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

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.”

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.

At their most basic virtual accounts are simply a way of organizing and reporting data within a real bank account.

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 integrated across 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.

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 integrated across all the firm’s product offerings, real time if required.

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 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.

Virtual accounts drive significant efficiencies within a given legal entity, but they can also be a powerful on-behalf-of tool when applied to corporate structures.

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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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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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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Founder’s KTAs from NeuGroup for Pension and Benefits 2020 H1 Meeting

Crisis Team

By Joseph Neu

The NeuGroup for Pension and Benefits 2020 H1 meeting took place last week, sponsored by BNY Mellon and their subject matter expert Insight Investment. 

Here are a few takeaways I wanted to share: 

Interregnum part 2. Insight Investment CEO Abdallah Nauphal put the Covid-19 crisis into the context of his thesis presented last October that the world is in an interregnum period between the financial-economic system that emerged from World War II and what comes next. Covid-19 is a likely trigger for pushing us further toward a new financial economic order.

To pass through it, his colleagues note, we will probably travel through three acts of crisis:

  1. Act 1, a liquidity crisis
  2. Act 2, a credit crisis and
  3. Act 3, an inflation crisis that will ultimately crescendo to the crisis that ushers in a new system.

  •  We are currently entering Act 2, the credit crisis, which means pension funds should continue to allocate investments to high-quality credits and select, lower-quality assets with visible cash flows offering better returns.
  • Pension plan sponsors need to use Act 2 to win authorization from plan committees to move quickly when it is time to target real cash flows and inflation protection, shifting allocations to inflation-linked assets and bonds, equities and other real assets.

By Joseph Neu

The NeuGroup for Pension and Benefits 2020 H1 meeting took place last week, sponsored by BNY Mellon and their subject matter expert Insight Investment. 

Here are a few takeaways I wanted to share: 

Interregnum part 2. Insight Investment CEO Abdallah Nauphal put the Covid-19 crisis into the context of his thesis presented last October that the world is in an interregnum period between the financial-economic system that emerged from World War II and what comes next. Covid-19 is a likely trigger for pushing us further toward a new financial economic order.

To pass through it, his colleagues note, we will probably travel through three acts of crisis:

  1. Act 1, a liquidity crisis
  2. Act 2, a credit crisis and
  3. Act 3, an inflation crisis that will ultimately crescendo to the crisis that ushers in a new system.
  •  We are currently entering Act 2, the credit crisis, which means pension funds should continue to allocate investments to high-quality credits and select, lower-quality assets with visible cash flows offering better returns.
  • Pension plan sponsors need to use Act 2 to win authorization from plan committees to move quickly when it is time to target real cash flows and inflation protection, shifting allocations to inflation-linked assets and bonds, equities and other real assets.

Pension best practice is very firm and situation dependent. For example, LDI and hedge strategies were validated by this crisis. The performance of fixed income assets boosted the confidence of plans that deployed LDI and also STRIPS and overlay strategies.

  • But it helped to be in a well-funded position to implement them in the first place.
  • And you also need to have committee approval to deploy overlays.

Underfunded plans, meanwhile, now face big decisions to make regarding the timing of moves to rebalance toward equities or otherwise re-risk.

Recreating a “pension” option for DC plans. Traditional annuities offered by insurance companies have earned a bad reputation, yet employees who retire fear running out of money more than they do dying.

  • Employers should, therefore, look to offer DC plan participants retirement income certainty options to keep retirees in their plans and
  • Work with the investment and insurance community to design better solutions. 
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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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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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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.

Agree on expectations. Panelists and participants agreed that the best mentorship relationships begin with a clear intentions and goals. “Be very deliberate about it,” one panelist said. “It’s important to have a shared set of expectations.” She recommends seeking mentors in other areas of the company to whom you would not normally have access. Another panelist said that it pays to be flexible and find both women and men to serve as mentors and sponsors.

Know when to end the relationship. One panelist praised a former mentoring circle leader who was clear in saying, “Your name has been given to me, I want to invest in you; but when this is not valuable, let’s admit that and move on and give someone else the spot.”

Transparency matters. Some participants described being surprised at learning—after the fact—that someone had played the role of sponsor for them in supporting their advancement.

  • One woman only found out after she left her previous company that she had people in her corner who were very supportive of her work and capabilities. That could have made all the difference for her motivation to leave or stay.
  • In general, she said, knowing she has a sponsor will motivate her and make her feel nurtured. Absent that knowledge, it’s possible to “misinterpret how the organization feels about you,” she said.
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A Coronavirus Crisis Treasury Playbook

Treasurers probably haven’t seen crises like this before. Here’s what they can learn from past events. The COVID-19 pandemic has presented the modern world with an almost unprecedented crisis. And the daily onslaught of worrying headlines—cancelled sports seasons and parades, Tom Hanks and wife infected, travel bans—seems to be triggering mystifying actions by panicked consumers, like the run on toilet paper. But despite COVID-19’s unprecedented nature, for treasurers there actually is precedent, so there should be no mystery about what needs to be done (and certainly, Microsoft is not going to run out of Excel spreadsheets).

Treasurers probably haven’t seen crises like this before. Here’s what they can learn from past events.
 
The COVID-19 pandemic has presented the modern world with an almost unprecedented crisis. And the daily onslaught of worrying headlines—cancelled sports seasons and parades, Tom Hanks and wife infected, travel bans—seems to be triggering, mystifying actions by panicked consumers, like the run on toilet paper. But despite COVID-19’s unprecedented nature, for treasurers there actually is precedent, so there should be no mystery about what needs to be done (and certainly, Microsoft is not going to run out of Excel spreadsheets).
 
During the eurozone crisis that began in 2009 and stretched into 2013, treasurers were guided by time-tested cash management principles honed in the US financial crisis of 2008 (and perhaps other crises like Argentina in the early 2000s). But they were also forced to create more comprehensive contingency playbooks addressing all aspects of business risk.
 
And although treasurers were caught off guard like everyone else by the speed of the current COVID-19 crisis, they can still check to make sure playbooks are up to date for whatever lies ahead. Generally speaking, these playbooks should include a range of risks and mitigation steps to ensure minimal disruption for clients and employees and are typically incorporated into a larger corporate-wide strategy that addresses all aspects of the business.  
 
The list below is culled from a late 2012 article, in which NeuGroup Insights’ predecessor, iTreasurer, asked members to list the important aspects that should be considered in the creation of their playbooks. We think it has aged well enough to be included in what now can be called the Coronavirus Crisis Playbook. Take a look:

Show me the money. Liquidity fears are one of the most prominent issues faced by members and are the subject of a variety of stress-testing scenarios and contingency planning strategies. It is important to understand how our organization will manage through extreme levels of volatility making sure that your cash is safe and accessible as needed. Extreme contingency plans have gone as far as holding levels of cash on hand in vaults and other secure locations in the event that banks are closed, and funds are unavailable for an extended period of time.

  • Making sure that the business can function after a significant event or during ongoing ones like now is of a primary focus for treasurers and their teams. It is possible that banks would close for a period of time and would impose capital controls or other reporting requirements or lifting fees, so it is critical that treasurers identify ways to keep the local office running as smoothly as possible. These important step-by-step details should be included in the overall contingency strategy.

2020 refresh: Ed Scott, retired treasurer of Caterpillar, recommends treasurers “pressure test their business plan” and suggests they “revise projections” to assume a one, two or three-month decline in revenue.
 

People management. All members agreed that it is important to ensure you have accurate updated employee contact information as well as a documented communication plan (call tree) so that you can quickly contact all appropriate stakeholders in the event it becomes necessary. Each member of the crisis team should understand their individual roles and responsibilities, and the business dependencies, in the event of market disruption.

  • This plan should be tested with sporadic “surprise drills” so that everyone can be sure the pieces are in place and are working as expected. It is always best to test contingency plans well before they are executed in real-time.

2020 refresh: Does your company have the technology in place for employees to work and meet remotely?
 

Payment and collections. Contingency planning for a disruption in your payment or collections activity should include a full understanding of your key customers, including their ownership and business location. You should know where your largest customers source their revenue so that you can determine potential downstream effects and plan accordingly. It is also important to understand the business details of your key suppliers; where they are headquartered and where they source their raw materials, so that you can plan for potential disruptions in the delivery of your raw materials to ensure production is not disrupted. 

  • It is important to identify a communication plan for large key clients and vendors so that you are ready to address payment terms if necessary. Some members have implemented supply chain finance programs in the event their key clients are unable to access bank funding. 

2020 refresh: Many companies now use suppliers from different regions as a redundancy measure. Are these other suppliers up to date on your business plans?

Trigger events. Each organization will need to address relevant trigger events that are specific to their individual organization. It is important to understand what trigger events you will monitor to ensure an early warning of potential disruption. Try not to predict what might happen, but instead use it as a contingency-planning tool. Understand where your cash is and how you can access it. Identify what key stressors exist in your supply chain and how can you contain risk to prevent significant business disruption.

  • Crisis management teams should meet periodically to address any changes to the status of the crisis and make necessary changes based on specific trigger events that may have occurred.

2020 refresh: “Each company should then determine what they can do to manage their variable expenses and cashflow,” Mr. Scott says.
 

Operations and technology. Have you stress-tested existing systems and procedures to manage changes in volume? Are you confident in the readiness plans of any third party providers? How soon will software providers be ready to accept new payment instructions or new currency codes? These questions should be carefully considered as part of the overall contingency strategy. The smallest detail can trip up a treasury team if it was not considered ahead of time. Some members have gone as far as to create new accounts with banks outside the “danger zone” to be opened upon the announcement of a country exit or bank closures.

2020 refresh: All TMS functions should be in the cloud.

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Not All Bank Fees Are Created Equal

In good times and bad, treasury teams benefit from knowing how their banks look at the world. That’s one reason this chart, created by NeuGroup’s Scott Flieger, is compelling. It shows which products are especially important to banks by measuring both their relative profitability and how much balance sheet impact they have. A third dimension shows which products result in predictable revenue and which are more episodic in nature. Most members found the slide “directionally accurate” and helpful in explaining why…

In good times and bad, treasury teams benefit from knowing how their banks look at the world. That’s one reason this chart, created by NeuGroup’s Scott Flieger, is compelling. It shows which products are especially important to banks by measuring both their relative profitability and how much balance sheet impact they have. A third dimension shows which products result in predictable revenue and which are more episodic in nature. Most members found the slide “directionally accurate” and helpful in explaining why banks have been more aggressive on some products versus others. 

  • Mr. Fleiger explained that FX revenue is important to banks because of its high level of predictability. And while “flow” FX business such as spot FX transactions may not be terribly profitable, it allows banks to demonstrate their competitive strengths and commitment to corporates. It may also increase their chances of being selected when more lucrative opportunities presents themselves, including FX transactions associated with cross-border strategic M&A.
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It’s Time for Nonfinancial Corporates to Gear Up Libor-SOFR Transition Plans

Founder’s Edition, by Joseph Neu

NeuGroup member calls with corporate treasury leaders reveal preparation gaps.

Some NeuGroup corporate members—nonfinancial institutions—are well on track with planning to transition off Libor before the end of 2021. One company, Ford Motor, has even joined the Alternative Reference Rates Committee (ARRC), a group of private-sector participants convened by the Federal Reserve Board and the New York Fed to help identify alternatives to Libor and develop strategies to promote their use.

