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Tear Down, Rebuild: A Treasurer Lays a Foundation for Best Practices

How a newly hired treasurer revamped her company’s capital structure, banking group and her team. 

Soon after arriving at a fast-growing midsized multinational company, a newly-hired treasurer with extensive experience in loan restructurings and amendments launched a loan compliance cleanup. That was the first step on the path to establishing best practices at a company that had never had a treasurer with experience in treasury.

  • The treasurer described what she did and her thinking at a recent meeting of NeuGroup’s Treasurers’ Group of Thirty and in a follow-up interview.
  • While each company’s situation is different, this member’s experience provides insights for peers committed to implementing new treasury practices, policies and procedures that meet an expanding business’s rapidly changing needs and help set it on a course for more growth.

How a newly hired treasurer revamped her company’s capital structure, banking group and her team. 

Soon after arriving at a fast-growing midsized multinational company, a newly-hired treasurer with extensive experience in loan restructurings and amendments launched a loan compliance cleanup. That was the first step on the path to establishing best practices at a company that had never had a treasurer with experience in treasury.

  • The treasurer described what she did and her thinking at a recent meeting of NeuGroup’s Treasurers’ Group of Thirty and in a follow-up interview.
  • While each company’s situation is different, this member’s experience provides insights for peers committed to implementing new treasury practices, policies and procedures that meet an expanding business’s rapidly changing needs and help set it on a course for more growth.

Triage, fixes, goals. The treasurer’s knowledge of loan covenants, operational limitations in credit agreements, technical defaults and compliance certificates allowed her to quickly conclude that the loan compliance situation needed immediate attention. “I saw there were some things that we needed to fix,” she said. The good news: “There was an understanding at the company that this was an area that needed an upgrade and a fresh set of eyes,” she said.

  • Following a relatively “easy negotiation” with banks over cleaning up the credit agreement, the treasurer set about stress test modeling on the company’s credit facility and reviewing existing covenants.
  • She then seized the moment to initiate significant changes as she engaged with senior management and the board to focus their attention on the strategic importance of capital structure.
  • Before embarking on projects of this scale, “You have to be mindful of the time frame to achieve your goals,” the treasurer advises. Ask yourself, “What can you realistically accomplish within the first 12 to 24 months to get some quick wins?
  • “And thinking to the future, what is it you need over the next couple years to really expand what you’re doing? When you go into these new situations and you’re in a rebuilding mode, you’ve got to show some accomplishments.”

New terms, new flexibility. Her goals set, the treasurer realizedwe needed to have more flexibility within our capital structure given the size of the company and the fact that we were much more global than we had been several years prior. And I knew that we needed to work with more than just two banks.

  • “It was all about crafting a credit agreement that would work with not only where the company was, but where it’s going,” she said. “The company had very good financial performance so it was really the right time to lay out what it is we needed, what were the exact terms that we were looking for.”
  • The revamped capital structure now features a five-year credit facility and a seven-year term loan. “It was really structuring this so we could have a good runway for the next couple of years.”
  • As a result, “Our pricing went down and our flexibility went up because I took it out to four or five different banks who came back and presented term sheets to us. We also bid out the international banking business at the same time.” The company used its newfound flexibility relatively soon, she said, declining to elaborate.

The people part. The member also put her stamp on the treasury team. “The positions needed to be reworked, the personnel needed to be switched out, essentially,” the treasurer said. Among her moves:

  • The elimination of an assistant treasurer position, in part because of overlapping capabilities with the treasurer.
  • An “opportunistic hire” of a senior manager of treasury with international experience at a large tech company looking for broader treasury experience.
  • The creation of a cash manager position staffed by someone in the company’s accounts receivable area who had treasury experience.
  • “What worked out well for me is I was able to use a combination of internal and external people. I didn’t go 100% external, and that was important, at least within our organization,” the treasurer said.

In focus now. Having laid a solid foundation for treasury, the member has her team focused on investment policy, cash forecasting and position, assessing foreign exchange risk and other areas requiring “some more refinement,” she said.

  • After tackling big areas like capital structure and bank groups, treasurers have to meet the challenge of showing senior management the value of addressing other areas that may seem less exciting or important.
  • The engagement this requires is made more difficult by the pandemic, working from home and the absence of “informal communication,” the member noted.

Needed: support, hard work. Not surprisingly, the feasibility of entering a new company and revamping the capital structure and the banking group and making other major changes requires the support of senior management.

  • “You’ve got to have the support from your manager to really go in and assess what is existing, what are the positions, what is the structure, what do you need immediately to accomplish your goals,” the treasurer said.
  • Don’t underestimate the amount of work involved in pushing a company to shift gears and adopt best practices. And then make the most of the opportunity.
  • The treasurer told herself, “You don’t get to do this a lot. It’s kind of an unusual experience and even though it’s a lot of work I’m going to take advantage of it.”
  • Sure enough, “It was a lot of work, it took a lot of energy,” she said. “But I think it has paid a lot of dividends for the company.”
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Borrowing Authority and the Board: How Often Do You Renew?

NeuGroup’s survey results on the frequency of borrowing authority renewals, use of carve-outs for M&A and more.

Nearly two-thirds of the treasurers responding to a recent NeuGroup survey renew their borrowing authority with the board on an ad hoc or as-needed basis, while about one-third do it every year. That’s shown in the first pie chart below.

  • But at a follow-up meeting to discuss the results, the general consensus seemed to be that an annual review made the most sense, as it can be part of the overall conversation with the board regarding capital structure.
  • The second chart shows that for the majority (59%) of companies that responded, the full board grants borrowing authority, with the finance committee of the board playing that role at 29% of the companies.

NeuGroup’s survey results on the frequency of borrowing authority renewals, use of carve-outs for M&A and more.

Nearly two-thirds of the treasurers responding to a recent NeuGroup survey renew their borrowing authority with the board on an ad hoc or as-needed basis, while about one-third do it every year. That’s shown in the pie chart on the left, below.

  • But at a follow-up meeting to discuss the results, the general consensus seemed to be that an annual review made the most sense, as it can be part of the overall conversation with the board regarding capital structure.
  • The second chart shows that for the majority (59%) of companies that responded, the full board grants borrowing authority, with the finance committee of the board playing that role at 29% of the companies.

Context. The importance of borrowing authority flexibility was underscored at another NeuGroup meeting in 2019. The takeaways then included:

  • Winning authority from the board to go to capital markets opportunistically is a best practice. Treasury needs to have authority from the finance committee to refinance or issue debt when market stars are in alignment. This provides the flexibility to act fast, and members agreed it’s ideal for everyone as long as there’s full transparency between treasury and the board of directors.

Other observations from the more recent meeting:

  • Some companies with a specified dollar amount ceiling for borrowing have carve-outs which do not require additional approval for purposes such as M&A financing, where borrowing needs are discussed during the normal evaluation and approval process.
  • Members do not share details of their borrowing authority with the rating agencies, but rather provide a range of borrowing which might occur in the upcoming year.
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Talking Shop: Net Investment Hedging Programs

Member question: “Anyone have a net investment hedging program? If so, how often are you rolling hedges?

  • “What is your typical tenor? Are you hedging 100% or something less?”

Member question: “Anyone have a net investment hedging program? If so, how often are you rolling hedges?

  • “What is your typical tenor? Are you hedging 100% or something less?”

Peer answer: “We have done some opportunistic NIH hedging in JPY with FX forwards. We generally use our EUR capacity for debt issuances as well. Hedges have been in the two- to three-year range.

  • “We will go up to 100% of capacity (we do not seek to push to the 125% mark that is allowed).
  • “We also believe it should be thought of as synthetic debt—that the currency being hedged should have real underlying cash flows (e.g., would be able to pay off the debt if issued locally).”
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Learning New Strokes: A Treasurer Adds Tax to Her Skill Set

One NeuGroup member has “had to learn from doing” to tackle tax—and also tap internal and external experts.

When the head of tax at a midsized multinational company left to take another job a couple of years ago, the CFO tapped the treasurer to run tax, too. The treasurer shared some of the challenges she faced and how she addressed them at a recent meeting of the Treasurers’ Group of Thirty and in a follow-up interview.

A difficult beginning. Three of four junior tax staffers also ended up departing, leaving the treasurer with only one other tax person after being in the tax job for just a month. “That was obviously pretty difficult,” she said. “I literally had to do two jobs because we didn’t have many people at first.”

One NeuGroup member has “had to learn from doing” to tackle tax—and also tap internal and external experts.

When the head of tax at a midsized multinational company left to take another job a couple of years ago, the CFO tapped the treasurer to run tax, too. The treasurer shared some of the challenges she faced and how she addressed them at a recent meeting of the Treasurers’ Group of Thirty and in a follow-up interview.

A difficult beginning. Three of four junior tax staffers also ended up departing, leaving the treasurer with only one other tax person after being in the tax job for just a month. “That was obviously pretty difficult,” she said. “I literally had to do two jobs because we didn’t have many people at first.”

  • The exodus also changed the nature of the role senior management had initially intended the treasurer to play in tax. “At the time, they thought that it would be more of a management role for me; whereas with the departure of all those people and a new set of eyes, it became much more of a rebuilding cleanup exercise than a pure managerial exercise,” she said.

A key hire with an accounting background. Senior management combined the roles in part because “there was enough crossover between the two disciplines that it made sense to have a more unified approach,” the treasurer said. But when it comes to matters of tax compliance, GAAP tax provision, tax returns and audit defense, there is little crossover with treasury, she said.

  • “I ended up going out and hiring a really ‘heavyweight’ director of tax,” she said. “And one of my requirements was that they had to have a CPA. Because there’s two types of people out there in the tax world. There’s the CPAs and then the lawyers. We didn’t have enough structuring going on at our company to warrant a legal background. We really needed the accounting background.”
  • Her advice to peers building in-house tax teams: “If you are going to build internally, you need to get someone very heavy underneath you.”

Scaling the learning curve. To learn what she needed to know about tax, the treasurer posed lots of questions to her tax director and, when necessary, the company’s outside tax auditor. And, like a lot of learning, much is done on the job. “I had to learn from doing,” she said, including the analysis of the implications of a tax and legal structure proposed by the company’s outside auditor.

  • “I felt like I was really good at asking questions. And I felt like I could sort of think the way tax people think. But when you just don’t have the fundamental subject matter expertise, that’s where it gets difficult because you haven’t done the tax return yourself.”

The need to pick your spots. Making the transition to running tax and treasury requires deciding how much effort to devote to mastering tax concepts. “The tricky thing as a manager going from treasury to tax is how much time do you invest in that stuff,” the member said. “Because learning about these tax concepts is complicated and most things are not 10-minute discussions, it’s 20- or 30-minute discussions, at a minimum.

  • “I have to pick and choose how much I want to learn. I’m never going to be a tax professional and sit and do a tax return for a multinational company. I have no desire to do that and I won’t do that,” she added.

When wearing two hats pays off. The treasurer’s knowledge of repatriation of cash, global cash forecasting and cross-border investments has proven valuable in her management of this multinational’s tax team.

  • “Whenever there is cross-border, you have to involve tax,” she said. “So as we look at cross-border investments around the world and repatriating cash, now that I know more about the tax elements, I can really represent both areas at meetings and we don’t have to have yet another tax person on the call.
    • “So our tax director can focus on the stuff he needs to be working on and then I can go back to him for clarification or ask him to work on certain things.”

When outsourcing makes sense. The company does most of its domestic tax work in-house, but outsources transfer pricing studies to its outside auditor in addition to having the firm review other complicated, international tax matters. In response to a question from a peer at the meeting, she said, “Outsourcing is very expensive when you talk to the big four firms.”

  • The company outsources more in its operations abroad, including the preparation of tax returns and value-added tax (VAT) payments.

Dividing her time. When the treasurer took over tax, the company was in the midst of a global tax restructuring that required her to spend 80% to 90% of her time on tax. Her goal for 2021 is to spend 20% to 30% on tax and the rest on treasury.

  • “But I’d be happy if I could get down to 50% on average,” she said.
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Sign of the Times: Retailers Say Coin Shortage Worries Persist

Burned by a dearth of coins during the pandemic, many retailers are cautious despite some signs of stability.

“Cash-mageddon” is how one member at a recent meeting of NeuGroup for Retail Treasury described the havoc wreaked by the coin shortage that made life hellish for many retailers last year. And despite signs of normalization and increased production by the US Mint (see below), some members remain unconvinced that the coin supply disruption caused by the pandemic is truly over.

Burned by a dearth of coins during the pandemic, many retailers are cautious despite some signs of stability.

“Cash-mageddon” is how one member at a recent meeting of NeuGroup for Retail Treasury described the havoc wreaked by the coin shortage that made life hellish for many retailers last year. And despite signs of normalization and increased production by the US Mint (see below), some members remain unconvinced that the coin supply disruption caused by the pandemic is truly over.

Cautious about outlook. “The Fed hasn’t really given any new updates, so I would not take your sign down,” one member said, referring to the ubiquitous signs asking customers to use exact change or telling them to use credit or debit cards. One company resorted to giving out gift cards as change.

  • Another member whose company sometimes went weeks without a new coin delivery echoed the caution voiced by her peer.  “I’m uber-sensitive to coin; it was incredibly draining for our stores,” she said. “We’re at a point where it’s stable, but given all the uncertainty, keep your signs up, maybe to save you from having to reprint them.”
  • A third treasurer remarked that because the coin shortage stems from a circulation issue, if Covid protocols send consumers back online and away from physical stores, he “doesn’t see us being through it.”
    • The member said his company is completely reliant on courier services to deliver new coin to brick-and-mortal locations, and if for some reason there is an issue with the courier, the coin shortage would return. “It feels like they don’t have enough built-up inventory, they’re just using up what they have for that day,” he said.

Courier issues. Other members who use couriers for cash pickup and delivery said they share similar worries after years of inconsistent service, even before the pandemic.

  • When the coin shortage worsened last summer, couriers were hit hard as well, sometimes going up to 10 days without service for retailers. Though delivery has improved to a level that one member called “stable,” it still is not meeting some corporates’ needs.
  • “I’m being incredibly frustrated by the quality and level of service of these companies,” one member said. “I’m trying to be sensitive to their situation, I’m guessing their business is declining. They’re claiming there are driver shortages due to Covid, but sometimes we are going weeks without pickup.”

An unplanned stress test. One member said because the coin shortage became a large pain point, it served as something of a stress test, showing companies just how much they could take and providing a warning to prepare for all scenarios.

  • Another member said she is now preparing buffers and sensitivity analysis for her company, planning for the possibility of another lockdown.
  • “We’re thinking through a lot of the things we probably thought would never happen,” she said. “I don’t think anyone ever thought that we wouldn’t have coin, so when it stopped showing up, that was devastating to our stores. We had to be nimble and quick.”
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Calmer Seas: Revolvers Recover, Return to Pre-Covid Pricing, Tenor

Upfront fees are higher, but treasurers renewing facilities see reason for optimism; U.S. Bank is also positive.

Multiyear tenors for revolving credit facilities are now available to investment-grade (IG) corporate borrowers, according to several NeuGroup members who have been talking to their bankers recently. This week, one treasurer said, “Things have normalized a fair amount for solid credits,” citing a large bank.

Upfront fees are higher, but treasurers renewing facilities see reason for optimism; U.S. Bank is also positive.

Multiyear tenors for revolving credit facilities are now available to investment-grade (IG) corporate borrowers, according to several NeuGroup members who have been talking to their bankers recently. This week, one treasurer said, “Things have normalized a fair amount for solid credits,” citing a large bank.

  • This member, who was in the process of renewing his company’s revolver last year when Covid hit, is now deciding when to “pick it back up” and wanted to know what his peers have heard.
  • “Multiyear is back,” said one of them.

Longer tenors. “It sounds like five years is back on the table,” said another treasurer. She works for a company that postponed extending the tenor and raising the amount of its revolver last year.

  • This treasurer—whose company is a “new IG credit”—recently circled back with traditional lenders and said, “The reception’s been good,” noting that she got very little pushback to her plans to restructure the revolver.

Is the price right? The company did not get quotes, but “pricing appears to have settled down,” the member said. Another treasurer said upfront fees remain higher than before Covid, adding “how much you can push that” depends on your relationship with the banks and, of course, the size of your wallet.

  • This treasurer said some banks want funded facilities now that revolver drawdowns have been repaid. They are eager to increase assets and have a healthy risk appetite, he said, adding that they all want higher fees.

U.S. Bank’s analysis. NeuGroup Insights reached out to Jeff Stuart, head of capital markets at U.S. Bank, who keeps close tabs on the revolver market. Here are his observations:

  • The market for large-cap investment-grade revolving credit facilities has largely recovered to pre-Covid levels in terms of both pricing and tenor, with many borrowers executing five-year renewals at pre-Covid pricing levels.
  • U.S. Bank is seeing higher upfront fees pretty much across the board, one to three basis points for the higher-rated names.
  • The market is a bit sector- and ratings-specific, with higher impacted sectors still exacting a pricing premium, and more bank caution around lower investment-grade borrowers.
  • Some sectors, like utilities, have been slower to normalize despite their relative credit quality, with discussions going to five-year tenors only just recently.
  • On the bank side, there seems to be a higher post-Covid emphasis on returns, with a specific focus on available ancillary business, particularly by smaller regional banks.
  • U.S. Bank expects the trend toward a full return to pre-Covid terms on revolving credits to continue amid recovery overall during the first half of 2021. But it will continue to vary by situation and sector.

Sustainability-linked revolvers anyone? Back at the meeting, one treasurer raised the issue of revolving credit facilities whose terms are linked to the company achieving sustainability goals, unlike green bonds or loans whose proceeds must be used for sustainable purposes (see next story).

  • He has not seen the value in the idea, saying the savings for hitting the targets are minimal, a few basis points at most. “The net benefit is not good enough” given the incremental cost, he said. Another treasurer agreed that “treasury is not driving” the move by some companies to use sustainability-linked revolvers.
  • One treasurer drew laughs when he said his efforts to research “green revolvers” with a Google search turned up images of green handguns.

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Green Hedges: What You Need to Know About ESG Derivatives

Standard Chartered explains the potential value of “use of proceeds” and performance-linked ESG derivatives.

The flood of money pouring into ESG finance—everything from green bonds to sustainability-linked revolving credit facilities—has washed up on the shores of derivatives markets. At a recent NeuGroup meeting of European treasurers, sponsor Standard Chartered dove beneath the surface to reveal what value ESG derivatives may offer. The bank described two types:

  • “Use of proceeds” ESG derivatives that hedge FX or interest rate risks arising from ESG financing and are ring-fenced as hedges referencing a specific loan or bond.
  • ESG performance-linked derivatives that link a payoff with ESG metrics or key performance indicators (KPIs).
    • The sustainability metrics are determined by a third party’s score or index or by the corporate itself.

Standard Chartered explains the potential value of “use of proceeds” and performance-linked ESG derivatives.

The flood of money pouring into ESG finance—everything from green bonds to sustainability-linked revolving credit facilities—has washed up on the shores of derivatives markets. At a recent NeuGroup meeting of European treasurers, sponsor Standard Chartered dove beneath the surface to reveal what value ESG derivatives may offer. The bank described two types:

  • “Use of proceeds” ESG derivatives that hedge FX or interest rate risks arising from ESG financing and are ring-fenced as hedges referencing a specific loan or bond.
  • ESG performance-linked derivatives that link a payoff with ESG metrics or key performance indicators (KPIs).
    • The sustainability metrics are determined by a third party’s score or index or by the corporate itself.

Case studies. Standard Chartered’s presentation included several examples of how ESG derivatives can be used.

  • A company using an FX forward to hedge export pricing in Asia that will receive a discounted FX rate if it meets ESG targets which support the United Nations Sustainable Development Goals.
  • A company enters into an interest rate swap where the credit spread is linked to the corporate’s sustainability performance as measured annually by Sustainalytics.
  • A company enters into a cross-currency basis swap with a bank where either party’s interest rate payments can rise if they don’t meet their sustainability targets.

Any takers? While NeuGroup members expressed interest in the topic, it’s unclear if treasury teams are ready to embrace ESG derivatives since many companies are still figuring out where green bonds or sustainability-linked loans or revolvers fit in their sustainability plans.

A poll at the meeting revealed the low percentage of companies that have given treasury a specific sustainability mandate or have linked ESG to performance (see below).

One of the Standard Chartered bankers said the fact that almost half of those polled expect performance to be tied to ESG initiatives within one to three years was better than he expected and was “encouraging.”

  • An outside risk management consultant asked by NeuGroup Insights about the firm’s clients said, “It’s actually a new enough market development that we haven’t seen a lot of corporates exploring the use of ESG derivatives just yet.” Stay tuned.
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Fertile Ground: Capital Markets Look Good for Growing Tech Companies

Bank of the West/BNP Paribas sees inviting conditions for young companies raising capital in 2021.

Capital markets bounced back strongly in the second half of 2020, with soaring levels of convertible bond deals and a healthy climate for IPOs and high-yield bonds. Favorable conditions will continue to benefit emerging technology companies this year, according to Bank of the West/BNP Paribas, sponsor of the fall meeting of the Tech20 High-Growth Treasurers’ Peer Group.

Bank of the West/BNP Paribas sees inviting conditions for young companies raising capital in 2021.

Capital markets bounced back strongly in the second half of 2020, with soaring levels of convertible bond deals and a healthy climate for IPOs and high-yield bonds. Favorable conditions will continue to benefit emerging technology companies this year, according to Bank of the West/BNP Paribas, sponsor of the fall meeting of the Tech20 High-Growth Treasurers’ Peer Group. Highlights:

Low high-yields. Volatility due to political tensions and a second wave of Covid cases worldwide put a damper on the high-yield market at the start of the fourth quarter, but the market quickly strengthened following the November election.

  • High-yield deals had reached a record $453 billion through mid-December, nearly twice the levels of 2019.
  • Yields are in record low territory, around 4.3% vs. 2019-2020 average of 6.41%, Bank of the West/BNP Paribas said, a favorable environment for high-growth companies.

Cool convertibles. The US convertible bond market hit near-record issuance levels in 2020, reaching over $100 billion, with tech companies issuing nearly half of all convertible debt (see below).

  • Even with investor-friendly deals made at the onset of the pandemic, last year had the highest conversion premium and the lowest average coupon in the last decade, creating an ideal environment for issuers.
  • The bankers said market confidence has sparked the return of 24-hour marketing periods, as opposed to pre-market launches for same day pricings.

IPOs made easier. Constructive market conditions and a faster, easier process have made initial public offerings increasingly attractive for developing companies.

