottom interest rates, swelling the amount of cash on their balance sheets. And risk-averse senior executives and board members are often not in favor of adding floating-rate debt, or certain types of it, to correct the imbalance, despite the arguments of banks and others that, over time, floating is cheaper than fixed, some members said.

  • “We kept our fixed-to float [ratio] where we wanted it through the [commercial paper] markets, but there was always a discussion with the finance committee about the liquidity risk of the CP markets and where long-term rates were,” one member said. “So when the curve got smashed during Covid—and I think almost every corporate has been doing this—with all the [liability management] exercises that you see, everyone’s taking long duration at low rates.
  • “And now we’re all catching our breath, and it’s like, now I need to get back to my framework and, what is my new framework?” he asked. “Where do I begin to get back to more of an optimal fixed-float mix?”

The benefits of a framework. Another member explained the basis and benefits of having a framework that determines the ratio of fixed-to-floating. The basis: We fundamentally believe that floating-rate debt is going to be cheaper than fixed-rate debt over the longer term,” he said.

  • That long-term perspective helps address questions about interest-rate volatility that might push against sticking with floating-rate debt, he said. “We believe that there is a decent amount of interest expense volatility that we’re willing to take to be able to lower interest expense over the longer term,” he said.
  • The member’s company used an efficient frontier analysis to come up with a framework using a benchmark portfolio that is 40% floating- and 60% fixed-rate debt. “That has done wonders for us, just to make it a programmatic approach and take the decision-making out of it,” he said.
  • The framework helps treasury ground the argument to swap back to floating when it may not be obvious that’s the right call from a market perspective. “We report out where we are against our debt portfolio benchmark on a quarterly basis to senior executives, so they generally know if we’re overly fixed or overly floating.You can say, ‘well here we are against the benchmark,’” he said.
  • One of the Deutsche Bank bankers underscored the value of frameworks during times like now when there is uncertainty about interest rates and the Fed. “For any of these decisions, anchoring to some belief that you think is sensible and realistic helps you manage the gyrations of the market,” he said. “Because as we’ve seen for the last year and a half and we’ll continue to see, the market has moved materially in interest rates.”

Do the math Before the member’s companyadopted the framework, in the wake of the Great Recession and the historically low fixed rates that followed, treasury faced unwavering resistance when it asked for the authority to swap into floating rate debt. “We got to the point where the board said, ‘stop—stop asking,’” he said.

  • So in 2017 the member’s team “did the math” and showed the board that if the company had been at a 60%-40% fixed-to-floating ratio during the previous ten years, it would have saved “triple-digit millions.” That helped pave the way for a change in approach.

Talking swap rates. Of course, not every corporate will adopt a framework, making entry points to swap to floating more relevant than for companies that have a programmatic approach.

  • One member in this position said, “Since we don’t have programmatic, we are picking entry points and I’m of the opinion that absolute swap rates matter and that they’re too low to be advantageous at the moment.”
  • Another member said his team is also looking at the timing of swaps to floating. It did an efficient frontier exercise to help figure out the optimal mix. “We are looking at the term premium, carry, first three years of the swap, is it advantageous to take it now and reassess every year?”
  • “Given most corporates are currently underweight floating, it’s important to think big picture and get floating rate exposure back up instead of waiting for the best entry point,” one Deutsche Bank banker said. “Most companies have learned that it is very difficult to time the market perfectly, so the decision to increase floating rate exposure should be both strategic and tactical over the next few years.”
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Cyber Insurance Reality Check: Stress Testing to Set Coverage Goals

One company got help doing stress tests to report to senior management what cyber coverage it needed and why. 

Corporations scrambling to cope with the rising threat of data breaches and ransomware attacks face the additional, unpleasant reality of soaring premiums (see chart) and shrinking capacity in the cyber insurance market. That’s putting more pressure on finance teams to weigh the potential risks of forgoing or reducing coverage against the high price of having protection.

  • At a recent meeting of NeuGroup for Large-Cap Treasurers, a risk manager at one member company explained in detail how her team responded to a request by the CFO to justify coverage when it came time to renew the firm’s cybersecurity insurance.
  • “You have to allow your team to do a fair amount of diligence,” the member said. In her case, that involved bringing in insurance broker Marsh to do intensive stress testing that revealed the need for increased coverage.

One company got help doing stress tests to report to senior management what cyber coverage it needed and why. 

Corporations scrambling to cope with the rising threat of data breaches and ransomware attacks face the additional, unpleasant reality of soaring premiums (see chart) and shrinking capacity in the cyber insurance market. That’s putting more pressure on finance teams to weigh the potential risks of forgoing or reducing coverage against the high price of having protection.

  • At a recent meeting of NeuGroup for Large-Cap Treasurers, a risk manager at one member company explained in detail how her team responded to a request by the CFO to justify coverage when it came time to renew the firm’s cybersecurity insurance.
  • “You have to allow your team to do a fair amount of diligence,” the member said. In her case, that involved bringing in insurance broker Marsh to do intensive stress testing.

Start by asking the right questions. The member began the cyber insurance assessment process with a basic framework. “First, we decided we needed to dig into what the program gives us, why it’s important and what can we do with it going forward that allows us to grow it in a way that’s responsible and disciplined and still allows us to make our budget.” She devised three critical questions that a stress test at the center of the project must answer:

  • What are the potential losses that drive the company’s cyber coverage and technology errors and omissions (E&O) insurance program?
  • How will the company’s risk profile evolve over the next five years?
  • How much insurance is optimal for the company to purchase, at the most price-efficient structure, given current market conditions?

Prepare for interviews and Monte Carlo. The member worked with Marsh to do a “very detailed” analysis of the company’s preparedness for cyberthreats. The process required interviewing company leaders and “going through risk scenarios to show you the potential cost of that scenario. They can show you what the cost of an event would be under certain variables.”

  • The member described a time-consuming process to get the company’s legal department comfortable with the discoverable nature of what would be discussed with an external group, as Marsh’s analysis required comprehensive access.
  • “We then started the stress test last fall and made 15 leaders available to discuss materiality, risk profiles, long-tail risk events and mitigants,” she said.
  • “Interviews were conducted for eight weeks, and Marsh went ahead with modeling and Monte Carlo simulations; they had a pretty impressive team doing the work. They definitely helped improve the comprehension on our team.”

The bottom line. The study recommended that the company should ultimately double its cyber insurance limits to provide better balance sheet protection. But current cyber insurance market conditions and capacity constraints prevented the company from doing that in one annual renewal cycle.

  • Instead, it will increase its limits by 20% and hope to reach the 100% level in the next three to five years. The cost increase for its total program (primary and excess) this year was 55%. The company also increased its retention by 50%.
  • The member’s presentation indicated that the company had “no significant pullbacks or narrowing of coverage,” but that its business interruption waiting period increased from eight hours to 12 hours.
  • Looking ahead, the member said that “depending on market appetite feedback, we may even consider stripping out tech E&O in the high excess of the cyber program to enable more market appetite.”
  • The company will also seek to raise capacity by looking at carriers in other markets. “We are looking to add more of our global markets from a coverage standpoint once we’re able to travel more easily,” the member said.

Peer feedback. One member responded that his company has struggled to invest in cybersecurity insurance due to the amount of due diligence required. “But you could drive a truck through our current coverage,” so he said it would likely be worth the effort.

  • The presenting member responded that it likely would be, adding that her company’s program is still “relatively inadequate—it’s helpful but still not sufficient.”
  • Another treasurer responded that the presentation was eye-opening. “We don’t have cyber, but after this presentation I probably will,” he said, adding, “We’ll probably only add catastrophic coverage going forward.”
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The Great (Treasury) Resignation

Insights and advice for treasury teams grappling with new challenges in recruiting talent and holding on to it.

Treasury departments are not immune to the tight labor markets and higher workforce churn rates roiling employers at the same time they grapple with managing remote workers and the entry of a new and younger generation with different work expectations.