However, the majority of members have work to do, as revealed by polling on two conference calls last week with David Bowman, the Fed’s senior staff liaison to the ARRC. Altogether, we had 184 member participants from 91 companies on these calls.

Founder’s Edition, by Joseph Neu

NeuGroup member calls with corporate treasury leaders reveal preparation gaps.

Some NeuGroup corporate members—nonfinancial institutions—are well on track with planning to transition off Libor before the end of 2021. One company, Ford Motor, has even joined the Alternative Reference Rates Committee (ARRC), a group of private-sector participants convened by the Federal Reserve Board and the New York Fed to help identify alternatives to Libor and develop strategies to promote their use. 

However, the majority of members have work to do, as revealed by polling on two conference calls last week with David Bowman, the Fed’s senior staff liaison to the ARRC. Altogether, we had 184 member participants from 91 companies on these calls.

  • Teamwork. 41% of members have not yet established a cross-functional team to manage the transition from Libor to SOFR, the Secured Overnight Financing Rate the ARRC and the Fed are promoting to replace Libor. A cross-functional team to include participants from treasury, accounting, tax, legal and procurement, credit and collections and other business finance leads is seen as the first big step in taking the transition seriously. An additional 27% have realized this and are planning to put a team together.
  • Information. By far the easiest preparation step is to sign up for the ARRC’s email updates. Just 18% of our members had signed up (before last week’s calls).  Every week, the ARRC publishes a free email update with important information on the Libor transition. You can sign up on the ARRC home page: https://www.newyorkfed.org/arrc.
    • A recent edition highlights an ARRC proposal for New York State legislation, as New York law governs most USD financial transactions, to deal with the permanent cessation of Libor that many contracts did not envision, which may also be difficult or impossible to amend.  
  • Timing. Although the phaseout of Libor is mandated for the end of 2021, liquidity is likely to shift away from Libor-referenced contracts sooner than that with a tipping point possible for many by the end of this year. As an example, Fannie Mae and Freddie Mac have said they will stop accepting adjustable-rate mortgages tied to Libor by the end of 2020. As soon as ISDA finalizes its fallback language protocol, expected for implementation in H2, liquidity in the markets for swaps and other rate derivatives markets will likely also tip away from Libor.

 Time to get busy.

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FX Hedging Opportunities Amid Virus Volatility

Opportunistic FX managers are locking in favorable exchange rates to hedge exposures as markets gyrate. NeuGroup members have locked in favorable foreign exchange rates in the wake of volatility sparked by the coronavirus outbreak, plunging oil prices and speculation about more US interest rate cuts by the Federal Reserve.

  • “We’re taking advantage; this is something of an opportunity to layer in hedges,” said one risk manager during a NeuGroup’s Virtual FX Summit sponsored by Chatham Financial.
  • Amol Dhargalkar, a managing director at Chatham, said, “We are definitely seeing some opportunistic hedging of FX as it has moved to more favorable rates—depending upon the direction of the exposure, of course.”

Opportunistic FX managers are locking in favorable exchange rates to hedge exposures as markets gyrate.

NeuGroup members have locked in favorable foreign exchange rates in the wake of volatility sparked by the coronavirus outbreak, plunging oil prices and speculation about more US interest rate cuts by the Federal Reserve.

  • “We’re taking advantage; this is something of an opportunity to layer in hedges,” said one risk manager during a NeuGroup’s Virtual FX Summit sponsored by Chatham Financial.
  • Amol Dhargalkar, a managing director at Chatham, said, “We are definitely seeing some opportunistic hedging of FX as it has moved to more favorable rates—depending upon the direction of the exposure, of course.”
Source: Reuters

Yen strengthens. The summit began one day after the Japanese yen soared to a more than three-year high of 101.19 per US dollar on Monday as investors sought safe-haven currencies. It jumped 9.4% in 12 trading days.

  • One NeuGroup member whose company has restarted a yen cash-flow hedge program said the FX team locked in rates in the range of 102 to 104. Another member whose company is long the currency said locking in yen was “the main opportunity” for her team amid the volatility.

Winning from weakness. A third participant said the market turmoil allowed his team to layer in hedges for currencies where the company is short, including the Brazilian real, the Canadian dollar and the Mexican peso. The peso fell to a three-year low against the dollar on Monday and the real has plunged about 15% this year.

Not everyone. At least one person at the virtual meeting said her team has not been trading “because spreads are so wide.” For now, traders at this company are “just monitoring” market moves.

Beyond FX: One of the participants said that beyond FX, her company has debt maturing in a little over a year and is exploring options for the best time to refinance in light of the recent plunge in interest rates.

  • Mr. Dhargalkar said many companies have already taken advantage of extremely low fixed rates and are not in a position to do more now. “Companies that did nothing are coming back and saying maybe we should do something now,” he said.
  • Chatham continues to see more companies adding fixed-rate debt to their capital structures; recently, more of them are doing so synthetically rather than through new issuance.
  • Chatham is seeing more companies do pre-issuance hedging of future anticipated financings. “Many investment grade companies are rushing to hedge now for issuances as far out as two years,” Mr. Dhargalkar said.

Strategic opportunities Below are three suggestions listed in Chatham’s presentation on hedging opportunities. Insights will dive into these and other highlights from the Virtual FX Summit in future posts.

  • Extend hedges on floating rate debt to take advantage of pricing and lock in a low rate.
  • Consider a combination approach of caps and swaps to hedge floating rate debt.
  • For hedges maturing in the near future, consider executing forward starting hedges while rates are low.
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Org Charts and Beyond: How Leaders Help Prepare Teams for Change

Many treasurers want to give team members the skills to move to other areas or companies.

NeuGroup members at a recent Treasurers’ Group of Thirty meeting delved into the nuances of treasury department organizational structures and how they meet specific company needs. Participants enjoyed seeing on a screen exactly how other treasury teams have been put together and why. And they had a laugh when one person didn’t recognize his own org chart.

  • But many members clearly feel the weight of managing relatively small teams with highly specialized skills where advancement is difficult, turnover is high among analysts, and competition for skilled talent is fierce, resulting in shallow benches at some companies.
  • Given that set of circumstances and other factors, some treasurers feel duty bound to prepare their staffs for the future and change by ensuring they have the training and experience to move ahead.

PE realities. The treasurer of a private-equity owned company noted the inevitable: “We’re going to get sold someday, so how do I make sure that [team members] have all the skills necessary to look good for their next job?” he said.

Many treasurers want to give team members the skills to move to other areas or companies.

NeuGroup members at a recent Treasurers’ Group of Thirty meeting delved into the nuances of treasury department organizational structures and how they meet specific company needs. Participants enjoyed seeing on a screen exactly how other treasury teams have been put together and why. And they had a laugh when one person didn’t recognize his own org chart.

  • But many members clearly feel the weight of managing relatively small teams with highly specialized skills where advancement is difficult, turnover is high among analysts, and competition for skilled talent is fierce, resulting in shallow benches at some companies.
  • Given that set of circumstances and other factors, some treasurers feel duty bound to prepare their staffs for the future and change by ensuring they have the training and experience to move ahead.

PE realities. The treasurer of a private-equity owned company noted the inevitable: “We’re going to get sold someday, so how do I make sure that [team members] have all the skills necessary to look good for their next job?” he said.

  • He seeks to provide staff engaged in otherwise segregated duties with exposure to different areas within treasury, so they’re “marketable” outside their current functions. “We talk to the private-equity [staff], and about the goals we’re setting as team; we share everything,” he said.
  • NeuGroup meetings play a role in educating team members, he said, noting that his company recently hosted the cash management peer group.
  • He recently switched the roles of two employees, the directors of treasury operations and of liquidity and capital markets.
  • The treasurer looks for cross-functional opportunities, such as the capital markets director working on a project with the tax team.

Transformation opens opportunities. Mergers mean change, and a peer group member who started as treasurer at a company digesting a transatlantic merger has required staff to have a “sense of urgency and the ability to knock down barriers, find solutions and execute,” or depart.

  • Some professionals had been in treasury functions for a decade or more, leaving a shallow bench that in part will be rebuilt with recruits hired fresh out of college. They will be trained across treasury “infrastructure,” including bank account statements and management, TMS and bank portal, with the goal of moving them up.
  • The treasurer also communicates openly to staff about his own departure: Whenever that arrives, it will provide opportunity for advancement to others. “Until that happens, my job is to provide training and career development, so they have the right sorts of skills to go somewhere internally or externally and be successful.”
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Internal Auditors Snapping into Action to Help Companies Cope with Coronavirus Crisis

The outbreak points up the need to create or improve pandemic policies and formalize rules. The coronavirus outbreak is revealing how prepared multinational corporations are for threats posed by crises that can affect almost every area of a business. And that’s made the virus a top concern and focus of many members of NeuGroup’s Internal Auditors’ Peer Group (IAPG) who are playing a key role in the response.

  • Proactive approach. “I am now devoting more than 50% of my time to pandemic team duties,” wrote one senior internal auditor who said companies are now trying to “get proactive” after being reactive. The pandemic team he is a member of meets daily and is issuing communications and policies “on a real-time basis,” he said.
  • Working remotely. Another member writes, “We have cancelled all travel for March and April audits, expanding our existing use of technology solutions to do the work remotely; [we] have postponed a few audits. At the company level, our general Emergency Crisis Management Team has been activated, and we are working closely with health organizations around the world to update our guidance to employees every day.”
  • Bans and communication. A third member has banned travel to all Asia locations, Italy and Seattle for her team. The corporation, she added, is “in constant communication with our Operations Control Center and the CDC and assessing the situation continually.”

The outbreak points up the need to create or improve pandemic policies and formalize rules.

The coronavirus outbreak is revealing how prepared multinational corporations are for threats posed by crises that can affect almost every area of a business. And that’s made the virus a top concern and focus of many members of NeuGroup’s Internal Auditors’ Peer Group (IAPG) who are playing a key role in the response.

  • Proactive approach. “I am now devoting more than 50% of my time to pandemic team duties,” wrote one senior internal auditor who said companies are now trying to “get proactive” after being reactive. The pandemic team he is a member of meets daily and is issuing communications and policies “on a real-time basis,” he said.
  • Working remotely. Another member writes, “We have cancelled all travel for March and April audits, expanding our existing use of technology solutions to do the work remotely; [we] have postponed a few audits. At the company level, our general Emergency Crisis Management Team has been activated, and we are working closely with health organizations around the world to update our guidance to employees every day.”
  • Bans and communication. A third member has banned travel to all Asia locations, Italy and Seattle for her team. The corporation, she added, is “in constant communication with our Operations Control Center and the CDC and assessing the situation continually.”

Pandemic policy? One IAPG member said his company had a pandemic policy in place that had never been tested until now; he said it’s a bit “deficient” in some respects.

  • “One particular area that seems to lacking from most policies is the existence of a response level framework which defines the triggers changing the classification of severity from level one to level two,” he said. The policies should also define when a company closes an office and offers work-from-home options, he added.
  • His company is now implementing formal policies on travel, facility closure, working from home, visitor access, and attendance at events involving more than 1,000 people, among other measures.

