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Under the Hood of the Global Payments System: Complexity

How TIS helped The Adecco Group harmonize payment, reporting and bank account management processes.

So, you need to make payments? Sounds simple, but once you look under the hood of the global payments apparatus—which has developed differently in different places for different currencies—you will discover separate layers of complexity. That’s according to Joerg Wiemer, co-founder and CEO of Treasury Intelligence Solutions, or TIS.Put simply, there are three different sources of complexity.

  1. The connection and integration of the ERP and the bank system is incomplete, resulting in the use of multiple e-banking tools and a cumbersome cash visibility process.
  2. Payment formats, despite efforts to harmonize them, are not fully standardized, resulting in more time-consuming setup processes and/or costly payment fixes.
  3. Communication options like APIs are more like green bananas than the ripe fruit they are currently made out to be. Add to these the increased frequency of fraud attempts targeting the payments function.

How TIS helped The Adecco Group harmonize payment, reporting and bank account management processes.

So, you need to make payments? Sounds simple, but once you look under the hood of the global payments apparatus—which has developed differently in different places for different currencies—you will discover separate layers of complexity. That’s according to Joerg Wiemer, co-founder and CEO of Treasury Intelligence Solutions, or TIS.

Put simply, there are three different sources of complexity.

  1. The connection and integration of the ERP and the bank system is incomplete, resulting in the use of multiple e-banking tools and a cumbersome cash visibility process.
  2. Payment formats, despite efforts to harmonize them, are not fully standardized, resulting in more time-consuming setup processes and/or costly payment fixes.
  3. Communication options like APIs are more like green bananas than the ripe fruit they are currently made out to be. Add to these the increased frequency of fraud attempts targeting the payments function. 

High jump. The combination of these factors makes it hard for a treasury management system (TMS) to truly meet payment needs. And that’s before you consider that you will always need to make payments. A TMS, TIS suggests, can be a great “all-arounder” but is still like an Olympic decathlete in terms of required functionalities compared to the superior, focused expertise of a sprinter, long-distance runner, high jumper or javelin thrower.

A simplification case. At a recent meeting of the Tech20 High Growth Edition, NeuGroup for treasurers of high-growth tech companies, TIS co-presented a payments simplification case with a client, The Adecco Group. 

  • Adecco is a Fortune Global 500 recruitment and staffing agency based in Zurich, Switzerland, which operates 5,100 branches in eight regions and 60 countries. Over 60% of its EUR 23.4 billion FY2019 revenues came from Western Europe, and 19% from North America.
  • While the business is relatively stable and has some offsetting/countercyclical elements, 75% of revenues come from temporary staffing solutions with “retail-like” margins, i.e., not that generous. With processes involving up to 700,000 individuals at any given time, the emphasis is naturally on operating efficiency.
  • This entails digitization and automation in timesheets, recruitment (e.g., candidate portals), documentation, administration and, of course, payments. 

The handover. The payments function, often managed by treasury, is a handover point from many stakeholders, including treasury itself, accounting, shared services, IT or value-added process owners, and a variety of legal entities. It is similar at Adecco. The objectives of Adecco’s transformation journey are focused on:

  • Global cash visibility in the TMS, Kyriba.
  • Connection to all banks globally using TIS as the service bureau, ensuring communication efficiency (SWIFT, host-to-host, EBICS, BACS) depending on volume and complexity of local business needs.
  • Improved and harmonized payment, reporting and bank account management processes via a single, bank-independent e-banking system, provided by TIS (over 10,000 banks are connected via TIS’s cloud platform)—while also achieving compliance, bank-signature governance, risk reduction and cash centralization via pooling arrangements.  

A complicating factor is payroll payments: Salary and wage payments come from human resource systems where local rules and regulations for employee protections and taxes drive local differences, making this type of payment hard to harmonize.

The business case? Depending on your starting point, a “very high” ROI can be achieved primarily by:

  • Building in the ability to choose the most efficient communication option (bullet 2 above) for each payment. Over 90% of the traffic can go directly via non-SWIFT channels, meaning it’s cheaper: SWIFT has transaction-based pricing and TIS has “value-based” pricing where higher complexity means higher pricing (the number of bank accounts or ERPs is a proxy for complexity). But part of the TIS value proposition is reducing complexity with their project implementation.
  • Overcoming format-error driven payment delays (and costly fixes) with the use of TIS’s continuously updated and maintained payments “format library.” 

Success factors. Like many project stories, success lies in the effective coordination and collaboration of people.

  • Senior management sets the tone by driving change and expectations; also required is committed involvement from internal controls, compliance and IT/security, and strong governance from business, finance and treasury leadership.  

Test, test and test some more. For an end-to-end (E2E) process approach to be successful, test, test and retest all the formats and pathways thoroughly. And include deliberate errors to make testing as robust as possible.

Next up: From batch to instant payments. TIS does not consider APIs quite ready for prime time yet, and cites country-by-country differences (apps, clearing systems, amount thresholds and the varying API libraries banks have) as the primary reasons. They are nevertheless a big development and will bring many benefits in time.

  • People use Adecco’s app to find jobs; when their work is done and approved, nothing really stands in the way of settling the payment for that work.
  • “So we envision moving from batch to instant payments,” André van der Toorn, senior vp of treasury at the Adecco Group, said. Adecco’s associates (employees for whom Adecco is the employer of record) may be keen to accept that, even if it means they will get paid slightly less. Instant payments may come very soon, based on the success of a live test with a digital client in a remote part of the world.

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Obstacle Course: Cash Forecasting Challenges in Latin America 

Treasurers in Latin America are coping with the pandemic, M&A activity and working capital needs.
 
Many of the cash management challenges currently facing treasurers in Latin America are being complicated by a variety of factors, including the omnipresent COVID-19 crisis. But also in the mix is recent M&A activity in the region (think integration and its opposite, divestiture), along with difficult financing conditions affecting working capital management.
 
COVID chaos. Latin America is no exception in regions contending with the difficulties brought on by the pandemic. As in other parts of the world, work from home (WFH) processes have had to be invented on the fly and then executed.

Treasurers in Latin America are coping with the pandemic, M&A activity and working capital needs.
 
Many of the cash management challenges currently facing treasurers in Latin America are being complicated by a variety of factors, including the omnipresent COVID-19 crisis. But also in the mix is recent M&A activity in the region (think integration and its opposite, divestiture), along with difficult financing conditions affecting working capital management.
 
COVID chaos. Latin America is no exception in regions contending with the difficulties brought on by the pandemic. As in other parts of the world, work from home (WFH) processes have had to be invented on the fly and then executed.

  • This has led to some turnover, part of which stems from the paradoxical situation where WFH often means more work and burnout; this then leads to companies onboarding new people either virtually or in person while maintaining social distancing protocols.
  • Members pointed out that this highlighted the importance of written, up-to-date policies and procedures. 

M&A chaos. Acquisitions, and in one case a divestiture, bring their own challenges to accurate cash forecasting. Integration of the entities involved must take place country by country. The message here is that there is a lot to do, in multiple tax and regulatory environments that generally do not allow cross-border solutions. Of course, the whole forecast philosophy can vary—forecast as needed vs. regular forecasts. Also, the need to repatriate regularly or leave the cash where it is requires major adjustment and training.

  • Where treasury management systems are involved (and the accounting systems that feed them), there is the need to reconcile different approaches to the requirements of the new combined (or separated) entity. 

Working cap scrutiny. Communicating the expected cash needs of the new company is an important issue to management ahead of earnings calls. Going along with this is the focus on working capital, and in particular short-term assets like accounts receivable (DSO’s) and inventory (months of sales).

  • Often overlooked is the opportunity presented on the liability side. Companies with historically strong cash flow may have slipped into a practice of just paying the bills as presented.
  • By paying according to terms, or negotiating payment terms to industry benchmarks, companies can add to cash on hand the same way collecting sales faster adds to cash. 

Cash rules. Treasury needs to work closely with in-country managers to identify where there are opportunities to increase cash on hand and then determine how to get that cash to where it is needed, whether to pay down debt or pay equity investors.

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Why Swapping Fixed-Rate Debt to Floating Is Still Worth Considering

Wells Fargo shared insights on liability management at the pilot meeting of NeuGroup for Capital Markets.

At a spring meeting of NeuGroup for Capital Markets, sponsored by Wells Fargo, several members said they had used interest-rate swaps to shift more of their debt to floating rates, a move that paid off as rates fell in the second quarter amid the pandemic.

  • A few participants had regrets about having swapped from floating to fixed rates.
  • One member said his team is “spending a lot of time trying to get the right mix” of fixed and floating rates as it asks if “it makes sense to do swaps.”

Wells Fargo shared insights on liability management at the pilot meeting of NeuGroup for Capital Markets.

At a spring meeting of NeuGroup for Capital Markets, sponsored by Wells Fargo, several members said they had used interest-rate swaps to shift more of their debt to floating rates, a move that paid off as rates fell in the second quarter amid the pandemic.

  • A few participants had regrets about having swapped from floating to fixed rates.
  • One member said his team is “spending a lot of time trying to get the right mix” of fixed and floating rates as it asks if “it makes sense to do swaps.”

Conversations and convincing. One of the members who swapped from fixed to floating said it had required “convincing management this was right” from an asset liability management (ALM) perspective, adding that treasury had lots of conversations with the CFO “to make him comfortable.” She said much of the focus was on timing which, fortunately, “worked out.”

  • As a result, some of this company’s hedges are in the money, raising the question of whether it makes sense to unwind or enter into offsetting swaps to monetize the hedge gains. The member asked for input on accounting and other considerations.
  • This company had also done some pre-issuance hedging and was doing more of it at the time of the meeting.

Magic formula? One of the presenters from Wells Fargo asked, rhetorically, how many people at the meeting had been told there is a “magic formula” for the ideal debt mix, such as 75% fixed to 25% floating.

  • Formulas aside, the key question investment-grade (IG) companies must answer before using interes-rate swaps, he said, is how much volatility in corporate earnings (before interest and taxes) will result from changes in rates. The answer, he suggested, depends on the cyclicality of the business and its “absorption capacity.”
  • It’s important to ask why you put on the swap, especially in this environment when fixed to floating-rate swaps went into the money, the Wells Fargo presenter said. What’s important is determining how much potential eps volatility it creates and whether “you can add it and not create heartburn,” he said.

What now? Another presenter from Wells Fargo said that, as a result of lower savings now available from swapping fixed to floating rates, “I think people have written off swaps to floating.” But he said the savings are still decent, meaning it makes sense to keep swaps on the radar screen and that corporates should “keep thinking” about them.

  • In a follow-up call in early July, he said his views still hold in the current market and pointed to data Wells Fargo presented during the meeting to illustrate that swaps to floating make sense even when rates are flat.
  • It shows that over the last 23 years, the savings on a 5-year swap, even in an adjusted market environment where interest rates remain flat and trendless, still amount to nearly 100 basis points.
  • This may be especially relevant today given that so many companies boosted liquidity as the pandemic shut down the economy by issuing fixed-rate debt.
  • As a result, Wells Fargo’s presentation says, the liability portfolios of many IG issuers are overweight fixed-rate debt.
  • The bank also noted an “asset liability mismatch (debt versus cash/short-term investments) creating ‘negative carry drag’.”
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Brain Game: Using Artificial Intelligence to Improve Cash Forecasting

ION’s plans to tap machine learning, deep learning and neural networks to help treasurers.  
 
Making better use of technology to improve cash flow forecasting (and cash visibility) has taken on greater importance during the pandemic for many companies where it was already a high priority. That was among the key takeaways at the spring virtual meeting of the Global Cash and Banking Group, sponsored by ION Treasury.

  • ION sells seven different treasury management systems (TMSs), including Reval and Wallstreet Suite.
  • Among the cross-product solutions ION is focused on is a cash forecasting tool leveraging artificial intelligence (AI), mostly in the form of machine learning (ML) and deep learning neural networks.
  • One of the ION presenters said advances in AI and ML have produced an “opportunity to reimagine how cash forecasting can be done,” noting something treasurers know too well—that no one yet has truly “solved in a great way” one of the top challenges facing finance teams.

ION’s plans to tap machine learning, deep learning and neural networks to help treasurers.  
 
Making better use of technology to improve cash flow forecasting (and cash visibility) has taken on greater importance during the pandemic for many companies where it was already a high priority. That was among the key takeaways at the spring virtual meeting of the Global Cash and Banking Group, sponsored by ION Treasury.

  • ION sells seven different treasury management systems (TMSs), including Reval and Wallstreet Suite.
  • Among the cross-product solutions ION is focused on is a cash forecasting tool leveraging artificial intelligence (AI), mostly in the form of machine learning (ML) and deep learning neural networks.
  • One of the ION presenters said advances in AI and ML have produced an “opportunity to reimagine how cash forecasting can be done,” noting something treasurers know too well—that no one yet has truly “solved in a great way” one of the top challenges facing finance teams.

Define your terms. Another ION presenter explained that AI is any intelligence demonstrated by a machine.

  • ML—a subset of AI—involves the ability to learn without being explicitly programmed.
  • Deep learning (DL) is a subset of ML and includes so-called neural networks inspired by the human brain. The algorithms powering neural networks need “training data” to learn, enabling them to recognize patterns.
    • The ION presenter gave the example of a neural network within a self-driving vehicle that processes images “seen” by the car. 

Building on data and business knowledge. For cash forecasting, the learning process starts with entering historical data into the model that is “cleaned” by tagging the inflows and outflows appropriately and removing outliers that would significantly skew trends. Models are trained via algorithms that apply rules and matching inputs with expected outputs.

Validation required. Like many learning curves, it takes time for the model to reach a high level of performance and requires treasury professionals to validate that the algo knows what it is doing by comparing the forecast to actual variances.

  • Similarly, people—not machines—will have insider knowledge of significant changes within the organization and must make tweaks to the model where appropriate. 

Measuring the models. Various statistical approaches feed neural networks’ underlying algorithms. When building their AI cash forecasting solution, ION tested everything from simple linear regression to multivariable linear regression to the Autoregressive Integrated Moving Average (ARIMA) model, which adds layers to the neural network and process non-linear activities.

  • ION’s research suggests that linear regression-based learning models perform well for businesses with stable, growing cash flows, but less well with cash flows subject to seasonal peaks.
    • ARIMA models perform better, but need extra modeling for seasonality while neural networks require careful attention to training data to learn from, as well as supplemental intervention when non-repeating events occur—such as global pandemics.
  • Still, you can get 90%-95% accuracy most of the time, in seconds vs a day or more using manual methods. ML for cash forecasting has the potential to be 3,000 times faster than common manual processes companies employ, according to ION.
    • Other benefits include improving accuracy, overcoming human biases, picking up anomalies that could mean fraudulent activity, and realizing monetary gains from more predictable cash positions.
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Managing the Team Through WFH Takes Effort

Powering an effective team through tough times – snacks and all.

For all the talk about how well NeuGroup peer group members and their teams have navigated the pandemic – quarter closes, bond issuances, insurance renewals, revolver negotiations, even hostile takeover attempts – there is a nagging feeling that “this can’t go on forever” without more problems manifesting themselves in some way. 

After almost four months of a near complete “work from home” or WFH regime, it will still be a while before the full strength of the treasury team is back together in the office. Some companies have announced recently phased-in returns as early as mid-June while others have been told to stay home through the end of the year. What can be learned from the experience so far as the situation stays fluid? Here are some thoughts from NeuGroup’s recent Tech20 Treasurers’ Peer Group meeting.

Powering an effective team through tough times – snacks and all.

For all the talk about how well NeuGroup peer group members and their teams have navigated the pandemic – quarter closes, bond issuances, insurance renewals, revolver negotiations, even hostile takeover attempts – there is a nagging feeling that “this can’t go on forever” without more problems manifesting themselves in some way. 

After almost four months of a near complete “work from home” or WFH regime, it will still be a while before the full strength of the treasury team is back together in the office. Some companies have announced recently phased-in returns as early as mid-June while others have been told to stay home through the end of the year. What can be learned from the experience so far as the situation stays fluid? Here are some thoughts from NeuGroup’s recent Tech20 Treasurers’ Peer Group meeting. 

First, all the BCP work pays off. Treasury’s essential focus of keeping the lights on no matter the catastrophe has long required detailed business continuity plans to ensure access to liquidity, collections capabilities and the ability to make payments away from a compromised office site. 

  • So, arguably, no team was better prepared than treasury going into the pandemic-driven mandate for staff to take up their posts at home. Some treasurers noted with relief that they had recently tested the BCP and that things had worked out as planned when the order came. 

Not much change for some. Global corporations of a certain size already have regional treasury centers in other places of the world, and – especially if based in the high-cost San Francisco Bay Area – varying levels of distributed teams in lower-cost regions of the US, e.g., Florida and Texas. The ability to lead those teams may have taken on a different nuance in the WFH environment, but managers were already used to leading remote team members. 

  • “We were already very remote so we had that down, and the [quarterly] close wasn’t a problem,” said a Tech20 member who leads both the treasury and tax teams. Nevertheless – and despite a significant redistribution of ergonomic chairs from offices to homes across the Bay Area – several companies gave a stipend of up to several hundred dollars to set up a home office. 

Reassure the team with leadership, transparency. With the airwaves filled with COVID-19 news and the increased focus on cash and forecasting facing a very uncertain future, it is natural that people start worrying about losing their jobs. Some companies, including one Tech20 member who shared her company’s approach to leading in times of COVID-19, announced that there would be no layoffs in 2020. 

  • This company also makes a lot of effort to show empathy with employees and demonstrates its own focus on well-being to reassure others that it is OK to nor just power on as usual. The cadence of communication is important.

Set boundaries, examples. Particularly in situations where the whole family is at home, it’s important to demarcate work time and home time. Our presenting member said her husband oversees schooling the kids and she does “after school” activities. This means she is not available for meetings for a set number of hours in the afternoon and encourages her staff to set similar limits. 

  • Another member, who also emphasized mental well-being after the intensity of weeks upon weeks of blurred work/home lines – especially for single parents with young kids, and since taking vacation seems pointless if you can’t go anywhere – said he would take a Friday off on a regular basis, signaling that similar actions by staff are acceptable. 

A lot of mileage out of small morale boosters. Coffee breaks and happy hours by Zoom, a dedicated Slack channel for office chitchat and family pictures, checking in on the singles on the team, and online trivia game time are examples of team building and maintaining a sense of team and inclusion. The tax and treasury chief from above organized a “remote offsite” meeting to connect with the team and from time to time sends much-welcomed healthy snack packages (from Oh My Green) to her staff. 

  • All this combined with the moratorium on layoffs have rewarded the presenting company’s management with their highest employee satisfaction numbers, despite the challenging period. 
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Do Pensions Need to Bolster Post-Retirement Resources?

Pension managers could be doing a better job of guiding retirees with their post-work pension planning.

For decades, defined contribution (DC) retirement plans have helped address the needs of individuals leading up to retirement. However, plan sponsors have made little progress in addressing individuals’ needs during retirement itself, according to Insight Investment, a sponsor of the NeuGroup for Pension and Benefits’ recent meeting. 

Retirement anxiety. There is a lot of unease for employees on the verge of retiring, as they worry about funding their non-working lives. It also remains a major concern among the population still working, given the disappearance of defined benefit pension plans, near-zero interest rates and highly volatile equity markets.

Pension managers could be doing a better job of guiding retirees with their post-work pension planning.

For decades, defined contribution (DC) retirement plans have helped address the needs of individuals leading up to retirement. However, plan sponsors have made little progress in addressing individuals’ needs during retirement itself, according to Insight Investment, a sponsor of the NeuGroup for Pension and Benefits’ recent meeting. 

Retirement anxiety. There is a lot of unease for employees on the verge of retiring, as they worry about funding their non-working lives. It also remains a major concern among the population still working, given the disappearance of defined benefit pension plans, near-zero interest rates and highly volatile equity markets.  

“Surveys are showing that this is a concern for individuals,” said Bruce Wolfe, head of individual retirement strategy at Insight Investment. “The first step is to understand how the decumulation phase differs from the accumulation phase and create a framework to deliver the steady, predictable lifetime income that retirees generally desire.” 

  • Mr. Wolfe believes many of the “hurdles for plan sponsors to do more are only a matter of perception.” This means steps do exist for those managing the plan to not only educate soon-to-be retirees but also offer solutions to help manage their assets at separation “giving them firmer footing for the next phase of their lives.”
  • Meeting attendees basically agreed that while it was generally good to offer their employees a range of investment products – including environmental, social and governance options – within their retirement plans, there was little interest in what exiting employees did with their savings after they leave the company. While companies may offer some simple retirement planning tools, they do not want to risk appearing to be fiduciaries. 

Decumulation in the spotlight. The lack of tools has put decumulation in the spotlight for many plan sponsors, a recognition that most retirees are lost when it comes to what is, in practical terms, fairly sophisticated financial analysis. For example, only 5.5% wait until age 70 to start taking social security benefits when most retirees should wait as long as possible given longevity protection and inflation hedge that social security uniquely provides. For 401(k) participants seeking help there are some positive developments including:

  • 41% of plans have at least some form of “retirement income” solutions available, although plan sponsors acknowledge more innovation is needed.
  • The Setting Every Community Up for Retirement Enhancement (SECURE) Act cleared away some legal impediments to offering more retirement income products, particularly annuity-related ones.
  • QLAC products (Qualified Longevity Annuity Contracts) can be offered with limits within DC plans providing participants access to lifetime annuity contracts starting when individuals reach their 80s.   

This means plan sponsors need to “think harder about the escalating challenges they will face through the ‘decumulation’ phase of their investment lifecycle,” the Insight Investment team told meeting attendees. 

Unsteady footing. “Uncertainty is building as we find ourselves in an ‘interregnum’ between the post-war economic order and a brand-new economic era,” said Abdallah Nauphal, CEO at Insight Investment. “COVID-19 has provided an idea of how liquidity challenges, rebalancing and tail risk concerns can be elevated in stressed market conditions.” 

  • This means investors should prepare for future crises accordingly.
  • “Plans may need to consider adding additional tools to the toolkit, such as completion, overlay, asymmetric payoff and cost-effective downside equity risk management strategies to help ensure full funding and manage pension risks,” said Shivin Kwatra, Insight Investment’s head of LDI portfolio management in the US.
  • “We also believe investors need to focus on high quality investments to help ensure they meet their return and cash flow requirements with the highest level of certainty,” Mr. Kwatra said.
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Preparation Pays Off for Microsoft in Debt Exchange Offer

Liability management success: Microsoft received exchange interest of $12.5B, 56% of the targeted notional amount.
 
Treasury teams managing their debt portfolios have a menu of liability management transactions to choose from, including bond tenders, open-market repurchases, consent solicitations and debt exchanges. To use most of these tools, corporates need to offer investors a reasonable amount of time to decide, ranging from five to 20 business days.

  • So a successful liability transaction such as a debt exchange depends, in part, on a generally stable underlying market. COVID-19, of course, wreaked havoc on markets and sent volatility levels spiking. But monetary actions by the Fed and fiscal stimulus help calm markets, resulting in a sharp drop in volatility. And that opened the door for companies including Microsoft to take action.

Liability management success: Microsoft received exchange interest of $12.5B, 56% of the targeted notional amount.
 
Treasury teams managing their debt portfolios have a menu of liability management transactions to choose from, including bond tenders, open-market repurchases, consent solicitations and debt exchanges. To use most of these tools, corporates need to offer investors a reasonable amount of time to decide, ranging from five to 20 business days.

  • So a successful liability transaction such as a debt exchange depends, in part, on a generally stable underlying market. COVID-19, of course, wreaked havoc on markets and sent volatility levels spiking. But monetary actions by the Fed and fiscal stimulus help calm markets, resulting in a sharp drop in volatility. And that opened the door for companies including Microsoft to take action.

Laying the foundation. At a recent NeuGroup for Capital Markets office hours session, Microsoft’s treasury team discussed their recent debt exchange, announced on April 30, 2020 and settled on June 1, 2020.

  • Like any successful capital markets transaction, the preparation done in the months before by the treasury team laid the foundation for a debt exchange which accomplished the company’s financial and strategic objectives.
  • These objectives were driven by the primary principle to maximize economic value, including reducing the annual interest rate paid and being P&L accretive. 

Debt exchange details. On April 30, the company announced a registered waterfall exchange offer targeting 14 series of notes across two separate pools with maturities between 2035-2057, all with coupon rates above 3.75% (the existing notes) in exchange for cash into $6.25 billion of new notes due 2050 and $3 billion of new notes due 2060.

  • Microsoft set a waterfall prioritization based on economic value and registered the exchange via an S-4 filing requiring a 20-day offering period. It included an early exchange time on May 13, 2020 which offered investors better economics by exchanging their notes earlier than the official expiration date on May 28, 2020.
    • The strong interest by investors in the exchange allowed Microsoft to increase the amount of the new 2060 note to $3.75 billion. The final coupons on the new 2050 notes and the new 2060 notes were 2.525% and 2.675%, respectively. 

Banks with strong LM credentials. Working with joint dealer managers, Microsoft was able to tap into the knowledge and insights of two banks with strong credentials in liability management.

  • These banks were able to form a consensus on important details including what spreads over US Treasuries to use for both the existing notes and the new notes, modeling analysis, supporting logistics, the identification of holders of the existing notes and their likelihood of participating in the exchange, and potential ways to hedge interest rate movements.
  • At the end of the day, the transaction generated significant interest savings, and extended Microsoft’s debt maturity profile. The exchange also established new, liquid, par securities by allowing investors to move out of high dollar-priced bond issues.

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Cash and COVID-19: A Tale of Two Companies

One company asks, “Where is the cash?” while another reevaluates operational processes.
 
The economic upheaval unleashed by the pandemic divided the universe of companies at a recent virtual meeting of the Global Cash and Banking Group into two camps: Those with ample liquidity that were able to manage cash and conduct business as usual; and those forced to play defense and go “back to basics,” as one member in the latter camp put it.

  • Two member companies sharing very different perspectives on the pandemic’s impact on their businesses embodied this dichotomy: One, a tech giant, presented opportunities it found for process improvements; the other, a travel and leisure company, described an all-hands-on-deck liquidity crunch involving stress tests and turning over every stone for cash.

One company asks, “Where is the cash?” while another reevaluates operational processes.
 
The economic upheaval unleashed by the pandemic divided the universe of companies at a recent virtual meeting of the Global Cash and Banking Group into two camps: Those with ample liquidity that were able to manage cash and conduct business as usual; and those forced to play defense and go “back to basics,” as one member in the latter camp put it.

  • Two member companies sharing very different perspectives on the pandemic’s impact on their businesses embodied this dichotomy: One, a tech giant, presented opportunities it found for process improvements; the other, a travel and leisure company, described an all-hands-on-deck liquidity crunch involving stress tests and turning over every stone for cash. 

Tech tools. Liquidity was not an issue for the tech company and “we probably weathered the crisis better than other industries because of all the tech tools we have,” the member said, adding that the “crisis has raised opportunities” to improve processes.

  • The company was completely prepared to shift gears to work remotely so the challenge became how to overcome various geographical shutdowns and stay-at-home orders across the globe that affected access to stores, lockboxes and, in some cases, payroll.
  • Another technology company found opportunities on the check issuance side, saying that some vendors wanted to switch to ACH payments to improve their liquidity; but ACHs also made sense because it was pointless to send checks to locations (stores, lockboxes, etc.) that were closed. 

Tokens vs. mobile apps. During the pandemic, the first tech company lifted some restrictions on the use of mobile banking apps; when a token doesn’t work and treasury isn’t “in the building” the ease of a mobile app can save the day, especially since the company’s internal process requires three people to move money across the board.

  • However, future thought must be given to the continued use of mobile banking because in the case of termination or employee’s departure, it is easier to collect a token than disable a feature on their phone.

Are wet signatures a thing of the past? The pandemic also presented an opportunity to see how far banks would go in accepting DocuSign.

  • Members said the answer depends on the bank, with the member from the tech company saying, “We adjust to whatever the banks can support.” That said, many banks have made allowances that members hope will continue when things return to “normal.”

Where is the cash? On the flip side to these operational improvement opportunities, many treasury departments across industries scrambled to get a handle on all cash everywhere as the pandemic squeezed liquidity.

  • Hard hit. The travel and leisure industry in particular has been hard hit by mandated travel restrictions and months of consumer cancellations, resulting in a big blow to liquidity. For one member in that industry, prudent cash management and operations have been imperative to keeping the company’s balance sheet strong.
  • No treasury outside treasury. A centralized treasury department has helped with tackling the liquidity pinch for this member, allowing for global transparency and examination of onshore and offshore cash.
    • Because onshore does not equate to accessibility, her treasury department has re-bucketed cash by availability to determine true cash positions across horizons and established an internal task force with legal and accounting to establish minimum balances required for operations.
  • Scenario analyses and stress tests. Good cash forecasting has never been so important— treasury has been called to turn over models, run various scenario analyses and stress test base cases to safeguard the business. 
    • This treasury team tested base, prolonged recovery and severe impact analyses to consider various economic scenarios and protect minimum operating requirements.

Teamwork. The company formed a global finance task force to explore what more can be done to generate cost savings, defer tax and bolster receivables. The member said she was pleased to have employees volunteering from various departments and teams, coming together to help keep the company strong.

  • Similarly, with working capital management, different approaches are being taken with treasury in mind. Previously, departments would seek approval from the CFO based on anticipated ROI; now these teams are talking to treasury first to see if the use of cash makes sense before seeking sign-off. 

I will remember that. Members in similar boats agreed that some banks have gone out of their way to help them while others have been more strict, pushing back on requests and acting as though treasury was asking too much.

  • That prompted one member to say, “The banks who gave us the hard time—we won’t give them business.”
  • On the subject of accessing money invested in term deposits, she advised peers to always look at force majeure clauses in bank agreements to make sure they are not one-sided—allowing the bank to terminate but not allowing the investor to get money back early.
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US Coin Shortage: Retail Treasury Teams Call for Action, Urgency

Call it a disruption or call it a shortage—not enough coins means pain for retailers and banks.

Treasurers of major retailers and restaurant chains sounded loud notes of alarm at a NeuGroup virtual meeting Friday about what many observers are calling a coin shortage. U.S. Bank, the meeting sponsor, described it a “severe disruption” in the nation’s coin circulation sparked by COVID-19. (People have spent less cash during the pandemic and have exchanged far fewer coins for bills or credit at banks or grocery stores.)

Whatever you call this state of affairs, it’s a problem almost everyone said will turn painful this week and may last several months.

Call it a disruption or call it a shortage—not enough coins means pain for retailers and banks.

Treasurers of major retailers and restaurant chains sounded loud notes of alarm at a NeuGroup virtual meeting Friday about what many observers are calling a coin shortage. U.S. Bank, the meeting sponsor, described it as a “severe disruption” in the nation’s coin circulation sparked by COVID-19. (People have spent less cash during the pandemic and have exchanged far fewer coins for bills or credit at banks or grocery stores.)

Whatever you call this state of affairs, it’s a problem almost everyone said will turn painful this week and may last several months.

  • “What is the sense of urgency?” of addressing the problem, one assistant treasurer asked a U.S. Bank representative who serves on the Federal Reserve’s cash advisory council.
  • The U.S. Bank official said banks are keeping pressure on the US Mint, which ramped up production of all coins in mid-June, and are urging the Fed to make the public aware of the issue, including through social media.
  • While there is no easy, short-term solution, U.S. Bank is exhausting all channels to help clients, given the Fed’s decision to effectively ration the amount of coins banks can access to supply businesses.
  • The AT said his company’s coin orders are being filled at lower and lower percentages—as low as 20% or 0% in some areas. Roughly 20% of the company’s retail transactions are in cash.
A June 27 Twitter post by @Inevitable_ET says the photo is from a 7-Eleven.

Educating the public. “Why is the marketing campaign taking so long?” asked another member about expected efforts by the Fed to educate the public about the coin problem and encourage people to bring as many coins as possible back into the banking system.

  • “We as retailers are going to have to deal with consumers who don’t understand,” she said.
  • The treasurer of another retailer, where 40% of transactions are in cash, said there is some resistance from field teams to “having to explain the coin shortage in the country.”

Banks are showing a general lack of urgency/transparency. Members described their banks as providing varying degrees of help, from doing what they can, to “it’s not our problem” or “it’s not that bad of an issue.”

  • Comparing the issue to toilet paper hoarding earlier in the crisis, members noted that there is CEO-to-CEO engagement between retailers and suppliers. But that level of engagement is not happening between retailers and their banks, who are their suppliers of coin. 

Calls for more bank engagement. To address this, members suggested that banks come out with public letters from their CEOs calling attention to the coin shortage. This would help treasury get better traction and awareness in C-suites that this is a major issue that needs to be addressed.

Fixes are awkward, costly. Members noted that the fixes they are contemplating either are awkward or costly, and usually both.

  • On the awkward side is training associates to always ask for exact change, posting signs encouraging this and even saying that customers who do not have exact change (or an electronic form of payment) may not be able to check out or have their order filled.
  • On the cost side, moving low-dollar transactions to electronic payment has a significant economic cost (fees); rounding typically costs store as consumers don’t want to round up (and there are multi-jurisdiction tax issues to consider); and reprogramming point of sale systems can be expensive.
    •  Gift card issuance for change is also cumbersome. Some members are looking to donate change (or rounded-up amounts) to charity, usually the sponsored charity of the store.
    • Meanwhile, operators are being told to stop depositing coins, bringing in their own coins from home, ask local banks for supply and not to turn away coin orders that are “short.” 

Will coin disruption spread to notes? While banks have been assured by the Fed that the issue is not going to spread to notes, e.g., dollar bills or fives, retailers face an environment where the unexpected can happen, so members should extend their contingency plans to work out how to address disruption in smaller denomination notes as well.

Better/cheaper payment rails. Despite COVID-19 being a global issue, the coin disruption is principally a US problem, at least for the developed economies. Asked about the situation in the UK, for example, a member noted the country has an electronic payment system with much lower fees that allows for acceptance of electronic payment to become cost-effective at much lower ticket sizes. Multinational retailers are monitoring the situation in other cash-intensive markets closely, however.

Thus, the coin disruption provides yet another talking point alongside others with COVID-19, for those promoting an end to cash, a more inclusive electronic payment method, and digital currency. The Bank for International Settlements calls out the role of central banks with payments in this digital era, including establishing digital currencies in its recent economic annual report, for example.

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European Pensions Ride the ESG Bandwagon. Will US Plans Catch Up?

In Europe, ESG is gaining traction in pension funds while it still lags a bit in US; raters also need to standardize.
 
While many observers thought environmental, social and governance (ESG) issues would take a back seat amid the pandemic, the opposite has happened, with treasury practitioners—at least in NeuGroup’s universe— seeking more information.

  • Still, as members of the NeuGroup for Pensions and Benefits (NGPG) were told in a virtual meeting in May, it depends on where you are.

In Europe, ESG is gaining traction in pension funds while it still lags a bit in US; raters also need to standardize.
 
While many observers thought environmental, social and governance (ESG) issues would take a back seat amid the pandemic, the opposite has happened, with treasury practitioners—at least in NeuGroup’s universe— seeking more information.

  • Still, as members of the NeuGroup for Pensions and Benefits (NGPG) were told in a virtual meeting in May, it depends on where you are. 

How important? “ESG means different things to different people,” a sponsor presenter told members. “In Europe it’s the first thing pensions want to talk about, but not in the US.” The presenter added that this interest has been driven by both stakeholders and government. “So, depends on where plans are located.” 

  • One member said ESG is considered in managing the company’s pension but it is just one of several other considerations. ESG “is adopted as one of the factors in evaluating portfolio choice,” he said. “But it’s not a controlling factor.” The member added that he “thought it would have more of an impact but as of now we have had less interest.”
  • Since interest in Europe has been keener – particularly in Sweden, one member noted – multinationals were much more focused on ESG within their European funds. 

Held to a different standard. There is also a difference in standards, with one ESG rater often seeing things differently vs. another ESG rater. Essentially there are no industry standards, members were told. 

  • The lack of measurement standards results in vastly different scoring depending upon which of the many vendors are used. But there are efforts afoot to unify standards.
  • There’s also mixed evidence of the value-add of ESG-oriented investments: a Hamburg review of studies found a “non-negative” correlation between ESG and corporate financial performance, meaning there were mostly studies showing a positive relationship; but there were also a number of negative results. In the meantime, several sovereign wealth funds have targeted ESG believing ESG assets will outperform.
  • This lack of rock-solid evidence in addition to fiduciary responsibility of pension managers has been cited as reason for the lack of interest in the US. Some participants said that they haven’t changed asset allocation in the US to reflect ESG. 
  • There is an effort underway in the EU to create uniform pension regulations, although Brexit means that UK will not be part of this work. However, UK interest in ESG is strong.
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What the Experiment With Modern Monetary Theory Means for Risk Managers

Treasury and finance teams need to adapt to the reality of different thinking about debt and deficits.

By Joseph Neu

“We’re not even thinking about thinking about raising rates,” Fed Chairman Jerome Powell said after the Federal Open Market Committee’s June meeting.

  • This was good timing for me: On the same day, I suggested to clients of Chatham Financial attending a virtual summit that among the accelerating trends treasury and financial risk managers need to prepare for is the current flirtation with Modern Monetary Theory.

Study up on MMT. For those with a limited understanding of MMT, including me, it’s time to bone up, because without really saying they are doing so, governments and central banks of developed nations seem to be pushing us very close to something that will end up looking like an MMT experiment.

Treasury and finance teams need to adapt to the reality of different thinking about debt and deficits. 

By Joseph Neu

“We’re not even thinking about thinking about raising rates,” Fed Chairman Jerome Powell said after the Federal Open Market Committee’s June meeting.

  • This was good timing for me: On the same day, I suggested to clients of Chatham Financial attending a virtual summit that among the accelerating trends treasury and financial risk managers need to prepare for is the current flirtation with Modern Monetary Theory. 

Study up on MMT. For those with a limited understanding of MMT, including me, it’s time to bone up, because without really saying they are doing so, governments and central banks of developed nations seem to be pushing us very close to something that will end up looking like an MMT experiment. 

  • The zero-rates-for-the-foreseeable-future policy coming out of the Fed is telling, because one of the tenets of MMT is to set rates at zero to borrow more efficiently to cover needed government spending and print money to repay it. Apparently, though, some MMT proponents suggest that it’s even more efficient just to print money to cover government deficits and not issue any debt at all.
  • It’s probably safer to keep the government debt issuance going for now as it underpins private sector debt financing, credit and interest rate management. Many of us have to unlearn what we’ve been taught about printing money and inflation, too, before we stop worrying about how we will pay off government debt. 
  • Taxes, in the MMT view, are not to increase cash flow to pay the debt but to take out excess printed money from the system so that we don’t get to hyperinflation.

After studying MMT, those of you who are treasury and financial risk managers should consider: 

  • Changing your thinking about financial risk. The developed world seems to be on a mission to test MMT. Time to adjust thinking to that reality.
  • Rethinking your fixed-rate bias. For current policy to work, we need low rates (even zero, if not negative) to be the norm, so the economics of swaps or interest-rate risk management isn’t necessarily going to be the same.
  • Accepting central banks as financial market primaries. The massive central bank intervention crisis playbook has sped up. How much more can the Fed do before it becomes the primary financing mechanism for everything? 
  • Is your company a have or a have not? The divide between those that have unlimited access to capital and those that do not will widen—and it is not limited to sovereigns. If sovereigns have unlimited ability to finance deficits and issue debt, they also have unlimited ability to support the financing of entities they deem unworthy of failure. Meanwhile, the financially strongest private entities will look for an equivalent power to print money. 
  • Becoming “antifragile.” MMT (or whatever governs our financial economic situation now) is not likely sustainable; or if it is, the transition to everyone believing it is unlikely to be smooth. So risk managers must promote resilience in preparation for the unknown of what comes next.
    • If you subscribe to Nassim Taleb’s view, then the most resilient risk management approach is to become “antifragile.” That is, strive to manage risk through the transition to MMT (or whatever we end up with) so that you can benefit from shocks while thriving and growing when exposed to volatility, randomness, disorder and stressors. And don’t forget learning to love adventure, risk and uncertainty.
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Transition to SOFR Pushing Ahead Despite Pandemic

The pandemic and its aftermath forced bank treasurers to move the Libor-to-SOFR transition to the back burner; but make no mistake, it is still very much still on the stove.

With apologies to the real estate industry, there were three critical issues that mattered to bank treasurers before the pandemic: 1) Libor to SOFR transition, 2) Libor to SOFR transition and 3) Libor to SOFR transition. But now, given COVID-19’s damaging impact on world economies, banks have been presented with new priorities, like securing adequate liquidity and the Paycheck Protection Program (PPP). 

This mindset has led many banks to thinking that they should back-burner the transition until the coast is clear. Another driver of this thinking is that many treasurers haven’t been so keen on moving away from Libor in the first place.

The pandemic and its aftermath forced bank treasurers to move the Libor-to-SOFR transition to the back burner; but make no mistake, it is still very much still on the stove.

With apologies to the real estate industry, there were three critical issues that mattered to bank treasurers before the pandemic: 1) Libor to SOFR transition, 2) Libor to SOFR transition and 3) Libor to SOFR transition. But now, given COVID-19’s damaging impact on world economies, banks have been presented with new priorities, like securing adequate liquidity and the Paycheck Protection Program (PPP). 

This mindset has led many banks to thinking that they should back-burner the transition until the coast is clear. Another driver of this thinking is that many treasurers haven’t been so keen on moving away from Libor in the first place.