  • Many members shared their positive experiences with virtual roadshows, which can take under an hour and require no travel expenses. They also give growth companies access to a broad range of US and international investors.
  • “It’s hard to see a world post-Covid where investors fly to Europe to attend investor meetings,” one member said. “I think it’s here to stay.”
  • The lag between public filing and pricing an IPO rose to a month or more, a growing pipeline that the bankers described as “a sign that issuers have more confidence in the stability of markets.”

SPACs surge. Special-purpose acquisition companies (SPACs), an alternative to IPOs, surged last year, a trend that some analysts say is likely to continue in 2021.

  • Hedge funds looking for money market alternatives in a low-yield environment boosted demand for SPACs, a positive for growing tech companies.
  • Between the high-profile success story of Virgin Galactic and a willingness of target companies to go public via a “de-SPACing” acquisition rather than a traditional IPO, SPAC issuance in 2020 alone exceeded the previous decade combined.
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Bridging a Skills Gap Facing Finance Teams as Businesses Transform

Data from The Hackett Group show more companies plan to launch talent development initiatives this year. 

The good news is that more finance teams are placing a higher priority on aligning the skills and talents of their members with changing business needs amid digital transformation. The somewhat bad news is that many of those teams currently lack the abilities necessary to make that alignment a reality.

Data from The Hackett Group show more companies plan to launch talent development initiatives this year. 

The good news is that more finance teams are placing a higher priority on aligning the skills and talents of their members with changing business needs amid digital transformation. The somewhat bad news is that many of those teams currently lack the abilities necessary to make that alignment a reality.

  • Those are among the takeaways from survey data collected and analyzed by The Hackett Group and presented at several NeuGroup 2020 second-half meetings by Nilly Essaides, senior research director for Hackett’s finance advisory practice.

Progress report. Finance teams looking ahead ranked aligning skills and talent with changing business needs among their top 10 priorities in Hackett’s 2021 Key Issues Study. That’s a sign of progress, Ms. Essaides said, given that talent development did not crack the top 10 a year earlier.

  • That fact provides context in which to evaluate the significance of 42% of finance organizations reporting they plan to launch a talent development initiative in 2021—one of several findings presented in the graphic below.
  • “I see more and more finance teams that want to own staff development rather than hanging on the coattails of HR,” Ms. Essaides said. “There’s more interest by CFOs to develop these programs.”

Pushed by the pandemic. The prioritization of skills development is also significant as it comes amid the pandemic and plans by many finance teams to cut costs and enable remote work through process automation—the number one initiative on the function’s transformation agenda for this year. 

  • “Covid has really intensified the need to go digital,” Ms. Essaides said, adding that Hackett is seeing increased use of robotic process automation (RPA) and cloud-based applications, among other signs.
  • More than 20% of the organizations surveyed plan to hire more RPA specialists, data architects and scientists, and digital transformation managers.

Falling short. The graphic also shows that more than half of those surveyed (54%) see a big gap between current and desired analytic skills. More broadly, Hackett data show that finance organizations ranked their staffs’ lack or deficiency of critical skills second among the hurdles to making “transformation progress,” Ms. Essaides noted.

  • Those critical skills include analytics, emerging technologies, process redesign, design thinking and change management.
  • Technology and process complexity ranked first on the list of hurdles and organizational resistance to change came in third.

It’s not all about analytics. It’s critical to remember that in addition to technical and analytical skills, finance team members must possess the “ability to tell a story,” as one NeuGroup member put it.

  • Other NeuGroup members and Ms. Essaides agreed on the need for so-called soft skills that form the basis of communication, the ability to negotiate and influence and bring groups together.
  • Hackett calls these “core skills,” in part to counteract the perception that soft is somehow less important than the hard skills that often overshadow qualities that are essential for leaders in finance and every other function.
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Locking Up: Preventing Cyberfraud Attacks by Identifying Weaknesses

NeuGroup members share successes and failures keeping their companies secure amid the shift to an all-digital workforce.

The all-digital work from home environment has left treasury teams more connected to their devices than ever, but also left them—and their companies—more vulnerable to fraud. But by identifying weaknesses early, teams can resolve issues before fraudsters even have a chance to strike.

NeuGroup members share successes and failures keeping their companies secure amid the shift to an all-digital workforce.

The all-digital work from home environment has left treasury teams more connected to their devices than ever, but also left them—and their companies—more vulnerable to fraud. But by identifying weaknesses early, teams can resolve issues before fraudsters even have a chance to strike.

  • Members at a recent meeting of NeuGroup’s Treasurers’ Group of Thirty discussed their approaches to prevent the threat, one that continues to worsen.
  • Fatigue caused by working from home led to a communication breakdown for one member’s company, but others reported success through their preparation.

Success stories. Many NeuGroup members reported recent close calls with cyber breaches and have implemented processes to prevent future issues.

  • One member nearly fell prey to a fraud scheme when a phishing email included highly detailed information about the company, which could have fooled an employee into providing secure information.
    • This happened because one employee innocuously posted an update on LinkedIn about the company’s goings-on, and the scammers are growing more and more advanced.
    • The member suggests encouraging employees to only share what is necessary on social media to keep malicious third parties in the dark.
  • Another member had an issue with hackers accessing the company’s internal instant messaging system, allowing them to imitate employees with “no way to verify it was them.”
    • Some members use a series of steps to authenticate accounts before accessing sensitive information, including callbacks from verified phone numbers.

“A breakdown in communication.” One NeuGroup member had this type of system in place, but a series of internal mistakes led to a loss of nearly $10,000; thankfully, the member said they were able to recover the stolen cash.

  • When a new employee was hired at the member’s company, fraudsters hacked the digital account of an actual vendor that the company uses and corresponded with the new employee from a seemingly authentic  email address.
  • Though the member’s company does use a callback authentication process, he said there were application errors “on multiple levels” and plans more frequent audits and training to identify and prevent these weaknesses in the future.
    • “Fatigue is a real issue,” another member said, recommending smaller, “bite-size” trainings for employees to prevent burnout and ensure employees apply the knowledge they learn.
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Why Internal Audit Needs to Blow Its Own Horn

Like other functions, internal audit needs to publicize its value to senior executives and the broader corporation.

After the completion of a lengthy process audit at a multinational company, the chief audit executive (CAE) reported results to the owner of that process. After a cursory review, the process owner, also a senior executive, asked, “What else have you done?”

  • The CAE was somewhat taken aback. The audit took several months and ate up lots of FTE hours. But since it only resulted in a few findings, the audited executive thought there must be more that audit was working on.

Like other functions, internal audit needs to publicize its value to senior executives and the broader corporation.

After the completion of a lengthy process audit at a multinational company, the chief audit executive (CAE) reported results to the owner of that process. After a cursory review, the process owner, also a senior executive, asked, “What else have you done?”

  • The CAE was somewhat taken aback. The audit took several months and ate up lots of FTE hours. But since it only resulted in a few findings, the audited executive thought there must be more that audit was working on.

A need for self-promotion. This led the CAE to question how familiar management is with audit’s work. “We have not done a good job of selling audit” to management, he said, adding that his task now was to “reeducate the management team about the value of internal audit.”

  • To be sure, audit departments do not need to prove or explain themselves to management. Most, if not all, report directly to the audit committee of the company’s board. Their budgets in most cases are growing and not shrinking.
  • Still, administratively they typically report to the CFO, so there is some explaining to do when it comes to budget allocations. Nonetheless, this auditor felt that management needed to know more about what internal audit (IA) does and the benefits it can bring.

Stepping up. At another company, the auditor has seemingly cracked the code when it comes to showing IA’s benefits. This company, a serial acquirer with a tight fist when it comes to budgets across the company, wanted to cut its external auditor budget by 15%. When its external auditor balked at the request, IA stepped up to fill in any gaps. This saved the company millions of dollars.

  • This same auditor took a close look at the company’s licensing relationships and found many of the deals out of date or companies out of compliance with the terms of their contracts. Thus, the IA team was able to claw back several million dollars in fees. The same was done with supplier performance agreements.
  • All of these efforts were well received by senior management and, best of all, the chief executive.

Best foot forward. While some IAs have struggled with promoting their skills and value to the rest of the company, in some cases, Covid has allowed them to shine. Many IAs, forced to change audit plans at the outset of the pandemic (not stopping or canceling audits, but slowing timelines), have been able to do extra work outside of their purview.

  • This includes assisting with Covid response, data analytics, accounting or lending out FTEs to help in other functions where there is a need. This showed other parts of the organization all the good IA can do.
  • Consulting is on the docket in 2021 for the first auditor. He said IA is going to work on and highlight “what the value is we can bring beyond the X amount of audits and findings,” which he hopes to accomplish by doing more consultative projects. 
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Talking Shop: Derivative Regulatory Compliance in Hedging Programs

Member question: “Our hedging programs have trading entities in multiple jurisdictions requiring continual monitoring of derivative regulatory compliance regulation. This is mostly handled internally, leveraging external counsel to advise on specific topics and questions.

  • “How do others manage derivative regulatory compliance such as EMIR (European Market Infrastructure Regulation), FMIA (Financial Market Infrastructure Act) and others? Do you outsource, handle internally, hybrid solution or is it not applicable? Are there advisors that you would recommend?”

Member question: “Our hedging programs have trading entities in multiple jurisdictions requiring continual monitoring of derivative regulatory compliance regulation. This is mostly handled internally, leveraging external counsel to advise on specific topics and questions.

  • “How do others manage derivative regulatory compliance such as EMIR (European Market Infrastructure Regulation), FMIA (Financial Market Infrastructure Act) and others? Do you outsource, handle internally, hybrid solution or is it not applicable? Are there advisors that you would recommend?”

Peer answer 1: “My company is similar; predominantly navigated internally with legal’s assistance as needed.”

Peer answer 2: “Response from our derivatives manager:

  • “We monitor internally in treasury and at our regulated financial units (typically through either internal legal or accounting/compliance groups, and this in the past has sometimes been a reactive position rather than proactive).
  • “Sometimes the banks may notify us of a change; I’ve seen this in the onshore highly regulated markets due to the local complexities/language/access to regulation, etc.—Brazil, India, China, Thailand.
  • “For the US and European market regulations, there are a few representatives that have actively participated in the Coalition for Derivatives End-Users run by Gibson Dunn.”
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Learning a New Language: Tax Experts Who Become Treasurers

Insights and advice from a tax professional who left her comfort zone to become treasurer. 

A “steep learning curve” is how one member of NeuGroup’s Treasurers’ Group of Thirty (T30) who has extensive experience in tax described what she encountered in taking on the added responsibility of treasury at her company at a recent meeting sponsored by Standard Chartered.

Insights and advice from a tax professional who left her comfort zone to become treasurer. 

A “steep learning curve” is how one member of NeuGroup’s Treasurers’ Group of Thirty (T30) who has extensive experience in tax described what she encountered in taking on the added responsibility of treasury at her company at a recent meeting sponsored by Standard Chartered.

  • She is one of several members in the group who previously led tax teams and are relatively new to leading treasury. Below is a Q&A the treasurer had with NeuGroup Insights following the meeting, edited for space and clarity.

Q: What has made taking over treasury a tall order for someone with a deep background in tax?

A: While both are financial disciplines, a different language can be spoken and there can be different norms for various interactions, aside from the difference in general education for the roles.

  • I remind myself that I didn’t earn the treasurer role based on my finance background, but rather my ability to build and motivate teams, learn quickly and distill complex topics into understandable language for stakeholders—along with strong communication and leadership qualities.

Q: What are the biggest challenges you’ve faced moving to treasury from tax?

A: Being entirely out of my comfort zone. When presenting to our board on tax matters, I know I’m the expert in the room, which allows a certain confidence.

  • With treasury topics, I’m not the expert and have realized I second-guess myself, which can impact confidence in leading the discussion.
  • And given that I took on treasury in January 2020, Covid was a huge challenge in March/April/May and continues to require ongoing focus.  

Q: How have you scaled the learning curve to get a grip on treasury—peers, colleagues, other sources of information?

A: I was extremely clear with my CFO when agreeing to take on treasury that it was not my wheelhouse and his support and expertise would be critical.

  • He and I work closely together and I also have a very bright and steady assistant treasurer with a finance background. Our styles mesh well and his background is complementary to mine.
  • T30 has been helpful to meet others in similar roles; I’ve sought advice from others which has been very helpful. Our banking group has provided valuable insight and support, too.

Q: How has your tax background aided your transition to running treasury? How do the two areas complement each other?

A: In tax, I learned to be comfortable making decisions with partial (but best available!) information; avoiding analysis paralysis. This arises extremely often in treasury as well, be it cash management, insurance renewals, debt.

  • I work to keep things simple in both areas; if I can’t explain it to the CFO and others clearly and concisely, we need to simplify.

Q: Is there an example of something you’re working on now that allows you to leverage your knowledge of both tax and treasury?

A: Consolidated cash planning/forecasting and cash repatriation. I have a new appreciation of bank account complexity and KYC queries that can arise and have been able to share additional insight from a tax perspective with the treasury team regarding specific structures and nuances.

Q: What advice do you have for other treasurers who have a tax background; and what advice for treasury folks who find themselves running tax? Which is the harder transition in your view?

A:I don’t think one is harder than the other, both have a steep learning curve! A lot of treasurers may have had exposure to tax concepts through cash repatriation work, intercompany loan documentation or structuring external debt.

  • My advice for both sides of the coin: Ask questions—there is no such thing as a stupid question. Your team and advisors are paid to answer your questions, so leverage their expertise!
    • I’ve found a lot of the questions I have are similar to what others want to ask as well.
  • My other piece of advice is around each team—build and maintain a strong team that meshes and communicates well. I rebuilt the tax team and it was critical to eliminate some bad apples; the treasury team I joined works very well together and we recently added an analyst, too.
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Raising the Bar: How AI, ML and Big Data Could Fix Cash Forecasts

Asia Treasury members discuss how advanced technology may boost satisfaction with forecasting tools. 

A quick poll at a fall meeting of the Asia Treasury Peer Group sponsored by Standard Chartered underscored both the dissatisfaction of members with their cash forecasting tools and the intensifying scrutiny of cash positions by senior management since the beginning of the pandemic.

  • None of the treasurers polled are highly satisfied with their current set of tools: 60% have low satisfaction and 40% said medium. All of the treasurers said they’re fielding more questions about cash from the C-Suite.

Asia Treasury members discuss how advanced technology may boost satisfaction with forecasting tools. 

A quick poll at a fall meeting of the Asia Treasury Peer Group sponsored by Standard Chartered underscored both the dissatisfaction of members with their cash forecasting tools and the intensifying scrutiny of cash positions by senior management since the beginning of the pandemic.

  • None of the treasurers polled are highly satisfied with their current set of tools: 60% have low satisfaction and 40% said medium. All of the treasurers said they’re fielding more questions about cash from the C-Suite.

Building better tools. In a presentation by Kyriba arranged by Standard Chartered, members heard about the potential for big data, artificial intelligence (AI) and machine learning (ML) to “move treasury into true management of working capital” and improve the accuracy of cash forecasts.

  • As the chart below shows, this vision for building a so-called behavioral model of working capital depends heavily on extracting huge amounts of data from a multitude of sources and collecting it in a data lake.
  • ML allows the model to learn patterns based on innumerable variables—and the effects of one upon another—and then predict future flows with more precision.
  • In breakout discussions, members discussed their data management challenges, including the need to standardize exogenous data before it is fed into a model.

Addressing the AR problem. The presentation included discussion of pain points experienced when forecasting invoice payment dates. “We do not know when our customers are going to finally pay their invoices,” read one example.

  • Another said cash collection “is very blurry,” resulting in a “manual and time-consuming process” to build a cash position for future days, weeks and months.
  • The presentation identified the value proposition as creating an automated process to forecast the payment date of each invoice.
  • Using AI in pilot programs with two corporates, Kyriba said, helped reduce payment forecast variances from 25 days to five days.

Other use cases. In addition to forecasting invoice payment dates, the presentation identified these use cases for companies that use systems built with AI and ML:

  • Assign budget codes to bank movements.
  • Reduce manual cash reconciliations made by users.
  • Detect payment anomalies compared to history.
  • Detect abnormal FX transactions.
  • Suggest financing request to suppliers.
  • Forecast investment and debt.
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The Post-Covid Playbook: WFH Flexibility and Office Collaboration

The goal is keeping the good parts of work from home, replacing the bad with the benefits of office teamwork.

Corporates looking ahead to a post-Covid world are taking stock of how the shift to work from home (WFH) has changed the ways that teams function—for better and worse. This requires weighing the beneficial flexibility offered by remote work against the detrimental loss of collaboration that is only possible when people are in the same building.

The goal is keeping the good parts of work from home, replacing the bad with the benefits of office teamwork.

Corporates looking ahead to a post-Covid world are taking stock of how the shift to work from home (WFH) has changed the ways that teams function—for better and worse. This requires weighing the beneficial flexibility offered by remote work against the detrimental loss of collaboration that is only possible when people are in the same building.

  • As some companies consider abandoning offices altogether, many practitioners at recent NeuGroup meetings shared how they hope to retain the conveniences that have come with WFH while reestablishing a positive office culture that cannot be replicated virtually.

Technology benefits. The near-universal shift to WFH has accelerated companies’ embrace of technology that can boost efficiency and encourage collaboration, albeit virtually. Those tech solutions are here to stay.

  • Messaging apps and video conferencing platforms such as Slack and Microsoft Teams became crucial for uniting team members spread far and wide. One member said they also “work really well for broader organizations too,” connecting employees who may not have interacted in a physical office, including members of different finance teams.
  • Members also found success with project management tools like Asana and WorkBoard, which they plan to keep using. “They can be really helpful to put specific structure to the workflows you’re tracking,” one member said.
    • “The best part is they provide great visibility to the entire team for what others are working on, and the facets of their work.”

The productivity puzzle. One member, echoing others, reported a rise in productivity at the start of the shift to WFH. But as fatigue set in, brought about in many cases by too many hours working, that productivity declined at some companies.

  • Some companies have established specific virtual work hours, but members said they ran into challenges enforcing this, especially after the early days of the pandemic.
  • “Some people just work until midnight because they’re at home and they can have dinner and still be at the office,” one member said.
  • That said, many members are planning to allow part of their workforce to continue working from home to some degree. “We learned that you don’t necessarily need everyone together all the time,” one treasurer said.

Returning to the office. Many members see physical offices as irreplaceable, capable of fostering innovation that can only come through unplanned interactions in real-life spaces.

  • One member said it has become difficult to get employees to think outside the box without in-person collaboration. She looks forward to restarting the company’s whiteboard sessions.
  • “It is really challenging to recreate inter-team communications,” another member said. “Cross-functional problem solving is even harder to replicate.”
  • A third member remarked that “lots of conversations get funneled through management” in the WFH environment, preventing the creative solutions that can come from spontaneity.
  • When it comes to onboarding new employees virtually, one member reported “really uneven” results, saying that many new employees do not settle into the company without interpersonal instruction.
    • In the long-term, the member said, a return to offices will benefit the onboarding process, even if the employee ends up working virtually most of the time.

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Talking Shop: Allowing Vendors to Directly Debit Bank Accounts

Member question: “What are your policies with respect to allowing vendors to direct debit your bank accounts for invoices due?

  • “Our policy does not support vendor direct debit of our bank accounts. We do have an exception process for situations where vendor stoppage may have material impact (i.e. utilities for a manufacturing plant) or the vendor requires DD and there are no other alternatives (i.e. postal service).”

Member question: “What are your policies with respect to allowing vendors to direct debit your bank accounts for invoices due?

  • “Our policy does not support vendor direct debit of our bank accounts. We do have an exception process for situations where vendor stoppage may have material impact (i.e. utilities for a manufacturing plant) or the vendor requires DD and there are no other alternatives (i.e. postal service).
  • “I think part of our position is a historical perception that it is ‘bad’ to allow another entity to have access to debit your bank account. I am starting to question in today’s technology world if we need to think about this differently. I think we could tighten up our payment processes and gain efficiencies by leveraging vendor DDs more.
  • “When we set up the DD exception with the bank, it has very specific parameters and we are establishing a control processes to monitor to ensure DDs exceptions are current and valid. And we do encourage our customers to allow us to DD their bank accounts! Looking for policies and/or perspective from other companies.”

Peer answer 1: “We recently added an addendum to our global payout policy in which we labeled direct debit as a high risk payout method, and defined our process by which this payment method could be requested.

  • “We have a workflow tool for the request, once approved by financial operations it feeds to treasury for debit filters or mandates or any action needed to allow the debit to our account. We struggled with timely recons with DD, comprehensive payments reporting, and accountability on matured contracts and debit authorizations.”

Peer answer 2: “Direct debit is a hot button item at my company also. Treasury has always had the point of view to not allow direct debits unless it is not profitable or if the risk is high not allowing them (i.e. utilities or certain governmental payments). We have it listed in our internal financial controls to avoid direct debits unless there is good reason for them.

  • Our AP teams are constantly challenging treasury on this topic and we have always been open to discussion. We now have a process where a treasury leader and a controller of the business must both sign off before a direct debit can be initiated.

Peer answer 3: “We’ve recently discussed this as well, mostly related to an ADP process which is daily and manual for the team. We don’t have specific policy but have historically avoided it. We’re also revisiting though due to the efficiencies it can provide. For example:

  • SCF: Our provider wanted us to open an account at their bank. We prefer they auto debit our treasury accounts rather than have another account to monitor and fund.
  • Government/utility: We’ve had instances where we do not need to provide a LC or BG if the utility can auto debit our account.
  • ADP: Currently, a manual wire process; we are investigating whether it’s worth the manual effort versus allowing ADP to auto debit our accounts.”

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Getting Granular: A Tool to Dig Deeper and Improve Cash Forecasts

How Cashforce built a stronger foundation for one member’s cash flow forecasting and working capital optimization.

Covid-19 shook the foundations of cash flow forecasting and working capital management for companies facing uncertainty about revenues, vendor payments, appropriate inventory levels and adequate cash reserves.

  • At a recent NeuGroup virtual interactive session, one participant impressed others by describing how a fintech solution provided by Cashforce a year earlier allowed his company to dig into the weeds of business operations, examining line-item details of cash flows to prepare for and absorb shocks to liquidity.
  • That ability helped treasury provide real value to the company when the internal spotlight landed on the team during the pandemic.

How Cashforce built a stronger foundation for one member’s cash flow forecasting and working capital optimization.

Covid-19 shook the foundations of cash flow forecasting and working capital management for companies facing uncertainty about revenues, vendor payments, appropriate inventory levels and adequate cash reserves.