Creating a policy. The law firm Baker McKenzie says that companies in need of developing a pandemic policy might draw on their experiences with other business disruptions like natural disasters or strikes. Thus, policies will likely:

  • Include an emergency communication protocol.
  • Procedures for closing and opening offices.
  • Address working with limited staff.
  • Offer additional technical support to allow employees to work remotely.
  • Offer HR and communication support to ensure that employees are being treated fairly.

Offering help. Internal audit expert and blogger Norman Marks recently wrote that in response to coronavirus, risk practitioners should be asking management, “How can we help?” He says the goal is to ensure that the organization is prepared and capable of responding promptly and appropriately to:

  • A breakdown in the supply of materials
  • An inability to deliver products or services to customers
  • The forced closure of a part of the business, such as a factory or a call center
  • The loss of key personnel who come down with symptoms
  • The inability of a competitor to deliver products or services (an opportunity!)
  • A surge or drop in demand
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Actuarial Agony: Falling Interest Rates and the Plight of Pension Fund Managers

Private equity helps matters, but track records of outperformance don’t sway actuaries.

Falling interest rates are pushing down the expected return on assets (EROA) at pension funds, an unwanted development for all managers and especially aggravating, perhaps, for those who have historically been able to outperform expectations. That was among the takeaways from a recent NeuGroup pension roundtable.

Blame it on the actuaries. The pension fund manager at a major media company maintained an EROA of 7.5% over the last few years. Despite the fund outperforming relevant benchmarks, the EROA will soon move to 7.25% based on advice from actuaries concerned about long-term forecasts. “They just don’t care,” he said of his track record.

Private equity helps matters, but track records of outperformance don’t sway actuaries.

Falling interest rates are pushing down the expected return on assets (EROA) at pension funds, an unwanted development for all managers and especially aggravating, perhaps, for those who have historically been able to outperform expectations. That was among the takeaways from a recent NeuGroup pension roundtable.

Blame it on the actuaries. The pension fund manager at a major media company maintained an EROA of 7.5% over the last few years. Despite the fund outperforming relevant benchmarks, the EROA will soon move to 7.25% based on advice from actuaries concerned about long-term forecasts. “They just don’t care,” he said of his track record.

Several other participants acknowledged that their funds’ EROAs, too, had either dropped recently or likely will soon.

Private equity provides respite. The executive from a major pharmaceutical company agreed that actuaries appear set on lower EROAs, regardless of track records. She noted that her pension’s EROA currently rests at 8% but will likely fall to the high 7s in the next year or two. “Private equity is the only way we’ve been able to maintain it that high, and it’s why we have such a meaningful allocation to it,” she said.

Another participant said the sizable portion of his fund’s portfolio devoted to private assets, around 20%, enables it to support a higher EROA. Still another noted that “our private equity and venture capital [managers] are using a 11.25% long-term return, which helps, versus 8.25% for equities.”

The pharma exec noted a similar allocation, pointing out, however, that private assets are difficult to manage from an operational standpoint, given the cash flow and year-end accounting. “It’s a big commitment,” she said.

Priorities blur. A roundtable member noted that the question for the group is whether EROA is based just on capital market assumptions and employee allocations, or does income statement impact play a greater role. “Is the pressure to keep EROAs up from management?” he asked.

“Yes,” the group responded in unison.

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What Should Treasury and Finance Functions Be Doing About the Coronavirus?

Something that warrants a rare FOMC inter-meeting rate cut calls for broader finance engagement. There is a lot of information, advice and checklists coming out on how businesses should respond to the coronavirus, or COVID-19. This one from McKinsey is a good example.

  • Health and safety first. A majority of companies, rightly, start with the most important steps to ensure the health and safety of employees, customers, suppliers and other stakeholders.
  • Tabletop crisis response and planning. The next most important item tends to be the crisis response and scenario planning. Tabletop exercises are emphasized, because you must both plan and practice to ensure that they can be executed.
  • Digital acceleration focused on customers/customer experience. One of the most interesting checklist items that more companies need to take to heart is how this crisis is pushing digital disruption of traditional business activities and accelerating transformation focused on customer needs and the customer experience.

Something that warrants a rare FOMC inter-meeting rate cut calls for broader finance engagement.
 
There is a lot of information, advice and checklists coming out on how businesses should respond to the coronavirus, or COVID-19. This one from McKinsey is a good example. 

  • Health and safety first. A majority of companies, rightly, start with the most important steps to ensure the health and safety of employees, customers, suppliers and other stakeholders. 
  • Tabletop crisis response and planning. The next most important item tends to be the crisis response and scenario planning. Tabletop exercises are emphasized, because you must both plan and practice to ensure that they can be executed. 
  • Digital acceleration focused on customers/customer experience. One of the most interesting checklist items that more companies need to take to heart is how this crisis is pushing digital disruption of traditional business activities and accelerating transformation focused on customer needs and the customer experience. 
    • If you are stuck at home, for example, how do you easily and safely procure food and water (online shopping with a screened delivery driver or an autonomous delivery method), plus continue to do your job and earn your pay (remote work, collaboration and meeting tools)?
    • If you are reliant on a supplier in China or Milan, how do you get production and delivery back online and mitigate future shutdowns (accelerate the Industrial Revolution 4.0 timeline with supply-chain financing and capital-raising assistance)? 

This is why I think treasury and finance teams need to think proactively and creatively to support their business response by staying close to their customers (in the business, especially). They should also think about the financial support in terms of structural, long-term transformations beyond the near-term crisis responses (which are also important).

McKinsey’s advice on this point is outstanding:

Stay close to your customers. Companies that navigate disruptions better often succeed because they invest in their core customer segments and anticipate their behaviors…. Customers’ changing preferences are not likely to go back to pre-outbreak norms(emphasis mine).

Accordingly, treasury and finance teams should push back on cost-cutting measures presented as a coronavirus response and balance the short-term crisis risks with the opportunities for transformative investments that will pay off in the long run. 

  • Move past the obvious. Crises always prompt a “cash is king” reminder and a recommendation to ensure that liquidity is sufficient to weather the storm
    • How well will ML and AI forecasting apps and analytics tools fare in with this sort of black swan event?
    • Does this change your final recommendations on how much excess cash to keep on the balance sheet in the wake of US tax reform?
    • Does this change how you invest that cash, especially now with the rate-cut response? 

Most firms are hyper-focused on cash and liquidity already, especially high-growth start-ups.

Moving on, other questions to ask: 

  • How has FX hedging been adjusting to shifting exposure profiles from demand and supply shocks? Commodity price risk management?
  • What’s the supply-chain financing support being arranged to expedite effective supply/production shifts and how are firms and their finance partners dealing with the credit risk? Thinking longer-term, might your superior capital-raising ability help make structural and digital manufacturing changes that are needing to come anyway?
  • Is a near or sub-1% USD funding round, or a potentially lower EUR round, right for dialing up a bond issue or other form of capital raise? Are the proceeds for buybacks? Or to make transformational investments like acquistions sooner rather than later? Does this present another liability management opportunity? 

And perhaps most importantly: 

  • Are your banks and others serving you best by staying close to you as their customers to better understand your challenges during this time? To be there with solutions, currently available, and those they are prepared to invest in to make available soon? 

Here is what NeuGroup is doing

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Fed Official to NeuGroup Members: The Time to Start Paying Attention to Libor’s End Is Now

ARRC liaison David Bowman explains the implications of SOFR and what corporates need to do now.

Corporate treasury teams that have paid little or no attention to the planned transition from Libor to SOFR, take note: That stance makes much less sense today than last year and “won’t make any sense” by the end of this year, in the view of David Bowman, the senior staff liaison from the Federal Reserve Board of Governors to the Alternative Reference Rates Committee (ARRC).

  • Mr. Bowman made the remarks in an exclusive presentation to NeuGroup members Monday afternoon, the first of two such sessions. The second is on Thursday.
  • Among the treasury professionals participating in the call, only 35% said their companies have formed cross-functional teams to manage the transition to SOFR, while 35% have not and 30% have plans to do so. In other words, a lot of companies have plenty to do to prepare.
  • Mr. Bowman said Ford Motor Co. will be joining ARRC, which already includes the National Association of Corporate Treasurers and the Association for Financial Professionals; less than a third of members are banks. He said that ARRC welcomes the input of nonfinancial corporates in its working groups.

ARRC liaison David Bowman explains the implications of SOFR and what corporates need to do now.

Corporate treasury teams that have paid little or no attention to the planned transition from Libor to SOFR, take note: That stance makes much less sense today than last year and “won’t make any sense” by the end of this year, in the view of David Bowman, the senior staff liaison from the Federal Reserve Board of Governors to the Alternative Reference Rates Committee (ARRC).

  • Mr. Bowman made the remarks in an exclusive presentation to NeuGroup members Monday afternoon, the first of two such sessions. The second is on Thursday.
  • Among the treasury professionals participating in the call, only 35% said their companies have formed cross-functional teams to manage the transition to SOFR, while 35% have not and 30% have plans to do so. In other words, a lot of companies have plenty to do to prepare.
  • Mr. Bowman said Ford Motor Co. will be joining ARRC, which already includes the National Association of Corporate Treasurers and the Association for Financial Professionals; less than a third of members are banks. He said that ARRC welcomes the input of nonfinancial corporates in its working groups.

What you should be doing now. In addition to forming cross-functional review teams, Mr. Bowman recommended that members start testing SOFR now through lines of credit, for example. His presentation noted that testing SOFR will help corporates shape how the market evolves and learn what works and what doesn’t. “Waiting means you forgo the chance to shape choices that will eventually impact you,” one slide stated.

Other advice and insights:

  • Corporates should participate in the ISDA protocol to amend fallback language in derivatives, and amend or renegotiate fallback provisions in other contracts when opportunities arise.
  • Operational changes will take time and planning. New loans, debt and securitizations based on SOFR will require operational updates, especially when using SOFR in arrears, and will have different pricing and margins.
  • Changes to internal valuations or other systems will need to be included in budgets, IT project planning, etc. Corporates will also want to make sure that external vendors are making necessary changes and that those changes will meet specific needs.
  • It’s a misconception that the repo market rates SOFR is based on will move down more than overnight unsecured rates. They actually move quite closely with the fed funds effective rate and the Fed’s monetary policy targets:
Source: FRBNY

Time check. Here are some timeline facts to keep in mind as corporates plan for the SOFR transition.

  • The UK’s Financial Conduct Authority in July 2019 said it expects some banks to leave the Libor panels soon after 2021. At that point Libor would either stop or FCA would have to judge wither it was reliably accurate. FCA has noted that with so few transactions already underlying Libor, any further bank departures would make Libor even less representative.
  • The Federal Reserve Bank of New York on Monday began publishing 30-, 90-, and 180-day SOFR averages as well as a SOFR index, in order to support a successful transition away from Libor.
  • ISDA’s protocol for converting legacy derivative contracts is expected in Q3.
  • GSEs like Fannie Mae will stop using Libor for ARMs and begin using SOFR in Q4.
  • The creation of a SOFR term reference rate will take place in 2021. Mr. Bowman said the original plan called for that to happen at the end of the year but the hope is to move that up to H1 2021.
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How to Convince Business Units That ERM Has Real Value

Integrating it with strategic planning shifts perceptions that ERM is a bureaucratic exercise.