Lingering skepticism. Several members of NeuGroup’s Bank Treasurers’ Peer Group (BankTPG), meeting virtually recently, revealed wariness of jumping on the SOFR train too soon. “People want someone else to be first mover,” said one member in a breakout session at the meeting, which was held virtually. There was not a lot of interest at his bank, he said, adding that SOFR-based lending “would be sticking out like a sore thumb” among peers. Another member said his bank was “not operationally ready” to move off Libor. “We could find an alternative rate,” he added. 

  • There is “a lot of discovery that hasn’t been done yet,” noted another member in the breakout. “The lending business has to evolve.” Another member added there are “a lot of things we can’t do operationally,” however, what he said the bank should be doing “is educating our customers: whatever replacement they’re going to.” 

Unfortunately, bank treasurers are going to have to overcome their hesitancy. 

The show must go on. According to a presentation at the meeting by Tom Wipf, Vice Chairman of Institutional Securities at Morgan Stanley and Chair of the Federal Reserve’s Alternative Reference Rates Committee (ARRC), the committee is “taking the timelines provided by the official sector as given and continuing its work, recognizing that although some near-term goals may be delayed, other efforts can continue.” 

In other words, do not assume Libor will continue to be published at the end of 2021, Mr. Wipf told meeting attendees. One of the official authorities the ARRC cites is the UK Financial Conduct Authority. The FCA in late March said the end-Libor date “has not changed and should remain the target date for all firms to meet.” 

  • “The transition from Libor remains an essential task that will strengthen the global financial system. Many preparations for transition will be able to continue. There has, however, been an impact on the timing of some aspects of the transition programmes of many firms,” the FCA said in a statement.
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March Madness: Searching for Answers on Cash Flow and Credit

Data from Clearwater underscores the concerns of treasury investment managers reducing risk during the pandemic.

If you needed any more proof that the pandemic has made treasury investment managers even more attuned to the risks in their portfolios, check out the table below from Clearwater Analytics, which sponsored a NeuGroup meeting this week on market trends and improving balance sheet management.

Cash flow and credit. It may not be surprising, but relative to other searches, the sheer number of views in March of data on cash flow projections for securities and portfolios—more than 13,000—captures exactly what was the top concern of nearly every portfolio manager.

Data from Clearwater underscores the concerns of treasury investment managers reducing risk during the pandemic.

If you needed any more proof that the pandemic has made treasury investment managers even more attuned to the risks in their portfolios, check out the table below from Clearwater Analytics, which sponsored a NeuGroup meeting this week on market trends and improving balance sheet management. 

Cash flow and credit. It may not be surprising, but relative to other searches, the sheer number of views in March of data on cash flow projections for securities and portfolios—more than 13,000—captures exactly what was the top concern of nearly every portfolio manager.

  • Also noteworthy is the 84% jump from the prior month in credit events inquiries. The investment manager for a large technology company who described his experience and thinking in the last several months said that keeping track of the volume of downgrades and other credit actions was “breathtaking.”
  • The same manager told his peers about having eliminated stakes in “industries we didn’t like” and reducing investments in energy, retail and health care credits. He said his team spent “an ungodly amount of time on credit.” 
  • And while not every treasury team does its own credit analysis, a widespread focus by managers on vulnerable sectors underlies the more than doubling (111%) in Clearwater views during March of portfolio exposure by industry. 

Governance and communication. The importance of strong governance emerged as a key takeaway from the meeting. It’s critical, as several NeuGroup members noted, that a company’s management team not only understands the risks taken by the investment team but are also comfortable with them before a significant market disruption like that experienced this year.

  • One member asked others if they were receiving any pressure from management to boost investment returns now that interest rates are closer to zero. And while managers whose companies issued debt at wide spreads in March said senior management is interested in reducing interest expense, that is not translating into pressure to take on greater risk with the cash.

Look around the corners. That said, investment managers who survived the first quarter and are now looking toward closing the books on the second are asking plenty of questions about how to position themselves for what lies ahead—much of which is uncertain. Many said they are still asking, as one of them put it, “What is the right amount of credit risk, liquidity, market risk, etc.” 

  • Whatever they do with cash in the months ahead, members are well advised to heed the warning of one peer who is constantly asking “what if we’re wrong?” in assessing what’s next. He noted that many observers doubted COVID-19 would move beyond Asia. That points up the critical need, he said, to keep doing stress tests. Without them, he said, “It’s hard to react if you’re on the wrong side of it.”
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Juneteenth and Beyond: NeuGroup Member Companies Take Action on Racial Justice

Treasurers at major retailers discuss what’s been done so far and what lies ahead.

Calls for major societal change in the wake of the killing of George Floyd have sparked many corporations, including NeuGroup member companies, to take a range of actions in support of change and racial justice. For some, those actions included the observation of Juneteenth, which commemorates the end of slavery in the US.

Treasurers at major retailers discuss what’s been done so far and what lies ahead.
 

Calls for major societal change in the wake of the killing of George Floyd have sparked many corporations, including NeuGroup member companies, to take a range of actions in support of change and racial justice. For some, those actions included the observation of Juneteenth, which commemorates the end of slavery in the US.

  • At a NeuGroup virtual meeting for retailers last Friday on changing regulation and business norms post-crisis, a member from a major American retailer described his company’s quick decision to make Juneteenth (June 19) a company holiday.
  • Noting that the company doesn’t typically move as quickly, he credited its fast action to its cross functional crisis leadership team which is approaching the company’s reaction to recent events as it would a crisis such as a hurricane or COVID-19.
  • The company kept stores open but paid time and half to hourly workers on Juneteenth; other, eligible workers had the option to take the day off with full pay; and the company’s headquarters offices were closed.
  • “As we pivoted to this issue, we had to decide if we wanted to follow or lead,” the member said. “We wanted to lead.” 

Education and sincerity. One participant, who is African American, encouraged others on the call to better educate themselves on matters of slavery and black history, noting that few on the call knew the meaning of Juneteenth until recently.

  • This treasury professional said that what matters is sincerity and action, not talk, taken to address underlying problems. She said there is a difference between “what you know is expedient and what is taken to heart, what is sincere and what is a press release.”

 A good start. Another participant noted the pride he felt in seeing how both his current and former employers have tackled the issue of race head-on, including the CEO of the company where he works now urging conversation and learning. “I couldn’t be prouder of how people have responded,” he said.
 
Accelerated change.  In the last few weeks, the national conversation shifted from COVID-19 to racial justice crisis, focused on diversity and inclusion and black lives.

  • That, observed NeuGroup founder Joseph Neu, highlights the extent to which COVID-19 has forced business thinking to be open to accelerated change and the urgency for companies and finance teams to embrace a faster pace of change for good.

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Can You Save A Month a Year Automating FX Trades?

360T says corporates can use the roughly four weeks saved by automating FX “nuisance trades” to spend time on more valuable analytical work.

The graphic below demonstrates some of the benefits of automating FX trades described by technology provider 360T at a recent interactive session for NeuGroup members called “Demystifying Automated Trading Across the Trade Lifecycle.”


360T says corporates can use the roughly four weeks saved by automating FX “nuisance trades” to spend time on more valuable analytical work.
 

The graphic above demonstrates some of the benefits of automating FX trades described by technology provider 360T at a recent interactive session for NeuGroup members called “Demystifying Automated Trading Across the Trade Lifecycle.”

  • The time savings accrue by eliminating the need to manually enter orders onto trading platforms, examine the pricing offered, choose among competing banks (and sometimes talking to them on the phone) and then deal with all the required back-office chores involved.
  • 360T’s presenters said that by automating the workflow trading process using rules-based trading execution technology that connects directly to a company’s treasury management system, users save time, achieve the best possible price—improving their spreads—and reduce operational risk caused by human errors.

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Pandemic Creates Too Many Unknowns to Change Pension Strategies

Pension managers struggle with strategy amid a pandemic pace unlike the drawn-out financial crisis.

Rapidly changing conditions during the pandemic have made it extremely difficult for many NeuGroup members and other treasury practitioners to create forecasts and devise strategies. Pension fund managers are in the same pickle, finding it nearly impossible to change their overall pension strategies given how fast the landscape is shifting.

Pension managers struggle with strategy amid a pandemic pace unlike the drawn-out financial crisis.
 
Rapidly changing conditions during the pandemic have made it extremely difficult for many NeuGroup members and other treasury practitioners to create forecasts and devise strategies. Pension fund managers are in the same pickle, finding it nearly impossible to change their overall pension strategies given how fast the landscape is shifting.

  • This is a far different predicament than during the 2008-09 financial crisis, which was a slow-moving disaster.
  • “The financial crisis evolved over time, so you had a lot of time,” said one member at a recent NeuGroup Pension and Benefits virtual meeting. “In COVID, you don’t have much time – you don’t know what things will be like a week from now.”
  • At the peak of the COVID crisis, pension managers focused on liquidity concerns—sometimes exacerbated by margin calls—and immediate benefit payment requirements.

Back seat. With market, credit and liquidity risk front and center, longevity risk management, which has minimal linkage to market conditions, has taken a back seat. Similarly, buy-outs and buy-ins—where plans buy annuities—are not currently priority projects. 

  • Buy-outs are on the back burner because many companies have already transferred low-balance participants because the economics are pretty powerful; that’s especially true of younger participants (whereas it becomes almost impossible to transfer longtime employees).

No enthusiasm for handouts. There was mixed enthusiasm for legislative initiatives like the American Benefits Council (ABC) proposal for new funding relief in light of the havoc COVID-19 has inflicted on defined benefit pension plans. This is because many investment-grade companies don’t face mandatory contributions in the next few years despite the market downturn, thanks to outstanding pension relief and previous proactive pre-funding. 

  • Nonetheless, funding relief remains a very important issue for some meeting participants; also, the Health and Economic Recovery Omnibus Emergency Solutions Act (HEROES) passed by the US House apparently already includes many of the ABC provisions that would result in substantial funding relief. HEROES was previously estimated to equate to roughly five years of funding holiday.

Fixed income. In drilling down on fixed-income strategy, one sponsor presenter said that, broadly, there are three phases of a crisis: a liquidity crisis, a credit crisis and, finally, an inflation crisis. He believed that we are at the start of the credit crisis stage. He noted that central banks are supporting some categories of assets but not others, with clear trading implications. 

  • It is hard to evaluate some asset categories based on cash flows that are currently being deferred by many borrowers (such as rents) because it’s not known how much and how fast the deferred amounts will get repaid.
  • Also, it was explained how increases in operating costs can erode margins and also increase leverage—particularly in the high-yield space. Ultimately, members should worry about inflation because how else will all the government and private sector debt get repaid?
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Pensions Look for Re-Entry, Re-Risk Opportunities

Pension managers were de-risking at the end of 2019, much to their relief months later; now it’s time to add some risk.

Although pension managers have been de-risking over the course of the last several months – and continue to do so in different areas – many are now on the hunt to re-enter the market to re-risk. “Can we be nimble enough to pounce given the opportunities that are out there?” wondered one member of NeuGroup’s Pension and Benefits (NGPB) peer group at a recent virtual meeting.

Pension managers were de-risking at the end of 2019, much to their relief months later; now it’s time to add some risk.

Although pension managers have been de-risking over the course of the last several months – and continue to do so in different areas – many are now on the hunt to re-enter the market to re-risk. “Can we be nimble enough to pounce given the opportunities that are out there?” wondered one member of NeuGroup’s Pension and Benefits (NGPB) peer group at a recent virtual meeting.

LDI. Liability driven investment and de-risking clearly was the winning strategy at the end of 2019, which caused collective sighs of relief when the pandemic hit. 

  • Overall, the sentiment was that the equity market now seems to have gotten ahead of itself, so some participants are keeping some liquidity available for market downturns. 

Different paths. One theme emerging from a projects and priorities discussion at the meeting was that there was no uniformity in pension strategy among member companies. There is no gold standard “answer.” Why? Because of variations in underlying situations, such as companies with active vs. frozen plans, varying demographics of plan participants, and well-funded plans vs. those with a large deficit. 

  • The current roller-coaster environment makes it challenging to shift pension strategy, particularly given corporate governance issues and board oversight.

An example of this is different approaches to glide paths: some companies only have de-risking triggers as funded status improves, others have re-risking as well when equity investment value declines, and others have no defined glide path at all. 

  • In one sponsor presentation on pension risk management, a more sophisticated evolution was presented using outright option positions, collars and option replication using delta hedging.  

Options an option? Still, these strategies are challenged by the currently high volatility behind option pricing and, in particular, the volatility skew which makes out-of-the-money put options particularly expensive. 

  • It sounded like a few meeting participants had investigated these strategies but again are challenged by governance issues in authorization for them. Some participants are not even using derivative overlays at this point. Derivative overlays facilitate rapid shifts in risk position without the costs of buying and selling underlying cash investments, and also allow for better management of overall risk.

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Economic Forecast: Outlook for Recovery Improving, but Numerous Risks Remain

Evercore ISI economist Dick Rippe lays out the case for second-half growth after a first-half plunge.

The increased difficulty of cash forecasting and other financial planning since the COVID-19 outbreak means that many treasury and finance teams are eager to hear informed economic analysis and forecasts while we all wait for a vaccine.

  • At a NeuGroup meeting in late May, Dick Rippe, managing director and economist at Evercore ISI, provided his firm’s US and global economic outlook and responded to member questions. Mr. Rippe this week provided updates to his firm’s forecast and analysis.

Evercore ISI economist Dick Rippe lays out the case for second-half growth after a first-half plunge.

The increased difficulty of cash forecasting and other financial planning since the COVID-19 outbreak means that many treasury and finance teams are eager to hear informed economic analysis and forecasts while we all wait for a vaccine.

  • At a NeuGroup meeting in late May, Dick Rippe, managing director and economist at Evercore ISI, provided his firm’s US and global economic outlook and responded to member questions. Mr. Rippe this week provided updates to his firm’s forecast and analysis.

Two quarters of pain. Evercore ISI forecasts the economy will contract by a 40% annual rate in Q2, following a drop of 5.0% in Q1. Mr. Rippe noted that the combined decline in the first two quarters is the largest in the post-World War II period. 

  • The firm has counted over 1,300 instances of layoffs, pay cuts, and business or institution closures; many of these may be temporary, but as they occur, they reverberate throughout the economy, Mr. Rippe said. 

Encouraging signs. Evidence of an upturn has been accumulating rapidly in Evercore ISI’s view:

  • Employment picked up in May (after an enormous fall in April); filings for unemployment insurance – while still high – have diminished substantially in recent weeks; and retail sales rebounded sharply in May, as have auto sales. Similar gains are being seen in China and Germany.
  • Massive economic stimulus is being provided by both the Federal Reserve and the fiscal authorities in Congress and the Trump Administration.
  • A major GDP driver is consumer net worth—the value of houses, securities, and bank accounts. It is close to an all-time high, Mr. Rippe said, adding that it fell much further during the 2008-2009 financial crisis than it did when the coronavirus pandemic started.


Growth likely to resume in H2. Based upon those signs and fundamentals, Evercore ISI updated its economic forecast to show a faster recovery in the second half of 2020.

  • The forecast now shows growth in both Q3 and Q4 at a 20% annual rate; even so, measured from Q4 2019 to Q4 2020, real GDP is expected to decline by 4.8%.
  • Evercore ISI forecasts an increase of 5.0% in 2021. 
  • The improvements depend upon maintaining simulative economic policies which will help keep companies open and consumers solvent, Mr. Rippe said.
  • The emergence of a country-wide second wave of infections would be very damaging, he added. On the positive side, the rapid development of a vaccine would allow a much more secure economic advance.

Dollar doldrums? Responding to a member’s query about the outlook for the US dollar, Mr. Rippe noted that low interest rates brought about by highly accommodative monetary policy would usually be expected to lower the dollar. But in the current global environment, almost all central banks are moving in the same direction. So while the dollar might decline a little, no big move was likely, he said.

Negative Rates? Addressing another member’s concerns about short-term rates possibly going negative, Mr. Rippe said that given the US’s productive economy, when growth resumes negative rates won’t be necessary. And the Fed would go negative only in an absolute emergency, he said, because of the havoc it would reap on money-markets.

  • “But if you asked me three years ago to bet on what German 10-year bond yields would be, I never would have bet they would be negative.”
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Pandemic Hits Argentina Hard – With Tighter FX Controls in Its Wake

The pandemic has inflicted serious pain on world economies and it could be extra painful for Argentina.  
 
Argentina has faced recurring fiscal crises, and now the global pandemic-induced economic recession has once again pushed the country to the brink of defaulting on its dollar-denominated sovereign debt. For corporates doing business there, including members of NeuGroup’s Latin America Treasury Peer Group (LatAmTPG), the most visible manifestation of the crisis is in the defensive measures the government is taking to preserve FX reserves, i.e., getting local cash and earnings out is getting harder and harder.

The pandemic has inflicted serious pain on world economies and it could be extra painful for Argentina.  
 
Argentina has faced recurring fiscal crises, and now the global pandemic-induced economic recession has once again pushed the country to the brink of defaulting on its dollar-denominated sovereign debt. For corporates doing business there, including members of NeuGroup’s Latin America Treasury Peer Group (LatAmTPG), the most visible manifestation of the crisis is in the defensive measures the government is taking to preserve FX reserves, i.e., getting local cash and earnings out is getting harder and harder.
 
In the “good” column, the government has confiscated USD held privately, which was the so-called “pesofication” policy implemented during the last fiscal crisis. Second, the Argentine government does allow a parallel FX market (aka, the blue-chip swap market) to coexist with the official rate available from the Argentine Central Bank (BCRA).

  • The blue-chip transaction involves buying local bonds or shares using pesos, transferring them out and selling them for dollars, at a significant “haircut.” The rate at which you can buy dollars officially is about 73 pesos, obviously preferred to the blue-chip rate at about 124 (June 17). 

Eat your veggies first… In the most recent iteration of FX controls, companies are now required to use their offshore dollars first to cover their dollar needs, and only then will they be given access to USD from the BCRA at the official rate. In addition, companies are careful not to “flout” the FX controls too boldly, as it carries reputation risk and so most keep their parallel transactions to inconspicuous amounts.

  • Having said that, large MNCs are reluctant to use the blue-chip market at all because if they do, they must wait 90 days before being allowed to transact at the official rate with the BCRA again. 

No confidence vote. As difficult and uncertain as the financial environment is in Argentina, members also noted that much of the difficulties stem from a lack of confidence in the government to take the necessary steps for a successful resolution to the current crisis. Looking at the facts on the ground, the fiscal and debt measures do not appear to be nearly as bad as in the past, they said. 

  • On the working capital management side, members also noted that some banks are willing to factor receivables (without recourse) “at a reasonable rate.”
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A Win-Win Solution to Save Suppliers and Manage Corporate Cash

C2FO gives on and off-balance sheet options for early payments to suppliers in need.

As suppliers struggle in the COVID-19 economic environment, getting cash to them quickly can be a lifesaver, and even better is letting them choose the rate that’s most suitable for their circumstances.

  • At a recent NeuGroup virtual meeting, a major retailer described how C2FO’s unique platform gives even small suppliers ready access to a flexible, in-house, early funding program or supply chain finance (SCF) solution.

Cash management tool. By using the C2FO platform, companies can employ their own cash to fund early payments to their suppliers in return for a discount; or suppliers can choose a dynamic SCF option funded via a banking partner Both ways guarantee early payments.

 

C2FO gives on and off-balance sheet options for early payments to suppliers in need.
 
As suppliers struggle in the COVID-19 economic environment, getting cash to them quickly can be a lifesaver, and even better is letting them choose the rate that’s most suitable for their circumstances.

  • At a recent NeuGroup virtual meeting, a major retailer described how C2FO’s unique platform gives even small suppliers ready access to a flexible, in-house, early funding program or supply chain finance (SCF) solution.

Cash management tool. By using the C2FO platform, companies can employ their own cash to fund early payments to their suppliers in return for a discount; or suppliers can choose a dynamic SCF option funded via a banking partner Both ways guarantee early payments.

  • “It’s a nice mixture of having off and on-balance sheet programs, and being able to adjust and navigate the different needs—both supplier needs and corporate needs—in the event we want to reallocate that cash somewhere else,” the senior director of global treasury said.

Uptick in demand. The pandemic has increased demand for C2FO’s platform, especially for the company-cash option, according to Jordan Novak, SVP of market innovation at the Kansas City-headquartered fintech.

  • The SCF rate is attractive for suppliers, but there are significant onboarding hurdles, whereas onboarding to a company’s internal offering is fast and easy.  

Slice and dice. The company provides the yield it seeks, i.e. the discount suppliers give for early payment, and the available cash. C2FO’s platform uploads approved invoices and suppliers log in to set offers for early payment. The fintech’s proprietary algorithms match suppliers’ offers to the company’s desired rate of return. For example, if the target rate is 2%, one supplier may offer 1.5% and another 2.2%, and the technology aggregates all offers to the desired rate, resulting in a higher volume program.

  • C2FO provides the company’s ERP with the discount and new pay date.
  • The company still pays its suppliers directly, only faster.
  • The platform eliminates the need to segment suppliers, as this happens automatically when suppliers name their rates through C2FO.
  • C2FO is able to create programs for small and medium-sized companies, women-owned, minority-owned and veteran-owned businesses. The major retailer was able to craft these programs for its suppliers overnight.
  •  “We can slice and dice different groups of suppliers and have different targets or minimal rates,” the member said.  

Win-win. C2FO facilitates the company’s early payments to suppliers, and it’s a boon to those in critical need of cash.

  • Suppliers can pursue early payment across multiple geographies on the same platform while staying compliant with tax regulations globally.
  • For companies, the cloud-based platform automates what previously could have been hundreds or even thousands of negotiations with suppliers, providing seamless collaboration among companies and their trading partners.
  • “It improves our cash position and return on cash on the margins, and where it’s being used, it is definitely a benefit to P&L,” the retail treasury member said.

Here’s a slide summarizing the reasons the retailer chose to use C2FO’s platform:

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A “Perfect Storm” in Emerging Markets Shatters Hope for Some Investors 

Treasury investment managers hear sober forecasts and calls for greater action by the IMF.

Hardly any of the treasury investment managers who met in early May at a NeuGroup virtual meeting said they owned emerging market (EM) debt—not very surprising given that most companies have been parking cash in high-quality, short-duration investments since the pandemic rattled credit markets.

  • But one manager who does invest in USD-denominated EM debt said he was “bitterly disappointed” in the International Monetary Fund and G7 nations that had not “come to grips” with the depth of the problem facing the poorest countries in the developing world in the wake of the coronavirus, adding that they “haven’t thought big enough about” the issue—a contrast to fiscal and monetary efforts by developed nations.
  • He noted that emerging markets had been forecast to supply two-thirds of the world’s economic growth.
  • On the plus side, his company had avoided investments in Argentina and sold stakes in Turkish and Ukrainian debt.

Treasury investment managers hear sober forecasts and calls for greater action by the IMF.

Hardly any of the treasury investment managers who met in early May at a NeuGroup virtual meeting said they owned emerging market (EM) debt—not very surprising given that most companies have been parking cash in high-quality, short-duration investments since the pandemic rattled credit markets.

  • But one manager who does invest in USD-denominated EM debt said he was “bitterly disappointed” in the International Monetary Fund and G7 nations that had not “come to grips” with the depth of the problem facing the poorest countries in the developing world in the wake of the coronavirus, adding that they “haven’t thought big enough about” the issue—a contrast to fiscal and monetary efforts by developed nations.
  • He noted that emerging markets had been forecast to supply two-thirds of the world’s economic growth.
  • On the plus side, his company had avoided investments in Argentina and sold stakes in Turkish and Ukrainian debt.  

BlackRock’s take. Several representatives from BlackRock, sponsor of the meeting, described a grim situation in emerging markets, with one saying many nations face a “perfect storm,” given inadequate health care infrastructure to deal with COVID-19 cases, the trend toward onshoring in global supply chains, capital outflows and serious debt issues. One presenter said the IMF’s efforts at debt relief were “not enough.”

  • One senior executive said he was “very bearish” on the outlook for countries including Brazil, Indonesia and Argentina, saying all hope has been “shattered.”
  • The executive also noted that the greatest impact of climate change will be on the equatorial world, including Brazil, Africa and Bangladesh. “If you believe in climate change, the long-term impact is incredibly ugly,” he said. The developing world, he added, will “use more coal than ever” during a severe economic downturn.

Updates. In mid-June, the BlackRock Investment Institute explained its views on EM debt:

  •  “We stay neutral on hard-currency EM debt due to the heavy exposure to energy exporters and limited policy space among some markets. Default risks may be underpriced.
  • “We are neutral on local-currency EM debt because we see a risk of further currency declines in key markets amid monetary and fiscal easing. This could wipe out the asset class’s attractive coupon income.” 
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So far, So Good: US Banking Sector Shows Strength During Pandemic

Banks are as healthy as ever, and  robust investment-grade debt issuance has bolstered the industry’s profitability.

The global pandemic has cratered economies and affected businesses the world over. But the US banking system remains healthy because banks are well capitalized, having adhered to rules put in place after the 2008 financial crisis. Equally important: Investment-grade debt issuance by corporates is generating bank profits.

Banks are as healthy as ever, and  robust investment-grade debt issuance has bolstered the industry’s profitability.

The global pandemic has cratered economies and affected businesses the world over. But the US banking system remains healthy because banks are well capitalized, having adhered to rules put in place after the 2008 financial crisis. Equally important: Investment-grade debt issuance by corporates is generating bank profits.

  • That’s some of what members of NeuGroup’s Tech20 Treasurers’ Peer Group heard at a recent meeting from a bank equity strategist.
  • “The investment-grade markets are stronger than ever,” the strategist said. “Funding markets are very robust, with corporates taking advantage of low rates.”
  • Data from US securities industry organization SIFMA and financial tech and data company Refinitiv show that investment grade companies have issued more $1 trillion in debt this year. As a result, the strategist said, bank industry profits “are going gangbusters,” noting that this is a continuation of a long-term trend.

Texas ratios. This all means that despite the current economic straits, “We can handle a greater level of the problems we’re facing,” the strategist said. He also referred to the “Texas ratio,” which, by dividing nonperforming assets by tangible common equity and loan-loss reserves, helps investors determine how risky a bank is. (The higher the Texas ratio the more financial trouble a bank might be in.) By this measure, the sector is, “very healthy.”

  • That health stems in part from banks “setting aside a lot of money for loan losses” in the first quarter, the strategist said. He acknowledged that deferments “are happening” and loan forbearances “are way up;” additionally, bank lending standards are tightening and “demand is going down.” He added that he expects bank earnings to be weak “but this is not a balance sheet event or credit event.” Bottom line: “The banking system is as healthy as its been in our lifetimes.”

Weakness in Europe. The strategist said that while US banks are in top form, European banks are not. That’s because of the zero interest rate environment in the European Union. The European bank sector is weak because zero rates makes banks inefficient, the strategist noted. “European banks are as weak as they were in during the ’08-’09 financial crisis,” he said. US banks have taken a hit and are a great shape, and “nowhere near ’09 levels.”
 
Negative rates in the US? While there are negative rates globally, the strategist didn’t think the US would go that route. “There are now unprecedented levels of negative rates” globally, he said. “Will US go there? No, because we have a huge money market fund market and if we break the buck again, then it will be a huge mess.” And it certainly would be “negative for bank profitability.”

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The Loan Road Ahead: Steep Prices May Linger Longer Than Short Tenors

Post-pandemic advice from U.S. Bank for treasury teams: keep close to your banks.

Unlike the booming bond market, corporates still face restrictions on loans, and it may be awhile before pricing returns to pre-pandemic levels. U.S. Bank, sponsor of a recent NeuGroup meeting for assistant treasurers, provided participants with insights into revolver drawdowns and what to anticipate when refinancing or seeking new debt.

Revolver pricing leaps. The volume of revolving-credit drawdowns—once taboo—has hovered at over $250 billion since leaping to that level in mid-April.

  • A plurality of drawdowns by volume (42%) has been by companies rated ‘BBB’, followed by ‘BB’ (24.9%), ‘B’ (10.6%) and ‘A’ (8.5%), according to U.S. Bank.
  • Highly-rated borrowers issuing incremental short-tenor, drawn facilities saw pricing jump more than 40%, and well over 100% for undrawn ones, except ‘AA’ which increased 86%.

Post-pandemic advice from U.S. Bank for treasury teams: keep close to your banks.

Unlike the booming bond market, corporates still face restrictions on loans, and it may be awhile before pricing returns to pre-pandemic levels. At a recent NeuGroup meeting for assistant treasurers, U.S. Bank provided participants with insights into revolver drawdowns and what to anticipate when refinancing or seeking new debt.

Revolver pricing leaps. The volume of revolving-credit drawdowns—once taboo—has hovered at over $250 billion since leaping to that level in mid-April.

  • A plurality of drawdowns by volume (42%) has been by companies rated ‘BBB’, followed by ‘BB’ (24.9%), ‘B’ (10.6%) and ‘A’ (8.5%), according to U.S. Bank.
  • Highly-rated borrowers issuing incremental short-tenor, drawn facilities saw pricing jump more than 40%, and well over 100% for undrawn ones, except ‘AA’ which increased 86%.

Restrictions will persist. Libor floors became prevalent early on, said Jeff Stuart, U.S. Bank’s head of capital markets, and several structural features have since emerged, such as restricted payment tests on dividends and share buybacks, and anti-hoarding provisions requiring that a portion of drawdowns be used to pay down debt.

  • “I think they’ll be here for a while,” said Mr. Stuart, responding to a question whether such changes will apply to new issuances or executing an “accordion” option to increase loan size.
  • Pricing will stay elevated as well. “That’s what we’re going to see for some time,” Mr. Stuart said.

Some good news. Of 156 deals since March 23 tracked by U.S. Bank, only five new-money deals achieved tenors longer than a year; four were unrated and two secured. Eight “amends and extends” were longer than a year, and all 13 of those deals were in May.

  • “The world fell out of the five-year and dramatically increased the 364-day,” Mr. Stuart said, adding longer tenors will likely return to pre-pandemic levels sooner than pricing.

Some advice. Given banks’ “shock” at the rush to draw down revolvers, Mr. Stuart said, for the foreseeable future it will be harder to do multiyear facilities as well as accordion and incremental financings without impacting pricing on entire deals.

  • Banks are squirrely now, saying no to easy deals but agreeing to difficult ones. “It’s very difficult to predict what they’ll do, so this is a time when you need to be as close to your banks as ever,” Mr. Stuart said.
  • He anticipates greater confidence to lend next year and potentially improvements come fall, but “If you don’t have to do a deal now, don’t do it.”

No more stigma. Asked how drawing down a revolver influences banks’ view of the borrower, Mr. Stuart said initially he was perturbed at the lack of trust that the funding request implied, but soon realized how boards applied pressure to bolster liquidity.

  • “It used to be the worst thing a corporate could do, drawing down its back-up revolver, but I don’t think anybody is looking at it like that now,” he said.
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Dusting Off the Cobwebs and Retooling the Investment Policy

An inside look at portfolio governance and changes to investment strategies.

When the global pandemic hit, investment managers needed to act fast to manage liquidity and move company cash to short-dated safe havens. So having flexibility in their investment management strategy was essential for reallocation of portfolios and easy access to cash. At two NeuGroup virtual meetings for investment managers, members discussed investment policies and what governance their companies have in place.

An inside look at portfolio governance and changes to investment strategies.

When the global pandemic hit, investment managers needed to act fast to manage liquidity and move company cash to short-dated safe havens. So having flexibility in their investment management strategy was essential for reallocation of portfolios and easy access to cash. At two NeuGroup virtual meetings for investment managers, members discussed investment policies and what governance their companies have in place.

What is best-in-class portfolio governance? Most member companies have an investment policy that includes a high-level statement that can only be modified by the board, with underlying investment policies and procedures that may be changed by the treasurer or assistant treasurer; some require CFO approval.

  • The most convenient practice is to have a policy that allows the treasurer or assistant treasurer approval of investment mandates with monthly or quarterly reporting to the CFO and yearly reporting to the board. But is most convenient also best in class? Yes, if responsiveness during the liquidity crisis could have been inhibited by waiting for board approval.

Reinventing an investment program.  One member recently went through the process—thankfully before the global pandemic—of dusting off the cobwebs on her company’s investment policy and shared with peers the following advice for successful realignment.

  • Consider your cash buckets (i.e.: operational cash versus cash reserves), establish a minimum cash framework and back test your operating buffers.
    • Determine and maintain minimum operating cash balances.
    • Ensure sufficient liquidity to meet ongoing operational & strategic business needs.
  • Establish a new “cash culture” mindful of the cash impact from operational decisions.
    • Secure buy-in from management.
    • Align more frequently with FP&A.
    • Host biweekly meeting with treasurer & finance heads.
    • Improve treasury Cash Forecast by making departments accountable for forecast variances.
  • Conduct an investment policy review annually (or more frequently as needed)
    • Oversee risks, controls, managers and performance within treasury and accounting teams.
    • Address manager violations. One member uses Clearwater to monitor managers’ decisions and performance, making the managers reimburse the company if they violate a policy and have to sell an asset at a loss; if the manager was out of compliance at time of purchase, the CFO is alerted.

Benchmark for success:  This starts with monitoring the investment portfolio) daily and report at least monthly and quarterly. Also:

  • Pay attention daily to market moves, fair market value changes, unrealized gains/losses.
  • Compliance guidelines should be established via dashboards and baseline reporting. 
  • One member advocated that reporting is a way to confirm alignment with internal stakeholders.
    • Although his 10-page policy is approved annually, every quarter his team reports portfolio performance to the board.
    • Each month, his team sends the treasurer and CFO reports on permissible investments, holdings, performance, variances to prior years. 
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Latin America Treasury Peer Group Members Discuss Challenges of Managing Cash Amid Crisis

NeuGroup and Latin America

By Joseph Neu

Latin America is being hard hit by the COVID-19 virus and the economic aftershocks, both of which formed the backdrop for NeuGroup’s Latin America Treasury Peer Group 2020 H1 virtual meeting. Members discussed the challenges of intercompany lending, the lack of treasury center capabilities and looming Argentina chaos.

Here are few key takeaways I wanted to share.

By Joseph Neu

Latin America is being hard hit by the COVID-19 virus and the economic aftershocks, both of which formed the backdrop for NeuGroup’s Latin America Treasury Peer Group 2020 H1 virtual meeting. Members discussed the challenges of intercompany lending, the lack of treasury center capabilities and looming Argentina chaos.

Here are few key takeaways I wanted to share.

Rethinking intercompany funding. One member noted that in most Latin American countries where her company is located, entities are funded on a standalone basis. This is challenging when banks locally don’t step up with reasonable credit.

  • MNCs funding intercompany need to fit the region carefully into their strategic financing plans, for example, to tailor funds transfer pricing or their capital allocation models for intercompany loans; also at issue is capital invested into the region and cash pulled out vs. left in country.
  • COVID-19 has vastly disrupted forecasts of local cash and capital needs, so going forward, members will look to both improve forecasting capabilities in the region and integrate them more smoothly into the company’s broader strategic cash and capital planning.

Exasperation with the lack of treasury center capabilities. Members expressed their growing impatience with the lack of progress in the region, by governments and banks, to allow them to implement world-class cash management and other treasury operations solutions.

  • Latin America is simply not keeping pace with what is happening in the rest of the world. The impediments to world-class treasury center capabilities, e.g., linking up affiliates to the in-house bank, makes it more challenging amid the crisis to meet the needs of members’ businesses, customers, suppliers, and other stakeholders.

Factoring in another Argentina crisis. As one member observed, this is not a new occurrence for Argentina; the country has defaulted on its debt nine times. Still, the most recent default has led to some new and innovative restrictions to accessing USD, members note.

  • For example, there has been a call on companies with offshore dollars to use them to pay external vendors before being able to sell more pesos. The only alternative is to invest pesos in assets that yield something that helps mitigate the inflationary loss.
  • So-called blue-chip swaps and their bond equivalents still carry fears of reputation risk.
  • Meanwhile, find a bank to help with factoring receivables so that you get those pesos to invest or spend as soon as possible.
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Under the Hood of the Global Payments System: Complexity

How TIS helped The Adecco Group harmonize payment, reporting and bank account management processes.

So, you need to make payments? Sounds simple, but once you look under the hood of the global payments apparatus—which has developed differently in different places for different currencies—you will discover separate layers of complexity. That’s according to Joerg Wiemer, co-founder and CEO of Treasury Intelligence Solutions, or TIS.Put simply, there are three different sources of complexity.

  1. The connection and integration of the ERP and the bank system is incomplete, resulting in the use of multiple e-banking tools and a cumbersome cash visibility process.
  2. Payment formats, despite efforts to harmonize them, are not fully standardized, resulting in more time-consuming setup processes and/or costly payment fixes.
  3. Communication options like APIs are more like green bananas than the ripe fruit they are currently made out to be. Add to these the increased frequency of fraud attempts targeting the payments function.

How TIS helped The Adecco Group harmonize payment, reporting and bank account management processes.

So, you need to make payments? Sounds simple, but once you look under the hood of the global payments apparatus—which has developed differently in different places for different currencies—you will discover separate layers of complexity. That’s according to Joerg Wiemer, co-founder and CEO of Treasury Intelligence Solutions, or TIS.

Put simply, there are three different sources of complexity.

  1. The connection and integration of the ERP and the bank system is incomplete, resulting in the use of multiple e-banking tools and a cumbersome cash visibility process.
  2. Payment formats, despite efforts to harmonize them, are not fully standardized, resulting in more time-consuming setup processes and/or costly payment fixes.
  3. Communication options like APIs are more like green bananas than the ripe fruit they are currently made out to be. Add to these the increased frequency of fraud attempts targeting the payments function. 

High jump. The combination of these factors makes it hard for a treasury management system (TMS) to truly meet payment needs. And that’s before you consider that you will always need to make payments. A TMS, TIS suggests, can be a great “all-arounder” but is still like an Olympic decathlete in terms of required functionalities compared to the superior, focused expertise of a sprinter, long-distance runner, high jumper or javelin thrower.

A simplification case. At a recent meeting of the Tech20 High Growth Edition, NeuGroup for treasurers of high-growth tech companies, TIS co-presented a payments simplification case with a client, The Adecco Group. 

  • Adecco is a Fortune Global 500 recruitment and staffing agency based in Zurich, Switzerland, which operates 5,100 branches in eight regions and 60 countries. Over 60% of its EUR 23.4 billion FY2019 revenues came from Western Europe, and 19% from North America.
  • While the business is relatively stable and has some offsetting/countercyclical elements, 75% of revenues come from temporary staffing solutions with “retail-like” margins, i.e., not that generous. With processes involving up to 700,000 individuals at any given time, the emphasis is naturally on operating efficiency.
  • This entails digitization and automation in timesheets, recruitment (e.g., candidate portals), documentation, administration and, of course, payments. 

The handover. The payments function, often managed by treasury, is a handover point from many stakeholders, including treasury itself, accounting, shared services, IT or value-added process owners, and a variety of legal entities. It is similar at Adecco. The objectives of Adecco’s transformation journey are focused on:

  • Global cash visibility in the TMS, Kyriba.
  • Connection to all banks globally using TIS as the service bureau, ensuring communication efficiency (SWIFT, host-to-host, EBICS, BACS) depending on volume and complexity of local business needs.
  • Improved and harmonized payment, reporting and bank account management processes via a single, bank-independent e-banking system, provided by TIS (over 10,000 banks are connected via TIS’s cloud platform)—while also achieving compliance, bank-signature governance, risk reduction and cash centralization via pooling arrangements.  

A complicating factor is payroll payments: Salary and wage payments come from human resource systems where local rules and regulations for employee protections and taxes drive local differences, making this type of payment hard to harmonize.

The business case? Depending on your starting point, a “very high” ROI can be achieved primarily by:

  • Building in the ability to choose the most efficient communication option (bullet 2 above) for each payment. Over 90% of the traffic can go directly via non-SWIFT channels, meaning it’s cheaper: SWIFT has transaction-based pricing and TIS has “value-based” pricing where higher complexity means higher pricing (the number of bank accounts or ERPs is a proxy for complexity). But part of the TIS value proposition is reducing complexity with their project implementation.
  • Overcoming format-error driven payment delays (and costly fixes) with the use of TIS’s continuously updated and maintained payments “format library.” 

Success factors. Like many project stories, success lies in the effective coordination and collaboration of people.

  • Senior management sets the tone by driving change and expectations; also required is committed involvement from internal controls, compliance and IT/security, and strong governance from business, finance and treasury leadership.  

Test, test and test some more. For an end-to-end (E2E) process approach to be successful, test, test and retest all the formats and pathways thoroughly. And include deliberate errors to make testing as robust as possible.

Next up: From batch to instant payments. TIS does not consider APIs quite ready for prime time yet, and cites country-by-country differences (apps, clearing systems, amount thresholds and the varying API libraries banks have) as the primary reasons. They are nevertheless a big development and will bring many benefits in time.

  • People use Adecco’s app to find jobs; when their work is done and approved, nothing really stands in the way of settling the payment for that work.
  • “So we envision moving from batch to instant payments,” André van der Toorn, senior vp of treasury at the Adecco Group, said. Adecco’s associates (employees for whom Adecco is the employer of record) may be keen to accept that, even if it means they will get paid slightly less. Instant payments may come very soon, based on the success of a live test with a digital client in a remote part of the world.

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Obstacle Course: Cash Forecasting Challenges in Latin America 

Treasurers in Latin America are coping with the pandemic, M&A activity and working capital needs.
 