  • At a recent NeuGroup virtual interactive session, one participant impressed others by describing how a fintech solution provided by Cashforce a year earlier allowed his company to dig into the weeds of business operations, examining line-item details of cash flows to prepare for and absorb shocks to liquidity. 
  • That ability helped treasury provide real value to the company when the internal spotlight landed on the team during the pandemic.

Digging into details. Cashforce opened a window to a more accurate cash picture by revealing what was going on across the business and how various moving ‘levers’ were rapidly changing, the treasurer said.

  • The technology tracked the granular details of cash flows and highlighted respective drivers that helped identify areas of business behaving normally and those under greater stress from delays in customer receipts.
  • The resulting insights facilitate setting baseline expectations and seeing potential roadblocks so that treasury teams can have productive conversations with operations teams about changes, new products, etc. so that business intelligence is layered into forecasts appropriately.

The velocity and veracity of data. Covid-19 has called more attention to the need for banking APIs and the harmonization of data feeds into a single analytical source. Real-time mandates are now the norm: Everyone wants payment information in real time, with consolidated cash positions at the press of a button. This greater level of urgency has driven the need for cash flow forensics and analytics.

  • 82% of participants polled have accelerated plans to automate and digitize treasury operations since the pandemic (see chart above for details).
  • Cashforce stressed that all processes surrounding cash flow and working capital optimization must be revisited to accomplish real-time goals. Across companies, they are seeing an emergence of a cash culture away from the heavy focus solely on earnings.
  • This shift requires links to AI models so treasury practitioners can determine cash flow drivers not easily spotted by the human eye because they are in the weeds of massive amounts of data.

The data is there; why can’t we get to it? Simply put by one member: Most treasury management systems (TMSs) are not designed to house the magnitude of transaction-level data nor provide the analytic capabilities needed for transparent cash forecasting and best-in-breed working capital analytics.

  • For example, not all TMSs are able to take in various data streams or extrapolate trends to build cash flow patterns into a cash forecast. For companies with multiple ERPs, the complexity and volume of data becomes exponentially difficult to manage and impossible to analyze manually.
  • Algorithms designed to roll up your sleeves for you and dig into transaction-level detail to predict trends and flag anomalies provide a structure for cash optimization and a safeguard for deviations that threaten liquidity. 
  • Measure KPIs to move the needle. Automated calculations and daily reporting on key indicators through Cashforce tools allow for expedited metrics that enable smart decision making and facilitate improving working capital through analytics.

Wedded bliss: Marrying short-term direct to long-term indirect cash forecasts! Treasury and FP&A forecast disconnects are common sources of reconciliation tension across companies.

  • Cashforce uses a “rules engine” that takes ERP data to transform the indirect P&L components into direct cash flow drivers and calculate timing parameters based on historical trends.
  • One member inquired about the possibility of forecasting by purchase order and was pleased to hear that once the purchase order details were transferred into the system, algorithms calculate cash amounts and timing for both “open ended or closed” purchase orders, taking the headache out of what is often a guessing game.

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The Right Steps on the Path to Optimizing Working Capital Management

MUFG presents a working capital road map for technology companies at NeuGroup’s AsiaTech20 pilot meeting. 

At the inaugural meeting of NeuGroup’s AsiaTech20 Treasurers’ Peer Group, sponsor MUFG led a session titled “Optimizing Working Capital (in Uncertain Times)” and participants discussed challenges including how to get vendors to extend payment terms, the need for efficient collections processes and developing KPIs around working capital.

MUFG presents a working capital road map for technology companies at NeuGroup’s AsiaTech20 pilot meeting. 

At the inaugural meeting of NeuGroup’s AsiaTech20 Treasurers’ Peer Group, sponsor MUFG led a session titled “Optimizing Working Capital (in Uncertain Times)” and participants discussed challenges including how to get vendors to extend payment terms, the need for efficient collections processes and developing KPIs around working capital.

Working capital cycle. MUFG’s presentation identified four areas, and goals for each, in the working capital cycle.

Big Picture. The presentation also set down a path for companies starting on the path to optimizing their working capital management programs. It requires:

Senior attention.

  • Working capital improvement is an ongoing process led by the most senior stakeholders within the company.
  • Holistic organizational transformation requires close cross-functional coordination.
  • Change in culture and organizational buy-in by all stakeholders is necessary.

Organizational change management.

  • Buy-in is needed across various departments, including treasury, sales and procurement teams.
  • Working capital solutions require a deep understanding of systems and processes supporting the company, legal contracts and payment terms affecting working capital, and financial tools used to improve and gain efficiency.

Steps. Here are four steps to take on the path to an optimized working capital management approach, according to MUFG:

Observations from North America. MUFG’s presentation said that over the course of 2020, “companies have seen substantially higher amounts tied up in working capital. Furthermore, several key working capital metrics deteriorated during the year.” In addition:

Pricing pressure.

  • With liquidity scarce and credit concerns, we have seen significant repricing movement across the broader market.
  • Pricing levels have varied from program to program with new pricing around 25 to 50 basis points higher.
  • The industry segments hit hardest by Covid-19 faced the most pressure with significant premiums needed to maintain funding.

Term or tenor extension.

  • Buyers are delaying payments and/or forcing extension of terms to preserve cash.
  • Terms continue to get extended with 90- to 120-day terms becoming more common and customers absorbing higher product costs from suppliers in exchange. In some cases, terms have approached 360 days

Usage and volume.

  • Seller-led programs have had growth in usage over LTM due to longer tenors while volume has decreased.
  • Buyer-led (payable) programs have had an increase in usage as volumes have increased as suppliers are looking for more liquidity.
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Banks Craving Yield Hear Case for Lightly Structured Corporate Notes

An option for members of the Bank Treasurers’ Peer Group coping with excess liquidity amid rock-bottom rates.

Many members of the Bank Treasurers’ Peer Group (BTPG) find themselves looking to their investment portfolios as they search for yield in a manner that complies with policy risk parameters—a theme heard at other NeuGroup meetings in the second half as interest rates fell.

An option for members of the Bank Treasurers’ Peer Group coping with excess liquidity amid rock-bottom rates.

Many members of the Bank Treasurers’ Peer Group (BTPG) find themselves looking to their investment portfolios as they search for yield in a manner that complies with policy risk parameters—a theme heard at other NeuGroup meetings in the second half as interest rates fell.

  • Banks face the added challenge of tepid loan growth amid a surge in deposits driven by a flight to safe havens and businesses parking cash received through the Paycheck Protection Program.
  • “We have all this cash and nowhere to invest,” one bank treasurer said.
  • One suggestion from the sponsor of the BTPG H2 meeting: Buy lightly structured investment-grade corporate bonds, in addition to US treasuries, federal agency debt, MBS, ABS and municipal bonds.

Structured notes. According to the sponsor, lightly structured bonds can offer a significant yield pickup and be customized to meet portfolio needs. Structured correctly, these securities can be a capital-efficient investment from a risk-weighting perspective. Structured notes issued by US depositary institutions or qualifying foreign banks can have the same risk-weighting as a federal agency or MBS investment.

  • The sponsor was that clear structured notes, if appropriate, would still only comprise a relatively small percentage of a bank’s securities portfolio, primarily because they can be less liquid than other investments, especially during times of high volatility and stress in the financial markets.
  • That said, these investments can be customized by issuer, tenor, rating, fixed versus variable interest payments and call feature.
  • Additionally, more highly structured notes can allow the portfolio manager to express views on inflation or the shape of the yield curve, again, if appropriate.

Caveat emptor. The search for yield does not come without risk, of course. But for investment portfolios that have a buy and hold approach to at least a small portion of their holdings, they may have merit.

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Talking Shop: Remittance Verification Options for Treasury Payments

Member question: “How do others handle remittance instruction verification for treasury payments? Callback? Third-party service? Any ML or technology?

  • “We are reviewing our verification process for remittance instructions for payments processed through treasury. Today, we require it to be on the bene’s letterhead, or bank letter, or imbedded in the contract, but have not implemented a callback. Who does the verification in your organization? Are you looking at any third-party services or ML-type models for additional controls?”

Member question: “How do others handle remittance instruction verification for treasury payments? Callback? Third-party service? Any ML or technology?

  • “We are reviewing our verification process for remittance instructions for payments processed through treasury. Today, we require it to be on the bene’s letterhead, or bank letter, or imbedded in the contract, but have not implemented a callback. Who does the verification in your organization? Are you looking at any third-party services or ML-type models for additional controls?”

Peer answer 1: “We conduct a callback for all new or changes to existing beneficiary payment instructions.”

Peer answer 2: “Our company also does a callback verification.”

Peer answer 3: “My company does callback verifications for changes to existing beneficiary instructions or new beneficiary instructions for treasury payments.”

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Best of NeuGroup Insights 2020

2020 was a year to remember—even if it left us with much we would rather forget. 

Editor’s note:
The power to move forward is the best gift any of us will receive this year. In 2021, our team will use that gift to redouble our efforts to bring you valuable insights that help you thrive in an uncertain world. You can read those insights here on our website or by signing up for our email newsletter (click here).

2020 was a year to remember—even if it left us with much we would rather forget. 

Editor’s note:
The power to move forward is the best gift any of us will receive this year. In 2021, our team will use that gift to redouble our efforts to bring you valuable insights that help you thrive in an uncertain world. You can read those insights here on our website or by signing up for our email newsletter (click here).

This week’s newsletter, our last of 2020, revisits a range of posts that resonated with readers, reflecting a year when ESG gained force, the pandemic forced finance teams to act fast and smart, and the country grappled with issues of race, social injustice and political strife.

To read it, please click here.

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M&A Deals Reveal Growing Power of ESG Ratings, Research

In a recent NeuGroup Virtual Interactive Session, Deutsche Bank weighed in on the changing face of the players doling out ESG ratings which are increasingly important to investors and issuers.

  • As the graphic below makes clear, credit rating agencies and other companies are racing to get in on the action through acquisitions.

In a recent NeuGroup Virtual Interactive Session, Deutsche Bank weighed in on the changing face of the players doling out ESG ratings which are increasingly important to investors and issuers.

  • As the graphic below makes clear, credit rating agencies and other companies are racing to get in on the action through acquisitions.

Trisha Taneja, Deutsche Bank’s head of ESG advisory, identified MSCI and Morningstar as two popular ratings providers, adding that Moody’s and S&P are growing.

  • “The two current main ones are MSCI and Morningstar,” she said. “Those drive the most amount of capital total, not just fixed income, but across asset classes.
    • “MSCI’s data feeds into the ESG indexes which are licensed to a lot of asset capital.
    • “With Morningstar, Sustainalytics data feeds into their fund ratings, but also their standard research, so that also provides a lot of capital.”
  • Ms. Taneja said S&P and Moody’s are coming up fast because their “ESG ratings are more issuer-friendly, so there’s more engagement there.
  • “It’s more forward-looking because they’re based on interviews with management,” she added. “However, because they’re issuer-solicited, it is hard for investors to use it for portfolio construction.”
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Wild Rides: Three Treasurers Rise to the 2020 Financing Challenge

Lessons from three companies whose equity, debt and bank credit transactions required flexibility, speed and more.

The scramble for liquidity during the pandemic underscored the need for treasury to be prepared—at any point—to snap into action and access capital or credit. And while each company’s circumstances are different, there are some lessons that emerged from this year’s financings that should interest almost any treasury team.

Lessons from three companies whose equity, debt and bank credit transactions required flexibility, speed and more.

The scramble for liquidity during the pandemic underscored the need for treasury to be prepared—at any point—to snap into action and access capital or credit. And while each company’s circumstances are different, there are some lessons that emerged from this year’s financings that should interest almost any treasury team.

  • At a second-half meeting of NeuGroup’s Life Sciences Treasurers’ Peer Group, three members described funding transactions involving debt, equity and a revolving credit facility. Larry Williamson, head of healthcare coverage at Societe Generale—the meeting sponsor—moderated their discussion.
    • “Companies took appropriate actions in terms of managing their underlying business and undertaking financing to reinforce their balance sheets and ensure adequate liquidity,” Mr. Williamson said.

Be flexible, patient, unafraid. Volatile capital markets, illiquidity, fluctuating pricing and terms for revolvers created situations for some treasurers that required patience and flexibility.

  • One treasurer needed to ensure his company’s acquisition strategy would not be jeopardized by a lack of funding. He had counted on expanding the company’s bank group in a previous year to provide a deep pool of incremental credit commitments. However, the pandemic undermined the critical size of that option and “we had to go back to the drawing board,” he said.
  • The company “explored all corners of debt capital markets to see if we could structure something to preemptively reduce potential M&A execution risk” before initially moving toward a delayed draw term loan, to balance critical size objectives and the cost of carry.
    • Then other corporates starting paying down revolvers, a positive for banks. Ultimately, the company decided on a “massive short-term revolver,” but had to pivot a number of times. After first being told banks wouldn’t do anything longer than 364 days, the company ended up with a two-year revolver with commitments 100% larger than the required facility size.
  • Reaching what the treasurer called “an extraordinary outcome given prevailing market conditions” required going back to the board as the market outlook changed. “Don’t be afraid to go back if you can get a better deal,” he advises. “Don’t feel you’re locked into something and be willing to push internally if you can get a better outcome,” he said.

Don’t rule anything out. In March, as markets shuddered, another company’s senior management decided to say “no go” on a deal to refinance a security maturing in the fall. Waiting until May, the treasurer said he “threw all the spaghetti on the wall” as he looked at the cost of capital of multiple options and worked under a mandate not to affect the P&L.

  • In the end, the company “fell back to something we had done,” a convertible bond that the treasurer described as pretty vanilla but required treasury to be flexible and do a seven-year deal instead of a five-year.

Be prepared, fast, coordinated and aligned. A third treasurer’s financing demonstrated the value of being prepared to act fast to take advantage of an opportunity by working closely and intensely with other finance functions and leaning on bankers and lawyers to get a deal done when time is tight. The multifaceted deal, which the treasurer called “grueling,” involved equity, debt and bridge financing. Takeaways:

  • Don’t underestimate the amount of time it will take to produce and review multiple versions of documents. “We started as early as we could,” the treasurer said. “Thanks to the pandemic, everyone whose input was needed to get the financing done, including board members, was at home and available.”
  • Get internal buy-in and work closely in cross-functional teams. “That’s the only way to do this,” he said. Real trust emerged between the team members as they came together virtually, led by legal and treasury.
  • Be prepared to learn about the strength of your relationship with banks as you make them part of the deal team. When it came to bond allocations, “my goal was to make banks as least unhappy as possible,” the treasurer said, adding that everyone except the lead bookrunner ends up unhappy to some degree.
  • Align on bank roles and titles with senior executives before they field calls from banks, making sure everyone internally agrees that the decisions are fair and equitable. “The management team stood firm,” he said, adding that through it all, “I was really thick-skinned.”

More lessons on banks and boards. Don’t rely solely on your existing banks and service providers for a deal that meets your needs but may not be to their liking, one member said. For his financing, the treasurer broadened his bank group, bringing in several new, non-U.S.-based banks to diversify lender behaviors.

  • The same treasurer advised peers that members of your board may talk to members of other boards and could develop a fear of missing out—FOMO. That means treasury has to combat “doing something for the sake of doing it” (such as a bond offering) by having a lot of discussions about why “others are doing what they’re doing.” He added, “Always be prepared to talk about markets in general and relevant reference deals in particular.”
  • Another treasurer remarked that “the board dynamic is interesting to navigate,” requiring treasury to align on expectations with the C-Suite and “hold the line” on decisions about the banking group and other matters.

Keep it quiet. More than one treasurer emphasized the benefits of keeping information under wraps until it has to be shared with a broader audience.

  • “Confidentiality was key; if information leaked ahead of announcing to the market, there would have likely been negative impact on the execution of the transaction,” one member said.
  • Another only kept the “lead left” informed up until the morning of issuance, saying, “We had been burned before when leaking affected pricing.”
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Laddering: FX Risk Management with Less Work, Fewer Transactions

Wells Fargo explains an alternative to layering for corporates hedging cash flow exposures. 

Who doesn’t want to get more for less? As in less work, more efficiency and fewer transactions, all while still meeting risk management goals. To take advantage, though, you have to be willing to look closer at the shortcomings of the very common cash flow hedging approach known as layering.

Wells Fargo explains an alternative to layering for corporates hedging cash flow exposures. 

Who doesn’t want to get more for less? As in less work, more efficiency and fewer transactions, all while still meeting risk management goals. To take advantage, though, you have to be willing to look closer at the shortcomings of the very common cash flow hedging approach known as layering.

  • During a recent interim meeting of NeuGroup’s two FX managers’ peer groups, the quantitative solutions team at Wells Fargo laid out an alternative to layering called laddering.

Layering rationale. A Wells Fargo survey in 2018 found 63% of the public companies that responded use layering in their cash flow hedge programs.

  • By adding in hedges over time to achieve a higher hedge ratio as the exposure gets closer and exposure forecasts get more accurate, the rationale is that the resulting dollar-cost averaging smooths out gains and losses from FX volatility. This achieves a more stable outcome year-over-year or quarter-over-quarter.  

The downside. The disadvantage of this approach is that it requires the ongoing execution of a large number of hedges, with all the accompanying process work from trade initiation, confirmation and accounting through reconciliation and settlement, not to mention the transaction costs.

  • Wells Fargo’s analysis demonstrates that for a monthly layered cash flow program with a 12-month hedge horizon, a company would have 78 outstanding hedges at any given time per currency, or 300 for a two-year hedge horizon.
  • Many companies choose quarterly layering programs, but that’s still a big number to keep track of, especially when also considering the hedge accounting documentation requirements. Automation helps, but not all companies have achieved that level of automation yet.

Another way. Laddering, by contrast, means hedging a higher percentage of the exposure earlier and for longer per hedge, i.e., “more notional but less frequently” or “sort of an infrequent layering program,” as Wells Fargo’s presenter put it.

  • The example uses a third of the exposure hedged from two years out with an added third starting a year out. This cuts down significantly on the number of hedge executions required and outstanding hedges per currency at any given time, especially as compared to a monthly layering program, of course.

Volatility. But does this increase volatility? Intuitively, if the rationale for frequent layering to increase the hedge ratio over time is to reduce volatility, less frequent would increase volatility. But Wells Fargo’s backtesting analysis for EUR, GBP, CAD and MXN, for example, shows that volatility reduction is better with this tenor extension than with more frequent execution, and lower still for a two-year program.

  • Why is that? Laddered hedging “maximizes the overlap of the rates you are picking up” for the currencies involved as compared to the classical smoothing of layering, the presenter explained.

Converts. So laddering, anyone? One member noted that by conducting similar analysis, her company has indeed transitioned to a laddering (sometimes called staggering) approach to reduce the operational burden of frequent layering while still achieving similar levels of volatility reduction.

  • Another member, however, has a dual mandate of volatility reduction and opportunism to do better than a fully systematic program. So her team needs flexibility to increase (or not) their hedge ratios (above a required minimum prescribed in the policy), and the layered program provides that.  
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Talking Shop: Net Investment Hedging When There Is No Underlying Income

Member question: “Do you hedge net investments where there is no underlying operating income or cash flows?

  • “Curious what philosophy or triggers companies have around net investment hedging—and if any companies do NIH where they don’t have an underlying positive cash flow or plans to liquidate? For example, a region where you may have a lot of fixed assets but no material underlying revenues.”

Member question: “Do you hedge net investments where there is no underlying operating income or cash flows?

  • “Curious what philosophy or triggers companies have around net investment hedging—and if any companies do NIH where they don’t have an underlying positive cash flow or plans to liquidate? For example, a region where you may have a lot of fixed assets but no material underlying revenues.”

Peer answer 1: “At our company, we have to raise debt regularly, so our NIH program is mostly foreign currency debt (both organic and synthetic via cross-currency swaps). Our NIH currencies happen to be in countries with material revenues.

  • “But for us, the thought process is that we’re going to raise debt and some of that capital will be deployed into other countries and currencies; why not raise some of that debt in the same currency in which the assets will be deployed as a natural hedge?
  • “We do also sometimes use forwards tactically as short-term NIH if we’re declaring a dividend or return-of-capital or putting money into a foreign sub prior to that sub making an acquisition.”

Peer answer 2: “We execute NIHs in anticipation of large dividend payments as a way to hedge the cash flow prior to dividend declaration.”

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Tear Down, Rebuild: A Treasurer Lays a Foundation for Best Practices

How a newly hired treasurer revamped her company’s capital structure, banking group and her team. 

Soon after arriving at a fast-growing midsized multinational company, a newly-hired treasurer with extensive experience in loan restructurings and amendments launched a loan compliance cleanup. That was the first step on the path to establishing best practices at a company that had never had a treasurer with experience in treasury.

  • The treasurer described what she did and her thinking at a recent meeting of NeuGroup’s Treasurers’ Group of Thirty and in a follow-up interview.
  • While each company’s situation is different, this member’s experience provides insights for peers committed to implementing new treasury practices, policies and procedures that meet an expanding business’s rapidly changing needs and help set it on a course for more growth.

How a newly hired treasurer revamped her company’s capital structure, banking group and her team. 

Soon after arriving at a fast-growing midsized multinational company, a newly-hired treasurer with extensive experience in loan restructurings and amendments launched a loan compliance cleanup. That was the first step on the path to establishing best practices at a company that had never had a treasurer with experience in treasury.

  • The treasurer described what she did and her thinking at a recent meeting of NeuGroup’s Treasurers’ Group of Thirty and in a follow-up interview.
  • While each company’s situation is different, this member’s experience provides insights for peers committed to implementing new treasury practices, policies and procedures that meet an expanding business’s rapidly changing needs and help set it on a course for more growth.

Triage, fixes, goals. The treasurer’s knowledge of loan covenants, operational limitations in credit agreements, technical defaults and compliance certificates allowed her to quickly conclude that the loan compliance situation needed immediate attention. “I saw there were some things that we needed to fix,” she said. The good news: “There was an understanding at the company that this was an area that needed an upgrade and a fresh set of eyes,” she said.

  • Following a relatively “easy negotiation” with banks over cleaning up the credit agreement, the treasurer set about stress test modeling on the company’s credit facility and reviewing existing covenants.
  • She then seized the moment to initiate significant changes as she engaged with senior management and the board to focus their attention on the strategic importance of capital structure.
  • Before embarking on projects of this scale, “You have to be mindful of the time frame to achieve your goals,” the treasurer advises. Ask yourself, “What can you realistically accomplish within the first 12 to 24 months to get some quick wins?
  • “And thinking to the future, what is it you need over the next couple years to really expand what you’re doing? When you go into these new situations and you’re in a rebuilding mode, you’ve got to show some accomplishments.”