  • That reality formed the backdrop for a conversation at a recent meeting of NeuGroup for Mid-Cap Treasurers on how to attract and retain talent, with several members reporting that they are struggling to backfill open positions. They also outlined hurdles they face in searching for new talent.

Insights and advice for treasury teams grappling with new challenges in recruiting talent and holding on to it.

Treasury departments are not immune to the tight labor markets and higher workforce churn rates roiling employers at the same time they grapple with managing remote workers and the entry of a new and younger generation with different work expectations.

  • That reality formed the backdrop for a conversation at a recent meeting of NeuGroup for Mid-Cap Treasurers on how to attract and retain talent, with several members reporting that they are struggling to backfill open positions. They also outlined hurdles they face in searching for new talent.

Cutting through red tape. At several companies, HR resources have shrunk considerably during waves of cost reductions. “That leaves HR unprepared for the challenge of recruiting in a difficult market,” complained one of the participants. Plus, because HR typically controls the hiring process, it can involve too many handoffs.

  • “It can take eight weeks to hire someone,” explained one member. “Meanwhile, candidates get multiple offers, and are more likely than not to take another offer.”
  • The expanding adoption of diversity, equity and inclusion (DE&I) policies is a great step forward, but it also presents a new roadblock for treasurers. “We used to just go into the system and pull the resumes. Now, the identity is not only disguised, but to avoid any chance of bias, HR has blocked hiring managers’ ability to access resumes,” one member said.

Remote work. Virtual work is an opportunity to expand the talent pool, especially for organizations in locations not favored by applicants. At the same time, it’s harder to conduct interviews and even harder to onboard using Zoom or other tools.

  • While remote positions may be more attractive right now, members were unanimous in their belief that treasury staff needs to be in-office because of the high-value, critical transactions they execute as well as cyber risk and the chance for fraud.
  • New technologies enable more secure execution and segregation of duties; however, the consensus among members was that these new tools are not yet ready for prime time. This perception may have to change, as another potential surge in the pandemic arrives, once again postponing companies’ return-to-work plans.

Talent is hard to find. Getting open positions filled is definitely more difficult right now. Therefore, the challenge for treasurers and their HR partners is to embrace new ways of reaching out to potential candidates. Just posting a position and waiting for people to apply is not enough. “You have to leverage your network and reach out proactively to potential candidates.”

  • Treasurers also need to expand beyond established recruiting strategies to include non-traditional sources of talent. One way is to leverage relationships with finance professors at universities and colleges and ask about graduates they’d recommend.
  • Another is to use external recruiters to complement HR’s efforts. Only a couple of members had experience with treasury-focused recruiters, and the jury still out on how effective that experience may be.

Build the brand. It’s also important to market the treasury brand. “Let’s be frank, treasury is the most exciting place to work in finance,” said a member. That needs to be clearly communicated in job postings and conversations with potential employees.

  • However, treasury teams must also be aware that what excites the younger workforce is different: Digital natives expect a high degree of process automation and the chance to work with “cool” technologies that mimic their consumer experiences. This is one among many reasons treasuries must update their technologies and embrace new tools for internal interaction as well as core activities such as payments.

The upshot. The “Great Resignation” is not leaving treasury unscathed. Some members were facing the task of hiring to fill multiple positions, leading to a rethink of career paths within and outside of the function. A clear career path is also a highly effective way to attract new talent.

  • In the meantime, treasurers are considering more cross-training and working with HR and general finance on rotational programs. “We have a three-year rotational program in finance, and treasury is an important stop. This approach has generated a lot of success in hiring internally,” one member said.
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Bridging the Gap Between Treasury and FP&A 

By Nilly Essaides

Technological advances are fueling the convergence of once-disparate finance processes, as they increasingly rely on the same tools to execute critical processes.

In addition, faced with continued disruption in business, economic and financial conditions, CFOs expect finance organizations to contribute greater value through faster and more insightful decision-support. To do so effectively, legacy silos among different areas of finance must be dismantled.

By Nilly Essaides

Technological advances are fueling the convergence of once-disparate finance processes, as they increasingly rely on the same tools to execute critical processes.

In addition, faced with continued disruption in business, economic and financial conditions, CFOs expect finance organizations to contribute greater value through faster and more insightful decision-support. To do so effectively, legacy silos among different areas of finance must be dismantled.

Going Beyond Best Practice to Process Innovation

Nowhere is the need to bridge barriers more urgent than at the treasury and FP&A nexus, as both are charged with aligning the company’s strategic and financial objectives. The connection between the two is critical, if companies are going to make smart capital-allocation choices based on scenario planning, produce reliable forecasts of cash and P&L and deliver data-driven insight.

While the initial transformation will take some heavy lifting, it’s imperative the two groups understand their respective processes, identify redundancies, operationalize a collaborative relationship, and join forces to improve the quality of the decision support they provide key stakeholders. In the finance org of the future, intra-process best practices are no longer enough to achieve a competitive advantage. Today, finance orgs must reach beyond through process and technology innovation.

Five Points of Intersection

While treasury and FP&A teams represent different workstreams, they have several intersection points that should be recognized and operationalized.

  1. Data Analytics: Ideally both teams will leverage the same analytics solution, which will pull data from a single repository. For a while, each had its own technology ecosystem; however, larger vendors like SAP, Oracle, OneStream and Workday are pivoting away from a single-process focus to a cross-process view, thus reducing friction within finance, lowering system cost to bolster ROI, and aligning everyone on common methodologies, models and tools. Inconsistent data and models trigger confusion and undermine the goal of making data-driven decisions.
  2. Talent management: Research shows finance hires primarily from within, and it’s increasingly reliant on experiential vs. formal training. That means functional rotations, mentoring and coaching and career pathing are becoming critical to hiring, retention and succession planning—especially in today’s tight labor market. To attract candidates, finance needs to not only build brand awareness but also establish finance-specific talent development programs that offer clear career pathing. And while some treasury and FP&A skills are still specialized, core competencies are largely the same, e.g., financial and business acumen, critical and innovative thinking, agility and customer-centricity.
  3. Cash forecasting: FP&A and treasury produce short-, medium- and long-term cash forecasts that are often out of sync, creating confusion at planning time. By converging the two work streams, treasury and FP&A can leverage the same data-collection pipeline, models and intelligent automation to produce a more reliable range (vs. point) forecasts along with confidence intervals. This way, the end product can better support management decisions about capital raising and allocation.
  4. ESG: ESG will impact all areas of finance, primarily account-to-report (disclosures), treasury (financing) and FP&A (strategic planning, capital allocation, scenario planning and KPIs). FP&A needs to track the company’s progress toward its sustainability goals so they can be clearly communicated to multiple stakeholders, from creditors, to vendors, credit agencies, investors and auditors. Meanwhile, treasury is responsible for green funding and investment.
  5. Business partnering. Leading treasury and FP&A teams are investing greater resources in developing robust partnering capabilities. They are evolving their business acumen, dedicating FTEs, and refining engagement models to provide leadership with a clear view into the financial implications of business decisions, e.g., the impact on P&L, liquidity and financing requirements. The two have a shared interest in becoming a formal part of the business review process and developing common skill set.

The lines that separate different finance processes are blurring, as the finance operating model transitions to a new level of interconnectivity. That applies to FP&A and treasury. Another big area where we see convergence is between FP&A and account-to-report. The big question is what the finance org looks like, once everyone moves in sync.

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Talking Shop: Risks of Extending Duration in Investment Policy

Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: [email protected].


Member question: “I’d appreciate your insights and experience on the following questions regarding changes in investment policy:

Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: [email protected].


Member question: “I’d appreciate your insights and experience on the following questions regarding changes in investment policy:

  1. “If we extend the duration and/or the maximum maturity of a single instrument, is there any statistic, research report, etc. which could help illustrate the level of increased risk associated with longer tenors?
  2. “Overall, how do you decide what duration or maximum maturity is the most appropriate?”

