Insights

Peer-Validated Insight Distilled by NeuGroup

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

Spotlight Features

What the FASB’s Supply Chain Finance Disclosure Rules Mean for Corporates

The Science of FX Exposure Management

How to Climb the Crypto Learning Curve

Justin Jones
In Risk Management

Hedging Commodity Risk: How Polaris Put the Pieces Together

Treasury, backed by the C-Suite and Chatham Financial, worked with procurement to better manage risk exposure.

Starting or reviving a commodities hedging program requires risk managers in treasury to collaborate with procurement teams and secure the backing of the C-Suite to overcome challenges in securing changes in contracts that facilitate the use of hedge accounting. In addition, some corporates will benefit from having a knowledgeable advisor help navigate the complexities of hedging commodities.

  • Those are few of the takeaways from the first meeting of NeuGroup’s Commodities Working Group, which focused on the commodities hedging program at Polaris, a NeuGroup member company that makes off-road, on-road and marine products.

Treasury, backed by the C-Suite and Chatham Financial, worked with procurement to better manage commodity risk exposure.

Starting or reviving a commodities hedging program requires risk managers in treasury to collaborate with procurement teams and secure the backing of the C-Suite to overcome challenges in securing changes in contracts that facilitate the use of hedge accounting. In addition, some corporates will benefit from having a knowledgeable advisor help navigate the complexities of hedging commodities.

  • Those are few of the takeaways from the first meeting of NeuGroup’s Commodities Working Group, which focused on the commodities hedging program at Polaris, a NeuGroup member company that makes off-road, on-road and marine products.
  • At the session, advisors from Chatham Financial joined Matt Koller, a Polaris treasury manager who oversees currency, interest rate and commodities hedging. Polaris engaged Chatham to help it hedge commodities.
  • A growing number of NeuGroup member companies have discussed hedging commodities in the past two years amid rising costs and their negative effects on corporate earnings. Recent declines in some commodity prices have not dampened interest in the topic, even if some risk managers face more questions about timing.

A cross-functional hedging program empowered by the C-Suite. Polaris had dabbled in commodities hedging in years past but had paused the program, in part because of the impact on earnings from mark-to-market accounting prior to the ability to apply hedge accounting to commodities. The significant headwinds created by rising prices for base metals including steel led to new conversations with executive leadership about mitigating the risk of price volatility.

  • With backing and direction from the CFO, Mr. Koller’s team engaged Chatham on the feasibility of reducing risk through hedging and the risk of not hedging. Chatham helped visualize the impact of remaining unhedged by looking at the historical price ranges of commodities through the lens of outcomes that were possible, probable and expected. “We were not comfortable with the unhedged basis,” Mr. Koller said.
  • The full support of senior finance executives helped treasury conduct some challenging conversations with the procurement, or sourcing, team about modifying existing contracts—including those settled with a handshake—to include indices and be eligible for hedge accounting—a condition of the program Polaris established. Discussions between executive leaders from sourcing and finance helped pave the way for contract changes.

Risks, objectives and alignment. Treasury needs to dig into the risks (and embedded derivatives in some cases) within commodities contracts and define a corporate’s exposure, its size and the indices related to it, Chatham director Matt McGill said. Chatham begins by identifying and consolidating all of the exposures that may lurk in various contracts.

  • Quantifying risk includes measuring how movements in, say, metals prices, will affect a corporate’s expenses and bottom line. Statistics help decide “if the juice is worth the squeeze,” as Mr. McGill said.
  • Objectives for programs range from capping costs, fixing them or establishing a budget rate for the commodity. “The objectives are not as simple as FX and interest rate hedging programs,” Mr. McGill said.
  • The complexity in part reflects differing objectives of stakeholders affected by a commodities hedging program: procurement wants to reduce costs; treasury wants to reduce exposures; and accounting wants to reduce volatility on the income statement. These three groups, Mr. McGill said, “have to get aligned.”
  • At Polaris, clarity and alignment on the objective of using the hedging program to reduce risk and volatility in addition to minimizing cost was critical to establishing a program that will prepare the company for future periods of significant price volatility, Mr. Koller said.

Keeping it simple, transparent. While Chatham helped Polaris understand the potential benefits of using at-the-money calls, collar strategies and more complicated approaches, Polaris decided to go with a swaps strategy for hedging commodity risk. “We want to keep it pretty vanilla,” Mr. Koller said. Mr. McGill said using less exotic products often results in “the most effective accounting” outcomes for corporates.

  • Polaris uses Chatham to: initiate trades Polaris executes with banks within its credit facility experienced in commodities trading; measure the effectiveness of its hedges and help with reporting; and determine how long a hedge stays in other comprehensive income (OCI) before being released to the P&L.
  • Mr. Koller said it’s important that business units and executive leadership are not surprised if cash flow hedges produce losses when the underlying commodity price declines. The good news is that lower prices for the commodity will help offset the losses to some extent.
  • In the same vein, it’s essential to be clear with the C-Suite on the objective of the hedging program and make clear, for example, a given time may not be optimal to layer on hedges for 80% of the company’s exposure. But it’s also key to keep the program in place no matter what direction prices head and avoid market timing.
  • Mr. Koller recommended peers give themselves “plenty of runway” to start a program. Polaris started the process about 18 months ago. It took six months, Mr. Koller said, to put hedge designation memos in place for hedge accounting and to update documentation and connections with banks regarding ISDAs.

Follow a road map. The implementation road map in Chatham’s presentation listed these five steps:

  1. Define the risk profile.
  2. Quantify the economic risk.
  3. Establish institutional objectives.
  4. Evaluate available strategies.
  5. Implement a competitive program.

Questions to answer. To establish an effective commodities risk management program, Chatham identified three main areas of activities and decision-making: economics, accounting and operations. Within each category were questions, including:

  1. What is the worst-case financial impact of a given exposure?
  2. Can suppliers offer fixed pricing? If so, your hedging needs may be reduced.
  3. How much risk can be mitigated through hedging given forecasting and accounting constraints?
  4. Is the commodities contract a derivative?
  5. Do we need to minimize the P&L impacts of hedging?
  6. Is the contractually specified component in a contract eligible to be hedged?
  7. What is the optimal hedge strategy given the objectives and constraints?
  8. What tools do we need to manage the program?
  9. What metrics will be used to measure program effectiveness?
  10. How will we report program performance to key stakeholders?

Key accounting elements. Chatham listed these six aspects of accounting when hedging commodities, which can be complex, in part because not all commodity indices are liquid and forwards aren’t always available. This can result in proxy hedges or additional charges.

  1. Contractually specified risk. Understand if contracts have a specified index included in the pricing.
  2. Derivative qualification. If a contract qualifies as derivative, can normal purchase, normal sale (NPNS) be applied?
  3. Multiple indices. Need to prove correlation and pool into single designation.
  4. Exposure window. Compare historical forecasts vs. actuals to determine probability assertion window.
  5. Effectiveness assessment. Identify the index of the hedging instrument and test effectiveness vs. a hypothetical derivative.
  6. Exposure lifecycle review. Perform a walkthrough of the exposure to determine proper lifecycle events.
Read More Read Less
Contact Us
Justin Jones
In Diversity & Inclusion

Seeking Out Mentors Who Balance Advocacy With Frank Feedback

The best advocates are also willing to give honest appraisals of where there is room for improvement.

Mentorship and sponsorship are recurring themes at sessions of Women in NeuGroup where women in finance discuss the benefits of having supporters who help sharpen their skills, guide their careers and stand up for them.

  • In a video you can watch by hitting the play button below, Kristen Michaud, a principal in PwC’s Finance Transformation group, talks about the support of colleagues who have stepped in and called attention to her expertise if other people in a meeting were not including her in a discussion where she was the expert.

The best advocates are also willing to give honest appraisals of where there is room for improvement.

Mentorship and sponsorship are recurring themes at sessions of Women in NeuGroup where women in finance discuss the benefits of having supporters who help sharpen their skills, guide their careers and stand up for them.

  • In a video you can watch by hitting the play button below, Kristen Michaud, a principal in PwC’s Finance Transformation group, talks about the support of colleagues who have stepped in and called attention to her expertise if other people in a meeting were not including her in a discussion where she was the expert.
  • But she also speaks about the importance of having advocates who are willing to dole out tough love and frank feedback when they think you’re getting too comfortable or not taking advantage of an opportunity.

An MBA, not med school. Ms. Michaud studied biology and planned to go to medical school; but she became fascinated by finance and IT and got an MBA instead. Her resume includes a decade at IBM, where she rose to manager of global treasury systems, and more than nine years at GE Capital. Today, she helps guide treasury teams through digital transformation initiatives.

  • On the next episode of NeuGroup’s Strategic Finance Lab podcast (available on Apple and Spotify), Ms. Michaud talks with NeuGroup’s Julie Zawacki-Lucci. They discuss their experiences as women in finance, the individuals that aided them along their journey and the skills they’ve developed that have helped them thrive.
Read More Read Less
Contact Us
Justin Jones
In Treasury Management

Clearing a Path to Effective Change Management

Finance teams in the throes of change need leadership, resources and collaboration with HR to overcome obstacles.

Recession fears are intensifying the pressure on finance and other G&A functions to cut costs. The result is often a reduction in headcount. To meet the challenge of doing more with less, treasury and finance organizations are looking for new ways to work more efficiently.

    • At the spring meeting of NeuGroup for Mega-Cap Treasurers, one member reported that his group has already been asked to match the budget-reduction mandate issued to other functions.

        • As a result, treasury had to let go of staff and find ways to leverage the company’s offshore business process outsourcing provider (BPO) to execute critical activities.

    • But outsourcing to third parties isn’t the only way treasurers are responding to rising demand to decrease headcount; some are migrating activities to shared services centers and fast-tracking digital transformation projects.

Finance teams in the throes of change need leadership, resources and collaboration with HR to overcome obstacles.

Recession fears are intensifying the pressure on finance and other G&A functions to cut costs. The result is often a reduction in headcount. To meet the challenge of doing more with less, treasury and finance organizations are looking for new ways to work more efficiently.