Many of the cash management challenges currently facing treasurers in Latin America are being complicated by a variety of factors, including the omnipresent COVID-19 crisis. But also in the mix is recent M&A activity in the region (think integration and its opposite, divestiture), along with difficult financing conditions affecting working capital management.
 
COVID chaos. Latin America is no exception in regions contending with the difficulties brought on by the pandemic. As in other parts of the world, work from home (WFH) processes have had to be invented on the fly and then executed.

Treasurers in Latin America are coping with the pandemic, M&A activity and working capital needs.
 
Many of the cash management challenges currently facing treasurers in Latin America are being complicated by a variety of factors, including the omnipresent COVID-19 crisis. But also in the mix is recent M&A activity in the region (think integration and its opposite, divestiture), along with difficult financing conditions affecting working capital management.
 
COVID chaos. Latin America is no exception in regions contending with the difficulties brought on by the pandemic. As in other parts of the world, work from home (WFH) processes have had to be invented on the fly and then executed.

  • This has led to some turnover, part of which stems from the paradoxical situation where WFH often means more work and burnout; this then leads to companies onboarding new people either virtually or in person while maintaining social distancing protocols.
  • Members pointed out that this highlighted the importance of written, up-to-date policies and procedures. 

M&A chaos. Acquisitions, and in one case a divestiture, bring their own challenges to accurate cash forecasting. Integration of the entities involved must take place country by country. The message here is that there is a lot to do, in multiple tax and regulatory environments that generally do not allow cross-border solutions. Of course, the whole forecast philosophy can vary—forecast as needed vs. regular forecasts. Also, the need to repatriate regularly or leave the cash where it is requires major adjustment and training.

  • Where treasury management systems are involved (and the accounting systems that feed them), there is the need to reconcile different approaches to the requirements of the new combined (or separated) entity. 

Working cap scrutiny. Communicating the expected cash needs of the new company is an important issue to management ahead of earnings calls. Going along with this is the focus on working capital, and in particular short-term assets like accounts receivable (DSO’s) and inventory (months of sales).

  • Often overlooked is the opportunity presented on the liability side. Companies with historically strong cash flow may have slipped into a practice of just paying the bills as presented.
  • By paying according to terms, or negotiating payment terms to industry benchmarks, companies can add to cash on hand the same way collecting sales faster adds to cash. 

Cash rules. Treasury needs to work closely with in-country managers to identify where there are opportunities to increase cash on hand and then determine how to get that cash to where it is needed, whether to pay down debt or pay equity investors.

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Why Swapping Fixed-Rate Debt to Floating Is Still Worth Considering

Wells Fargo shared insights on liability management at the pilot meeting of NeuGroup for Capital Markets.

At a spring meeting of NeuGroup for Capital Markets, sponsored by Wells Fargo, several members said they had used interest-rate swaps to shift more of their debt to floating rates, a move that paid off as rates fell in the second quarter amid the pandemic.

  • A few participants had regrets about having swapped from floating to fixed rates.
  • One member said his team is “spending a lot of time trying to get the right mix” of fixed and floating rates as it asks if “it makes sense to do swaps.”

Wells Fargo shared insights on liability management at the pilot meeting of NeuGroup for Capital Markets.

At a spring meeting of NeuGroup for Capital Markets, sponsored by Wells Fargo, several members said they had used interest-rate swaps to shift more of their debt to floating rates, a move that paid off as rates fell in the second quarter amid the pandemic.

  • A few participants had regrets about having swapped from floating to fixed rates.
  • One member said his team is “spending a lot of time trying to get the right mix” of fixed and floating rates as it asks if “it makes sense to do swaps.”

Conversations and convincing. One of the members who swapped from fixed to floating said it had required “convincing management this was right” from an asset liability management (ALM) perspective, adding that treasury had lots of conversations with the CFO “to make him comfortable.” She said much of the focus was on timing which, fortunately, “worked out.”

  • As a result, some of this company’s hedges are in the money, raising the question of whether it makes sense to unwind or enter into offsetting swaps to monetize the hedge gains. The member asked for input on accounting and other considerations.
  • This company had also done some pre-issuance hedging and was doing more of it at the time of the meeting.

Magic formula? One of the presenters from Wells Fargo asked, rhetorically, how many people at the meeting had been told there is a “magic formula” for the ideal debt mix, such as 75% fixed to 25% floating.

  • Formulas aside, the key question investment-grade (IG) companies must answer before using interes-rate swaps, he said, is how much volatility in corporate earnings (before interest and taxes) will result from changes in rates. The answer, he suggested, depends on the cyclicality of the business and its “absorption capacity.”
  • It’s important to ask why you put on the swap, especially in this environment when fixed to floating-rate swaps went into the money, the Wells Fargo presenter said. What’s important is determining how much potential eps volatility it creates and whether “you can add it and not create heartburn,” he said.

What now? Another presenter from Wells Fargo said that, as a result of lower savings now available from swapping fixed to floating rates, “I think people have written off swaps to floating.” But he said the savings are still decent, meaning it makes sense to keep swaps on the radar screen and that corporates should “keep thinking” about them.

  • In a follow-up call in early July, he said his views still hold in the current market and pointed to data Wells Fargo presented during the meeting to illustrate that swaps to floating make sense even when rates are flat.
  • It shows that over the last 23 years, the savings on a 5-year swap, even in an adjusted market environment where interest rates remain flat and trendless, still amount to nearly 100 basis points.
  • This may be especially relevant today given that so many companies boosted liquidity as the pandemic shut down the economy by issuing fixed-rate debt.
  • As a result, Wells Fargo’s presentation says, the liability portfolios of many IG issuers are overweight fixed-rate debt.
  • The bank also noted an “asset liability mismatch (debt versus cash/short-term investments) creating ‘negative carry drag’.”
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Brain Game: Using Artificial Intelligence to Improve Cash Forecasting

ION’s plans to tap machine learning, deep learning and neural networks to help treasurers.  
 
Making better use of technology to improve cash flow forecasting (and cash visibility) has taken on greater importance during the pandemic for many companies where it was already a high priority. That was among the key takeaways at the spring virtual meeting of the Global Cash and Banking Group, sponsored by ION Treasury.

  • ION sells seven different treasury management systems (TMSs), including Reval and Wallstreet Suite.
  • Among the cross-product solutions ION is focused on is a cash forecasting tool leveraging artificial intelligence (AI), mostly in the form of machine learning (ML) and deep learning neural networks.
  • One of the ION presenters said advances in AI and ML have produced an “opportunity to reimagine how cash forecasting can be done,” noting something treasurers know too well—that no one yet has truly “solved in a great way” one of the top challenges facing finance teams.

ION’s plans to tap machine learning, deep learning and neural networks to help treasurers.  
 
Making better use of technology to improve cash flow forecasting (and cash visibility) has taken on greater importance during the pandemic for many companies where it was already a high priority. That was among the key takeaways at the spring virtual meeting of the Global Cash and Banking Group, sponsored by ION Treasury.

  • ION sells seven different treasury management systems (TMSs), including Reval and Wallstreet Suite.
  • Among the cross-product solutions ION is focused on is a cash forecasting tool leveraging artificial intelligence (AI), mostly in the form of machine learning (ML) and deep learning neural networks.
  • One of the ION presenters said advances in AI and ML have produced an “opportunity to reimagine how cash forecasting can be done,” noting something treasurers know too well—that no one yet has truly “solved in a great way” one of the top challenges facing finance teams.

Define your terms. Another ION presenter explained that AI is any intelligence demonstrated by a machine.

  • ML—a subset of AI—involves the ability to learn without being explicitly programmed.
  • Deep learning (DL) is a subset of ML and includes so-called neural networks inspired by the human brain. The algorithms powering neural networks need “training data” to learn, enabling them to recognize patterns.
    • The ION presenter gave the example of a neural network within a self-driving vehicle that processes images “seen” by the car. 

Building on data and business knowledge. For cash forecasting, the learning process starts with entering historical data into the model that is “cleaned” by tagging the inflows and outflows appropriately and removing outliers that would significantly skew trends. Models are trained via algorithms that apply rules and matching inputs with expected outputs.

Validation required. Like many learning curves, it takes time for the model to reach a high level of performance and requires treasury professionals to validate that the algo knows what it is doing by comparing the forecast to actual variances.

  • Similarly, people—not machines—will have insider knowledge of significant changes within the organization and must make tweaks to the model where appropriate. 

Measuring the models. Various statistical approaches feed neural networks’ underlying algorithms. When building their AI cash forecasting solution, ION tested everything from simple linear regression to multivariable linear regression to the Autoregressive Integrated Moving Average (ARIMA) model, which adds layers to the neural network and process non-linear activities.

  • ION’s research suggests that linear regression-based learning models perform well for businesses with stable, growing cash flows, but less well with cash flows subject to seasonal peaks.
    • ARIMA models perform better, but need extra modeling for seasonality while neural networks require careful attention to training data to learn from, as well as supplemental intervention when non-repeating events occur—such as global pandemics.
  • Still, you can get 90%-95% accuracy most of the time, in seconds vs a day or more using manual methods. ML for cash forecasting has the potential to be 3,000 times faster than common manual processes companies employ, according to ION.
    • Other benefits include improving accuracy, overcoming human biases, picking up anomalies that could mean fraudulent activity, and realizing monetary gains from more predictable cash positions.
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Managing the Team Through WFH Takes Effort

Powering an effective team through tough times – snacks and all.

For all the talk about how well NeuGroup peer group members and their teams have navigated the pandemic – quarter closes, bond issuances, insurance renewals, revolver negotiations, even hostile takeover attempts – there is a nagging feeling that “this can’t go on forever” without more problems manifesting themselves in some way. 

After almost four months of a near complete “work from home” or WFH regime, it will still be a while before the full strength of the treasury team is back together in the office. Some companies have announced recently phased-in returns as early as mid-June while others have been told to stay home through the end of the year. What can be learned from the experience so far as the situation stays fluid? Here are some thoughts from NeuGroup’s recent Tech20 Treasurers’ Peer Group meeting.

Powering an effective team through tough times – snacks and all.

For all the talk about how well NeuGroup peer group members and their teams have navigated the pandemic – quarter closes, bond issuances, insurance renewals, revolver negotiations, even hostile takeover attempts – there is a nagging feeling that “this can’t go on forever” without more problems manifesting themselves in some way. 

After almost four months of a near complete “work from home” or WFH regime, it will still be a while before the full strength of the treasury team is back together in the office. Some companies have announced recently phased-in returns as early as mid-June while others have been told to stay home through the end of the year. What can be learned from the experience so far as the situation stays fluid? Here are some thoughts from NeuGroup’s recent Tech20 Treasurers’ Peer Group meeting. 

First, all the BCP work pays off. Treasury’s essential focus of keeping the lights on no matter the catastrophe has long required detailed business continuity plans to ensure access to liquidity, collections capabilities and the ability to make payments away from a compromised office site. 

  • So, arguably, no team was better prepared than treasury going into the pandemic-driven mandate for staff to take up their posts at home. Some treasurers noted with relief that they had recently tested the BCP and that things had worked out as planned when the order came. 

Not much change for some. Global corporations of a certain size already have regional treasury centers in other places of the world, and – especially if based in the high-cost San Francisco Bay Area – varying levels of distributed teams in lower-cost regions of the US, e.g., Florida and Texas. The ability to lead those teams may have taken on a different nuance in the WFH environment, but managers were already used to leading remote team members. 

  • “We were already very remote so we had that down, and the [quarterly] close wasn’t a problem,” said a Tech20 member who leads both the treasury and tax teams. Nevertheless – and despite a significant redistribution of ergonomic chairs from offices to homes across the Bay Area – several companies gave a stipend of up to several hundred dollars to set up a home office. 

Reassure the team with leadership, transparency. With the airwaves filled with COVID-19 news and the increased focus on cash and forecasting facing a very uncertain future, it is natural that people start worrying about losing their jobs. Some companies, including one Tech20 member who shared her company’s approach to leading in times of COVID-19, announced that there would be no layoffs in 2020. 

  • This company also makes a lot of effort to show empathy with employees and demonstrates its own focus on well-being to reassure others that it is OK to nor just power on as usual. The cadence of communication is important.

Set boundaries, examples. Particularly in situations where the whole family is at home, it’s important to demarcate work time and home time. Our presenting member said her husband oversees schooling the kids and she does “after school” activities. This means she is not available for meetings for a set number of hours in the afternoon and encourages her staff to set similar limits. 

  • Another member, who also emphasized mental well-being after the intensity of weeks upon weeks of blurred work/home lines – especially for single parents with young kids, and since taking vacation seems pointless if you can’t go anywhere – said he would take a Friday off on a regular basis, signaling that similar actions by staff are acceptable. 

A lot of mileage out of small morale boosters. Coffee breaks and happy hours by Zoom, a dedicated Slack channel for office chitchat and family pictures, checking in on the singles on the team, and online trivia game time are examples of team building and maintaining a sense of team and inclusion. The tax and treasury chief from above organized a “remote offsite” meeting to connect with the team and from time to time sends much-welcomed healthy snack packages (from Oh My Green) to her staff. 

  • All this combined with the moratorium on layoffs have rewarded the presenting company’s management with their highest employee satisfaction numbers, despite the challenging period. 
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Do Pensions Need to Bolster Post-Retirement Resources?

Pension managers could be doing a better job of guiding retirees with their post-work pension planning.

For decades, defined contribution (DC) retirement plans have helped address the needs of individuals leading up to retirement. However, plan sponsors have made little progress in addressing individuals’ needs during retirement itself, according to Insight Investment, a sponsor of the NeuGroup for Pension and Benefits’ recent meeting. 

Retirement anxiety. There is a lot of unease for employees on the verge of retiring, as they worry about funding their non-working lives. It also remains a major concern among the population still working, given the disappearance of defined benefit pension plans, near-zero interest rates and highly volatile equity markets.

Pension managers could be doing a better job of guiding retirees with their post-work pension planning.

For decades, defined contribution (DC) retirement plans have helped address the needs of individuals leading up to retirement. However, plan sponsors have made little progress in addressing individuals’ needs during retirement itself, according to Insight Investment, a sponsor of the NeuGroup for Pension and Benefits’ recent meeting. 

Retirement anxiety. There is a lot of unease for employees on the verge of retiring, as they worry about funding their non-working lives. It also remains a major concern among the population still working, given the disappearance of defined benefit pension plans, near-zero interest rates and highly volatile equity markets.  

“Surveys are showing that this is a concern for individuals,” said Bruce Wolfe, head of individual retirement strategy at Insight Investment. “The first step is to understand how the decumulation phase differs from the accumulation phase and create a framework to deliver the steady, predictable lifetime income that retirees generally desire.” 

  • Mr. Wolfe believes many of the “hurdles for plan sponsors to do more are only a matter of perception.” This means steps do exist for those managing the plan to not only educate soon-to-be retirees but also offer solutions to help manage their assets at separation “giving them firmer footing for the next phase of their lives.”
  • Meeting attendees basically agreed that while it was generally good to offer their employees a range of investment products – including environmental, social and governance options – within their retirement plans, there was little interest in what exiting employees did with their savings after they leave the company. While companies may offer some simple retirement planning tools, they do not want to risk appearing to be fiduciaries. 

Decumulation in the spotlight. The lack of tools has put decumulation in the spotlight for many plan sponsors, a recognition that most retirees are lost when it comes to what is, in practical terms, fairly sophisticated financial analysis. For example, only 5.5% wait until age 70 to start taking social security benefits when most retirees should wait as long as possible given longevity protection and inflation hedge that social security uniquely provides. For 401(k) participants seeking help there are some positive developments including:

  • 41% of plans have at least some form of “retirement income” solutions available, although plan sponsors acknowledge more innovation is needed.
  • The Setting Every Community Up for Retirement Enhancement (SECURE) Act cleared away some legal impediments to offering more retirement income products, particularly annuity-related ones.
  • QLAC products (Qualified Longevity Annuity Contracts) can be offered with limits within DC plans providing participants access to lifetime annuity contracts starting when individuals reach their 80s.   

This means plan sponsors need to “think harder about the escalating challenges they will face through the ‘decumulation’ phase of their investment lifecycle,” the Insight Investment team told meeting attendees. 

Unsteady footing. “Uncertainty is building as we find ourselves in an ‘interregnum’ between the post-war economic order and a brand-new economic era,” said Abdallah Nauphal, CEO at Insight Investment. “COVID-19 has provided an idea of how liquidity challenges, rebalancing and tail risk concerns can be elevated in stressed market conditions.” 

  • This means investors should prepare for future crises accordingly.
  • “Plans may need to consider adding additional tools to the toolkit, such as completion, overlay, asymmetric payoff and cost-effective downside equity risk management strategies to help ensure full funding and manage pension risks,” said Shivin Kwatra, Insight Investment’s head of LDI portfolio management in the US.
  • “We also believe investors need to focus on high quality investments to help ensure they meet their return and cash flow requirements with the highest level of certainty,” Mr. Kwatra said.
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Preparation Pays Off for Microsoft in Debt Exchange Offer

Liability management success: Microsoft received exchange interest of $12.5B, 56% of the targeted notional amount.
 
Treasury teams managing their debt portfolios have a menu of liability management transactions to choose from, including bond tenders, open-market repurchases, consent solicitations and debt exchanges. To use most of these tools, corporates need to offer investors a reasonable amount of time to decide, ranging from five to 20 business days.

  • So a successful liability transaction such as a debt exchange depends, in part, on a generally stable underlying market. COVID-19, of course, wreaked havoc on markets and sent volatility levels spiking. But monetary actions by the Fed and fiscal stimulus help calm markets, resulting in a sharp drop in volatility. And that opened the door for companies including Microsoft to take action.

Liability management success: Microsoft received exchange interest of $12.5B, 56% of the targeted notional amount.
 
Treasury teams managing their debt portfolios have a menu of liability management transactions to choose from, including bond tenders, open-market repurchases, consent solicitations and debt exchanges. To use most of these tools, corporates need to offer investors a reasonable amount of time to decide, ranging from five to 20 business days.

  • So a successful liability transaction such as a debt exchange depends, in part, on a generally stable underlying market. COVID-19, of course, wreaked havoc on markets and sent volatility levels spiking. But monetary actions by the Fed and fiscal stimulus help calm markets, resulting in a sharp drop in volatility. And that opened the door for companies including Microsoft to take action.

Laying the foundation. At a recent NeuGroup for Capital Markets office hours session, Microsoft’s treasury team discussed their recent debt exchange, announced on April 30, 2020 and settled on June 1, 2020.

  • Like any successful capital markets transaction, the preparation done in the months before by the treasury team laid the foundation for a debt exchange which accomplished the company’s financial and strategic objectives.
  • These objectives were driven by the primary principle to maximize economic value, including reducing the annual interest rate paid and being P&L accretive. 

Debt exchange details. On April 30, the company announced a registered waterfall exchange offer targeting 14 series of notes across two separate pools with maturities between 2035-2057, all with coupon rates above 3.75% (the existing notes) in exchange for cash into $6.25 billion of new notes due 2050 and $3 billion of new notes due 2060.

  • Microsoft set a waterfall prioritization based on economic value and registered the exchange via an S-4 filing requiring a 20-day offering period. It included an early exchange time on May 13, 2020 which offered investors better economics by exchanging their notes earlier than the official expiration date on May 28, 2020.
    • The strong interest by investors in the exchange allowed Microsoft to increase the amount of the new 2060 note to $3.75 billion. The final coupons on the new 2050 notes and the new 2060 notes were 2.525% and 2.675%, respectively. 

Banks with strong LM credentials. Working with joint dealer managers, Microsoft was able to tap into the knowledge and insights of two banks with strong credentials in liability management.

  • These banks were able to form a consensus on important details including what spreads over US Treasuries to use for both the existing notes and the new notes, modeling analysis, supporting logistics, the identification of holders of the existing notes and their likelihood of participating in the exchange, and potential ways to hedge interest rate movements.
  • At the end of the day, the transaction generated significant interest savings, and extended Microsoft’s debt maturity profile. The exchange also established new, liquid, par securities by allowing investors to move out of high dollar-priced bond issues.

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Cash and COVID-19: A Tale of Two Companies

One company asks, “Where is the cash?” while another reevaluates operational processes.
 
The economic upheaval unleashed by the pandemic divided the universe of companies at a recent virtual meeting of the Global Cash and Banking Group into two camps: Those with ample liquidity that were able to manage cash and conduct business as usual; and those forced to play defense and go “back to basics,” as one member in the latter camp put it.

  • Two member companies sharing very different perspectives on the pandemic’s impact on their businesses embodied this dichotomy: One, a tech giant, presented opportunities it found for process improvements; the other, a travel and leisure company, described an all-hands-on-deck liquidity crunch involving stress tests and turning over every stone for cash.

One company asks, “Where is the cash?” while another reevaluates operational processes.
 
The economic upheaval unleashed by the pandemic divided the universe of companies at a recent virtual meeting of the Global Cash and Banking Group into two camps: Those with ample liquidity that were able to manage cash and conduct business as usual; and those forced to play defense and go “back to basics,” as one member in the latter camp put it.

  • Two member companies sharing very different perspectives on the pandemic’s impact on their businesses embodied this dichotomy: One, a tech giant, presented opportunities it found for process improvements; the other, a travel and leisure company, described an all-hands-on-deck liquidity crunch involving stress tests and turning over every stone for cash. 

Tech tools. Liquidity was not an issue for the tech company and “we probably weathered the crisis better than other industries because of all the tech tools we have,” the member said, adding that the “crisis has raised opportunities” to improve processes.

  • The company was completely prepared to shift gears to work remotely so the challenge became how to overcome various geographical shutdowns and stay-at-home orders across the globe that affected access to stores, lockboxes and, in some cases, payroll.
  • Another technology company found opportunities on the check issuance side, saying that some vendors wanted to switch to ACH payments to improve their liquidity; but ACHs also made sense because it was pointless to send checks to locations (stores, lockboxes, etc.) that were closed. 

Tokens vs. mobile apps. During the pandemic, the first tech company lifted some restrictions on the use of mobile banking apps; when a token doesn’t work and treasury isn’t “in the building” the ease of a mobile app can save the day, especially since the company’s internal process requires three people to move money across the board.

  • However, future thought must be given to the continued use of mobile banking because in the case of termination or employee’s departure, it is easier to collect a token than disable a feature on their phone.

Are wet signatures a thing of the past? The pandemic also presented an opportunity to see how far banks would go in accepting DocuSign.

  • Members said the answer depends on the bank, with the member from the tech company saying, “We adjust to whatever the banks can support.” That said, many banks have made allowances that members hope will continue when things return to “normal.”

Where is the cash? On the flip side to these operational improvement opportunities, many treasury departments across industries scrambled to get a handle on all cash everywhere as the pandemic squeezed liquidity.

  • Hard hit. The travel and leisure industry in particular has been hard hit by mandated travel restrictions and months of consumer cancellations, resulting in a big blow to liquidity. For one member in that industry, prudent cash management and operations have been imperative to keeping the company’s balance sheet strong.
  • No treasury outside treasury. A centralized treasury department has helped with tackling the liquidity pinch for this member, allowing for global transparency and examination of onshore and offshore cash.
    • Because onshore does not equate to accessibility, her treasury department has re-bucketed cash by availability to determine true cash positions across horizons and established an internal task force with legal and accounting to establish minimum balances required for operations.
  • Scenario analyses and stress tests. Good cash forecasting has never been so important— treasury has been called to turn over models, run various scenario analyses and stress test base cases to safeguard the business. 
    • This treasury team tested base, prolonged recovery and severe impact analyses to consider various economic scenarios and protect minimum operating requirements.

Teamwork. The company formed a global finance task force to explore what more can be done to generate cost savings, defer tax and bolster receivables. The member said she was pleased to have employees volunteering from various departments and teams, coming together to help keep the company strong.

  • Similarly, with working capital management, different approaches are being taken with treasury in mind. Previously, departments would seek approval from the CFO based on anticipated ROI; now these teams are talking to treasury first to see if the use of cash makes sense before seeking sign-off. 

I will remember that. Members in similar boats agreed that some banks have gone out of their way to help them while others have been more strict, pushing back on requests and acting as though treasury was asking too much.

  • That prompted one member to say, “The banks who gave us the hard time—we won’t give them business.”
  • On the subject of accessing money invested in term deposits, she advised peers to always look at force majeure clauses in bank agreements to make sure they are not one-sided—allowing the bank to terminate but not allowing the investor to get money back early.
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US Coin Shortage: Retail Treasury Teams Call for Action, Urgency

Call it a disruption or call it a shortage—not enough coins means pain for retailers and banks.

Treasurers of major retailers and restaurant chains sounded loud notes of alarm at a NeuGroup virtual meeting Friday about what many observers are calling a coin shortage. U.S. Bank, the meeting sponsor, described it a “severe disruption” in the nation’s coin circulation sparked by COVID-19. (People have spent less cash during the pandemic and have exchanged far fewer coins for bills or credit at banks or grocery stores.)

Whatever you call this state of affairs, it’s a problem almost everyone said will turn painful this week and may last several months.

Call it a disruption or call it a shortage—not enough coins means pain for retailers and banks.

Treasurers of major retailers and restaurant chains sounded loud notes of alarm at a NeuGroup virtual meeting Friday about what many observers are calling a coin shortage. U.S. Bank, the meeting sponsor, described it as a “severe disruption” in the nation’s coin circulation sparked by COVID-19. (People have spent less cash during the pandemic and have exchanged far fewer coins for bills or credit at banks or grocery stores.)

Whatever you call this state of affairs, it’s a problem almost everyone said will turn painful this week and may last several months.

  • “What is the sense of urgency?” of addressing the problem, one assistant treasurer asked a U.S. Bank representative who serves on the Federal Reserve’s cash advisory council.
  • The U.S. Bank official said banks are keeping pressure on the US Mint, which ramped up production of all coins in mid-June, and are urging the Fed to make the public aware of the issue, including through social media.
  • While there is no easy, short-term solution, U.S. Bank is exhausting all channels to help clients, given the Fed’s decision to effectively ration the amount of coins banks can access to supply businesses.
  • The AT said his company’s coin orders are being filled at lower and lower percentages—as low as 20% or 0% in some areas. Roughly 20% of the company’s retail transactions are in cash.
A June 27 Twitter post by @Inevitable_ET says the photo is from a 7-Eleven.

Educating the public. “Why is the marketing campaign taking so long?” asked another member about expected efforts by the Fed to educate the public about the coin problem and encourage people to bring as many coins as possible back into the banking system.

  • “We as retailers are going to have to deal with consumers who don’t understand,” she said.
  • The treasurer of another retailer, where 40% of transactions are in cash, said there is some resistance from field teams to “having to explain the coin shortage in the country.”

Banks are showing a general lack of urgency/transparency. Members described their banks as providing varying degrees of help, from doing what they can, to “it’s not our problem” or “it’s not that bad of an issue.”

  • Comparing the issue to toilet paper hoarding earlier in the crisis, members noted that there is CEO-to-CEO engagement between retailers and suppliers. But that level of engagement is not happening between retailers and their banks, who are their suppliers of coin. 

Calls for more bank engagement. To address this, members suggested that banks come out with public letters from their CEOs calling attention to the coin shortage. This would help treasury get better traction and awareness in C-suites that this is a major issue that needs to be addressed.

Fixes are awkward, costly. Members noted that the fixes they are contemplating either are awkward or costly, and usually both.

  • On the awkward side is training associates to always ask for exact change, posting signs encouraging this and even saying that customers who do not have exact change (or an electronic form of payment) may not be able to check out or have their order filled.
  • On the cost side, moving low-dollar transactions to electronic payment has a significant economic cost (fees); rounding typically costs store as consumers don’t want to round up (and there are multi-jurisdiction tax issues to consider); and reprogramming point of sale systems can be expensive.
    •  Gift card issuance for change is also cumbersome. Some members are looking to donate change (or rounded-up amounts) to charity, usually the sponsored charity of the store.
    • Meanwhile, operators are being told to stop depositing coins, bringing in their own coins from home, ask local banks for supply and not to turn away coin orders that are “short.” 

Will coin disruption spread to notes? While banks have been assured by the Fed that the issue is not going to spread to notes, e.g., dollar bills or fives, retailers face an environment where the unexpected can happen, so members should extend their contingency plans to work out how to address disruption in smaller denomination notes as well.

Better/cheaper payment rails. Despite COVID-19 being a global issue, the coin disruption is principally a US problem, at least for the developed economies. Asked about the situation in the UK, for example, a member noted the country has an electronic payment system with much lower fees that allows for acceptance of electronic payment to become cost-effective at much lower ticket sizes. Multinational retailers are monitoring the situation in other cash-intensive markets closely, however.

Thus, the coin disruption provides yet another talking point alongside others with COVID-19, for those promoting an end to cash, a more inclusive electronic payment method, and digital currency. The Bank for International Settlements calls out the role of central banks with payments in this digital era, including establishing digital currencies in its recent economic annual report, for example.

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What the Experiment With Modern Monetary Theory Means for Risk Managers

Treasury and finance teams need to adapt to the reality of different thinking about debt and deficits.

By Joseph Neu

“We’re not even thinking about thinking about raising rates,” Fed Chairman Jerome Powell said after the Federal Open Market Committee’s June meeting.

  • This was good timing for me: On the same day, I suggested to clients of Chatham Financial attending a virtual summit that among the accelerating trends treasury and financial risk managers need to prepare for is the current flirtation with Modern Monetary Theory.

Study up on MMT. For those with a limited understanding of MMT, including me, it’s time to bone up, because without really saying they are doing so, governments and central banks of developed nations seem to be pushing us very close to something that will end up looking like an MMT experiment.

Treasury and finance teams need to adapt to the reality of different thinking about debt and deficits. 

By Joseph Neu

“We’re not even thinking about thinking about raising rates,” Fed Chairman Jerome Powell said after the Federal Open Market Committee’s June meeting.

  • This was good timing for me: On the same day, I suggested to clients of Chatham Financial attending a virtual summit that among the accelerating trends treasury and financial risk managers need to prepare for is the current flirtation with Modern Monetary Theory. 

Study up on MMT. For those with a limited understanding of MMT, including me, it’s time to bone up, because without really saying they are doing so, governments and central banks of developed nations seem to be pushing us very close to something that will end up looking like an MMT experiment. 

  • The zero-rates-for-the-foreseeable-future policy coming out of the Fed is telling, because one of the tenets of MMT is to set rates at zero to borrow more efficiently to cover needed government spending and print money to repay it. Apparently, though, some MMT proponents suggest that it’s even more efficient just to print money to cover government deficits and not issue any debt at all.
  • It’s probably safer to keep the government debt issuance going for now as it underpins private sector debt financing, credit and interest rate management. Many of us have to unlearn what we’ve been taught about printing money and inflation, too, before we stop worrying about how we will pay off government debt. 
  • Taxes, in the MMT view, are not to increase cash flow to pay the debt but to take out excess printed money from the system so that we don’t get to hyperinflation.

After studying MMT, those of you who are treasury and financial risk managers should consider: 

  • Changing your thinking about financial risk. The developed world seems to be on a mission to test MMT. Time to adjust thinking to that reality.
  • Rethinking your fixed-rate bias. For current policy to work, we need low rates (even zero, if not negative) to be the norm, so the economics of swaps or interest-rate risk management isn’t necessarily going to be the same.
  • Accepting central banks as financial market primaries. The massive central bank intervention crisis playbook has sped up. How much more can the Fed do before it becomes the primary financing mechanism for everything? 
  • Is your company a have or a have not? The divide between those that have unlimited access to capital and those that do not will widen—and it is not limited to sovereigns. If sovereigns have unlimited ability to finance deficits and issue debt, they also have unlimited ability to support the financing of entities they deem unworthy of failure. Meanwhile, the financially strongest private entities will look for an equivalent power to print money. 
  • Becoming “antifragile.” MMT (or whatever governs our financial economic situation now) is not likely sustainable; or if it is, the transition to everyone believing it is unlikely to be smooth. So risk managers must promote resilience in preparation for the unknown of what comes next.
    • If you subscribe to Nassim Taleb’s view, then the most resilient risk management approach is to become “antifragile.” That is, strive to manage risk through the transition to MMT (or whatever we end up with) so that you can benefit from shocks while thriving and growing when exposed to volatility, randomness, disorder and stressors. And don’t forget learning to love adventure, risk and uncertainty.
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Transition to SOFR Pushing Ahead Despite Pandemic

The pandemic and its aftermath forced bank treasurers to move the Libor-to-SOFR transition to the back burner; but make no mistake, it is still very much still on the stove.

With apologies to the real estate industry, there were three critical issues that mattered to bank treasurers before the pandemic: 1) Libor to SOFR transition, 2) Libor to SOFR transition and 3) Libor to SOFR transition. But now, given COVID-19’s damaging impact on world economies, banks have been presented with new priorities, like securing adequate liquidity and the Paycheck Protection Program (PPP). 

This mindset has led many banks to thinking that they should back-burner the transition until the coast is clear. Another driver of this thinking is that many treasurers haven’t been so keen on moving away from Libor in the first place.

The pandemic and its aftermath forced bank treasurers to move the Libor-to-SOFR transition to the back burner; but make no mistake, it is still very much still on the stove.

With apologies to the real estate industry, there were three critical issues that mattered to bank treasurers before the pandemic: 1) Libor to SOFR transition, 2) Libor to SOFR transition and 3) Libor to SOFR transition. But now, given COVID-19’s damaging impact on world economies, banks have been presented with new priorities, like securing adequate liquidity and the Paycheck Protection Program (PPP). 

This mindset has led many banks to thinking that they should back-burner the transition until the coast is clear. Another driver of this thinking is that many treasurers haven’t been so keen on moving away from Libor in the first place.

Lingering skepticism. Several members of NeuGroup’s Bank Treasurers’ Peer Group (BankTPG), meeting virtually recently, revealed wariness of jumping on the SOFR train too soon. “People want someone else to be first mover,” said one member in a breakout session at the meeting, which was held virtually. There was not a lot of interest at his bank, he said, adding that SOFR-based lending “would be sticking out like a sore thumb” among peers. Another member said his bank was “not operationally ready” to move off Libor. “We could find an alternative rate,” he added. 

  • There is “a lot of discovery that hasn’t been done yet,” noted another member in the breakout. “The lending business has to evolve.” Another member added there are “a lot of things we can’t do operationally,” however, what he said the bank should be doing “is educating our customers: whatever replacement they’re going to.” 

Unfortunately, bank treasurers are going to have to overcome their hesitancy. 

The show must go on. According to a presentation at the meeting by Tom Wipf, Vice Chairman of Institutional Securities at Morgan Stanley and Chair of the Federal Reserve’s Alternative Reference Rates Committee (ARRC), the committee is “taking the timelines provided by the official sector as given and continuing its work, recognizing that although some near-term goals may be delayed, other efforts can continue.” 

In other words, do not assume Libor will continue to be published at the end of 2021, Mr. Wipf told meeting attendees. One of the official authorities the ARRC cites is the UK Financial Conduct Authority. The FCA in late March said the end-Libor date “has not changed and should remain the target date for all firms to meet.” 

  • “The transition from Libor remains an essential task that will strengthen the global financial system. Many preparations for transition will be able to continue. There has, however, been an impact on the timing of some aspects of the transition programmes of many firms,” the FCA said in a statement.
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March Madness: Searching for Answers on Cash Flow and Credit

Data from Clearwater underscores the concerns of treasury investment managers reducing risk during the pandemic.

If you needed any more proof that the pandemic has made treasury investment managers even more attuned to the risks in their portfolios, check out the table below from Clearwater Analytics, which sponsored a NeuGroup meeting this week on market trends and improving balance sheet management.

Cash flow and credit. It may not be surprising, but relative to other searches, the sheer number of views in March of data on cash flow projections for securities and portfolios—more than 13,000—captures exactly what was the top concern of nearly every portfolio manager.

Data from Clearwater underscores the concerns of treasury investment managers reducing risk during the pandemic.

If you needed any more proof that the pandemic has made treasury investment managers even more attuned to the risks in their portfolios, check out the table below from Clearwater Analytics, which sponsored a NeuGroup meeting this week on market trends and improving balance sheet management. 

Cash flow and credit. It may not be surprising, but relative to other searches, the sheer number of views in March of data on cash flow projections for securities and portfolios—more than 13,000—captures exactly what was the top concern of nearly every portfolio manager.

  • Also noteworthy is the 84% jump from the prior month in credit events inquiries. The investment manager for a large technology company who described his experience and thinking in the last several months said that keeping track of the volume of downgrades and other credit actions was “breathtaking.”
  • The same manager told his peers about having eliminated stakes in “industries we didn’t like” and reducing investments in energy, retail and health care credits. He said his team spent “an ungodly amount of time on credit.” 
  • And while not every treasury team does its own credit analysis, a widespread focus by managers on vulnerable sectors underlies the more than doubling (111%) in Clearwater views during March of portfolio exposure by industry. 

Governance and communication. The importance of strong governance emerged as a key takeaway from the meeting. It’s critical, as several NeuGroup members noted, that a company’s management team not only understands the risks taken by the investment team but are also comfortable with them before a significant market disruption like that experienced this year.

  • One member asked others if they were receiving any pressure from management to boost investment returns now that interest rates are closer to zero. And while managers whose companies issued debt at wide spreads in March said senior management is interested in reducing interest expense, that is not translating into pressure to take on greater risk with the cash.

Look around the corners. That said, investment managers who survived the first quarter and are now looking toward closing the books on the second are asking plenty of questions about how to position themselves for what lies ahead—much of which is uncertain. Many said they are still asking, as one of them put it, “What is the right amount of credit risk, liquidity, market risk, etc.” 

  • Whatever they do with cash in the months ahead, members are well advised to heed the warning of one peer who is constantly asking “what if we’re wrong?” in assessing what’s next. He noted that many observers doubted COVID-19 would move beyond Asia. That points up the critical need, he said, to keep doing stress tests. Without them, he said, “It’s hard to react if you’re on the wrong side of it.”
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Juneteenth and Beyond: NeuGroup Member Companies Take Action on Racial Justice

Treasurers at major retailers discuss what’s been done so far and what lies ahead.

Calls for major societal change in the wake of the killing of George Floyd have sparked many corporations, including NeuGroup member companies, to take a range of actions in support of change and racial justice. For some, those actions included the observation of Juneteenth, which commemorates the end of slavery in the US.

Treasurers at major retailers discuss what’s been done so far and what lies ahead.
 

Calls for major societal change in the wake of the killing of George Floyd have sparked many corporations, including NeuGroup member companies, to take a range of actions in support of change and racial justice. For some, those actions included the observation of Juneteenth, which commemorates the end of slavery in the US.

  • At a NeuGroup virtual meeting for retailers last Friday on changing regulation and business norms post-crisis, a member from a major American retailer described his company’s quick decision to make Juneteenth (June 19) a company holiday.
  • Noting that the company doesn’t typically move as quickly, he credited its fast action to its cross functional crisis leadership team which is approaching the company’s reaction to recent events as it would a crisis such as a hurricane or COVID-19.
  • The company kept stores open but paid time and half to hourly workers on Juneteenth; other, eligible workers had the option to take the day off with full pay; and the company’s headquarters offices were closed.
  • “As we pivoted to this issue, we had to decide if we wanted to follow or lead,” the member said. “We wanted to lead.” 

Education and sincerity. One participant, who is African American, encouraged others on the call to better educate themselves on matters of slavery and black history, noting that few on the call knew the meaning of Juneteenth until recently.

  • This treasury professional said that what matters is sincerity and action, not talk, taken to address underlying problems. She said there is a difference between “what you know is expedient and what is taken to heart, what is sincere and what is a press release.”

 A good start. Another participant noted the pride he felt in seeing how both his current and former employers have tackled the issue of race head-on, including the CEO of the company where he works now urging conversation and learning. “I couldn’t be prouder of how people have responded,” he said.
 
Accelerated change.  In the last few weeks, the national conversation shifted from COVID-19 to racial justice crisis, focused on diversity and inclusion and black lives.

  • That, observed NeuGroup founder Joseph Neu, highlights the extent to which COVID-19 has forced business thinking to be open to accelerated change and the urgency for companies and finance teams to embrace a faster pace of change for good.

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Can You Save A Month a Year Automating FX Trades?

360T says corporates can use the roughly four weeks saved by automating FX “nuisance trades” to spend time on more valuable analytical work.

The graphic below demonstrates some of the benefits of automating FX trades described by technology provider 360T at a recent interactive session for NeuGroup members called “Demystifying Automated Trading Across the Trade Lifecycle.”


360T says corporates can use the roughly four weeks saved by automating FX “nuisance trades” to spend time on more valuable analytical work.
 

The graphic above demonstrates some of the benefits of automating FX trades described by technology provider 360T at a recent interactive session for NeuGroup members called “Demystifying Automated Trading Across the Trade Lifecycle.”

  • The time savings accrue by eliminating the need to manually enter orders onto trading platforms, examine the pricing offered, choose among competing banks (and sometimes talking to them on the phone) and then deal with all the required back-office chores involved.
  • 360T’s presenters said that by automating the workflow trading process using rules-based trading execution technology that connects directly to a company’s treasury management system, users save time, achieve the best possible price—improving their spreads—and reduce operational risk caused by human errors.

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Pandemic Creates Too Many Unknowns to Change Pension Strategies

Pension managers struggle with strategy amid a pandemic pace unlike the drawn-out financial crisis.

Rapidly changing conditions during the pandemic have made it extremely difficult for many NeuGroup members and other treasury practitioners to create forecasts and devise strategies. Pension fund managers are in the same pickle, finding it nearly impossible to change their overall pension strategies given how fast the landscape is shifting.