New terms, new flexibility. Her goals set, the treasurer realizedwe needed to have more flexibility within our capital structure given the size of the company and the fact that we were much more global than we had been several years prior. And I knew that we needed to work with more than just two banks.

  • “It was all about crafting a credit agreement that would work with not only where the company was, but where it’s going,” she said. “The company had very good financial performance so it was really the right time to lay out what it is we needed, what were the exact terms that we were looking for.”
  • The revamped capital structure now features a five-year credit facility and a seven-year term loan. “It was really structuring this so we could have a good runway for the next couple of years.”
  • As a result, “Our pricing went down and our flexibility went up because I took it out to four or five different banks who came back and presented term sheets to us. We also bid out the international banking business at the same time.” The company used its newfound flexibility relatively soon, she said, declining to elaborate.

The people part. The member also put her stamp on the treasury team. “The positions needed to be reworked, the personnel needed to be switched out, essentially,” the treasurer said. Among her moves:

  • The elimination of an assistant treasurer position, in part because of overlapping capabilities with the treasurer.
  • An “opportunistic hire” of a senior manager of treasury with international experience at a large tech company looking for broader treasury experience.
  • The creation of a cash manager position staffed by someone in the company’s accounts receivable area who had treasury experience.
  • “What worked out well for me is I was able to use a combination of internal and external people. I didn’t go 100% external, and that was important, at least within our organization,” the treasurer said.

In focus now. Having laid a solid foundation for treasury, the member has her team focused on investment policy, cash forecasting and position, assessing foreign exchange risk and other areas requiring “some more refinement,” she said.

  • After tackling big areas like capital structure and bank groups, treasurers have to meet the challenge of showing senior management the value of addressing other areas that may seem less exciting or important.
  • The engagement this requires is made more difficult by the pandemic, working from home and the absence of “informal communication,” the member noted.

Needed: support, hard work. Not surprisingly, the feasibility of entering a new company and revamping the capital structure and the banking group and making other major changes requires the support of senior management.

  • “You’ve got to have the support from your manager to really go in and assess what is existing, what are the positions, what is the structure, what do you need immediately to accomplish your goals,” the treasurer said.
  • Don’t underestimate the amount of work involved in pushing a company to shift gears and adopt best practices. And then make the most of the opportunity.
  • The treasurer told herself, “You don’t get to do this a lot. It’s kind of an unusual experience and even though it’s a lot of work I’m going to take advantage of it.”
  • Sure enough, “It was a lot of work, it took a lot of energy,” she said. “But I think it has paid a lot of dividends for the company.”
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Borrowing Authority and the Board: How Often Do You Renew?

NeuGroup’s survey results on the frequency of borrowing authority renewals, use of carve-outs for M&A and more.

Nearly two-thirds of the treasurers responding to a recent NeuGroup survey renew their borrowing authority with the board on an ad hoc or as-needed basis, while about one-third do it every year. That’s shown in the first pie chart below.

  • But at a follow-up meeting to discuss the results, the general consensus seemed to be that an annual review made the most sense, as it can be part of the overall conversation with the board regarding capital structure.
  • The second chart shows that for the majority (59%) of companies that responded, the full board grants borrowing authority, with the finance committee of the board playing that role at 29% of the companies.

NeuGroup’s survey results on the frequency of borrowing authority renewals, use of carve-outs for M&A and more.

Nearly two-thirds of the treasurers responding to a recent NeuGroup survey renew their borrowing authority with the board on an ad hoc or as-needed basis, while about one-third do it every year. That’s shown in the pie chart on the left, below.

  • But at a follow-up meeting to discuss the results, the general consensus seemed to be that an annual review made the most sense, as it can be part of the overall conversation with the board regarding capital structure.
  • The second chart shows that for the majority (59%) of companies that responded, the full board grants borrowing authority, with the finance committee of the board playing that role at 29% of the companies.

Context. The importance of borrowing authority flexibility was underscored at another NeuGroup meeting in 2019. The takeaways then included:

  • Winning authority from the board to go to capital markets opportunistically is a best practice. Treasury needs to have authority from the finance committee to refinance or issue debt when market stars are in alignment. This provides the flexibility to act fast, and members agreed it’s ideal for everyone as long as there’s full transparency between treasury and the board of directors.

Other observations from the more recent meeting:

  • Some companies with a specified dollar amount ceiling for borrowing have carve-outs which do not require additional approval for purposes such as M&A financing, where borrowing needs are discussed during the normal evaluation and approval process.
  • Members do not share details of their borrowing authority with the rating agencies, but rather provide a range of borrowing which might occur in the upcoming year.
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Learning New Strokes: A Treasurer Adds Tax to Her Skill Set

One NeuGroup member has “had to learn from doing” to tackle tax—and also tap internal and external experts.

When the head of tax at a midsized multinational company left to take another job a couple of years ago, the CFO tapped the treasurer to run tax, too. The treasurer shared some of the challenges she faced and how she addressed them at a recent meeting of the Treasurers’ Group of Thirty and in a follow-up interview.

A difficult beginning. Three of four junior tax staffers also ended up departing, leaving the treasurer with only one other tax person after being in the tax job for just a month. “That was obviously pretty difficult,” she said. “I literally had to do two jobs because we didn’t have many people at first.”

One NeuGroup member has “had to learn from doing” to tackle tax—and also tap internal and external experts.

When the head of tax at a midsized multinational company left to take another job a couple of years ago, the CFO tapped the treasurer to run tax, too. The treasurer shared some of the challenges she faced and how she addressed them at a recent meeting of the Treasurers’ Group of Thirty and in a follow-up interview.

A difficult beginning. Three of four junior tax staffers also ended up departing, leaving the treasurer with only one other tax person after being in the tax job for just a month. “That was obviously pretty difficult,” she said. “I literally had to do two jobs because we didn’t have many people at first.”

  • The exodus also changed the nature of the role senior management had initially intended the treasurer to play in tax. “At the time, they thought that it would be more of a management role for me; whereas with the departure of all those people and a new set of eyes, it became much more of a rebuilding cleanup exercise than a pure managerial exercise,” she said.

A key hire with an accounting background. Senior management combined the roles in part because “there was enough crossover between the two disciplines that it made sense to have a more unified approach,” the treasurer said. But when it comes to matters of tax compliance, GAAP tax provision, tax returns and audit defense, there is little crossover with treasury, she said.

  • “I ended up going out and hiring a really ‘heavyweight’ director of tax,” she said. “And one of my requirements was that they had to have a CPA. Because there’s two types of people out there in the tax world. There’s the CPAs and then the lawyers. We didn’t have enough structuring going on at our company to warrant a legal background. We really needed the accounting background.”
  • Her advice to peers building in-house tax teams: “If you are going to build internally, you need to get someone very heavy underneath you.”

Scaling the learning curve. To learn what she needed to know about tax, the treasurer posed lots of questions to her tax director and, when necessary, the company’s outside tax auditor. And, like a lot of learning, much is done on the job. “I had to learn from doing,” she said, including the analysis of the implications of a tax and legal structure proposed by the company’s outside auditor.

  • “I felt like I was really good at asking questions. And I felt like I could sort of think the way tax people think. But when you just don’t have the fundamental subject matter expertise, that’s where it gets difficult because you haven’t done the tax return yourself.”

The need to pick your spots. Making the transition to running tax and treasury requires deciding how much effort to devote to mastering tax concepts. “The tricky thing as a manager going from treasury to tax is how much time do you invest in that stuff,” the member said. “Because learning about these tax concepts is complicated and most things are not 10-minute discussions, it’s 20- or 30-minute discussions, at a minimum.

  • “I have to pick and choose how much I want to learn. I’m never going to be a tax professional and sit and do a tax return for a multinational company. I have no desire to do that and I won’t do that,” she added.

When wearing two hats pays off. The treasurer’s knowledge of repatriation of cash, global cash forecasting and cross-border investments has proven valuable in her management of this multinational’s tax team.

  • “Whenever there is cross-border, you have to involve tax,” she said. “So as we look at cross-border investments around the world and repatriating cash, now that I know more about the tax elements, I can really represent both areas at meetings and we don’t have to have yet another tax person on the call.
    • “So our tax director can focus on the stuff he needs to be working on and then I can go back to him for clarification or ask him to work on certain things.”

When outsourcing makes sense. The company does most of its domestic tax work in-house, but outsources transfer pricing studies to its outside auditor in addition to having the firm review other complicated, international tax matters. In response to a question from a peer at the meeting, she said, “Outsourcing is very expensive when you talk to the big four firms.”

  • The company outsources more in its operations abroad, including the preparation of tax returns and value-added tax (VAT) payments.

Dividing her time. When the treasurer took over tax, the company was in the midst of a global tax restructuring that required her to spend 80% to 90% of her time on tax. Her goal for 2021 is to spend 20% to 30% on tax and the rest on treasury.

  • “But I’d be happy if I could get down to 50% on average,” she said.
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Sign of the Times: Retailers Say Coin Shortage Worries Persist

Burned by a dearth of coins during the pandemic, many retailers are cautious despite some signs of stability.

“Cash-mageddon” is how one member at a recent meeting of NeuGroup for Retail Treasury described the havoc wreaked by the coin shortage that made life hellish for many retailers last year. And despite signs of normalization and increased production by the US Mint (see below), some members remain unconvinced that the coin supply disruption caused by the pandemic is truly over.

Burned by a dearth of coins during the pandemic, many retailers are cautious despite some signs of stability.

“Cash-mageddon” is how one member at a recent meeting of NeuGroup for Retail Treasury described the havoc wreaked by the coin shortage that made life hellish for many retailers last year. And despite signs of normalization and increased production by the US Mint (see below), some members remain unconvinced that the coin supply disruption caused by the pandemic is truly over.

Cautious about outlook. “The Fed hasn’t really given any new updates, so I would not take your sign down,” one member said, referring to the ubiquitous signs asking customers to use exact change or telling them to use credit or debit cards. One company resorted to giving out gift cards as change.

  • Another member whose company sometimes went weeks without a new coin delivery echoed the caution voiced by her peer.  “I’m uber-sensitive to coin; it was incredibly draining for our stores,” she said. “We’re at a point where it’s stable, but given all the uncertainty, keep your signs up, maybe to save you from having to reprint them.”
  • A third treasurer remarked that because the coin shortage stems from a circulation issue, if Covid protocols send consumers back online and away from physical stores, he “doesn’t see us being through it.”
    • The member said his company is completely reliant on courier services to deliver new coin to brick-and-mortal locations, and if for some reason there is an issue with the courier, the coin shortage would return. “It feels like they don’t have enough built-up inventory, they’re just using up what they have for that day,” he said.

Courier issues. Other members who use couriers for cash pickup and delivery said they share similar worries after years of inconsistent service, even before the pandemic.

  • When the coin shortage worsened last summer, couriers were hit hard as well, sometimes going up to 10 days without service for retailers. Though delivery has improved to a level that one member called “stable,” it still is not meeting some corporates’ needs.
  • “I’m being incredibly frustrated by the quality and level of service of these companies,” one member said. “I’m trying to be sensitive to their situation, I’m guessing their business is declining. They’re claiming there are driver shortages due to Covid, but sometimes we are going weeks without pickup.”

An unplanned stress test. One member said because the coin shortage became a large pain point, it served as something of a stress test, showing companies just how much they could take and providing a warning to prepare for all scenarios.

  • Another member said she is now preparing buffers and sensitivity analysis for her company, planning for the possibility of another lockdown.
  • “We’re thinking through a lot of the things we probably thought would never happen,” she said. “I don’t think anyone ever thought that we wouldn’t have coin, so when it stopped showing up, that was devastating to our stores. We had to be nimble and quick.”
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Calmer Seas: Revolvers Recover, Return to Pre-Covid Pricing, Tenor

Upfront fees are higher, but treasurers renewing facilities see reason for optimism; U.S. Bank is also positive.

Multiyear tenors for revolving credit facilities are now available to investment-grade (IG) corporate borrowers, according to several NeuGroup members who have been talking to their bankers recently. This week, one treasurer said, “Things have normalized a fair amount for solid credits,” citing a large bank.

Upfront fees are higher, but treasurers renewing facilities see reason for optimism; U.S. Bank is also positive.

Multiyear tenors for revolving credit facilities are now available to investment-grade (IG) corporate borrowers, according to several NeuGroup members who have been talking to their bankers recently. This week, one treasurer said, “Things have normalized a fair amount for solid credits,” citing a large bank.

  • This member, who was in the process of renewing his company’s revolver last year when Covid hit, is now deciding when to “pick it back up” and wanted to know what his peers have heard.
  • “Multiyear is back,” said one of them.

Longer tenors. “It sounds like five years is back on the table,” said another treasurer. She works for a company that postponed extending the tenor and raising the amount of its revolver last year.

  • This treasurer—whose company is a “new IG credit”—recently circled back with traditional lenders and said, “The reception’s been good,” noting that she got very little pushback to her plans to restructure the revolver.

Is the price right? The company did not get quotes, but “pricing appears to have settled down,” the member said. Another treasurer said upfront fees remain higher than before Covid, adding “how much you can push that” depends on your relationship with the banks and, of course, the size of your wallet.

  • This treasurer said some banks want funded facilities now that revolver drawdowns have been repaid. They are eager to increase assets and have a healthy risk appetite, he said, adding that they all want higher fees.

U.S. Bank’s analysis. NeuGroup Insights reached out to Jeff Stuart, head of capital markets at U.S. Bank, who keeps close tabs on the revolver market. Here are his observations:

  • The market for large-cap investment-grade revolving credit facilities has largely recovered to pre-Covid levels in terms of both pricing and tenor, with many borrowers executing five-year renewals at pre-Covid pricing levels.
  • U.S. Bank is seeing higher upfront fees pretty much across the board, one to three basis points for the higher-rated names.
  • The market is a bit sector- and ratings-specific, with higher impacted sectors still exacting a pricing premium, and more bank caution around lower investment-grade borrowers.
  • Some sectors, like utilities, have been slower to normalize despite their relative credit quality, with discussions going to five-year tenors only just recently.
  • On the bank side, there seems to be a higher post-Covid emphasis on returns, with a specific focus on available ancillary business, particularly by smaller regional banks.
  • U.S. Bank expects the trend toward a full return to pre-Covid terms on revolving credits to continue amid recovery overall during the first half of 2021. But it will continue to vary by situation and sector.

Sustainability-linked revolvers anyone? Back at the meeting, one treasurer raised the issue of revolving credit facilities whose terms are linked to the company achieving sustainability goals, unlike green bonds or loans whose proceeds must be used for sustainable purposes (see next story).

  • He has not seen the value in the idea, saying the savings for hitting the targets are minimal, a few basis points at most. “The net benefit is not good enough” given the incremental cost, he said. Another treasurer agreed that “treasury is not driving” the move by some companies to use sustainability-linked revolvers.
  • One treasurer drew laughs when he said his efforts to research “green revolvers” with a Google search turned up images of green handguns.

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Green Hedges: What You Need to Know About ESG Derivatives

Standard Chartered explains the potential value of “use of proceeds” and performance-linked ESG derivatives.

The flood of money pouring into ESG finance—everything from green bonds to sustainability-linked revolving credit facilities—has washed up on the shores of derivatives markets. At a recent NeuGroup meeting of European treasurers, sponsor Standard Chartered dove beneath the surface to reveal what value ESG derivatives may offer. The bank described two types:

  • “Use of proceeds” ESG derivatives that hedge FX or interest rate risks arising from ESG financing and are ring-fenced as hedges referencing a specific loan or bond.
  • ESG performance-linked derivatives that link a payoff with ESG metrics or key performance indicators (KPIs).
    • The sustainability metrics are determined by a third party’s score or index or by the corporate itself.

Standard Chartered explains the potential value of “use of proceeds” and performance-linked ESG derivatives.

The flood of money pouring into ESG finance—everything from green bonds to sustainability-linked revolving credit facilities—has washed up on the shores of derivatives markets. At a recent NeuGroup meeting of European treasurers, sponsor Standard Chartered dove beneath the surface to reveal what value ESG derivatives may offer. The bank described two types:

  • “Use of proceeds” ESG derivatives that hedge FX or interest rate risks arising from ESG financing and are ring-fenced as hedges referencing a specific loan or bond.
  • ESG performance-linked derivatives that link a payoff with ESG metrics or key performance indicators (KPIs).
    • The sustainability metrics are determined by a third party’s score or index or by the corporate itself.

Case studies. Standard Chartered’s presentation included several examples of how ESG derivatives can be used.

  • A company using an FX forward to hedge export pricing in Asia that will receive a discounted FX rate if it meets ESG targets which support the United Nations Sustainable Development Goals.
  • A company enters into an interest rate swap where the credit spread is linked to the corporate’s sustainability performance as measured annually by Sustainalytics.
  • A company enters into a cross-currency basis swap with a bank where either party’s interest rate payments can rise if they don’t meet their sustainability targets.

Any takers? While NeuGroup members expressed interest in the topic, it’s unclear if treasury teams are ready to embrace ESG derivatives since many companies are still figuring out where green bonds or sustainability-linked loans or revolvers fit in their sustainability plans.

A poll at the meeting revealed the low percentage of companies that have given treasury a specific sustainability mandate or have linked ESG to performance (see below).

One of the Standard Chartered bankers said the fact that almost half of those polled expect performance to be tied to ESG initiatives within one to three years was better than he expected and was “encouraging.”

  • An outside risk management consultant asked by NeuGroup Insights about the firm’s clients said, “It’s actually a new enough market development that we haven’t seen a lot of corporates exploring the use of ESG derivatives just yet.” Stay tuned.
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Fertile Ground: Capital Markets Look Good for Growing Tech Companies

Bank of the West/BNP Paribas sees inviting conditions for young companies raising capital in 2021.

Capital markets bounced back strongly in the second half of 2020, with soaring levels of convertible bond deals and a healthy climate for IPOs and high-yield bonds. Favorable conditions will continue to benefit emerging technology companies this year, according to Bank of the West/BNP Paribas, sponsor of the fall meeting of the Tech20 High-Growth Treasurers’ Peer Group.

Bank of the West/BNP Paribas sees inviting conditions for young companies raising capital in 2021.

Capital markets bounced back strongly in the second half of 2020, with soaring levels of convertible bond deals and a healthy climate for IPOs and high-yield bonds. Favorable conditions will continue to benefit emerging technology companies this year, according to Bank of the West/BNP Paribas, sponsor of the fall meeting of the Tech20 High-Growth Treasurers’ Peer Group. Highlights:

Low high-yields. Volatility due to political tensions and a second wave of Covid cases worldwide put a damper on the high-yield market at the start of the fourth quarter, but the market quickly strengthened following the November election.

  • High-yield deals had reached a record $453 billion through mid-December, nearly twice the levels of 2019.
  • Yields are in record low territory, around 4.3% vs. 2019-2020 average of 6.41%, Bank of the West/BNP Paribas said, a favorable environment for high-growth companies.

Cool convertibles. The US convertible bond market hit near-record issuance levels in 2020, reaching over $100 billion, with tech companies issuing nearly half of all convertible debt (see below).

  • Even with investor-friendly deals made at the onset of the pandemic, last year had the highest conversion premium and the lowest average coupon in the last decade, creating an ideal environment for issuers.
  • The bankers said market confidence has sparked the return of 24-hour marketing periods, as opposed to pre-market launches for same day pricings.

IPOs made easier. Constructive market conditions and a faster, easier process have made initial public offerings increasingly attractive for developing companies.

  • Many members shared their positive experiences with virtual roadshows, which can take under an hour and require no travel expenses. They also give growth companies access to a broad range of US and international investors.
  • “It’s hard to see a world post-Covid where investors fly to Europe to attend investor meetings,” one member said. “I think it’s here to stay.”
  • The lag between public filing and pricing an IPO rose to a month or more, a growing pipeline that the bankers described as “a sign that issuers have more confidence in the stability of markets.”

SPACs surge. Special-purpose acquisition companies (SPACs), an alternative to IPOs, surged last year, a trend that some analysts say is likely to continue in 2021.

  • Hedge funds looking for money market alternatives in a low-yield environment boosted demand for SPACs, a positive for growing tech companies.
  • Between the high-profile success story of Virgin Galactic and a willingness of target companies to go public via a “de-SPACing” acquisition rather than a traditional IPO, SPAC issuance in 2020 alone exceeded the previous decade combined.
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Bridging a Skills Gap Facing Finance Teams as Businesses Transform

Data from The Hackett Group show more companies plan to launch talent development initiatives this year. 

The good news is that more finance teams are placing a higher priority on aligning the skills and talents of their members with changing business needs amid digital transformation. The somewhat bad news is that many of those teams currently lack the abilities necessary to make that alignment a reality.

Data from The Hackett Group show more companies plan to launch talent development initiatives this year. 

The good news is that more finance teams are placing a higher priority on aligning the skills and talents of their members with changing business needs amid digital transformation. The somewhat bad news is that many of those teams currently lack the abilities necessary to make that alignment a reality.

  • Those are among the takeaways from survey data collected and analyzed by The Hackett Group and presented at several NeuGroup 2020 second-half meetings by Nilly Essaides, senior research director for Hackett’s finance advisory practice.

Progress report. Finance teams looking ahead ranked aligning skills and talent with changing business needs among their top 10 priorities in Hackett’s 2021 Key Issues Study. That’s a sign of progress, Ms. Essaides said, given that talent development did not crack the top 10 a year earlier.

  • That fact provides context in which to evaluate the significance of 42% of finance organizations reporting they plan to launch a talent development initiative in 2021—one of several findings presented in the graphic below.
  • “I see more and more finance teams that want to own staff development rather than hanging on the coattails of HR,” Ms. Essaides said. “There’s more interest by CFOs to develop these programs.”

Pushed by the pandemic. The prioritization of skills development is also significant as it comes amid the pandemic and plans by many finance teams to cut costs and enable remote work through process automation—the number one initiative on the function’s transformation agenda for this year. 

  • “Covid has really intensified the need to go digital,” Ms. Essaides said, adding that Hackett is seeing increased use of robotic process automation (RPA) and cloud-based applications, among other signs.
  • More than 20% of the organizations surveyed plan to hire more RPA specialists, data architects and scientists, and digital transformation managers.

Falling short. The graphic also shows that more than half of those surveyed (54%) see a big gap between current and desired analytic skills. More broadly, Hackett data show that finance organizations ranked their staffs’ lack or deficiency of critical skills second among the hurdles to making “transformation progress,” Ms. Essaides noted.