  • At the spring meeting of NeuGroup for Mega-Cap Treasurers, one member reported that his group has already been asked to match the budget-reduction mandate issued to other functions.
    • As a result, treasury had to let go of staff and find ways to leverage the company’s offshore business process outsourcing provider (BPO) to execute critical activities.
  • But outsourcing to third parties isn’t the only way treasurers are responding to rising demand to decrease headcount; some are migrating activities to shared services centers and fast-tracking digital transformation projects.

It’s about the people. Redesigning and automating legacy processes is critical to the sustainability of the finance organization. However, getting staff on board can be a significant obstacle to the success of a transformation initiative.

  • Respondents to NeuGroup’s February 2022 Change Management Survey ranked fear of change as the second largest hurdle to effective change management (see chart below).
  • In many cases, new tools like machine learning raise concerns about job losses.
  • Also common: ML algorithms can be viewed as black boxes and thus rejected by staff who prefer using Excel. “You have to have transparency,” said a member of NeuGroup for Mega-Cap Heads of FP&A at a recent monthly session. “If that means using a less-complex algorithm that people can understand, that is better than pushing a highly sophisticated one that no one wants to use,” she said.
  • In another case, a member company rolled out Tableau to global finance staff to empower them to conduct on-demand analysis. “The result was a proliferation of models and data definitions, which did not deliver the desired outcomes.” Cognizant of people’s inclination to build their own model, the company is developing a standard dashboard that everyone can use.

Changing for the better. An effective change management program is essential to the success of transformation initiatives; however, the survey revealed that:

  • Only 7% of respondents have highly effective change management programs.
  • More worrisome: 43% said their change management project plan is not aligned with the overall transformation initiative.

During the FP&A group’s February session, members shared challenges and recommended opportunities for improvement.

Strained resources. To sustain the program over time, finance needs dedicated leadership and resources. On a positive note, the survey found that 64% of companies already have a dedicated change management leader or team and 62% have a change management budget as part of their overall transformation budget (typically under 5% of that total cost).

However, as cost pressures mount, companies are pulling back on what they consider soft spending; NeuGroup members are reporting they are losing critical resources.

  • “We used to have four people dedicated to change management,” according to one member. “Now we have one.” That single resource supports four FP&A groups and is pulled in too many directions, she said.
  • Another member initially had a team of dedicated HR staff assigned to collaborate on the program, but no longer does. “We have a single resource who is now embedded in finance.”
  • With change being a constant, and limited specialized resources, the question arose whether the capability should be embedded in everyone’s job. One member cautioned against this approach: “When you make something everyone’s job you make it nobody’s job.”

Fuzzy accountability. The survey also showed that change management is often owned jointly with HR. But the respondents said the current level of collaboration leaves a lot to be desired.

  • Half the respondents said working closely with HR is very important or even critical, yet 71% ranked the effectiveness of their collaboration with HR at three or less out of five (see chart).
  • While finance may own the transformation change management program, HR typically runs talent development programs at the enterprise level, and the two may not be aligned. The result is a disconnect in terms of building staff’s long-term skills and competencies. “We end up doing only very short-term training and upskilling,” a member said, thus not providing continuity of support.

Finding the right KPIs. Ultimately, in order to assess the effectiveness of the change management program, members need hard data. But to measure the success of the effort, finance requires a set of KPIs that are aligned with its transformation objectives.

  • Only 43% of respondents said they use KPIs to measure the change management program’s success.
  • And, as a member at one large company found, “just because you have KPIs does not mean you have the right KPIs.” After a three-year transformation process, “we found that we weren’t necessarily measuring the right things,” she said.
  • “The first time around, we used quantitative and qualitative metrics, but going forward, the path is less clear,” she added. “We decided that the KPIs we used before were not truly effective in assessing our success.”
Read More Read Less
Contact Us
Justin Jones
In Banking, Risk Management

Finance Fallout: SVB’s Head-Scratching Risk Management Failure

SVB insights from NeuGroup founder Joseph Neu and senior executive advisors Paul Dalle Molle and Jerry Olivo.

Financial crises like the failure of Silicon Valley Bank reveal the grit, dedication and skill of first-rate treasury and finance teams—and their ability to manage risk when battling forces they can’t control. Upheaval, volatility and uncertainty also test the mettle of NeuGroup, whose mission is to help members, sponsors and partners withstand the blows.

  • Hours after regulators shut down SVB last Friday, the NeuGroup team ran an hour-long session where more than three dozen members shared what they knew and what they’d done so far. They answered each other’s questions and provided a path for their peers through the fog.
  • The Silicon Valley Bank Crisis Community session and two others have been hosted by senior executive advisor Paul Dalle Molle, a former head of technology banking in North America at Societe Generale.
  • In a video clip you can watch by hitting the play button below, Paul offers his observations on a bank failure that he says did not have to take place, as well as takeaways from hearing how members have navigated the crisis and lessons the collapse of SVB holds for corporates and their finance teams.

SVB insights from NeuGroup founder Joseph Neu and senior executive advisors Paul Dalle Molle and Jerry Olivo.

Financial crises like the failure of Silicon Valley Bank reveal the grit, dedication and skill of first-rate treasury and finance teams—and their ability to manage risk when battling forces they can’t control. Upheaval, volatility and uncertainty also test the mettle of NeuGroup, whose mission is to help members, sponsors and partners withstand the blows.

  • Hours after regulators shut down SVB last Friday, the NeuGroup team ran an hour-long session where more than three dozen members shared what they knew and what they’d done so far. They answered each other’s questions and provided a path for their peers through the fog.
  • The Silicon Valley Bank Crisis Community session and two others have been hosted by senior executive advisor Paul Dalle Molle, a former head of technology banking in North America at Societe Generale.
  • In a video clip you can watch by hitting the play button below, Paul offers his observations on a bank failure that he says did not have to take place, as well as takeaways from hearing how members have navigated the crisis and lessons the collapse of SVB holds for corporates and their finance teams.

Deep bench. Paul is one member of a NeuGroup bench deep with talented individuals with a wealth of experience in banking and capital markets who have stepped up to connect and help guide members dealing with the fallout from SVB’s collapse.

  • They include Jerry Olivo former head of intraday liquidity at Citi treasury, senior director Scott Flieger (formerly of Deutsche Bank) and director Chris Hall (Mizuho, Deutsche Bank).
  • Jerry’s observations include this take on SVB’s shortcomings and the run on the bank: “Every bank with meaningful corporate and institutional deposit levels should be monitoring depositor concentration risks. This was a discussion topic at each of Citi’s Institutional Client Group ALCo (asset and liability committee) meetings.
  • “Also, this is where management skill comes into play. There’s no historic model out there that could be relied upon to forecast the very unique monetary and fiscal environments of the recent past, but common sense should suggest that if concentrated deposits build up as fast as they did, they could also exit at an accelerated pace and should be invested accordingly.”

Running the team. Overseeing the NeuGroup team’s response to the SVB crisis is founder and CEO Joseph Neu, whose experience guiding members during tough times includes the Great Financial Crisis of 2008. Here are some of his insights on the SVB debacle:

  • There is a need for cross-organizational collaboration during the developing banking crisis. Treasury has to work with AR to determine which customers were exposed to SVB or Signature Bank. Procurement must determine which suppliers lost funding, and the AP team needs to reroute payments away from frozen accounts in trust.
  • There is also a need to work with all of the finance team to validate new payment instructions, to avoid falling victim to cybercriminals. This is a good time for a payment security assessment.
  • It might also be time to work with HR to see how employees could be exposed, including via payroll services. Even if they are through a solid bank counterparty, is there a plan B if they go down operationally due, for example, to a cyber incident?
  • All the focus on uninsured deposits should also trigger treasury to review where it has cash and if it’s putting all idle cash to work securely in money funds or treasury bills earning 4% to 5% or more.
  • Following board presentations on risk, bank counterparty risk dashboards may return—if they went away—and some new KPIs might be inserted, such as the percentage of investment portfolio classified as HTM, interest rate swaps relative to fixed income assets, and the diversification of the deposits base.
  • If you don’t feel good about your own liquidity right now, do something about it by pre-funding, upsizing the revolver, and improving working capital efficiency—a big area demanding cross-organizational collaboration. Consider tapping the breaks on share repurchases.

A treasurer’s thanks. Following the first Silicon Valley Bank Crisis Community session, a NeuGroup member who is treasurer of a consumer retailer wrote, “As I finally sit down at the end of a very long week which was topped off by the SVB situation (which took up my entire day—I really could not afford the time), I wanted to offer thanks for everything the NeuGroup team does.

  • “The ability to pull together a short notice, emergency meeting on SVB that so many members participated in is just another example of the tremendous value associated with being part of NeuGroup. Thank you!”
  • NeuGroup in turn extends its thanks to you and every member committed to sharing knowledge with peers in need—a commitment grounded in trust that you’ll receive their help when you need it most.
  • Trying times like these require finance professionals to support each other with even greater determination than when times are good. And NeuGroup’s mission is to enable and enrich that support, whenever and wherever possible.
Read More Read Less
Contact Us
Justin Jones
In FX, Technology

Advancing Analytics: FX is Embracing AI and ML

Rising pressure to protect earnings from currency volatility is prompting FX risk managers to pursue more advanced analytics.

Sixty-nine percent: That’s the percentage of participants in a recent NeuGroup for Foreign Exchange monthly session who are already using or are exploring the adoption of advanced analytics solutions. Their reasons include improving the quality of the FX exposure forecast, conducting scenario planning and having a more refined capability to measure hedge program performance in terms of volume, effectiveness and cost.

Rising pressure to protect earnings from currency volatility is prompting FX risk managers to pursue more advanced analytics.

Sixty-nine percent: That’s the percentage of participants in a recent NeuGroup for Foreign Exchange monthly session who are already using or are exploring the adoption of advanced analytics solutions. Their reasons include improving the quality of the FX exposure forecast, conducting scenario planning and having a more refined capability to measure hedge program performance in terms of volume, effectiveness and cost.