Enterprise risk management (ERM) is often viewed by business leaders as a check-the-box exercise that interferes with the profit engines they’re seeking to run.

A treasurer at a recent NeuGroup meeting who also chairs his company’s risk committee sought advice on how to convince the leaders of business units and other corporate entities that the ERM process adds value. Ed Scott, senior executive advisor at NeuGroup and a retired Caterpillar Inc. treasurer, noted two approaches Caterpillar used to improve ERM.

Integrating it with strategic planning shifts perceptions that ERM is a bureaucratic exercise.

Enterprise risk management (ERM) is often viewed by business leaders as a check-the-box exercise that interferes with the profit engines they’re seeking to run.

A treasurer at a recent NeuGroup meeting who also chairs his company’s risk committee sought advice on how to convince the leaders of business units and other corporate entities that the ERM process adds value. Ed Scott, senior executive advisor at NeuGroup and a retired Caterpillar Inc. treasurer, noted two approaches Caterpillar used to improve ERM.

Strategic planning integration. ERM must be integrated with the company’s strategic planning efforts.

  • A lesson learned, Mr. Scott said, is to coordinate ERM with the planning that each business does annually. At Caterpillar, that’s done in the fall, but the ERM exercise was conducted from December through February, confusing business-unit managers and making integration with the strategic plan more difficult.
  • “Prior to integrating the ERM process with annual strategic planning, action plans for each risk weren’t part of the goals and objectives for each business unit’s strategic plan, so it looked like just a bureaucratic, regulatory exercise,” Mr. Scott said.
  • To improve the process, ERM was moved from internal audit (IA) to the strategic planning group. “So now it was no longer some bureaucratic exercise but viewed as part of the strategic planning process,” he said.

The third dimension. ERM risk profiles typically factor in the probability of a risk occurring and the resulting severity in terms of cost. Several years ago, Caterpillar added time for the risk to occur as a third factor. For example:

  • In the case of a chemical company, there is a low to medium probability of a railcar chlorine spill, but if it occurred it would be severe and immediate. The severity and urgency would make it high risk.
  • Conversely, losing highly talented employees may be a medium risk and potentially severe, but since it could occur over a longer period of time, the total risk may be diminished.
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Hard to Let Go: Markets Slow to Move from Libor to New Benchmark

October 09, 2019

By Ted Howard

Banks are still using the London Interbank Offered Rate but SOFR is slowly gaining traction.

The members of NeuGroup’s Bank Treasurers’ Peer Group (BTPG) recently heard Chatham Financial discuss the switch from Libor to SOFR on their Q3 interim conference call. The big takeaway is that Libor remains firmly embedded in a lot of transactions, and even though banks understand that the tainted benchmark will disappear in the near future, the transition is inching along slowly. This could be because the shift is seen as a heavy lift given the low liquidity levels in the SOFR market.

“Here we are in September of 2019, and I would say that across our client base we really haven’t seen clients pulling away from Libor-based products in advance of the 2020-21 time frame with as much urgency as some have advocated for,” said Andrew Little, managing director at Chatham Financial. “As a matter of fact, given the shape of the curve, we’ve seen some clients actually extend the duration of their Libor exposure well out to seven years, 10 years and beyond.”

Nonetheless, Mr. Little said, “We have definitely seen a meaningful uptick in non-LIBOR-based balance sheet hedging.”

October 09, 2019

By Ted Howard

Banks are still using the London Interbank Offered Rate but SOFR is slowly gaining traction.

The members of NeuGroup’s Bank Treasurers’ Peer Group (BTPG) recently heard Chatham Financial discuss the switch from Libor to SOFR on their Q3 interim conference call. The big takeaway is that Libor remains firmly embedded in a lot of transactions, and even though banks understand that the tainted benchmark will disappear in the near future, the transition is inching along slowly. This could be because the shift is seen as a heavy lift given the low liquidity levels in the SOFR market.

“Here we are in September of 2019, and I would say that across our client base we really haven’t seen clients pulling away from Libor-based products in advance of the 2020-21 time frame with as much urgency as some have advocated for,” said Andrew Little, managing director at Chatham Financial. “As a matter of fact, given the shape of the curve, we’ve seen some clients actually extend the duration of their Libor exposure well out to seven years, 10 years and beyond.”

Nonetheless, Mr. Little said, “We have definitely seen a meaningful uptick in non-LIBOR-based balance sheet hedging.”

SOFR and the credit component. Todd Cuppia, managing director at Chatham Financial, agreed the elevated market volatility and the shape of the curve have increased the amount of hedging activity. He said around 75% of the macro trades that Chatham executes for its bank clients are still pointing to Libor, which he said was a “pretty meaningful departure” from what those statistics were a year ago, when close to 95% of balance sheet hedging referenced the LIBOR index. “Now there is an encouraging percentage of the activity we see going toward fed funds as an index, and eventually we expect SOFR once it becomes more viable from a liquidity standpoint,” Mr. Cuppia said. “I think ultimately from what we can tell, banks want a clear path forward on how to operate in the period before Libor goes away as well as clarity on fallback mechanics.”

Chatham pointed out, as have others, that the one thing that could engender better SOFR uptake would be some type of credit component that could be added to SOFR. Chatham reports that there is a strong interest from the market in developing one soon, although the path forward is still unclear.

“I think most of the [Libor-SOFR] conversation reduces in some way to the desire to replicate the time-varying credit spread that is inherent in Libor,” Mr. Cuppia noted. That reality has increased the relevancy of what he calls the “alternative alternative reference rates.” The two leading contenders are Ameribor and the ICE Bank Yield Index. Things to know here, he said, include:

  • Take comfort. For longer-dated Libor contracts, banks and the market may take some comfort from the fact that the historical spread method has already started to be priced into the forward curves. By that measure, “some may say that the transition is becoming priced in to the extent you believe that current basis markets and historical averages are going to be in range of what the different working groups have suggested, which was a multiyear average or median of those rates,” Mr. Cuppia said.
  • “If you look at fed funds as a reasonable proxy for SOFR and you look at the basis between fed funds and Libor, you can see a pretty meaningful decline in those basis rates to what could be a fair representation of their historical average,” he said. “I believe that’s what could be guiding the thinking of those who are using those much longer-term Libor contracts relative to what their alternatives may be.”
  • Standards that simplify. Mr. Cuppia said another issue that merits deeper attention is a recent change in the hedge accounting standard that has made it significantly easier for institutions to hedge fixed-rate exposures. “This relief is just in time for the Libor transition and so to the extent that there is concern around hedges using Libor, which have these fallback risks, it’s very simple to use a non-Libor index. We’ve seen a meaningful increase in the use of non-Libor derivatives on our macro hedging desk.”
  • Product development. To that end, one of the things that Chatham is working on is how to think about replicating some of the option products that exist for Libor in a SOFR world. Mr. Cuppia said there isn’t a lot of clarity yet, but markets received some good news recently when the CME Group announced it will begin to trade options on SOFR futures beginning in January. “This could be the beginning of the development of the volatility complex, which is important for balance sheet hedging and broader risk management processes,” Mr. Cuppia said.
  • Go fixed rate. One theme that Chatham is seeing is an increased interest in hedging fixed-rate loans. “Users were in a sense sidestepping the development of these alternative reference rates and how to calculate the appropriate spread through the different economic cycles, and using a more plain-vanilla balance sheet hedging strategy allowing portfolio managers to take the risks they want on the asset side without getting their asset-liability picture off-kilter, so to speak,” Mr. Cuppia said.

All this has led to many questions, according to Chatham. For instance:

  • How will Ameribor develop now that there is both a cash and futures market? How will the ICE US Bank Index develop?
  • How will both connect with what the International Swaps and Derivatives Association (ISDA) will say should be the credit component on interest-rate swaps?

There remains a lot to keep track of as we transition from Libor to an alternative reference rate. We know that SOFR is certainly an alternative with strong support from the Fed, and it seems as if it will be up to the market to collectively determine the outcome of the credit component. This transition will not only be keenly watched by bank treasurers, but also by corporate treasurers who have assets and liabilities currently referenced to Libor. Stay tuned!

Libor Exposure Breakdown

The value of all financial products tied to US dollar Libor is about $200 trillion, according to the New York Federal Reserve. This amount, which the Fed estimates is roughly 10 times US GDP, includes $3.4 trillion of business loans, $1.8 trillion of floating-rate notes and bonds, another $1.8 trillion of securitizations and $1.3 trillion of consumer loans, most of which are residential mortgage loans. The remaining 95% of exposures are derivative contracts.

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A Look Back at Our Enterprise Reconciliation Insight

Founder’s Edition, by Joseph Neu

A 20-year-old best practice guide says a lot about the state of working capital management today.

There seems to be a lot of renewed interest in working capital management lately, with a focus on automating processes, capturing data and deploying technology. The goal: to improve analysis and predictability of the quote-to-cash, order-to-delivery and purchase-to-pay cycles. This stands to vastly improve working capital management, but especially cash and liquidity management.

  • I kept thinking, all of this seems oddly familiar, and now I know why. I dug up one of our old best practice guides, published 20 years ago: Enterprise Reconciliation: The New Foundation for Cash Management in the Era of E-Commerce. Substitute AI-powered data matching for reconciliation and digital transformation for e-commerce and we could easily republish the guide today.

Founder’s Edition, by Joseph Neu

A 20-year-old best practice guide says a lot about the state of working capital management today.

There seems to be a lot of renewed interest in working capital management lately, with a focus on automating processes, capturing data and deploying technology. The goal: to improve analysis and predictability of the quote-to-cash, order-to-delivery and purchase-to-pay cycles. This stands to vastly improve working capital management, but especially cash and liquidity management.

  • I kept thinking, all of this seems oddly familiar, and now I know why. I dug up one of our old best practice guides, published 20 years ago: Enterprise Reconciliation: The New Foundation for Cash Management in the Era of E-Commerce. Substitute AI-powered data matching for reconciliation and digital transformation for e-commerce and we could easily republish the guide today.

Produced with Chase Bank, the guide drew from a series of exchanges with companies (including Colgate-Palmolive, Dell, Eli Lilly, Merck, Microsoft, Nike and P&G) and a roundtable we facilitated in April 2000. The latter offered practical guidelines for how treasury, leveraging the internet, could take a leading role in promoting “enterprise reconciliation.” Here are some takeaways that remain highly relevant today:

  • Enterprise reconciliation requires businesses to reconcile information on transactions conducted through the banking system via intra-enterprise networks and extra-enterprise networks connecting business value chains.  Generally, these reconciliations come in three types:
    • Matching cash positions with those reported by banks via primary collection and disbursement accounts, and secondary custodial accounts receiving funds from investments and dispersing them to investors.
    • Matching cash with payments and receipts from invoicing and bill presentment that come from suppliers and customers (which also may be performed by a bank).
    • Matching cash positions with physical goods and services ordered, sourced, manufactured and delivered prior to the payments being made or received.
  • Total working capital management requires that data from each type be regularly reported, captured and analyzed relative to current, future and historical information.

In the broadest sense, then, enterprise reconciliation was understood as capturing data from all transactions, analyzing it and connecting the dots to gain instant insight and develop foresight on what the transactions say about the business today and what they can predict.