  • Those critical skills include analytics, emerging technologies, process redesign, design thinking and change management.
  • Technology and process complexity ranked first on the list of hurdles and organizational resistance to change came in third.

It’s not all about analytics. It’s critical to remember that in addition to technical and analytical skills, finance team members must possess the “ability to tell a story,” as one NeuGroup member put it.

  • Other NeuGroup members and Ms. Essaides agreed on the need for so-called soft skills that form the basis of communication, the ability to negotiate and influence and bring groups together.
  • Hackett calls these “core skills,” in part to counteract the perception that soft is somehow less important than the hard skills that often overshadow qualities that are essential for leaders in finance and every other function.
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Locking Up: Preventing Cyberfraud Attacks by Identifying Weaknesses

NeuGroup members share successes and failures keeping their companies secure amid the shift to an all-digital workforce.

The all-digital work from home environment has left treasury teams more connected to their devices than ever, but also left them—and their companies—more vulnerable to fraud. But by identifying weaknesses early, teams can resolve issues before fraudsters even have a chance to strike.

NeuGroup members share successes and failures keeping their companies secure amid the shift to an all-digital workforce.

The all-digital work from home environment has left treasury teams more connected to their devices than ever, but also left them—and their companies—more vulnerable to fraud. But by identifying weaknesses early, teams can resolve issues before fraudsters even have a chance to strike.

  • Members at a recent meeting of NeuGroup’s Treasurers’ Group of Thirty discussed their approaches to prevent the threat, one that continues to worsen.
  • Fatigue caused by working from home led to a communication breakdown for one member’s company, but others reported success through their preparation.

Success stories. Many NeuGroup members reported recent close calls with cyber breaches and have implemented processes to prevent future issues.

  • One member nearly fell prey to a fraud scheme when a phishing email included highly detailed information about the company, which could have fooled an employee into providing secure information.
    • This happened because one employee innocuously posted an update on LinkedIn about the company’s goings-on, and the scammers are growing more and more advanced.
    • The member suggests encouraging employees to only share what is necessary on social media to keep malicious third parties in the dark.
  • Another member had an issue with hackers accessing the company’s internal instant messaging system, allowing them to imitate employees with “no way to verify it was them.”
    • Some members use a series of steps to authenticate accounts before accessing sensitive information, including callbacks from verified phone numbers.

“A breakdown in communication.” One NeuGroup member had this type of system in place, but a series of internal mistakes led to a loss of nearly $10,000; thankfully, the member said they were able to recover the stolen cash.

  • When a new employee was hired at the member’s company, fraudsters hacked the digital account of an actual vendor that the company uses and corresponded with the new employee from a seemingly authentic  email address.
  • Though the member’s company does use a callback authentication process, he said there were application errors “on multiple levels” and plans more frequent audits and training to identify and prevent these weaknesses in the future.
    • “Fatigue is a real issue,” another member said, recommending smaller, “bite-size” trainings for employees to prevent burnout and ensure employees apply the knowledge they learn.
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Why Internal Audit Needs to Blow Its Own Horn

Like other functions, internal audit needs to publicize its value to senior executives and the broader corporation.

After the completion of a lengthy process audit at a multinational company, the chief audit executive (CAE) reported results to the owner of that process. After a cursory review, the process owner, also a senior executive, asked, “What else have you done?”

  • The CAE was somewhat taken aback. The audit took several months and ate up lots of FTE hours. But since it only resulted in a few findings, the audited executive thought there must be more that audit was working on.

Like other functions, internal audit needs to publicize its value to senior executives and the broader corporation.

After the completion of a lengthy process audit at a multinational company, the chief audit executive (CAE) reported results to the owner of that process. After a cursory review, the process owner, also a senior executive, asked, “What else have you done?”

  • The CAE was somewhat taken aback. The audit took several months and ate up lots of FTE hours. But since it only resulted in a few findings, the audited executive thought there must be more that audit was working on.

A need for self-promotion. This led the CAE to question how familiar management is with audit’s work. “We have not done a good job of selling audit” to management, he said, adding that his task now was to “reeducate the management team about the value of internal audit.”

  • To be sure, audit departments do not need to prove or explain themselves to management. Most, if not all, report directly to the audit committee of the company’s board. Their budgets in most cases are growing and not shrinking.
  • Still, administratively they typically report to the CFO, so there is some explaining to do when it comes to budget allocations. Nonetheless, this auditor felt that management needed to know more about what internal audit (IA) does and the benefits it can bring.

Stepping up. At another company, the auditor has seemingly cracked the code when it comes to showing IA’s benefits. This company, a serial acquirer with a tight fist when it comes to budgets across the company, wanted to cut its external auditor budget by 15%. When its external auditor balked at the request, IA stepped up to fill in any gaps. This saved the company millions of dollars.

  • This same auditor took a close look at the company’s licensing relationships and found many of the deals out of date or companies out of compliance with the terms of their contracts. Thus, the IA team was able to claw back several million dollars in fees. The same was done with supplier performance agreements.
  • All of these efforts were well received by senior management and, best of all, the chief executive.

Best foot forward. While some IAs have struggled with promoting their skills and value to the rest of the company, in some cases, Covid has allowed them to shine. Many IAs, forced to change audit plans at the outset of the pandemic (not stopping or canceling audits, but slowing timelines), have been able to do extra work outside of their purview.

  • This includes assisting with Covid response, data analytics, accounting or lending out FTEs to help in other functions where there is a need. This showed other parts of the organization all the good IA can do.
  • Consulting is on the docket in 2021 for the first auditor. He said IA is going to work on and highlight “what the value is we can bring beyond the X amount of audits and findings,” which he hopes to accomplish by doing more consultative projects. 
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Talking Shop: Derivative Regulatory Compliance in Hedging Programs

Member question: “Our hedging programs have trading entities in multiple jurisdictions requiring continual monitoring of derivative regulatory compliance regulation. This is mostly handled internally, leveraging external counsel to advise on specific topics and questions.

  • “How do others manage derivative regulatory compliance such as EMIR (European Market Infrastructure Regulation), FMIA (Financial Market Infrastructure Act) and others? Do you outsource, handle internally, hybrid solution or is it not applicable? Are there advisors that you would recommend?”

Member question: “Our hedging programs have trading entities in multiple jurisdictions requiring continual monitoring of derivative regulatory compliance regulation. This is mostly handled internally, leveraging external counsel to advise on specific topics and questions.

  • “How do others manage derivative regulatory compliance such as EMIR (European Market Infrastructure Regulation), FMIA (Financial Market Infrastructure Act) and others? Do you outsource, handle internally, hybrid solution or is it not applicable? Are there advisors that you would recommend?”

Peer answer 1: “My company is similar; predominantly navigated internally with legal’s assistance as needed.”

Peer answer 2: “Response from our derivatives manager:

  • “We monitor internally in treasury and at our regulated financial units (typically through either internal legal or accounting/compliance groups, and this in the past has sometimes been a reactive position rather than proactive).
  • “Sometimes the banks may notify us of a change; I’ve seen this in the onshore highly regulated markets due to the local complexities/language/access to regulation, etc.—Brazil, India, China, Thailand.
  • “For the US and European market regulations, there are a few representatives that have actively participated in the Coalition for Derivatives End-Users run by Gibson Dunn.”
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Learning a New Language: Tax Experts Who Become Treasurers

Insights and advice from a tax professional who left her comfort zone to become treasurer. 

A “steep learning curve” is how one member of NeuGroup’s Treasurers’ Group of Thirty (T30) who has extensive experience in tax described what she encountered in taking on the added responsibility of treasury at her company at a recent meeting sponsored by Standard Chartered.

Insights and advice from a tax professional who left her comfort zone to become treasurer. 

A “steep learning curve” is how one member of NeuGroup’s Treasurers’ Group of Thirty (T30) who has extensive experience in tax described what she encountered in taking on the added responsibility of treasury at her company at a recent meeting sponsored by Standard Chartered.

  • She is one of several members in the group who previously led tax teams and are relatively new to leading treasury. Below is a Q&A the treasurer had with NeuGroup Insights following the meeting, edited for space and clarity.

Q: What has made taking over treasury a tall order for someone with a deep background in tax?

A: While both are financial disciplines, a different language can be spoken and there can be different norms for various interactions, aside from the difference in general education for the roles.

  • I remind myself that I didn’t earn the treasurer role based on my finance background, but rather my ability to build and motivate teams, learn quickly and distill complex topics into understandable language for stakeholders—along with strong communication and leadership qualities.

Q: What are the biggest challenges you’ve faced moving to treasury from tax?

A: Being entirely out of my comfort zone. When presenting to our board on tax matters, I know I’m the expert in the room, which allows a certain confidence.

  • With treasury topics, I’m not the expert and have realized I second-guess myself, which can impact confidence in leading the discussion.
  • And given that I took on treasury in January 2020, Covid was a huge challenge in March/April/May and continues to require ongoing focus.  

Q: How have you scaled the learning curve to get a grip on treasury—peers, colleagues, other sources of information?

A: I was extremely clear with my CFO when agreeing to take on treasury that it was not my wheelhouse and his support and expertise would be critical.

  • He and I work closely together and I also have a very bright and steady assistant treasurer with a finance background. Our styles mesh well and his background is complementary to mine.
  • T30 has been helpful to meet others in similar roles; I’ve sought advice from others which has been very helpful. Our banking group has provided valuable insight and support, too.

Q: How has your tax background aided your transition to running treasury? How do the two areas complement each other?

A: In tax, I learned to be comfortable making decisions with partial (but best available!) information; avoiding analysis paralysis. This arises extremely often in treasury as well, be it cash management, insurance renewals, debt.

  • I work to keep things simple in both areas; if I can’t explain it to the CFO and others clearly and concisely, we need to simplify.

Q: Is there an example of something you’re working on now that allows you to leverage your knowledge of both tax and treasury?

A: Consolidated cash planning/forecasting and cash repatriation. I have a new appreciation of bank account complexity and KYC queries that can arise and have been able to share additional insight from a tax perspective with the treasury team regarding specific structures and nuances.

Q: What advice do you have for other treasurers who have a tax background; and what advice for treasury folks who find themselves running tax? Which is the harder transition in your view?

A:I don’t think one is harder than the other, both have a steep learning curve! A lot of treasurers may have had exposure to tax concepts through cash repatriation work, intercompany loan documentation or structuring external debt.

  • My advice for both sides of the coin: Ask questions—there is no such thing as a stupid question. Your team and advisors are paid to answer your questions, so leverage their expertise!
    • I’ve found a lot of the questions I have are similar to what others want to ask as well.
  • My other piece of advice is around each team—build and maintain a strong team that meshes and communicates well. I rebuilt the tax team and it was critical to eliminate some bad apples; the treasury team I joined works very well together and we recently added an analyst, too.
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Raising the Bar: How AI, ML and Big Data Could Fix Cash Forecasts

Asia Treasury members discuss how advanced technology may boost satisfaction with forecasting tools. 

A quick poll at a fall meeting of the Asia Treasury Peer Group sponsored by Standard Chartered underscored both the dissatisfaction of members with their cash forecasting tools and the intensifying scrutiny of cash positions by senior management since the beginning of the pandemic.

  • None of the treasurers polled are highly satisfied with their current set of tools: 60% have low satisfaction and 40% said medium. All of the treasurers said they’re fielding more questions about cash from the C-Suite.

Asia Treasury members discuss how advanced technology may boost satisfaction with forecasting tools. 

A quick poll at a fall meeting of the Asia Treasury Peer Group sponsored by Standard Chartered underscored both the dissatisfaction of members with their cash forecasting tools and the intensifying scrutiny of cash positions by senior management since the beginning of the pandemic.

  • None of the treasurers polled are highly satisfied with their current set of tools: 60% have low satisfaction and 40% said medium. All of the treasurers said they’re fielding more questions about cash from the C-Suite.

Building better tools. In a presentation by Kyriba arranged by Standard Chartered, members heard about the potential for big data, artificial intelligence (AI) and machine learning (ML) to “move treasury into true management of working capital” and improve the accuracy of cash forecasts.

  • As the chart below shows, this vision for building a so-called behavioral model of working capital depends heavily on extracting huge amounts of data from a multitude of sources and collecting it in a data lake.
  • ML allows the model to learn patterns based on innumerable variables—and the effects of one upon another—and then predict future flows with more precision.
  • In breakout discussions, members discussed their data management challenges, including the need to standardize exogenous data before it is fed into a model.

Addressing the AR problem. The presentation included discussion of pain points experienced when forecasting invoice payment dates. “We do not know when our customers are going to finally pay their invoices,” read one example.

  • Another said cash collection “is very blurry,” resulting in a “manual and time-consuming process” to build a cash position for future days, weeks and months.
  • The presentation identified the value proposition as creating an automated process to forecast the payment date of each invoice.
  • Using AI in pilot programs with two corporates, Kyriba said, helped reduce payment forecast variances from 25 days to five days.

Other use cases. In addition to forecasting invoice payment dates, the presentation identified these use cases for companies that use systems built with AI and ML:

  • Assign budget codes to bank movements.
  • Reduce manual cash reconciliations made by users.
  • Detect payment anomalies compared to history.
  • Detect abnormal FX transactions.
  • Suggest financing request to suppliers.
  • Forecast investment and debt.
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The Post-Covid Playbook: WFH Flexibility and Office Collaboration

The goal is keeping the good parts of work from home, replacing the bad with the benefits of office teamwork.

Corporates looking ahead to a post-Covid world are taking stock of how the shift to work from home (WFH) has changed the ways that teams function—for better and worse. This requires weighing the beneficial flexibility offered by remote work against the detrimental loss of collaboration that is only possible when people are in the same building.

The goal is keeping the good parts of work from home, replacing the bad with the benefits of office teamwork.

Corporates looking ahead to a post-Covid world are taking stock of how the shift to work from home (WFH) has changed the ways that teams function—for better and worse. This requires weighing the beneficial flexibility offered by remote work against the detrimental loss of collaboration that is only possible when people are in the same building.

  • As some companies consider abandoning offices altogether, many practitioners at recent NeuGroup meetings shared how they hope to retain the conveniences that have come with WFH while reestablishing a positive office culture that cannot be replicated virtually.

Technology benefits. The near-universal shift to WFH has accelerated companies’ embrace of technology that can boost efficiency and encourage collaboration, albeit virtually. Those tech solutions are here to stay.

  • Messaging apps and video conferencing platforms such as Slack and Microsoft Teams became crucial for uniting team members spread far and wide. One member said they also “work really well for broader organizations too,” connecting employees who may not have interacted in a physical office, including members of different finance teams.
  • Members also found success with project management tools like Asana and WorkBoard, which they plan to keep using. “They can be really helpful to put specific structure to the workflows you’re tracking,” one member said.
    • “The best part is they provide great visibility to the entire team for what others are working on, and the facets of their work.”

The productivity puzzle. One member, echoing others, reported a rise in productivity at the start of the shift to WFH. But as fatigue set in, brought about in many cases by too many hours working, that productivity declined at some companies.

  • Some companies have established specific virtual work hours, but members said they ran into challenges enforcing this, especially after the early days of the pandemic.
  • “Some people just work until midnight because they’re at home and they can have dinner and still be at the office,” one member said.
  • That said, many members are planning to allow part of their workforce to continue working from home to some degree. “We learned that you don’t necessarily need everyone together all the time,” one treasurer said.

Returning to the office. Many members see physical offices as irreplaceable, capable of fostering innovation that can only come through unplanned interactions in real-life spaces.

  • One member said it has become difficult to get employees to think outside the box without in-person collaboration. She looks forward to restarting the company’s whiteboard sessions.
  • “It is really challenging to recreate inter-team communications,” another member said. “Cross-functional problem solving is even harder to replicate.”
  • A third member remarked that “lots of conversations get funneled through management” in the WFH environment, preventing the creative solutions that can come from spontaneity.
  • When it comes to onboarding new employees virtually, one member reported “really uneven” results, saying that many new employees do not settle into the company without interpersonal instruction.
    • In the long-term, the member said, a return to offices will benefit the onboarding process, even if the employee ends up working virtually most of the time.

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Talking Shop: Allowing Vendors to Directly Debit Bank Accounts

Member question: “What are your policies with respect to allowing vendors to direct debit your bank accounts for invoices due?

  • “Our policy does not support vendor direct debit of our bank accounts. We do have an exception process for situations where vendor stoppage may have material impact (i.e. utilities for a manufacturing plant) or the vendor requires DD and there are no other alternatives (i.e. postal service).”

Member question: “What are your policies with respect to allowing vendors to direct debit your bank accounts for invoices due?

  • “Our policy does not support vendor direct debit of our bank accounts. We do have an exception process for situations where vendor stoppage may have material impact (i.e. utilities for a manufacturing plant) or the vendor requires DD and there are no other alternatives (i.e. postal service).
  • “I think part of our position is a historical perception that it is ‘bad’ to allow another entity to have access to debit your bank account. I am starting to question in today’s technology world if we need to think about this differently. I think we could tighten up our payment processes and gain efficiencies by leveraging vendor DDs more.
  • “When we set up the DD exception with the bank, it has very specific parameters and we are establishing a control processes to monitor to ensure DDs exceptions are current and valid. And we do encourage our customers to allow us to DD their bank accounts! Looking for policies and/or perspective from other companies.”

Peer answer 1: “We recently added an addendum to our global payout policy in which we labeled direct debit as a high risk payout method, and defined our process by which this payment method could be requested.

  • “We have a workflow tool for the request, once approved by financial operations it feeds to treasury for debit filters or mandates or any action needed to allow the debit to our account. We struggled with timely recons with DD, comprehensive payments reporting, and accountability on matured contracts and debit authorizations.”

Peer answer 2: “Direct debit is a hot button item at my company also. Treasury has always had the point of view to not allow direct debits unless it is not profitable or if the risk is high not allowing them (i.e. utilities or certain governmental payments). We have it listed in our internal financial controls to avoid direct debits unless there is good reason for them.

  • Our AP teams are constantly challenging treasury on this topic and we have always been open to discussion. We now have a process where a treasury leader and a controller of the business must both sign off before a direct debit can be initiated.

Peer answer 3: “We’ve recently discussed this as well, mostly related to an ADP process which is daily and manual for the team. We don’t have specific policy but have historically avoided it. We’re also revisiting though due to the efficiencies it can provide. For example:

  • SCF: Our provider wanted us to open an account at their bank. We prefer they auto debit our treasury accounts rather than have another account to monitor and fund.
  • Government/utility: We’ve had instances where we do not need to provide a LC or BG if the utility can auto debit our account.
  • ADP: Currently, a manual wire process; we are investigating whether it’s worth the manual effort versus allowing ADP to auto debit our accounts.”

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Getting Granular: A Tool to Dig Deeper and Improve Cash Forecasts

How Cashforce built a stronger foundation for one member’s cash flow forecasting and working capital optimization.

Covid-19 shook the foundations of cash flow forecasting and working capital management for companies facing uncertainty about revenues, vendor payments, appropriate inventory levels and adequate cash reserves.

  • At a recent NeuGroup virtual interactive session, one participant impressed others by describing how a fintech solution provided by Cashforce a year earlier allowed his company to dig into the weeds of business operations, examining line-item details of cash flows to prepare for and absorb shocks to liquidity.
  • That ability helped treasury provide real value to the company when the internal spotlight landed on the team during the pandemic.

How Cashforce built a stronger foundation for one member’s cash flow forecasting and working capital optimization.

Covid-19 shook the foundations of cash flow forecasting and working capital management for companies facing uncertainty about revenues, vendor payments, appropriate inventory levels and adequate cash reserves.

  • At a recent NeuGroup virtual interactive session, one participant impressed others by describing how a fintech solution provided by Cashforce a year earlier allowed his company to dig into the weeds of business operations, examining line-item details of cash flows to prepare for and absorb shocks to liquidity. 
  • That ability helped treasury provide real value to the company when the internal spotlight landed on the team during the pandemic.

Digging into details. Cashforce opened a window to a more accurate cash picture by revealing what was going on across the business and how various moving ‘levers’ were rapidly changing, the treasurer said.

  • The technology tracked the granular details of cash flows and highlighted respective drivers that helped identify areas of business behaving normally and those under greater stress from delays in customer receipts.
  • The resulting insights facilitate setting baseline expectations and seeing potential roadblocks so that treasury teams can have productive conversations with operations teams about changes, new products, etc. so that business intelligence is layered into forecasts appropriately.

The velocity and veracity of data. Covid-19 has called more attention to the need for banking APIs and the harmonization of data feeds into a single analytical source. Real-time mandates are now the norm: Everyone wants payment information in real time, with consolidated cash positions at the press of a button. This greater level of urgency has driven the need for cash flow forensics and analytics.

  • 82% of participants polled have accelerated plans to automate and digitize treasury operations since the pandemic (see chart above for details).
  • Cashforce stressed that all processes surrounding cash flow and working capital optimization must be revisited to accomplish real-time goals. Across companies, they are seeing an emergence of a cash culture away from the heavy focus solely on earnings.
  • This shift requires links to AI models so treasury practitioners can determine cash flow drivers not easily spotted by the human eye because they are in the weeds of massive amounts of data.

The data is there; why can’t we get to it? Simply put by one member: Most treasury management systems (TMSs) are not designed to house the magnitude of transaction-level data nor provide the analytic capabilities needed for transparent cash forecasting and best-in-breed working capital analytics.

  • For example, not all TMSs are able to take in various data streams or extrapolate trends to build cash flow patterns into a cash forecast. For companies with multiple ERPs, the complexity and volume of data becomes exponentially difficult to manage and impossible to analyze manually.
  • Algorithms designed to roll up your sleeves for you and dig into transaction-level detail to predict trends and flag anomalies provide a structure for cash optimization and a safeguard for deviations that threaten liquidity. 
  • Measure KPIs to move the needle. Automated calculations and daily reporting on key indicators through Cashforce tools allow for expedited metrics that enable smart decision making and facilitate improving working capital through analytics.

Wedded bliss: Marrying short-term direct to long-term indirect cash forecasts! Treasury and FP&A forecast disconnects are common sources of reconciliation tension across companies.

  • Cashforce uses a “rules engine” that takes ERP data to transform the indirect P&L components into direct cash flow drivers and calculate timing parameters based on historical trends.
  • One member inquired about the possibility of forecasting by purchase order and was pleased to hear that once the purchase order details were transferred into the system, algorithms calculate cash amounts and timing for both “open ended or closed” purchase orders, taking the headache out of what is often a guessing game.