Peer answer 1:  “Regarding 1., extending duration/maturity essentially reduces liquidity, and liquidity in this case is defined as the level of realized gain/loss from a liquidation or forced sale of a security. Thus, you will need to compare the volatility of the (unrealized) gain/loss position in a portfolio resulting from adding longer duration securities.

  • For 2., you can look at the above analysis and compare it to your comfort level. You can also point to common practice. In a typical segmentation, my guess is that medium-term would be a maximum three-year maturity with a portfolio duration of 1.5 years; and longer-term would be a maximum five-year maturity with a max portfolio duration of 2.5 years.”

Peer answer 2: “On the second question, we typically try to avoid having to sell things prior to maturity to avoid bid-ask spread or fees charged by banks in case of term deposits.

  • “So with that in mind, we set the maturity for the instrument based on how far out we are comfortable holding it, as we assume we will have it to maturity. With the exception being longer dated bonds, as we may sell those based on other reasons.
  • “For the first point, one additional risk to consider when going longer is that you will increase your duration risk, so changes in rates will have a greater impact on mark-to-market values. Also, if rates rise (fall), you will be locked into a lower (higher) rate longer.”
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Cloning and Cleaving: The Successful Execution of a Complex Spin-off 

Capital markets insights from a NeuGroup member’s journey helping spinning off businesses intertwined within the parent.

Not all spin-offs are created equal—a lesson brought home powerfully to one NeuGroup member who helped their company successfully navigate a large, complex, nearly two-year spin-off of three product groups that did not formerly exist as stand-alone businesses and were not managed as a group by the parent company.

  • “These products were fully intertwined across every aspect of the business,” they said. So were the systems used by the three groups, including those for accounts payable, accounts receivable and payroll— “every system that we have, fully intertwined.”
  • At the fall meeting of NeuGroup for Capital Markets, the assistant treasurer (AT) described it as “one of the toughest, most challenging” projects they’ve undertaken during a decades-long career in treasury that included working on many complex transactions.
  • For the entire company, “from a human body perspective, it was like trying to clone every single organ and body part you have and then sending that body off to go live its own life,” they said, laughing.
  • For treasury, the process involved new legal entities, global bank accounts, pooling structures and treasury management systems as well as setting up new pensions, benefits, insurance, ISDAs and the treasury organization itself.

Capital markets insights from a NeuGroup member’s journey helping spinning off businesses intertwined within the parent.

Not all spin-offs are created equal—a lesson brought home powerfully to one NeuGroup member who helped their company successfully navigate a large, complex, nearly two-year spin-off of three product groups that did not formerly exist as stand-alone businesses and were not managed as a group by the parent company.

  • “These products were fully intertwined across every aspect of the business,” they said. So were the systems used by the three groups, including those for accounts payable, accounts receivable and payroll— “every system that we have, fully intertwined.”
  • At the fall meeting of NeuGroup for Capital Markets, the assistant treasurer (AT) described it as “one of the toughest, most challenging” projects they’ve undertaken during a decades-long career in treasury that included working on many complex transactions.
  • For the entire company, “from a human body perspective, it was like trying to clone every single organ and body part you have and then sending that body off to go live its own life,” they said, laughing.
  • For treasury, the process involved new legal entities, global bank accounts, pooling structures and treasury management systems as well as setting up new pensions, benefits, insurance, ISDAs and the treasury organization itself.

Start with the balance sheet and cash flow forecast. The member told peers that from a capital markets perspective, “the foundational financial data for a spin is the most critical thing that you need.” But unlike most capital markets transactions, treasury in this spin-off did not have the needed information available in 10-K filings or pro forma data prepared by accounting teams. “That didn’t exist,” they said. That meant lots of complexity and collaboration.

  • “For us to prepare a forecast of the balance sheet and cash flows, we have to pull in all these people who are struggling with, ‘what’s the boundary around this business, how do we segregate it out?’” they said.
  • For the balance sheet, the complexities include deciding what tax and legal liabilities go on the books of the spun off entity as well as estimating pension liabilities “when you don’t know who the people are—are they one-year hires or are they 30-year tenured employees?”
  • They advised peers, “Make sure when you do a spin that you have line of sight to financial data. Does it exist, does it not?”
  • Realize that accountants will be preparing a Form 10, a precursor to a 10-K, that is focused on actuals but that treasury will also need a Form 10 with pro forma figures—both of which are difficult to create in a situation where the spun-off entity does not yet exist.
  • One key lesson learned: the timeline to issue debt on behalf of the spin-off company—a major component of the process—was constrained by the need to wait until the Form 10 was complete and filed with the SEC, something that couldn’t happen until after the completion of the parent’s financial filings.

Expect a bevy of banks to reach out. Financial institutions that are in a corporate’s bank group and all those that have been trying to get in, including diversity firms, will approach treasury in the wake of a spin-off announcement, the AT said, adding, “You have to be prepared to carve out time for those discussions.”

  • The treasury team met with every bank in the corporate’s bank group to make sure they had “a fair playing field” to compete to join the spin-off’s banking group.
  • Among the issues facing treasury are how many tiers the spin-off’s bank group will have and how many banks will go in each tier. They debated whether to have a flat, single tier but ultimately chose a two-tier structure.
  • Deciding which banks will join the spin-off’s group requires considering the spin-off’s operational needs and whether it will, for example, have a FX hedging program or a pension plan. The goal is picking banks that can meet the new company’s needs and provide a “fairly seamless transition,” they said.

Capital structure and credit ratings. The AT needed to guide decisions on an appropriate capital structure for the spin-off, informed by credit rating considerations. “Are they better off as low investment grade with risk of slipping into high yield or as high yield with different challenges?” was one question, they said.

  • Another option: a split rating that would require getting a third rating to break the tie. Among the factors to consider, treasury must weigh what credit rating the spin-off’s financial projections will support as well as the perspective of the new company’s management.
  • “You hate to spin off a company with a certain rating and then that management goes off and takes actions and the rating changes,” the AT said. “It’s not great for investors and it feels like a little bit of a disconnect.”
  • In the end, the spin-off was rated high yield and has secured debt and term loans. The member said the complexity with secured debt is determining which assets will secure the debt, an issue of great importance with potential tax implications.
    • The parent is rated investment grade and its debt is entirely unsecured. Both companies pay dividends, and each have USD and euro debt.
  • In addition to financial forecasts and scenarios, treasury was involved in creating extensive presentation materials to explain every aspect of the businesses, strategy and financials of the spin-off to rating agencies and debt investors. “Do not underestimate the amount of time you will spend doing that,” they advised.

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New Wrinkles to Iron Out in Capital Structure Analysis as Fed Resets

Five areas of focus for treasury teams embarking on new analysis of capital structure as the outlook for rates changes.

Capital structure analysis has taken on added importance and complexity for corporate treasurers who piled on liquidity to survive the pandemic but are now “skeptical about keeping a large chunk of change around,” as one member put it at a recent meeting of NeuGroup for Large-Cap Treasurers.

  • NeuGroup senior executive advisor Roger Heine, a former investment banker experienced in helping companies analyze capital structure, highlighted the ongoing challenges treasury teams face, including significant price pressures and uncertainly about future inflation; negative real interest rates even out to 30 years on inflation-adjusted US treasuries; and ebullient equity and credit markets seemingly oblivious to these economic challenges.

Five areas of focus for treasury teams embarking on new analysis of capital structure as the outlook for rates changes.

Capital structure analysis has taken on added importance and complexity for corporate treasurers who piled on liquidity to survive the pandemic but are now “skeptical about keeping a large chunk of change around,” as one member put it at a recent meeting of NeuGroup for Large-Cap Treasurers.

  • NeuGroup senior executive advisor Roger Heine, a former investment banker experienced in helping companies analyze capital structure, highlighted the ongoing challenges treasury teams face, including significant price pressures and uncertainly about future inflation; negative real interest rates even out to 30 years on inflation-adjusted US treasuries; and ebullient equity and credit markets seemingly oblivious to these economic challenges.
  • Mr. Heine reviewed a handful of areas which should be part of any capital structure analysis:

Debt levels and credit ratings. Academic arguments for using debt as a tax shield have been diluted by factors including low corporate tax rates, various limitations on interest expense deductibility, and lower investor tax rates applied to dividends and capital gains relative to interest income, Mr. Heine said.