  • Two-decade-old challenges. Extending the bank reconciliation concept to the enterprise level posed three major challenges that should also ring familiar:
    • Moving to real-time reporting and processing that captures all relevant data.
    • Integrating data on physical and anticipated transactions with actual cash payments.
    • Creating a mandate to act on the data across the relevant functional finance and business silos.   

Finally, the old guide’s checklist items, meant to prompt specific actions, are totally relevant today. These include:

  • Expand scope—or die. As treasury’s time gets freed up by automation, teams need to expand their scope to other areas for financial operations to be in the game for total working capital management.
  • Assemble a cross-functional team. If a “takeover” isn’t possible, then assemble a team to work across the relevant finance silos and—above all—partner with the business units. Make sure you receive a clear mandate to both obtain the needed data and act on it.
  • Form partnerships with business operations based on common goals. Identify partners in specific business operations and determine how you can help them meet specific performance goals.
  • Go on-site to find data. Jointly looking under the hood to find relevant data is one of the main reasons to form these partnerships, so do it.

As happy as I am about the value of this 20-year-old insight, I’d rather see it have very little relevance beyond nostalgia when I look back in 20 years.

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A Treasurer Grows Frustrated with a Top US Lender and Takes It down a Notch

Seeking a bigger return on its capital as rules tighten, the bank wanted a larger share of wallet.

One of the largest US commercial lenders is aggressively seeking more return—share of wallet—for the credit it provides corporates, prompting at least one borrower to say “enough” and downgrade the bank’s rank in its loan syndicate.

  • That takeaway emerged at a recent NeuGroup meeting where members exchanged insights about syndicated loan market trends and discussed which banks are eager to extend credit and which are less inclined.

Fed up. The treasurer who grew sick of the bank’s demands was in the process of renewing a term loan A and revolver last year. The lender’s insistence on a higher return on capital went too far. “We actually tiered that one down, because we were frustrated with them,” he said.

Seeking a bigger return on its capital as rules tighten, the bank wanted a larger share of wallet.

One of the largest US commercial lenders is aggressively seeking more return—share of wallet—for the credit it provides corporates, prompting at least one borrower to say “enough” and downgrade the bank’s rank in its loan syndicate.

  • That takeaway emerged at a recent NeuGroup meeting where members exchanged insights about syndicated loan market trends and discussed which banks are eager to extend credit and which are less inclined.

Fed up. The treasurer who grew sick of the bank’s demands was in the process of renewing a term loan A and revolver last year. The lender’s insistence on a higher return on capital went too far. “We actually tiered that one down, because we were frustrated with them,” he said.

Capital concerns. As the Basel III capital accords continue to take hold, banks are increasing their focus on their risk-weighted assets (RWA). That’s especially true of their capital-intensive revolving and term loan facilities, and whether a bank’s overall relationship with a borrower warrants providing it the amount of credit it currently does.  

Different perspective. Given that context, another member at a Fortune 100 company that deals with the bank in question had a different take, saying the lender appears to be ahead of the curve in adapting to the new rules, ensuring adequate return for putting its balance sheet to work, and communicating clearly with clients. “We see enhanced dialogue and focus from [the bank]. We use them as a sounding board,” he said.    

Credit seekers. Members agreed that US regionals, including PNC, US Bank, Fifth Third and SunTrust, are eager to participate in revolvers and, in particular, term loan A’s, where they can earn reasonable net interest margins relative to their borrowing costs and develop deeper relationships with the borrowing companies.

  • Japanese banks, such as Mitsubishi UFJ Financial Group, Mizuho Bank and Sumitomo Mitsui Banking have also been active on that front.
  • For blue-chip names, Chinese banks have stepped up for commitments of $50 million or $75 million, “but they don’t ever want them drawn, because they’re working off swap lines from China,” one member said, adding, “It’s branding more than anything else.”

Less enthused. European banks have retreated from the syndicated loan market for years—HSBC just announced significantly scaling back operations in the US and Europe.

  • Canadian banks received a mixed reaction from members regarding their willingness to participate in revolving credit facilities. Some have expressed a willingness to expand their lending into the US because of its sizeable fee pool across commercial and investment banking. However, their main focus remains the strong franchises they have built in Canada.
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No Slam Dunk for Pension Fund Managers: Selling Leverage-Averse Boards on Overlays

The popularity of overlays is increasing in the US despite concerns of executive committees.

Leverage is something of a dirty word in the world of pension funds and that, perhaps, presents the biggest challenge that pension fund managers face when seeking to persuade their companies’ executive committees to use overlays that use derivatives as a fund-management tool.

At a roundtable of pension fund managers arranged by the NeuGroup, one participant said his team had begun to explore how to “de-risk” the plan more than three years ago, using a derivative overlay to hedge liabilities as one tool.

  • But the executive committee said no to derivatives and the leverage they often include. “So we had to go through an education process on their timeline. Since then, rates fell 50 basis points, and committee members asked, ‘Have you put on the overlay yet?’”

Laugh line. That produced chuckles in the room and prompted other roundtable participants to chime in about the difficulty of convincing executive committees about the benefits of overlay strategies. Such strategies use derivatives like swaps and treasury futures to gain, offset or substitute specific portfolio exposures beyond the portfolios’ physical assets.

The popularity of overlays is increasing in the US despite concerns of executive committees.

Leverage is something of a dirty word in the world of pension funds and that, perhaps, presents the biggest challenge that pension fund managers face when seeking to persuade their companies’ executive committees to use overlays that use derivatives as a fund-management tool.

At a roundtable of pension fund managers arranged by the NeuGroup, one participant said his team had begun to explore how to “de-risk” the plan more than three years ago, using a derivative overlay to hedge liabilities as one tool.

  • But the executive committee said no to derivatives and the leverage they often include. “So we had to go through an education process on their timeline. Since then, rates fell 50 basis points, and committee members asked, ‘Have you put on the overlay yet?’”

Laugh line. That produced chuckles in the room and prompted other roundtable participants to chime in about the difficulty of convincing executive committees about the benefits of overlay strategies. Such strategies use derivatives like swaps and treasury futures to gain, offset or substitute specific portfolio exposures beyond the portfolios’ physical assets.

Overlay rising. A banker attending the meeting noted that 10 years ago, few if any plans in the UK used overlay as a part of liability driven investment (LDI) strategies, but today nearly all do. He added that the approach has crossed the Atlantic, with a recent survey showing 75% of US plans using overlay compared to less than half five or so years ago.

An overlay argument. LDI strategies aim to accrue sufficient assets to cover all current and future liabilities, often requiring derivative overlays when physical assets are insufficient or inappropriate. Another member said that rolling out an LDI program generated “quite a discussion” with the executive committee.

  • Her team framed its argument by noting that the company’s greatest risk in terms of expense management and cash flow is its funded status volatility, emphasizing that implementing an LDI program reduces such volatility, even when derivatives introduce leverage.

Counterparty concerns. Aside from leverage, another issue stemming from overlays is the counterparty risk of over-the-counter swaps, a big concern during the financial crisis. But new regulations require daily margin calls on all the derivatives used, and “that risk has essentially gone away,” noted a roundtable member.

Leveraging up only assets is problematic. In an asset/liability context, however, using derivatives to increase the duration of the pension fund’s asset pool to offset the fund’s short liability position is actually delevering and decreasing risk. “The powerful thing about overlay,” he said, “is that it is leverage from a narrow, asset-only perspective, but from an asset/liability bent it is risk reducing.”

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Treasury Teams Taking to Heart the Force of the ESG Wave Barreling Across Atlantic

Discussing insurance, investing and BlackRock’s Larry Fink, NeuGroup members weighed in on ESG.

The potentially dramatic and varied impact on multinationals from the environmental, social and governance (ESG) wave barreling across the Atlantic from Europe is hitting home for a growing number of US finance teams. That was among the key takeaways from comments by treasurers gathered in Dallas for NeuGroup’s first meeting of 2020.

Thanks for the warning. One the most interesting revelations involved the effect of ESG on insurance.

  • One treasurer said a French insurer sought to “squeeze language” on a recent casualty policy renewal in light of the potential social concerns arising from the company’s defense industry products. Another member planning to implement an auto policy for his company’s European fleet appreciated the heads-up.
    • “We’re taking out all local policies, so it’s good to hear about your experience. We’ll probably run into that,” he said.
  • US insurers increasingly use ESG to help measure risk in the policies they’re underwriting so “if your company has a bad ESG score, then you’re probably going to pay a higher premium,” NeuGroup’s Scott Flieger said.

Discussing insurance, investing and BlackRock’s Larry Fink, NeuGroup members weigh in on ESG.

The potentially dramatic and varied impact on multinationals from the environmental, social and governance (ESG) wave barreling across the Atlantic from Europe is hitting home for a growing number of US finance teams. That was among the key takeaways from comments by treasurers gathered in Dallas for NeuGroup’s first meeting of 2020.

Thanks for the warning. One the most interesting revelations involved the effect of ESG on insurance.

  • One treasurer said a French insurer sought to “squeeze language” on a recent casualty policy renewal in light of the potential social concerns arising from the company’s defense industry products. Another member planning to implement an auto policy for his company’s European fleet appreciated the heads-up.
    • “We’re taking out all local policies, so it’s good to hear about your experience. We’ll probably run into that,” he said.
  • US insurers increasingly use ESG to help measure risk in the policies they’re underwriting so “if your company has a bad ESG score, then you’re probably going to pay a higher premium,” NeuGroup’s Scott Flieger said.

The Fink Effect. The meeting took place just three weeks after BlackRock CEO Larry Fink, in his annual letter to CEOs, announced initiatives placing sustainability at the center of the giant asset manager’s investment approach, including exiting incompatible investments and launching new products that screen fossil fuels.

  • One treasurer, underscoring the significance of the letter, said, “If your company is publicly rated, BlackRock is probably one of your top five shareholders, and if it wants to see what you’re doing in that space, then ESG is coming.”
    • The possible implications of what’s coming include something already seen in Europe: ESG pricing grids that borrowers may encounter alongside credit grids on their credit facilities.

Risk alarm bell. Mr. Flieger made the point that screening for ESG can pay off for investors beyond doing what’s beneficial for society. “Investors are using these ESG scores not only for socially responsible sustainable investments, but to identify which might be susceptible to a significant tail-risk event,” he said.

Avoid controversy. Strong ESG scores can be undermined by “controversy” scores, generated by the frequency of a company’s negative press. Funds likely won’t share the ESG reports they pay the scoring firms for, but treasury executives should ask them for details. “Because if I’m going to be invested in ESG, my company better be in those funds,” one member said.

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Mike Likes It, but Would Your Team Vote for an Open-Office Plan?

Open-office plans like the one Mike Bloomberg adopted at City Hall have fans and skeptics. Where do you stand (sit)?

Presidential hopeful Mike Bloomberg in December tweeted the picture above of the “bullpen” office he had as New York City mayor and wrote, “I’ll turn the East Room into an open-office plan, where I’ll sit with our team.”

No one can say if that will ever happen, of course. But the subject of open-office plans definitely sparked interest at a NeuGroup meeting this month when one member asked how others organize their office space.

Breaking down walls. One member surprised peers by saying that within a few months his company will move completely to open space, with no walls between people, and that arrangement will apply also to top executives, including the CEO, CFO and legal counsel.

Open-office plans like the one Mike Bloomberg adopted at City Hall have fans and skeptics. Where do you stand (sit)?