Pension managers struggle with strategy amid a pandemic pace unlike the drawn-out financial crisis.
 
Rapidly changing conditions during the pandemic have made it extremely difficult for many NeuGroup members and other treasury practitioners to create forecasts and devise strategies. Pension fund managers are in the same pickle, finding it nearly impossible to change their overall pension strategies given how fast the landscape is shifting.

  • This is a far different predicament than during the 2008-09 financial crisis, which was a slow-moving disaster.
  • “The financial crisis evolved over time, so you had a lot of time,” said one member at a recent NeuGroup Pension and Benefits virtual meeting. “In COVID, you don’t have much time – you don’t know what things will be like a week from now.”
  • At the peak of the COVID crisis, pension managers focused on liquidity concerns—sometimes exacerbated by margin calls—and immediate benefit payment requirements.

Back seat. With market, credit and liquidity risk front and center, longevity risk management, which has minimal linkage to market conditions, has taken a back seat. Similarly, buy-outs and buy-ins—where plans buy annuities—are not currently priority projects. 

  • Buy-outs are on the back burner because many companies have already transferred low-balance participants because the economics are pretty powerful; that’s especially true of younger participants (whereas it becomes almost impossible to transfer longtime employees).

No enthusiasm for handouts. There was mixed enthusiasm for legislative initiatives like the American Benefits Council (ABC) proposal for new funding relief in light of the havoc COVID-19 has inflicted on defined benefit pension plans. This is because many investment-grade companies don’t face mandatory contributions in the next few years despite the market downturn, thanks to outstanding pension relief and previous proactive pre-funding. 

  • Nonetheless, funding relief remains a very important issue for some meeting participants; also, the Health and Economic Recovery Omnibus Emergency Solutions Act (HEROES) passed by the US House apparently already includes many of the ABC provisions that would result in substantial funding relief. HEROES was previously estimated to equate to roughly five years of funding holiday.

Fixed income. In drilling down on fixed-income strategy, one sponsor presenter said that, broadly, there are three phases of a crisis: a liquidity crisis, a credit crisis and, finally, an inflation crisis. He believed that we are at the start of the credit crisis stage. He noted that central banks are supporting some categories of assets but not others, with clear trading implications. 

  • It is hard to evaluate some asset categories based on cash flows that are currently being deferred by many borrowers (such as rents) because it’s not known how much and how fast the deferred amounts will get repaid.
  • Also, it was explained how increases in operating costs can erode margins and also increase leverage—particularly in the high-yield space. Ultimately, members should worry about inflation because how else will all the government and private sector debt get repaid?
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Pensions Look for Re-Entry, Re-Risk Opportunities

Pension managers were de-risking at the end of 2019, much to their relief months later; now it’s time to add some risk.

Although pension managers have been de-risking over the course of the last several months – and continue to do so in different areas – many are now on the hunt to re-enter the market to re-risk. “Can we be nimble enough to pounce given the opportunities that are out there?” wondered one member of NeuGroup’s Pension and Benefits (NGPB) peer group at a recent virtual meeting.

Pension managers were de-risking at the end of 2019, much to their relief months later; now it’s time to add some risk.

Although pension managers have been de-risking over the course of the last several months – and continue to do so in different areas – many are now on the hunt to re-enter the market to re-risk. “Can we be nimble enough to pounce given the opportunities that are out there?” wondered one member of NeuGroup’s Pension and Benefits (NGPB) peer group at a recent virtual meeting.

LDI. Liability driven investment and de-risking clearly was the winning strategy at the end of 2019, which caused collective sighs of relief when the pandemic hit. 

  • Overall, the sentiment was that the equity market now seems to have gotten ahead of itself, so some participants are keeping some liquidity available for market downturns. 

Different paths. One theme emerging from a projects and priorities discussion at the meeting was that there was no uniformity in pension strategy among member companies. There is no gold standard “answer.” Why? Because of variations in underlying situations, such as companies with active vs. frozen plans, varying demographics of plan participants, and well-funded plans vs. those with a large deficit. 

  • The current roller-coaster environment makes it challenging to shift pension strategy, particularly given corporate governance issues and board oversight.

An example of this is different approaches to glide paths: some companies only have de-risking triggers as funded status improves, others have re-risking as well when equity investment value declines, and others have no defined glide path at all. 

  • In one sponsor presentation on pension risk management, a more sophisticated evolution was presented using outright option positions, collars and option replication using delta hedging.  

Options an option? Still, these strategies are challenged by the currently high volatility behind option pricing and, in particular, the volatility skew which makes out-of-the-money put options particularly expensive. 

  • It sounded like a few meeting participants had investigated these strategies but again are challenged by governance issues in authorization for them. Some participants are not even using derivative overlays at this point. Derivative overlays facilitate rapid shifts in risk position without the costs of buying and selling underlying cash investments, and also allow for better management of overall risk.

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Economic Forecast: Outlook for Recovery Improving, but Numerous Risks Remain

Evercore ISI economist Dick Rippe lays out the case for second-half growth after a first-half plunge.

The increased difficulty of cash forecasting and other financial planning since the COVID-19 outbreak means that many treasury and finance teams are eager to hear informed economic analysis and forecasts while we all wait for a vaccine.

  • At a NeuGroup meeting in late May, Dick Rippe, managing director and economist at Evercore ISI, provided his firm’s US and global economic outlook and responded to member questions. Mr. Rippe this week provided updates to his firm’s forecast and analysis.

Evercore ISI economist Dick Rippe lays out the case for second-half growth after a first-half plunge.

The increased difficulty of cash forecasting and other financial planning since the COVID-19 outbreak means that many treasury and finance teams are eager to hear informed economic analysis and forecasts while we all wait for a vaccine.

  • At a NeuGroup meeting in late May, Dick Rippe, managing director and economist at Evercore ISI, provided his firm’s US and global economic outlook and responded to member questions. Mr. Rippe this week provided updates to his firm’s forecast and analysis.

Two quarters of pain. Evercore ISI forecasts the economy will contract by a 40% annual rate in Q2, following a drop of 5.0% in Q1. Mr. Rippe noted that the combined decline in the first two quarters is the largest in the post-World War II period. 

  • The firm has counted over 1,300 instances of layoffs, pay cuts, and business or institution closures; many of these may be temporary, but as they occur, they reverberate throughout the economy, Mr. Rippe said. 

Encouraging signs. Evidence of an upturn has been accumulating rapidly in Evercore ISI’s view:

  • Employment picked up in May (after an enormous fall in April); filings for unemployment insurance – while still high – have diminished substantially in recent weeks; and retail sales rebounded sharply in May, as have auto sales. Similar gains are being seen in China and Germany.
  • Massive economic stimulus is being provided by both the Federal Reserve and the fiscal authorities in Congress and the Trump Administration.
  • A major GDP driver is consumer net worth—the value of houses, securities, and bank accounts. It is close to an all-time high, Mr. Rippe said, adding that it fell much further during the 2008-2009 financial crisis than it did when the coronavirus pandemic started.


Growth likely to resume in H2. Based upon those signs and fundamentals, Evercore ISI updated its economic forecast to show a faster recovery in the second half of 2020.

  • The forecast now shows growth in both Q3 and Q4 at a 20% annual rate; even so, measured from Q4 2019 to Q4 2020, real GDP is expected to decline by 4.8%.
  • Evercore ISI forecasts an increase of 5.0% in 2021. 
  • The improvements depend upon maintaining simulative economic policies which will help keep companies open and consumers solvent, Mr. Rippe said.
  • The emergence of a country-wide second wave of infections would be very damaging, he added. On the positive side, the rapid development of a vaccine would allow a much more secure economic advance.

Dollar doldrums? Responding to a member’s query about the outlook for the US dollar, Mr. Rippe noted that low interest rates brought about by highly accommodative monetary policy would usually be expected to lower the dollar. But in the current global environment, almost all central banks are moving in the same direction. So while the dollar might decline a little, no big move was likely, he said.

Negative Rates? Addressing another member’s concerns about short-term rates possibly going negative, Mr. Rippe said that given the US’s productive economy, when growth resumes negative rates won’t be necessary. And the Fed would go negative only in an absolute emergency, he said, because of the havoc it would reap on money-markets.

  • “But if you asked me three years ago to bet on what German 10-year bond yields would be, I never would have bet they would be negative.”
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A Win-Win Solution to Save Suppliers and Manage Corporate Cash

C2FO gives on and off-balance sheet options for early payments to suppliers in need.

As suppliers struggle in the COVID-19 economic environment, getting cash to them quickly can be a lifesaver, and even better is letting them choose the rate that’s most suitable for their circumstances.

  • At a recent NeuGroup virtual meeting, a major retailer described how C2FO’s unique platform gives even small suppliers ready access to a flexible, in-house, early funding program or supply chain finance (SCF) solution.

Cash management tool. By using the C2FO platform, companies can employ their own cash to fund early payments to their suppliers in return for a discount; or suppliers can choose a dynamic SCF option funded via a banking partner Both ways guarantee early payments.

 

C2FO gives on and off-balance sheet options for early payments to suppliers in need.
 
As suppliers struggle in the COVID-19 economic environment, getting cash to them quickly can be a lifesaver, and even better is letting them choose the rate that’s most suitable for their circumstances.

  • At a recent NeuGroup virtual meeting, a major retailer described how C2FO’s unique platform gives even small suppliers ready access to a flexible, in-house, early funding program or supply chain finance (SCF) solution.

Cash management tool. By using the C2FO platform, companies can employ their own cash to fund early payments to their suppliers in return for a discount; or suppliers can choose a dynamic SCF option funded via a banking partner Both ways guarantee early payments.

  • “It’s a nice mixture of having off and on-balance sheet programs, and being able to adjust and navigate the different needs—both supplier needs and corporate needs—in the event we want to reallocate that cash somewhere else,” the senior director of global treasury said.

Uptick in demand. The pandemic has increased demand for C2FO’s platform, especially for the company-cash option, according to Jordan Novak, SVP of market innovation at the Kansas City-headquartered fintech.

  • The SCF rate is attractive for suppliers, but there are significant onboarding hurdles, whereas onboarding to a company’s internal offering is fast and easy.  

Slice and dice. The company provides the yield it seeks, i.e. the discount suppliers give for early payment, and the available cash. C2FO’s platform uploads approved invoices and suppliers log in to set offers for early payment. The fintech’s proprietary algorithms match suppliers’ offers to the company’s desired rate of return. For example, if the target rate is 2%, one supplier may offer 1.5% and another 2.2%, and the technology aggregates all offers to the desired rate, resulting in a higher volume program.

  • C2FO provides the company’s ERP with the discount and new pay date.
  • The company still pays its suppliers directly, only faster.
  • The platform eliminates the need to segment suppliers, as this happens automatically when suppliers name their rates through C2FO.
  • C2FO is able to create programs for small and medium-sized companies, women-owned, minority-owned and veteran-owned businesses. The major retailer was able to craft these programs for its suppliers overnight.
  •  “We can slice and dice different groups of suppliers and have different targets or minimal rates,” the member said.  

Win-win. C2FO facilitates the company’s early payments to suppliers, and it’s a boon to those in critical need of cash.

  • Suppliers can pursue early payment across multiple geographies on the same platform while staying compliant with tax regulations globally.
  • For companies, the cloud-based platform automates what previously could have been hundreds or even thousands of negotiations with suppliers, providing seamless collaboration among companies and their trading partners.
  • “It improves our cash position and return on cash on the margins, and where it’s being used, it is definitely a benefit to P&L,” the retail treasury member said.

Here’s a slide summarizing the reasons the retailer chose to use C2FO’s platform:

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A “Perfect Storm” in Emerging Markets Shatters Hope for Some Investors 

Treasury investment managers hear sober forecasts and calls for greater action by the IMF.

Hardly any of the treasury investment managers who met in early May at a NeuGroup virtual meeting said they owned emerging market (EM) debt—not very surprising given that most companies have been parking cash in high-quality, short-duration investments since the pandemic rattled credit markets.

  • But one manager who does invest in USD-denominated EM debt said he was “bitterly disappointed” in the International Monetary Fund and G7 nations that had not “come to grips” with the depth of the problem facing the poorest countries in the developing world in the wake of the coronavirus, adding that they “haven’t thought big enough about” the issue—a contrast to fiscal and monetary efforts by developed nations.
  • He noted that emerging markets had been forecast to supply two-thirds of the world’s economic growth.
  • On the plus side, his company had avoided investments in Argentina and sold stakes in Turkish and Ukrainian debt.

Treasury investment managers hear sober forecasts and calls for greater action by the IMF.

Hardly any of the treasury investment managers who met in early May at a NeuGroup virtual meeting said they owned emerging market (EM) debt—not very surprising given that most companies have been parking cash in high-quality, short-duration investments since the pandemic rattled credit markets.

  • But one manager who does invest in USD-denominated EM debt said he was “bitterly disappointed” in the International Monetary Fund and G7 nations that had not “come to grips” with the depth of the problem facing the poorest countries in the developing world in the wake of the coronavirus, adding that they “haven’t thought big enough about” the issue—a contrast to fiscal and monetary efforts by developed nations.
  • He noted that emerging markets had been forecast to supply two-thirds of the world’s economic growth.
  • On the plus side, his company had avoided investments in Argentina and sold stakes in Turkish and Ukrainian debt.  

BlackRock’s take. Several representatives from BlackRock, sponsor of the meeting, described a grim situation in emerging markets, with one saying many nations face a “perfect storm,” given inadequate health care infrastructure to deal with COVID-19 cases, the trend toward onshoring in global supply chains, capital outflows and serious debt issues. One presenter said the IMF’s efforts at debt relief were “not enough.”

  • One senior executive said he was “very bearish” on the outlook for countries including Brazil, Indonesia and Argentina, saying all hope has been “shattered.”
  • The executive also noted that the greatest impact of climate change will be on the equatorial world, including Brazil, Africa and Bangladesh. “If you believe in climate change, the long-term impact is incredibly ugly,” he said. The developing world, he added, will “use more coal than ever” during a severe economic downturn.

Updates. In mid-June, the BlackRock Investment Institute explained its views on EM debt:

  •  “We stay neutral on hard-currency EM debt due to the heavy exposure to energy exporters and limited policy space among some markets. Default risks may be underpriced.
  • “We are neutral on local-currency EM debt because we see a risk of further currency declines in key markets amid monetary and fiscal easing. This could wipe out the asset class’s attractive coupon income.” 
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So far, So Good: US Banking Sector Shows Strength During Pandemic

Banks are as healthy as ever, and  robust investment-grade debt issuance has bolstered the industry’s profitability.

The global pandemic has cratered economies and affected businesses the world over. But the US banking system remains healthy because banks are well capitalized, having adhered to rules put in place after the 2008 financial crisis. Equally important: Investment-grade debt issuance by corporates is generating bank profits.

Banks are as healthy as ever, and  robust investment-grade debt issuance has bolstered the industry’s profitability.

The global pandemic has cratered economies and affected businesses the world over. But the US banking system remains healthy because banks are well capitalized, having adhered to rules put in place after the 2008 financial crisis. Equally important: Investment-grade debt issuance by corporates is generating bank profits.

  • That’s some of what members of NeuGroup’s Tech20 Treasurers’ Peer Group heard at a recent meeting from a bank equity strategist.
  • “The investment-grade markets are stronger than ever,” the strategist said. “Funding markets are very robust, with corporates taking advantage of low rates.”
  • Data from US securities industry organization SIFMA and financial tech and data company Refinitiv show that investment grade companies have issued more $1 trillion in debt this year. As a result, the strategist said, bank industry profits “are going gangbusters,” noting that this is a continuation of a long-term trend.

Texas ratios. This all means that despite the current economic straits, “We can handle a greater level of the problems we’re facing,” the strategist said. He also referred to the “Texas ratio,” which, by dividing nonperforming assets by tangible common equity and loan-loss reserves, helps investors determine how risky a bank is. (The higher the Texas ratio the more financial trouble a bank might be in.) By this measure, the sector is, “very healthy.”

  • That health stems in part from banks “setting aside a lot of money for loan losses” in the first quarter, the strategist said. He acknowledged that deferments “are happening” and loan forbearances “are way up;” additionally, bank lending standards are tightening and “demand is going down.” He added that he expects bank earnings to be weak “but this is not a balance sheet event or credit event.” Bottom line: “The banking system is as healthy as its been in our lifetimes.”

Weakness in Europe. The strategist said that while US banks are in top form, European banks are not. That’s because of the zero interest rate environment in the European Union. The European bank sector is weak because zero rates makes banks inefficient, the strategist noted. “European banks are as weak as they were in during the ’08-’09 financial crisis,” he said. US banks have taken a hit and are a great shape, and “nowhere near ’09 levels.”
 
Negative rates in the US? While there are negative rates globally, the strategist didn’t think the US would go that route. “There are now unprecedented levels of negative rates” globally, he said. “Will US go there? No, because we have a huge money market fund market and if we break the buck again, then it will be a huge mess.” And it certainly would be “negative for bank profitability.”

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The Loan Road Ahead: Steep Prices May Linger Longer Than Short Tenors

Post-pandemic advice from U.S. Bank for treasury teams: keep close to your banks.

Unlike the booming bond market, corporates still face restrictions on loans, and it may be awhile before pricing returns to pre-pandemic levels. U.S. Bank, sponsor of a recent NeuGroup meeting for assistant treasurers, provided participants with insights into revolver drawdowns and what to anticipate when refinancing or seeking new debt.

Revolver pricing leaps. The volume of revolving-credit drawdowns—once taboo—has hovered at over $250 billion since leaping to that level in mid-April.

  • A plurality of drawdowns by volume (42%) has been by companies rated ‘BBB’, followed by ‘BB’ (24.9%), ‘B’ (10.6%) and ‘A’ (8.5%), according to U.S. Bank.
  • Highly-rated borrowers issuing incremental short-tenor, drawn facilities saw pricing jump more than 40%, and well over 100% for undrawn ones, except ‘AA’ which increased 86%.

Post-pandemic advice from U.S. Bank for treasury teams: keep close to your banks.

Unlike the booming bond market, corporates still face restrictions on loans, and it may be awhile before pricing returns to pre-pandemic levels. At a recent NeuGroup meeting for assistant treasurers, U.S. Bank provided participants with insights into revolver drawdowns and what to anticipate when refinancing or seeking new debt.

Revolver pricing leaps. The volume of revolving-credit drawdowns—once taboo—has hovered at over $250 billion since leaping to that level in mid-April.

  • A plurality of drawdowns by volume (42%) has been by companies rated ‘BBB’, followed by ‘BB’ (24.9%), ‘B’ (10.6%) and ‘A’ (8.5%), according to U.S. Bank.
  • Highly-rated borrowers issuing incremental short-tenor, drawn facilities saw pricing jump more than 40%, and well over 100% for undrawn ones, except ‘AA’ which increased 86%.

Restrictions will persist. Libor floors became prevalent early on, said Jeff Stuart, U.S. Bank’s head of capital markets, and several structural features have since emerged, such as restricted payment tests on dividends and share buybacks, and anti-hoarding provisions requiring that a portion of drawdowns be used to pay down debt.

  • “I think they’ll be here for a while,” said Mr. Stuart, responding to a question whether such changes will apply to new issuances or executing an “accordion” option to increase loan size.
  • Pricing will stay elevated as well. “That’s what we’re going to see for some time,” Mr. Stuart said.

Some good news. Of 156 deals since March 23 tracked by U.S. Bank, only five new-money deals achieved tenors longer than a year; four were unrated and two secured. Eight “amends and extends” were longer than a year, and all 13 of those deals were in May.

  • “The world fell out of the five-year and dramatically increased the 364-day,” Mr. Stuart said, adding longer tenors will likely return to pre-pandemic levels sooner than pricing.

Some advice. Given banks’ “shock” at the rush to draw down revolvers, Mr. Stuart said, for the foreseeable future it will be harder to do multiyear facilities as well as accordion and incremental financings without impacting pricing on entire deals.

  • Banks are squirrely now, saying no to easy deals but agreeing to difficult ones. “It’s very difficult to predict what they’ll do, so this is a time when you need to be as close to your banks as ever,” Mr. Stuart said.
  • He anticipates greater confidence to lend next year and potentially improvements come fall, but “If you don’t have to do a deal now, don’t do it.”

No more stigma. Asked how drawing down a revolver influences banks’ view of the borrower, Mr. Stuart said initially he was perturbed at the lack of trust that the funding request implied, but soon realized how boards applied pressure to bolster liquidity.

  • “It used to be the worst thing a corporate could do, drawing down its back-up revolver, but I don’t think anybody is looking at it like that now,” he said.
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Dusting Off the Cobwebs and Retooling the Investment Policy

An inside look at portfolio governance and changes to investment strategies.

When the global pandemic hit, investment managers needed to act fast to manage liquidity and move company cash to short-dated safe havens. So having flexibility in their investment management strategy was essential for reallocation of portfolios and easy access to cash. At two NeuGroup virtual meetings for investment managers, members discussed investment policies and what governance their companies have in place.

An inside look at portfolio governance and changes to investment strategies.

When the global pandemic hit, investment managers needed to act fast to manage liquidity and move company cash to short-dated safe havens. So having flexibility in their investment management strategy was essential for reallocation of portfolios and easy access to cash. At two NeuGroup virtual meetings for investment managers, members discussed investment policies and what governance their companies have in place.

What is best-in-class portfolio governance? Most member companies have an investment policy that includes a high-level statement that can only be modified by the board, with underlying investment policies and procedures that may be changed by the treasurer or assistant treasurer; some require CFO approval.

  • The most convenient practice is to have a policy that allows the treasurer or assistant treasurer approval of investment mandates with monthly or quarterly reporting to the CFO and yearly reporting to the board. But is most convenient also best in class? Yes, if responsiveness during the liquidity crisis could have been inhibited by waiting for board approval.

Reinventing an investment program.  One member recently went through the process—thankfully before the global pandemic—of dusting off the cobwebs on her company’s investment policy and shared with peers the following advice for successful realignment.

  • Consider your cash buckets (i.e.: operational cash versus cash reserves), establish a minimum cash framework and back test your operating buffers.
    • Determine and maintain minimum operating cash balances.
    • Ensure sufficient liquidity to meet ongoing operational & strategic business needs.
  • Establish a new “cash culture” mindful of the cash impact from operational decisions.
    • Secure buy-in from management.
    • Align more frequently with FP&A.
    • Host biweekly meeting with treasurer & finance heads.
    • Improve treasury Cash Forecast by making departments accountable for forecast variances.
  • Conduct an investment policy review annually (or more frequently as needed)
    • Oversee risks, controls, managers and performance within treasury and accounting teams.
    • Address manager violations. One member uses Clearwater to monitor managers’ decisions and performance, making the managers reimburse the company if they violate a policy and have to sell an asset at a loss; if the manager was out of compliance at time of purchase, the CFO is alerted.

Benchmark for success:  This starts with monitoring the investment portfolio) daily and report at least monthly and quarterly. Also:

  • Pay attention daily to market moves, fair market value changes, unrealized gains/losses.
  • Compliance guidelines should be established via dashboards and baseline reporting. 
  • One member advocated that reporting is a way to confirm alignment with internal stakeholders.
    • Although his 10-page policy is approved annually, every quarter his team reports portfolio performance to the board.
    • Each month, his team sends the treasurer and CFO reports on permissible investments, holdings, performance, variances to prior years. 
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Latin America Treasury Peer Group Members Discuss Challenges of Managing Cash Amid Crisis

NeuGroup and Latin America

By Joseph Neu

Latin America is being hard hit by the COVID-19 virus and the economic aftershocks, both of which formed the backdrop for NeuGroup’s Latin America Treasury Peer Group 2020 H1 virtual meeting. Members discussed the challenges of intercompany lending, the lack of treasury center capabilities and looming Argentina chaos.

Here are few key takeaways I wanted to share.

By Joseph Neu

Latin America is being hard hit by the COVID-19 virus and the economic aftershocks, both of which formed the backdrop for NeuGroup’s Latin America Treasury Peer Group 2020 H1 virtual meeting. Members discussed the challenges of intercompany lending, the lack of treasury center capabilities and looming Argentina chaos.

Here are few key takeaways I wanted to share.

Rethinking intercompany funding. One member noted that in most Latin American countries where her company is located, entities are funded on a standalone basis. This is challenging when banks locally don’t step up with reasonable credit.

  • MNCs funding intercompany need to fit the region carefully into their strategic financing plans, for example, to tailor funds transfer pricing or their capital allocation models for intercompany loans; also at issue is capital invested into the region and cash pulled out vs. left in country.
  • COVID-19 has vastly disrupted forecasts of local cash and capital needs, so going forward, members will look to both improve forecasting capabilities in the region and integrate them more smoothly into the company’s broader strategic cash and capital planning.

Exasperation with the lack of treasury center capabilities. Members expressed their growing impatience with the lack of progress in the region, by governments and banks, to allow them to implement world-class cash management and other treasury operations solutions.

  • Latin America is simply not keeping pace with what is happening in the rest of the world. The impediments to world-class treasury center capabilities, e.g., linking up affiliates to the in-house bank, makes it more challenging amid the crisis to meet the needs of members’ businesses, customers, suppliers, and other stakeholders.

Factoring in another Argentina crisis. As one member observed, this is not a new occurrence for Argentina; the country has defaulted on its debt nine times. Still, the most recent default has led to some new and innovative restrictions to accessing USD, members note.

  • For example, there has been a call on companies with offshore dollars to use them to pay external vendors before being able to sell more pesos. The only alternative is to invest pesos in assets that yield something that helps mitigate the inflationary loss.
  • So-called blue-chip swaps and their bond equivalents still carry fears of reputation risk.
  • Meanwhile, find a bank to help with factoring receivables so that you get those pesos to invest or spend as soon as possible.
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Life Sciences Treasurers Speak to Capital Market Strategies, Insurance and Payment Fraud Mitigation

By Joseph Neu

The NeuGroup Life Sciences Treasurers’ Peer Group completed its H1 meeting series last week, sponsored by Societe Generale. Here are a few takeaways I wanted to share:

Three types of companies with three capital markets crisis strategies. Life sciences businesses, like those in most sectors, fall into three general capital market strategy buckets:

  1. Those needing rescue capital in order to survive through this crisis.
  2. Those looking to fortify their balance sheets.
  3. Those looking to be opportunistic to monetize high stock volatility and build acquisition capital to diversify their growth portfolio.

By Joseph Neu

The NeuGroup Life Sciences Treasurers’ Peer Group completed its H1 meeting series last week, sponsored by Societe Generale. Here are a few takeaways I wanted to share:

Three types of companies with three capital markets crisis strategies. Life sciences businesses, like those in most sectors, fall into three general capital market strategy buckets:

  1. Those needing rescue capital in order to survive through this crisis.
  2. Those looking to fortify their balance sheets.
  3. Those looking to be opportunistic to monetize high stock volatility and build acquisition capital to diversify their growth portfolio.

Most members saw the crisis as a reason to build liquidity to give themselves the option to fund R&D, have dry powder for an acquisition and fund share buybacks or dividend payments.

  • That means the majority of companies in this group have one foot in the balance sheet fortification strategy and the other in the opportunistic and strategic bucket.

Pandemic pushing traditional insurance out. A session on the insurance market impact of COVID-19 revealed that the market is driving retention increases, with as much as 60 percent increases on renewal quotes.

  • But higher retention is not leading to the expected premium relief, especially on D&O and property coverage.
  • Some corporates are not even able to get competing quotes on D&O.

The feeling that the insurance market is broken is compounded by the lack of direct and indirect pandemic coverage found in current policies. Some of this is still to be determined by legislation and litigation. Plus, members are told that outright pandemic exclusions should be expected going forward and pandemic coverage, if offered at all, will come at a very high price.

  • These circumstances have more members weighing creative coverage and alternatives to traditional insurance, such as captives and group captives, perhaps even for D&O.
  • They are also allocating more lead time to the renewal process to consider all options. 

Payment fraud prevention in focus. Cyber risk of all kinds has risen during the work from home phase of the virus and remains high as more workers return to the office. But payment fraud is top of mind. One member presented to the group a layered approach to preventing payment fraud.

  • A key insight was the focus on contractual language now embedded in their supplier portal to put the onus on all vendors to comply with their cybersecurity requirements, including immediate notice of a business email compromise.
  • Plus, the supplier portal allows the firm to use credentialed logins to identify the right person to confirm remittance discrepancies.
  • Another popular best practice is to implement after-action reviews to go over any issues or events to make them into a teachable moment.
  • These reviews complement well a reward system where anyone who takes the extra step to confirm a potentially fraudulent payment or prevent a real one is acknowledged.

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Smooth Sailing: One Investment Manager’s Painless Adoption of CECL

Taking a qualitative approach and doing no discounted cash flow calculations produced a calm CECL debut for at least one investment manager.

At a recent NeuGroup meeting, the only investment manager whose company adopted the new accounting standard for estimating credit losses in the first quarter described a relatively painless process, giving comfort to some of his peers. The meeting, sponsored by BlackRock, included a presentation by Aladdin on FASB’s current expected credit losses (CECL) methodology. Aladdin offers risk management software tools and is part of BlackRock.

Qualitative vs quantitative. Among the CECL decisions facing corporates is whether to assess their credit investment portfolio on a qualitative basis or to use a quantitative approach that requires the use of models and, often, discounted cash flow (DCF) analysis. One of the Aladdin presenters said clients with larger portfolios often do a quantitative analysis or combine it with a qualitative approach.

Taking a qualitative approach and doing no discounted cash flow calculations produced a calm CECL debut for at least one investment manager.

At a recent NeuGroup meeting, the only investment manager whose company adopted the new accounting standard for estimating credit losses in the first quarter described a relatively painless process, giving comfort to some of his peers. The meeting, sponsored by BlackRock, included a presentation by Aladdin on FASB’s current expected credit losses (CECL) methodology. Aladdin offers risk management software tools and is part of BlackRock.

Qualitative vs quantitative. Among the CECL decisions facing corporates is whether to assess their credit investment portfolio on a qualitative basis or to use a quantitative approach that requires the use of models and, often, discounted cash flow (DCF) analysis. One of the Aladdin presenters said clients with larger portfolios often do a quantitative analysis or combine it with a qualitative approach.

  • The NeuGroup member whose company adopted CECL uses a qualitative method as an initial screen; if the qualitative assessment indicates that a security is “not money good,” then a quantitative assessment will be performed. The company’s accountants are comfortable with this approach, he added. 
    • In response to a question, the member said that in the event of needing to do a DCF analysis he will have Clearwater run the analysis. In practice, this is unlikely because any security with a credit loss will likely have been out of compliance and sold, he said.
  • The investment manager said his portfolio assessment includes making sure that every security is investment grade and then looking closely at any “outliers” that have dropped below a certain price level. He receives feedback and guidance from external managers when an issuer is downgraded. “Is it still money-good” is what he wants to know.
  • One investment manager said the perspective offered by the member who doesn’t expect to have to do any DCF analyses provided some relief. “The additional work may not be as bad as I thought it would be,” he said.
  • Another member of the group would like to see a survey showing if peers are taking a quantitative or a qualitative approach. He said the qualitative process described earlier “doesn’t sound vastly different from an “OTTI regime,” referring to the other-than-temporary impairment approach used to account for credit losses before the adoption of CECL. 

Adverse or severe? Companies using models as they adopt CECL face other decisions, including which economic scenario to use—particularly challenging given the uncertainty created by the COVID-19 pandemic. An Aladdin presenter said the relevant scenarios today include:

  1. Baseline
  2. Adverse
  3. Severely adverse

The presenter said most, but not all, of the companies he’s seen are using the adverse scenario assumptions. That surprised at least one member who has run scenarios in preparation to adopt CECL. He said, “We asked ourselves, if this isn’t severe, what is?”

  • That same member, in response to a question about what his scenario testing had revealed, said it was “super interesting to watch.” He said the company initially had no credit losses on its books; “now, suddenly it’s everywhere.” An Aladdin presenter later said CECL could have an impact on earnings for some companies that have adopted the standard. 

Final thoughts. That said, the member whose company has adopted CECL said that “our general stance is that CECL is not targeted to us,” a sentiment that echoed statements heard in at least one of the meeting’s earlier breakout sessions on projects and priorities, where CECL was deemed “sort of a non-event for everyone,” as the NeuGroup leader in the group described it. We’ll see if that sentiment holds up through the next few quarters. 

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Differing Opinions About Audit Opinions

Internal auditors use a variety ratings or opinions for their reporting, despite a trend of not using them.

There is a growing trend of internal audit departments moving away from using audit opinions, or ratings, to rate the progress of a mitigation effort. The idea is to focus on the audit issue itself and mitigate it. Despite this trend, many auditees and audit committee members are happy with the current system and push back against suggestions to get rid of ratings.

Following an audit of a process, the auditee gets a rating or opinion on the progress they’ve made on fixing the process – the audit issue. Ratings methods differ; some employ colors.  Green generally means good while colors like yellow or orange mean “needs work” or “needs improvement;” red means things are bad and not being addressed at all. “I’ve never seen a red since I’ve been an auditor,” one member said at a recent virtual meeting of NeuGroup’s Internal Auditors’ Peer Group (IAPG).

Internal auditors use a variety ratings or opinions for their reporting, despite a trend of not using them.

There is a growing trend of internal audit departments moving away from using audit opinions, or ratings, to rate the progress of a mitigation effort. The idea is to focus on the audit issue itself and mitigate it. Despite this trend, many auditees and audit committee members are happy with the current system and push back against suggestions to get rid of ratings.

Following an audit of a process, the auditee gets a rating or opinion on the progress they’ve made on fixing the process – the audit issue. Ratings methods differ; some employ colors.  Green generally means good while colors like yellow or orange mean “needs work” or “needs improvement;” red means things are bad and not being addressed at all. “I’ve never seen a red since I’ve been an auditor,” one member said at a recent virtual meeting of NeuGroup’s Internal Auditors’ Peer Group (IAPG). 

In the meeting, members described their various rating scales – no two the same – and said in some cases they were asked to move away from them. One reason for this was that many of the functions being audited focused too much on the rating and not on the underlying issue. “The (audit) finding gets lost,” said one auditor. 

  • But auditors say they get pushback when they discuss moving away from ratings. “Execs like the overall rating because they don’t have to read the whole audit report,” said one IAPG member. Added another member, “Audit reports sometimes have too many pages. [AC members and executives] will read through them and then ask, ‘what’s important here?’ So the ratings and colors are needed.” 

And despite the industry effort to drop ratings, some IAPG members have actually added more rating categories to their scales. Several members who have three ratings for findings, typically along the lines of “satisfactory,” “needs improvement” and “ineffective” or “unsatisfactory,” have added more nuance. In a few cases they have split the middle rating, “needs improvement,” into “moderate improvement opportunity” and “needs significant improvement.” 

Language matters. Members also mentioned that there’s sometimes pushback over the language of ratings. 

  • For one member, the legal department made IA change the red rating “ineffective” to “major improvement needed.” This was because, in the case of a lawsuit, ineffective could be misconstrued and create a problem.
  • Another member mentioned that sometimes auditees, particularly millennials, take issue even if their mitigation efforts are good or get the top rating. In this member’s case, that rating is “satisfactory,” which to some ears sounds mediocre or worse. But the auditor said it’s not his job to say it’s anything more than that. 
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Financing the Fight Against COVID-19: Sustainability Bond Deals

Corporates and banks fuel gains in social and sustainability bond issuance amid the battle against the coronavirus.
 
The coronavirus pandemic may have dampened green bond issuance in the first quarter of 2020, but it has also pushed some corporates to use proceeds from sustainability bond offerings to help fight the virus. Case in point: Pfizer.

  • Heather Lang, executive director of sustainable finance solutions at ESG ratings firm Sustainalytics—which is being acquired by Morningstar—named Pfizer as one of the institutions using proceeds from recent sustainable debt deals to address the effects of COVID-19. She spoke at a recent NeuGroup meeting for assistant treasurers. Sustainalytics provided Pfizer with a so-called second-party opinion supporting the deal.
  • Pfizer—already in the process of preparing to issue a sustainability bond when the virus began—said some of the $1.25 billion in proceeds from its 10-year March offering will be used to “address the global COVID-19 pandemic and the threat of antimicrobial resistance.”

Corporates and banks fuel gains in social and sustainability bond issuance amid the battle against the coronavirus.
 
The coronavirus pandemic may have dampened green bond issuance in the first quarter of 2020, but it has also pushed some corporates to use proceeds from sustainability bond offerings to help fight the virus. Case in point: Pfizer.

  • Heather Lang, executive director of sustainable finance solutions at ESG ratings firm Sustainalytics—which is being acquired by Morningstar—named Pfizer as one of the institutions using proceeds from recent sustainable debt deals to address the effects of COVID-19. She spoke at a recent NeuGroup meeting for assistant treasurers. Sustainalytics provided Pfizer with a so-called second-party opinion supporting the deal.
  • Pfizer—already in the process of preparing to issue a sustainability bond when the virus began—said some of the $1.25 billion in proceeds from its 10-year March offering will be used to “address the global COVID-19 pandemic and the threat of antimicrobial resistance.”

Big Picture. Sustainalytics, according to its slide presentation, has expanded its “internal taxonomy to explicitly identify potential use of proceeds related to the virus, targeting two main areas – healthcare and socio-economic impact mitigation.”

  • Sustainalytics said, “Social bonds are ideal instruments for allocating capital to specific groups impacted by the pandemic and/or the wider population impacted by the economic crisis,” one reason that “there has been an uptick in social and sustainability bond issuance since the COVID-19 outbreak.”
  • In mid-May, Bank of America issued a $1 billion bond aimed at financing not-for-profit hospitals, skilled nursing facilities, and manufacturers of health care equipment and supplies.
  • At the time of that deal, Bloomberg reported that borrowers globally had raised a record $102.6 billion of debt this year to combat the coronavirus including development banks, sovereigns and corporates. It reported that Chinese companies have issued the most so-called pandemic bonds.

Multiple uses of proceeds. During the meeting, one NeuGroup member said that public bond offerings are inherently sizable, “so unless you have major sustainability projects, it’s kind of hard” to use all the proceeds for environmental, social or governance activities.

  • But Ms. Lang pointed out that proceeds from one offering can be allocated to multiple uses.
  • For example, she said, a company could use the money for a pair of renewable energy projects, a Leadership in Energy and Environmental Design (LEED)-certified headquarters office, and several social initiatives. “It doesn’t all have to go into one bucket.” 

Loans are the rage. Volume in the fastest-growing segment of the sustainability market, ESG-linked loans, leapt 168% over the last two years, exceeding $122 billion last year. One big draw: They offer the flexibility to use the proceeds for general corporate purposes.

  • They’re designed to promote the pursuit of sustainability goals by linking the interest rate on the loan to the achievement of those goals.
  • They’re available to investment grade and non-investment grade companies, including “browner” companies not previously eligible for an ESG bond, Ms. Lang said. They can be structured as revolvers, term loans, bilateral or syndicated.

She said Sustainalytics has recently worked on transactions for shipping companies, which struggled to enter the green market but have “a lot of potential for reducing carbon emissions for their fleets.”

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Founder’s KTAs from NeuGroup for European Treasury Peer Group 2020 H1 Meeting

By Joseph Neu
 
The European Treasury Peer Group 2020 H1 meeting took place last week, sponsored by HSBC. Here are some takeaways that I wanted to share:
 
COVID-19 validates regional treasury centers. HSBC said the case for regional treasury centers has been further validated by the pandemic. In comments on how clients have shown resilience and are preparing for markets to reopen, the bank noted the importance of real-time global exposure information, including a centralized liquidity and risk management framework; but also critical is the existence of treasury hubs to execute in regional markets.

By Joseph Neu
 
The European Treasury Peer Group 2020 H1 meeting took place last week, sponsored by HSBC. Here are some takeaways that I wanted to share:
 
COVID-19 validates regional treasury centers. HSBC said the case for regional treasury centers has been further validated by the pandemic. In comments on how clients have shown resilience and are preparing for markets to reopen, the bank noted the importance of real-time global exposure information, including a centralized liquidity and risk management framework; but also critical is the existence of treasury hubs to execute in regional markets. 

  • The value of regional centers stems from the need for MNCs to be agile and respond quickly in the new normal. That’s because the predictability of cash flows, FX markets and thus exposures are substantially diminished. So are the diversification of risk portfolios, natural hedges and the capacity to take risk more generally.
  • One result is that the comfort zone in which treasurers can wait for local context to get relayed to headquarters and for risk managers there to respond is likely to be gone for a while. 

Work from home works. All members reported that working from home (WFH) has worked well and better than expected. But some participants admitted to missing the office. Two reasons:

  • The ability to communicate on small things without scheduling a phone call or web conference is a disadvantage of WFH. 
  • Onboarding and training new hires remotely remains a big challenge. 

At the next meeting, members will share how their plans to return to the office have evolved. Most expect the additional flexibility of working remotely to persist post-pandemic. How this plays out for regional centers located in tax advantaged locations with substance requirements will be something to watch.
 
The virtues of virtual accounts. Two members shared rollouts of virtual account (VA) projects in EMEA. All members noted that their banks have been selling them hard.

  • The tangible advantage described so far is for companies with multiple ERPs, since virtual accounts allow them to identify payments and separate account statements, helping to automate posting and reconciliation across various systems.
  • VAs can bring more efficiency to liquidity sweeping arrangements with fewer accounts to manage and audit. 