A sweeping trend. The pursuit of more AI- and machine learning-enabled tools is not confined to the FX department. While a little late to the party, treasuries are now joining the rest of finance in looking to produce more sophisticated and actionable insight to support business and senior management decisions.

Learning ML. Most members are still in the experimentation stage, but according to one participant in the session, the only way to come up the learning curve is by doing.

  • “We’ve been on a journey,” the FX manager said. One area of focus has been enhancing the accuracy of the forecast using machine learning algorithms. “Forecasting is a challenge,” he said, “because our cash flow forecasting process involves reaching out to over 150 entities worldwide.”
  • This corporate has been helped by the establishment of a finance center of excellence (COE) for analytics, staffed by data scientists who can write and update algorithms. “We are using data scientists to do more of a top-down format,” he explained. “We added the data scientists internally to help with this.”
  • While the company has had some success in forecasting net exposure, “We still don’t have visibility to explain variances.” With pressure from management, getting to the root cause is essential.
  • “We’re not perfect today,” he admitted. “We need to update the algorithms so we can get more details and set new parameters. We are making progress in improving accuracy but also automating part of the job to free up staff capacity.”

Leveraging embedded tools. Like the company above, other treasuries are taking advantage of finance-wide automation initiatives to gain access to better tools, for example through the implementation of SAP S/4HANA.

  • “We have been on a journey almost for almost five years to integrate all of treasury into SAP, initially using SAP Treasury, but now in a migration to S/4HANA,” one member shared.
  • Having an all-in-one solution was a big draw. “It has allowed us to get rid of third parties and give us more direct information for reporting,” she added. The third parties include vendors of FX risk management solutions.
  • “Our first step is to aggregate and clean the data, so we can all pull from the same source,” she said. “Data analytics is huge for us, and we’re working to build those models.”
  • Another member who is implementing S/4HANA said that the immediate benefit for treasury has been real-time visibility into data. “We’re very much in the limelight right now because of the extreme volatility and having this technology has helped us tremendously.”
  • “Once [SAP] gets full functionality in the platform, they will give other vendors a run for their money,” the participant predicted.

Three key considerations. The migration to SAP S/4HANA is a trend across NeuGroup finance and treasury peer groups. For the company referenced above, the transition was relatively smooth because it was on a single instance of SAP from the start. The FX manager acknowledges the migration is more challenging for organizations with multiple ERPs or even multiple instances of the same ERP.

Here are three things to consider, as the pressure to improve analytics mounts:

  1. The acceleration of finance digital transformation is bringing new opportunities for treasury teams that do not require securing a dedicated budget. With cost pressures mounting, it’s a lot easier to build a business case for benefiting from in-flight implementations.
  2. At organizations with a fractured system environment, treasury should consider whether a TMS vendor is adding or planning to add AI-enabled analytics, for example for forecasting. Another option is to adopt a standalone analytics solution to speed up the development of modeling capabilities; some tools may already be in use in another part of finance, e.g., FP&A.
  3. Finally, if treasury and finance are looking to build analytics core competency, there are ways to leverage a COE model to amplify the reach of a small group of data scientists. The benefit is the ability to try out different use cases and improve on the go.
Read More Read Less
Contact Us
Justin Jones
In Diversity & Inclusion, The NeuGroup Insights Interview

Nurturing a Finance Career and a Family: One Woman’s Journey

How Emily Backstrom of General Mills navigates career and family, and how the company supports women in finance.

In this Strategic Finance Lab podcast marking Women’s History Month, Emily Backstrom, vice president for corporate finance at General Mills, shares with NeuGroup’s Nilly Essaides how she has successfully managed a 21-year career at the company, rising to her current position overseeing enterprise FP&A among other responsibilities.

  • Ms. Backstrom also discusses the value of deciding to lean into your career at certain times and, at other times, to step back to devote more time to family, as she did when she was a new mother.

How Emily Backstrom of General Mills navigates career and family, and how the company supports women in finance.

In this Strategic Finance Lab podcast marking Women’s History Month, Emily Backstrom, vice president for corporate finance at General Mills, shares with NeuGroup’s Nilly Essaides how she has successfully managed a 21-year career at the company, rising to her current position overseeing enterprise FP&A among other responsibilities.

  • Ms. Backstrom also discusses the value of deciding to lean into your career at certain times and, at other times, to step back to devote more time to family, as she did when she was a new mother.
  • In addition to offering advice for women juggling work and family and describing how General Mills supports women employees, Ms. Backstrom walks through her career journey, including a decade of experience in commercial finance leadership roles across the company’s operating segments and four years in Singapore, where she served as vice president of finance for Asia & Latin America.
  • Listen now by heading to Apple or Spotify.

In the interview, Ms. Backstrom also talks about the importance of making decisions based on values. That approach is one key reason she decided against returning to Wall Street after getting her MBA and sought out a company that would provide work-life balance and pursue her interest in business strategy.

  • “My learning is that if you make a choice based on culture and one that’s going to give you space to grow, you can build a really long career even if it is only under one roof of one company,” she says in the podcast.

Read More Read Less
Contact Us
Justin Jones
In Risk Management

Striking a Balance: Simplicity and Complexity in Audit Reports

How internal auditors manage audit ratings and opinions is key to clear communication with the audit committee and management.

There is no one way to present an update to the audit committee (AC) of a board of directors. But there is a general consensus that internal auditors must be succinct and not drag AC members into the weeds with too many details.

  • That takeaway emerged at a recent monthly meeting of NeuGroup for Internal Audit Executives designed to help one group member create an internal audit (IA) rating and opinion program for her company.

How internal auditors manage audit ratings and opinions is key to clear communication with the audit committee and management.

There is no one way to present an update to the audit committee (AC) of a board of directors. But there is a general consensus that internal auditors must be succinct and not drag AC members into the weeds with too many details.

  • That takeaway emerged at a recent monthly meeting of NeuGroup for Internal Audit Executives designed to help one group member create an internal audit (IA) rating and opinion program for her company.
  • Members offered differing approaches to building an audit structure and communicating findings to management and the AC. This variance produced an illuminating discussion about the granularity and parameters of reporting structures.
  • A NeuGroup Peer Research survey conducted before the session revealed that 60% of respondents use a three- or four-level system for overall audit opinions and 91% of the companies used a three- or four-level system in providing risk ratings.
  • Some members offer overall audit opinions along with risk ratings, while others have abandoned providing opinions. One member said at previous companies he’d worked for, “CEOs and CFOs preferred not to have opinions for the report because they didn’t like the way it looked.”

Striking a balance. A balance must be struck to build a common understanding between internal audit, the AC and management. At several companies this has been achieved, in part, by simplifying the ratings scale used by IA to bring more efficiency to the IA function.

  • One member said, “We were spending a lot of calories over ‘which side of the line does it fall,’ rather than, ‘does everyone agree on the facts,’ and can we just get on with fixing the issue.”
  • Another member mentioned that it often comes down to leadership’s preferences, and that their audit committee wanted to keep the detailed ratings system because it helped them see which direction the process or control was trending.

What to include in a report. Internal auditors must also come to an agreement, sometimes with the input from the AC chair, about the level of detail in audit reports. Several members agreed that too much detail in the report might “excite the audit committee, perhaps unnecessarily,” opening up a can of worms about a finding that they didn’t need to worry about.

  • One member said a previous employer changed its color scheme for ratings from red, yellow and green to dark blue, medium blue and light blue so nobody was unnecessarily alarmed.
  • Some member companies provide their full audit report, including low-risk issues, to management but give a trimmed down executive summary to the audit committee. Other members provide all findings in an appendix to their executive summary that the AC can access.

Tracking issues. Beyond performing the initial audit, internal auditors must decide which issues should be tracked and which left to management to correct based on a management action plan (MAP). Some members track all of their findings, even low-risk issues, while others rely on attestations from management that they will follow IA recommendations.

  • One member transitioned from tracking all issues to using management attestations, he said, “because I was spending an inordinate amount of time validating MAPs, [even] low-risk ones. If they’re risk-rated why are we spending the same amount of time on a high one as a low one?
  • “My assessment was: ‘Does your dentist go and check that you’re brushing your teeth all the time?’ At some point you have to rely on people doing what they said they would do. Now if we find in a subsequent audit that they have misrepresented something, then we almost always mark that as a [high-risk issue]. I have to rely on management to understand the importance of the control.”

Bottom line: There are many ways to go about running an internal audit team, but the one commonality is finding the solution that leads to the most trust and understanding between IA, executives, and the AC.

Read More Read Less
Contact Us
Justin Jones
In Technology

Making the Leap: SAP Treasury Solutions That Run on S/4HANA

PwC insights on corporates using SAP treasury tools and S/4HANA to ease automation and data analytics.

Implementing S/4HANA, the SAP ERP, and using SAP’s growing number of treasury modules is one way to accelerate treasury’s digital transformation—a route being taken by some multinationals that are deciding to forgo the use of a traditional treasury management system (TMS). PwC consultants discussed the benefits of this approach at recent NeuGroup meetings, including one that focused on the role of cloud-based ERPs and in-house banks.

  • It’s a route that makes the most sense for treasury teams at companies adopting S/4HANA across the enterprise—and in some cases having treasury and finance teams implement it first.

PwC insights on corporates using SAP treasury tools and S/4HANA to ease automation and data analytics.

Implementing S/4HANA, the SAP ERP, and using SAP’s growing number of treasury modules is one way to accelerate treasury’s digital transformation—a route being taken by some multinationals that are deciding to forgo the use of a traditional treasury management system (TMS). PwC consultants discussed the benefits of this approach at recent NeuGroup meetings, including one that focused on the role of cloud-based ERPs and in-house banks.

  • It’s a route that makes the most sense for treasury teams at companies adopting S/4HANA across the enterprise—and in some cases having treasury and finance teams implement it first.
  • “If SAP is your main ERP solution, then transitioning to S/4HANA will provide the best capability and experience for treasury needs,” according to a PwC presentation demonstrating that S/4HANA connects to SAP treasury software and also to third-party solutions for functions including trading and working capital management.
  • In a follow-up conversation, Karsten Kohl, principal at PwC, said that adopting SAP treasury solutions can give corporates the ability to better leverage ERP data, including for cash forecasting, balance sheet hedging and payments. SAP, he added, is a reliable vendor, while some “niche [treasury] systems are getting consolidated or lack attention from their respective vendors.”