Presidential hopeful Mike Bloomberg in December tweeted the picture above of the “bullpen” office he had as New York City mayor and wrote, “I’ll turn the East Room into an open-office plan, where I’ll sit with our team.”

No one can say if that will ever happen, of course. But the subject of open-office plans definitely sparked interest at a NeuGroup meeting this month when one member asked how others organize their office space.

Breaking down walls. One member surprised peers by saying that within a few months his company will move completely to open space, with no walls between people, and that arrangement will apply also to top executives, including the CEO, CFO and legal counsel.

  • “If you want to exchange confidential information, there will be a room, but you won’t be allowed to sit there all day,” he said.
  • Another member called his firm’s environment open, “but we do have individually assigned desks, so we’re not completely free.”

Backlash. The concept of open-space seating has been around for decades, especially among technology companies that have viewed open-space environments as conducive to exchanging ideas.

  • More recently, however, there has been something of a backlash, with studies like one in 2018 by Harvard researchers showing that open-space workplaces can significantly reduce employee productivity.

Alternatives. Another meeting participant’s company had expressed interest in open space, but for now employees remain in cubicles with low walls, and managers have offices.

  • Its finance arm’s building is being renovated, however, and the result will be low-wall cubicles and every manager’s office will be the same size, no matter their rank.

Still, meeting members suggested most treasury departments remain conservative on the seating front, with team members sitting in cubicles with high walls—a “legacy thing,” as one person put it.

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Margin Bells Will Soon Toll for More Pension Funds

Pension funds need to prepare for margin rules covering the OTC derivatives they use.

Corporate pension-fund managers may soon have initial-margin responsibilities for the over-the-counter (OTC) derivatives they use to manage those funds, even if their parent companies are exempt.

Background. Following the financial crisis, global regulators established variation and initial margin rules for OTC derivatives to provide greater transparency into counterparty risk.

  • Those requirements first became effective in 2016 for financial firms with more than $3 trillion in notional derivatives exposure and were extended in stages to firms with smaller notionals, reaching those with $750 billion in exposure in 2019.
  • While most corporate end-users of OTC derivatives were exempted from margin requirements, their employee-benefits plans, under the Employee Retirement Income and Security Act (ERISA), were not. Consequently, most corporate pension plans will soon be subject to margin rules, and several fund managers raised issues at a recent NeuGroup meeting:

Pension funds need to prepare for margin rules covering the OTC derivatives they use.

Corporate pension fund managers may soon have initial-margin responsibilities for the over-the-counter (OTC) derivatives they use to manage those funds, even if their parent companies are exempt.

Background. Following the financial crisis, global regulators established variation and initial margin rules for OTC derivatives to provide greater transparency into counterparty risk.

  • Those requirements first became effective in 2016 for financial firms with more than $3 trillion in notional derivatives exposure and were extended in stages to firms with smaller notionals, reaching those with $750 billion in exposure in 2019.

While most corporate end-users of OTC derivatives were exempted from margin requirements, their employee-benefits plans, under the Employee Retirement Income and Security Act (ERISA), were not. Consequently, most corporate pension plans will soon be subject to margin rules, and several fund managers raised issues at a recent NeuGroup meeting:

  • When? The threshold for posting margin drops this year to financial end users with more than $50 billion in notional exposure, and in 2021 will include market participants with more than $8 billion in OTC notional.
  • Covering margin calls. A member of the roundtable noted the need for a policy for raising cash to cover margin calls. Another participant recounted addressing that issue when her company began its overlay program, so it decided to perform a VAR analysis to size its collateral at 99% for a one-month stress test.
    • “It wouldn’t have covered where we landed in the global financial crisis for equity, but for every other scenario there was sufficient cash,” she said.
  • Cash or Treasuries? The participant added that her company is holding the collateral as cash, which it then “equitizes,” or places in short-term investments such as ETFs. Depending on the instrument, she said, the cash can generally also be held in Treasuries, providing a bit of income.
  • Administration? No way. Tracking daily margin and posting margin is an administrative hassle, which the roundtable member said she leaves to her ERISA manager.
    • “There’s no way I would ever want to do that. I just make sure there’s enough cash in the account with the manager to cover the amount of collateral we feel is sufficient,” she said.

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Mining Merchant Services for Today’s Gold: Data

Founder’s Edition by Joseph Neu

The drive to access and leverage data from credit card and other transactions is transforming merchant services.

Merchant services are fast becoming a key value driver for transaction banks, fintechs and other financial services institutions. The key reason is the importance of capturing data at the point of sale, along with facilitating frictionless transactions. What takes place under the heading of merchant services is worth your attention because:

  1. It’s the beginning of the data-rich order-to-cash cycle for most companies, which is vital to understanding their cash flow models, their businesses, and their credit risks.
  2. It’s a vital source of data to understand what consumers buy, how much they spend, how they pay, and where and when they pay—which, in turn, can be used to verify identity and mitigate fraud.
  3. It offers a critical opportunity to influence—by using what is learned from the data—how customers pay, which enables effective loyalty programs and promotional incentives and, potentially, the reduction of merchant transaction fees (see below).

Founder’s Edition by Joseph Neu

The drive to access and leverage data from credit card and other transactions is transforming merchant services.

Merchant services are fast becoming a key value driver for transaction banks, fintechs and other financial services institutions. The key reason is the importance of capturing data at the point of sale, along with facilitating frictionless transactions. What takes place under the heading of merchant services is worth your attention because:

  1. It’s the beginning of the data-rich order-to-cash cycle for most companies, which is vital to understanding their cash flow models, their businesses, and their credit risks.
  2. It’s a vital source of data to understand what consumers buy, how much they spend, how they pay, and where and when they pay—which, in turn, can be used to verify identity and mitigate fraud.
  3. It offers a critical opportunity to influence—by using what is learned from the data—how customers pay, which enables effective loyalty programs and promotional incentives and, potentially, the reduction of merchant transaction fees (see below).

The value of data is why e-commerce giants like Alibaba in China have moved quickly to dominate in a wide variety of merchant services, including digital payments. It may have started with helping customers pay with less friction, but now the data is more important.

  • China + data. The experience in China, where Alibaba’s Alipay and Tencent’s WeChat Pay have totally disrupted banks on consumer payments and other merchant services, is one reason transaction banks outside China are trying hard to disrupt merchant services themselves. But like the e-commerce giants, they’re also eying the value of data.

A major problem with merchant services has been its fragmentation—too many players serving different segments of the market; there was also a general lack of integration end-to-end. This creates inefficiencies and higher fees, but it also means that a lot of data gets lost.

  • Creating end-to-end platforms. Hence, the desire for players in merchant services to create end-to-end platforms, either through acquisition rollups or greenfield investment.

Banks, particularly those with a strong retail presence already, are looking at creating end-to-end global payment and merchant services platforms as potential cores to their broader transaction services businesses. “Payments are now nonlinear,” said one banker who heads global merchant services sales for such a bank, “so you need to own the payment system end to end. You also want to be able to serve all clients from smallest to largest, across segments.”

In theory, this push toward single platforms also will help merchants and consumers get something in return for the data they end up sharing at the point of sale.

  • Consumers, for example, could be offered more choices for rewards depending on the form of payment—e.g., use this card and you will get a $50 credit on your next purchase at that store, bypassing the typical 1%, 2% or 3% cash back.
  • Merchants, meanwhile, may be able to drive more sales with loyalty programs and targeted incentives, but also tap into a broader pool of data to manage inventory and product selection. This will also allow them to share more of the value in interchange fees and lower them via the data capture (e.g., so-called level 3 data such as invoice and order numbers).

Watch this space!

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Negative-Rate Concerns Spreading to Pension Funds

US MNCs with European pension funds are being forced to contend with negative rates in Europe.

Although the likelihood of negative interest rates in the US still seems remote, in Europe they’ve been a reality for several years, and pension funds are now grappling with what that means. 

In a recent NeuGroup meeting, the head of pension investments at a multinational corporation (MNC) with several European funds noted that for the first time the company will have to use negative interest rates to value liabilities, specifically in a Swiss fund.

This treasurer noted that he reviewed IFRS accounting rules that apply to European companies, and concluded a negative number must be used in those calculations, “even though it doesn’t sound right. You promised a $100 pension to someone, and you knew it wouldn’t be more than that, but today you have to say that my liability is $105.”

US MNCs with European pension funds are being forced to contend with negative rates in Europe.

Although the likelihood of negative interest rates in the US still seems remote, in Europe they’ve been a reality for several years, and pension funds are now grappling with what that means. 

In a recent NeuGroup meeting, the head of pension investments at a multinational corporation (MNC) with several European funds noted that for the first time the company will have to use negative interest rates to value liabilities, specifically in a Swiss fund.

This treasurer noted that he reviewed IFRS accounting rules that apply to European companies, and concluded a negative number must be used in those calculations, “even though it doesn’t sound right. You promised a $100 pension to someone, and you knew it wouldn’t be more than that, but today you have to say that my liability is $105.”
 
Falling rates are no fun either. Other participants noted that falling rates, even if not yet negative, are also problematic given the growing pressure they put on banks, and ultimately their services. One member noted the impact of falling rates on her company’s P&L and said her team is now concentrating on investment manager searches and debating the value of passive versus active managers. “Do we think active management would provide us with a bit more of a defensive posture, in our equity line up?” she said. 

Cutting costs. The topic of centralizing pension plans across European countries also arose during the meeting. This was in regard to enabling pensions facing the challenge of negative rates to cut costs while potentially smoothing out imbalances when some of an MNC’s funds across different countries are well funded while others are in the red. A participant noted that Belgian law permits pooling pension fund assets, and his team has considered the move with respect to funds in smaller European countries—Belgium and Austria, for example—but the complexity has hindered progress. “We don’t see blending Germany and the UK, Switzerland and the UK, or those in other large countries,” he said. 

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For Property & Casualty: Look Past the First Tier

If you’re not getting the premium reductions your’e looking for, shop around and check out low-cost brokers.

When thinking about top-tier insurance brokers for corporates the usual suspects come to mind: Hub International, Marsh & McLennan Cos., Willis Towers Watson, Aon PLC and the like. But after a quick look beyond that upper slot, one comes across unfamiliar names. Take for instance a broker called Oswald Companies.

  • Not a well-recognized insurance broker among treasurers attending a recent NeuGroup meeting, the Cleveland-based Oswald actually has a long track record, since 1893, that stems from its high quality, low cost services.

At least that’s what one treasurer told peers, noting his company’s existing market-leading broker had declined to reduce premiums by the requested 20%. Even with revenues of nearly $4.5 billion in 2019, “We felt we were not a big enough client, either inside or outside the US” to get the proper respect and that 20% reduction, the treasurer said.

If you’re not getting the premium reductions your’e looking for, shop around and check out low-cost brokers.

When thinking about top-tier insurance brokers for corporates the usual suspects come to mind: Hub International, Marsh & McLennan Cos., Willis Towers Watson, Aon PLC and the like. But after a quick look beyond that upper slot, one comes across unfamiliar names. Take for instance a broker called Oswald Companies.

  • Not a well-recognized insurance broker among treasurers attending a recent NeuGroup meeting, the Cleveland-based Oswald actually has a long track record, since 1893, that stems from its high quality, low cost services.