  • The biggest argument for debt today is the absolute low level of interest rates; the Fed’s suppression of rates is effectively subsidizing debt incurrence.
  • For large borrowers, however, investment-grade ratings are needed to maintain large amounts of debt and avoid restrictive high-yield debt covenants.
  • One member said his company’s problem is not debt but rather restoring EBITDA to levels so that the company’s debt-to-EBITDA ratio is commensurate with its target credit ratings.
  • Another member noted the importance of access to commercial paper for many companies and the role CP plays in considering target ratings.

How much liquidity is enough? Events such as the 2008 financial crisis, Covid and supply chain disruptions have compelled many companies to draw up contingency plans which need to factor in rating agency expectations as well as war chests for possible major investments, Mr. Heine said.

  • Liquidity includes not just cash, but bank lines and secured facilities including receivable financing.
  • A few members noted how they still maintain higher-than-normal cash balances despite the low-rate environment because the experience of March/April 2020 is still fresh in their minds and that of their boards.

What to do with excess cash? From a capital allocation perspective, Mr. Heine noted that excess cash could either be used to reduce leverage or returned to shareholders.

  • Reducing debt could also include making pension contributions to achieve deleveraging targets, especially for companies which took on debt following a strategic acquisition.
  • Allocating cash to dividend payments has some value by signaling consistent growth and confidence in the future. But Mr. Heine pointed out that studies have indicated high dividend yields do not necessarily translate into higher stock market valuations.
  • Many companies have resumed share repurchases paused at the outset of the pandemic, employing a variety of strategies allowing them to buy during price dips or using a price-agnostic approach. Most members do not believe that a 1% or 2% tax being contemplated on buybacks would have much impact on their buyback levels.

Cost of capital and understanding its costs. Estimating cost of capital is extremely challenging given very low interest rates while inflation is increasing, Mr. Heine said. He asked, rhetorically, whether a hurdle rate should be based on artificially low, riskless rates manipulated by the Fed.

  • A better approach, he suggested, might be to forecast expected cash flows based on an average of both good and bad scenarios—not simply the most likely path and then solve for the discount price that produces today’s stock price.

Fixed/floating: What’s the correct balance? One member observed that there is a remarkably low cost of borrowing for both investment grade and high yield companies despite uncertainty about inflation.

  • Terming out debt remains very attractive and is probably the best and cheapest hedge against long-term inflation risks, even if the Fed still manages to keep rates low. The debt service will become cheaper for companies over time if revenue and profits keep pace with inflation.
  • A few members have significantly reduced interest expense by swapping fixed-rate bonds to floating. And while they understand that over time, floating-rate debt is cheaper, one member said it is getting harder to think that will be the case in the future based on the absolute level of rates and the likelihood of rate increases by the Fed.
  • Certainly, having a large cash balance, which is effectively a floating-rate asset, makes having floating-rate debt a bit easier. Butt how that will play out as companies eventually reduce cash balances will be important to watch, Mr. Heine said.
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A Closer Look at China’s Approach to Tech Through an ‘S’ in ESG Lens

An expert on China shares how tech firms should prepare to navigate the Chinese government’s recent pivot.

By Joseph Neu

Some Western observers are quick to see a Chinese Communist Party crackdown on technology companies as a reaction to the rising power of tech giants. But you can also view it through a social lens that aligns with the equity and inclusion goals of many global corporations. Seen this way, it may be more of a China-specific approach to a global trend reconsidering the cost of unbridled success, which tech companies have enjoyed even more during the pandemic.

  • This insight emerged at the recent NeuGroup for Tech Treasurers (aka Tech20) annual meeting, marking the group’s 20th anniversary, during a session on the treasury and finance implications of the tech sector coming under growing scrutiny in the US and globally.

An expert on China shares how tech firms should prepare to navigate the Chinese government’s recent pivot.

By Joseph Neu

Some Western observers are quick to see a Chinese Communist Party crackdown on technology companies as a reaction to the rising power of tech giants. But you can also view it through a social lens that aligns with the equity and inclusion goals of many global corporations. Seen this way, it may be more of a China-specific approach to a global trend reconsidering the cost of unbridled success, which tech companies have enjoyed even more during the pandemic.

  • This insight emerged at the recent NeuGroup for Tech Treasurers (aka Tech20) annual meeting, marking the group’s 20th anniversary, during a session on the treasury and finance implications of the tech sector coming under growing scrutiny in the US and globally.
  • The session featured a China expert whose perspective helped fuse this theme with ideas discussed in an earlier session on social impact investment (the S in ESG)—a follow-up to the “Ripple in the Pond” initiative the group launched in May.

Success comes with a price. While policy in China previously favored openness to trade and growth of 8% or more, there is now a growing acceptance that a policy that provides better balance of success may be preferrable, even if it delivers growth of 4% to 5%, which is still robust compared to most developed countries.

  • “The idea that success comes with a price reached a critical peak,” according to the China expert. “People talked about wanting balance, but there was no action before, and even regulators were pushing growth.”

A long-term directional change. Firms active in China should see this as a long-term directional change, our expert advised. Both government and society in China has formed a consensus that economic growth must come in balance with other desired outcomes. This is not a short-term adjustment.

  • This long-term directional change also fits into ESG, which is a concept that has become very familiar to Chinese companies. Regulation to balance the costs of growth is being aligned with ESG commitments, including those for net zero carbon, both for China and global consumption.
  • Along with the environmental commitments, equity and inclusion is being emphasized in China, which is seeking a better balance of wealth distribution. This also explains the recent crackdown on cram schools that allow the wealthy to get their kids into the top schools, which is unfair to those who cannot afford them.
  • “If you look at the regulatory changes in the last few years,” they have impacted more than just tech and are felt broadly across industries, “with some benefiting and some getting hit,” the China expert noted.

Growth with balance or growth with self-reliance. The other nuance for this China take on ESG is growth with self-reliance. Self-reliance is on one hand a response to overreliance on global trade and a backlash on overreliance on China expressed by the US and other nations.

  • On the other hand, it fits with objectives China has expressed to become a global leader, or self-reliant, in key strategic areas. For tech, this means key technology components, like semiconductors. Any investment that helps China become more self-reliant in these will be well received.
  • So will investment that promotes growth balance, which includes being good for the environment and social equity and inclusion, also known as common prosperity.
  • This helps explain why Western companies like Tesla continue to be successful in China, and anyone providing green tech as well. It’s also why internet, social media and gaming companies got hit hardest. They are perceived as encouraging excess, overconsumption and growth out of balance, with uneven benefits derived from monopoly power and massively powerful platforms.
  • For this reason, many of these companies have added ESG and common prosperity elements to their corporate goals. Investment and initiative in support of these will get funded over those favoring unbalanced growth.

ESG-finance mandates in support. Much like in the rest of the world, but with a China-specific way of doing it, finance and treasury departments at Chinese companies are also scrambling to support ESG goals and initiatives with green, sustainability and social finance efforts. This will also serve them well with global investors guided by ESG mandates.

  • NeuGroup members looking to inspire Chinese peers with social impact investment examples will find an eager audience. So may financial service firms offering to advise and help them issue green- or social bonds, arrange sustainability or social-linked financings, provide ESG scores or assessments and otherwise help them invest in growth with balance or growth with self-reliance.
  • Stakeholder capitalism efforts will also flourish in support of greening and carbon reduction in the supply chain, better pay and benefits for employees to balance growth to benefit society.
  • Put another way, like our members, more Chinese companies will be looking to have their company do better to support all stakeholders and finance and treasury professionals will be looking to support the business to do better in this same way, too.
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Weighing the Impact of Inflation and ESG on Tech Credit Ratings

Credit rating agencies sit down to weigh in on hot topics with Tech20 treasurers at the annual breakfast panel.