Roadmap for the future. The treasurer at one NeuGroup member company said that by implementing S/4HANA and adopting SAP treasury software solutions, his company is “buying a roadmap for the future” and expects to benefit by having all its data in one spot.

  • He said by using a data analysis tool like Tableau with just one database—the case with SAP S/4HANA—“you can get the data generally faster, quicker and more up-to-date” than if Tableau is pointed at multiple databases. He also likes having a system that’s cloud-based and offers the company robust support.
  • This company will employ a private cloud that is an individual instance of the ERP with customization options. “This is the solution that most [MNCs] are using and that offers both comprehensive treasury functionality and the option to interface to SaaS TMS solutions,” Mr. Kohl explained. “It also offers flexible connectivity.”
  • Smaller companies may elect to use the public cloud, using “exactly the same instance” of the ERP as other SAP customers, he said.

Evolution of SAP treasury tools. Improvements SAP has made to its treasury and risk management solutions have persuaded more finance teams to use them. For example, SAP responded to pressure it received about its cash management and short-term cash positioning modules, Mr. Kohl said. “The solution has come a long way over the last few years and is a serious competitor in the treasury system market.”

  • PwC’s presentation showed a timeline of the steady development and expansion of SAP treasury technology in three categories since the debut of S/4HANA in 2015:
  1. Banking and payments.
  2. Cash and liquidity management.
  3. Financial risk management.
  • Among other milestones, the timeline displays SAP’s cash flow analyzer and hedge management “cockpit” for FX cash flow hedging coming online before 2018, followed in subsequent years by a payment factory solution, an FX balance sheet hedging tool, a new AI-based cash forecast solution in the last year and a new in-house bank solution in 2023.
  • SAP has also shown a willingness to collaborate with some corporates on standardized treasury solutions that work with S/4HANA that benefit other companies. NeuGroup Insights reported in Nov. 2021 that Google’s treasury team worked with its own engineers and SAP to make multiple enhancements to the software’s hedge management capabilities and exposure management trading interface.

Weighing pros and cons. Some NeuGroup members say that while SAP’s treasury tools have improved, the software is not intuitive and can require multiple keystrokes to do a simple task. They also recommend that treasury teams read SAP contracts very carefully to avoid agreeing to pay for services they don’t need.

  • PwC’s Mr. Kohl says that while SAP’s treasury system will never be as flexible as a standalone solution, adopting S/4HANA and SAP treasury tools allows corporates to achieve a level of integration and transparency that will serve them well on the journey to treasury transformation.
  • Another key benefit to weigh, he says, is the quality of the functionality SAP has built into the software for in-house banks and payment factories, which it redesigned from scratch.
Read More Read Less
Contact Us
Justin Jones
In Capital Markets, Diversity & Inclusion

Win-win: Prioritizing D&I Firms for Share Repurchase Programs

Many NeuGroup members say diverse-owned firms excel at open market share repurchases.

A long-simmering debate over share repurchases is heating up, generating headlines featuring President Biden and Warren Buffett. But there is no debating that stock buybacks remain a hugely significant tool for corporate capital allocation: they’re projected to exceed $1 trillion in 2023.

  • Bigger insight: Comments about buybacks by NeuGroup members at recent meetings also reveal growing agreement that diverse-owned banks and brokerage firms are distinguishing themselves on share repurchases, providing treasury teams with top-rate service and achieving pricing on open market repurchase (OMR) programs that equals or surpasses other banks.

Many NeuGroup members say diverse-owned firms excel at open market share repurchases.

A long-simmering debate over share repurchases is heating up, generating headlines featuring President Biden and Warren Buffett. But there is no debating that stock buybacks remain a hugely significant tool for corporate capital allocation: they’re projected to exceed $1 trillion in 2023.

  • Bigger insight: Comments about buybacks by NeuGroup members at recent meetings also reveal growing agreement that diverse-owned banks and brokerage firms are distinguishing themselves on share repurchases, providing treasury teams with top-rate service and achieving pricing on open market repurchase (OMR) programs that equals or surpasses other banks.

Focused eyeballs. Size is one factor explaining the high marks corporates give diverse-owned firms. “They’re smaller, they’re really focused, they’re really driven, they’re not as overextended across the large numbers of programs,” one member said. “And at the same time, I noticed many bulge brackets shrinking their support of share repurchases.”

  • Sobani Warner, co-head of corporate finance at Siebert Williams Shank (SWS), one of the nation’s top diverse-owned firms, told NeuGroup Insights, “We probably have more eyeballs watching buybacks; we have the head of our desk watching, making sure that we are able to deliver within the parameters clients set forth, following their instructions, communicating with them.”
  • Participation in bond deals may be more lucrative for banks, but lower fees for OMRs are not a disincentive for many diverse-owned firms. “There’s no question that the business is lower margin, but it’s a solid margin relative to trading for institutional equities—it’s all about what your perspective is,” Ms. Warner said.
  • “The more touchpoints you have, the stickier you are,” she added. “Then clients understand the importance that we place on them by seeing us handle different types of their business with white glove service.”

High performance, high service. “Our experience has been excellent, the performance vs. volume-weighted average price (VWAP) was just as good as all the bigger banks from our revolver and better than average,” said one member who uses a D&I firm for OMRs. He added that he’s had no back-office or administrative issues, and “it was certainly a positive experience, and we have no reservations about continuing to use them.”

  • The member first vetted the broker’s repurchase desk, checking the number of traders and their experiences, and seeking references from other corporates. The member has since been used as a reference by the diverse-owned firm numerous times.
  • “If you use them all the time, your bank group might get upset because they’re losing fees, but we don’t have any problems sharing that business around,” he said.

Limitations and ways around them. Despite high performance on open market repurchases, just 40% of members who work with diverse-owned investment firms who responded to a recent NeuGroup research survey said they use the firms for buybacks. One reason, suggested by the member quoted above: many corporates would have to go outside their existing bank group to find, vet and choose another firm.

  • Also, as Ms. Warner explained, diverse-owned firms like SWS have balance sheet limitations, an obstacle for accelerated share repurchases (ASRs), which require principal trading and forward transactions.
  • However, SWS recently formed an alliance with a bulge-bracket bank that allows clients who may not be interested in OMRs to engage with SWS on ASRs, despite the size of its balance sheet.
  • The larger bank manages the risk on the deal, as well as doing the derivatives trading, which Ms. Warner said leaves SWS to “contribute by doing the baseline open market trading.”
  • “The larger firms realize that many companies want to be able to engage with the D&I brokers for their repurchase activities,” she said. “This arrangement allows a company to incorporate a D&I firm in their share buyback process and do an ASR.”
Read More Read Less
Contact Us
Justin Jones
In Regional, Treasury Management

Reimagining the Regional Treasury Center’s Strategic Role

Post-pandemic thinking on the role of Asian regional treasury centers, often based in Singapore.

By Joseph Neu

I was excited to return to in February for the first time since 2019 to address NeuGroup for Asia Treasury, a group launched in 2011 to connect member companies to this vital region. While much has changed in a dozen years, Asia in 2023 remains crucial for MNC growth plans, so the group’s bridging mission remains more important than ever.

Post-pandemic thinking on the role of Asian regional treasury centers, often based in Singapore.

By Joseph Neu

I was excited to return to Singapore in February for the first time since 2019 to address NeuGroup for Asia Treasury, a group launched in 2011 to connect member companies to this vital region. While much has changed in a dozen years, Asia in 2023 remains crucial for MNC growth plans, so the group’s bridging mission remains more important than ever.

  • When I met with members before the pandemic, I wanted to help them navigate a more strategic role for MNC regional treasury. Since then, NeuGroup has pivoted further to embrace strategic finance professionals who move beyond SG&A support roles to become valued business partners.
  • It is my mission now to see regional treasury centers (RTCs)—especially those in Asia—join this pivot. The roles and responsibilities of RTCs must elevate to deliver more value. Treasury operations and low-value transactional work belong elsewhere—ideally in the hands of machines.
  • The good news is that discussions with members suggest that RTC roles will be more customer- and supplier-facing—aligning them with the strategic finance focus.

Innovation that drives growth. Singapore has gained in strategic significance for MNCs as a gateway to Southeast Asia—becoming even more expensive as a result; the economics support the continuing trend toward local hires vs. expats doing “study abroad programs.” The city-state, meanwhile, has continued to successfully position itself as a finance and innovation center, including for liquidity structures, especially payments.

  • Chinese tech and other companies are setting up shop to support their international businesses and leapfrogging traditional cross-border structures.
  • The Monetary Authority of Singapore, the central bank, is supporting numerous projects to unlock value from the (regulated) digitalization of payments across borders. Among these, Project Ubin, has resulted in experimentation with blockchain-based payment rails for programable money.
  • In 2021, DBS, JPMorgan and Temasek formed a special tripartite technology company “to reimagine and accelerate value movements for payments, trade and foreign exchange settlement in a new digital era.”
  • Not all programmable money has to live on a blockchain, yet what banks are learning from experimentation with digital currency is showing up in the fiat world, segregating firm funds from those of ecosystem “marketplace sellers” and integrating bank accounts and digital wallets.
  • Separating real solutions from hype is a role for Singapore-based RTCs. Speaking to experts there will help MNCs do this.

RTCs should be bridging all this innovation to drive business growth.

  • Technology-enabled treasury operations with programmable money will free up time to do this.
  • The data from digitalization of transactions will make forecasting and planning that better serve business ecosystems less time-consuming.

RTC incentives no longer tax driven. The other major change from 2011 is that tax incentives are no longer a driver of treasury center location. OECD corporate minimum tax and BEPS have taken tax incentives further off the table in 2023—if not eliminated them as an RTC consideration.