Request denied. At least that’s what one treasurer told peers, noting his company’s existing market-leading broker had declined to reduce premiums by the requested 20%. Even with revenues of nearly $4.5 billion in 2019, “We felt we were not a big enough client, either inside or outside the US” to get the proper respect and that 20% reduction, the treasurer said.

That prompted a search beyond the biggest names. “We went with Oswald, a tier 2 broker that has alliances overseas that its customers can access and is hungry for business. They cut our premiums by almost $2 million,” the member said, to the audible gasps of fellow treasurers. “Almost 40% in one year.”

In return, Oswald received a base fee and a percentage of premium savings.

Coverage quality still good. Asked if coverage quality suffered, the member said the level of coverage remained largely the same, as did the carrier group—Chubb Limited, Aegon N.V., etc. “And they were able to come to us and say, ‘Here’s the data you’ll need, here’s how to put it together, and this is what the insurance companies are looking for,” he said, adding, “They did a lot of heavy lifting.”

Related risk management. The member also noted Oswald’s ancillary risk management services, such as implementing driver monitor and safety programs for auto-insurance policies related to the company’s transportation needs.

Fast. The member said his treasury group moved quickly to replace its current policies, and Oswald kept pace, replacing policies “within a quarter.”

Go long. One member asked if peers recently renewing their property and casualty policies had done so annually or for multiple years, and the consensus was a combination, although today’s rising premium environment favors longer rather than shorter. A couple of members said their brokers had locked them into two-year contracts that had worked out well. “Insurers have been hit very hard recently,” noted one. “The industry is saying we need to make money on these products.”

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Making Bank on Receivables

Founder’s Edition by Joseph Neu

Investor demand for receivables-backed securities presents opportunities for banks that harness data, technology.

Last week, I noted how supply chain finance (reverse factoring et al) was raising concerns with accountants, rating agencies and regulators because it allows unscrupulous firms to potentially extend payables to fund their working capital without considering it to be debt.

This week I focus on the positive sides of trade finance and, especially, supply chain finance: Thinking about receivables plus data opens exponential possibilities to secure financing, usually at lower rates than many imagine. Here’s the story as it applies to reverse factoring:

Investors want trade receivables. Attending a bank session last month, I learned that every asset manager and insurance company (and probably a sizable segment of other smart investors) wants receivables-backed investment opportunities from credible supply chain programs. They are coming to banks asking to put $10 billion or more to work and the banks are asking themselves how to satisfy this investor demand. The banker leading the trade finance session said there is an estimated $1.5 trillion gap between supply and demand for trade finance paper. The gap will soon climb another trillion as SMEs become more integrated into supply chains.

Why trade receivables? What investors really want are securities backed by diverse pools of trade receivables that have mitigated credit risk due to commercial relationships. Critical suppliers to strong- credit buyers are a good risk, because the buyer is not going to let a good supplier go under by not paying an invoice; the payment ensures the cash flow that supports the security the investor purchases.

Has the invoice been approved? Clearly, if the invoice has been approved, then the credit risk is further diminished. Thus, a whole ecosystem of machine learning and AI has emerged to help predict which invoices are expected to receive approval. Some solutions are said to be accurate enough to win a government guarantee based on their predictions of whether and when the invoices will be approved.

Data as a risk mitigant. Of course, the predictive power of technology is very reliant on the data accessible to it. Indeed, the data is quickly becoming as or more valuable than the receivable itself. The more data a supply chain finance vendor/arranger has that indicates when buyers approve and pay which suppliers, not to mention the commercial importance of the transaction, the more confidence investors will have in the certainty and timing of the underlying cash flows.

Founder’s Edition by Joseph Neu

Investor demand for receivables-backed securities presents opportunities for banks that harness data, technology.

Last week, I noted how supply chain finance (reverse factoring et al) was raising concerns with accountants, rating agencies and regulators because it allows unscrupulous firms to potentially extend payables to fund their working capital without considering it to be debt.

This week I focus on the positive sides of trade finance and, especially, supply chain finance: Thinking about receivables plus data opens exponential possibilities to secure financing, usually at lower rates than many imagine. Here’s the story as it applies to reverse factoring:

  • Investors want trade receivables. Attending a bank session last month, I learned that every asset manager and insurance company (and probably a sizable segment of other smart investors) wants receivables-backed investment opportunities from credible supply chain programs. They are coming to banks asking to put $10 billion or more to work and the banks are asking themselves how to satisfy this investor demand. The banker leading the trade finance session said there is an estimated $1.5 trillion gap between supply and demand for trade finance paper. The gap will soon climb another trillion as SMEs become more integrated into supply chains.
  • Why trade receivables? What investors really want are securities backed by diverse pools of trade receivables that have mitigated credit risk due to commercial relationships. Critical suppliers to strong- credit buyers are a good risk, because the buyer is not going to let a good supplier go under by not paying an invoice; the payment ensures the cash flow that supports the security the investor purchases.
  • Has the invoice been approved? Clearly, if the invoice has been approved, then the credit risk is further diminished. Thus, a whole ecosystem of machine learning and AI has emerged to help predict which invoices are expected to receive approval. Some solutions are said to be accurate enough to win a government guarantee based on their predictions of whether and when the invoices will be approved.
  • Data as a risk mitigant. Of course, the predictive power of technology is very reliant on the data accessible to it. Indeed, the data is quickly becoming as or more valuable than the receivable itself. The more data a supply chain finance vendor/arranger has that indicates when buyers approve and pay which suppliers, not to mention the commercial importance of the transaction, the more confidence investors will have in the certainty and timing of the underlying cash flows.
  • New value in data sources. This data, unfortunately for banks, resides mostly in ERP systems and not in the banking system. This explains the opportunity for ERP vendors and fintechs to partner to source this data to reduce trade friction and mitigate credit risk. If every invoice that gains approval were updated in the ERP and that information was made available instantly to a bank or securitization pool, the world would be a different place.
  • Trusted intermediary for the data. With concern growing about who has access to what data, especially when it involves historical relationships between trusted counterparties, who plays the role of intermediary for receivables data matter.
    • Banks would be one option, but they are limited in how many counterparties they can onboard to their systems (and how quickly) due to KYC regulations. Unregulated fintechs have more scope to onboard, but do they have the trust factor?
    • Another option might be platforms like Marco Polo or Voltran (now Contour), that could use their distributed ledger/blockchain to provide secure intermediation of the transactions and the data.
  • Who provides balance sheet? Corporates in the Fortune 50 that look at supply chain finance programs also want to have someone else’s balance sheet behind them. “If the whole thing goes upside down, they want to know that there is a backer able to write a half-billion-dollar check,” said one banker. Yet no bank wants to support a platform that is not exclusively theirs and no corporate wants their supply chain dependent on one bank. Bolero and Swift efforts have shown the challenges of pleasing all constituencies.

Meanwhile, the opportunity to package trade receivables and the underlying data to create optimal pools of receivables at scale to meet investor demand remains.

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Treasurers Educate HighRadius on Cash Forecasting Needs

NeuGroup members give to get by providing feedback on AI-based cash forecasting solutions.

Treasurers at a NeuGroup meeting in Texas sponsored by HighRadius provided feedback to the Houston-based technology company on what they’d like to see from cash forecasting solutions that use artificial intelligence (AI) and machine learning (ML) to improve accuracy, reduce treasury’s need to input data and allow a wider variety of pertinent data.

  • HighRadius has long provided forecasting services for accounts receivable (AR), the biggest component of cash forecasting, that make use of ML. It now is applying the methodology to accounts payable and other cash forecasting components.

Input wanted. HighRadius executives eagerly sought input on the company’s cash forecasting solution now being developed, and here’s some of what they heard from NeuGroup members:

NeuGroup members give to get by providing feedback on AI-based cash forecasting solutions.

Treasurers at a NeuGroup meeting in Texas sponsored by HighRadius provided feedback to the Houston-based technology company on what they’d like to see from cash forecasting solutions that use artificial intelligence (AI) and machine learning (ML) to improve accuracy, reduce treasury’s need to input data and allow a wider variety of pertinent data.

  • HighRadius has long provided forecasting services for accounts receivable (AR), the biggest component of cash forecasting, that make use of ML. It now is applying the methodology to accounts payable and other cash forecasting components.

Input wanted. HighRadius executives eagerly sought input on the company’s cash forecasting solution now being developed, and here’s some of what they heard from NeuGroup members:

  • Drill down to the invoice level. The HighRadius app enables companies to explore which of dozens of variables—business line, currency, country—generate most of the variance between forecasted and actual cash. A NeuGroup member suggested going deeper still, to reveal which customers generate the variance.
    • A HighRadius representative said the firm’s technology already predicts payments by individual customers on the collection side, and “we’ve been debating how far to take it” with cash forecasting.
  • A longer tail. Orders for goods and services would be another helpful variable, one member said, because they look out further than invoices.
  • Size matters. Another member suggested that HighRadius include the ability to drill down to customers responsible for 80% to 90% of a company’s AR and provide details on those accounts.
  • Override. The app allows for manual overrides when, for example, a major customer wants to pay early, prompting one meeting participant to say it should identify the customer and explain the reason for early payment.
    • “We’ve heard similar requests, so it’s on the roadmap,” a HighRadius rep responded.
  • Cross-company learnings. A corporate customer may historically pay its annual invoice on time but face challenges this year that aren’t captured by historical data. A member asked whether HighRadius’ app incorporates that company’s more recent payment history with other clients, indicating potential troubles ahead.
    • That will come as High Radius’ customer base grows, a rep said, since “learnings from one company could apply to others.”
  • Sales forecasts? Yes, said a HighRadius rep, sales forecasts provided by a company’s FP&A group could be included in the model to generate long-term forecasts.
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Steps on a Technology Journey to Data-Driven Decisions, Actions

A detailed look at the progression of one tech company’s digital transformation.

Building and using a data lake that is a centralized source of data is a key part of the modernization and technology journey for treasury at one leading tech company; a progression from being data aware to data proficient to data savvy to achieving data-driven decisions and actions.

  • A treasury cash operations manager presenting details of this journey at a NeuGroup meeting said a top priority was “wading into the data lake despite the complexity” because treasury is “tired of pulling data from multiple systems.” Among the goals are data transparency, standardization and control.

Data analytics. This company’s treasury adopted Power BI (everyone is trained to use it) for creating standardized dashboards with drill-down capabilities so it could address questions immediately but also create a more self-serve environment. Using the tool’s capabilities to do data analytics, the member said, reveals both data-driven answers and, initially, data shortcomings.

  • Hence the benefit of the data lake. And as other NeuGroup members have noted, treasury’s ability to use AI and machine learning for cash flow forecasting and other purposes depends on having data that has depth and detail.

A detailed look at the progression of one tech company’s digital transformation.

Building and using a data lake that is a centralized source of data is a key part of the modernization and technology journey for treasury at one leading tech company; a progression from being data aware to data proficient to data savvy to achieving data-driven decisions and actions.

  • A treasury cash operations manager presenting details of this journey at a NeuGroup meeting said a top priority was “wading into the data lake despite the complexity” because treasury is “tired of pulling data from multiple systems.” Among the goals are data transparency, standardization and control.