Tax departments at several member companies are leery of assigning virtual accounts to multiple entities, which would help transform pay-on-behalf-of and receive-on-behalf-on structures, and allow in-house banks to fully leverage them. But the bottom line is that virtual account penetration in EMEA continues. 

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C2FO Showcases Scope Expansion to AT Leaders

Working Capital Cycle

By Joseph Neu

C2FO sponsored our recent Assistant Treasurers’ Leadership Group Meeting on Zoom. Their scope expansion, which is indicative of ways working capital platforms can support business ecosystems in this crisis, is my first of three takeaways from that meeting.

Working capital platforms expand their scope. Platforms such as C2FO’s focusing on intermediating between buyers with access to capital and a wide range of suppliers with working capital needs have a vital role to play in this pandemic.

  • C2FO is focusing on bringing more small and medium-sized businesses to their platform to better access working capital.
  • They can use their platform to connect suppliers with buyers in a position to offer early payment directly in reaction to the Covid-19 triggered economic downturn or to connect suppliers with their buyers’ banks and other financial providers to fund their working capital using the buyer’s superior credit.
  • C2FO is also advocating for government stimulus aimed at small businesses to get channeled through its platform.
  • Finally, to get access to working capital sooner, platforms are looking to offer pre-invoice, or purchase order financing in response to this crisis.

Either way, C2FO says, firms helping suppliers with earlier payment are generating stickiness and loyalty.

By Joseph Neu

C2FO sponsored our recent Assistant Treasurers’ Leadership Group Meeting on Zoom. Their scope expansion, which is indicative of ways working capital platforms can support business ecosystems in this crisis, is my first of three takeaways from that meeting.

Working capital platforms expand their scope. Platforms such as C2FO’s focusing on intermediating between buyers with access to capital and a wide range of suppliers with working capital needs have a vital role to play in this pandemic.

  • C2FO is focusing on bringing more small and medium-sized businesses to their platform to better access working capital.
  • They can use their platform to connect suppliers with buyers in a position to offer early payment directly in reaction to the Covid-19 triggered economic downturn or to connect suppliers with their buyers’ banks and other financial providers to fund their working capital using the buyer’s superior credit.
  • C2FO is also advocating for government stimulus aimed at small businesses to get channeled through its platform.
  • Finally, to get access to working capital sooner, platforms are looking to offer pre-invoice, or purchase order financing in response to this crisis.

Either way, C2FO says, firms helping suppliers with earlier payment are generating stickiness and loyalty.

Insurance renewals won’t be fun. Several members noted working on insurance renewal projects and hearing from peers that it is a nightmare, with premiums going higher for less coverage, starting with D&O. 

  • In response members are working more closely with their brokers, even changing brokers to seek better advice, as well as focusing internal risk teams on coming up with solutions. 

Bond economics are key to positive bank relationships. In a session where members narrated their recent bond deals to shore up liquidity for the crisis, all mentioned more attention than ever being paid to using bond economics to reward banks:

  • in the RCF,
  • who indicated a willingness to step up with new lending, or
  • who had helped advise on pre-crisis capital structure and capital plans.

There was also attention paid to familiar faces who had been actives on a bond deal with them before, given that everyone had to do this remotely.

  • Passives who lost out due to this “familiar-faces” bias, might also have gotten some make up money.

Such is the importance of bond economics to bank relationships these days.

Stay safe and well.

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Goldman Sachs’ Bold Vision for Virtual Accounts and the Future of Cash Management

As it enters the corporate cash management market, Goldman looks to revolutionize virtual accounts with better tech, more familiarization and streamlined processes.

Goldman Sachs is entering the cutthroat and increasingly crowded world of corporate cash management determined to play the role of innovative disruptor—no easy task. A cornerstone of Goldman’s strategy is a product whose name is familiar to many corporate treasury professionals but that is not fully understood by all of them: virtual accounts.

That state of affairs has put Mark Smith, Goldman’s Transaction Banking head of global liquidity, on a mission to answer every question treasury teams have about virtual accounts, particularly as the bank has just launched its own Virtual Integrated Account (VIA) offering in the US, with plans to roll it out internationally later in 2020. “Virtual accounts are a foundational product for us and we’re conscious that awareness and understanding of them is inconsistent,” Mr. Smith says. “We’re here to change that.”

As it enters the corporate cash management market, Goldman looks to revolutionize virtual accounts with better tech, more familiarization and streamlined processes.

Goldman Sachs is entering the cutthroat and increasingly crowded world of corporate cash management determined to play the role of innovative disruptor—no easy task. A cornerstone of Goldman’s strategy is a product whose name is familiar to many corporate treasury professionals but that is not fully understood by all of them: virtual accounts.

That state of affairs has put Mark Smith, Goldman’s Transaction Banking head of global liquidity, on a mission to answer every question treasury teams have about virtual accounts, particularly as the bank has just launched its own Virtual Integrated Account (VIA) offering in the US, with plans to roll it out internationally later in 2020. “Virtual accounts are a foundational product for us and we’re conscious that awareness and understanding of them is inconsistent,” Mr. Smith says. “We’re here to change that.”

The Basics
Virtual accounts began in the Asia-Pacific region in the early 2000s and started being used extensively in Europe in the last 10 years. In the last five years, they’ve become more mature in Europe, where there is less dependency on cash. They’re a relatively new concept in the US, presenting Goldman with an opportunity to help corporate treasurers who are seeking more efficient liquidity solutions.

“At their most basic,” Mr. Smith says, “virtual accounts are simply a way of organizing and reporting data within a real bank account.” Traditionally, he explains, companies have organized cash flow information by having separate physical bank accounts. He cites an example of a corporate with 10 divisions, with each division having its own bank account; in this instance, the cash balance, incoming receipts and outgoing payments can be tracked for each. “But that means maintaining 10 bank accounts,” Mr. Smith says. One alternative is to have one bank account and tracking information on an Excel spreadsheet with 10 tabs. The trouble with the Excel model is that “correctly allocating the incoming receipts and outgoing payments can be time-consuming and error-prone.”

Unique Identifiers
Virtual accounts organize data within a bank account so that it looks as if it’s divided into mini-accounts or sub-ledgers (i.e., virtual accounts). Just like a real bank account, each virtual account has an opening balance, a closing balance, incoming receipts and outgoing payments. The key to achieving this is assigning a unique identifier to each incoming receipt and outgoing payment so that the bank’s VIA solution can attribute it to the correct virtual account, and in turn the bank account with which it is associated. These identifiers can be reference numbers, in which case each payment instruction needs to contain the real bank account number and the reference number.

Alternatively, the virtual account identifiers can be configured as a clearing-recognized account number, such as an International Bank Account Number or IBAN. This method means that the payment instruction only needs to contain the clearing-recognized account number; no additional reference number is required. When the bank receives the incoming payment, the VIA system automatically posts it to the relevant real bank account and (simultaneously) reflects it in the correct virtual account. Virtual accounts and the real account are always kept in sync.

Mr. Smith says the benefits of the reporting capability of virtual accounts have helped fuel their growth among corporates. This is particularly true in Europe, where many cite the typical treasury need for better control and visibility over cash and liquidity. But the potential of virtual accounts goes far beyond reporting and visibility.

Rationalization
Virtual accounts are a great tool for tackling the challenge of bank account and bank rationalization. Treasuries worldwide have witnessed a proliferation of bank accounts over the past several decades as customers and supply chains have expanded globally. This has brought with it the time and cost required to open and maintain all those accounts.

With virtual accounts, once the master physical account has been established, any number of virtual accounts can be opened—all with minimal additional documentation, if any. This will be one of the main features of Goldman‘s VIA offering. “The Goldman Sachs offering is self-service, putting the full power and flexibility of virtual accounts in the hands of the treasurer,” Mr. Smith says. This means treasurers “can effectively open and close virtual accounts instantly, and update hierarchies in real time. It’s a totally different experience to managing traditional bank accounts.”

In certain situations, virtual accounts can eliminate and replace real bank accounts, but with no loss of reporting detail. What’s more, Mr. Smith asserts that a virtual account could end up costing at most a tenth of what a traditional account would cost—and in many cases, virtual accounts may be free altogether. Consequently, rationalizing traditional accounts into virtual accounts should save both time and money.

Goldman Sachs’ offering can also function across ERP systems. This means users will have the ability to send information using all industry formats; it’s also API-enabled and integratedacross all the firm’s product offerings, real time if required. This is unlike incumbent payment mechanisms, which many banks use, and which use a host-to-host connection or node. Moreover, once the SWIFT structure is implemented, it’s hard to change.

More than Just Accounts Receivable (AR)
Arguably the most documented use case for virtual accounts is in receivables management, which is how virtual accounts got started in Asia over a decade ago. Virtual accounts address an inherent problem with traditional receivables structures in which many receipts are received into one bank account, requiring significant manual intervention to reconcile.

Breaking up a traditional bank account into virtual accounts can, Mr. Smith says, drive much higher rates of straight-through reconciliation if, for example, one virtual account is assigned per client. Reconciling receipts vs. open accounts receivable in the one-to-one relationships in virtual accounts is, Goldman says, more straightforward than in the “many-to-one” relationships typical in traditional account structures.

Nikil Nanjundayya, Goldman’s Transaction Banking head of emerging products, says that using virtual accounts this way eliminates the need to dedicate personnel to manual reconciliation, resulting in potentially significant cost savings. Furthermore, faster reconciliation can mean faster cash application and better working capital availability. Faster reconciliation can even lead to a better client experience.

Payments/Receipts On Behalf Of (POBO/ROBO)
Virtual accounts also drive significant efficiencies within a given legal entity, but they can be a powerful on-behalf-of tool when applied to corporate structures, Mr. Smith says. Subsidiaries no longer need to maintain their own bank accounts. Instead, they can maintain virtual accounts with a parent entity or treasury center. In this case, the virtual account becomes an intercompany ledger, recording the parent entity’s or treasury center’s position with the subsidiary, as well as all the underlying transactions.

If a treasury center makes a payment on behalf of a subsidiary, that outgoing payment will bear the subsidiary’s virtual account number and will reflect simultaneously in that virtual account and post to the physical account. Incoming receipts similarly can be reflected on behalf of a subsidiary to the relevant virtual account.

While virtual accounts can drive POBO/ROBO structures, clients will still need to organize their payment and receipt operations centrally. This may require a time investment up-front, but the time and cost savings of POBO/ROBO structures will be well worth it and are well documented.

Virtual accounts can therefore sit at the heart of an in-house bank. Here, Mr. Smith is keen to reiterate the advantage of the Goldman Sachs virtual account offering. “Goldman virtual accounts can be configured to be clearing-recognizable, which some other in-house bank solutions cannot,” he says. He adds that that other “engines” for virtual accounts rely on reference numbers, but those numbers can be mistakenly omitted or transposed, resulting in the inefficiency of manual intervention.

Some European banks, and even European corporates, believe virtual account structures may be a convenient way to address regulatory pressure on notional pooling. In Europe, Basel III requires capital to be held against the gross assets in a notional pool, not the net position. This has made notional pooling more expensive for capital-intensive European banks, which are subject to the supplementary leverage ratio; it has even called into question the future of notional pooling altogether.

“Single currency notional pools can absolutely be replicated virtually,” Mr. Smith explains. This is done by assigning virtual accounts to subsidiaries within the same physical accounts, he says. Mr. Smith adds that individual virtual accounts can be overdrawn, but if the physical account maintains a positive balance, no overdraft charges are incurred. The virtual pool is also self-funding and self-collateralizing. Crucially, only the net balance on the physical deposit is reflected for general ledger and regulatory reporting—including capital reporting. “There’s no risk of gross-up as you have with a notional pool,” Mr. Smith says. Finally, pooling in this way doesn’t require cross guarantees as the bank faces only the one physical bank account.

Pooling Not Out Completely
Virtual multicurrency notional pools should also be possible through multicurrency virtual accounts, in which the parent physical account is denominated in one currency while the virtual accounts represent wallets in different currencies. The currency balance on the virtual accounts is translated into the nominal currency of the parent account but isn’t converted via any FX trade—they remain in source currency. The economics should be like a traditional multicurrency notional pool, where net negative balances are charged a cost-effective collateralized overdraft rate. But again, cross guarantees aren’t required as the bank faces the net position on the parent physical account.

Because cross guarantees aren’t required, virtual notional pooling should be significantly more straightforward to establish than traditional notional pooling. Theoretically, more clients should be able to benefit from the cheaper funding costs and lower FX fees as a result, Goldman argues.

There is one important difference between traditional notional pooling and virtual notional pooling. In a traditional notional pool, there are no intercompany balances between entities. In a virtual notional pool, all participating virtual accounts represent an intercompany relationship with the entity that owns the physical account. For some corporates, avoiding intercompany balances is an important objective in pooling. Such corporates will need to weigh the potential advantage of avoiding cross guarantees against any potential disadvantages of intercompany balances.

KYC Questions
Both banks and their corporate clients have wondered whether virtual accounts can ease the burden of know your customer (KYC) and anti-money laundering (AML) rules when physical accounts are replaced with virtual accounts. The use of virtual accounts may streamline customer onboarding obligations, with a focus on the customer—the physical accountholder. Still, it is reported that in South America, local regulations are requiring KYC by legal entity. “A certain level of due diligence will always be required on any participant in the US financial system, whether they participate physically or virtually,” Mr. Nanjundayya says.

Mr. Smith and Mr. Nanjundayya maintain that Goldman’s VIA is cutting-edge, and will continue to evolve, offering a best-in-class user experience, including full self-service capability as well as the ability to scale. As Mr. Nanjundayya explains, “Clients can open a million or more virtual accounts effective instantly themselves, should they need to—and to close them.” Further, he says, Goldman Sachs clients will be able to structure accounts into hierarchies and adjust those hierarchies using the same self-service capability. This ability to scale isn’t possible with traditional bank accounts, Mr. Nanjundayya says. Additionally, traditional cash structuring, including account opening, typically involves more engagement with the bank than is necessary with virtual structuring.

But Goldman doesn’t just want to be at the leading edge when it comes to virtual accounts; it wants to define that leading edge and drive it forward. “We are also future-proofing our product,” Mr. Nanjundayya asserts. While the bank is not willing to divulge specifics, Goldman’s offering will include capabilities expanding into FX, analytics, cross-border activity and even M&A management.

It’s All About the User
Goldman Sachs believes that the benefits of virtual accounts can benefit all clients and that its offering is not a segment-specific solution. That means it is flexible and can be adapted to corporates that have a variety of use cases, i.e., different corporates will use the accounts in different ways. For example, a property manager may use them to track the cash flows for each building, while a software company may use them to manage developer payments.

Migrating to virtual accounts need only be as complex as changing bank accounts, although structuring them into more sophisticated solutions will need careful planning in partnership with the bank. However, the benefits of moving to virtual accounts should outweigh the costs many times over, Goldman says. In short, the bank says that virtual accounts should be at the heart of treasury transformation.  

Transaction Banking is business of Goldman Sachs Bank USA (“GS Bank”) and its affiliates. GS Bank is a New York State chartered bank and a member of the Federal Reserve System and FDIC, as well as a swap dealer registered with the CFTC, and is a wholly-owned subsidiary of The Goldman Sachs Group, Inc. (“Goldman Sachs”). Transaction Banking services leverages the resources of multiple Goldman Sachs subsidiaries, subject to legal, internal and regulatory restrictions. Transaction Banking has compensated NeuGroup for their participation in the drafting of this white paper.  

© 2020 Goldman Sachs. All rights reserved.

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How Corporates Tapping Capital Markets Use Minority and Diversity Firms

NeuGroup members discuss benefits, challenges and process as treasury promotes diversity and inclusion.  

Many treasury teams at multinational corporations strive to include firms owned by women, people of color and disabled veterans when selling debt, buying back stock or issuing commercial paper. At a recent NeuGroup meeting focusing on capital markets, members shared their insights on the process of including minority and diversity firms in various transactions.

Formalize the process. The member who kicked off the discussion described her company’s path toward formalizing the process of using minority and diversity firms to underwrite bond deals. Using diversity firms as junior managers initially encountered resistance from some lead managers who declined to fill their orders, she said. But in 2013 the company mandated the inclusion of five to six of the firms in each debt issue, allocating 1% to 2% of the bonds to them.

NeuGroup members discuss benefits, challenges and process as treasury promotes diversity and inclusion.  

Many treasury teams at multinational corporations strive to include firms owned by women, people of color and disabled veterans when selling debt, buying back stock or issuing commercial paper. At a recent NeuGroup meeting focusing on capital markets, members shared their insights on the process of including minority and diversity firms in various transactions.

Formalize the process. The member who kicked off the discussion described her company’s path toward formalizing the process of using minority and diversity firms to underwrite bond deals. Using diversity firms as junior managers initially encountered resistance from some lead managers who declined to fill their orders, she said. But in 2013 the company mandated the inclusion of five to six of the firms in each debt issue, allocating 1% to 2% of the bonds to them.

  • “There are about 20 firms we use,” the member explained. “We sat down with each one of them three years ago and we rotate among 12-15 of them for bond deals.”
  • Every year, the company also sets up a relatively small, 364-day revolving credit facility employing local diversity firms from the metropolitan area where it’s based.

Adding value. Some members have found diversity and minority firms add particular value in stock buybacks. “We have found a select group that do well in share repurchase,” said one participant. Others said they had more success in using diversity and minority firms in their CP programs, including the session leader. “They have come through for us when bulge bracket firms have not come through,” she said.

  • At a separate NeuGroup meeting of assistant treasurers, one member said, “Philosophically we want to further diversity, but we also want to find ways to add value when we work with diversity and minority firms.” Transaction execution quality is the top criteria to measure value, he added.
  • On bond deals, “we find these firms bring real and incremental orders,” the AT said, noting the investors they serve tend to be price-insensitive. And while those orders don’t make or break a deal, they help on the margin, diversifying the company’s large debt stack.

Meetings matter. Participants in both NeuGroup discussions agreed that meeting with diversity and minority firms is worthwhile, in part to determine which business owners are truly “walking the talk.” For instance, one member said, it’s a red flag if a woman who owns a firm shows up with six men. Also, he wants to know what a firm owned by a disabled veteran is doing beyond hiring veterans. He was particularly impressed by one firm that is offering training classes to disabled vets. 

  • Another member said it’s important to find minority and diversity firms that truly align with the values of his company, adding that hiring these firms is an extension of the corporation’s commitment to environmental, social and governance (ESG) principles—an increasingly important topic for issuers. 

Challenges. The relatively small size of a diversity or minority firm and the capital it has may limit its ability to execute on a bond underwriting, members said. “How much they could take was a problem,” one said of her experience with minority firms on debt deals. 

  • The assistant treasurer’s company has a sizable investment portfolio, but trades requiring significant balance sheets can be problematic for small minority firms, he said. Their size can also inhibit them from providing asset-management services to large corporates seeking efficiency by doling out multi-billion-dollar mandates.

Backing by big banks. Members agreed that a few large investment banks step up to help manage the inclusion of a minority or diversity firm in a bond offering and, in some cases, provide a capital backstop for the smaller firm. Other banks, one member said, still ask, “Why do we have to do this?” In other words, as another member observed, “Some lead underwriters are better or more willing than others.”

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Founder’s KTAs from the Global Cash and Banking Group 2020 H1 Meeting

Digital Forecasting

By Joseph Neu

NeuGroup facilitated our Global Cash and Banking Group’s 2020 H1 meeting last week, sponsored by ION Treasury.

Here are a few takeaways I wanted to share.

Focused on cash visibility and forecasting, still. Members in this group noted that their projects and priorities had not shifted as a result of Covid-19 and its impacts, given that cash visibility and forecasting were already a priority.

  • Using treasury technology and process improvement to get better at both also has not changed.
  • It’s just now the tech and processes have to work from home.

By Joseph Neu

NeuGroup facilitated our Global Cash and Banking Group’s 2020 H1 meeting last week, sponsored by ION Treasury.

Here are a few takeaways I wanted to share.

Focused on cash visibility and forecasting, still. Members in this group noted that their projects and priorities had not shifted as a result of Covid-19 and its impacts, given that cash visibility and forecasting were already a priority.

  • Using treasury technology and process improvement to get better at both also has not changed.
  • It’s just now the tech and processes have to work from home.

AI is the future of cash forecasting. Among the cross-product solutions ION is focused on are machine learning applications, starting with a cash forecasting tool leveraging artificial intelligence, mostly in the form of machine learning and deep learning neural networks. ION’s research suggests that linear regression-based learning models perform well for businesses with stable, growing cash flows, but less well with cash flows subject to seasonal peaks. ARIMA, or AutoRegressive Integrated Moving Average and Neural Network models perform better, but require extra modeling:

  • for seasonality with ARIMA models and
  • with neural networks, careful attention to training data to learn from and supplemental intervention when non-repeating events occur, such as when global pandemics happen.

Still, you can get 90%-95% accuracy most of the time, in seconds vs a day or more.

Bank connectivity as a service progressing. Members sharing on bank connectivity experience suggests that it is a diminishing, albeit still a pain point as:

  • global banks offer to serve as a gateway for statements and payments
  • TMS and ERP vendors look to connect around traditional bank portals and
  • specialty providers fill the breach for those ill-served by these solutions.

Balancing access security (e.g., managing tokens) and segregation of duties with convenience and business continuity in a crisis (mailing new physical tokens vs. turning off virtual tokens on employees own smartphones fast enough) is still an issue, yet positive progress is the prevailing sentiment.

Stay safe and well.

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Good Timing: Blowout Bond Deals Before and After the Meltdown

Two debt issues show the benefits of both planning and flexibility when tapping capital markets.

Investors clamoring for highly rated corporate bonds before the financial-market meltdown began in late February and again in early May provided opportunities for issuers to do debt deals at very attractive terms under different circumstances. Two members of NeuGroup’s Assistant Treasurers’ Leadership Group discussed with peers the key factors and market dynamics driving their companies’ deals.
 
The similarities. Each company’s offering, one at the start of 2020 and the other in early May, was oversubscribed by several multiples.

  • Each deal saw spreads inked well below initial price talk.
  • Both companies are in the technology sector and their deals may have benefited from investor demand following a dearth of tech offers in 2019. 

Two debt issues show the benefits of both planning and flexibility when tapping capital markets.

Investors clamoring for highly rated corporate bonds before the financial-market meltdown began in late February and again in early May provided opportunities for issuers to do debt deals at very attractive terms under different circumstances. Two members of NeuGroup’s Assistant Treasurers’ Leadership Group discussed with peers the key factors and market dynamics driving their companies’ deals.
 
The similarities. Each company’s offering, one at the start of 2020 and the other in early May, was oversubscribed by several multiples.

  • Each deal saw spreads inked well below initial price talk.
  • Both companies are in the technology sector and their deals may have benefited from investor demand following a dearth of tech offers in 2019. 

Thinking ahead pays. With existing bonds maturing over the summer and volatility likely as November elections neared, the first issuer decided that refinancing early was prudent. Had it waited a few months, the combination of blackout periods and the market impact of the coronavirus could have derailed its efforts.

So does flexibility. The second issuer had planned to refinance at year-end 2020 an existing deal maturing in summer 2021. Then it drew down its revolver in March, prompting a rethink. A lesson learned, the issuer’s AT said, was “be quick and flexible enough to react to market changes.”

  • Equities rallied and credit spreads tightened in April in response to the Federal Reserve’s aggressive efforts to stabilize markets and fiscal stimulus.The company filed its 10-Q at month’s end, a week after its earnings, to give investors time to read disclosures, especially regarding COVID-19.
  • The offering prospectus noted explicitly that proceeds were to pay down the revolver and refinance existing bonds, reassuring investors.

ESG talk helps. The first issuer’s bond wasn’t a sustainability bond, but slides in its NetRoadshow presentation discussed the company’s ESG footprint, and the CFO and treasurer explained its ESG initiatives during investor calls.

  • “That allowed us to draw a more diversified group of investors,” the AT said.  

Rewarding book runners. When assigning active book-runner positions, the first issuer prioritized help it had received on capital structure and allocation issues—beyond the banks’ normal treasury-operations services.

  • The second issuer chose active book runners from the first tier of its bank group and appeased a tier-one member that didn’t get that lucrative position by giving it the swap-manager role. “We typically would have unwound [the forward-starting swaps] ourselves, but we gave them that business,” the AT said.  

Saving money. The second issuer informed banks that it planned to pay down the revolver and asked them to waive the “breakage fee” for drawing on the bank facility. “Since we were dangling the bond economics, it gave them incentive to waive those fees,” the AT said.

  • The first issuer saved interest expense by stating the transaction size of its deal would not exceed what was initially announced, allowing the bookrunners to tighten pricing and get the best terms possible for the company.

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Aligning Investment Strategy With the Shape of the Economic Recovery

Investment managers hear Neuberger Berman’s bull, bear and base case scenarios and the outlook for credit markets.

The best path for some fixed-income investors amid the uncertainty created by the pandemic may be to follow the lead of the Federal Reserve and buy assets that the US central bank is buying to keep credit markets liquid. That was among the key takeaways about asset allocation at a NeuGroup virtual meeting of treasury investment managers in late April sponsored by Neuberger Berman.

Bull, bear or base case. Neuberger Berman shared with members its investment playbook, which lays out three scenarios for economic recovery:

Investment managers hear Neuberger Berman’s bull, bear and base case scenarios and the outlook for credit markets.

The best path for some fixed-income investors amid the uncertainty created by the pandemic may be to follow the lead of the Federal Reserve and buy assets that the US central bank is buying to keep credit markets liquid. That was among the key takeaways about asset allocation at a NeuGroup virtual meeting of treasury investment managers in late April sponsored by Neuberger Berman.

Bull, bear or base case. Neuberger Berman shared with members its investment playbook, which lays out three scenarios for economic recovery:

  1. Base case: “U-shaped” recovery
  2. Bull case: “V-shaped” recovery
  3. Bear case: “L-shaped” recovery

Medical, not economic. One of the Neuberger Berman presenters called the bull case somewhat “implausible,” while another said that investors betting on the bear case should definitely “follow the Fed.” The scenario that ultimately plays out, he said, will be determined more by “medical” facts than traditional economic forces. He added that watching what happens in countries farther along the coronavirus curve than the US will indicate whether the recovery is W-shaped, following second waves of infections.

Update: differentiation. In mid-May, Neuberger Berman’s asset allocation committee (ACC) wrote in a report that “after ‘following the Fed’ in the wake of the central bank’s interventions in credit markets, investors appear to have moved quickly to differentiate the strong from the vulnerable, reminding us of the importance of robust fundamental research in the current environment.”

What to do now. Following the meeting, one of the presenters said the following when asked for advice for corporate treasurers looking to add yield:

  • Extending maturities modestly makes sense as we think the Fed will be on hold for a significant period.
  • Although they have tightened off the [widest spreads], things like AAA-rated ABS, CMBS, and mortgage product make sense.
  • Although riskier, we like AAA-rated CLOs and short duration investment grade corporate securities as well.

Retracement but value. At the meeting, the presenters said that although spreads had tightened significantly on high-quality corporate debt, valuations remained attractive, a point reiterated by Neuberger Berman’s fixed income strategy committee in a subsequent report. It stated that weak economic growth will create challenges for pockets of credit markets—amid strong central bank support.

  • “The combination of these two ideas leaves us focused on high-quality fixed income investments, which in our view have substantial upside even after the recent retracement in markets. A world of zero yields will ultimately drive investors toward quality investments that are supported by global central banks,” the committee wrote.

Pretty bullish. In a follow-up discussion, one of the presenters said Neuberger Berman thinks “this can be an environment where credit spreads and risk assets reach pretty bullish outcomes.”

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Risk and the Butterfly Effect on Supply Chains Amid COVID-19 

What small issue now can turn into a larger risk later? And how far away is later?
 
Can a small slipup in the supply chain—such as the inability to get a small part—create a bigger risk down the line? That example of the butterfly effect in action is what one member of NeuGroup’s Corporate Enterprise Risk Management group says he and management have been thinking about lately. The issue, like many things in business these days, is that COVID-19 adds a new and unpredictable layer to forecasting.

What small issue now can turn into a larger risk later? And how far away is later?
 
Can a small slipup in the supply chain—such as the inability to get a small part—create a bigger risk down the line? That example of the butterfly effect in action is what one member of NeuGroup’s Corporate Enterprise Risk Management group says he and management have been thinking about lately. The issue, like many things in business these days, is that COVID-19 adds a new and unpredictable layer to forecasting.
 
Scope and speed. “We’re really struggling with something happening in the supply chain” and then how big it will become and how soon it would affect the business, he said. He added that the velocity of risk, that is, how soon whatever happens in the supply chain hurts the company, is also difficult to predict in the current environment. “There are different views of this,” he said. 

  • “One group might say that if so and so happened, it would take nine months” to affect the company. “Another group may say three months.”
  • This member is also refocusing on another significant risk that has been mostly forgotten amid the pandemic: trade war. This is something that was a big supply chain concern in all of 2019, the member said, and to him, “is more serious than COVID-19.”

Risk influencer. Another topic discussed by ERM members is the idea that COVID-19 shouldn’t be considered a risk at this point, but more of a risk influencer. There are other risks that predate the pandemic and will exist going forward. The challenge now is determining how will COVID-19 impact those existing risks. 

  • One ERM member said he was trying to get management to think beyond the short term and COVID-19. As the company “gets back into the swing of things, we want management to start thinking of the long-term risks associated with COVID-19.”
  • Echoing this point, another member added that he’s also been trying to get his management to think of COVID-19 not as a “separate risk, but something that is influencing other risks.”
  • “COVID-19, yes, but let’s not forget about existing risks,” added another member.
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Investment Managers Balance Need for Liquidity and Desire for Yield 

More cash and falling interest rates have some corporates weighing a return to prime funds.

Many treasury teams have plenty of cash to invest but not many places to park it that offer attractive yields. That has some of them debating whether, when and how to add risk to their portfolios while preserving capital and liquidity. The challenge is figuring out “how to optimize cash in a very short portfolio,” as one member put it. Read on to see what others said this spring at two NeuGroup virtual meetings for investment managers.

More cash and falling interest rates have some corporates weighing a return to prime funds.

Many treasury teams have plenty of cash to invest but not many places to park it that offer attractive yields. That has some of them debating whether, when and how to add risk to their portfolios while preserving capital and liquidity. The challenge is figuring out “how to optimize cash in a very short portfolio,” as one member put it. Here’s some of what others said this spring at two NeuGroup virtual meetings for investment managers:

  • “We’re evaluating different alternatives to pick up yield without commensurate risk—there’s not a lot of low-hanging fruit,” one assistant treasurer said. “We don’t want to get too far out over our ski tips. It’s a struggle—there’s no playbook in terms of where we’re headed here.”
  • Another member asked what others are doing “to capture extra yield” given that rates at the front end of the yield curve are near zero. “I struggle with that,” responded one of his peers. “I can go out six months and get 30 basis points; is it worth it?”
  • Another investment manager said his team is “balancing liquidity for the firm with taking advantage of dislocations.”

Raising capital. The economic uncertainty created by the pandemic sent many corporations racing to the capital markets to boost liquidity by issuing debt in record amounts in March and April. One member’s company raised more than $10 billion in two bond offerings. “Now we have to manage the cash,” he said, a reality mentioned by several members whose companies had done debt deals.  

Time for prime? After huge outflows sparked by the pandemic, prime funds more recently have seen inflows and increased interest by NeuGroup members who dumped them to put cash in government and treasury money market funds (MMFs). The Federal Reserve’s backstop, the Money Market Mutual Fund facility (MMLF), gave some investors more peace of mind about credit risk.

  • One member with cash to invest after raising capital asked if any of his peers had done “anything to find yield” and whether there was an “easy yield pickup” between prime and government MMFs.
  • “We are in prime funds,” another member said later. “We find the yield benefit attractive currently and do not have operational issues supporting the NAV movements. We ‘diligence’ prime fund managers thoroughly before investing in any particular fund to ensure we are OK with their credit process.”  
  • Another member, who is not back in prime funds or LVNAV funds in Europe, is considering them now, in part because he likes their yields relative to bank deposits, saying he views the risk of deposits “the same or worse” as prime funds. He’s evaluating:
    • Performance of the fund before, during, and after “what has so far been the peak of the market dislocation.”
    • The fund’s NAV, size, any gates or fees imposed and any recapitalizations.
    • “We will also look at things like the Fed’s MMLF to see how that may help in case there is a market ‘flare-up’,” he said.

Enhanced money market fund.  One participant who is not invested in prime MMFs raised the interest of peers by describing an enhanced MMF she manages internally that allows her to “go out three years floating, 18 months fixed” and invest in BBB credits. Over a six-year period, she has outperformed prime funds by about 40 basis points. And the icing on the cake: “I don’t charge 15 basis points.”

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Aligning Risks to Inculcate Risk Awareness

How one company’s ERM team is raising risk awareness and its own profile by organizing the firm’s sprawling risks.

Sometimes the best way to add importance to your function is to look to the top. To management, that is. This was what one company’s enterprise risk management team did to accomplish two things: help organize the company’s risks and add a level of seriousness to the function itself.

The head of this ERM team recently described, at NeuGroup’s Corporate ERM Group’s annual meeting, how he and his colleagues went about this task of organizing and legitimizing.

How one company’s ERM team is raising risk awareness and its own profile by organizing the firm’s sprawling risks.

Sometimes the best way to add importance to your function is to look to the top. To management, that is. This was what one company’s enterprise risk management team did to accomplish two things: help organize the company’s risks and add a level of seriousness to the function itself.

The head of this ERM team recently described, at NeuGroup’s Corporate ERM Group’s annual meeting, how he and his colleagues went about this task of organizing and legitimizing.

  • The member said that when he took over the role of head of risk management at the company, “ERM was a board reporting exercise; it was muted.” But then the board, in its desire to improve at oversight, decided it wanted to get a better handle on the company’s risks.

Simplifying. The member said his team started with the twin goals of simplifying and optimizing. “Simplification,”  he said, was “near and dear” to his company’s heart. This involved getting a better and more holistic view of enterprise risks and applying a strategy that assigned risks to business lines or individuals and allowed a better way to share results, standardize risk scoring, clarify risk definitions and roles, and leverage technology.

Whose risk is it? One of the first issues was identifying who owned what risk. “We don’t have a lot of roles that are ‘risk managers’ or ‘risk champions.'” ERM developed a risk council, which was comprised of people from different parts of the business. The council was given heft by drafting “a leader that was high up in the organization to help navigate and get people more engaged.” There is now active engagement across the company as well as a program that is a good balance of time, commitment and resources for all involved. 

Aligning on tech. There is also good alignment on methodology and what technology to use. The member said that the technology search has been getting momentum from other functions that have an interest in ultimately sharing it. “More groups are pricking up their ears as we get closer to a tool selection,” he said. This is beneficial because it will allow ERM to share the cost with whichever function decides to partner with it.

Sharing the news on risk. The final step will be how to share any findings on risk and spread the word across the business. This includes creating a forum for problem-solving and sharing information on risk, where to focus mitigation efforts and aligning the messaging to leadership. 

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Pandemic Raises the Stakes for Banks to Double Down on Digital

Digital banking is speeding up, and banks not getting ahead of the trend will be left behind.

Now is the time for all good bankers to embrace digital banking—or risk being left behind as the pandemic accelerates a trend that was gaining momentum well before the arrival of COVID-19. Engaging with digital now is also smart because the barrier to entry is relatively small and the returns can be significant. Those were among the insights from a presentation at a recent virtual meeting of NeuGroup’s Bank Treasurers’ Peer Group.

  • “This was a shift that was going to take years, but now that timeline has sped up,” a digital banking analyst at the meeting said. “It is now compressed into a matter of months.” He also said that “social distancing will reformat bank branches,” so there will be fewer visits to brick and mortar banks, which means banks, like many companies during the pandemic, should consider shrinking their footprints.
  • “There won’t be people walking through the door,” the bank analyst said. And contactless payments will continue to grow. “Cash is one of the dirtiest things you can touch these days,” he added.

Digital banking is speeding up, and banks not getting ahead of the trend will be left behind.

Now is the time for all good bankers to embrace digital banking—or risk being left behind as the pandemic accelerates a trend that was gaining momentum well before the arrival of COVID-19. Engaging with digital now is also smart because the barrier to entry is relatively small and the returns can be significant. Those were among the insights from a presentation at a recent virtual meeting of NeuGroup’s Bank Treasurers’ Peer Group.

  • “This was a shift that was going to take years, but now that timeline has sped up,” a digital banking analyst at the meeting said. “It is now compressed into a matter of months.” He also said that “social distancing will reformat bank branches,” so there will be fewer visits to brick and mortar banks, which means banks, like many companies during the pandemic, should consider shrinking their footprints.
  • “There won’t be people walking through the door,” the bank analyst said. And contactless payments will continue to grow. “Cash is one of the dirtiest things you can touch these days,” he added.

Growing pool. Another presenter, a bank treasurer, pointed out that the pool of potential clients for digital is growing, particularly in the health care space. Doctors and dentists are increasingly processing payments digitally and want to borrow online to expand their businesses. Another reason to act now: nonbank competitors.

  • “Amazon is becoming more bank-like,” the presenter said. The online retailer is “able to use vendor information to offer loans and financing. How can we tap that?”

Bottom line. Bankers at the meeting also heard that current technology solutions help level the playing field for regional banks. “We’re not a G-SIB,” the bank treasurer said, referring to the behemoth global systemically important banks. “So, this was an opportunity to buy and get in,” he said of his own bank’s entry. There are good verticals, he added, and the volume of business could mean a big increase in bank revenue.

  • He also said that nearly 90% of all banking is now done digitally, so there’s almost no choice. “Investing in digital infrastructure is paying benefits,” so “if you’re not focusing on digital, you’re missing out.”

More takeaways:

  • Shift in customer service. The digital bank analyst said that in addition to investing in tech, banks will need to hire more customer service staff. Digital banks are seeing a “huge influx of calls into call centers during the crisis,” he said.
  • Saying no. Customers are resisting paying for certain bank services. “They don’t want to pay fees; checking fees and for other services,” the analyst said. Also, digital banks have been waiving fees for early withdrawal on CDs.” The good news is that lower overhead with digital means banks would be able to waive some fees.
  • Reality check. It’s easier said than done for regional banks to digitize their entire product set. Online deposit gathering is very rate driven, and not a reliable source of funds. Loan origination online takes work, particularly if you want to digitize the whole customer journey through the interfaces with back-end systems.
  • Keep trying. Nonetheless, some members report success, competing with the likes of Chase, which has much bigger systems overhead than almost anyone else. This also eats up a significant portion of their tech spend advantage. Being smaller and agile helps. Members also report success with targeted acquisitions.
  • No more wet signature? The digital wave also may be the end of e-signatures, the bank treasurer said. “Will the Federal Reserve keep accepting e-signatures? Banks have temporarily allowed it; will they go back? I don’t think so.”
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Lessons Learned From a Major Treasury Integration and Enhancement

Consultants and lots of testing may pay off for corporates picking a single TMS following an acquistion. 

The merger of two large technology companies resulted in a highly ambitious integration and upgrade of numerous treasury functions and systems, and provided lessons for one NeuGroup member about setting realistic goals and the value of rigorous testing.
 
TMS timing. The member, who worked through many long days during the process, walked peers through the decision-making and implementation steps. The acquired company went live on Reval just as the merger closed; the other company had put on hold upgrading its FIS systems, Quantum and Trax, in light of the anticipated acquisition.
 
Time-intensive. The first step was to decide which treasury management system (TMS) would best suit both companies. This involved:

Consultants and lots of testing may pay off for corporates picking a single TMS following an acquistion. 

The merger of two large technology companies resulted in a highly ambitious integration and upgrade of numerous treasury functions and systems, and provided lessons for one NeuGroup member about setting realistic goals and the value of rigorous testing.
 
TMS timing. The member, who worked through many long days during the process, walked peers through the decision-making and implementation steps. The acquired company went live on Reval just as the merger closed; the other company had put on hold upgrading its FIS systems, Quantum and Trax, in light of the anticipated acquisition.
 
Time-intensive. The first step was to decide which treasury management system (TMS) would best suit both companies. This involved:

  • Members from the two treasury teams traveling back and forth between offices (yes, pre-coronavirus).
  • The completion of multiple vendor demos.
  • The involvement of 30 business workstreams.
  • 70 senior management executives engaging in more than 80 meetings.
  • The IT team logging more than 600 hours on the assessment project alone. 

And the winner is… “At the end of the day, we consulted with our top management, took a very deep dive in terms of strategic attributes and requirements, and FIS bubbled to the top,” the member said. But he emphasized that this was the best choice for them based on the specifics of the company and not necessarily the best choice for others. The real takeaway was the thoroughness of the selection process.
 
More moves. In addition to consolidating the two treasury functions under a single TMS, the companies migrated service bureaus to FIS and adopted the most recent versions of Trax and Quantum. The first year was taken up with planning, including scoping the FIS project, prepping for upgrades and user-acceptance testing (UAT), testing scripts and bank engagements. The meat of the project went live in 2019, with planned enhancements to hedging accounting, eBAM and bank fee tools.
 
The company learned important lessons: 

  • Consultants add value. In addition to devoting significant in-house resources, the companies tapped consultancies. Treasury Strategies helped conduct the RFP of TMS vendors, and Deloitte and TSI Consulting were retained to help determine which technologies best suited the two treasury groups, each with different functions and approaches to employing technology.
    • The consultancies already have the test scripts and can point to the strengths and weaknesses of different vendors. “So even though you have to pay them, it saves time in the end,” the member said, adding that the extra layer of resources comes in handy when the business side doesn’t have time to do the necessary testing. 