  • Today, financial infrastructure, policy and government support are what matters. Grants to support strategic finance investment, including the training and development of future-oriented, strategic finance professionals have replaced incentivized tax rates.
  • Cost and quality of living also count in our post-pandemic world. This is why Thailand is making a bid to attract start-ups and finance types who would rather not have to fly to play at the beach.
  • Tax structures, of course, never fully go away, so check with your tax department to see if there isn’t something they can design that still works from a cash perspective.

Agility centers. The final lesson from the pandemic being applied at RTCs is how to remain agile and promote agility out to the periphery and back to the center. Indeed, promoting agility from the regional center may be the answer to unlocking the most growth and innovation in Asia.

  • Supply chains are shifting and MNCs need to be agile to keep them both resilient and sustainable. Let RTCs support these shifts from a finance perspective.
  • Shared services are transforming with the opportunities empowered by technology. What was once a RTC coordinating role with a low-cost center might become one for higher-value activities with a center of excellence.
  • Finally, RTCs can educate local monetary authorities and other government policymakers to adjust policies to better promote direct investment and become more agile in how they manage their balance of payments.

The mission. Working with our members and their partners in the region, NeuGroup remains committed to:

  • Supporting MNCs in Asia.
  • Making regional treasury centers more strategic and agile.
  • Connecting members with all finance-business partner activities in the region.
  • Bridging those finance-business partner activities in Asia with those HQ is planning to bring into the region.
  • Making the career paths for finance professionals in the region more rewarding.
Read More Read Less
Contact Us
Justin Jones
In FX

Lowering the Volume on FX Noise in the P&L

Higher interest rates and economic uncertainty have treasuries taking a long look at FX risk management programs.

Recent signs of economic strength and enduring inflation have raised the specter of more interest rate hikes. This does not come as a surprise to NeuGroup members: In the Treasurers’ 2023 Agenda Survey, they ranked political and financial volatility as second and third on their list of risks for this year. That’s up from fourth and fifth place in 2022.

Increased scrutiny. While economic and financial market volatility influence every part of treasury, they have the most direct impact on FX risk management. Fluctuations in the value of the US dollar against other currencies are threatening to deliver a double blow to companies’ financial performance, i.e., injecting volatility into the P&L, just as earnings are diminishing.

Higher interest rates and economic uncertainty have treasuries taking a long look at FX risk management programs.

Recent signs of economic strength and enduring inflation have raised the specter of more interest rate hikes. This does not come as a surprise to NeuGroup members: In the Treasurers’ 2023 Agenda Survey, they ranked political and financial volatility as second and third on their list of risks for this year. That’s up from fourth and fifth place in 2022.

Increased scrutiny. While economic and financial market volatility influence every part of treasury, they have the most direct impact on FX risk management. Fluctuations in the value of the US dollar against other currencies are threatening to deliver a double blow to companies’ financial performance, i.e., injecting volatility into the P&L, just as earnings are diminishing.

  • “Treasury is under a microscope,” said a participant in a recent agenda survey debriefing session for members of NeuGroup for Foreign Exchange.
  • 60% of participants reported they are working more closely with the CFO and the board, and one-third are revving up their collaboration with investor relations.
  • “If your hedging program is effective, you shouldn’t have a ton of noise, you should be talking to investors about everything else besides FX,” one member said.

Building a partnership with the business. The adverse effects of changes in currencies’ value are also highlighting the important role FX managers can have in supporting business decisions, from providing more accurate forecasts to build business plans to acting as a bridge between treasury and operational functions like procurement.

  • The focus is on “helping our commercial finance teams or CFO to explain how the financial impact has changed,” one session participant said. “We’re not trying to predict the market, but we’re looking at things that can happen, what to expect internally, and what’s driving financials.”
  • “We have been working with FP&A and providing them information on expectations of forward effects and gains/losses based on our findings,” another member added. “We communicate much more often with them to try and compare and get a more accurate forecast to help drive business decisions.”

Focus on the balance sheet. C-Suite concerns about FX impact on the P&L are prompting members to review risk management strategies, for example balance sheet hedging.

  • While 44% of participants have been hedging balance sheet risk all along, 22% reported they are working on launching a new program to reduce fluctuation in the FX gain/loss line. (See chart above)
  • “We are being asked to validate our hedging programs, and how we’re hedging,” one member shared. “We are looking at how to improve the balance sheet side of hedging, since misses are magnified due to FX volatility.”
  • “Even a small variance in hedge volume can provide positive or negative P&L impact,” agreed another, “and we’ve been tasked to fine-tune the balance sheet and cash flow hedge programs, and rethink if we’re hedging the proper volumes.”
  • As part of fine-tuning balance sheet hedging, one member conducted in-depth analysis comparing the plain-vanilla rolling forwards strategy to determine if they would do better by using collars, long forwards and participating forwards. After intense analysis of hedging cost and risk reduction benefits, “we decided to stay with our original approach,” the member said.

Bookending volatility. As the primary purpose of hedging is to insulate earnings per share (EPS) from FX volatility, members are taking steps to measure how their programs perform against this objective.

  • To determine performance, “we perform a [value-at-risk] analysis per currency pair looking back over the past year,” said one member who had completed the analysis in Q4 of 2022.
  • However, others suggested a more frequent review is necessary, given the wide movements in the market.
  • “We review what percentage we’re hedging and the overall performance result,” one member said. “VaR analysis used to be annual, but we started doing it twice a year in 2022.”
  • Another member questioned whether analyzing the exposures by currency is producing a holistic picture of the company’s currency risks. “Why not do the analysis on a portfolio basis?” he asked.
  • The first member noted that correlations “change all the time.” Plus, he is concerned that reporting on the portfolio level would be too confusing for his stakeholders. “You have got to know your audience,” he said.

Action items. “FX is in the limelight,” one session participant concluded. It therefore behooves risk managers to:

  1. Consider whether they should also hedge the balance sheet, given the amplified effects of frequent currency moves in order to bookend EPS volatility.
  2. Work directly with the CFO and investor relations to develop a qualitative narrative to explain the FX data to investors.
  3. Work closely with FP&A to create a more accurate forecast to support business decisions.
Read More Read Less
Contact Us
Justin Jones
In Diversity & Inclusion, FP&A, The NeuGroup Insights Interview

A Finance Leader Balances Work, Family and Helping Other Women

In two video clips, General Mills’ Emily Backstrom shares her experience juggling work and family and describes General Mills’ Women Across Finance program.

March is Women’s History Month and NeuGroup is recognizing the achievements, challenges and experiences of successful women in finance. Below you’ll find two video clips with insights from Emily Backstrom, vice president for corporate finance at General Mills. She has worked at the company for more than two decades; today, she oversees enterprise FP&A, financial capabilities and systems, and financial support for several global functions.

  • Later this month, Ms. Backstrom will be a guest on NeuGroup’s Strategic Finance Lab podcast—available on Apple and Spotify. In an interview with NeuGroup’s Nilly Essaides, she discusses her career journey, including a decade of experience in commercial finance leadership roles across the company’s operating segments, including four years in Singapore, where she served as vice president of finance for Asia & Latin America.
  • In the first video clip below, Ms. Backstrom describes her personal experiences managing her career, including when she was a new mother, and discusses the value of deciding to lean into your career at certain times and, at other times, to step back to devote more time to family.

In the second clip, she shares how General Mills supports women throughout the enterprise and within the finance organization via a group called Women Across Finance. It organizes circles of like-minded women to foster professional relationships and mentorships, and allows senior leaders like Ms. Backstrom to give back as they rise through the ranks of the company.

In two video clips, General Mills’ Emily Backstrom shares her experience juggling work and family and describes General Mills’ Women Across Finance program.

March is Women’s History Month and NeuGroup is recognizing the achievements, challenges and experiences of successful women in finance. Below you’ll find two video clips with insights from Emily Backstrom, vice president for corporate finance at General Mills. She has worked at the company for more than two decades; today, she oversees enterprise FP&A, financial capabilities and systems, and financial support for several global functions.

  • Later this month, Ms. Backstrom will be a guest on NeuGroup’s Strategic Finance Lab podcast—available on Apple and Spotify. In an interview with NeuGroup’s Nilly Essaides, she discusses her career journey, including a decade of experience in commercial finance leadership roles across the company’s operating segments, including four years in Singapore, where she served as vice president of finance for Asia & Latin America.
  • In the first video clip below, Ms. Backstrom describes her personal experiences managing her career, including when she was a new mother, and discusses the value of deciding to lean into your career at certain times and, at other times, to step back to devote more time to family.

In the second clip, she shares how General Mills supports women throughout the enterprise and within the finance organization via a group called Women Across Finance. It organizes circles of like-minded women to foster professional relationships and mentorships, and allows senior leaders like Ms. Backstrom to give back as they rise through the ranks of the company.

Read More Read Less
Contact Us
Justin Jones
In Regional, Technology

How Finance Creates Better Partnerships With Business in Asia

Lessons from finance leaders at NeuGroup meetings in Singapore highlight success factors for business partner roles.

By Joseph Neu

How to navigate finance-business partner roles and related activities in Asia—where they really matter—emerged as an underlying theme at NeuGroup meetings in Singapore last week. Here are a few of my takeaways from lively discussions with finance leaders ranging from regional treasurers to CFOs.

Lessons from finance leaders at NeuGroup meetings in Singapore highlight success factors for business partner roles.

By Joseph Neu

How to navigate finance-business partner roles and related activities in Asia—where they really matter—emerged as an underlying theme at NeuGroup meetings in Singapore last week. Here are a few of my takeaways from lively discussions with finance leaders ranging from regional treasurers to CFOs.

Translator applications. “We are a translator for global corporate strategy and business conditions in each of the regional markets,” explained one member.

  • It is often HQ that needs to better understand how business plans play out in each of Asia’s markets—and the extent to which each one is different.
  • There’s a bias to take a regional approach akin to Europe, members said. For most MNCs, Asia is 12 to 14 distinct markets.

Of course, supporting business efforts in each local market also requires finance to translate corporate goals into terms that make sense to business operations there.

  • If local managers don’t understand how to implement the corporate plan in their market, it won’t succeed.

Technology is a huge enabler. Translator apps on your smartphone or PC make basic communications across languages easier in the region.