Data analytics. This company’s treasury adopted Power BI (everyone is trained to use it) for creating standardized dashboards with drill-down capabilities so it could address questions immediately but also create a more self-serve environment. Using the tool’s capabilities to do data analytics, the member said, reveals both data-driven answers and, initially, data shortcomings.

  • Hence the benefit of the data lake. And as other NeuGroup members have noted, treasury’s ability to use AI and machine learning for cash flow forecasting and other purposes depends on having data that has depth and detail.  

The role of the cloud. The presenter said that moving treasury applications to the cloud to co-locate data reduced IT’s footprint by 60%. Treasury has about 40 applications; 24 of them are first-party apps (meaning the company builds and maintains them in-house), and the rest are third-party apps. The first-party apps address:

  • Cash forecasting
  • Cash visibility
  • Bank account management
  • Intercompany loan management
  • Wire requests and tracking

SWIFT gpi and transparency. The company was an early adopter of SWIFT gpi, which allows treasury to track wires once they leave treasury’s banking partner. One member said this is good news for her treasury. “This will be very beneficial to us as we have limited visibility to transactions once they leave our banks,” she said. “SWIFT gpi will provide more transparency on payment statuses.”

SWIFT and the cloud. The company and SWIFT have worked together on a cloud-native project that allows SWIFT wire transfers to be done over the cloud. The teams have enabled SWIFT wire transfers on this setup. The company is the first cloud provider working with SWIFT to build public cloud connectivity and will work toward making this solution available to the industry. 

How it works. Treasury sends a wire instruction through a web app on the cloud, which is validated by using machine-learning algorithms.

  • Once validated for authenticity, these wires are sent to SWIFT via the company’s SWIFT installation on the cloud. SWIFT validates the wire instructions and sends it off to the appropriate bank. Once the bank carries out the wire instruction, it sends confirmation through to treasury.

Machine learning. Treasury built a machine-learning forecasting solution that is addressing a key FX exposure for the company while improving forecast accuracy of AR and operational efficiency for the team.

  • Historical data in the cloud was cleaned and used to create the solution using the R programming language and other tools.
  • Cumulative forecasting of notional exposure improved by 6%.
  • Volatility of FX impact on other income and expense was reduced by ~25%.

The people part. Like many treasury teams, this one is trying to strike the right balance between people in possession of core treasury knowledge and skills and those who are more adept at data analytics and have advanced quantitative abilities. In addition to everyone learning Power BI, treasury recently hired its own data analysts.

The problem remains, though, that some staff lack the skills, ability or interest to learn new tools and technology at a point when data science is increasingly critical. The treasury team highly encourages employees to take courses to increase their skills in the data analytics space and provides sponsorship to help them achieve these goals.

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Tales from the Cyber Crypt

Assistant treasurers exchange recent scary cyber tales of success and failure.

In a breakout session at NeuGroup’s Assistant Treasurers’ Leadership Group focusing on securing companies from cyberattacks, members recounted recent experiences and the conundrums they face combating them.

Digital protection, à la carte. NeuGroup’s own Scott Flieger, director of peer groups, said a fellow member of a college board who runs a cybersecurity advisory firm recommends companies make a menu of their digital assets, from bank accounts onward, and seek to value them. Then ask how much the company is willing to pay to protect that asset. He added that few understand a company’s digital assets better than assistant treasurers. “Being the person in treasury who has an inventory of the digital assets and can value their importance—that’s an important position,” Mr. Flieger said.

Assistant treasurers exchange recent scary cyber tales of success and failure.

In a breakout session at NeuGroup’s Assistant Treasurers’ Leadership Group focusing on securing companies from cyberattacks, members recounted recent experiences and the conundrums they face combating them.

Digital protection, à la carte. NeuGroup’s own Scott Flieger, director of peer groups, said a fellow member of a college board who runs a cybersecurity advisory firm recommends companies make a menu of their digital assets, from bank accounts onward, and seek to value them. Then ask how much the company is willing to pay to protect that asset. He added that few understand a company’s digital assets better than assistant treasurers. “Being the person in treasury who has an inventory of the digital assets and can value their importance—that’s an important position,” Mr. Flieger said.

Bad timing. The email system of a NeuGroup member firm’s collections team was compromised, revealing all its customer contacts. The fraudsters then sent realistically scripted emails to customers requesting payments be sent to a different bank and providing the necessary details.

The member’s security team wanted to alert customers, but it was two weeks from quarter end, “and you don’t want to spook customers so they don’t pay you—a real treasury issue,” the member said.

Cyber reticence. Companies develop their cybersecurity plans internally, but then what? “One of our biggest challenges was that people don’t want to talk about cybersecurity,” one participant said, noting wariness about discussing the plan with third parties.

  • “We had a hard time finding peers to benchmark against, and we were paranoid as well, creating a special NDA that we made all of our banking partners sign before talking about our cybersecurity,” he said. Even his team’s discussion about how to store the plan was challenging, “because we effectively created a playbook for how to hack us.”

Cryptocurrency conundrum. A ransomware attacker may demand the transfer of $50,000 in Bitcoin to a cryptocurrency account to unfreeze a company’s system. If news breaks on CNBC about the attack, pressure will mount to meet that demand, but opening cryptocurrency accounts takes time. Companies may open cryptocurrency accounts in preparation for an attack, but would this information becoming public in an earnings call invite such attacks? And should any payment be made at all, given that the attacker could be a terrorist organization?

  • One solution: “We back up all our data, even on the desktops, so if we get locked out of our primary system, we can just reload everything,” one member said.
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Crisis Management Brings Executives Together

Having a crisis response plan can help make the company more resilient now and later.

Following a framework for crisis response planning that engages management as well as the board can create significant political capital for internal audit, not to mention better prepare the company for crises that may arise.

Having a crisis response plan can help make the company more resilient now and later.

Following a framework for crisis response planning that engages management as well as the board can create significant political capital for internal audit, not to mention better prepare the company for crises that may arise.

Multipurpose framework. The head of internal audit at a major government contractor said in a recent NeuGroup meeting that his company uses the National Fire Protection Association 1600 Standard on Continuity, Emergency and Crisis Management. He described it as a “fairly transferable” framework that can be used across a variety of scenarios, from fire drills to much more complex and resource-intensive corporate initiatives. Most members participating in the meeting were unfamiliar with the NFPA document and listened raptly as the IA chief describe the benefits.

The member noted that the company’s risk committee chairman had required adopting the framework and given the nature of the company’s business, most of its provisions were already in place.

What not to do. The member said a fascinating outcome of crisis response planning is understanding better what executives are not supposed to do or say, “particularly for the C-suite, where it’s not uncommon to have lots of type A personalities.” The exercise clarifies what each executive’s role is and emphasizes letting the crisis manager inform them about developments so they can better determine their next steps.

By promoting understanding of the various scenarios and analyzing what to report versus what to disclose, the requirements and the cadence of reporting, “We really challenged management to think about that, and it was very helpful,” he said.

Muscle memory. “Every time we went through the exercise, whether [for a major initiative], or for cyber, or an inside threat, we’d learn something new, or ask questions we hadn’t thought to ask before,” the member said. The future will always bring situations that can’t be anticipated, and he recounted a few humorous ones. “There’s always something you don’t think about, but the more you do it, it builds muscle memory,” he said.

Political capital. The member noted that facilitating these conversations in his capacity as IA was highly rewarding. “It engaged management at different levels and created political capital that has paid dividends in so many different areas for IA,” he said.

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Appealing to Millennials and Gen Zers: The Academic Perspective

Insights from the Foster School of Business on what today’s MBAs want—and what treasurers have to say.

Corporates who want to hire MBA finance graduates face a highly competitive market and are well served by knowing what the current crop of millennials and Gen Zers value most when weighing job offers. That was among the key takeaways from a presentation by faculty and administrators at the University of Washington’s Foster School of Business to the members of a group of treasurers at mega-cap companies. Here’s what matters most:

Insights from the Foster School of Business on what today’s MBAs want—and what treasurers have to say.

Corporates who want to hire MBA finance graduates face a highly competitive market and are well served by knowing what the current crop of millennials and Gen Zers value most when weighing job offers. That was among the key takeaways from a presentation by faculty and administrators at the University of Washington’s Foster School of Business to the members of a group of treasurers at mega-cap companies. Here’s what matters most:

  • Strategic thinking
  • Business decision-making
    • A Foster School assistant dean later elaborated: “New graduates are seeking jobs in strategic positions that impact a company’s present and future direction. They are savvy in technology, use of communication networks, and see both the present and the future in how they think, so where they can exercise these attributes and skills makes a difference to them.  They think with innovation in mind and have a global sense of their potential impact.”
  • Cross-functional teams
  • Salary
    • The average salary for Foster’s 2018 MBA finance graduates was about $115,000, plus a signing bonus of $25,000.
  • Flexibility/work balance.
  • Promotions.
    • In an earlier session, one treasurer asked his peers if they found that new hires expected a promotion every year. He said that’s unrealistic and his approach is to tell people the company is “going to get you where you ultimately want to go,” but don’t expect a promotion every year. Another treasurer said finance has a 70% retention rate and warned, “You’ll lose them if they’re not advancing.”
  • Frequent feedback. The Foster School professors added that MBAs want contact with senior leadership.

How to engage potential recruits. The Foster School presentation recommended members take these actions to appeal to MBA students:

  • Give a guest lecture or serve on a panel at the school.
  • Host a group of students for a tour or talk.
  • Sponsor a spring analytics project.
  • Mentor a student.
  • The obvious: Hold on-campus recruiting events.

The corporate perspective. Not all the treasurers present said they favored MBA graduates. In fact, one member said MBA grads who are on rotations in the company’s leadership program usually don’t return to finance roles because they “want to do exciting business stuff, sexy biz dev stuff.” It’s easier, he said, to retain undergraduates who start in finance. “I love the leadership program when we get undergrads,” he said.

  • Another treasurer asked, “How do we make finance sexier?” He noted that corporates are often competing against investment banks for top talent.
  • The first treasurer said that when he does hire MBAs, he takes graduates from “second tier” schools who did well and are intent on proving themselves, as opposed to trying to recruit Ivy League MBAs. “Let them go to McKinsey or Goldman Sachs,” he said.
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Supply Chain Finance Faces Rising Regulatory Scrutiny

Founder’s Edition, by Joseph Neu

Making sense of calls to increase debt classification and disclosure requirements for reverse factoring.

I received an email recently from a consultant giving me a heads-up about a potential financial reporting change that could adversely impact the multibillion-dollar market for supply chain finance.

Founder’s Edition, by Joseph Neu

Making sense of calls to increase debt classification and disclosure requirements for reverse factoring.

I received an email recently from a consultant giving me a heads-up about a potential financial reporting change that could adversely impact the multibillion-dollar market for supply chain finance.

  • Extended payables vs. debt. At issue is the ability of companies to use a financial intermediary to pay suppliers at a discount while extending their payments terms to the suppliers (sometimes in conjunction with raising financing against their own receivables, too), or simply extend payables beyond the norm to preserve cash (aka reverse factoring, payables financing or supply chain finance). Many such transactions are not recorded as debt but rather as trade payables.

The collapse of the UK construction firm Carillion in early 2018, linked by critics to its misuse of supply chain finance, is seen as one tipping point. But the broader use of reverse financing to help firms fund themselves at lower cost that is being promoted by a growing number of financial intermediaries