Each year, members of NeuGroup for Tech Treasurers sit down with tech sector analysts from S&P, Fitch and Moody’s to discuss their pressing questions for the credit rating agencies. This year’s conversation revolved around the hot topics of inflation and ESG. One important takeaway: there’s not much for tech companies to worry about (yet).

  • The chief lending officer at meeting sponsor BNY Mellon moderated the discussion with Andrew Chang, director of corporate ratings at S&P; Jason Pompeii, senior director of corporates at Fitch Ratings; and Rick Lane, senior vice president at Moody’s.
  • A selection of questions and answers follow, and have been edited for clarity and brevity.

Credit rating agencies sit down to weigh in on hot topics with Tech20 treasurers at the annual breakfast panel.

Each year, members of NeuGroup for Tech Treasurers sit down with tech sector analysts from S&P, Fitch and Moody’s to discuss their pressing questions for the credit rating agencies. This year’s conversation revolved around the hot topics of inflation and ESG. One important takeaway: there’s not much for tech companies to worry about (yet).

  • The chief lending officer at meeting sponsor BNY Mellon moderated the discussion with Andrew Chang, director of corporate ratings at S&P; Jason Pompeii, senior director of corporates at Fitch Ratings; and Rick Lane, senior vice president at Moody’s.
  • A selection of questions and answers follow, and have been edited for clarity and brevity.

Question: Inflation is rising at its fastest pace in decades, fueled in part by surging demand, increased consumer spending and supply chain disruptions. What are your inflation expectations for 2022 and how might rising prices affect tech companies’ credit ratings?

Mr. Lane (Moody’s): “My sense is that inflation is not going to be as strong as what some people suspect. Especially with this group here, there’s a deflationary element to what everyone in the tech sector does; they’re not as exposed to some of the cost pressures as other sectors.

  • “Intellectual property and software are less exposed to inflationary pressures, and though supply chain is an issue for some folks here, it could be a 1% to 2% impact in the short-term. It’s a cost that can be well-accommodated in the business model and the credit rating.”

Mr. Chang (S&P): “I’m sort in the same camp as economists that view it as transitory, though that word has certainly been overused this year. But we view it as transitory with the caveat, at least from S&P, that it’s been stronger and longer than we had anticipated, but still transitory.

  • “Customer prices will be permanently higher as a result, and if that’s not offset by higher wages then purchasing power will be falling, which would slow demand and bring inflation back to target. While it looks out of control for now, our economists still view it as transitory.
  • “From a tech perspective, the inflation concern is a limiting factor. Companies have costs that are rising and supply constraints, but have been able to pass along the price increases to consumers, and their customers have been willing to accept higher prices because they are in need of the tech supplies, so we don’t see that impacting our view of the credit.”

Mr. Pompeii (Fitch): “I think there’s already been an indication of the slowdown in bond repurchases, there’s an expectation that rates will rise in 2022. It’s important to remember that, obviously, there’s a lag effect there.

  •  “We do expect there to be inflation in the meantime; though our institutional view remains that it’s largely transitory, we still expect it to be extending well into 2022. I think this all makes sense in the context of the supply and demand picture, and all of the government intervention taking place that is unprecedented in our lifetimes.
  • “Expect things to start normalizing in 2023. We have very low interest rates, obviously, but it’s difficult to get too concerned about [inflation] at this point.”

Question: What steps are the credit agencies taking to provide transparency and visibility into the role ESG factors have on ratings?

Mr. Chang (S&P): “With our ESG credit indicator, we’re trying to call out ESG factors that are already being integrated in the ratings. They’re mostly neutral for tech, unlike oil and gas for example.

  • “This is largely investor-driven, as fixed-income investors want to know or want a picture of ESG factors on their credit ratings. One differentiating factor from third-party ESG raters is we have a line of communication with every issuer, we actually get to talk to the treasurer and get a more granular view of ESG, which benefits fixed-income investors.
  • “One question asked consistently in our calls with issuers is that some were disappointed that they, as a large hardware/software provider, are proactive in tackling these ESG factors and they should be rated higher on a score from one to five.
  • “Our response is that the ESG factor has to be significant enough to impact the overall credit to be a one, for example. A two is our neutral score, which the majority of tech issuers get. It’s a pretty high bar to get to a one.”

Mr. Pompeii (Fitch): “At Fitch, what we’ve done is focused more on the importance of the discussion of ESG. These are factors we’ve always looked at, so it’s really just a reflection on how significant that discussion is.

  • “Not unexpectedly, it really comes down to, for the most part, governance and the shareholder concentration and private equity ownership. Those sorts of things are most common instances where we would say this is more important.”

Mr. Lane (Moody’s): “We’ve begun to roll out ESG scores for a number of companies, we’ve just done some preliminary drafting for the tech sector amongst others. We’ve got 21 ratings in our ratings system, but for ESG we’ve got five ratings. A one is extremely rare, and a five is also pretty rare, so there are really only a few ratings we can have.

  • “We’ve always incorporated ESG into our ratings, we simply had not called those out, so we’re becoming granular and transparent about this and their credit rating impact. Our efforts now on the ESG front are going to be a bit more transparent and break out the environmental, social and governance issues.
  • “We’re not taking the approach of sustainability aspects, we’re speaking of ESG factors as they relate to credit ratings. Over time, we may become more quantitative and use third-party data, but that’s not where we’re starting off.”

Question: Are there any updates on cybersecurity and how that can impact credit ratings? [Earlier this year, Moody’s sent a cybersecurity survey to some issuers.]

Mr. Chang (S&P): “The cybersecurity issue is embedded in the G side of our ESG program. To the extent that the company makes a serious error, those things will be reflected on the governance side and potentially on the credit rating, but I don’t believe we’ve taken memorable ratings actions yet.”

Mr. Pompeii (Fitch): “At this particular point, our response to that has been pretty reactive. I can think of a couple of cases in which we perhaps would put out a comment or maybe provide an outlook based on an event that maybe wasn’t strictly due to cybersecurity issues.

  • “It will be interesting to see how we’re going to be able to assess, objectively, the steps that are being taken from a cybersecurity standpoint. I think over the medium-term, what we’re doing will be to the extent that disclosure does not meaningfully change our ratings.”

Mr. Lane (Moody’s): “We’ve put out a lot of research on cybersecurity, we’ve got a growing group that’s focused on that more elevated risk aspect, especially from an operational/reputational standpoint.

  • “A fair bit of our work is reactive, commenting on particular instances. Over the next few years, we’re going to try to sharpen our pencils and be a bit more proactive, but at this point it’s more observatory.”
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Training for Treasury’s Tech Future With Coding Boot Camps

Treasurers are moving to familiarize their teams with computer programming, some by enlisting members in coding boot camps.

A growing number of treasurers are pushing their teams to learn computer programing skills as they seek to improve metrics like forecasting accuracy, gain access to more powerful processing and minimize their dependence on IT teams and third-party solutions.

  • At a recent meeting of NeuGroup for Foreign Exchange 2, members discussed their approaches, from large-scale internal classes to sending team members to online boot camps.
  • The external classes they recommended include a two-week course offered by Google and one from Udemy.

Treasurers are moving to familiarize their teams with computer programming, some by enlisting members in coding boot camps.

A growing number of treasurers are pushing their teams to learn computer programing skills as they seek to improve metrics like forecasting accuracy, gain access to more powerful processing and minimize their dependence on IT teams and third-party solutions.

  • At a recent meeting of NeuGroup for Foreign Exchange 2, members discussed their approaches, from large-scale internal classes to sending team members to online boot camps.
  • The external classes they recommended include a two-week course offered by Google and one from Udemy.

Faster processing with Python. When one treasurer’s BI dashboard for cash flow forecasting began running slowly, her team started using the open-source programming language Python to do the calculations.