Testing, testing, testing. The company tested its work six times over six weekends in the first half of 2019. “All the testing, all the time, did pay off,” the member said. “We found multiple problems in our practice go-lives, and those were rung out of the system. So when we went live it was almost flawless.”

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Treasury’s CECL Conundrum: How to Estimate (and Define) a Credit Loss

Treasury investment managers trying to get a better handle on FASB’s new methodology for estimating credit losses got some help this month at two NeuGroup virtual meetings. No surprise, the issue of how exactly to estimate those losses generated plenty of interest. 

  • One of the meetings featured a presentation from EY that included the slide below. It lays out three criteria used to adjust historical loss information to develop a loss estimate. EY’s presenter said that coming up with a “reasonable and supportable forecast” is the tricky part, especially given the uncertainty created by the pandemic.
  • One member commented that while the slide is simple, “the definition of a credit loss is where I have an issue.” Like other members, he underscored the difficulty of determining what portion of an unrealized loss is related to credit as opposed to other factors, including liquidity. “I have a problem actually calculating that,” he said.
  • EY’s presentation made the point that CECL requires “the use of more judgment and is expected to increase earnings volatility.”

Treasury investment managers trying to get a better handle on FASB’s new methodology for estimating credit losses got some help this month at two NeuGroup virtual meetings. No surprise, the issue of how exactly to estimate those losses generated plenty of interest. 

  • One of the meetings featured a presentation from EY that included the slide below. It lays out three criteria used to adjust historical loss information to develop a loss estimate. EY’s presenter said that coming up with a “reasonable and supportable forecast” is the tricky part, especially given the uncertainty created by the pandemic.
  • One member commented that while the slide is simple, “the definition of a credit loss is where I have an issue.” Like other members, he underscored the difficulty of determining what portion of an unrealized loss is related to credit as opposed to other factors, including liquidity. “I have a problem actually calculating that,” he said.
  • EY’s presentation made the point that CECL requires “the use of more judgment and is expected to increase earnings volatility.”

Models. One EY presenter said the length of time the CECL process takes depends in part on what model corporates use to estimate losses. At another meeting, presenters from Aladdin—which offers risk management software tools and is owned by BlackRock—described three sources for coming up with “CECL numbers.” They are:

  1. Asset Managers. Aladdin advises asking if money managers are able to provide CECL- compliant numbers and to consider whether differences in loss modeling approaches between managers are acceptable. One member got silence after asking peers at the meeting if they had had any luck getting CECL information from external asset managers. Another member reported no luck after asking Clearwater.
  2. Internal Processes. Determine whether you have internal models that you can use as-is or if you need to make adjustments. And do you have in-house expertise for all asset classes? Are all the right teams involved?
  3. Vendor Solutions. Aladdin, which offers CECL modelling services to corporates, recommends assessing the quality of a firm’s asset coverage, asking whether it supports end-to-end workflow, including integration with accounting platforms, and asking whether the corporate can selectively override the vendor’s model settings if treasury has a different view.
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Treasurers Are Making the Most of Zoom and Microsoft Teams

The buzz: Zoom’s security improves, Teams may help IT governance, and more access to Bloomberg.
 
Virtual meetings have been a godsend to corporate treasury executives sheltering in place, despite occasional glitches. In a recent Zoom meeting, NeuGroup members exchanged valuable tips about making their virtual interactions more efficient and effective.
 
Kudos for Teams. A few participants using Microsoft Teams while working from home heaped praise on the solution. Responding to requests to elaborate, one member called it “absolutely superb for team working,” because it allows audio and video calls but also enables colleagues to work simultaneously on Excel spreadsheets and other Microsoft 365 applications.

The buzz: Zoom’s security improves, Teams may help IT governance, and more access to Bloomberg.
 
Virtual meetings have been a godsend to corporate treasury executives sheltering in place, despite occasional glitches. In a recent Zoom meeting, NeuGroup members exchanged valuable tips about making their virtual interactions more efficient and effective.
 
Kudos for Teams. A few participants using Microsoft Teams while working from home heaped praise on the solution. Responding to requests to elaborate, one member called it “absolutely superb for team working,” because it allows audio and video calls but also enables colleagues to work simultaneously on Excel spreadsheets and other Microsoft 365 applications.

  • “And there’s a very efficient follow-up mechanism—give someone a task, and they automatically get emails until they’ve completed it,” he said. 

Curbing shadow IT. Free technologies such as Microsoft Teams can fall outside a company’s IT toolkit and governance framework—so-called “shadow IT.” A cybersecurity expert at the meeting said Teams runs on a Microsoft SharePoint backbone, so the corporate IT people supporting SharePoint can control access.

  • “They can impose some degree of governance on the Teams environment,” he said. 

Zoom news. Zoom remains the go-to virtual meeting service but raises security concerns, such as “Zoom bombings” when hackers disrupt confidential meetings.

  • The April 27 release of Zoom 5.0, the expert said, provides significant security enhancements.
  • “Don’t be surprised in the next weeks or months when you see a very aggressive advertising campaign by Microsoft to ditch Zoom and get on to Teams,” the security expert said. 

Bloomberg: additional access. There is no need for one person to take on all Bloomberg terminal responsibilities for the group. A member noted that Bloomberg’s Disaster Recovery Services (DRS) allows multiple users to access a terminal subscription from different computers—one at a time, similar to an actual terminal.  

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ESG: A Leading Indicator of Quality for Federated Hermes

The asset manager believes an active ownership approach to responsible investing is how to navigate this market.

“ESG Investing Shines in Market Turmoil, With Help From Big Tech,” shouted a headline in the Wall Street Journal this week. The story reports that investors put a record $12 billion into ESG funds in the first four months of 2020, according to Morningstar Direct, more than double the same period last year. And more than 70% of ESG funds across all asset classes performed better than their counterparts during the first four months of the year.

The outperformance of many ESG funds during the pandemic is helping change the minds of investors who thought they had to sacrifice returns to invest responsibly, said Martin Jarzebowski, director of responsible investing at Federated Hermes, speaking at a roundtable this week. He expects the interest in sustainable investing to grow as more investors see the value in screening for ESG factors. 

The asset manager believes an active ownership approach to responsible investing is how to navigate this market.

“ESG Investing Shines in Market Turmoil, With Help From Big Tech,” shouted a headline in the Wall Street Journal this week. The story reports that investors put a record $12 billion into ESG funds in the first four months of 2020, according to Morningstar Direct, more than double the same period last year. And more than 70% of ESG funds across all asset classes performed better than their counterparts during the first four months of the year.

The outperformance of many ESG funds during the pandemic is helping change the minds of investors who thought they had to sacrifice returns to invest responsibly, said Martin Jarzebowski, director of responsible investing at Federated Hermes, speaking at a roundtable this week. He expects the interest in sustainable investing to grow as more investors see the value in screening for ESG factors. 

  • “There is a correlation between ESG leaders and lower volatility and more consistent profits,” he said. “ESG is a new quality factor—ESG leaders are additive to performance.”

Federated Hermes is doing its part to spread the word and get more businesses to engage in sustainability-focused risk management during the crisis and beyond. The company, a pioneer in active engagement, has pushed “stewardship” for investment managers for well over a decade and has a dedicated team, called EOS, that actively engages directly with company boards and executives. 

  • “EOS’s mission is to engage in a collaborative dialogue with corporate issuers to better understand material ESG risks and advocate for positive change,” Mr. Jarzebowski wrote in a recent blog post. “These dedicated engagers are ESG subject-matter experts who complement the fundamental research of Federated Hermes investment teams across all asset classes.”

The firm’s deep understanding of financially relevant ESG factors helps Federated Hermes’ global portfolio managers to assess the underlying quality of the companies in which they invest. And that, Mr. Jarzebowski argues, gives the company an edge against passive investing, which does not take the same approach.   

  • “By incorporating forward-looking ESG insights into our active investment process, we think we can better assess where the puck is headed relative to passive indexes, which are mostly judging quality through a rearview mirror,” Mr. Jarzebowski wrote.

Federated Hermes will share its insights on sustainable investing and how ESG can fit your company’s strategy in a webinar hosted by NeuGroup on June 9, 2020. Register for it here

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Pandemic Pushes Some Companies Away From Checks, Toward Real-Time Payments

U.S. Bank sees more clients opting for RTP in a bid to gain control and improve forecasting.

The COVID-19 pandemic appears to be persuading more companies to consider abandoning paper checks and start using electronic payment rails to pay bills — even though many corporate treasurers do not view speed as a major incentive to switch. That insight emerged during a presentation by U.S. Bank at a recent NeuGroup meeting it sponsored. 
 
Old, suboptimal habits in the US. Here’s some context for where US business stands now: Companies with $1 billion or more in revenue still make 39 percent of payments with checks, and the figure is higher for smaller companies, according to the Association of Financial Professionals’ 2020 Payments Fraud and Control Survey.

  • Among payment methods, checks are the most susceptible to fraud.
  • Forty-four other countries already have instant, electronic payment methods. 

U.S. Bank sees more clients opting for RTP in a bid to gain control and improve forecasting.

The COVID-19 pandemic appears to be persuading more companies to consider abandoning paper checks and start using electronic payment rails to pay bills — even though many corporate treasurers do not view speed as a major incentive to switch. That insight emerged during a presentation by U.S. Bank at a recent NeuGroup meeting it sponsored. 
 
Old, suboptimal habits in the US. Here’s some context for where US business stands now: Companies with $1 billion or more in revenue still make 39 percent of payments with checks, and the figure is higher for smaller companies, according to the Association of Financial Professionals’ 2020 Payments Fraud and Control Survey.

  • Among payment methods, checks are the most susceptible to fraud.
  • Forty-four other countries already have instant, electronic payment methods. 

The new normal. With most corporate mailrooms functioning minimally, businesses are trying alternatives to checks, including a system from The Clearing House called Real Time Payment (RTP), which U.S. Bank trailblazed as one of the earliest adopters.

  • “Over the last month we’ve seen the greatest number of clients opting for RTP,” said Anuradha Somani, a payment solutions executive in global treasury management at U.S. Bank. 
  • The timing is ripe, she said, since electronic payment rails have emerged that enable transactions to carry much more data, improving working capital, security, and analytics such as cash-flow forecasting.  

“Just in time” payments. Meeting participants agreed that payment speed was not the only priority, and Ms. Somani said that RTP’s key improvement is flexibility and control – meaning, no longer initiating a payment today and having to wait one or two days for settlement.

  • “It’s the ability to control payments at the precise time you want,” she said, noting that such control and the irrevocability of incoming RTPs, available 24/7/365, can dramatically improve cash forecasting. 
  • The treasurer of a major industrial company said, “What intrigues me is if I can have better information, and there’s something truly analytical about this to help enhance forecasting abilities.”

Data continuity: John Melvin, working capital consultant at U.S. Bank, called RTP “the biggest payments infrastructure change in the last 40 years.”  That change is the extensive data that transactions carry through the RTP network of connected banks.

Data-light ACH payments often receive remittance information through outside methods such as email or fax, which often requires searching for a payer’s identity in order to post the transaction. RTP’s request for payment (RFP) function instead allows billers to alert customers that payments are due by sending a message containing all the relevant biller information, facilitating reconciliation.

  • Because RFP-prompted payments require payers’ approval, they dramatically reduce fraud, and “models can be created to reconcile payments, eliminating the need for shared service centers purposed for reconciliation,” Melvin said.

While the pandemic is likely to be one of the most challenging crises businesses will ever face, proactively taking stock of payments strategy can help plan for the future, according to U.S. Bank. And it says that no matter what the initial driver is – the pandemic, speed, data, superior control or the ability to forecast better, faster payments are here to stay. 

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ERM’s Profile Rises as Boards Focus on Risk Oversight Role

Corporate boards are taking their oversight mandate more seriously; that’s why they need ERM.

Today’s corporate boards need to fully understand the risks a company faces as well as their relevance to its strategy and risk appetite. That’s been the case since 2009 when the SEC started requiring disclosure of a board’s role in risk oversight, including the qualifications of its members and a description of how the board administers its oversight function.

  • The risks revealed by COVID-19 make this a good time to probe how enterprise risk managers fit into this picture.

Corporate boards are taking their oversight mandate more seriously; that’s why they need ERM.

Today’s corporate boards need to fully understand the risks a company faces as well as their relevance to its strategy and risk appetite. That’s been the case since 2009 when the SEC started requiring disclosure of a board’s role in risk oversight, including the qualifications of its members and a description of how the board administers its oversight function.

  • The risks revealed by COVID-19 make this a good time to probe how enterprise risk managers fit into this picture.

ERM’s role. ERM can help the board fulfill its mandate and gain satisfaction that the right risks are being addressed. That was among the takeaways from a discussion led by Dr. Paul Walker, executive director of the Center for Excellence in ERM at St. John’s University. It is the ERM function that can collate all the risks of the company and drill down to the most important ones. 

  • Dr. Walker added that practitioners can provide the satisfaction the board is looking for by benchmarking with peers and uncovering possible risks through conversations and other interactions with company managers. This risk discovery process helps ERM to map the connected risks of the company. Dr. Walker said ERMs should take those connected risks and “boil them down to a story.” It’s more art than science, he admitted, but it can be done. 

Ultimately, Dr. Walker said, these efforts will further arm ERM with the right answer when the board eventually asks: “How do we know we’re looking at the right set of risks?”
 
Here are some of Dr. Walker’s recommendations for engaging with the board:

  • Know the laws. Corporations have a growing list of requirements on risk and governance best practices. This is a chance to show your risk expertise.
  • Don’t go overboard. Some ERMs can give too much information or create big presentations; boards and presenters can end up in the weeds. The truth of the matter is, ERM will probably get 15 minutes in front of the board or even a subcommittee (i.e., risk committee), so make it concise.
  • Whisper campaign. With that brief amount of face time, try sharing any other risks concerns with colleagues. If those colleagues are going to report to the board, whether they be audit or other compliance functions, “whispering” the issues to them can help. “Maybe they’ll mention it to the board in their report,” Dr. Walker said.
  • Know your audience. Dr. Walker said getting to know the board, what they read, what they want or expect, can be especially useful. Who likes data? Who likes reports? Who likes visuals? This will require a bit of sleuthing on the part of ERM.
  • Ahead of the curve. More gumshoeing here: Stay ahead of the board’s expectations and questions.

In the end, Dr. Walker said, “Don’t give vanilla if they want chocolate chip cookie dough.”

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The Challenges for Corporates of Nonbank Payments

Treasurers in Asia discuss why regulation, technology and business models complicate nonbank payments in the B2C space.

The brave new world of nonbank payments presents both challenges and opportunities for finance teams at multinationals that have to collect cash from open platforms, a topic that garnered attention at a recent meeting of NeuGroup treasurers in Asia. 

Key issues. In the business-to-consumer (B2C) arena, the widespread use of tech intermediaries such as PayPal, WeChat and Alipay poses a problem for corporates because these open platforms are not meeting the typical segregation of duties and reconciliation protocols required by audits. The only options involve complex manual processes.

Treasurers in Asia discuss why regulation, technology and business models complicate nonbank payments in the B2C space.

The brave new world of nonbank payments presents both challenges and opportunities for finance teams at multinationals that have to collect cash from open platforms, a topic that garnered attention at a recent meeting of NeuGroup treasurers in Asia. 

Key issues. In the business-to-consumer (B2C) arena, the widespread use of tech intermediaries such as PayPal, WeChat and Alipay poses a problem for corporates because these open platforms are not meeting the typical segregation of duties and reconciliation protocols required by audits. The only options involve complex manual processes.

B2B dynamics. In the business-to-business space (B2B), payment service intermediaries such as TraxPay have emerged with offerings that present corporates with risks as well as opportunities, such as the ability to hold data in the cloud. Regulation, technology and business models also complicate the B2B payment landscape. The hope is that in the long run, platforms become more sophisticated. For now, there’s no immediate relief, a sore point for corporates.

Fintech and the trust Issue. Reliance on intermediaries in the B2B payments area raises a related issue facing finance teams at multinationals: How much do they trust fintechs? When it comes to payments, corporates trust banks far more than fintechs or ideas like crowdfunding. The issue is especially relevant when it comes to payment aggregators like PayPal, Stripe and Square. Corporates have to weigh the popularity of these systems and their ability to provide a neutral layer between them and a bank against the risks of giving data to businesses that don’t have to comply with bank regulations. The dependence of these systems on APIs also presents risks.

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Crisis Forces Consideration of Unwinding Cash-Flow Hedges

The COVID-19 crisis has reduced exposures to a point where for many companies those hedges may not be needed anymore. Time to unwind?

If you’re planning on unwinding a cash-flow hedge, there are many things to think about before you do. Determining when and why to unwind, as well as how to view the transaction’s cost benefits, and what counterparty to use, are just a few of the factors to consider. This was the topic of discussion among NeuGroup FX Managers’ Peer Group 1 and 2 members in a recent virtual “office hour” meeting, which led to some interesting takeaways.

  • The “No Choice” camp. With hedge accounting being a big driver for most members, keeping hedges on the books when exposures are materially reduced – as they unarguably have for many sectors in the COVID-19 crisis – is not an option as you’ll be over-hedged. For some companies, the lost sales in the crisis might be made up for in a later quarter, but for travel and service business, it is unlikely the rebound will make up for all of it.

 

The COVID-19 crisis has reduced exposures to a point where for many companies those hedges may not be needed anymore. Time to unwind?

If you’re planning on unwinding a cash-flow hedge, there are many things to think about before you do. Determining when and why to unwind, as well as how to view the transaction’s cost benefits, and what counterparty to use, are just a few of the factors to consider. This was the topic of discussion among NeuGroup FX Managers’ Peer Group 1 and 2 members in a recent virtual “office hour” meeting, which led to some interesting takeaways.

  • The “No Choice” camp. With hedge accounting being a big driver for most members, keeping hedges on the books when exposures are materially reduced – as they unarguably have for many sectors in the COVID-19 crisis – is not an option as you’ll be over-hedged. For some companies, the lost sales in the crisis might be made up for in a later quarter, but for travel and service business, it is unlikely the rebound will make up for all of it.
  • Monetizing in-the-money hedges. If hedge accounting is a driver to unwind hedges that are in the money, the extra liquidity is welcome, nevertheless. But ITM hedges are also an opportunity to access additional liquidity, even if the hedges are still “good.” By unwinding them – cashing in – you get the extra cash immediately and if needed, you can enter into a new set of hedges for the remaining exposure at prevailing market rates.
  • Do you need to take the P/L right away? Talk to your hedge accounting people to see whether the gains/losses on the hedges are material enough to require that they be recognized in the current quarter or if they can be released in the quarter they otherwise would have occurred.
  • Do you need to sell the hedge? And if so, to the same counterparty? Not necessarily. If you don’t feel the pricing offered is attractive enough from the original counterparty, you can bid it out competitively if your trading processes permit. Or, you can dedesignate the hedge and enter into an offsetting cash-flow hedge for the “over-hedged” part for a neutral outcome.
  • Can you offset it on the balance hedge side instead? None of the members on the call said they could. In one case it was because of systems that prevented a cash-flow hedge to be “transferred” to the balance-sheet program. So instead, the cash-flow hedge needs to be dedesignated and an offsetting hedge to be put in place the same day.
  • How much extra work is it? Unwinding cross-currency interest rate swaps and other complex or multi-tranche derivatives can mean a lot of extra trading and processing work for the treasury team. That is less likely for relatively simple FX derivatives, most of which can likely be pushed through the regular trading process but will probably incur some more “manual” (spreadsheet) valuation calculations. This should take care of most of the push back from the treasury operations and accounting side.
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Cyberattacks: Post-Pandemic May Be Worse Than the Lockdown

Best practices pre-pandemic have become even more important as the economy reopens.

A top treasury concern for years, cyberattacks ramped up following the sudden transition to the work-from-home regimen prompted by the pandemic. They’ll likely ramp up even further when the economy begins opening up.

That was among the takeaways from a session on cybersecurity at a recent virtual NeuGroup meeting headed by Jenny Menna, deputy chief information security officer at U.S. Bank, and Chris Moschovitis, CEO of technology consultancy tmg-emedia.

Best practices pre-pandemic have become even more important as the economy reopens. 

A top treasury concern for years, cyberattacks ramped up following the sudden transition to the work-from-home regimen prompted by the pandemic. They’ll likely ramp up even further when the economy begins opening up. 

  • That was among the takeaways from a session on cybersecurity at a recent virtual NeuGroup meeting headed by Jenny Menna, deputy chief information security officer at U.S. Bank, and Chris Moschovitis, CEO of technology consultancy tmg-emedia. Below are more insights.

Beware of stuffed animals. When fear struck that the COVID-19 was in the US and spreading, the bad guys—criminals and state actors—saw opportunity. 

  • Almost immediately there was a jump in phishing emails that seek to exploit fears about the virus to lure employees into revealing private information. 
  • Malicious apps professing to come from key resources of information, and even stuffed animals with accompanying thumb drives arriving by mail, are designed to infect home computers. 

Don’t forget to patch. These best practices and defensive measures have become even more important:

  • Install the latest software patches on phones, personal computers and work laptops to guard against evolving malware.
  • Assume that requests from higher-ups, especially from a personal email account, to send money are bogus.
  • Don’t use personal email accounts for business. Don’t email company documents to a personal email account.
  • Home printers may be compromised; avoid attaching work laptops to them.
  • Change up Zoom and other virtual meeting-room passwords to avoid unwanted guests. 
  • Alert employees to the latest phishing scams and cyberattacks. The Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency (CISA) and the FBI regularly update the latest developments. 

At the corporate level. Understand connections to vendors and other third parties, their cybersecurity policies, and your company’s dependency on them. 

  • Discuss in advance with outside counsel and the FBI how to respond to a ransomware attack, Ms. Menna said. Several large corporations have been hit recently.  

The internal threat. Mr. Moschovitis noted that 30% of cybercrimes are conducted by internal agents who understand how to bypass an institution’s controls.

  • Without any physical controls or eye-to-eye employee interactions that may provide hints of bad intent, any company-related queries by an employee outside his or her direct responsibilities or otherwise odd behavior should be escalated to HR.  

Prep now. A meeting participant mentioned fears that reopening the economy will accompany a flurry of activity fueling even more cyberattacks. 

  • Mr. Moschovitis agreed. The flood of overdue invoices and other documents may be overwhelming to process, creating opportunity for cyberattacks. “Our advice remains consistent: The minute something becomes abnormal, pick up the phone” to double-check, he said.
  • Many employees will continue working from home, so policies such as how the division of labor will occur must be developed. “Now is the time to have these conversations,” he said. “And it will involve having a lot of stakeholders around the table—the COO, CFO, IT, cybersecurity. All these folks need to be in the room to have this conversation.”
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Pandemic Reveals the Haves and the Have Nots: Asia Report

Examples of the varying effects lockdowns had on businesses, and how they’ve responded.

The coronavirus pandemic has provided more proof that crises affect some companies far differently than others. The reasons include what industry a company is in, its business model and how much cash it has on hand—the haves and the have-nots.

Perhaps less expected is that business units within the same company may weather a storm better than others. All this and more emerged in discussions among finance practitioners in Asia participating in a NeuGroup virtual meeting in mid-April.

Examples of the varying effects lockdowns had on businesses, and how they’ve responded.

The coronavirus pandemic has provided more proof that crises affect some companies far differently than others. The reasons include what industry a company is in, its business model and how much cash it has on hand—the haves and the have-nots.

Perhaps less expected is that business units within the same company may weather a storm better than others. All this and more emerged in discussions among finance practitioners in Asia participating in a NeuGroup virtual meeting in mid-April. Here are some takeaways:

  • Members who work for cash-rich companies expressed interest in making strategic acquisitions as asset prices declined in response to the pandemic. Potential deals in this environment must be evaluated not only based on price but the degree to which an acquisition will deplete the buyer’s cash pile.
  • Asia business units planning to provide funds to parent companies had different experiences. For at least one company, the process was relatively easy, thanks to its strong relationships with local partners. Others faced difficulties getting approvals from external auditors and clearance from tax authorities.
  • Companies without significant cash surpluses have made significant cuts in capital expenditures and discretionary expenses. They have also drawn down or increased bank lines of credit.
  • A member from a consumer goods company described declining sales of its products that are distributed to restaurants but solid sales of products consumed at home and purchased in convenience stores.
  • Those drugs requiring face-to-face-meetings between pharmaceutical salespeople and health care providers are not selling as well as other drugs companies produce.
  • Lockdowns—no surprise—put a huge dent in sales of companies that rely on foot traffic.
  • Companies with business models that have easily transitioned to remote work such as consulting are doing well and, in some cases, have seen an uptick in business.
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Seeking Incremental Credit? Refinancing Loans? Expect Hurdles

Insights from U.S. Bank on current market dynamics as corporates shore up their access to credit.

Defensive drawdowns of revolving credit lines have subsided and banks are selectively entertaining requests for new, incremental loans as well as refinancings of existing credit lines. But borrowers can expect some hoops, hurdles and different market dynamics. That was among the takeaways from a presentation by U.S. Bank, sponsor of a recent virtual NeuGroup meeting for treasurers of large-cap companies. Here are highlights:

  • Members heard that in the wake of the pandemic, U.S. Bank had received more than 150 client requests for incremental liquidity lines—both new revolving and term—and to date had closed over 70 facilities with many more in the works as of April 23.

Insights from U.S. Bank on current market dynamics as corporates shore up their access to credit.

Defensive drawdowns of revolving credit lines have subsided and banks are selectively entertaining requests for new, incremental loans as well as refinancings of existing credit lines. But borrowers can expect some hoops, hurdles and different market dynamics. That was among the takeaways from a presentation by U.S. Bank, sponsor of a recent virtual NeuGroup meeting for treasurers of large-cap companies. Here are highlights:

  • Members heard that in the wake of the pandemic, U.S. Bank had received more than 150 client requests for incremental liquidity lines—both new revolving and term—and to date had closed over 70 facilities with many more in the works as of April 23.

Refinancing season begins. U.S. Bank is working with two large borrowers rated single-A or higher that are rolling over their 364-day tranches but leaving five-year portions alone, rather than pushing them out a year as they once would have.

  • These borrowers are offering upfront fees. “They’re trying to keep the integrity of the existing deal but recognizing that banks are under strain and pricing is likely to go up, so they’re offering the fees to bridge that gap,” said Jeff Duncan, managing director of loan capital markets at U.S. Bank.
  • Covenant waivers and amendments are likely to increase, he said, as companies digest their first quarter earnings and look ahead.

Loan split stays. The structure splitting loans into 364-day and five-year portions will likely continue, despite today’s challenges in rolling them over, because big companies can raise sufficient liquidity while keeping the bank group at a manageable number, Mr. Duncan said. Also:

  • A bank refusing to refinance the shorter piece while holding onto the five-year is effectively shutting off ancillary business. This gives borrowers leverage.
  • One member asked if seeking an incremental 364-day now would jeopardize refinancing an existing one in August. Ask the lead banks about syndicate capacity well in advance, said Jeff Stuart, U.S. Bank’s head of capital markets.
  • Coupling incremental loans with a bond deal incentivizes lenders with fees and reassures banks that the facility is temporary.

Big bank hiatus. A member looking for an unfunded revolver said the largest US banks were the least likely to step up, while European lenders, large US regionals, and Japanese banks even increased their allocations.

Prepare for the sprint. Given pricing volatility, U.S. Bank has led syndications that, from initial discussions to closing, have wrapped up in two weeks instead of the typical five or six, thereby meeting corporate clients’ accelerated funding needs.

Floors required, please. Libor floors on bank loans, guaranteeing a minimum yield, are becoming increasingly popular, most at 75 basis points and some at 100 basis points, Mr. Duncan said, and some banks are requiring floors in order to commit to incremental facilities.

  • “We’re seeing them more frequently at launch to take that issue off the table and maximize the number of participants getting into deals,” he said.

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Aligning on the Meaning of Risk Helps Companies Focus on It

The word risk means different things to different people; how can you agree on the definition across an organization?

“What exactly does risk mean to you?” one member asked during a recent virtual meeting of NeuGroup’s Corporate Enterprise Risk Management Group. The question was a bit rhetorical—the member answered it himself by saying risk means different things to different people. There is good risk, bad risk, strategic risk, operational risk and catastrophic risk.

  • This was true, said one member of an ERM team presenting to the group on risk alignment at her company. She said, “Initial definitions are easier to get consensus” on; but she observed that as you move away from those definitions and go out to the businesses, “That’s where we see more variation of risk.”

The word risk means different things to different people; how can you agree on the definition across an organization?

“What exactly does risk mean to you?” one member asked during a recent virtual meeting of NeuGroup’s Corporate Enterprise Risk Management Group. The question was a bit rhetorical—the member answered it himself by saying risk means different things to different people. There is good risk, bad risk, strategic risk, operational risk and catastrophic risk.

  • This was true, said one member of an ERM team presenting to the group on risk alignment at her company. She said, “Initial definitions are easier to get consensus” on; but she observed that as you move away from those definitions and go out to the businesses, “That’s where we see more variation of risk.”

Risk council. Another ERM member leading that alignment effort said that risk definitions need to be made uniform and that those definitions should be decided upon company-wide. To do it, ERM created a risk council by recruiting leaders from the regulatory side of the business, HR, accounting, R&D and the business units to help the broader company focus on ERM.

  • He added that since ERM reports into finance, he made sure not to “overload finance on the council.” The group sought to determine “where we were different and where were we the same,” when it came to nailing down the meaning of risk in different areas of the business.

No appetite for “appetite.” This member said the process was not straightforward because of the number of different personalities and agendas. “I expected we would stumble on some definitions,” he said, adding that, for instance, ERM’s “view of the world may be influenced by board personality.” Others might be influenced by other necessities; that means “there are words some people want to use and others they don’t want to use.”

  • For example, the company’s legal counsel didn’t like the term “risk appetite” and said the company had zero appetite for risk. He wanted to call it something else. Others saw it differently, which made it “challenging in some naming conventions.”

Higher profile. Nonetheless, this effort helped ERM “level set” what risk meant, the member said. The group then presented refined risk definitions to the board to get agreement. “The result has been active engagement.”

  • Overall, this and other efforts have raised the profile of ERM within the company. When he first took the position, ERM “was a board-reporting exercise; ERM was muted.” But now with the alignment project, the function is “now more of a presence.”

This has meant building more risk accountability and finding the right risk owners across the company. “The more we can get involved with individual regions or business, the more we can inculcate risk into the organization,” he said.

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COVID-19 Puts Buyback Programs on Hold—but Not for Everybody

Some companies are keeping share repurchases programs going while many others suspend them.

We are continuing to buy back stock,” said the treasurer of a cash-rich technology company in mid-March, speaking to peers during a virtual NeuGroup meeting of mega-cap businesses. “We haven’t pulled share repurchases either,” said the treasurer of a large health care company with a very healthy balance sheet and strong cash flow.

  • Later that day, a third treasurer—working from home—told the group that investor Bill Ackman was feeding market panic during an interview with CNBC. In it, he urged US companies to stop their buyback programs because “hell is coming.”

Some companies are keeping share repurchases programs going while many others suspend them.

We are continuing to buy back stock,” said the treasurer of a cash-rich technology company in mid-March, speaking to peers during a virtual NeuGroup meeting of mega-cap businesses. “We haven’t pulled share repurchases either,” said the treasurer of a large health care company with a very healthy balance sheet and strong cash flow.

  • Later that day, a third treasurer told the group that investor Bill Ackman was feeding market panic during an interview with CNBC. In it, he urged US companies to stop their buyback programs because “hell is coming.”

Suspending, scaling. In the month and a half since that day, as the coronavirus effectively shut down the US economy, many companies—including some NeuGroup members—have suspended share repurchase programs because of uncertainty about future cash flows, among other reasons.

  • One example: A consumer goods company that reported outstanding quarterly earnings in late April suspended its buyback program and withdrew guidance for 2020. The treasurer said the reasons include concerns about raw materials and—if infection rates spike—manufacturing sites. As a result, the company is “managing liquidity with a very different focus,” he said.
  • The capital markets manager of another large-cap company said, “We have a small buyback program in place and we’ve slowed it down over the last few weeks,” adding, “We’re waiting to get direction; the program is not cancelled but scaled back.”
  • A member who works at a company that began a repurchase program in late 2019 noted that buybacks in the current political and economic climate are “being frowned upon in some spaces.” He said his company may be scaling back on share repurchases and asked what peers are doing.
  • “We discontinued our share buyback program,” one treasurer said. “We think the world will understand.”

Not stopping now. The treasurer of the health care business said in the days leading up to a recent bond offering he was asked several times by investors if the company planned to stop buying back its stock. The answer—no—did not keep the deal from being a complete success, thanks to the company’s strong capital position, among other factors.

  • This company plans for its own “rainy day,” he said, adding it would undoubtedly pause the share repurchase program if it ever faced liquidity issues or needed government assistance—not its current situation.
  • The company, he said, will stick to its approach to repurchases, which includes buying when the stock trades below what leadership believes is the intrinsic value of the company.

A framework for buybacks. Back in 2018, as buybacks surged following US tax reform and the repatriation of assets, one NeuGroup member shared his three-point approach to designing a framework for repurchases. It involves:

  1. Achieving stated capital structure goals.
  2. Updating the valuation thesis regularly, validating repurchase decisions through retrospective analysis and adjusting for market conditions, changing business conditions or other factors.
  3. Execution: taking advantage of multiple buyback tools to manage through open markets and blackouts, while considering volatility, ADTV, VWAP and other factors to measure program success, bank execution and other factors.
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Time-Consuming and Intense: Due Diligence for Today’s Debt Deals

Corporates tapping the bond market should expect an in-depth, rigorous look at COVID-19 impacts.

Seller beware: Corporates selling bonds to bolster their liquidity this spring should expect a rigorous due diligence experience involving auditors, underwriters, internal counsel and external capital markets lawyers, among others.

  • The once seemingly perfunctory process for investment-grade issuers has become an intensive, multi-day, near round-the-clock affair, as banks and investors scrutinize issuer disclosures about COVID-19’s near- and long-term business impact.

Corporates tapping the bond market should expect an in-depth, rigorous look at COVID-19 impacts.
 
Seller beware: Corporates selling bonds to bolster their liquidity this spring should expect a rigorous due diligence experience involving auditors, underwriters, internal counsel and external capital markets lawyers, among others.

  • The once seemingly perfunctory process for investment-grade issuers has become an intensive, multi-day, near round-the-clock affair, as banks and investors scrutinize issuer disclosures about COVID-19’s near- and long-term business impact.

Be prepared. Once generic diligence questions are now very specific, even referencing unofficial public documents and news sources indicating business slowing that capital markets lawyers would never have used pre-pandemic.
“Things are happening so quickly, it almost gives us no choice,” Keith DeLeon, counsel at Sidley Austin LLP, told NeuGroup members at recent virtual meeting of treasurers at large-cap companies.

Extra time. In normal times, companies often issue debt immediately following Q1 financial filings, sometimes just before and sometimes on the same day. But now underwriters want more time to review.

  • “For first quarter and probably through the rest of 2020, underwriters are likely to recommend conducting the business and auditor calls a day or two following the filing of the 10-Q,” said Chris Cicoletti, a managing director of debt capital markets at US. Bank, which sponsored the meeting.
  • But don’t wait too long. Pre-coronavirus, offerings could take place weeks after the public filing, using a “bring-down call” with investors to fill in the gap. Few companies had filed 10-Qs so it’s hard to know, but that period may have shrunk to just a few days, Mr. DeLeon said, adding, “Diligence and disclosure, which clearly go hand-in-hand, go stale a lot faster.”

Groundhog Day. Mr. DeLeon observed that a current trend in the market involves diligence being refreshed overnight, because of new developments in between serial go/no-go calls.

  • “Deals are ready to go from a documentation perspective, there is a go/no-go call or market update that results in a decision to stand down, the diligence and disclosure are refreshed and the cycle repeats day after day until the deal gets done or stands down indefinitely,” he said.

Ready the big guns. Due diligence calls may once have been handled by treasury’s head of funding or investor relations. “It’s no longer delegated but handled by the C-suite officers,” Mr. DeLeon said.

  • Prepare for more underwriter questions. Full due diligence sessions are conducted with lead underwriters; now, co-managers and “passives” want the leads to ask more questions about coronavirus impact during a second call where the company updates underwriters on what may have changed since the first call.
  • “We don’t ask issuers to go through the entire diligence agenda again, but we do go through the biggest ticket items,” and that means the COVID-19 impact, Mr. DeLeon said.
  • Current practice suggests providing as much quantitative disclosure regarding the impacts of COVID-19 as possible, and other carefully worded qualitative disclosures regarding the actual and potential impacts of the pandemic in the risk factor and recent developments sections of offering and other disclosure documents.

Speed is of the essence. Quickly drafting disclosures as well as efficient mechanics, such as printing the offering documents, are vital to take advantage of optimal windows to issue bonds. The difference in pricing over just a few hours can be as much as half a percentage point given current intraday volatility. “Things like printer turnaround time have become critical in the current market given the often tight windows for optimal deal execution,” Mr. DeLeon noted.

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Keeping the Company Strong after the Initial Hit

Companies have survived the early impact of COVID-19; now the focus is keeping the concern going.

There is a lot of talk in treasury and risk circles lately about business continuity plans or BCPs. The talk is mainly around whether the plans worked and what lessons have been learned in the latest crisis. But there has not been as much talk about business resiliency, that is, whether the company, now in the throes of major health crisis, can hang in there and navigate ups and down. 

A recent Deloitte article on resiliency stressed that business leaders must be “vigilantly focused on protecting financial performance during and through the crisis … and making hard, fact-based decisions.” But what is also important, particularly in this crisis where lockdowns and employee isolation are the norm, is communications with those employees, keeping them engaged to help keep the company moving forward.

Companies have survived the early impact of COVID-19; now the focus is keeping the concern going.

There is a lot of talk in treasury and risk circles lately about business continuity plans or BCPs. The talk is mainly around whether the plans worked and what lessons have been learned in the latest crisis. But there has not been as much talk about business resiliency, that is, whether the company, now in the throes of major health crisis, can hang in there and navigate ups and down. 

A recent Deloitte article on resiliency stressed that business leaders must be “vigilantly focused on protecting financial performance during and through the crisis … and making hard, fact-based decisions.” But what is also important, particularly in this crisis where lockdowns and employee isolation are the norm, is communications with those employees, keeping them engaged to help keep the company moving forward.

Isolation stress. In a recent call with members of NeuGroup’s Internal Auditors’ Peer Group, several auditors said they were addressing the stresses that go with working remotely and the disconnect many employees feel as they isolate in their homes. 

  • In previous calls, members themselves have said that while working from home they often don’t know whether an action they take is just a shot in the dark with no result. “Is anything happening out there?” wondered one auditor.

Layoff fear. During the recent call, one member detailed how his company started doing a weekly check-in with employees, which included doctors and members of the human resources team. Doctors are there to answer health questions and HR can help with fears of layoffs. “Everyone feels like they’re out of touch and everyone is worried about layoffs at this point,” the member said. 

Another member said management at his company conducts similar calls, but in a more hierarchical way. They have calls with worldwide site leaders who in turn have calls with their employees. They also do calls with individual region leadership, like those in EMEA and Latin America. 

  • “They have very candid discussions,” the member said. Globally, employees can submit questions to managers that may or may not be addressed (due to volume) in any one of these calls. He said most of the questions regard layoffs.

Still another member said that his company’s HR is now providing support services for people isolated at home, which includes health services. 

Mapping the return. NeuGroup members continue to talk about returning to work and how that will all play out. One member said management meets with the CEO once a week to discuss locations and where stay-at-home orders are easing so they can start their back-to-work programs. 

  • Discussions also increasingly include reducing the company’s footprint by having some people work from home part time or on a rotational basis. “We’re looking at each location globally and doing the analysis,” said one member.
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Pandemic Lessons Learned by Treasurers in Asia

How finance teams respond to the need for cash depends in part on their ability to tap global cash pools.

As the pandemic brought  the world to a standstill, the primary concern of many multinational corporations centered on sustaining their operations, assuming no cash inflows for at least 30 days. For almost every company, that requires a lot of cash! That was among the takeaways from member comments at a recent NeuGroup virtual meeting of treasurers in Asia in early April.

Cash pools. Multinational companies best positioned to source emergency funds have access to global cash pools domiciled in jurisdictions where capital markets are liquid and central banks supportive, such as  London and  New York. To fund business activities elsewhere, companies rely on domestic banks or subsidiaries of foreign banks. 

How finance teams respond to the need for cash depends in part on their ability to tap global cash pools.

As the pandemic brought  the world to a standstill, the primary concern of many multinational corporations centered on sustaining their operations, assuming no cash inflows for at least 30 days. For almost every company, that requires a lot of cash! That was among the takeaways from member comments at a recent NeuGroup virtual meeting of treasurers in Asia in early April.

Cash pools. Multinational companies best positioned to source emergency funds have access to global cash pools domiciled in jurisdictions where capital markets are liquid and central banks supportive, such as  London and  New York. To fund business activities elsewhere, companies rely on domestic banks or subsidiaries of foreign banks. 

Other tools. Challenges arise when domestic credit is not sufficient to fund the company and its supply chain. To support loyal business partners, finance directors resort to traditional programs such as distributor and supplier financing. However, complex and paper intensive onboarding often holds them back. 

  • Likewise, declaring dividends from cash-rich subsidiaries to sustain cash-poor sister companies is challenging when both audit and tax clearance staff are themselves subject to lockdowns. Finance teams with long-standing relationships are more likely to break through. 