  • Technology to interpret is only getting better.
  • AI, including ChatGPT, is already writing English emails for team members. This is a time-saver.

Other ways of saving time with technology from auto-reconciliation to programmable money are pulling more transactional work out of human hands so finance teams can focus more on business partner needs.

  • While technology is pulling more of the low-value work out of the periphery, it is also making all the data available to support business decisions in real time.

A final way technology is enabling better finance-business partnerships is with modeling scenarios for improved planning and risk identification.

  • Twin models offer a virtual world view of the business (e.g., its supply chains) to scenario plan and identify risks, plus test responses to support business decisions as real-world conditions change.
  • Predictive modeling is also proving so accurate that forecasting is no longer a pain point, especially where data is unlocked in digital businesses.

Getting to yes. The finance organization needs to fight the problem of being seen by agile business leaders as always saying no.

  • Enterprise-grade governance and controls—applied to new account openings, new payments currencies and new business model creations, etc.—contribute to finance being seen as blockers vs facilitators.
  • Countering the negative perception and getting to “yes” in support of a business transformation means finance must be extremely proactive in searching for solutions and identifying opportunities to grow before business partners ask.

Finance is still finance. All the talk of embedding finance in the business suggests that a standalone finance function may become a thing of the past. Not so, say strategic finance professionals.

  • Ultimately, finance still needs to be able to talk as finance with finance (it’s a line of defense on business overoptimism, etc.).
  • So finance leaders need reporting lines and performance goals on the right side of the control line to keep balance in the partnership.
Read More Read Less
Contact Us
Justin Jones
In Capital Markets, ESG

How GM Treasury Drives the Company to a Sustainable Future

GM’s aims for carbon neutrality by 2040 will rely on treasury’s contributions—from acquisitions to green bonds.

Treasury at General Motors is playing an active role and working closely with the business as the automaker moves away from producing vehicles with internal combustion engines (ICE) and pushes deeper into manufacturing electric vehicles (EVs).

Speaking at the pilot session of NeuGroup for Auto and Transportation, GM assistant treasurer Gustavo Vello described how treasury is helping the automaker achieve its strategic goals.

GM’s aims for carbon neutrality by 2040 will rely on treasury’s contributions—from acquisitions to green bonds.

Treasury at General Motors is playing an active role and working closely with the business as the automaker moves away from producing vehicles with internal combustion engines (ICE) and pushes deeper into manufacturing electric vehicles (EVs).

Speaking at the pilot session of NeuGroup for Auto and Transportation, GM assistant treasurer Gustavo Vello described how treasury is helping the automaker achieve its strategic goals.

Gustavo Vello, GM AT

Joint effort, joint venture. Treasury directed the financing of three new vehicle battery-cell plants by negotiating the terms of a joint venture (JV) with LG Energy Solution (LGES) and securing a $2.5 billion loan for the JV from the US Department of Energy (DoE) under its Advanced Technology Vehicles Manufacturing program—one of the first loans closed since a 2010 deal with Tesla.

  • Treasury first partnered with GM’s corporate development and legal teams to negotiate the terms of the JV, called Ultium Cells LLC, including transfer price mechanisms, volume commitments and capital structure.
  • The loan due diligence process was extensive as GM and LGES declined to guarantee the loan (mitigating impact on the parent entities’ balance sheets and credit rating metrics), requiring the DoE to underwrite the loan based on the JV’s standalone credit risk. The DoE paid special attention to the JV’s financial projections, which were hard to calculate due to uncertainty about how quickly the market will transition to electric vehicles.
  • Mr. Vello said the loan from the DoE allowed Ultium Cells to borrow at “very attractive” rates based on Treasury yields compared to rates the JV could have obtained in the financial markets.
    • GM’s analysis of the loan, though, extended beyond interest rates. “We considered everything: financial covenants, approval rights, and all elements that may restrict the company’s ability to effectively manage its business.”
    • The process proved far more difficult than a typical loan for GM because the JV was evaluated as a new company in a new industry, whereas GM benefits from being a large investment-grade issuer.

Ensuring access to key raw materials. Globally, demand for battery raw material (BRM) has increased significantly due to projected EV production, resulting in concerns that supply deficits and elevated commodity prices could persist through 2030. That is another challenge treasury is helping address.

  • “As you can imagine with all the industry transition to EVs, there’s not enough raw material for everybody,” Mr. Vello said. “What’s happening right now is a race to get that capacity, and prices are really skyrocketing.”
  • So GM’s treasury team joined a major internal effort, working with purchasing, corporate development and legal teams to structure deals to obtain required BRM volumes at lower prices. These strategies include purchasing commitments, loans and equity investments to create or expand mining capacity in stable locations—like GM’s $650 million investment in Lithium Americas, announced last month.
    • In addition to benefiting suppliers through direct investments and revenue certainty, Mr. Vello said the deals lend credibility to the smaller miners and manufacturers, “so they can raise capital more easily from other investors.”
  • Mr. Vello added that, though there is a market to hedge cobalt and lithium hydroxide, it’s “very young,” with low liquidity and high costs. “We expect that to improve over time as demand grows.”

Putting the pieces together. GM’s aggressive plans to eliminate emissions from most vehicles in the US by 2035 also means significant investments in assembly plants are needed. Although the company’s cash generation has been robust, treasury took advantage of favorable pricing by launching the company’s inaugural green bond ($2.25 billion) in August 2022.

  • GM first had to launch a sustainable finance framework that allows it to borrow funds to finance projects associated with clean transportation solutions and social initiatives. Treasury led this process, working with two bank advisors and with support from the company’s legal, sustainability and investor relations teams.
  • A few days after launching the framework, GM issued the green bond. “It was an excellent opportunity to communicate the GM EV story to fixed income investors and better align our capital structure and funding to our journey to zero emissions,” Mr. Vello said.

Cruising ahead. Another initiative, and one with a longer time horizon, is to realize the company’s plans to move to autonomous vehicles. After helping acquire Cruise Automation—a start-up developing autonomous driving technology—in 2016, treasury supported several capital raises from financial and strategic investors such as Softbank, Honda, Microsoft and Walmart.

  • Treasury contributed to those transactions by performing valuations, evaluating comparable companies, conducting cash flow analysis and contributing to capital structure and governance rights negotiations.
  • Treasury also worked with GM Financial to offer a $5 billion credit line to Cruise to help fund its fleet of autonomous vehicles—which will be instrumental as Cruise looks to expand its commercial operations in San Francisco, Phoenix and Austin.
Read More Read Less
Contact Us
Justin Jones
In Capital Markets, Cash Investments, Diversity & Inclusion, The NeuGroup Insights Interview

Empowering Diversity in Finance: Views From Two Women Bank Execs

Loop Capital’s Sidney Dillard and Sobani Warner of Siebert Williams Shank discuss their careers, working at Black-owned firms, the role of D&I coordinators and more.

Many multinational corporations in recent years have increased their commitment to hiring banks, brokerage firms and asset managers that are owned by members of minority groups—so-called diverse-owned firms. NeuGroup is committed to learning and sharing more about these firms, the people who run them and the value they bring to corporates in capital markets transactions and other activities.

Loop Capital’s Sidney Dillard and Sobani Warner of Siebert Williams Shank discuss their careers, working at Black-owned firms, the role of D&I coordinators and more.

Many multinational corporations in recent years have increased their commitment to hiring banks, brokerage firms and asset managers that are owned by members of minority groups—so-called diverse-owned firms. NeuGroup is committed to learning and sharing more about these firms, the people who run them and the value they bring to corporates in capital markets transactions and other activities.

  • So to celebrate Black History Month, this episode of the Strategic Finance Lab podcast features two women in senior leadership positions at two of the top Black-owned financial firms in the US: Sidney Dillard, partner and head of the corporate investment banking division at Loop Capital Markets and Sobani Warner, co-head of corporate finance at Siebert Williams Shank.
  • Ms. Dillard and Ms. Warner speak with Andy Podolsky, head of NeuGroup for Diversity, Equity and Inclusion, a working group for NeuGroup members, to discuss their career paths, how corporates can prioritize diverse-owned firms by providing more meaningful, active roles in capital markets transactions and more.
  • Listen now by heading to Apple or Spotify.

One topic you’ll hear Ms. Dillard and Ms. Warner address are so-called diversity coordinators—large investment banks that are lead managers on bond deals that some corporates appoint to help support and facilitate active participation in the transactions by diversity firms.

  • These coordinators can play an important role in the allocation of bonds to diverse-owned firms in a deal led by big Wall Street banks. But it’s essential, the two women agree, that corporate issuers get to know and work directly with the smaller firms, to form relationships that allow companies to understand the full capabilities of Loop Capital, Siebert Williams Shank and other diversity firms.

Read More Read Less
Contact Us
Justin Jones
In Banking, Cash & Working Capital, Regional

A Year of War, Sadness and Confronting Challenges Together

Finance teams come together to overcome obstacles amid sanctions, countersanctions and the exodus of banks from Russia.

By Paul Dalle Molle, NeuGroup Senior Executive Advisor

This week’s one-year anniversary of Russia’s invasion of Ukraine is a sad moment, knowing as we do that the war is raging on with no signs of ending. It also reminds us that the conflict really began in 2014 with Russia’s annexation of Crimea and the war in Donbas. It has been almost a decade of sadness over lives lost and a country being destroyed.

Finance teams come together to overcome obstacles amid sanctions, countersanctions and the exodus of banks from Russia.

By Paul Dalle Molle, NeuGroup Senior Executive Advisor

This week’s one-year anniversary of Russia’s invasion of Ukraine is a sad moment, knowing as we do that the war is raging on with no signs of ending. It also reminds us that the conflict really began in 2014 with Russia’s annexation of Crimea and the war in Donbas. It has been almost a decade of sadness over lives lost and a country being destroyed.