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The Right Steps on the Path to Optimizing Working Capital Management

MUFG presents a working capital road map for technology companies at NeuGroup’s AsiaTech20 pilot meeting. 

At the inaugural meeting of NeuGroup’s AsiaTech20 Treasurers’ Peer Group, sponsor MUFG led a session titled “Optimizing Working Capital (in Uncertain Times)” and participants discussed challenges including how to get vendors to extend payment terms, the need for efficient collections processes and developing KPIs around working capital.

MUFG presents a working capital road map for technology companies at NeuGroup’s AsiaTech20 pilot meeting. 

At the inaugural meeting of NeuGroup’s AsiaTech20 Treasurers’ Peer Group, sponsor MUFG led a session titled “Optimizing Working Capital (in Uncertain Times)” and participants discussed challenges including how to get vendors to extend payment terms, the need for efficient collections processes and developing KPIs around working capital.

Working capital cycle. MUFG’s presentation identified four areas, and goals for each, in the working capital cycle.

Big Picture. The presentation also set down a path for companies starting on the path to optimizing their working capital management programs. It requires:

Senior attention.

  • Working capital improvement is an ongoing process led by the most senior stakeholders within the company.
  • Holistic organizational transformation requires close cross-functional coordination.
  • Change in culture and organizational buy-in by all stakeholders is necessary.

Organizational change management.

  • Buy-in is needed across various departments, including treasury, sales and procurement teams.
  • Working capital solutions require a deep understanding of systems and processes supporting the company, legal contracts and payment terms affecting working capital, and financial tools used to improve and gain efficiency.

Steps. Here are four steps to take on the path to an optimized working capital management approach, according to MUFG:

Observations from North America. MUFG’s presentation said that over the course of 2020, “companies have seen substantially higher amounts tied up in working capital. Furthermore, several key working capital metrics deteriorated during the year.” In addition:

Pricing pressure.

  • With liquidity scarce and credit concerns, we have seen significant repricing movement across the broader market.
  • Pricing levels have varied from program to program with new pricing around 25 to 50 basis points higher.
  • The industry segments hit hardest by Covid-19 faced the most pressure with significant premiums needed to maintain funding.

Term or tenor extension.

  • Buyers are delaying payments and/or forcing extension of terms to preserve cash.
  • Terms continue to get extended with 90- to 120-day terms becoming more common and customers absorbing higher product costs from suppliers in exchange. In some cases, terms have approached 360 days

Usage and volume.

  • Seller-led programs have had growth in usage over LTM due to longer tenors while volume has decreased.
  • Buyer-led (payable) programs have had an increase in usage as volumes have increased as suppliers are looking for more liquidity.
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Banks Craving Yield Hear Case for Lightly Structured Corporate Notes

An option for members of the Bank Treasurers’ Peer Group coping with excess liquidity amid rock-bottom rates.

Many members of the Bank Treasurers’ Peer Group (BTPG) find themselves looking to their investment portfolios as they search for yield in a manner that complies with policy risk parameters—a theme heard at other NeuGroup meetings in the second half as interest rates fell.

An option for members of the Bank Treasurers’ Peer Group coping with excess liquidity amid rock-bottom rates.

Many members of the Bank Treasurers’ Peer Group (BTPG) find themselves looking to their investment portfolios as they search for yield in a manner that complies with policy risk parameters—a theme heard at other NeuGroup meetings in the second half as interest rates fell.

  • Banks face the added challenge of tepid loan growth amid a surge in deposits driven by a flight to safe havens and businesses parking cash received through the Paycheck Protection Program.
  • “We have all this cash and nowhere to invest,” one bank treasurer said.
  • One suggestion from the sponsor of the BTPG H2 meeting: Buy lightly structured investment-grade corporate bonds, in addition to US treasuries, federal agency debt, MBS, ABS and municipal bonds.

Structured notes. According to the sponsor, lightly structured bonds can offer a significant yield pickup and be customized to meet portfolio needs. Structured correctly, these securities can be a capital-efficient investment from a risk-weighting perspective. Structured notes issued by US depositary institutions or qualifying foreign banks can have the same risk-weighting as a federal agency or MBS investment.

  • The sponsor was that clear structured notes, if appropriate, would still only comprise a relatively small percentage of a bank’s securities portfolio, primarily because they can be less liquid than other investments, especially during times of high volatility and stress in the financial markets.
  • That said, these investments can be customized by issuer, tenor, rating, fixed versus variable interest payments and call feature.
  • Additionally, more highly structured notes can allow the portfolio manager to express views on inflation or the shape of the yield curve, again, if appropriate.

Caveat emptor. The search for yield does not come without risk, of course. But for investment portfolios that have a buy and hold approach to at least a small portion of their holdings, they may have merit.

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Talking Shop: Remittance Verification Options for Treasury Payments

Member question: “How do others handle remittance instruction verification for treasury payments? Callback? Third-party service? Any ML or technology?

  • “We are reviewing our verification process for remittance instructions for payments processed through treasury. Today, we require it to be on the bene’s letterhead, or bank letter, or imbedded in the contract, but have not implemented a callback. Who does the verification in your organization? Are you looking at any third-party services or ML-type models for additional controls?”

Member question: “How do others handle remittance instruction verification for treasury payments? Callback? Third-party service? Any ML or technology?

  • “We are reviewing our verification process for remittance instructions for payments processed through treasury. Today, we require it to be on the bene’s letterhead, or bank letter, or imbedded in the contract, but have not implemented a callback. Who does the verification in your organization? Are you looking at any third-party services or ML-type models for additional controls?”

Peer answer 1: “We conduct a callback for all new or changes to existing beneficiary payment instructions.”

Peer answer 2: “Our company also does a callback verification.”

Peer answer 3: “My company does callback verifications for changes to existing beneficiary instructions or new beneficiary instructions for treasury payments.”

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Best of NeuGroup Insights 2020

2020 was a year to remember—even if it left us with much we would rather forget. 

Editor’s note:
The power to move forward is the best gift any of us will receive this year. In 2021, our team will use that gift to redouble our efforts to bring you valuable insights that help you thrive in an uncertain world. You can read those insights here on our website or by signing up for our email newsletter (click here).

2020 was a year to remember—even if it left us with much we would rather forget. 

Editor’s note:
The power to move forward is the best gift any of us will receive this year. In 2021, our team will use that gift to redouble our efforts to bring you valuable insights that help you thrive in an uncertain world. You can read those insights here on our website or by signing up for our email newsletter (click here).

This week’s newsletter, our last of 2020, revisits a range of posts that resonated with readers, reflecting a year when ESG gained force, the pandemic forced finance teams to act fast and smart, and the country grappled with issues of race, social injustice and political strife.

To read it, please click here.

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M&A Deals Reveal Growing Power of ESG Ratings, Research

In a recent NeuGroup Virtual Interactive Session, Deutsche Bank weighed in on the changing face of the players doling out ESG ratings which are increasingly important to investors and issuers.

  • As the graphic below makes clear, credit rating agencies and other companies are racing to get in on the action through acquisitions.

In a recent NeuGroup Virtual Interactive Session, Deutsche Bank weighed in on the changing face of the players doling out ESG ratings which are increasingly important to investors and issuers.

  • As the graphic below makes clear, credit rating agencies and other companies are racing to get in on the action through acquisitions.

Trisha Taneja, Deutsche Bank’s head of ESG advisory, identified MSCI and Morningstar as two popular ratings providers, adding that Moody’s and S&P are growing.

  • “The two current main ones are MSCI and Morningstar,” she said. “Those drive the most amount of capital total, not just fixed income, but across asset classes.
    • “MSCI’s data feeds into the ESG indexes which are licensed to a lot of asset capital.
    • “With Morningstar, Sustainalytics data feeds into their fund ratings, but also their standard research, so that also provides a lot of capital.”
  • Ms. Taneja said S&P and Moody’s are coming up fast because their “ESG ratings are more issuer-friendly, so there’s more engagement there.
  • “It’s more forward-looking because they’re based on interviews with management,” she added. “However, because they’re issuer-solicited, it is hard for investors to use it for portfolio construction.”
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Wild Rides: Three Treasurers Rise to the 2020 Financing Challenge

Lessons from three companies whose equity, debt and bank credit transactions required flexibility, speed and more.

The scramble for liquidity during the pandemic underscored the need for treasury to be prepared—at any point—to snap into action and access capital or credit. And while each company’s circumstances are different, there are some lessons that emerged from this year’s financings that should interest almost any treasury team.

Lessons from three companies whose equity, debt and bank credit transactions required flexibility, speed and more.

The scramble for liquidity during the pandemic underscored the need for treasury to be prepared—at any point—to snap into action and access capital or credit. And while each company’s circumstances are different, there are some lessons that emerged from this year’s financings that should interest almost any treasury team.

  • At a second-half meeting of NeuGroup’s Life Sciences Treasurers’ Peer Group, three members described funding transactions involving debt, equity and a revolving credit facility. Larry Williamson, head of healthcare coverage at Societe Generale—the meeting sponsor—moderated their discussion.
    • “Companies took appropriate actions in terms of managing their underlying business and undertaking financing to reinforce their balance sheets and ensure adequate liquidity,” Mr. Williamson said.

Be flexible, patient, unafraid. Volatile capital markets, illiquidity, fluctuating pricing and terms for revolvers created situations for some treasurers that required patience and flexibility.

  • One treasurer needed to ensure his company’s acquisition strategy would not be jeopardized by a lack of funding. He had counted on expanding the company’s bank group in a previous year to provide a deep pool of incremental credit commitments. However, the pandemic undermined the critical size of that option and “we had to go back to the drawing board,” he said.
  • The company “explored all corners of debt capital markets to see if we could structure something to preemptively reduce potential M&A execution risk” before initially moving toward a delayed draw term loan, to balance critical size objectives and the cost of carry.
    • Then other corporates starting paying down revolvers, a positive for banks. Ultimately, the company decided on a “massive short-term revolver,” but had to pivot a number of times. After first being told banks wouldn’t do anything longer than 364 days, the company ended up with a two-year revolver with commitments 100% larger than the required facility size.
  • Reaching what the treasurer called “an extraordinary outcome given prevailing market conditions” required going back to the board as the market outlook changed. “Don’t be afraid to go back if you can get a better deal,” he advises. “Don’t feel you’re locked into something and be willing to push internally if you can get a better outcome,” he said.

Don’t rule anything out. In March, as markets shuddered, another company’s senior management decided to say “no go” on a deal to refinance a security maturing in the fall. Waiting until May, the treasurer said he “threw all the spaghetti on the wall” as he looked at the cost of capital of multiple options and worked under a mandate not to affect the P&L.

  • In the end, the company “fell back to something we had done,” a convertible bond that the treasurer described as pretty vanilla but required treasury to be flexible and do a seven-year deal instead of a five-year.

Be prepared, fast, coordinated and aligned. A third treasurer’s financing demonstrated the value of being prepared to act fast to take advantage of an opportunity by working closely and intensely with other finance functions and leaning on bankers and lawyers to get a deal done when time is tight. The multifaceted deal, which the treasurer called “grueling,” involved equity, debt and bridge financing. Takeaways:

  • Don’t underestimate the amount of time it will take to produce and review multiple versions of documents. “We started as early as we could,” the treasurer said. “Thanks to the pandemic, everyone whose input was needed to get the financing done, including board members, was at home and available.”
  • Get internal buy-in and work closely in cross-functional teams. “That’s the only way to do this,” he said. Real trust emerged between the team members as they came together virtually, led by legal and treasury.
  • Be prepared to learn about the strength of your relationship with banks as you make them part of the deal team. When it came to bond allocations, “my goal was to make banks as least unhappy as possible,” the treasurer said, adding that everyone except the lead bookrunner ends up unhappy to some degree.
  • Align on bank roles and titles with senior executives before they field calls from banks, making sure everyone internally agrees that the decisions are fair and equitable. “The management team stood firm,” he said, adding that through it all, “I was really thick-skinned.”

More lessons on banks and boards. Don’t rely solely on your existing banks and service providers for a deal that meets your needs but may not be to their liking, one member said. For his financing, the treasurer broadened his bank group, bringing in several new, non-U.S.-based banks to diversify lender behaviors.

  • The same treasurer advised peers that members of your board may talk to members of other boards and could develop a fear of missing out—FOMO. That means treasury has to combat “doing something for the sake of doing it” (such as a bond offering) by having a lot of discussions about why “others are doing what they’re doing.” He added, “Always be prepared to talk about markets in general and relevant reference deals in particular.”
  • Another treasurer remarked that “the board dynamic is interesting to navigate,” requiring treasury to align on expectations with the C-Suite and “hold the line” on decisions about the banking group and other matters.

Keep it quiet. More than one treasurer emphasized the benefits of keeping information under wraps until it has to be shared with a broader audience.

  • “Confidentiality was key; if information leaked ahead of announcing to the market, there would have likely been negative impact on the execution of the transaction,” one member said.
  • Another only kept the “lead left” informed up until the morning of issuance, saying, “We had been burned before when leaking affected pricing.”
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Laddering: FX Risk Management with Less Work, Fewer Transactions

Wells Fargo explains an alternative to layering for corporates hedging cash flow exposures. 

Who doesn’t want to get more for less? As in less work, more efficiency and fewer transactions, all while still meeting risk management goals. To take advantage, though, you have to be willing to look closer at the shortcomings of the very common cash flow hedging approach known as layering.

Wells Fargo explains an alternative to layering for corporates hedging cash flow exposures. 

Who doesn’t want to get more for less? As in less work, more efficiency and fewer transactions, all while still meeting risk management goals. To take advantage, though, you have to be willing to look closer at the shortcomings of the very common cash flow hedging approach known as layering.

  • During a recent interim meeting of NeuGroup’s two FX managers’ peer groups, the quantitative solutions team at Wells Fargo laid out an alternative to layering called laddering.

Layering rationale. A Wells Fargo survey in 2018 found 63% of the public companies that responded use layering in their cash flow hedge programs.

  • By adding in hedges over time to achieve a higher hedge ratio as the exposure gets closer and exposure forecasts get more accurate, the rationale is that the resulting dollar-cost averaging smooths out gains and losses from FX volatility. This achieves a more stable outcome year-over-year or quarter-over-quarter.  

The downside. The disadvantage of this approach is that it requires the ongoing execution of a large number of hedges, with all the accompanying process work from trade initiation, confirmation and accounting through reconciliation and settlement, not to mention the transaction costs.

  • Wells Fargo’s analysis demonstrates that for a monthly layered cash flow program with a 12-month hedge horizon, a company would have 78 outstanding hedges at any given time per currency, or 300 for a two-year hedge horizon.
  • Many companies choose quarterly layering programs, but that’s still a big number to keep track of, especially when also considering the hedge accounting documentation requirements. Automation helps, but not all companies have achieved that level of automation yet.

Another way. Laddering, by contrast, means hedging a higher percentage of the exposure earlier and for longer per hedge, i.e., “more notional but less frequently” or “sort of an infrequent layering program,” as Wells Fargo’s presenter put it.

  • The example uses a third of the exposure hedged from two years out with an added third starting a year out. This cuts down significantly on the number of hedge executions required and outstanding hedges per currency at any given time, especially as compared to a monthly layering program, of course.

Volatility. But does this increase volatility? Intuitively, if the rationale for frequent layering to increase the hedge ratio over time is to reduce volatility, less frequent would increase volatility. But Wells Fargo’s backtesting analysis for EUR, GBP, CAD and MXN, for example, shows that volatility reduction is better with this tenor extension than with more frequent execution, and lower still for a two-year program.

  • Why is that? Laddered hedging “maximizes the overlap of the rates you are picking up” for the currencies involved as compared to the classical smoothing of layering, the presenter explained.

Converts. So laddering, anyone? One member noted that by conducting similar analysis, her company has indeed transitioned to a laddering (sometimes called staggering) approach to reduce the operational burden of frequent layering while still achieving similar levels of volatility reduction.

  • Another member, however, has a dual mandate of volatility reduction and opportunism to do better than a fully systematic program. So her team needs flexibility to increase (or not) their hedge ratios (above a required minimum prescribed in the policy), and the layered program provides that.  
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Talking Shop: Net Investment Hedging When There Is No Underlying Income

Member question: “Do you hedge net investments where there is no underlying operating income or cash flows?

  • “Curious what philosophy or triggers companies have around net investment hedging—and if any companies do NIH where they don’t have an underlying positive cash flow or plans to liquidate? For example, a region where you may have a lot of fixed assets but no material underlying revenues.”

Member question: “Do you hedge net investments where there is no underlying operating income or cash flows?

  • “Curious what philosophy or triggers companies have around net investment hedging—and if any companies do NIH where they don’t have an underlying positive cash flow or plans to liquidate? For example, a region where you may have a lot of fixed assets but no material underlying revenues.”

Peer answer 1: “At our company, we have to raise debt regularly, so our NIH program is mostly foreign currency debt (both organic and synthetic via cross-currency swaps). Our NIH currencies happen to be in countries with material revenues.

  • “But for us, the thought process is that we’re going to raise debt and some of that capital will be deployed into other countries and currencies; why not raise some of that debt in the same currency in which the assets will be deployed as a natural hedge?
  • “We do also sometimes use forwards tactically as short-term NIH if we’re declaring a dividend or return-of-capital or putting money into a foreign sub prior to that sub making an acquisition.”

Peer answer 2: “We execute NIHs in anticipation of large dividend payments as a way to hedge the cash flow prior to dividend declaration.”

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Dial It Down: Pension Fund Managers Cope With Lower EROAs

Key takeaways from a NeuGroup for Pension and Benefits meeting sponsored by Insight Investment and BNY Mellon.

Pension fund managers discussed best practices in selecting and evaluating investment managers, asset allocation and the impact of lower estimated return on assets (EROA) among other topics at a virtual meeting sponsored by Investment Insight and BNY Mellon. Here are takeaways from the gathering compiled by Roger Heine, senior executive advisor at NeuGroup.

Key takeaways from a NeuGroup for Pension and Benefits meeting sponsored by Insight Investment and BNY Mellon.

Pension fund managers discussed best practices in selecting and evaluating investment managers, asset allocation and the impact of lower estimated return on assets (EROA) among other topics at a virtual meeting sponsored by Investment Insight and BNY Mellon. Here are takeaways from the gathering compiled by Roger Heine, senior executive advisor at NeuGroup.
 
EROA expectations. Two-thirds of members are facing the reality that low interest rates are pushing down EROA assumptions, which ultimately reduce pension earnings under standard accounting.  Overall, EROA has eroded about 50 to 100 basis points over the past three years, according to figures presented by one member.

  • However, those pensions which still have large equity and risky asset allocations with higher expected returns are feeling less pain. 
  • With US interest rates now below expected inflation, actuaries and auditors have become less complacent with fixed income return assumptions based purely on historical returns—it seems almost impossible for these returns to be repeated going forward. 
  • Several members indicated that EROA analysis has evolved to weigh historical returns with forward-looking long-term estimates provided by fund managers and even actual recent performance. But several members expressed frustration with how much supposedly stable, long-term expectations can change year-to-year.
  • Several members emphasized that the EROA estimating process is performed independently of corporate management and is not influenced by the impact on reported earnings.

Adjustments to overall pension strategy? Despite all the market volatility in 2020, it appears most pensions stayed the course and have not fundamentally changed asset allocations as long-term strategies such as liability-driven investment (LDI) trumped sentiment that fixed income markets in particular have become overvalued.

Manager selection criteria. One member explained her very systematic process for selecting and retaining portfolio managers that starts with a highly quantitative approach, similar to analyzing each manager like a security under modern portfolio theory, based on historical data and evaluated almost continuously thanks to available software. 

  • Following that, qualitative factors are layered in, such as the investment philosophy, risk management controls and whether there is an idiosyncratic edge to the manager’s strategy.
  • Another member made the point that it’s important to look at historical performance on a rolling basis; otherwise, one good year could impact three, five and even 10-year historical performance.
  • Regarding the number of managers, three seemed to be a minimum requirement for each asset class to get diversification benefits. Larger pensions can have many more, limiting each manager to 15% to 20% concentration.
  • Another member discussed how it is preferable to work with underperforming managers before firing them, as you don’t want to do that at the bottom of their performance.

Passive vs active managers. There seems to be a trend to shift more assets to passive funds, particularly in the most liquid markets where the opportunity for alpha in active funds is probably minimal anyway and management fees are a drain on performance.

  • But a key challenge with passive funds is concentration in the tech-heavy top six or seven largest companies, with the imminent addition of Tesla to the S&P 500 adding to the challenge.

Contributions. Several members discussed how increasing corporate contributions to the pension makes a lot of sense when they would reduce the high 4.5% variable PBGC fees. But PBGC fees are capped for lower funded pensions, which discourages contributions among high yield companies.

  • The low borrowing rates for strong companies compared to much higher EROAs are also encouraging contributions to pensions.
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Is the Corporate Bond Market Ready for Digital Transformation?

Former NeuGroup members look to convince today’s treasurers that the current system needs to change.

By Joseph Neu

In the wake of a record year for corporate debt issuance—around $2 trillion in the US alone, generating estimated fees for banks topping $8 billion—this is a good time to assess if the corporate bond market needs transformation.

  • As part of a new series of virtual interactive sessions on fintech solutions to perennial treasury and finance function challenges, NeuGroup hosted a session last week looking at a corporate bond issuance auction platform backed by several NeuGroup member alumni and created for corporate issuers.
  • This fintech’s solution stands apart from others in that it is created by treasurers for treasury.

Former NeuGroup members look to convince today’s treasurers that the current system needs to change.

By Joseph Neu

In the wake of a record year for corporate debt issuance—around $2 trillion in the US alone, generating estimated fees for banks topping $8 billion—this is a good time to assess if the corporate bond market needs transformation.

  • As part of a new series of virtual interactive sessions on fintech solutions to perennial treasury and finance function challenges, NeuGroup hosted a session last week looking at a corporate bond issuance auction platform backed by several NeuGroup member alumni and created for corporate issuers.
  • This fintech’s solution stands apart from others in that it is created by treasurers for treasury.
  • Members who attended the session and saw the platform demo expressed real enthusiasm for the transparency, control and efficiency it offers. After all, who wouldn’t want to pay less for more?

A striking lack of innovation. As one member noted during the opening session assessing lessons learned from the work from home (WFH) bond issuance experience, “There’s a striking lack of innovation—it feels like we are in the stone age.”