Government help. As a last resort, companies apply for direct government support. Members report that the application process is resource intensive and time consuming. To be effective, the country’s senior executive must lead a multi-functional team including tax, legal, government affairs, HR, and finance. The treasury team executes loan transactions and reporting, ensuring that new covenants do not breach existing agreements. 

Although it is too early to draw definitive lessons from the pandemic, it’s clear that the even the best business contingency plans never fully test the complexity of an unfolding crisis. Leveraging a global cash pool by concentrating a company’s firepower brings benefits well beyond a cost advantage. They give finance directors the space to look for practical local workarounds where needed.

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Funding Is Top Priority for Treasurers amid Pandemic: Poll

Treasurers have funding on their minds as they deal with COVID-19. BCP and supply chains also a concern.

Securing funding is a top priority for corporate treasurers thrust into the role of organizing companies’ financial response amid the COVID-19 pandemic, according to a recent poll by Bloomberg and Greenwich Associates. Following funding, treasurers say their attention is also on business continuity plans and suppliers.

Many treasurers have been tasked with making sure key suppliers have the resources to stay in business and providing the needed parts and material.

Treasurers have funding on their minds as they deal with COVID-19. BCP and supply chains also a concern.

Securing funding is a top priority for corporate treasurers thrust into the role of organizing companies’ financial response amid the COVID-19 pandemic, according to a recent poll by Bloomberg and Greenwich Associates. Following funding, treasurers say their attention is also on business continuity plans and suppliers.

Many treasurers have been tasked with making sure key suppliers have the resources to stay in business and providing the needed parts and material. 

  • The Bloomberg-Greenwich survey revealed that treasurers (49% of respondents) are taking a closer look at customer and supplier credit, receivables and financing. 

“One of the most intriguing results of our poll was that it revealed the most important risk focus for treasurers is the credit position of their supply chain and customers,” said Ken Monahan, senior analyst at Greenwich Associates. 

  • “This even rated above improving relationships with their own creditors,” he added. “This is interesting because the most observable phenomenon has been the rush to funding. The scrutiny of the supply chain and the customers goes on behind the scenes but is a top priority nonetheless.”
  • NeuGroup has heard similar responses in weekly interactions with its members. Several companies mentioned making sure their suppliers remained viable. And early on they said they were looking to underpin balance sheets by tapping revolvers or looking for loans. 

However, at the same time, they noted that some bankers were viewing drawdowns and requests much more favorably than others. Realizing this, treasurers are communicating with banks. According to the Bloomberg-Greenwich poll, 39% of respondents said they “increased conversations with our banks.”

The poll was conducted during a Bloomberg webinar on Greenwich Associates’ recent report, “Changing KPIs force treasurers to improve their risk technology.”

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Looking for Yield: Investment Managers Mull Prime Funds, Short-Duration SMAs

After fleeing prime funds, corporates are asking if now is the time to return.

Treasury investment managers interested in picking up additional yield for short-duration cash are not yet returning to prime money market funds (MMFs) that they exited as the coronavirus pandemic emerged. That was one of the key takeaways at a NeuGroup virtual meeting this week where several managers expressed interest in what one of their peers is doing: Using separately managed accounts (SMAs) for liquidity investing.

  • None of the participants is currently invested in prime funds. “We got out and went into more government funds and stayed there,” one member said. Several others used almost the exact same phrase.

  • The speed of the fixed-income market’s reaction to COVID-19 reflected that, in the wake of the 2008 global financial crisis, “Everyone had a playbook for duration, counterparty risk and prime funds,” one investment manager said. “Once they realized it was for real, they acted on it quickly.

After fleeing prime funds, corporates are asking if now is the time to return.

Treasury investment managers interested in picking up additional yield for short-duration cash are not yet returning to prime money market funds (MMFs) that they exited as the coronavirus pandemic emerged. That was one of the key takeaways at a NeuGroup virtual meeting this week where several managers expressed interest in what one of their peers is doing: Using separately managed accounts (SMAs) for liquidity investing.

  • None of the participants is currently invested in prime funds. “We got out and went into more government funds and stayed there,” one member said. Several others used almost the exact same phrase.
  • The speed of the fixed-income market’s reaction to COVID-19 reflected that, in the wake of the 2008 global financial crisis, “Everyone had a playbook for duration, counterparty risk and prime funds,” one investment manager said. “Once they realized it was for real, they acted on it quickly.

Now what? Now that credit markets have stabilized, “We are curious about prime,” one member said. No wonder: The Federal Reserve’s moves to support markets with backstops for MMFs and commercial paper have some corporates wondering if the risk of prime funds is nearly comparable to that of government funds, making it worthwhile to take the extra yield offered by prime.

Prime problem. One reason to avoid prime funds, members said, is the gates that temporarily impose restrictions on redemptions if the funds breach weekly or daily liquidity requirements. Despite the Fed’s support, there are “still concerns,” one member said, adding that in the current situation you may unfortunately find out that you “have cash but don’t have the cash.”

  • He noted that Goldman Sachs and Bank of New York Mellon pumped money into their prime funds in March as redemptions surged.
  • An asset manager addressing the peer group told the managers, “If I had your jobs, I would not have a dollar outside the government funds” that is earmarked for a short-term, liquidity bucket. He said the floating or variable NAV of prime funds “can cause panic” in volatile markets.
    • As for the Fed’s backstop facilities, he said that when investing in commercial paper or other debt, “I want to buy a credit because it’s a credit that I think is solid and a fair valuation—not because the Fed is providing a backstop.” In short, he added, “There is no substitute to credit work.”

The SMA option. Several participants were happy to hear from one member that using SMAs for cash invested for as little as two-months can be worth the cost of hiring an external manager. That’s thanks to a “strong relationship with a manager” who charges a “very low fee,” the member said.

  • “I had always viewed the SMA route only for a weighted average life of a year or so,” one member commented. “But even for shorter duration it seems compelling now.”

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COVID-19 Puts Another Lens on ESG—and an Opportunity for Treasury to Lead

Mega-cap treasurers discuss treasury’s role in promoting ESG and the fragmented ratings landscape.

COVID-19 has moved the subject of ESG ratings and financing to the back burner for many businesses. One banker speaking at a NeuGroup meeting called ESG “a luxury” that many companies can’t afford now. But the issue is not going away, and the pandemic offers another lens to view how corporations affect the world and society, and how businesses respond to crises and the needs of employees, customers and other stakeholders.

  • The issue of where ESG fits in the current climate surfaced at a recent NeuGroup meeting of mega-cap treasurers that included presentations by MSCI, a provider of ESG ratings, and BNP Paribas. Highlights:

Mega-cap treasurers discuss treasury’s role in promoting ESG and the fragmented ratings landscape.

COVID-19 has moved the subject of ESG ratings and financing to the back burner for many businesses. One banker speaking at a NeuGroup meeting called ESG “a luxury” that many companies can’t afford now. But the issue is not going away, and the pandemic offers another lens to view how corporations affect the world and society, and how businesses respond to crises and the needs of employees, customers and other stakeholders.

  • The issue of where ESG fits in the current climate surfaced at a recent NeuGroup meeting of mega-cap treasurers that included presentations by MSCI, a provider of ESG ratings, and BNP Paribas. Highlights:

Prepare for acceleration. A banker from BNP Paribas discussing sustainability-linked finance acknowledged that the pandemic meant that ESG would not be “top of mind” for several months. Before the crisis, the bank forecasted that 100% of finance would become sustainable finance within five years.

  • Once the world is “back in rhythm,” he asserted, “what we have gone through will accelerate this move.” Expect to see more sustainability-linked loans, ESG-linked derivatives and continued interest in green bonds.

Treasury’s role. The treasurer of a large tech company told peers, “All of us in treasury can do some simple things to move the needle” on ESG. He mentioned:

  • “Changing the way we invest,” such as eliminating coal, tobacco and firearms.
  • Including minority-owned firms in all US bond offerings and more use of the firms in all activity.
  • Issuing green bonds.
  • Committing funds to affordable housing programs.

Another treasurer said his company used the issuance of a green bond to focus on the “e” in ESG both “internally and externally.” He said treasury drove the data accumulation to support the use of proceeds assertions for the bond.

  • The first treasurer told the group that corporate sustainability teams can’t tackle the ESG issue by themselves and that he would love to see other treasurers help rally their companies, promote a “sense of urgency” and get buy-in from their boards.

A lack of standards. The ESG ratings landscape is difficult to navigate for corporates seeking relative certainty and standards akin to what exists in the credit rating industry.

  • MSCI and Sustainalytics, two prominent ESG ratings firms, have “very different approaches,” said one ESG leader at the meeting who described MSCI’s ratings methodology as “in depth;” she said Sustainalytics uses a “huge number of metrics” and collects a “vast amount of information without prioritization.”
  • Another ESG specialist said his team put together a spread sheet with 700 different metrics tracked by 20 different agencies, underscoring the lack of uniformity among raters and the resulting confusion for companies.
  • That company and others are developing their own internal standards by, among other things, reaching out to their largest shareholders and bondholders as well as ESG investors to ask what they find most important from an sustainability perspective.

Be proactive. In the same vein, corporates should consider the path taken by one ESG leader who said her company is “really branching out” as it shifts from a “very reactive” stance to ratings to one that emphasizes “developing a strong point of view of what matters,” as her team does its own so-called gap analysis and digs “into where we might be able to improve disclosure.”

Connect with raters. Part of becoming proactive means taking the initiative with MSCI, Sustainalytics and other influencers in the ESG space. MSCI offers an issuer portal and Sustainalytics plans to roll one out in May. Treasury needs to be in the loop on who at the company connects with these firms as the importance of ESG for both investors and issuers increases.

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A Closer Look: ESG Ratings, KPIs and Second-Party Opinions

Sustainalytics discusses ESG trends, ratings and aligning internal KPIs with established principles.

Treasurers exploring the rapidly expanding land of environmental, social and governance (ESG) criteria quickly encounter Sustainalytics, a well-established provider of ESG ratings to institutional investors and so-called second-party opinions used by issuers of green bonds to give confidence to investors that bond proceeds will finance environmental or social projects.

  • At a recent NeuGroup virtual meeting, representatives from Sustainalytics described the company’s ratings and methodology, answered questions from members and discussed current trends in the sustainable finance space, which includes sustainability-linked loans, where the proceeds are used for general corporate purposes but the interest rate decreases as sustainability targets are met.

Sustainalytics discusses ESG trends, ratings and aligning internal KPIs with established principles.

Treasurers exploring the rapidly expanding land of environmental, social and governance (ESG) criteria quickly encounter Sustainalytics, a well-established provider of ESG ratings to institutional investors and so-called second-party opinions used by issuers of green bonds to give confidence to investors that bond proceeds will finance environmental or social projects.

  • At a recent NeuGroup virtual meeting, representatives from Sustainalytics described the company’s ratings and methodology, answered questions from members and discussed current trends in the sustainable finance space, which includes sustainability-linked loans, where the proceeds are used for general corporate purposes but the interest rate decreases as sustainability targets are met.

Market practice. Second-party opinions are not a requirement but are “increasingly becoming market practice when issuing ESG bonds,” Heather Lang, executive director of sustainable finance solutions at Sustainalytics, told members.

  • “As new industries enter the market, there is a high degree of scrutiny regarding which uses of proceeds qualify as green or socially impactful,” she said. “An external reviewer is well positioned to attest to the alignment of projects and activities to market standards and investor expectations, not to mention the credibility of the issuer.”
  • “Some clients will even license their ESG rating from us around the time of a bond issuance because they know that investors, especially responsible investors, will want to look at a company’s overall ESG performance alongside reviewing the use of proceeds,” Ms. Lang said.
  • Green bonds continue to drive the ESG market, accounting for about $260 billion in issuance in 2019. At the end of 2018, investors managed more than $30 trillion in ESG assets.

KPI considerations. One NeuGroup member considering a sustainability-linked, undrawn revolver said his company may license an ESG rating. The company’s sustainability report contains both audited and unaudited key performance indicators (KPIs), and the member asked Sustainalytics which KPIs banks and investors value the most.

  • Ms. Lang said companies’ internally tracked KPIs receive more scrutiny, especially if they’re not audited.
  • She highlighted the importance of aligning with the Sustainability Linked Loan Principles published in March 2019 by three global syndicated loan associations. They provide guidelines for capturing the fundamental characteristics of sustainability-linked loans, enabling a borrower to develop KPIs closely aligned with the company’s sustainability profile.

Levels of review. Sustainalytics and other ESG analysis firms can review selected KPIs to determine their materiality given a company’s subindustry and operating regions.

  • “That’s a way to combine involving a credible external party while also being able to focus on internally tracked KPIs,” Ms. Lang said, adding that some companies have combined internal KPIs with a holistic external ESG rating.
  • “Revolving credit facilities are very common for sustainability-linked loans,” she noted.

Corporate ratings use. ESG ratings are more prevalent in Europe but increasingly so in the US, Ms. Lang said, and are now being used by corporates in a variety of ways.

  • For one, they’re essential for companies seeking to be included in ESG investment indices, to diversify their investor base and include more international and “responsibility-tilted” sources of capital.
  • Ms. Lang said companies are increasingly publishing their ESG ratings externally, beyond just institutional investors to the more general public and employees.
  • Some companies are using ratings to identify ESG risks in the supply chain, and others are linking executive compensation to them.

What’s your company’s score? Two-thirds of NeuGroup members polled at the recent meeting did not know their Sustainalytics ratings.

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Seizing Opportunities, Waiting for More and Getting Back to Work

Quick Takes, COVID-19 edition: A roundup of news, notes and notions from the NeuGroup Network.

Strategic Acquistions: Waiting for Small Biotechs to Adjust to Lower Values
Here’s some post-meeting follow-up from a treasurer in the biotech industry on his expectations for a “resetting of asset prices” and opportunities for strategic acquisitions as markets gyrate.

“I would characterize it as an emerging opportunity. So far, you have had price adjustments (lower stock prices) for smaller biotechs. But you need two parties to make a deal. What needs to happen in the future is that those same smaller biotechs need to become acclimated to their new prices.

Quick Takes, COVID-19 edition: A roundup of news, notes and notions from the NeuGroup Network.

Strategic Acquistions: Waiting for Small Biotechs to Adjust to Lower Values
Here’s some post-meeting follow-up from a treasurer in the biotech industry on his expectations for a “resetting of asset prices” and opportunities for strategic acquisitions as markets gyrate.

“I would characterize it as an emerging opportunity. So far, you have had price adjustments (lower stock prices) for smaller biotechs. But you need two parties to make a deal. What needs to happen in the future is that those same smaller biotechs need to become acclimated to their new prices.

  • Right now, many [executives at small biotechs] believe the price will recover as this is a temporary phenomenon; but if the recovery is not a sharp, V-shaped recovery it will begin to impact management’s views on price. Additionally, those without a large cash cushion will not be able to fund using equity issuance. They will begin to feel the pain sooner.

Until the market makes progress on the last two steps, I don’t see immediate deal opportunities. Let’s see how the market moves in the 30-60 days.”

A Treasury Investment Manager Seizes Opportunities, Adjusts for Uncertainty in the Business
The head of global investments at a NeuGroup member company described how his team has navigated volatile financial markets and shared his insights on the phases of financial crises like the one we’re in now. Here’s what he said:

“I think of financial crises in three stages:

  1. Dash for cash/forced liquidation. Market participants want to own the shortest term, highest quality securities possible. However, it takes two parties to make a trade, if no one is buying, no one can sell – in trader speak “No bid.” No primary transactions occur.
  2. Illiquidity. Capital markets are frozen or sticky. Issuers can get deals done at a premium.
  3. Balance sheet rebuilding. Most issuers can access the market to repair balance sheets that were wrecked during the previous two stages.

We were fortunate:

  • The balance sheet investments had the lowest duration and highest quality in nine years.
  • The internally managed liquidity portfolio (investment-grade corporate credit) had the most assets ever.
  • We had significant maturities every week.
  • Once we understood there wasn’t an immediate cash need by the company, we were able to take advantage of “dash for cash” and purchase high quality commercial paper at crazy yields; as I recall Boeing was offering two-week CP north of 4%. Those opportunities are fleeting.

We also shifted our money market funds to government-only to avoid the risk of gates.

Over the past two weeks, we’ve seen more normalcy in the markets. We can pick up extra yield by investing in non-marquis issuers. The rating agencies started the downgrade cycle which always provides opportunities.

  • For us, the biggest challenge is the uncertainty in the business. Every [similar] company that has announced earnings has given no forward guidance. Due to the uncertainty, we have to stay short and forego opportunities even three months out.”

Back to Work: Not So Fast
Most members on a recent COVID-19 check-in call for NeuGroup’s Internal Auditors’ Peer Group are beginning the process of getting employees back to work. It’s anything but straightforward. Here’s some of what we heard:

  • Manage the return. The idea is to “control the process” using a phased or staggered approach, one member said. Another said his company was looking at the process and doing “re-entry modeling.” The current plan at this business is to allow back the most critically needed people—such as engineers—and then go down the chain from there. The main workforce would return in shifts to better manage spacing and social distancing rules.
  • No uniformity. This phased-in approach takes on added complexity since companies have to account for different rules in different US states as well as in other countries. India—where many companies have call centers or shared service centers—is almost in full lockdown mode, members noted. So even getting “essential employees” back to work could be a challenge.
  • The kid factor. Another member mentioned that in many areas, school will be cancelled for the rest of the year. And since summer camps and other programs haven’t started yet, it might not be feasible for parents to just jump back into work.
  • Permanent remote for some? There are also real estate considerations, said one member. The thinking at this company was that in certain places, perhaps remote work made more sense and renting office space was not economically practical. Management is asking, “Can we reduce our footprint?”

The process of companies getting people back to work could raise unforeseen problems. A member of a NeuGroup teasurers’ group recently wondered if the company would be liable financially if a worker went back to his job and then became ill with COVID-19.

Distressed Customers and Other Priorities for a Tech Treasurer
Here’s what one NeuGroup member tells us he and his team are working on in the current, COVID-19 climate:

  • Liquidity needs for the rest of the year
  • Stress test around liquidity from revenues, expenses, margin compression, etc
  • Staying on top of capital markets
  • Working with teams on A/R programs for distressed customers
  • Forecasting cash needs around the globe
  • Analyzing investment portfolios to understand unrealized losses and making adjustment where needed
  • And, of course, day-to-day operations
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Rating Agencies—Along With Everyone Else—Find Themselves in Uncharted Territory

Societe Generale provides perspective on how Moody’s and S&P are approaching COVID-19 effects.

Credit analysts are generally taking a “staged approach” to the new coronavirus’ impact on ratings, largely because current circumstances are unprecedented and have created uncharted analytical territory.

  • That was among the key takeaways from a session led by Societe Generale’s Karl Pettersen, head of rating advisory, at a recent meeting of NeuGroup’s AT30 peer group.
  • Each agency, he added, has adopted a slightly different mindset so far in approaching the crisis. As a result, rating agencies will also rely heavily on issuers to understand the mechanics of companies’ credit response to the virus.

Societe Generale provides perspective on how Moody’s and S&P are approaching COVID-19 effects.

Credit analysts are generally taking a “staged approach” to the new coronavirus’ impact on ratings, largely because current circumstances are unprecedented and have created uncharted analytical territory.

  • That was among the key takeaways from a session led by Societe Generale’s Karl Pettersen, head of rating advisory, at a recent meeting of NeuGroup’s AT30 peer group.
  • Each agency, he added, has adopted a slightly different mindset so far in approaching the crisis. As a result, rating agencies will also rely heavily on issuers to understand the mechanics of companies’ credit response to the virus.

Fishing expedition. One member said the analyst who covers his company at Moody’s Investors Service had reached out, fishing for information, but only vaguely responded to questions about how the agency might integrate that information into its analysis.

  • The Moody’s outreach was unsurprising, Mr. Pettersen said. In part, Moody’s got “burned” when it massively downgraded the oil and gas sector in the previous down cycle and has now opted for a more gradual and case-by-case approach. As a result, the agency has given individual analysts more latitude in building their cases with the agencies. 
  • S&P Global analysts have often been tight-lipped individually, but the agency is instead making “a lot of noise” at the policy level, announcing COVID-19 and oil price-related ratings actions affecting more than 1,000 issuers across the globe, including wholesale sector-wide credit watch or outlook changes. “That approach buys them time—60 days to figure everything out,” said Mr. Pettersen, adding S&P’s approach tends to be more formal and top down.

Credit vs. ESG. The advent of COVID-19 has also highlighted the question of how credit ratings and ESG ratings should intersect, Mr. Pettersen said. In addition:

  • The credit agencies’ traditional metrics are not designed to capture factors, often ESG related, that may permanently impair even highly rated companies’ credit trajectory. Thus, a reset in how ratings are defined may ultimately be necessary. 
  • The current situation highlights areas of complementarity or even contradiction between ESG and credit ratings. More bluntly, and more broadly, this tension is also embodied in the potentially competing priorities of economic and public health priorities today. In extreme cases, ESG and credit ratings can even be at opposite ends from each other.
  • The emerging issue’s poster child until recently has been Tesla, with its high ESG scores but deep-junk credit ratings. The current environment could accelerate questions around certain sectors such as oil and gas, and their fundamental ability to sustain credit quality over the long term.
  • One early consideration today is the extent to which market support (i.e. equity, debt, and bank capital markets, plus legislation/regulation) should be more formally incorporated and differentiated in credit ratings. For large investment-grade issuers, market access/support is an essential but mostly unspoken part of analysis, but which will come more to the forefront of analysis today, including through possible stimulus packages.

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Preparing for a (Grand?) Reopening

Founder’s Edition, by Joseph Neu

How should finance and treasury professionals prepare for an economic reopening following the COVID-19 lockdown?

Since March 10, I have attended most of the 40-plus Zoom meetings NeuGroup has held with members. These include virtual peer group meetings, COVID-19 discussions, weekly office hours and interactive sessions devoted to other subjects. Below are some of my takeaways and insights.

Forecasting is paramount. The emphasis every company is placing on forecasting began with determining how long they could last with the liquidity on hand, without new cash flow. Then it incorporated expectations on new revenue expected in two weeks, one month, next quarter, in two quarters and so on, all under various scenarios, including a realistic worst case.

Founder’s Edition, by Joseph Neu

How should finance and treasury professionals prepare for an economic reopening following the COVID-19 lockdown?

Since March 10, I have attended most of the 40-plus Zoom meetings NeuGroup has held with members. These include virtual peer group meetings, COVID-19 discussions, weekly office hours and interactive sessions devoted to other subjects. Below are some of my takeaways and insights.

Forecasting is paramount. The emphasis every company is placing on forecasting began with determining how long they could last with the liquidity on hand, without new cash flow. Then it incorporated expectations on new revenue expected in two weeks, one month, next quarter, in two quarters and so on, all under various scenarios, including a realistic worst case.

  • Members continue to monitor collections closely and have switched on cash preservation protocols with varying severity, depending on the expected impact from COVID-19, how much liquidity they had, and how much access they had to new sources.
  • Forecasting, business planning and replanning now turn to the reopening and figuring out how soon lines of business may recover, how fast new cash flow arrives (and for how long) and what the recovery will look like—V-shaped, U-shaped, a flat-line or something else?

Stratification is key. The insight from China, courtesy of this week’s Zoom with our AsiaCFO peer group, is that financial planning must be stratified. For example, the recovery in China is V-shaped, helped by pent-up demand and stimulus. Yet there is great uncertainty and an expectation the recovery will be upset by demand and supply shocks caused by the global nature of the pandemic and the economic recession it has triggered. That means economic forecasts and corporate cash flow forecasts must factor in:

  • The impact in each country, region, sector and market. For example, food service and hospitality will be hit much harder than professional services in most markets, and areas with higher population densities will be affected more severely.
  • Timing differences. Companies must account for the different stages and severity of COVID-19 in different countries, from the initial curve of infections in their markets, in others they sell into or source from, and then the curve of subsequent infections until a vaccine emerges or the virus dies out. China is a few weeks to a month out of lockdown, Australia is midway, Thailand is just starting, and Singapore, Japan and South Korea are going through various second waves of lockdown.
    • In late Q1, MNC affiliates in China helped fund their parents by sending cash home to the US and Europe, as they were getting hit with the first wave.
    • Make hay while you can: April, May and June will be big months for a lot of business in China due to the reopening, before the next wave hits. Where can MNCs turn to next to make hay during another market’s reopening phase?
  • The opportunity to reacquire customers and competitors’ customers when the economy reopens. In many business lines, from food service to health care, homebound customers will be open to new products, new stores, new treatments. How aggressively will your company compete to reacquire and acquire them?

It can get complex quickly, and with each new forecast or plan, businesses need to balance the upside opportunity against the danger risk. Therefore:

  • Agility and smart decisions. “What sets the most successful firms apart in this environment is agility and decision making,” one Asia CFO from a consultancy said. “Agility is really critical, but also the speed of how you make decisions.” People need clarity on what decisions need to be made and when, and who needs to make them. And with so many decisions, there must be a good delegation process so employees can make them quickly and then take action.

Do we have enough capital? Given this complexity, uncertainty and opportunity, there is already a lot of second-guessing by those with access to capital: Do we have enough? Should we have issued more bonds? Should we go back into the market again? The second-guessing isn’t helped by the fact that bond offerings continue to be oversubscribed, spreads keep narrowing in secondary markets for those who have already issued, and bankers keep calling and emailing to ask issuers if they want to go back for more. So the internal conversations for reopening might shift from liquidity to growth capital for some.

  • This gets to the final stratification of haves and have nots in this new world: Those with liquidity and access to capital to survive and then thrive and those who do not. The former might possibly look forward to a grand reopening, whereas others are just hoping to reopen.
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As Day Follows Night: China Exposures Grow and So Do the Hedges Against Them

Members whose companies have material exposure to the Chinese market exchange experiences with how to manage the currency risk.

What’s the best course of action when corporates need to blunt their growing cash-flow exposures in China? The answer, hedge. But what’s the best approach? Depends on the company of course. At a recent FX summit of NeuGroup’s two FX Managers’ Peer Groups – which due to COVID-19 was NeuGroup’s first-ever virtual peer group meeting – one session dealt with managing RMB risk. Two members shared their situations and planned or current approach, followed by virtual breakout discussions for peers to compare and contrast.

  • Company 1: As a company with many retail locations in China, Company 1’s cash-flow exposure is driven by the renminbi (RMB) royalties owed by RMB-functional entities to a USD-functional entity. The royalties are payable in USD and currently the onshore team processes RMB spot conversion to USD via a local payment bank. However, treasury is in the process of moving future royalty payments hedging, conversion and hedge settlement to treasury operations.
  • Company 2: This globally USD-functional company has expenses (capex and opex) in RMB related to the Chinese manufacturing of products (sold worldwide, priced in USD), as well as R&D and sales and marketing expenses. The company has a seven-person treasury front- and back office in Shanghai.

Members whose companies have material exposure to the Chinese market exchange experiences with how to manage the currency risk.

What’s the best course of action when corporates need to blunt their growing cash-flow exposures in China? The answer, hedge. But what’s the best approach? Depends on the company of course. At a recent FX summit of NeuGroup’s two FX Managers’ Peer Groups – which due to COVID-19 was NeuGroup’s first-ever virtual peer group meeting – one session dealt with managing RMB risk. Two members shared their situations and planned or current approach, followed by virtual breakout discussions for peers to compare and contrast.

  • Company 1: As a company with many retail locations in China, Company 1’s cash-flow exposure is driven by the renminbi (RMB) royalties owed by RMB-functional entities to a USD-functional entity. The royalties are payable in USD and currently the onshore team processes RMB spot conversion to USD via a local payment bank. However, treasury is in the process of moving future royalty payments hedging, conversion and hedge settlement to treasury operations.
  • Company 2: This globally USD-functional company has expenses (capex and opex) in RMB related to the Chinese manufacturing of products (sold worldwide, priced in USD), as well as R&D and sales and marketing expenses. The company has a seven-person treasury front- and back office in Shanghai.

Which market? The RMB is traded in two markets (onshore China, offshore China) with three curves: CNY (onshore), NDF (non-deliverable forwards) and CNH (offshore). Since mid-2018, offshore entities can access onshore FX rates in China and dividend payments and “forecasted” RMB exposure are eligible transactions. The CNY is traded on CFETS (China Foreign Exchange Trade System), run by the central bank, PBoC. Among the global banks, Citi, HSBC and Standard Chartered, for example, are CFETS members.

  • Company 1: As a buyer of USD, the CNH curve is more advantageous since the CNY curve includes a 150 basis point reserve charge.
  • Company 2: The CNY curve is better for a buyer of RMB like this company.

External and internal challenges: The implementation and ongoing running of a cash-flow hedge program faces some challenges of both external and internal nature, such as:

  • Documentation requirements from counterparties and regulators. Limitations as to what CFETS offers in products and tenors.
  • Since the CNY market is controlled, the USDCNY reference rate that is announced daily is open to manipulation.
  • The liquidity of the CNY NDF market falls off beyond the 1-year tenor mark.
  • Use and pricing of options/collars if and when the CNY market moves beyond PBoC’s +/- 2% guidance.
  • The counterparty credit risk is harder to quantify when dealing with locally regulated affiliates of multinational partner banks.
  • For company 2, if market conditions drive a shift from revenues in USD to CNY, what are the hedge program implications?
  • What do you lose when you centralize the hedge program to US? Local knowledge and contacts on the ground is particularly valuable in high-context cultural environments like China. How much of that will be lost in a drive to centralize hedging to HQ, many timezones away? It will be harder to communicate with the remaining team on the ground, as well as with trusted, regular bank contacts for FX and other local needs.

Accounting rate. Try to push for the use of the same accounting rate as the market you use the most; if you trade and hedge in the CNH market, push to use CNH as the accounting rate as well.

Hedge accounting. Does the choice of market have hedge accounting and effectiveness testing implications? For example, if CNY is the intercompany billing currency, would hedging in the NDF market require regression vs. only critical-terms match if you used the CNY market?

Internal collaboration:

  • Between FX, BU and AP teams for accuracy in forecasting and payment timing.
  • IT and TMS considerations: Can systems facilitate both CNY, CNH and NDFs?Will the system require the creation of a new “country” and assign the second RMB curve to that.
  • Legal and compliance: what amendments of key intercompany agreements are necessary?
  • Treasury: additional ISDA, KYC and other banking requirements.
  • Treasury Ops & Treasury Middle office: aligning settlement details, CNH (or CNY) accounts setup, Reval transaction flow.
  • Educating general internal stakeholders on the RMB market.

Note: Renminbi (RMB) is the name of the currency; a yuan is a unit of the currency; CNY is the onshore-traded yuan, CNH is the offshore-traded yuan; NDF is a non-deliverable forward denominated in CNY.

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“Too Soon” Is Now “Let’s Do It”: Risk Managers Start Planning for Life Beyond COVID

Up until about a week ago, companies were so busy handling the immediate issues related to COVID-19, they were putting off thinking of future risks.

Enterprise risk management professionals are paid to look into the future and help companies prepare for it. But COVID-19 changed all that. “Too soon,” was the answer from most members of NeuGroup’s ERM peer group two weeks ago when we asked them about post-pandemic planning and their thoughts about the future.

  • One member back then said he was eager to get into longer-term thinking and “scenarios for one or two or three weeks or more.” However, the reaction he got from management was, “Now’s not the time.”

Today, though, that attitude is changing as senior executives adjust to the new normal. For example, one member in late March was delaying his annual risk outlook program, where heads of business units and direct reports suggest the biggest risks they see in the next few months to a year or more. This member was also hesitant to ask people to name their biggest risk “because they’ll just say pandemic.”

Up until about a week ago, companies were so busy handling the immediate issues related to COVID-19, they were putting off thinking of future risks.

Enterprise risk management professionals are paid to look into the future and help companies prepare for it. But COVID-19 changed all that. “Too soon,” was the answer from most members of NeuGroup’s ERM peer group two weeks ago when we asked them about post-pandemic planning and their thoughts about the future.

  • One member back then said he was eager to get into longer-term thinking and “scenarios for one or two or three weeks or more.” However, the reaction he got from management was, “Now’s not the time.”

Today, though, that attitude is changing as senior executives adjust to the new normal. For example, one member in late March was delaying his annual risk outlook program, where heads of business units and direct reports suggest the biggest risks they see in the next few months to a year or more. This member was also hesitant to ask people to name their biggest risk “because they’ll just say pandemic.”

  • But in mid-April, he said the program is starting up again, with C-Suite interviews and the creation of a heat map to present to the board in September.
  • Another member said he was now assigning teams to look at what happens after the crisis abates. Likewise, a member of NeuGroup’s Internal Auditors’ Peer Group, who also oversees ERM, said identifying post-crisis risks was getting a “better reception” among senior leadership.
    • “We’re starting to ID things that will need to be addressed,” she said. “What will it take for a recovery?”

Along with thinking about future risks, ERM at some companies has been assigned the project of updating the business continuity plan with takeaways from the pandemic. At another IAPG member’s company, the lack of a good BCP plan “is very top of mind” and managers are asking themselves, “How did we miss this?” He added that the company’s response has been “on the fly” and has been effective so far, but they don’t want to be as unprepared next time.

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Revolvers to Recovery: Credit Markets and the Five R’s of COVID-19

US Bank on where credit markets have been, are now, and what (we hope) lies ahead: recovery and relaxation.

NeuGroup held a virtual meeting last week where members who work in treasury at major retailers heard a presentation on bond and loan markets from US Bank and discussed other topics of interest during this period of uncertainty, volatility and disruption. Here are some key takeaways as distilled by Joseph Neu, beginning with insights from US Bank.

The five R’s of COVID-19. US Bank described five stages of the debt and loan market’s progression in the wake of the coronavirus pandemic (see graphic). The funding market has moved through stage 1—revolver drawdowns—and stage 2—raise incremental liquidity—and is now in stage 3, repair, with covenant amendments and credit restructuring (to secured and asset-backed lending) with repricing along with that. Stage 4 brings recovery with the economy reopening, repayment of drawn lines and the bank market reopening for “regular-way” issuance extending beyond 364-days. Stage 5 is when we can all relax again.

US Bank on where credit markets have been, are now, and what (we hope) lies ahead: recovery and relaxation.

NeuGroup held a virtual meeting last week where members who work in treasury at major retailers heard a presentation on bond and loan markets from US Bank and discussed other topics of interest during this period of uncertainty, volatility and disruption. Here are some key takeaways as distilled by Joseph Neu, beginning with insights from US Bank.

  • The five R’s of COVID-19. US Bank described five stages of the debt and loan market’s progression in the wake of the coronavirus pandemic (see graphic). The funding market has moved through stage 1—revolver drawdowns—and stage 2—raise incremental liquidity—and is now in stage 3, repair, with covenant amendments and credit restructuring (to secured and asset-backed lending) with repricing along with that. Stage 4 brings recovery with the economy reopening, repayment of drawn lines and the bank market reopening for “regular-way” issuance extending beyond 364-days. Stage 5 is when we can all relax again.
  • Confirmation that accordions and incremental borrowing past a year are out. There was also confirmation that until the economy reopens (stage 4), banks will not offer anything but incremental short-term facilities priced above current revolver pricing (e.g., Libor + 225 basis points). The economics are best when done in conjunction with a bond deal and where revolvers remain undrawn. Lesser credits and smaller corporates may see Libor floors between .5% and 1%.
  • Debt issuance continues down the credit spectrum. Ongoing Federal Reserve efforts to bolster the credit markets—namely the primary and secondary corporate credit facilities—are helping to narrow credit spreads in the bond market. The expansion to include high-yield debt is helping the lower end of the investment grade market, too. The issuance trend will likely continue into fallen angels and convertibles as a result.
  • Essentials vs. non-essentials. Credit risk perception in both the bond and bank loan market is bifurcated by ratings as well as essential vs. non-essential businesses, with companies in the latter group also seeing their ratings downgraded on higher perceived credit risk. This expectation also helps explains why most of the draws were in the BBB space.
  • Some banks not participating in new lending. While the appetite for incremental lending varies based on the bank’s position in a company’s bank group, and there is more client selection going on than usual (with downsizing), some banks are not offering any more balance sheet at all. And foreign banks that cannot take US deposits are also reluctant to lend.
Source: US Bank

Member Insight

  • Prime funds same risk as government funds? One member asked where to put cash drawn from the revolving credit facility (or raised in the CP market). Peers said they are doing the regular counterparty risk checks on banks (CDS prices are rising, but still below 2008 levels). One member said he would share analysis his team is doing to test the hypothesis that, with all the Fed backstops, government-MMF risk and prime-fund risk may actually be pretty close, so why not take the extra yield offered by prime funds?
  • Credit card processor best practice. One member in a different group had been hit by a significant reserve request by BAMS; no one in the retail group has experienced that. This prompted an insight on processor best practice: Use multiple processors (three to five of the top ones) so you can shift volume when one does something to upset you; plus you can allocate based on stores (subsets of stores) and e-commerce.
  • China store update. One member shared that they are reopening stores in China by following the SARS 2003 playbook, which then saw getting back to normal taking five to six months. On a positive note, the current experience is tracking slightly ahead of that.
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How to Protect FX From Newbies on Rotation

A NeuGroup member asks peers how to train people passing through the FX function without raising the risk of costly mistakes.

More often than not, specific corporate functions love a rotation plan where people from other areas come through to learn how the work in that function gets done, usually as part of a training and development program for high-potential talent. But for FX, more specifically trading, this can sometimes be a little tricky.

  • For instance, how, asked one FX manager during a recent NeuGroup virtual peer group meeting, do other members protect against FX newbies on a rotation making expensive trading errors? In other words, this manager said, “How do you make sure the rotation people aren’t doing what they’re not supposed to be doing?”

A NeuGroup member asks peers how to train people passing through the FX function without raising the risk of costly mistakes.

More often than not, specific corporate functions love a rotation plan where people from other areas come through to learn how the work in that function gets done, usually as part of a training and development program for high-potential talent. But for FX, more specifically trading, this can sometimes be a little tricky.

  • For instance, how, asked one FX manager during a recent NeuGroup virtual peer group meeting, do other members protect against FX newbies on a rotation making expensive trading errors? In other words, this manager said, “How do you make sure the rotation people aren’t doing what they’re not supposed to be doing?”

Limitations. Another member responded that his company sets parameters on amounts and types of trades, for example, so that rotating staff can be “allowed to do some things but there is a limit to how much damage they can do.” Shadowing or overlap also helps, whether it’s a rotation or someone taking another’s place for a different reason; one member said she trained the person taking her place for maternity leave for a month before she left.

Different strokes for different folks. Rotation programs come in several flavors and target different level staff. For instance, one member described a program he was familiar with that was two-tiered. This means there was a junior financial development program and a program for more senior financial people.

  • In the junior program, the young rotators would serve in more of a support role, doing things like analysis of counterparties, reporting and other functions that support the trader— but they weren’t actually allowed to trade. The more senior people rotating through could execute trades, but they were also held accountable for mistakes commensurate with their more senior status.
  • Even without rotations, training needs to be adequate for all the teams interacting with the FX team as well. One member said his treasury doesn’t do a rotation per se, but his company’s model is to “use the cash operations staff to be the FX back office.” But FX can be complicated and hard to learn even for a person from inside the organization who already knows the company well.

Trading’s the easy part. Whatever the philosophy on who can and cannot be let loose at the trading desk, one member thought that for training people in the FX world, trading was actually the easy part. “I think I can train anybody in one week” to do a trade, he said. “But the hard part is the strategy side. Strategic thinking, the accounting, the consequences, collaborating with all the business partners. That’s the hard part of the trade. For that, you need at least six months or a year or more.”

For big firms only? Finally, whether rotations are feasible depends very much on the size of the company and the treasury department, or finance function writ large. Ultimately, as a member pithily put it, “Rotations are the luxury of the large company.”

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Treasurers Rise to the Challenge of Managing Teams Remotely

One treasurer shares how he keeps staff united and upbeat—and offers his take on leadership during a crisis. The COVID-19 pandemic has forced many treasurers to confront the challenges of managing finance teams remotely.

  • At a recent NeuGroup virtual meeting of mega-cap companies, one treasurer shared his approach to keeping his team cohesive, as well as an observation about how people perform during a crisis.

Together apart. To build a sense of togetherness and maintain unity when everyone is in a different place, the treasurer created a virtual “war room” where every morning each of his direct reports speaks up and updates the group on critical information including domestic and foreign cash levels.

One treasurer shares how he keeps staff united and upbeat—and offers his take on leadership during a crisis.

The COVID-19 pandemic has forced many treasurers to confront the challenges of managing finance teams remotely.

  • At a recent NeuGroup virtual meeting of mega-cap companies, one treasurer shared his approach to keeping his team cohesive, as well as an observation about how people perform during a crisis.

Together apart. To build a sense of togetherness and maintain unity when everyone is in a different place, the treasurer created a virtual “war room” where every morning each of his direct reports speaks up and updates the group on critical information including domestic and foreign cash levels.

  • He holds another war room call at the end of the day to learn, for example, about any cash shortfalls and ask his direct reports about the calls they’re holding with their teams and how the broader treasury group is functioning.
  • He also sends an email update to the entire treasury staff at the end of the day to reinforce the feeling that they are members of a team. He includes a fun fact about himself (first concert, favorite food, etc.). And he has received positive responses by sharing how he spends his workday.
    • “They are very interested in what your day looks like,” he said, adding that he would likely share some of what he got from the NeuGroup meeting that day.