  • At NeuGroup, the anniversary presents an occasion to recall how treasury and finance teams at multinational companies adapted to the crisis, including significant obstacles around banking. And it’s an opportunity to reflect on where things stand now for corporates coping with Western sanctions and Russian countersanctions.
  • While the war itself grinds on, we have witnessed a significant evolution in the needs of our members. To meet those needs, a year ago we created NeuGroup for Russia-Ukraine Crisis, a community where finance practitioners could pose hard questions and openly discuss challenges and solutions on a weekly basis.
  • As members got more control of the situation and clarity over sanctions and business restrictions, the group moved to meeting twice a month and then monthly. Today, after some two dozen meetings, we convene on an as needed basis. The next gathering is planned for March 13. Click here for more information.

Urgent questions. Early on in the crisis, members urgently sought answers to pressing questions, including how to get money to staff in Ukraine and Russia, in some cases to help them and their families relocate. Another major issue: making sense of a slew of sanctions, that changed frequently and grew to cover more people, banks, companies and even arcane subsidiaries and affiliates.

  • The next phase focused on resetting institutional relationships when partners ended up on those sanctions lists or ceased their activities. One example among many was payroll. How do you pay staff if your paying bank is now a sanctioned entity? An even bigger stress came when the giant payroll supplier ADP left the country.
  • Fortunately, the sanctions had lead-in times that allowed members to find alternatives, even if this meant a lot of scrambling. And to be clear, every member company in our group was determined to be a good corporate citizen. We never heard the slightest hint of someone trying to flout sanctions or other rules.

Struggles with banks. The single biggest topic for members of the working group in the past year has been an almost constant search for banking partners. Banks began to tighten conditions as soon as the war began, a process that continued until most foreign banks closed or announced impending closures.

  • Banks frequently delayed and sometimes rejected payments after detailed sanctions compliance analysis. Most payments eventually went through, some had to be resubmitted and others routed through different countries or banks because of different interpretations of a situation; a few payments were indeed rejected, with banks thankfully offering reasons for their decisions.
  • The four biggest international banks, Rosbank, Raiffeisen, UniCredit Russia and Citibank Russia, had the greatest impact on multinationals. Rosbank was sold by Societe Generale to its previous Russian owner; Citibank, the largest banker to MNCs, is closing its corporate business in two phases, creating a migration of accounts to the two big remaining EU banks, a few non-US/EU international banks and a few unsanctioned Russian banks.

Ruble wrinkles. The steady reduction in RUB liquidity of companies and international banks presented more challenges. This was primarily driven by the drastic reduction or elimination of local business, of course, but also a desire to reduce risk and keep liquidity to a bare minimum.

  • Some companies were forced to reduce liquidity below their desired minimum operating levels because of pressure from the few remaining international banks. These banks must reduce their Russian exposure and the reserves that need to be kept against their business, so they gradually forced their corporate MNC clients to reduce balances in bank accounts.
  • The good news is that the banks offer local RUB brokerage accounts, which do not attract reserves, alongside the bank accounts. So corporate liquidity can be invested in the brokerage accounts and then transferred into the banks when needed.

State of play today. The spectrum of treasury responsibilities in Russia today is very broad. At one end, some members have no activities at all because their companies chose to exit completely and did so.

  • At the other extreme are businesses (mostly in the special sectors of medical, pharmaceutical, agricultural, mineral and hydrocarbons) which maintain substantial operations in the country. That’s because these subsectors were not sanctioned, or lightly sanctioned, by US and EU authorities, a tacit and sometimes explicit indication that the authorities want these activities to continue.
  • In between these two extremes are corporates that still have some modest level of treasury activity, such as payables and receivables, funds transfers, RUB liquidity, etc. These find themselves maintaining a low level of operations in the country either because they cannot sell or transfer their assets or because they have decided to maintain some functions instead of undertaking a complete withdrawal.

Looking ahead. Several months after the start of the war our working group held a special session to review best treasury practices in crisis preparedness, including how this war and the complexity of sanctions revealed strengths or weaknesses in members’ plans and playbooks.

  • There were many approaches outlined and specific suggestions made, but by far the most important conclusion was the need, from the outset of a crisis, to have simple and clear lines of communication and decision-making for the entire company announced from the top. That’s one of the few positives to take away from this crisis—so companies can better weather the next one.
  • Corporates will continue to explore ways of reducing their activity and exiting that do not endanger local employees. And companies that remain will continue to cobble together payment and funding solutions for their core needs, establish new banking relationships with the ever-dwindling number of unsanctioned banks inside Russia, and generally run their businesses on a shoestring.

Finally, in thinking about the challenges and key issues that lie ahead, I cannot escape returning to the theme of sadness where we began. There is no sign that the war will end soon; the death and destruction look set to continue. My greatest hope is, of course, that the war ends soon.

Looking more tactically at our members and their businesses in Russia, I would hope for more clarity from US and EU institutions about the businesses that they want Western companies to continue to do in Russia (such as those special sectors mentioned above) and recognize the need for a few key Western banks to accompany them on this journey.

Read More Read Less
Contact Us
Justin Jones
In Capital Markets, Investment Management

Strengthening Bonds With Fixed-Income Investors Pays Dividends

A strong commitment to fixed-income investor relations in good times helps one company prepare for rough patches.

Say “investor relations” and most people immediately think of equity investors. But not the director of capital markets at a large manufacturer that has more than $100 billion outstanding in unsecured, asset-backed and convertible debt—and who has two team members dedicated solely to fixed-income investor relations (IR).

  • At a fall meeting of NeuGroup for Capital Markets sponsored by Deutsche Bank, the director described his company’s deliberate, proactive approach to fixed-income IR in good times and the benefits of the effort, which often show up most clearly when market or industry conditions become rough.

A strong commitment to fixed-income investor relations in good times helps one company prepare for rough patches.

Say “investor relations” and most people immediately think of equity investors. But not the director of capital markets at a large manufacturer that has more than $100 billion outstanding in unsecured, asset-backed and convertible debt—and who has two team members dedicated solely to fixed-income investor relations (IR).

  • At a fall meeting of NeuGroup for Capital Markets sponsored by Deutsche Bank, the director described his company’s deliberate, proactive approach to fixed-income IR in good times and the benefits of the effort, which often show up most clearly when market or industry conditions become rough.
  • His presentation generated considerable interest from peers who came away with fresh ideas for managing an area that may not always receive the attention it deserves, where work pays off in ways that at times are hard to quantify but are evident and significant.
  • Deutsche Bank bankers offered insights on how corporates—including those that are infrequent issuers—can foster relationships with debt investors as financial conditions grow more difficult and feedback from asset managers on topics like ESG and sustainable financing becomes more important.

Funding when times are tough. Fixed-income investor outreach “is critical given the need to fund” the member’s company and its financing arm throughout all economic cycles, including downturns, he said. Top bondholders are “anchor orders on our new deals and provide secondary market liquidity in support of our outstanding bonds”—leading to more favorable pricing of new deals, according to his presentation.

  • “We spend a lot of time in the good times engaging with investors, which, we think—it’s hard to quantify this—pays off in the times that aren’t so good,” the member said in elaborating on the value of fixed-income IR. “For us, it’s deal execution in a poor market, or deal execution when there are maybe some not-so-positive forces that are industry-specific.”
  • Matt Siracuse, a managing director on Deutsche Bank’s investment grade syndicate desk, added that reaching out to investors well before any deal is launched can pay off when debt market conditions move against issuers. “As we enter into a market that’s a bit more challenging, fostering those relationships ahead of any kind of issuance could go a long way to minimize deal risk,” he said.
  • NeuGroup’s Scott Flieger, a former banker who leads the capital markets group, said another benefit of engagement with bondholders is an issuer’s ability to complete transactions in the size they want during choppy markets, in part because investors believe a deal will be properly priced with room for some upside potential. Also, “You can get the maturities done that you want to—and you can get both fixed- and floating-rate paper done,” he added.

Unpacking fixed-income IR. The member’s company signals the importance of the company’s relationship with its top bondholders by proactive outreach and offering them private calls and meetings with senior leadership, including the CEO and CFO.

  • “We prioritize one-on-one investor relations,” the member said. “That takes more time, it takes more energy, it takes more work, but we get more candid feedback that way than group discussions.” He added, “We pride ourselves in being best in class, trying to really engage with investors in a way that they see as a partnership.”
  • One-on-one or small meetings are where investors feel more comfortable offering direct, frank feedback to issuers, Mr. Siracuse said. That may include offering critical opinions on KPIs a company may be considering for a sustainable bond.
  • The presentation listed these other key workstreams for fixed-income IR:
    • Supporting rating agency relationships; the fixed-income IR team owns the relationship with agencies.
    • Communicating key investor information to senior management, bringing back what IR hears from investors after earnings calls.
    • Leading quarterly earnings process for the company’s financing arm.
    • Supporting unsecured debt transactions.
    • Preparing quarterly fixed-income presentations for investor outreach.
  • At the end of a recent year, the member’s fixed-income IR had completed more than 250 meetings, including presentations at conferences, non-deal roadshows, virtual events and gatherings at the company’s offices. Many meetings included the company’s equity IR team, but not all.

Other ways to engage. Infrequent debt issuers and companies that don’t have dedicated fixed-income IR teams have options for efforts that will not be as extensive as the presenting member but are still worthwhile. They include:

  • Tacking on fixed-income meetings at your company’s equity conferences; consider joining your company’s IR team when they are going to an equity conference. If you can’t attend, add something to the deck the equity team is presenting.
  • Making sure that if your company’s large equity holders have big bond operations, the fixed-income side of the asset manager takes a serious look at starting or increasing debt holdings.
  • Asking banks to let you know when they are having credit conference so someone from your company can attend. If you prepare a deck for the conference, post it on the company’s website.
  • When visiting a large city, consider asking a bank to organize a lunch or afternoon session with a small group of fixed-income investors.
Read More Read Less
Contact Us
Justin Jones
In Diversity & Inclusion, The NeuGroup Insights Interview

Treasury’s DEI Opportunity: Partnering with Diverse-Owned Firms

Insights from Loop Capital’s Sidney Dillard and Siebert Williams Shank’s Sobani Warner.