  • It starts with reporting and compliance workflow: “Our bond deal was almost derailed in March because the printer couldn’t print and file all the documents,” the treasurer noted.
  • There is little pre-sale data other than how an issuer’s bonds are trading in the secondary market, and that does not necessary reflect actual investor preferences with a new issue.
  • The sales process gets executed by banks, mostly by phone and chat, without sharing of information on the bids and allocations as they happen.
  • Bond deal pricing is not optimized for best price execution, and the bank’s fees are mostly fixed, which leaves little incentive to innovate.

The conclusion: During the pandemic, some workflow for deals had to change to adapt to WFH, including virtual roadshows. But fundamentally, bonds got sold the way they always have been.

Oversubscribed. Unless you were an issuer in distress due to Covid, your bond deal was oversubscribed this year (by a lot). This suggests pricing is not reflecting demand. According to research cited by the fintech, US corporate bond offerings have increasingly been oversubscribed since the 2008 global financial crisis and remain underpriced by an average of 32 basis points.

  • If bonds are priced to move, then how much work are the underwriters doing to earn their fees from issuers?
  • If demand exceeds supply, then why not allow for an efficient auction with reverse inquiry even before an issuer starts to test the waters?

Direct the allocation. So much is being sold directly in our increasingly digital world that the buy-side is growing more comfortable with the direct issuance of corporate bonds. That said, big bond investors with good relationships with the top dealer banks may be ok with the current system.

  • But issuers want to diversify their bondholders in favor of the buy-and-hold cohorts (no hedge funds, please), and bond investors who must practically beg to get bonds are also supporting electronic platforms.
  • This includes corporates themselves, who often must scramble to buy bonds for their pension and cash investment portfolios.
  • Some issuers help their peers by instructing underwriters to allocate a percentage of their deal to other corporates.
  • Growing interest in diversity and inclusion (D&I) has also shown up in allocating bonds to Black- and minority-owned institutions to sell and purchase. This is yet another driver of issuers wanting to have more control.
  • There are also green and other ESG-related bonds that issuers may want to see land with investors with specific ESG mandates they favor.

Roadblocks. Despite the need for change, there is some skepticism that the current economics of corporate bond issuance will allow real transformation to take hold.

  • The fees paid for bond issuance are a means for corporate treasurers to compensate banks for a wide range of other services, starting with credit facilities and loans, that do not reflect a true market cost of credit.
    • But should bond economics be allowed to continue if banks are still able to charge for underwriting and market making that they are restricted by regulation from performing in the same way they used to?
  • Corporates that have banks as significant customers must also factor in how much of their commercial relationship is factored into the bond economics.
  • Treasurers may only receive minor credit from bosses if they shave fees from a bond transaction; but they could lose their job if a major bond deal falters.
    • True or not, the impression persists that a banker might press an institutional investor to buy bonds to prevent a deal from failing.
    • “Saving some on fees is not worth the risk of a deal going south on you,” one treasurer said.
    • On the other hand, some treasurers get the impression that junior bankers are mostly those working the phones these day—and they may not have as much sway with investors. (We guess they can hand the phone to an MD if needed.)
    • Perhaps an algorithm can be made smart enough with the right data at its disposal to prevent a deal from faltering without calling upon personal relationships.

Status quo appeal. Another obstacle: Less experienced corporate debt capital market teams at infrequent issuers may want to stick with a status quo where banks guide them through the process.

  • “How does a platform offer the same kind of hand-holding as we get know from our banks?” one session participant asked.
    • Would the treasurers backing a platform arrange for handholding, including training and development without a pro-bank tilt, for inexperienced bond issuers?
  • Also, there are treasurers who work hard at wallet management and analysis and believe that they come out well under current bond economics. They say they pay less overall compared to market pricing for credit and other services.
    • Even if they are not convinced they are leaving money on the table with the fees banks are setting, they may still have reason to overpay for bond issuance.

First movers. With all this said, what is required for a digital transformation of the corporate bond market is for some issuer of stature to be a first mover. And most corporate finance types are reluctant to be a first mover. Still, the enthusiasm of those who see transformation as inevitable, spurred on by all the acceleration of change brought about by Covid, might just do it.

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Test Your Knowledge of Treasury! A Trivia Contest to Attract Talent

One treasurer uses a quiz to educate, promote communication and build interest in treasury among finance teams.

Treasury teams often struggle to attract talent when competing with more glamourous finance functions. Part of the problem is a lack of understanding of what treasury does.

  • To build awareness and interest in treasury and enhance communication with other finance teams at his company, one treasurer created a contest to test the knowledge of senior leaders.
  • He described the quiz at a recent meeting of NeuGroup’s Treasurers’ Group of Thirty, sponsored by Standard Chartered.

One treasurer uses a quiz to educate, promote communication and build interest in treasury among finance teams.
 
Treasury teams often struggle to attract talent when competing with more glamourous finance functions. Part of the problem is a lack of understanding of what treasury does.

  • To build awareness and interest in treasury and enhance communication with other finance teams at his company, one treasurer created a contest to test the knowledge of senior leaders.
  • He described the quiz at a recent meeting of NeuGroup’s Treasurers’ Group of Thirty, sponsored by Standard Chartered.

Treasury 101. As many as 40 contestants compete for a small prize by answering a multiple-choice questionnaire called Treasury 101 that consists of 20 to 25 questions on subjects including:

  • Treasury organization
  • Cash management
  • Strategic objectives
  • Corporate finance
  • Risk management
  • Insurance

Time’s up. After the contestants have selected an answer, the subject matter expert tells them which one is correct and spends a few minutes providing more color, the treasurer explained.

  • “For instance, ‘How many people work in treasury?’ We might say 20, and then show the staff’s geographical dispersion or an organization chart showing who they are and what everybody does.”
  • As for results, he said, “We tend to find that most attendees have very little knowledge of the treasury function in general.”

The serious objective of having fun. The treasurer said the contest has three objectives:

  1. “To educate others about who is treasury and what we do.
  2. “Establish interest in treasury and create a bench of potential talent who might be interested in a career in treasury.
  3. “Have some fun and interaction with other finance departments.”

Positive results. In addition to the game being well attended and well received by participants, the member said the contestants are always a little more knowledgeable and appreciative of treasury’s role in the company after the event.

  • “It’s generated a lot of interest,” he said. And though participants in the game tend not to get too many questions correct, many participants reflect on how much they learned about treasury and how much fun they had.
  • While the game is better organized in an office location where lunch or snacks can be offered, in the current climate, it also works well virtually.
    • Anyone who thinks they can win by turning to the internet should know “they will not find the answers on Google—that’s for sure,” the treasurer said.
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Talking Shop: How Do You Restrict Trading for Currency and Bank Pairings?

Member question: “Question on restricting trading for certain currency/bank combinations: We have a few currencies that some banks have trouble settling with us (such as RUB). I want to avoid trading with these banks for those currencies.

  • “Ideally, I could set up a rule in FXall to restrict specific bank/currency combinations. Does anyone have suggestions for doing this? Thanks!”

Member question: “Question on restricting trading for certain currency/bank combinations: We have a few currencies that some banks have trouble settling with us (such as RUB). I want to avoid trading with these banks for those currencies.

  • “Ideally, I could set up a rule in FXall to restrict specific bank/currency combinations. Does anyone have suggestions for doing this? Thanks!”

Peer answer 1: “I believe that in FXall’s QuickTrade set-up, you can select/designate standard counterparty banks to populate for specific currencies pairs. Although this won’t prevent users from changing the counterparty, it could help in pre-populating the counterparties in FXall when, e.g., RUB is pulled up.”

Peer answer 2: “Agreeing with Peer 1’s comments. We currently restrict trading certain currencies to a subset of banks and have configured FXall so only those banks appear as possible counterparties in the RFQ screen. I’m happy to walk you through the steps.”

Peer answer 3: “I am curious if Peer 2 automated this. We use the QuickTrade set-up as well to have default counterparties by currency. We have a spreadsheet we plot the ‘roster’ in before entering into FXall (as we actively rotate counterparties quarterly). A matrix we maintain in the spreadsheet makes sure we do not choose bank/currency combinations we don’t think make sense.”

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Corporates Seek Best Practices in Backing Black-Owned Banks, Brokers

Selecting which minority-owned institutions to include on deals requires asking the right questions. 

Netflix, Apple, PayPal, Microsoft and other companies launched prominent initiatives to support Black-owned banks and brokerage firms this year in the wake of the social justice movement sparked by the death of George Floyd in May.

  • Scores of other corporates are making or doubling down on commitments to support financial institutions serving minority communities. They’re doing it through bank deposits, investments in community development financial institutions (CDFIs) and by engaging Black-owned firms to participate in capital markets transactions, among other approaches.

Selecting which minority-owned institutions to include on deals requires asking the right questions. 

Netflix, Apple, PayPal, Microsoft and other companies launched prominent initiatives to support Black-owned banks and brokerage firms this year in the wake of the social justice movement sparked by the death of George Floyd in May.  

  • Scores of other corporates are making or doubling down on commitments to support financial institutions serving minority communities. They’re doing it through bank deposits, investments in community development financial institutions (CDFIs) and by engaging Black-owned firms to participate in capital markets transactions, among other approaches.

Seeking metrics and best practices. At several NeuGroup meetings this fall, including one devoted to capital markets sponsored by Deutsche Bank, members discussed the challenges of managing risk as they commit capital amid broader corporate mandates on diversity and inclusion (D&I) efforts.

  • Treasury teams are also seeking input on best practices for choosing and evaluating minority-owned firms and establishing metrics to measure the corporate’s efforts at effecting change.
  • “We have yet to find a good way to measure the effectiveness of including the firms—or which firms to include or exclude” from capital markets transactions, the assistant treasurer of a company that has used minority-owned banks for liability management and bond transactions said.
  • “We don’t have good way to assess them,” he added. “We need a more comprehensive strategy on how, why and when to do business with these groups.”

Capital and capabilities. In response, other members suggested questions to ask and criteria to consider when selecting minority-owned firms, including:

  • A financial institution’s capital levels and who has invested in it.
  • The longevity of the relationship the company has with the minority-owned bank. “Firms tend to pop up and disappear,” one AT said.
  • The firm’s breadth of coverage and distribution capabilities. “Can these institutions sell bonds if they are asked to?”

Authenticity. “What’s your diversity level inside the firm?” one AT asks companies. One red flag: too many people who are not part of minority groups attending a meeting to represent a minority-owned institution.

  • Another AT wants to know, “What are they doing for the communities they represent? How are they engaging and giving back? How are they using the fees they generate—do they use some to hire staff and do charitable work?”

Performance questions. The same member evaluates a firm’s performance in a deal by asking questions that include:

  1. What is the quality of the order book they brought in?
  2. Are they bringing in hedge funds who are going to flip the bonds?
  3. Are they bringing in large players who already submitted orders to lead underwriters but are trying to meet diversity mandates?
  4. Are they instead bringing in a number of small, high-quality investors not covered by the leads. “That’s where diversity firms can add value,” he said.

Allocation game plan. One AT receives “constant pushback” from lead underwriters when he asks for information about the orders placed by minority-owned banks and allocation decisions. After one bank proposed allocations the company didn’t agree with, “we ended up saying ‘here are the allocations; forget your allocation’.”

  • Another member’s company instructs the lead underwriter to “quarterback diversity orders” and lets them know “how well they do interfacing with the diversity firms will affect our view of the lead underwriter’s performance on the transactions.”
  • He added, “By evaluating the lead underwriter on this basis, the banks know that future lead-managed transactions are at stake.”
  • The company requires the lead to explain their allocation decisions. “We’re not looking for a billion dollars of orders,” from minority-owned firms, he said. “We want 15 orders of $10 million that we can allocate $7 million to,” he said.
  • In a follow-up interview, one of the ATs said, “I would add that companies should set out their expectations up front with both the leads and diversity firms. That way everyone has a clear understanding of what is expected, how you will measure their success, and how to explain the deal to their teams and investors. 
    • “Then, do not be shy about pushing the leads to give allocations that you want. We set aside time on every deal to talk to the lead and make them justify their recommended diversity firm allocations and then either accept it or make them adjust as needed.”
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How to Engineer Complicated Engineering Audits

Recruiting engineers to join audit teams bolsters accuracy as well as credibility.

Highly technical engineering audits can be among the most challenging for internal auditors. A member of NeuGroup’s Internal Auditors’ Peer Group (IAPG) queried fellow internal auditors in a recent meeting about what parts of engineering they audit and the makeup of those auditing teams.

Recruiting engineers to join audit teams bolsters accuracy as well as credibility.

Highly technical engineering audits can be among the most challenging for internal auditors. A member of NeuGroup’s Internal Auditors’ Peer Group (IAPG) queried fellow internal auditors in a recent meeting about what parts of engineering they audit and the makeup of those auditing teams.
 
Expertise in short supply. A peer said engineering takes up more than 30% of his team’s 100-audit plan, and one of the challenges is finding sufficient engineering expertise, even as a technology company that employs plenty of engineers.

  • She noted IA aims to have IT auditors and technical program managers as a part of the audit teams, “So we have expertise going in.”
  • She added those experts also engage in ISO audits that assure audit quality.

Credibility bolster. An IAPG member at another tech company behemoth described a recently completed nine-month project that engaged half a dozen quality and design engineers as part of the audit team and also took advantage of co-sourcing to provide specific skills.

  • Analyzing a major client product and the company’s two biggest data centers, the IA team took a deep dive into the relevant systems and how information is being stored.
  • Bringing on those quality experts as well as engineers spanning the product life cycle was “hugely successful,” he said, adding, “We’re hoping to build on that and have more engineering expertise, because it also gives more credibility to the work.”
  • In the year ahead, he said, his team will look at how audit work done on the engineering and design side can be applied to manufacturing, “And also how they link up with the product road maps and the decisions that were made.”

Tracking revenue leaks. IAPG members agreed to discuss, offline, in greater detail their strategies and findings for engineering audits. One member asked to be included in those discussions, in part because her team had just embarked on a project to trace financial transactions all the way back to the engineering databases and could benefit from engineering expertise. 

  • She noted this is the first time for such a coordinated effort, from end to end. “It’s an advisory engagement and we’re working collaboratively with [the relevant departments] to do this completeness and accuracy check,” she said.
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Talking Shop: What Did Your Transition Plan to Hedge Accounting Look Like?

Member question: “What did your transition plan to hedge accounting look like?

  • “We are planning to adopt hedge accounting in the future. In terms of transitioning a book of hedges to designated hedges, we will close all existing undesignated hedges and put on a new book that is designated at inception.
  • “We are curious how others have put on these new hedges. How long did you take to put on hedges? Did you trade all at once, daily, weekly, etc.? Also, were there any lessons learned from executing your transition plan to hedge accounting?”

Member question: “What did your transition plan to hedge accounting look like?

  • “We are planning to adopt hedge accounting in the future. In terms of transitioning a book of hedges to designated hedges, we will close all existing undesignated hedges and put on a new book that is designated at inception.
  • “We are curious how others have put on these new hedges. How long did you take to put on hedges? Did you trade all at once, daily, weekly, etc.? Also, were there any lessons learned from executing your transition plan to hedge accounting?”

Peer answer 1: “We have transitioned five currencies to hedge accounting so far for our cash flow hedging program. We closed out our existing trades and placed the new trades for hedge accounting all at once in the same day.

  • “The project took much longer because we are utilizing a outsourced model for the accounting with Chatham because we did not have the capacity in accounting to bring it all in house, and our IT team had to build the API.
  • “We also implemented a new ERP system for one of the regions so we had to wait for that to be completed before we could launch that currency. But overall, the project has gone really well​.”

Peer answer 2: “If the hedges are identical (i.e., same value date, notional, etc.) as your existing hedges, I think a better approach may be to do a late designation. Basically, any mark-to-market up to the point of designation would remain mark-to-market through earnings, but once designated any future mark would go to other comprehensive income.

  • “The guidance does say designation needs to occur at the ‘inception’ of the hedge, but I have seen inception applied to mean more where you draw the line of capturing mark-to-market in OCI vs. earnings. (Unwinding hedges and entering identical hedges gets you to the same spot, absent the additional transaction cost). May be worth a discussion with your auditor if this is the fact pattern.”
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Asia Tech Companies Optimistic for Post-Covid Growth

Key takeaways from the AsiaTech20 Treasurers’ Peer Group pilot meeting sponsored by MUFG.

By Joseph Neu

Be prepared for global optimism. The global economic outlook is overwhelmingly positive with Covid-19 vaccines nearing distribution. Plus, a new administration in the US brings an expectation for economic growth to take on a more global scope, with Asia expected to outperform.

Key takeaways from the AsiaTech20 Treasurers’ Peer Group pilot meeting sponsored by MUFG.

By Joseph Neu

Be prepared for global optimism. The global economic outlook is overwhelmingly positive with Covid-19 vaccines nearing distribution. Plus, a new administration in the US brings an expectation for economic growth to take on a more global scope, with Asia expected to outperform.

  • For this reason, tech treasurers in Asia have also pivoted from enduring the crisis through stockpiling capital and liquidity to preparing to go on offense, growing with the recovery and improving their standing in the market—with customers, distributors, suppliers or all three.

Growth dynamics in Asia capital markets. MUFG helped shed light on a number of interesting trends in Asia capital markets of which tech clients are taking advantage.

  • First, the traditional strength of bank lending to tech in Asia remains, especially in Taiwan, China and Australia. Tech treasurers reported success with renewing credit facilities, up-sizing or adding new loans, as well as amending covenants favorably.
  • Bond issuance by Asian tech firms has also grown and they find receptive investors in the US, especially if they get a rating, as well as in Asia. The depth of debt capital markets in Asia continues to grow, according to MUFG, so that issuers seen as investment-grade looking to raise over $300 million or even $500 million can get deals done in Asia.
  • Two drivers of recent capital sourcing: M&A, such as Taiwanese tech manufacturers selling mainland China assets to fund new assets offshore; and Chinese tech firms funding take-private deals as US and other offshore listings draw more scrutiny.
  • Growth optimism and positive sector tailwinds will likely drive broader acquisition financing as well as increasing capex to lean into post-Covid demand.

Standardizing processes in preparation for accelerating digitalization. A discussion of organizational change in the wake of Covid-19 revealed that tech treasurers in Asia have benefited from projects to standardize treasury processes ahead of the crisis.

  • One member noted her proximity to a company shared services center and standardizing across integrated financial operations. Alongside this, her staff has been educating themselves on data analysis and automation tools that have also made it easier to improve cash forecasts over the crisis period.
  • Her TMS has not delivered well with data integration, as system APIs on the enterprise side and on the bank side are not as open as they promise. This is where coming up with your own means of data integration, such as RPA, is important.
  • One large fintech company treasurer has taken this even further by using software engineers at his firm to develop a mobile treasury app with three-click access to real time cash and debt levels. The aim of all such efforts is to scale support for rapid tech growth without growing treasury headcount.
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The Voyage to SOFR: TMS Headwinds for Some, Tailwinds for Others

Corporates weigh vendor readiness, the time and expense of updates and devise workarounds amid Libor transition.

Corporate treasurers trying to prepare for the transition from Libor to new indices like SOFR and other alternative interest rates are assessing the readiness of their TMS vendors. Many need to decide whether to spend the time and money necessary to upgrade systems or rely on third parties or devise their own solutions instead.

Corporates weigh vendor readiness, the time and expense of updates and devise workarounds amid Libor transition.

Corporate treasurers trying to prepare for the transition from Libor to new indices like SOFR and other alternative interest rates are assessing the readiness of their TMS vendors. Many need to decide whether to spend the time and money necessary to upgrade systems or rely on third parties or devise their own solutions instead.

  • While a proposed extension for legacy Libor contracts may provide some relief, members at recent NeuGroup meetings have voiced concern about TMS vendor readiness and the cost of upgrades.
  • At the same time, some users of Reval’s cloud-based solution expressed confidence that Reval is prepared, and they anticipate a relatively simple, automated roll-out of an update for SOFR.

Relying on Excel and banks. Members not in a position to upgrade or migrate to a new system may turn to making necessary calculations by hand, although some treasurers say this strategy is not sustainable.

  • One treasurer said his company would have to pay to upgrade its TMS to have SOFR functionality, “which we’re not going to do for lack of resources. So it’ll just be up to manual calculations at that point, leaning on the banks for some help with the SOFR calculations.”
    • Another who uses the same system outsources the calculations to Chatham Financial rather than pay to upgrade. “We feel comfortable about [Chatham’s] capabilities—we just outsource all that.”
  • Another TMS requires clients to undergo a multiyear migration to a new version of its system to handle SOFR. A member in the midst of this process said she has concerns about the project’s timeline and Libor’s end date.
  • Until the upgrade process is complete, the member said her treasury team will need to pull SOFR into Excel from Bloomberg and calculate the compound interest on a daily basis.
  • For smaller companies, this may be a feasible long-term solution, but not for larger companies like hers. “There’s a risk introduced by the number of contacts and transactions we have within the system,” she said.

Waiting game. A member whose company is opting to pay to upgrade said implementation will take 10 months, with the TMS unlikely to include SOFR index functionality until Q2 or Q3 of next year.

  • “I am a little bit concerned with where our vendor is with even providing that basic functionality that we need in the upgrade,” she said. “We’re already behind schedule, and we haven’t even kicked off the project.”

A good experience. Some members using Reval expressed fewer concerns, saying the “user-friendly” vendor is well-positioned for the transition.

  • Automated updates make using Reval simple for one member who said he appreciates the rollout process. “In each of their user releases, they’ve highlighted the changes and provided user guides, even on Libor exposure reporting,” he said. “It shows you a dashboard where you can see where all your exposure is, to help people along the journey.
    • “You have the ability to pick a date you want to transition to the new base rates, the base rates are already reporting in there if you want to see what that means for interest going forward, forecasting-wise.”
  • Reval’s pricing evaluator came in handy for another member’s team, which uses it to “evaluate our debt differently, based on alternative reference rates or Libor. Overall, it’s been a good experience.”
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An Early Warning System to Flag Excessive Counterparty Credit Risk

One corporate’s proactive approach to measuring and managing FX and other counterparty exposures.

Using credit ratings from S&P, Moody’s and Fitch is one way corporates establish maximum credit limits with counterparties. But at a meeting of FX risk managers this fall, one company described some shortcomings of that “classic approach” and explained an alternate method that enables it to take action before exposures reach unacceptable levels.

One corporate’s proactive approach to measuring and managing FX and other counterparty exposures.

Using credit ratings from S&P, Moody’s and Fitch is one way corporates establish maximum credit limits with counterparties. But at a meeting of FX risk managers sponsored by Wells Fargo this fall, one company described some shortcomings of that “classic approach” and explained an alternate method that enables it to take action before exposures reach unacceptable levels.