Fun stuff. To keep things light and spirits high during an extremely tough time, the treasurer had people wear something fun for St. Patrick’s Day. (Another member jokingly suggested having an “ugly sweater day.”)

  • Every Friday, as part of the end-of-day call, the team has a virtual happy hour. The overall goal, he said, is to create a “good environment” in the virtual workplace.  

Crisis response. In mid-March, two weeks or so into working from home, the treasurer had observed that some members of his team had not yet stepped up as leaders or started thinking outside the box as they navigated “unchartered waters” created by the pandemic.

  • “Most people tend to do what they are comfortable with during a crisis, rather than hit it head on,” he said. “Top leaders tend to shine during a crisis.”
  • To help maintain focus and motivation, the treasurer does a weekly review, listing the major accomplishments from the treasury/risk team.
  • He also pays tribute to individuals who hit milestones, like a work anniversary, or who go “above the call of duty.”
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Treasurers in Asia Alter Stress Tests, Grapple with Pandemic Challenges

Headaches include dividend repatriation, obstacles to execution of business contingency plans.

Repatriating dividends from China, India, Thailand and other countries is proving difficult for some treasury teams in Asia that are seeking to bolster their companies’ global liquidity in response to the coronavirus pandemic.

  • That takeaway and others emerged during a virtual meeting of treasurers in Asia facilitated by NeuGroup on Monday. Members at companies that had business continuity plans in place and had done stress testing before the crisis discussed some of the unforeseen consequences of this catastrophic outbreak.

Headaches include dividend repatriation, obstacles to execution of business contingency plans.

Repatriating dividends from China, India, Thailand and other countries is proving difficult for some treasury teams in Asia that are seeking to bolster their companies’ global liquidity in response to the coronavirus pandemic.

  • That takeaway and others emerged during a virtual meeting of treasurers in Asia facilitated by NeuGroup on Monday. Members at companies that had business continuity plans in place and had done stress testing before the crisis discussed some of the unforeseen consequences of this catastrophic outbreak.

Tax and audit issues. Few if any members assumed that the need for tax clearance and a full audit would thwart efforts to repatriate dividends. But the inability to access auditors and the closure of government tax offices has indeed made life difficult for some companies.

  • Treasury at one company solved the repatriation problem by doing back-to-back lending—leaving cash in China as a pledge to secure a loan to a subsidiary elsewhere.

New assumptions for stress tests. The repatriation issue underscores how the scope and effects of this pandemic exceeded the assumptions of many stress tests. As a result, companies are taking a hard look at those assumptions and making changes to reflect the new reality.

  • One company, for example, is now looking at how to build a cash buffer that will sustain it for two months without cash collection, up from one month under the old liquidity stress test assumption.

BCP steps: Not so simple. One member offered up an example of something in a business continuity plan that seems simple but is not working as advertised: The company had planned to shift some processes to India during the crisis but could not because logistical problems prevented the shipment of bank tokens there—meaning no access to the banking network.

Banks and documents. While some banks are accepting electronic signatures and the use of DocuSign, many are not, creating delays for corporates that then must get physical signatures and mail them to the bank. That raises the question of how far your banks will bend during this enormous disruption to business norms.

Business health. Companies in some industries have been devastated by the economic effects of the crisis. But among NeuGroup members, some at this meeting described doing quite well, particularly those in the technology and health care sectors. And only a small minority are considering the benefits of accepting government assistance.

Balancing act. On a personal level, members of treasury teams in Asia are confronting the same challenges of working at home described at all recent NeuGroup virtual meetings, especially by those with children who must be supervised because schools are closed. It’s another example of how the length and severity of the COVID-19 outbreak is forcing finance teams to adapt creatively to circumstances that everyone hopes will be much different by the second half of 2020 if not sooner.

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SOFR Passes COVID-19 Stress Test, Bolstered by Stability of Repo Market

The volume of repo transactions underlying the calculation of SOFR has remained strong as the coronavirus disrupted other markets.

US regulators’ recommended Libor replacement has performed strongly through the volatility roller coaster powered by the coronavirus. In fact, the overnight repurchase agreement (repo) market used to calculate SOFR has increased in daily volume to more than $1.3 trillion.

  • “With SOFR, you have good reason to be confident that it can always be calculated, and the rate you’re paying reflects actual transactions,” David Bowman, senior associate director at the Federal Reserve’s Board of Governors, told NeuGroup members at a recent virtual meeting. “Every market is challenged now, but the only one that really seems to be operating near standard capacity is the overnight treasury repo market.”

The volume of repo transactions underlying the calculation of SOFR has remained strong as the coronavirus disrupted other markets.

US regulators’ recommended Libor replacement has performed strongly through the volatility roller coaster powered by the coronavirus. In fact, the overnight repurchase agreement (repo) market used to calculate SOFR has increased in daily volume to more than $1.3 trillion.

  • “With SOFR, you have good reason to be confident that it can always be calculated, and the rate you’re paying reflects actual transactions,” David Bowman, senior associate director at the Federal Reserve’s Board of Governors, told NeuGroup members at a recent virtual meeting. “Every market is challenged now, but the only one that really seems to be operating near standard capacity is the overnight treasury repo market.”

Libor extension unlikely. The futures exchanges’ move to SOFR discounting in October, anticipated to ramp up SOFR hedging, and other significant developments this year may be delayed—but only briefly.

  • US regulators have little choice but to move forward with transitioning away from Libor, Mr. Bowman said, given banks’ unwillingness to submit their costs for wholesale, unsecured funding past 2021, when their agreement to continue submitting to Libor ends.
  • New York State legislation designed to facilitate the transition from Libor has recently stalled as coronavirus took priority; but earlier “discussions were positive” and efforts should resume when the crisis calms, Mr. Bowman said. The bill would impact a wide range of corporate transactions, such as purchase agreements where the late payment fee is based on Libor, that typically lack language enabling the fallback to an alternative rate.

Corporate concerns linger. Mr. Bowman described efforts by the International Swaps and Derivatives Association and the Alternative Rates Reference Committee (ARRC) to develop SOFR contractual language and best practices, respectively, for derivative and cash transactions, to facilitate the transition. Corporates, however, are concerned that a forward-looking term SOFR has yet to emerge, and payments must be calculated in arrears.

  • “We would want to see a full term structure, so we can base transactions off one-month and three-month SOFR,” said the assistant treasurer of a major pharmaceutical company, noting few corporates have issued SOFR-priced debt so far.
  • Mr. Bowman said the ARRC is “committed to doing everything it can” to ensure the production of a forward-looking SOFR term rate, and it anticipates borrowers having a choice of solutions.
  • He encouraged corporates to experiment with using SOFR calculated in arrears, noting that calculation needn’t occur shortly after the period ends but could be done five or 10 days before, giving more time to plan. “Don’t wait for a term rate—find out where you can use SOFR now,” Mr. Bowman added.

Calling all corporates. Mr. Bowman invited corporate finance executives to participate in his Friday afternoon office hours to discuss SOFR issues and to join ARRC committees and respond to its consultations. “Having you all help to shape the way this goes forward is vitally important,” he said.

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Using Bloomberg for “Nuisance” Trades

Avoiding the time-intensive process of requesting trades in a centralized structure, local cash managers speed the process with online access to Bloomberg.

During a recent NeuGroup virtual meeting of FX managers, one member said he has started to use Bloomberg for local affiliates’ “nuisance trades.” These are foreign currency-denominated accounts payable under a certain USD-equivalent threshold.

Avoiding the time-intensive process of requesting trades in a centralized structure, local cash managers speed the process with online access to Bloomberg.

During a recent NeuGroup virtual meeting of FX managers, one member said he has started to use Bloomberg for local affiliates’ “nuisance trades.” These are foreign currency-denominated accounts payable under a certain USD-equivalent threshold.

  • Local freedom. The member noted his company’s corporate treasury manages FX worldwide, so they were happy to find that local cash managers are able to load their trades by accessing Bloomberg online (which doesn’t require Bloomberg terminal access) for the centralized team in the US to execute.
  • Straight through. This process has eliminated an inefficient trade-request process using email across various time zones. The team’s normal e-platform for FX trading is not the best solution for this because many local banks don’t have the technology to connect to it. But they are all connected to Bloomberg. Affiliates only need a login and an internet connection to submit trade requests.
  • Multicurrency. Bloomberg also can execute onshore trades and NDFs in currencies the other platform might not support, so the FX team is able to trade INR, CNY, MYR, THB, KRW, and BRL, all onshore.
  • A small catch. There is a fee for access and authority to upload trades to Bloomberg. But for this company, it is well worth the cost to efficiently reduce the time required for this workflow.
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Supply Chain Finance Not Immune from Pandemic Pain Felt by Banks

Higher funding costs for banks amid COVID-19 mean wider spreads in SCF market. An assistant treasurer at a major consumer goods company learned from supply-chain-finance (SCF) vendors that banks financing SCF assets have asked for wider spreads to compensate for their own higher funding costs, at least temporarily. The banks had agreed to a fixed spread that was still attractive in early March but, in the midst of the coronavirus economic meltdown, is much less so today. “It isn’t as attractive an asset at this moment, but long term it’s a terrific asset for the banks,” the member said at a recent NeuGroup virtual meeting. Because the banks see it as a long-term asset, they’re unlikely to “pull the rug out,” he said.

  • Another member noted that banks are struggling to syndicate risk from factoring programs as investors hoard cash, and they’re scrambling to find room on their balance sheets to keep their commitments.

Higher funding costs for banks amid COVID-19 mean wider spreads in SCF market.
 
An assistant treasurer at a major consumer goods company learned from supply-chain-finance (SCF) vendors that banks financing SCF assets have asked for wider spreads to compensate for their own higher funding costs, at least temporarily. The banks had agreed to a fixed spread that was still attractive in early March but, in the midst of the coronavirus economic meltdown, is much less so today.

  • “It isn’t as attractive an asset at this moment, but long term it’s a terrific asset for the banks,” the member said at a recent NeuGroup virtual meeting. Because the banks see it as a long-term asset, they’re unlikely to “pull the rug out,” he said.
  • Another member noted that banks are struggling to syndicate risk from factoring programs as investors hoard cash, and they’re scrambling to find room on their balance sheets to keep their commitments.

Beyond COVID. The consumer goods company is a big proponent of SCF and uses three solution providers. It turned to fintech Orbian rather than a major bank more than a decade ago, partly because it offered the ability to engage a wide group of relationship banks without having to set up multiple SCF programs.

  • The company was able to reward the third- and fourth-tier banks in its revolving credit facility by tapping them to be liquidity providers in the program.
  • Not only does that diversify liquidity providers, but it gives “ancillary business to these banks that, quite frankly, we have a hard time providing business to,” the AT said.
  • The other AT noted factoring programs can be used similarly. 

Beyond Orbian. A few years ago, the consumer-goods company’s CFO tasked the finance function with increasing days payable outstanding (DPO) and working capital. The first step, extending terms, required reworking contracts with thousands of vendors, before seeking to persuade them to use SCF.

  • To roll out an SCF program to a wider population of suppliers, the company signed on fintech Taulia, the AT said, partly because its innovative SCF onboarding procedure more closely resembles downloading an iPhone app than competitors’ documentation-heavy approach.
  • Taulia also offers dynamic discounting, typically aimed at smaller vendors with more urgent cash needs.
  • In addition, Taulia offers an e-invoicing portal to facilitate vendors’ invoice submissions that can be used by vendors that do not take part in SCF or dynamic discounting. 

Big strides. With the US, Canada and Western Europe covered in terms of SCF, the company sought a global bank last year to provide an SCF option to suppliers in Asia and Latin America. At this point, the company has made “noticeable strides in DPO,” jumping from the fourth quartile to the second quartile among corporate peers, the AT said.

  • Segmenting suppliers by size, sophistication, geography and other relevant factors is key. Larger and more sophisticated vendors typically opt for SCF, in which discounts resemble the investment-grade company’s revolving-credit rate, but smaller companies may accept dynamic discounts as high as 14%, “and I’ll do that all day long,” the AT said.
  • Speeding up invoice approval is also necessary for a successful SCF program, since slow approvals reduce benefits for all the parties. The company standardized invoices, and its policy is to no longer accept invoices by mail or even PDF.

Suppliers unable to submit electronic-data-interchange (EDI) invoices must send PDFs to Taulia, which converts them to EDI and processes them straight through to the company ERP. Both Taulia and Orbian plug and play into SAP.

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Closing a Quarter for SOX Can be Difficult in New, Remote World

An internal auditor describes what his company has done to successfully close a quarter when some physical tasks can’t be done.

Part of Sarbanes-Oxley, the internal controls act released in 2002, requires a corporate’s chief executive and financial officers to certify financial and other information contained in the issuer’s quarterly and annual reports. But what happens in a crisis? What if some of that info requires someone in place to record inventory or in-person meetings when employee movement is heavily restricted during the current pandemic?

An internal auditor describes what his company has done to successfully close a quarter when some physical tasks can’t be done.

Part of Sarbanes-Oxley, the internal controls act released in 2002, requires a corporate’s chief executive and financial officers to certify financial and other information contained in the issuer’s quarterly and annual reports. But what happens in a crisis? What if some of that info requires someone in place to record inventory or in-person meetings when employee movement is heavily restricted during the current pandemic?

Practice. One answer is the punchline to the joke, “How do you get to Carnegie Hall?” Practice, practice, practice. That’s essentially what one member of NeuGroup’s Internal Audit Peer Group has done over the past few years. The company developed a robust business continuity plan where SOX was a particular focus and has used it a few times over the years for natural disasters and has audited the plan several times. So with COVID-19, “We’re in pretty good shape,” the member said.

Take a photo. Despite the company being comfortable with remote working, there still are challenges to closing the quarter amid the global pandemic. This includes practices like obtaining “wet ink” signatures, getting people in place for inventory observation or cut-off testing for shipping.

  • In this case, the auditor said, the company “did what it could when it came to inventory.” Local managers took photos of inventory before they were told to leave the premises. And managers were able to obtain wet signatures while keeping in mind social distancing rules. Where this couldn’t be done, e-signatures like those provided by DocuSign were allowed.
    • In one of NeuGroup’s treasury peer group zoom meetings recently, one practitioner in Europe said his relationship banks were permitting DocuSign functionality for 90 days.
  • Preparation. The member’s company listed all the controls it thought it wouldn’t be able to use when people couldn’t access company buildings or managers had little access to each other.
    • “We identified the controls and have been able to postpone some reporting,” he said. “It’s going to be an interesting quarter, but I think we’ll be able to close with no problems.”
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Lock It Up: What You Need to Know About Pre-Issuance Hedging

The pros and cons of treasury locks and forward-starting swaps as bond issuance jumps.

 The crush of investment-grade issuers rushing to sell bonds as COVID-19 wreaks economic havoc has made pre-issuance hedging a relatively hot topic for many treasury teams.

  • Chatham Financial, sponsor of NeuGroup’s Virtual FX Summit, helped members get a firmer grip on the various ways to manage interest rate risk—and the associated accounting implications—during the summit and a subsequent Zoom meeting.

Here are some of the key takeaways:

The pros and cons of treasury locks and forward-starting swaps as bond issuance jumps.

The crush of investment-grade issuers rushing to sell bonds as COVID-19 wreaks economic havoc has made pre-issuance hedging a relatively hot topic for many treasury teams.

  • Chatham Financial, sponsor of NeuGroup’s Virtual FX Summit, helped members get a firmer grip on the various ways to manage interest rate risk—and the associated accounting implications—during the summit and a subsequent Zoom meeting.

Here are some of the key takeaways:

  • Treasury locks are quite efficient as a short-term hedge (even intra-day), but can be less efficient when debt issuance is further out than three months, so it can be difficult to apply hedge accounting.
    • They may be easier to explain to senior management than a forward-starting swap, but the market is also not as liquid nor as transparent. 
    • Another con: You’ll pay a “roll” premium if the tenor goes beyond the next treasury auction.
  • Forward-starting swaps can be efficient as both a short-term and long-term hedge, but are predominantly used for longer-term refinance risk.
    • While more liquid, forward-starting swaps also add an element of “basis risk” in the event that swap spreads compress over US treasuries, which in turn can add a layer of complexity when seeking senior management approval.
  • Have a plan. Chatham Financial stressed that regardless of which option a company chooses, it’s important to have a plan in place including internal approvals that would permit the treasury team to execute hedges quickly if markets moved in a favorable direction. This sort of “readiness book” also helps prepare teams to strike while the capital markets are in their favor.
  • Check out Chatham’s table below for more comparisons between treasury locks, forward-starting swaps and swaptions. And to dive deeper into the economic and accounting considerations, contact the experts.
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Go with the Flow: How Treasury Is Adapting to Churning Markets

Flexibility and resourcefulness are critical as treasury teams cope with fallout from COVID-19. Assistant treasurers at a virtual NeuGroup meeting last week exchanged numerous examples of resourcefulness and flexibility in coping with the effects of the pandemic on FX trading, capital markets and other areas of responsibility. Here are some top takeaways: Time for algos. One AT said spot trading in the FX market became “ridiculous” as liquidity vanished and spreads widened, making it difficult to close out small spot trades. That means the FX team is “one of the most impacted right now,” she said.

  • As a result, she said the team has opened its toolbox and is using algos “ridiculously more” than usual.
  • Algos search out and aggregate snippets of liquidity across the market over time, and sometimes are used to mask the market participant’s intentions.

Flexibility and resourcefulness are critical as treasury teams cope with fallout from COVID-19.

Assistant treasurers at a virtual NeuGroup meeting last week exchanged numerous examples of resourcefulness and flexibility in coping with the effects of the pandemic on FX trading, capital markets and other areas of responsibility. Here are some top takeaways:

Time for algos. One AT saidspot trading in the FXmarket became “ridiculous” as liquidity vanished and spreads widened, making it difficult to close out small spot trades. That means the FX team is “one of the most impacted right now,” she said.

  • As a result, she said the team has opened its toolbox and is using algos “ridiculously more” than usual.
  • Algos search out and aggregate snippets of liquidity across the market over time, and sometimes are used to mask the market participant’s intentions.

Meeting the market. A rebound in the credit markets and healthy liquidity in investment grade bonds allowed many corporates to sell debt last week—but not under typical circumstances and therefore requiring flexibility.

  • One member described deciding tenor and size for a large, multi-tranche deal by paying more attention than usual to meeting market demand, noting, “You can’t wait for the perfect day in this marketplace.”
  • “We had good demand and were oversubscribed across all maturities, but we let the market dictate our maturities when normally we would driven that ourselves,” he said.
  • The AT of a major consumer-goods company, which had issued late the week before, said there was plenty of liquidity but very few of the usual large investors showed up. “We actually had to ask our banking partners who some of them were,” he said, adding that it looked then like investors “were getting ready to park their cash and go home for awhile.”
  • The investors that did step up made a good bet. Another member said he had heard that the bonds issued by the first AT had tightened 66 basis points since issuance.

Documents still must be signed. Even when almost everyone is working remotely, bank documents and checks still need signatures. Two members said their teams have set up schedules to limit staff entering the building to perform that function. Another offered that a scanned phone version of the document can speed up the process, leaving signatures on the actual documents for later on.

New approach to earnings calls? One AT member asked peers about handling the Q1 earnings process, given most employees now work from home and her company’s earnings are scheduled for release in late April.

  • “We’ve had some internal discussions about whether to do the process like we normally do it, with a regular call, or do something different,” she said.

Another member whose company’s earnings are scheduled for early May said his team had tentatively mapped out a virtual call as part of its business continuity plan. Recent discussions have focused on setting a schedule to prepare for the event and planning mock calls.

  • “We’ve kicked off the effort, but it’s probably 50/50 that will actually do it [in early May] at this point,” he said, adding, “We’re testing feasibility over the next two to three weeks.”
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Listen Up: A Banker’s Reality Check for Corporates Tapping Credit Lines

Societe Generale offers insights on bank pricing and priorities as companies seek cash safety. Companies determined to bolster their balance sheets by tapping revolvers or looking for loans, take heed: Bankers will view some drawdowns and requests much more favorably than others, and it pays to understand the bank’s perspective.

  • That insight and others emerged during comments by Guido van Hauwermeiren, Societe Generale’s head of coverage and investment banking in the Americas. He spoke this week during NeuGroup’s Assistant Treasurers’ Group of Thirty virtual meeting, sponsored by SocGen.
  • The meeting took place against the backdrop of some 130 companies drawing down $124 billion in credit lines since March 1, according to the Financial Times.

Societe Generale offers insights on bank pricing and priorities as companies seek cash safety.

Companies determined to bolster their balance sheets by tapping revolvers or looking for loans, take heed: Bankers will view some drawdowns and requests much more favorably than others, and it pays to understand the bank’s perspective.

  • That insight and others emerged during comments by Guido van Hauwermeiren, Societe Generale’s head of coverage and investment banking in the Americas. He spoke this week during NeuGroup’s Assistant Treasurers’ Group of Thirty virtual meeting, sponsored by SocGen.
  • The meeting took place against the backdrop of some 130 companies drawing down $124 billion in credit lines since March 1, according to the Financial Times.

Credit committee stress. Pent-up demand for new loans is stressing out bank credit committees, and that’s forcing bankers to pick who goes to the front of the line. As a result, Mr. van Hauwermeiren said, blue-chip companies that have funded long-term projects with short-term commercial paper (CP) may find banks unwilling to replace that inexpensive funding with a similarly priced loan.

  • “I’m not going to put requests from companies that have been financing project finance with CP on the top of the pile, or even in the pile,” he said.

Cash flow vs. buybacks. Client history will play a role in determining bank priorities. Companies with strong bank relationships that face disrupted cash flows or other types of financial duress can rely on the bank to do whatever possible. Those looking to fund share buybacks, less so.

  • “We’re saying there’s not enough money to go around, so you can’t do that,” Mr. van Hauwermeiren said.

Repairing and repricing. Revolving credit facilities (RCFs) have been the “lifeblood” for many companies, “but that system needs to be repaired, and I’m sure it will get repriced,” the SocGen banker said.

  •  Facilities priced between 30 and 45 basis points over LIBOR will likely see spreads widen to the 125 bps over Libor range, Mr. van Hauwermeiren said.

When to draw? An AT30 member asked if it was better to draw down a facility now, even if the company doesn’t need the liquidity, since it will face higher pricing anyway. Noting the new rules have yet to be written, Mr. van Hauwermeiren said he doesn’t foresee a stigma on corporates drawing down facilities, if it’s done the right way.

  • For example, he said, a highly rated company could request a new facility at the higher rate on top of its existing, inexpensively priced backstop, and promise to draw down only the new one if need arises. “That’s a sensible, relationship-type of play, and those borrowers will be viewed fondly,” he said.
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DIY: Forming Mentoring Circles That Lead to Sponsorship

More takeaways from the Women in NeuGroup meeting featuring three senior executives at one company.

The Women in NeuGroup (WiNG) virtual meeting held last week highlighted the use of mentoring circles as a building block for sponsorship—where someone senior to you in the company advocates for your advancement. Our first story described how the process works at one major American multinational, as described by three senior executives. Below are more takeaways from the meeting as distilled by Anne Friberg, senior director of peer groups at NeuGroup.

  • Yes, you can build your own. It doesn’t really require corporate sponsorship to build mentoring circles like the one featured at the WiNG event. You can start your own with women (and men) whom you know and just go for it. The one stumbling block may be to get budget approval for things like traveling along with mentors to other company facilities, for example, but most of the suggested actions don’t incur much cost. (Of course, almost no one is traveling now, but that will change some day.)
  • Don’t be afraid to ask someone to be a mentor (or even sponsor). The worst that can happen is they say no. The key is not to let that dent your confidence, and the silver lining is that it also opens up for a conversation of what it would take for them to consider mentoring or sponsoring you.

More takeaways from the Women in NeuGroup meeting featuring three senior executives at one company.

The Women in NeuGroup (WiNG) virtual meeting held last week highlighted the use of mentoring circles as a building block for sponsorship—where someone senior to you in the company advocates for your advancement. Our first story described how the process works at one major American multinational, as described by three senior executives. Below are more takeaways from the meeting as distilled by Anne Friberg, senior director of peer groups at NeuGroup.

  • Yes, you can build your own. It doesn’t really require corporate sponsorship to build mentoring circles like the one featured at the WiNG event. You can start your own with women (and men) whom you know and just go for it. The one stumbling block may be to get budget approval for things like traveling along with mentors to other company facilities, for example, but most of the suggested actions don’t incur much cost. (Of course, almost no one is traveling now, but that will change some day.)
  • Don’t be afraid to ask someone to be a mentor (or even sponsor). The worst that can happen is they say no. The key is not to let that dent your confidence, and the silver lining is that it also opens up for a conversation of what it would take for them to consider mentoring or sponsoring you.
  • It can get awkward with close associates. What if you started out at the same level with a long-time colleague, but now you’re in a more senior role and you’re mentoring that person? And what if you really feel you cannot in good conscience sponsor this person for a promotion or joining your team? Remember the key tenets of productive mentor and sponsor relationships: They require trust, honesty, communication and commitment. When you’ve known someone for a long time and may be friends outside work, this is hard.  But—gulp—take a deep breath and be honest about why you cannot sponsor someone, and be generous about sharing what you believe the areas of improvement required for your sponsor support are.
  • Prepare yourself for being sponsored. Not everyone is as aware as they would like about their own skill set or what’s required for being “discovered” and sponsored. If that sounds like you, it may pay to take an assessment from StrengthsFinder or similar services. That way, you can be more confident in putting yourself forward for something that suits your strengths, or seek out opportunities where you may need to dig deeper and develop an area that’s less of a strong suit for you to balance out your skill set. And mind you, a sponsor who’s gotten to know you may well see strengths and capabilities more clearly than you do.
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Beyond Revolvers: What NeuGroup Members are Talking About Now

More of Joseph Neu’s takeaways from virtual meetings dominated by talk of cash and liquidity. The waterfall of insights cascading from NeuGroup’s virtual meetings this month requires expert judgment on wringing out and distilling what matters most. One expert is NeuGroup founder Joseph Neu, who on Tuesday offered his take on tapping credit lines. Here are some of his other takeaways: Converts as an option. Industrial companies said they are looking at the convertible debt market as a financing option. Typically, these are the domain of tech and life sciences firms, so investors are said to be looking for diversification. Reviewing cash flow models. It pays to have a good cash flow model and members report reviewing those and watching key metrics. For example, recurring revenue companies: An increase in churn and pricing declines. Scenario plans are also being layered on top of these. “We are fine for a few months, but eight months is another matter,” one member said.

More of Joseph Neu’s takeaways from virtual meetings dominated by talk of cash and liquidity.

The waterfall of insights cascading from NeuGroup’s virtual meetings this month requires expert judgment on wringing out and distilling what matters most. One expert is NeuGroup founder and CEO Joseph Neu, who on Tuesday offered his take on tapping credit lines. Here are some of his other takeaways:

Converts as an option. Industrial companies said they are looking at the convertible debt market as a financing option. Typically, these are the domain of tech and life sciences firms, so investors are said to be looking for diversification.

Reviewing cash flow models. It pays to have a good cash flow model and members report reviewing those and watching key metrics. For example, recurring revenue companies: An increase in churn and pricing declines. Scenario plans are also being layered on top of these. “We are fine for a few months, but eight months is another matter,” one member said.

Cash forecasts not good enough. Even the best forecasters are challenged with the demand and supply shocks set off by this crisis. If you are hedging forecasted exposures, it really pays to be a hedge accounting whiz with hedged item designations and your effectiveness testing methodology. Even then auditors may want to put you into the penalty box, so be prepared to push back.  

Can you still concentrate global cash? Evaluate cash positions across the globe and the ability to centralize it under various contingencies, including currency controls being reimposed or tightened. This will become a bigger risk if FX rates continue to weaken.

Supply chain finance. Treasury should be working with banks and supply chain finance solution providers to take efficiency to the max level in onboarding and matching invoices for early payment to support key suppliers so they can focus their own balance sheet efforts on the most vulnerable suppliers that don’t have invoices to factor. One member noted the irony that a bank can hold their paper backed by supply chain finance obligations, but not its CP, which is a regulatory anomaly versus a credit risk economic issue. The member also noted that bank and investor demand for commercial-trade/invoice-backed financing for suppliers is said to be holding up well. This is huge given this context.

Signing documents. Tell banks and others allowing DocuSign (and other digital signature tools) that are allowing them as a temporary crisis fix that they should be good enough for the future, too. People to do company chops or process documents needed for cross-border transfers might not be available, which could delay cross-border transfers (see above).

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Bonds in the Time of COVID-19: Timing Is Everything

Treasury teams need to be prepared to pounce as investor sentiment shifts wildly in capital markets.

Be prepared so you can be nimble. That’s the advice from a treasurer whose company pounced when investor sentiment in the investment grade corporate bond market allowed nine corporates to issue $25 billion in debt on one day this month before the window slammed shut again amid COVID-19 fear.

  • “You have to take what the market gives you and respond to the environment around you, which has seen a bear market in equities and severe liquidity stress in credit markets,” he said during a recent NeuGroup meeting of mega-cap multinationals.
  • Several peers congratulated the treasurer on his team’s ability to act fast, with one saying, “Thanks for going out there and being our golden child. Thank God you did it yesterday.”
  • Another treasurer said his company is working on a bond offering but wasn’t prepared to tap the capital markets as quickly.

Treasury teams need to be prepared to pounce as investor sentiment shifts wildly in capital markets.

Be prepared so you can be nimble. That’s the advice from a treasurer whose company pounced when investor sentiment in the investment grade corporate bond market allowed nine corporates to issue $25 billion in debt on one day this month before the window slammed shut again amid COVID-19 fear.

  • “You have to take what the market gives you and respond to the environment around you, which has seen a bear market in equities and severe liquidity stress in credit markets,” he said during a recent NeuGroup meeting of mega-cap multinationals.
  • Several peers congratulated the treasurer on his team’s ability to act fast, with one saying, “Thanks for going out there and being our golden child. Thank God you did it yesterday.”
  • Another treasurer said his company is working on a bond offering but wasn’t prepared to tap the capital markets as quickly.

Be prepared to call an audible. The treasurer said his company has had a liquidity planning playbook since the 2008 financial crisis and had been looking to tap the capital markets for the last month. The market’s violent swings forced him to change the company’s original plans several times.

  • “We pivoted from a debt exchange which exposes you to 10 days of market risk until closing to an unsecured bond offering which gets you in and out of the market in one day,” he explained.
  • “We decided to warehouse liquidity on our balance sheet as a sign of strength, and once the coast is clear we can consider liability management and debt repayment.”

Laying the groundwork. To prepare to act fast, treasury told the board to consider the debt offering as “relatively cheap insurance” even though “it was really scary to dip your toe into this market,” the treasurer said.

  • The company’s ability to take advantage of the open window also involved having disclosure decisions in place. The company filed an 8-K that said, “Due to the speed with which the situation is developing, we are not able at this time to estimate the impact of COVID-19 on our financial or operational results, but the impact could be material.”
  • The treasurer received many more calls than normal from investors and relied on the 8-K, which stated, “COVID-19 may affect the ability of our suppliers and vendors to provide products and services to us. Some of these factors could increase the demand for our products and services, while others could decrease demand or make it more difficult for us to serve our customers.”

Hedging advice. Given the volatile nature of markets, the treasurer had this advice for peers looking to reduce interest-rate risk: “I highly encourage folks to do intraday hedging if you’re hedging the market.”

  • As distilled by NeuGroup founder Joseph Neu, “Pre-issuance hedging using the full knowledge base on treasury locks, swap locks, including intra-day rate hedging, and the hedge accounting implications are a must in this market.”
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Little or No Pushback Has Corporates Drawing on Credit Lines—At What Cost?

Founder’s Edition by Joseph Neu Insights on the reasons to tap revolvers and what the trend may mean for banks and treasury. One clear insight emerging during our first several NeuGroup virtual meetings as the COVID-19 crisis escalates is that corporates are taking a slew of steps to bolster their liquidity positions. Among the most notable: All but the most stellar credits are drawing on revolving credit facilities (RCFs), a move that has potentially profound implications for banks.

  • As Reuters noted recently, “After the 2008 financial crisis, several blue-chip companies drew down on revolving credit facilities, shocking banks that had charged minimal interest margins on the assumption the loans would remain unused (my emphasis).”

Founder’s Edition by Joseph Neu

Insights on the reasons to tap revolvers and what the trend may mean for banks and treasury.

One clear insight emerging during our first several NeuGroup virtual meetings as the COVID-19 crisis escalates is that corporates are taking a slew of steps to bolster their liquidity positions. Among the most notable: All but the most stellar credits are drawing on revolving credit facilities (RCFs), a move that has potentially profound implications for banks.

  • As Reuters noted recently, “After the 2008 financial crisis, several blue-chip companies drew down on revolving credit facilities, shocking banks that had charged minimal interest margins on the assumption the loans would remain unused (my emphasis).”

This time is different—kind of. The good news is that 12 years after the financial crisis began, banks are solid, have buffers and are in a good position to weather this storm; plus, central banks are backing them in a bigger way. Yet the pricing of RCFs, in the US especially, still largely assumes they will remain undrawn and often does not reflect the true cost of the credit.

  • If the stigma of drawing on an RCF for a company that normally relies on the capital markets goes away, then bank pricing of them will need to reflect that.
  • Indeed, it is happening already as banks have been adjusting the pricing of liquidity on RCFs, bilats, term loans et al. If you were used to 35 to 45 basis points over on an RCF, you should not expect any new lending at that price—it has gone up, said one banker to our members. If everyone one draws, and rating agencies start to rethink downgrading, banks are going to start to feel more pain and reprice their risk further. For some, their liquidity and capital ratios may come under duress. Banks will remember who drew when it comes time to renew.
  • So, if the drawing on RCFs continues, accordingly, treasurers should be prepared to kiss the RCF market they are used to goodbye. This will obviously have knock-on effects on the entire business model for bank pricing, fees and wallet analysis and bank relationship management.

Here are more of my takeaways on this topic from what we’re hearing from members and bankers so far:

Hoarding toilet paper. A banker invited to the opening of a Zoom meeting last week characterized the liquidity and capital markets situation as being like hoarding toilet paper: Those wealthy enough to buy and store it in bulk are creating shortages. They don’t need as much as they are buying, preventing those who really need toilet paper from finding any.

  • Similarly, high-grade corporates are taking as much liquidity as they can, hoarding cash and crowding out other market participants. Some are drawing on RCFs and term loans when they don’t have liquidity needs. Those with big needs are drawing down big facilities.
  • It feels like the stigma of this move signaling duress is gone.

No pushback. One member walked thought the thinking to draw a significant portion of his facility. “We spoke to the banks and our rating agencies and got no pushback.” One bank said “this is unusual, as we have not seen other companies in your sector do it,” but that was it. Rating agencies did not seem concerned “as our plan was to sit on the cash.”

CP market becoming hard work. A big reason to consider a draw is that the CP market is getting more difficult. One A2/P2 member has still been able to place paper even at one-month tenors (due to the quality of its name and business position in this crisis), but it’s been choppy. A1/P1 issuers are have only a bit better luck, but some quality names are reporting it’s taking more of an effort to place CP.

MAC clause concerns. A significant consideration in drawing before you need to is the MAC clause. If you think COVID-19 might trigger a material adverse change in the business, then it’s a reason to draw sooner.  

Deposit cash in banks you draw on. To mitigate some of the renewal repricing from drawing on your RCF, banks will advise you to deposit the drawn funds back with them. Unfortunately, the risk evaluation is not often the same for the banks you allow to provide you credit and those you will extend credit to in the form of a deposit. You also need to see if there is a set-off clause in the revolver.

Bank deposits or T-Bills? Part of the decision to draw on a facility is the bank risk, so one member said his plan is to put the cash into T-bills vs. bank deposits. Money market funds are also being watched closely. Prime funds (post reform) are facing their first crisis test, with some floating NAVs below $1, testing gates etc.

No to 8-K. While law firms have advised some members on the need to file an 8-K with a draw, other members got comfort that they could avoid the headline risk by foregoing an 8-K. They will have to note the draw in the 10-Q, but they have some time until the end of the quarter to determine if they want to pay it back before or not.

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Communication Is Key When Drawing on a Revolver

Get buy-in from internal and external stakeholders as you guard against a COVID-19 liquidity crunch. Every day seems to bring news of another multinational corporation drawing down some or all of a revolving credit facility to weather potential liquidity disruptions created by market reaction to the coronavirus outbreak. News reports say private equity firms like Blackstone are encouraging portfolio companies to tap credit lines.

  • The companies recently tapping revolvers include Kraft Heinz, L Brands and Carnival.

Get buy-in from internal and external stakeholders as you guard against a COVID-19 liquidity crunch.

Every day seems to bring news of another multinational corporation drawing down some or all of a revolving credit facility to weather potential liquidity disruptions created by market reaction to the coronavirus outbreak. News reports say private equity firms like Blackstone are encouraging portfolio companies to tap credit lines.

  • The companies recently tapping revolvers include Kraft Heinz, L Brands and Carnival.

NeuGroup Insights reached out to the treasurer of a company whose SEC filing announcing the drawdown of its revolver described the move as a precautionary measure to increase its cash position and “preserve financial flexibility” in light of current uncertainty in the global markets resulting from the COVID-19 outbreak.

  • The form 8-K also said the proceeds are now on the company’s balance sheet and may be used for general corporate purposes.

Buy-in across the board. The treasurer said the decision to draw down on the revolver was agreed upon at the highest levels of the company. In addition to the reasons for acting now that are spelled out in the 8-K, the company wanted to avoid a situation where it could not access the full amount of the revolver, he said.

Proactive outreach. The treasurer said the company considered the perceptions of investors and the three credit rating agencies, in part because it wants to maintain its current ratings. The treasurer said the company is committed to transparency with the agencies and its banking partners and was proactive with each group. Its strong liquidity position and conservative financial policy—along with the reasons in the 8K—supported taking this prudent, precautionary move, he added.

Bottom line. In the end, a lot depends on what you do before announcing the decision to draw down a revolver. “It’s the matter of communicating with internal and external stakeholders to the extent you can,” the treasurer said. “You want to make sure they understand the intent and are not caught off guard.” And the common denominator in all these conversations and relationships, he said, are trust and transparency.

Legal stuff. Law firmsare offering recommendations and observations to corporates considering the drawdown of revolvers. The firm Fried Frank says borrowers should review their credit agreements for “force majeure” or similar provisions that might excuse a revolving lender’s obligation to lend in bad economic environments. But it adds that, typically, “committed facilities do not include such provisions.”

Here are some other takeaways, from White & Case:

  • SEC 8-K filings typically disclose the amount of the borrowing, the interest rate, and the total cash available to the company after giving effect to the borrowing.
  • Companies also include a short reason for the borrowing that may include, depending on the circumstances, that it is a precautionary measure to increase cash and preserve flexibility in light of uncertainties surrounding COVID-19 and the global economy.
  • Companies provide a short summary of the terms of the relevant credit facility and a reference to the initial filing in which it was disclosed and attached as an exhibit.
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Using Mentoring Circles to Cultivate Organic Sponsorship for Women

Mentoring circles can help women find sponsors who can advocate for their career advancement.

Three women who are senior finance executives at a major multinational corporation described how their company organically builds sponsorship using so-called mentoring circles to support the development needs of high-potential talent. The three spoke this week at a Women in NeuGroup virtual meeting.

  • One of the women described mentoring circles as groups of 10 to 20 people led by more senior employees to discuss topics of common interest and engage in activities to support career development.

Mentoring circles can help women find sponsors who can advocate for their career advancement.

Three women who are senior finance executives at a major multinational corporation described how their company organically builds sponsorship using so-called mentoring circles to support the development needs of high-potential talent. The three spoke this week at a Women in NeuGroup virtual meeting.

  • One of the women described mentoring circles as groups of 10 to 20 people led by more senior employees to discuss topics of common interest and engage in activities to support career development.

Sponsor vs. mentor. “A mentor talks with you, and a sponsor talks about you.” That concise phrase captures a key difference between the two roles, as described in the panelists’ presentation. In addition:

  • A mentor helps you navigate your career, provides guidance, acts as an advisor or sounding board.
  • A sponsor uses strong influence to help you obtain high-visibility assignments, promotions; advocates for your advancement and champions your work and potential to senior leaders.

Why sponsorship matters. The presentation cited research showing:

  • 70% of individuals with sponsors felt more satisfied with their career advancement.
  • Women with sponsors are 22% more likely to ask for “stretch” assignments.
  • Women are 54% less likely than men to have a sponsor.

A Catalyst report also notes that among the benefits of sponsorship are increased loyalty and tenure and a willingness to give back by mentoring and sponsoring others.

Personal stories. One of the women cited her promotion from the senior director level to an officer role as the best example of how she benefited from sponsorship. She said a colleague took a calculated risk in recommending she take his job because he believed in her based on the work she did. Her advice: “You have to work for mentorship and sponsorship; it doesn’t just come to you.”

  • She and the other panelists agreed that doing a great job in the position you’re in is critical in building the trust necessary for a mentor to become a sponsor.

Sponsors cannot be assigned. No matter how structured and well-thought-out a program to advance the careers of women and other under-represented groups, you can’t force sponsorship. So the presenting company uses mentor circles “to create an environment” where a sponsor relationship can develop organically.

  • The structure of the mentor circles at the company promote various opportunities to talk, travel and work together, allowing mentors to learn enough about their mentees to make a decision to sponsor some but not all of them. That means the sponsor uses her own reputational capital to influence decisions about promotions for the mentee.