  • The team’s BI tools and spreadsheets were “not an option anymore, they can’t handle huge calculations,” she said. “I know we’re dealing with massive amounts of data nowadays, and where they would bog down Excel, Python is really great for that.”
  • One member added that the tools can work together, with BI showing the end result in a user-friendly dashboard.
    • “Python allows you to take [the data] out of there, do all that work, and put it back into BI,” he said. “All BI is now doing is the reporting on top without having to do the calculations. It runs very fast, it’s a much smoother way to consolidate the data.”
  • The only problem: Where BI tools are relatively simple, user-friendly visual systems, one treasurer said learning computer programming is “like learning a new language.”

Learning the nitty gritty. To learn that language, some teams are turning to online courses. “We had somebody do a Google two-week class, which cost $99. He became A-minus grade level in Python, but it was an intensive course outside of the 40-hour-a-week job,” one member said. “You have to be really interested in getting down into the nitty gritty.”

  • One member said he has found that exposing his team to different, small-scale coding projects helped him identify who on staff “gravitates toward that side of the work.” Then, he said the key is to “nurture” this skill by connecting them to online coding courses.
    • “What you need to do is free up their time to leverage that interest,” he said. “Plug them into Coding 202 instead of 101, then you start getting them really engaged. That’s how we’ve managed it and it’s worked really well so far.”
  • Another member had an employee in FX who taught himself programming, so treasury created a role for him on its digitization team. “You have to like that type of work,” the member said. “It’s not core treasury work, not something your trader who’s really savvy is typically going to want to do.”

DIY with others. Other members said their departments are learning programming together, in a group. That allows managers to identify people with the skills and interests to take on projects while everyone on the team learns about the possibilities and power of programming languages, what they can request and a sense of how much work it all takes.

  • After one member’s senior director in risk management went through a six-week online program to learn coding, he started a training course for all employees who report to him. The FX team met for an hour a day nearly every day for six months, with the director leading tutorials and assigning homework.
    • “And then it was on us from there to either think of projects we wanted to utilize or to practice on our own time,” the member said. “You have to really sit down and practice on your own time or you’re never going to learn it.”
  • One FX head connected an employee “working up the coding curve” with the IT team, “tapping into this network of other people at the company” who have programming skills.
    • “We’ve found it really helpful to have a real project in front of him, so we find a problem, and that forces him to work through all that stuff,” he said. 
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Stars Aligned for Now on Bank Subordinated Debt, Preferred Stock

Morgan Stanley says regional banks should consider moving up offerings to this year given volatility risk.

Regional and mid-cap banks are looking to raise capital, whether to refinance existing debt, buy back stock or support balance sheet growth, and the market is hot—at least for now, according to Morgan Stanley bankers presenting at a recent meeting of NeuGroup for Regional Bank Treasurers.

  • But volatility in the aftermath of last week’s Fed meeting could prompt institutional investors to pull back.
  • So banks considering issuance of subordinated debt or preferred stock in 2022 may want to move up offerings to this year, Morgan Stanley said.

Morgan Stanley says regional banks should consider moving up offerings to this year given volatility risk.
 
Regional and mid-cap banks are looking to raise capital, whether to refinance existing debt, buy back stock or support balance sheet growth, and the market is hot—at least for now, according to Morgan Stanley bankers presenting at a recent meeting of NeuGroup for Regional Bank Treasurers.

  • But volatility in the aftermath of last week’s Fed meeting could prompt institutional investors to pull back.
  • So banks considering issuance of subordinated debt or preferred stock in 2022 may want to move up offerings to this year, Morgan Stanley said.

Plummeting pricing. New issue levels for midcap banks’ subordinated debt have dropped 200 basis points or more since the initial Covid infection peak last May, despite the rise in US Treasury yields, Morgan Stanley bankers said.

  • And the coupons on those banks’ 10-year, noncallable five-year sub debt offerings have fallen from the 4% range at the start of 2021 to below 3% in some cases.
  • Similar dynamics have impacted bank preferred stock, where rates fell from 6% or 7% in the second and third quarters of 2020 to as low as 3% now.  
  • Still attractive compared to corporate bonds, however, those yields have resulted in positive inflows into ETFs investing in the securities in the past 29 of 30 weeks, enabling issuers to double the size of last year’s deals with the same structure and rating.

The changing tide. A gradual increase in Treasury yields should prolong the favorable bank-issuance market well into 2022, but Morgan Stanley points out that sudden volatility can change investor sentiment quickly.

  • ETF flows can turn negative in periods when Treasury yields have jumped, noted Drew Ertman, co-head of debt capital markets for financial institutions at Morgan Stanley.
  • That could happen following the Fed’s announcement last week that it will start tapering its bond purchases this month, thus moving forward interest-rate increases. Morgan Stanley strategists anticipate the yield on 10-year Treasury notes reaching 1.8% by year-end, a meaningful sell-off that, if gradual, should not close markets, Mr. Ertman said. But volatility is bound to pick up.
  • “That’s why moving [offerings] forward into Q4 versus waiting until January, given today’s low coupons and very low dividends, may make sense for some of you,” he added.
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Extra Credit: Energy Companies Issuing Debt from Green Subsidiaries

Bonds issued by energy company transition business units are preferred by debt investors who screen for green.

Bonds issued by entities within energy companies that are focused on low- or no carbon emission projects and technology are far more likely to appeal to some asset managers than debt issued by the holding company.

  • That takeaway emerged at a recent meeting of NeuGroup for Oil & Gas Treasury sponsored by Societe Generale during a session that featured two debt investors, one representing a traditional credit mandate and one with an ESG mandate.

Bonds issued by energy company transition business units are preferred by debt investors who screen for green.

Bonds issued by entities within energy companies that are focused on low- or no carbon emission projects and technology are far more likely to appeal to some asset managers than debt issued by the holding company.

  • That takeaway emerged at a recent meeting of NeuGroup for Oil & Gas Treasury sponsored by Societe Generale during a session that featured two debt investors, one representing a traditional credit mandate and one with an ESG mandate.
  • Both expressed a preference for debt issued by subsidiaries engaged in businesses largely unrelated to oil and gas. “I would love it if your industry started issuing out of their renewable subsidiaries,” one investor told members of the group.

Here are some of the points made by the investors about this preference that energy companies should consider:

  • Keep more investors who are leaning toward excluding fossil fuel issuers. Both asset managers noted that there is a cohort of investors committed to reducing the carbon footprint of their portfolios who will be far more likely to invest in bonds issued directly from the parts of a corporation shifting away from carbon.
  • Good marketing for little-to-no capital cost. This approach provides corporates with a marketing benefit while the cost of capital difference is likely to be trivial and can be avoided by structuring the offering with a parent guarantee. It also signals to investors that the transition/low carbon business is a viable enterprise that can support its own debt.
    • “That provides the talking point about how you are addressing transition. It’s the way that makes it the most obvious and clear that you are approaching this from a longer-run perspective and you’re shifting your focus in the long run,” one asset manager said.
  • Show a balance sheet and financial reporting not reliant on E&P. While cash is fungible, fixed-income investors want to see a transition that is not wholly reliant on oil and gas cash flows to fund energy transition. “The E&P balance sheet is a challenge to transition, so it helps to have a separate balance sheet and reporting entity to show consistent progress,” one investor said.
  • Positioning for a longer-run technology payoffs. Investment in renewables and low carbon energy has similarities to investing in technology. Like Moore’s law in technology, each investment in renewable technology, such as solar, helps the next generation produce more energy at less cost.
    • Fossil fuels investment payoffs, on the other hand, are much more dependent on the future fuel cost, which will be declining long-term as alternatives evolve, than the efficiency of getting that fuel out of the ground.
    • It is a different risk profile and payoff duration. The same can be said for investment in carbon capture/storage technology. Aligning the bond and duration to the longer-run technology payoff can thus makes sense.