NeuGroup’s Strategic Finance Lab Podcast—available on Apple and Spotify—will bring you an interview next week about the progress made by diverse-owned banks, brokers and asset managers. It features Sidney Dillard, partner and head of corporate investment banking at Loop Capital, and Sobani Warner, co-head of corporate finance at Siebert Williams Shank (SWS). The two firms are among the top Black-owned financial institutions in America.

  • Hit the play button below to watch a video clip from the interview in which Ms. Dillard discusses the opportunity corporate treasurers have to partner with diverse-owned firms and make significant contributions to how their companies promote diversity, equity and inclusion.
  • Ms. Warner notes that the podcast interview with NeuGroup’s Andy Podolsky comes during Black History Month and that the efforts of finance teams need to be seen in the larger context of strengthening all segments of American society. She looks forward, she says, to passing on what’s been achieved at diverse-owned firms like SWS and Loop to the next generation, adding, “it’s going to be fantastic.”

Insights from Loop Capital’s Sidney Dillard and Siebert Williams Shank’s Sobani Warner.

NeuGroup’s Strategic Finance Lab Podcast—available on Apple and Spotify—will bring you an interview next week about the progress made by diverse-owned banks, brokers and asset managers. It features Sidney Dillard, partner and head of corporate investment banking at Loop Capital, and Sobani Warner, co-head of corporate finance at Siebert Williams Shank (SWS). The two firms are among the top Black-owned financial institutions in America.

  • Hit the play button below to watch a video clip from the interview in which Ms. Dillard discusses the opportunity corporate treasurers have to partner with diverse-owned firms and make significant contributions to how their companies promote diversity, equity and inclusion.
  • Ms. Warner notes that the podcast interview with NeuGroup’s Andy Podolsky comes during Black History Month and that the efforts of finance teams need to be seen in the larger context of strengthening all segments of American society. She looks forward, she says, to passing on what’s been achieved at diverse-owned firms like SWS and Loop to the next generation, adding, “it’s going to be fantastic.”
Read More Read Less
Contact Us
Justin Jones
In Technology

Touched Less, Not Touchless: Bringing Automation to Life

Finding key parts of processes to automate can make automation more achievable than end-to-end automation.

AI chatbots like ChatGPT and Google’s Bard may conjure up a limitless future of so-called touchless, automated processes that require no human intervention. But for corporates limited by the budgets and sizes of IT teams, end-to-end process automation is often an unrealistic goal. So some NeuGroup members are embracing “touched less” solutions—adopting a mindset that can go a long way toward making automation more achievable.

  • At a recent session of NeuGroup for Technology Advancement, an IT project manager at a private company who works with finance teams discussed how he conceptualizes and implements automation through this lens.
  • “If you look at a business process holistically, end-to-end, we can start picking out parts down to the individual process that can be touched less—that’s how we’re deploying, and that’s how automation comes to life,” he said.

Finding key parts of processes to automate can make automation more achievable than end-to-end automation.

AI chatbots like ChatGPT and Google’s Bard may conjure up a limitless future of so-called touchless, automated processes that require no human intervention. But for corporates limited by the budgets and sizes of IT teams, end-to-end process automation is often an unrealistic goal. So some NeuGroup members are embracing “touched less” solutions—adopting a mindset that can go a long way toward making automation more achievable.

  • At a recent session of NeuGroup for Technology Advancement, an IT project manager at a private company who works with finance teams discussed how he conceptualizes and implements automation through this lens.
  • “If you look at a business process holistically, end-to-end, we can start picking out parts down to the individual process that can be touched less—that’s how we’re deploying, and that’s how automation comes to life,” he said.

Success story. The project manager walked through a recent automation the company implemented to improve purchases by the procurement team, saving hours of research time and improving decision-making.

  • For example, the solution, which he calls an “AI-lite” engine, can accept a purchase request for a specific type of pencil. The engine analyzes the entire history of purchases of that kind of pencil that the company’s ever made and recommends the optimal retailer or supplier.
  • While a “dream-state” automation tool might see the need for this type of pencil and make the purchase on its own, the additional steps would far prolong the design and development stages.
  • Instead, the process is now touched less, as the procurement team member simply inputs the specific need and receives a recommendation they can use to save time and money.

Holistic design. One member advised that when implementing automation solutions, it’s important to think holistically about current processes that may span multiple departments. Doing so allows practitioners and technologists to zero in on designing the best practical application; though it may prolong the design process, it will ensure a more useful final product.

  • Indeed, the IT project manager said internal clients often come to him imagining a new touchless process, but after considering the entire business workflow and how to address its pain points, a “touched less” solution is often what emerges.
  • To arrive at that solution, the project manager first must understand the entire business process and where automation and technology can result in meaningful change, an approach he calls “design thinking.” From there, his team develops solutions that can be implemented and built upon.

Making your case. Finance teams hoping to adopt either “touched less” or touchless automation can’t lose sight of the need to prove that the effort will pay off. “For tech resources, which are very expensive, to work on big projects we need to understand the P&L impact—it could be related to things like revenue or FTE hours saved,” another member said. “If it’s a small impact, we say they should layer that into another request.”

  • NeuGroup’s Kelly McClelland, who ran the session, encouraged members to step up and ask for what they need to make transformation a reality. “Technical resources might not always be where we need them to be,” she said. “Have an argument ready that an automation, however small, is going to save the organization a lot of money—you just have to build the business case.”
Read More Read Less
Contact Us
Justin Jones
In Cyber risk, Insurance, Risk Management

Ray of Hope: Cyber Catastrophe Bonds May Boost Insurer Capacity

The first cyber cat bond could spell some relief for corporates navigating a hard market for cyber insurance.

Corporate treasurers and risk managers whose companies face ever-increasing cyber risk may soon have a new tool to discuss with brokers and insurers as they build insurance towers and navigate the hard, capacity-strained market for cyber coverage: catastrophe bonds.

  • Last month, U.K. insurer Beazley sold $45 million in cyber cat bonds, the first deal of its kind—following more than a decade of discussion about the product in the insurance-linked securities (ILS) market. The Beazley cat bond will pay out if the insurer exceeds $300 million in losses from cyberattack claims.

The first cyber cat bond could spell some relief for corporates navigating a hard market for cyber insurance.

Corporate treasurers and risk managers whose companies face ever-increasing cyber risk may soon have a new tool to discuss with brokers and insurers as they build insurance towers and navigate the hard, capacity-strained market for cyber coverage: catastrophe bonds.

  • Last month, U.K. insurer Beazley sold $45 million in cyber cat bonds, the first deal of its kind—following more than a decade of discussion about the product in the insurance-linked securities (ILS) market. The Beazley cat bond will pay out if the insurer exceeds $300 million in losses from cyberattack claims.
  • Cat bond issuers pay interest to institutional investors who purchase the bonds; the investors end up paying out the principal set aside in a trust to the issuer only if indemnity or other loss triggers are set off by a specified type of storm, cyberattack or other catastrophic event.

More to come? The Beazley deal should fuel consideration of similar transactions to mitigate growing cyber risks that insurers worry pose a systemic threat, resulting in greater capacity to meet the needs of corporates, according to Peter Foster, chairman of WTW’s Global FINEX Cyber business.

  • He said cyber insurers will most likely be the biggest issuers of cyber cat bonds, but corporates could also issue the securities to reduce loss reserving and free up capital.
  • “Corporates could consider their own cat bond to provide greater capacity of cyber insurance projection,” Mr. Foster said.
  • Another industry observer told NeuGroup Insights, “The bond solution will only be there for the very largest clients in the market—or maybe client groups.”

Corporates no strangers to cats. Cat bonds are well established in the property and casualty market, where they have mostly been issued by insurers and reinsurers seeking to transfer risk to investors who are looking for returns uncorrelated with financial investments, including pension funds.

  • Some corporates looking for protection from natural disasters have also taken advantage of the market for cat bonds in recent years.
  • A corporate “maxes out coverage from the traditional insurance market, then goes to the cat bond market,” said John Seo, co-founder and managing director of Fermat Capital Management, an investor in the Beazley deal. He cited corporates that have increased coverage of earthquake risk:
    • Google and its parent Alphabet purchased $275.5 million of California earthquake risk protection in 2021 following two similar deals the year before.
    • Also in 2021, Kaiser Permanente renewed and increased the size of its cat bond providing earthquake protection.
  • “Even if the amount of cat bond coverage procured is modest, the impact on the traditional program can be significant,” Mr. Seo said.

Risk model concerns. Cyber cat bonds have long been discussed by ILS-market participants but concerns about the ability to accurately model cyber risk stalled potential transactions. The Beazley deal was privately placed by Gallagher Securities, the ILS arm of reinsurer Gallagher Re, and is tradeable under Rule 144A among institutional investors.

  • It uses the cyber risk model developed by CyberCube, which Mr. Seo said is becoming the “industry standard for cyber risk transfer” and a model Fermat used.
  • Another broker specializing in ILS, Aon Securities, also anticipates completing a cyber cat bond this year, according to CEO Paul Schultz, who has publicly credited maturing investor education and risk models for cyber cat deals finally coming to market.
  • More traditional risk model providers such as RMS, acquired by Moody’s Investors Service in September 2021, have ramped up their cyber offerings. Jin Shah, managing director, capital markets and resilience, said RMS’s cyber model is already widely used by the insurance industry, and his firm has spent significant time educating investors how it works.

Reality check. Fred Barnachawy, managing director and CIO at DeshCap, which negotiates contracts and insurance payouts on behalf of insured clients, said that property risk is easier to model and contacts are fairly standard compared to those covering cyber risk. Plus, he said, property does not carry the liability risk that often emerges in the wake of cyberattacks.

  • Mr. Barnachawy cautioned that the terms and conditions of early cyber cat deals are likely to be “constrained” and payouts limited, even after significant cyber events.
  • “Cyber cat bonds may help with the capacity issue, but will it help with core protection?” he asked.
  • What is clear, though, is the need for more coverage, capacity and innovation in cyber coverage. The National Association of Insurance Commissioners reported that 2021 data breaches increased 68% over the prior year. But despite trillions in estimated cyber losses, commercial premiums written totaled a relatively paltry $6.5 billion.
Read More Read Less
Contact Us