Reasons for resistance. In a follow-up email, one of the investors told NeuGroup Insights he has heard that some large energy companies are “evaluating” the idea but said he has not yet seen any issue debt directly out of their greener entities. Asked why, he wrote: “Based on my interactions with the energy companies I believe there are a few different reasons, and not necessarily in this order:

  1. Concern over cost of financing (assuming that [holding company] capital is cheaper).
  2. Lack of knowledge over requirements of issuing a green bond.
  3. Concern over potential claims of greenwashing given their core fossil fuel operations.
  4. Concern over valuation impact on core fossil fuel operations by highlighting and focusing on greener businesses.”
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Talking Shop: Reporting Specific Risks to the Board

Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: [email protected].


Member question: “Do any members report specific risks or risk categories to the board? For example—technological risk, cyber, system implementation, environmental or carbon, weather risks, etc.”

Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: [email protected].


Member question: “Do any members report specific risks or risk categories to the board? For example—technological risk, cyber, system implementation, environmental or carbon, weather risks, etc.”

Peer answer 1: “Yes, we just presented to our board this week and included the top five risks in our report. Of the five, I’d say two were specific risks and the other three were broader themes that each encompassed a few related risks.”

Peer answer 2: “We have been categorizing our risks into the following categories:

  1. Financial
  2. Legal, regulatory, compliance and ethics
  3. Human capital and talent management
  4. Business/strategic
  5. Operational
  6. Technological and new product development
  7. Brand/reputational”

Peer answer 3: “We update the audit and risk committee quarterly on top ERM risks (these are broad risks; physical security as an example).”

NeuGroup Insights: Nilly Essaides, NeuGroup’s managing director of Groups, Research and Insight, responds, “In this environment of persistent uncertainty, enterprise risk management has become an even greater imperative and a chief concern for CFOs and boards.

  • “It is critical that treasurers and heads of internal audit (i.e., whoever owns this responsibility) keep the CFO and the board audit committee in the loop at each quarterly meeting, and present to the entire board annually. The board has the fiduciary responsibility to be informed.
  • “Before approaching board members, it’s critical to settle on a top 10 (or fewer) risks, as outlined in answer 2 above. Which risks are most important may change over time and risks will vary by industry and company.”
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Google’s Treasury Transformation Search Results: Teaming up With SAP

Google’s co-innovation of treasury solutions that work with SAP S/4HANA could benefit other corporates.

Google’s frustrations with building its own customized treasury tools to enhance its ERP ultimately pushed the company to abandon that strategy. Today, it’s using standardized solutions it co-created with SAP that are now built into its cloud-based S/4HANA platform. Among the beneficiaries: other corporates that use S/4HANA that can make use of tools Google helped innovate.

  • Over a two-year implementation of SAP that Google called Project Emerald, the company used its resources—time, people and money — to develop solutions for hedge management and liquidity and payments—improvements now offered to all SAP clients.

Google’s co-innovation of treasury solutions that work with SAP S/4HANA could benefit other corporates.

Google’s frustrations with building its own customized treasury tools to enhance its ERP ultimately pushed the company to abandon that strategy. Today, it’s using standardized solutions it co-created with SAP that are now built into its cloud-based S/4HANA platform. Among the beneficiaries: other corporates that use S/4HANA that can make use of tools Google helped innovate.

  • Over a two-year implementation of SAP that Google called Project Emerald, the company used its resources—time, people and money — to develop solutions for hedge management and liquidity and payments—improvements now offered to all SAP clients.
  • In a meeting of NeuGroup for Foreign Exchange 2 and a conversation with NeuGroup Insights, Shaun Hazen, Google’s head of financial risk strategy, and Kathy Makowski, a business systems analyst, discussed the co-innovation process and its advantages.
    • “We knew that we had to co-innovate with SAP to make it standard,” Mr. Hazen said. “And now everything we’re using today is standard in SAP, it’s not any unique customization.”

Building the right team. For the entirety of the project, treasury members and engineers within Google were re-prioritized, laser-focused on implementing and co-innovating with SAP.

  • “We deprioritized other projects to create bandwidth,” Mr. Hazen said. “The people that were put on the project were more senior, so we weren’t pulling off the operational team members—it was people that had done the operational work and now had moved into more senior roles.”
  • To ensure the project ran smoothly, the company hired project managers to oversee operations across the company’s different divisions.
  • Google’s treasury team worked with internal engineers and SAP to make multiple enhancements to the software’s hedge management capabilities and exposure management trading interface.

The spirit of co-innovation. It’s worth noting that Google, like all SAP customers, could have requested that the vendor provide enhancements or additional modules. But such requests are pulled into a queue and prioritized based on factors chosen by SAP.

  • “One of the great benefits of co-innovation is you’re putting your resources where that request is,” Ms. Makowski said. “’Hey, we’re willing to also invest our time in this in order to bump it to the top of the list.’
    • “So it’s not just up to them to build, develop and test it. We want to be involved and we’re willing to give resource time in order to do that.”
  • “SAP also had a lot to benefit from,” Mr. Hazen said. “The spirit of co-innovation is in each team bringing a similar amount of resources and expertise.”

Key goals. To start, Google treasury laid out initial, attainable goals focused on creating an integrated treasury platform that is scalable, using automated processes and real-time data to support and create value.

  • A key objective was connecting the team’s separate systems to a central SAP platform without any need for add-ons. As the chart below shows, a spiderweb of connections and systems was streamlined and simplified. Other benefits included:
    • Centralization of banking information into one source through access to electronic bank statements and reporting.
    • Reducing operating cash balances.
    • Enabling in-house banks, including intercompany loan management, netting, settlements and accounting and better liquidity forecasting.
    • Increasing control and standardization of transaction and reporting.
    • Integrating transactions to provide yield automated cash forecasting and liquidity management.

Closing gaps, avoiding customization. From the beginning of the implementation project, one of Google’s primary tenets was minimal customization given the difficulties encountered with its previous ERP.

  • Those customized additions required constant effort to integrate with third-party data providers and systems. “Maintaining that over time as these systems and infrastructures change takes resourcing,” Mr. Hazen said.
  • “Any time you go to customize a pre-delivered tool, you end up with a lot of issues during upgrades,” Ms. Makowski said. “So SAP helped us identify gaps and helped us close those gaps.”
  • One of them: S/4HANA lacked some foreign exchange capabilities that Google desired. “We went back to [SAP] and asked [about] their capacity to have standard solutions for our high priority items,” Ms. Makowski said. “We worked directly with them [while] gathering requirements, and then again in the build.”
  • “Google has put a lot of thought into how we do our hedging and risk management programs,” Mr. Hazen said. “We brought our hedging policies, our analytics, how we make decisions” to meetings with SAP to decipher what a system component would look like.

A new standard. “This became a standard for other companies, a pre-delivery service SAP can offer,” Ms. Makowski said. “It was advantageous on both sides, because SAP can then improve their product.”

  • Though Google’s business team identified the necessary features and improvements, they left the design to SAP. This allowed SAP to design it in a way that leveraged Google’s inputs but wasn’t Google-specific.
  • “For example, when our traders are preparing to execute trades, they will sometimes net several smaller trades together and/or vice versa, split out one large trade to several smaller ones,” she continued. “Google’s input was on the requirements, but SAP designed where, when and how that functionality would work best to accommodate as many companies as possible.”

The now-standard improvements include:

  • Hedge management and trading:
    • Multi-platform support for trading, confirmation, and settlements.
    • Integration with upstream modules to generate FX trade requests.
    • Dedicated trading application for structuring, assignment and routing of requests.
    • Fulfillment process to validate that executed trades conform to what was approved.
    • Alignment with U.S. GAAP requirements.
  • Liquidity and payments:
    • Forecast hub that enables the full use of SAP cash forecasting capabilities through direct integrations with non-SAP inputs (payroll, collections, etc.).
    • Automated intraday cash reconciliation against forecasted items.
    • Ability to raise FX trade requests directly in the cash position, supporting onshore and intercompany FX settlements.
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Drilling for Clarity on How ESG Factors Influence Credit Ratings

Oil and gas sector analysts are scrambling to explain to energy companies the link between ESG scores and credit risk.

The momentum behind ESG mandates and the conviction that companies committed to sustainability represent better investment risks have put pressure on ratings agencies to reconcile traditional credit ratings with ESG scores.

  • This reconciliation has become more challenging as the agencies themselves begin to offer ESG scores or ratings as well as sustainability assessments. One approach is to explain in more detail how ESG factors, which agencies say have always been part of their risk assessments, are incorporated into credit ratings.
  • This effort is underway with rated firms in all sectors. However, it has been a major point of discussion over the last few months with members of NeuGroup for Oil & Gas Treasury at meetings sponsored by Societe Generale, including during sessions with sector analysts from Moody’s and S&P.

Oil and gas sector analysts are scrambling to explain to energy companies the link between ESG scores and credit risk.

The momentum behind ESG mandates and the conviction that companies committed to sustainability represent better investment risks have put pressure on ratings agencies to reconcile traditional credit ratings with ESG scores.

  • This reconciliation has become more challenging as the agencies themselves begin to offer ESG scores or ratings as well as sustainability assessments. One approach is to explain in more detail how ESG factors, which agencies say have always been part of their risk assessments, are incorporated into credit ratings.
  • This effort is underway with rated firms in all sectors. However, it has been a major point of discussion over the last few months with members of NeuGroup for Oil & Gas Treasury at meetings sponsored by Societe Generale, including during sessions with sector analysts from Moody’s and S&P.

Factoring in ESG. S&P says it has factored in environmental, social and governance issues into credit ratings as part of its industry risk assessments, business risk profiles, profitability analyses and management/governance scores.

  • Often, the risk is linked to jurisdictions where the companies face greater regulatory risk. Or where they have greater exposure to physical risks including hurricanes. These factors are generally reflected in their business risk profiles.
    • In addition, environmental incidents, such as oil spills, might also impact liquidity and show up in a company’s financial risk profile, S&P says.
  • Moody’s, meanwhile, will assign issuer profile scores for each of the three areas—environmental, social and governance—based on factors deemed most material to credit. It also has introduced a carbon transition assessment scorecard for certain sectors to assess the current, medium and long-term exposure of the issuer to the transition to low carbon business activities. 
  • True to the analytical rigor that Moody’s is known for, it will also layer on an ESG credit impact score that has a five-point scale (see table below), which is significantly influenced by the company’s industry sector.  Most of the oil and gas sector will get a score of three, meaning the issuer’s ESG attributes are overall considered as having a limited impact on its current rating, with greater potential for future negative impact over time.

Impact skewing bigger. It should come as no surprise, given the increasing attention paid to climate change and the growing likelihood of a government response in the US and globally, that the potential for ESG factors to negatively affect credit ratings is increasing.

  • S&P, for instance, in January revised its “industry risk assessment for the oil and gas E&P industry to ‘moderately high’ from ‘intermediate’ due to the potential for stricter regulations, substitutions and secular shifts in industry supply/demand fundamentals the energy transition entails.” This initiated a lower rating for most of the oil majors and a “recalibration” of business risk profiles for other entities in the sector.
  • S&P has also noted “early evidence of a funding gap between entities viewed as having lower vs. higher carbon footprints,” which will impact the cost and availability of capital.

Issuers want to shine on merit. As the impact of ESG risk factors looms larger, issuers want their rating analysts to shine a light by merit. One of the key complaints NeuGroup members across all sectors make is that the ESG risk factors seem to be applied more on a sector basis than an individual issuer basis.

  • Issuers in carbon sensitive sectors in particular want to get credit for their carbon transition story, along with other ESG initiatives, to help them stand out among peers.
  • Without the ability to raise their credit outlook on individual merit, issuers in carbon-transitioning sectors must bring their peers along to mitigate the adverse impact of ESG risk factors on their credit rating.
  • Until ESG raters adopt an approach like that for credit ratings, with issuer dialogue and information sharing, including some disclosure of inside information, it is very challenging for issuers to manage their external ESG assessments.

Issuer funding at risk? Unless and until rating agencies explain effectively how issuers can individually impact ESG risk factors on their credit rating, and do the same on the ESG scores, they will be encouraging treasurers to ignore the ratings, and go directly to debt investors with their meritorious carbon transition and ESG reporting and contextual stories. Eventually, they will need a new funding model for credit ratings. 

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Food for Treasury Thought: A Recipe to Set Minimum Cash Levels

One high-growth tech treasurer shares the multiple ingredients he uses to cook up a cash level that hits the spot.

Every corporate treasurer needs to have a point of view about the level of cash their company should keep on hand.  Too much and activist investors may begin targeting the company’s stock. But wind up with too little to weather an emergency and the treasurer could be looking for a new job.

  • Members of NeuGroup for Growth-Tech Treasurers tackled this question at a recent meeting, including some discussion of simple rules of thumb, like having the cash equivalent of three months to a year of forecasted operating expenses; or holding cash equal to a small percentage of the company’s market capitalization.

One high-growth tech treasurer shares the multiple ingredients he uses to cook up a cash level that hits the spot.
 
Every corporate treasurer needs to have a point of view about the level of cash their company should keep on hand.  Too much and activist investors may begin targeting the company’s stock. But wind up with too little to weather an emergency and the treasurer could be looking for a new job.  

  • Members of NeuGroup for Growth-Tech Treasurers tackled this question at a recent meeting, including some discussion of simple rules of thumb, like having the cash equivalent of three months to a year of forecasted operating expenses; or holding cash equal to a small percentage of the company’s market capitalization.
  • But in the end, the group consensus was that there is no one formula that can be applied across the board because companies and their industries are too different. 
  • Luckily, though, the presentation of one corporate treasurer provided a basic “recipe” that can be applied to help determine the appropriate minimum cash level for a company’s specific circumstances—regardless of size or industry.

The cash level cookbook. The recipe has four main ingredients: 

  1. Liquidity considerations. These encompass a company’s cash conversion cycle, working capital and operating expenses, including estimates for seasonality and growth prospects. 
    1. Next are the company’s business profile, especially its net margins and top line growth prospects, followed by its financial profile, including commitments to stakeholders. 
    2. Carefully consider financial policies, a company’s preferred credit rating and its policies on leverage, dividends and share repurchases. 
    3. Making a cold-blooded analysis of access to funding is critical, as financial flexibility increases with credit quality.  Finally, company strategy is important.  A serial acquirer must always have ample cash and financing available, as do companies that can be subject to high levels of business volatility. 
  2. The market’s key liquidity metrics and indicators. Among the many used by market analysts, the key ones include cash to market capitalization; cash to revenue; liquidity ratios such as cash to debt, current ratio, quick ratio, and acid ratio; the cash conversion cycle, which is the days inventory outstanding plus days sales outstanding minus the days payables outstanding. 
    1. From an accounting perspective, these metrics and indicators are snapshots in time, historical facts. But it is also important to agree on a range that these might achieve in the future based on business successes, failures, and external events.
  3. Peer group analysis. This is an extremely useful process because it can engender a stimulating discussion every time a company in the peer group strays far above or below the average for each of the liquidity metrics and indicators. 
    1. It is also part of an essential feedback loop, as observations about what peers are doing can be factored back into financial policies
  4. A subjective review of the results by treasury and the executive management team.  This final ingredient is crucial to having the target levels endorsed and turned into policy. 
    1. After that, periodic reviews can help refine and update the policy, allowing everyone in management to sleep soundly, knowing the company has sufficient access to cash to withstand any shocks that appear.

Defining cash. Finally, treasury and management must agree on the definition of “cash.” This group was unanimous in choosing to include cash and highly liquid securities in the basic definition, with other sources of liquidity (such as committed term bank facilities) to be added later in the process, if warranted.  

  • Also, most members agreed that stress testing can be done at every stage of the process, but that it is probably most valuable when done at the end, after the peer group analysis and during the management review.
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