Proactive vs. reactive The company’s director of liquidity and investment management said traditional credit ratings are reactive and sticky—they don’t move for long periods of time—and provide no insight into how risk is evolving in real time. He then explained the basics of the company’s new, proactive approach to managing counterparty credit risk.

  • It’s based on the Merton Distance to Default Model, developed by Nobel Prize winner Robert Merton.
  • The treasury team pulls data from public feeds, such as Bloomberg, then runs Merton model analytics in Python.
  • It uses a barrier option pricing model where spot is equal to market capitalization and the strike (barrier) equals total debt.
  • It uses option math to calculate the probability of exercise, which can be thought of as the probability of default.
  • “If we know our risk tolerance and the probability of default, we can calculate the maximum allowable credit limit for each customer or bank,” a slide in the company’s presentation said.

Counterparty risk exposure calculation. Instead of comparing current mark-to-market levels to the credit limit, the company compares limits to the maximum potential future exposure (MPFE).

  • It uses the Monte Carlo option pricing model to derive the 5th and 95th percentile forward curves for each currency pair for each quarter end over the life of the derivative.
  • The company models each derivative using those rates and groups them by counterparty to develop the MPFE.

Early warning. The presentation said this method produces an improved risk management system. Because exposures are measured on MPFE instead of MTM, “we have an early warning system that allows us to take action before our actual (MTM) exposure is at unacceptable levels,” one slide said.

  • To make the point, the presenter showed a slide showing that S&P had rated Lehman Brothers A+ at the end of 2007, while the company’s model produced an implied rating of B-.
  • On Sept. 12, 2008, S&P lowered Lehman to A while the model had put the company at triple-C on Sept. 9.
  • On Sept. 15, Lehman and the model downgraded Lehman to D—the level of a technical default. “That’s not a place we want to be, the presenter said.

Informed decisions. The example chart above shows the term structure of counterparty risk: how the risk could evolve over time (at the 95th percentile of forward rates) given the trades currently on the books with a given counterparty.

  • As trades expire, the chart declines; peaks indicate the point of maximum potential counterparty exposure.
  • “So, if you are bumping up against counterparty limits and the chart peaks in the three or six months before steeply falling off (due to trades expiring in that time frame) you may be willing to live with that exposure,” the presenter said.
    • “Whereas if the peak in the chart is two or three years out, you may be forced to decide how comfortable you are with that risk and whether any actions are warranted.”
  • This, he said, “allows you to be more thoughtful about” managing risk “without being in the heat of battle.” And that allows risk managers to decide if they want to limit exposure to short-dated trades “or do I want to trade with them at all.”
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Rethinking Risk: Who Needs Insurance When You Have ERM?

Relying on ERM instead of insurance is probably extreme, but robust risk management might reduce premiums.
 
Have surging insurance premiums got you down? One answer to controlling these costs could be to resurrect your enterprise risk management program or bolster an existing one. This was one takeaway from NeuGroup’s H2 Treasurers’ Group of Thirty (T30) meeting, where one member said his company was unwilling to pay increases in premiums that in some cases have more than doubled.

Relying on ERM instead of insurance is probably extreme, but robust risk management might reduce premiums.
 
Have surging insurance premiums got you down? One answer to controlling these costs could be to resurrect your enterprise risk management program or bolster an existing one. This was one takeaway from NeuGroup’s H2 Treasurers’ Group of Thirty (T30) meeting, where one member said his company was unwilling to pay increases in premiums that in some cases have more than doubled.

  • As has been well-documented in NeuGroup meetings this year, premiums—particularly for directors and officers (D&O) insurance—are surging. Premiums already were on the rise at the beginning of 2020 and the pandemic did nothing to arrest that trend. Members in several virtual peer group meetings have said they were seeing rates rise by between 25% and 70%.
  • One peer group member actually balked at a quote 25% more than the year before. He searched for a better price but couldn’t find one. What’s worse, when he went back for the 25% increase, it was now upwards of 50%. “I wish I took the 25% increase,” he said.

Enter the risk managers. Faced with the same problem, the T30 member said his plan to mitigate the increases was to cut coverage and concurrently resurrect the company’s ERM program to help prevent insurance events from happening in the first place.

  • “We took much less coverage than in the past,” the member said. “And then took this opportunity to reinstate the ERM program and pay more attention to process controls and the like.” He added that he felt the company was “in good shape” following the change.
  • Another member took a similar tack, using ERM to flesh out “what risks can break our company.” This exercise, he said, would better inform them as to “where to spend our insurance dollars.”

Getting out front. The idea of getting ahead of risks is gaining currency, not just in ERM but in internal audit, too. This means IA and ERM would need to be part of strategic discussions. One ERM member said one of his goals for 2021 was better decision-making across the company and management.

  • “Better decision quality can be affected at all levels,” the risk manager said. He added that he was going to “pitch a decision-making plan” to management, hiring a third party to educate the management team and others.
  • Echoing this sentiment, one internal auditor in another meeting said recently that her IA shop was “moving away from the traditional way of auditing and asking questions ahead of big decisions.”
  • “We want to drive the behavior instead of chasing things down in an audit later on,” she said. “When you’re there at the beginning, it makes it easier.” She brought up an example of systems implementation and offering advice on how it should go.
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Strengthening Treasury’s Capabilities by Developing Internal Talent

Key takeaways from the Treasurers’ Group of Thirty 2020 H2 meeting, sponsored by Standard Chartered.

By Joseph Neu

Move up the treasury learning curve. This group has a disproportionate number of treasurers who are new to their role. Several come from the tax side and a few were brought in to build or expand their company’s treasury capabilities.

Key takeaways from the Treasurers’ Group of Thirty 2020 H2 meeting, sponsored by Standard Chartered.

By Joseph Neu

Move up the treasury learning curve. This group has a disproportionate number of treasurers who are new to their role. Several come from the tax side and a few were brought in to build or expand their company’s treasury capabilities.

  • All are moving quickly up the learning curve and helping their bosses appreciate the importance of strategic treasury capabilities. Covid-19 has helped make their case—in terms of both coping with crisis concerns for adequate liquidity and the post-crisis mandates to support new business pivots.
  • The treasury learning curve may be steep, but this is an opportune time to move up it and help others within your organization better understand what treasury can do. It’s also a way to attract internal talent to the treasury team.

Remote talent management favors the young and the bold. Challenges to onboarding new hires remotely have more members focused on filling open positions internally and training people for advancement. Younger people are generally more open to branching out and being trained remotely.

  • The younger generation is also more receptive to the automation and data analytics skills and tools that have become even more of a priority recently. Having said this, more experienced employees can adapt to changing roles in a remote work setting, if they are bold about change.
  • One member who started her new role not long before Covid hit noted that she has learned to adapt to a new CFO whom she has never met in person, as the CFO joined the company post-Covid.
    • According to the treasurer, “It has worked out surprisingly well and we’ve aligned to get so much done that I would have said it was impossible before,” she said. “Remote work puts the focus on unrelenting execution.

Corporates can do more in response to negative rates. Banks appear to have done a good job of shielding corporates from the impact of negative interest rates by helping them to sweep cash into dollars and access funding at low, if not negative rates.

  • There is not a sense of real urgency to change funding or cash investment fundamentally in response to persistent negative rates in the eurozone, Japan, Denmark and Switzerland.
  • However, with negative-yielding debt climbing back towards its 2019 record of $17 trillion in the wake of Covid-19 and almost $800 billion in euro corporate debt within 25 basis points of negative territory, perhaps corporate treasurers should become more aggressive in managing their balance sheets with an eye to negative rates.
  • On the asset side, Standard Chartered suggests, for example, diversifying further into positive yielding currencies with strong correlations to the reporting currency and low vols to optimize risk-adjusted returns (with or without the aid of FX hedges).
  • On the liability side, the bank suggests looking at collateralized EUR loans (using positive rate currency cash) matching more EUR debt to funded EUR assets, or using a floating rate swap to get around loan floors, for example (it may also help with Libor transition).
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Verifying Virtue: Who’s Checking on Those ESG Promises?

Assuring ESG numbers is coming, but for now internal audit is stepping lightly.

Members of NeuGroup’s Internal Auditors’ Peer Group (IAPG) agreed that their companies’ environmental, social and governance efforts (ESG) often felt like marketing campaigns. Internal audit (IA) has so far provided little assurance regarding the validity of reported ESG numbers, but that likely is about to change.

Assuring ESG numbers is coming, but for now internal audit is stepping lightly.

Members of NeuGroup’s Internal Auditors’ Peer Group (IAPG) agreed that their companies’ environmental, social and governance efforts (ESG) often felt like marketing campaigns. Internal audit (IA) has so far provided little assurance regarding the validity of reported ESG numbers, but that likely is about to change.

  • One member said his technology company’s investor relations team had for the first time reported out ESG numbers according to frameworks established by organizations including the Global Reporting Initiative, the Sustainability Accounting Standards Board, and the Institutional Shareholder Servicers group.
  • “As you can imagine, we didn’t score well on some, and we identified a number of areas where we need to improve our metrics and reporting,” he said, adding, “I see a lot of alignment with ESG and what we’re doing around enterprise risk management (ERM).”

IA’s role? Another member said that marketing had engaged an external auditor to provide assurance, and for now his team would let them “stick their necks out on that.” Nevertheless, he queried, “Am I missing something? Have other folks gotten more involved?”

  • The general feedback was that IA has yet to take a deep dive into ESG but that some members will soon test the waters, especially for important and measurable ESG metrics such as greenhouse gas emissions, and water use and management.
  • “We may take a look at that this year, and at least review the process of how those numbers are being reported,” he said, adding the ever-increasing importance of ESG reporting calls for some level of IA participation, if not for the whole report.

Missing data. Another member expressed concern about what’s not being reported. This, he said, is “the other side of the coin where we probably don’t look so good, but that hasn’t been included to provide the full picture.”

  • A fellow member said her team recently stepped in that direction and found missing greenhouse-emission data according to current standards and guidelines. She noted that it is not yet mandatory for companies to be at a “mature level” in terms of meeting those guidelines and standards, “But we don’t have good data now and we need to get there.”
  • Another member said his team is mapping out the ESG numbers his company has external assurance on, such as those related to the supply chains or conflict minerals. It is also differentiating more reliable numbers, such as factory-emitted gasses, from more judgmental ones such as employee generated community-service hours.
  • “And one I’m curious about that has come up in our audit plan discussions for 2021 is some of the [ESG-related] funds we’ve created,” he said, noting a $100 million diversity-initiative fund. “We haven’t done that type of audit yet, but have others?” he asked, receiving no responses.

Sustaining ESG measures. Should IA take on establishing criteria for ESG programs and how to measure them, it will also be held accountable for ensuring their sustainability, since their performance inevitably will be compared year over year. One member said her team is in discussions about how to do that operationally and is talking to investors to gauge what they look for.

  • “We’re treading lightly to make sure we don’t get into something and then it disappears in our next disclosure,” she said.
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Softening the Blow of Rising Insurance Rates With Differentiation

Risk managers at life sciences companies hear analysis, share pain, discuss options. 

Virtually no company is immune to the ongoing pain meted out by rising insurance premiums in the wake of the pandemic. But one way to soften the blow, when possible, is differentiating yourself from the pack.

  • That takeaway and others emerged this week at a NeuGroup meeting for life sciences treasurers featuring an update on property insurance and directors and officers (D&O) coverage by Brad Zechman, an account executive at Aon who also addressed the group in June. “I wish I was coming back under better circumstances,” he said.

Risk managers at life sciences companies hear analysis, share pain, discuss options. 

Virtually no company is immune to the ongoing pain meted out by rising insurance premiums in the wake of the pandemic. But one way to soften the blow, when possible, is differentiating yourself from the pack.

  • That takeaway and others emerged this week at a NeuGroup meeting for life sciences treasurers featuring an update on property insurance and directors and officers (D&O) coverage by Brad Zechman, an account executive at Aon who also addressed the group in June. “I wish I was coming back under better circumstances,” he said.
  • Members across the NeuGroup Network have been sharing details of the increases they’re paying for renewals this year and offering advice on coping with markets that show no signs of softening anytime soon.
  • The unfavorable conditions are motivating some corporates to consider options including the potential use of captives. They also underscore the need for alternative risk transfer solutions. As NeuGroup founder Joseph Neu wrote recently, “Traditional insurance is overripe for transformation and it’s a matter of when, not if.”

Shop early. One valuable lesson learned: Start the renewal process as soon as you can. “You can never start early enough,” one member said, adding that getting rate quotes has been taking longer under current market conditions. Another treasurer said, “You need to be engaged throughout the process; you can’t wait for the total tower to be built.”

Explaining the pain. As the chart above shows, companies faced average increases for property coverage of about 33% in the third quarter. “Many insurers are continuing to push rates higher toward what they believe are sustainable levels to address increased risk and natural catastrophe losses,” Aon’s presentation stated. Increases are higher for companies with quota-share programs as opposed to single carrier program structures.

Differentiation. One key to lower premium hikes, Mr. Zechman said, is “how you differentiate yourself from everybody else,” citing the higher rates paid for programs with higher levels of catastrophic exposure and reduced scrutiny for companies with lower CAT exposure or “low claim activity.”

  • Business and contingent business interruption exposure for companies with complex or outsourced supply chains is another differentiator because underwriters are scrutinizing those exposures.
  • That scrutiny means transparency is key and companies are advised to provide as much information on their vendors as possible. “Take it as far as you can,” Mr. Zechman said. “All the detail helps.”
  • One treasurer pushed back when an insurance company justified a rate increase based on a false assumption. “They try to grab onto anything to raise prices,” he said.
  •  Another emphasized the need to educate insurers that not all life sciences companies present the same level of risk. “Make sure they are very clear on differentiation and that safety is not being compromised,” he said.

Covid exclusions. Insurers are mandating Covid-19 exclusions to “clarify their intent to not cover losses from it and other pandemics,” according to Aon’s presentation. The “Covid environment has put additional pressure on premiums” for both property and D&O coverage, Aon notes, adding that 17 Covid-related securities class action lawsuits were filed through October 2020.

The D&O landscape. In addition to detailing D&O rate increases for life sciences companies (see above), Aon made these observations about the market, which it says “continues to firm” amid rising claim costs and frequency.

  • The London insurance market still faces capacity challenges. Some companies are being denied B&C coverage and going with side A only. Others, in the US and elsewhere, are going with side A only to cut costs.
  • Going with side A only, Mr. Zechman said, is a more straightforward and “easier conversation” because it’s taking exposure off the table.
  • But companies converting B&C coverage to A only are not seeing the bang for the buck they have in the past, he said. The discounts for side A only are not as significant as they once were in the US and are virtually nonexistent in London. Retentions are rising for most companies, particularly in high-risk industries.
  • The good optics for corporates engaged in developing vaccines and antibodies are not, by and large, helping to lower D&O costs. Life sciences companies “are still one of the most challenging industries for D&O insurance,” Mr. Zechman said.

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Europe in Flux: Business Decentralization, ESG and Brexit

Key takeaways from the European Treasury Peer Group 2020 H2 meeting sponsored by Standard Chartered.
 
By Joseph Neu

Agile businesses with centralized support functions. Covid-19 and the need for business pivots have, at some companies, sparked calls for the pendulum to swing back toward decentralized business authority to promote agility and swift decision-making.

Key takeaways from the European Treasury Peer Group 2020 H2 meeting sponsored by Standard Chartered.
 
By Joseph Neu

Agile businesses with centralized support functions. Covid-19 and the need for business pivots have, at some companies, sparked calls for the pendulum to swing back toward decentralized business authority to promote agility and swift decision-making.

  • Treasury in turn is asking how best to support decentralized business accountability with the efficiencies and controls of a centralized corporate support function. It’s a perennial challenge. But now there is empowering access to data, new cloud-based technology and digital platforms to transcend distributed business structures.
  • Treasurers should therefore be able to maintain the corporate perspective on risk, cost of funding and liquidity access at scale, to better support business decisions. Globally-connected technology will allow scale to be achieved across far-flung nodes of agile businesses that are likely to deploy similarly cloud-based digital tools.
    • These ensure that data flows to the center, while also parsing out the impact of decisions along the edges that can be mitigated independently by the centralized support functions.
    • And speaking of functions at the center, now is also an opportune time to rethink the nimbleness and distribution of corporate support functions and transcend legacy thinking about what’s treasury, what’s shared services, AP, credit and collections and look at processes that support the businesses end to end.

ESG derivatives to hedge ESG-linked finance. If ESG sustainability-linked finance is the new megatrend, with Europe ahead in the game, then it’s time to think about ESG derivatives, both to manage use of proceeds financing and sustainability- or performance-linked financing. Standard Chartered shared examples of:

  • FX forwards to hedge export pricing in Asia where the FX rate is discounted if targets in support of sustainable development goals are met.
  • Interest rate swaps where the credit spread is linked to the company’s performance against sustainability targets, measured by Sustainalytics.
  • Green cross-currency basis swaps where the payments of either party rise if they do not make good on green initiatives.

Britain has no way out. Almost four and a half years after the referendum, we are still talking about Brexit with just a bit better than a 50 percent chance of a deal in the near term. Perhaps there is no way out of the EU. Members report building up inventory and pulling out excess cash from UK header bank accounts in preparation for the worst, but Britain seems to have gotten lost on the way out and may just end up getting back on the train.

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What an Extended Libor Deadline May Mean for Corporates

Takeaways on a proposal backed by the Fed that would allow more legacy Libor contracts to mature.

Libor relief? Monday brought news that US regulators welcome a proposal by Libor’s administrator to offer an additional 18 months—until June 30, 2023—for legacy contracts to mature before Libor fully winds down. Reuters called the plan a “stay of execution.”

Takeaways on a proposal backed by the Fed that would allow more legacy Libor contracts to mature.

Libor relief? Monday brought news that US regulators welcome a proposal by Libor’s administrator to offer an additional 18 months—until June 30, 2023—for legacy contracts to mature before Libor fully winds down. Reuters called the plan a “stay of execution.”

What it means for corporates. We reached out to Amanda Breslin, managing director of treasury advisory at Chatham Financial, to get the significance of this for companies with debt or derivative exposure to Libor. Here, edited for space, are some of Chatham’s key takeaways and analysis.

  1. A win. The extension of Libor is a win for market participants, allowing a more orderly transition from Libor to SOFR and letting debt and associated derivatives transition more naturally as legacy contracts mature.
    1. But the reality is that corporates that are able to take advantage but decide to amend or refinance debt prior to the extended deadline would likely move to SOFR at that time regardless of the extension.
  2. Complexity. The extension introduces complexity as corporates are navigating a wider array of potential fallback outcomes over a longer period of time. Different market participants will likely adopt a more aggressive move to SOFR at different paces, with corporates being subject to the pace of each of their counterparties and contract partners.
    1. This means that there’s an extended period where a corporate might have legacy IBOR instruments, new SOFR instruments, and potentially even instruments where they’ve already negotiated some type of fallback provision or index reference change that may not be an exact match for either (e.g., a SOFR-based rate that compounds differently, or some non-standard spread adjustment, or a specific date for an index change to take effect).
  3. Operational preparation. Market participants still need to be prepared to support accounting, system valuations and payment calculations for all Libor- and SOFR-based instruments, and may now have a wider range of operational support required over a longer time frame.
    1. If the preliminary time frames hold, this only buys time out to 6/30/23.  While certainly useful and definitely a big win, there are still many Libor-based instruments that do not mature until well after that, particularly on the debt side. 
    2. Clients still need to plan how they’d like their debt and derivatives documentation to align, and also to determine whether staying with Libor is a desirable strategy or just a convenient one. 
    3. Since many corporates now have debt with customized Libor fallback provisions, it may not be beneficial to leave the associated hedges unchanged.  In essence, this creates one more possible path to align debt and derivatives, but it’s also one more avenue to misalign on Libor fallback provisions. 

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Corporates to Banks: Untangle Processes, Offer Simple Solutions

NeuGroup members want simple but powerful improvements to banking services.

In a recent meeting of treasurers for high-growth companies, sponsored by Bank of the West BNP Paribas, representatives from the bank opened a session with a question: how can banks improve treasurers’ experience? While not directing their response to Bank of the West specifically but rather to banks generally, the answer, overwhelmingly, was clear: simplify the day-to-day experience.

NeuGroup members want simple but powerful improvements to banking services.

In a recent meeting of treasurers for high-growth companies, sponsored by Bank of the West BNP Paribas, representatives from the bank opened a session with a question: how can banks improve treasurers’ experience? While not directing their response to Bank of the West specifically but rather to banks generally, the answer, overwhelmingly, was clear: simplify the day-to-day experience.

  • NeuGroup members outlined how banks can streamline basic authorization and documentation processes that corporates find overly clunky or time-consuming, which could reshape their overall experience.

Back to Basics. As banks continue to announce new initiatives with fintechs, some members expressed frustration that their highest priorities weren’t being addressed.

  • One member suggested banks first work with corporates to figure out their priorities. “A lot of the announcements really don’t apply to a good number of us,” he said. “I think that’s one thing we struggle with, that there’s a lot of interesting stuff, but we can’t use it.”
  • “Help us out with the nuts and bolts that all of us deal with here,” one member said. “Just get back to basics, that can go a long way.”

Portal to a new future. Though members find the goal of fully electronic bank account management (eBAM) unrealistic, one member proposed small but meaningful upgrades to banks’ online portals.

  • “I have not seen a bank actually provide who they have as the account signers on the banking portal,” the member said. “Even something like that seems like a relatively easy thing to implement, but every one of us could benefit.”
    • One member said providing that information would put the onus back on the corporate to update outdated information and provide the supporting legal documents.
  • Another member shared similar issues getting in touch with banks on issues he thought could be solved by an improved online portal. “I can’t tell you the number of emails I’ve submitted over the last 10 years and had to chase down banks to get the simplest thing out there, like confirming a balance,” he said.

Documentation. A member described KYC documentation as a “horribly problematic” issue with banks and said an improved process “would be the biggest value add from a corporate treasury perspective.”

  • “Don’t ever send a PDF that’s not editable and fillable,” one member said. “If I have to hand-write validation on a PDF, it’s ridiculous in this day and age. If every PDF is at least editable, all I have to do is print and sign it.”
  • In another recent NeuGroup meeting, members also identified signatories as an area with “a lot of work left to do.”
    • One member described “a very positive example” of a bank anticipating corporates’ needs in this area. Though the bank required wet signatures, it sent the member a pre-printed shipping label to return the document with ease.
    • Another member has pivoted to digital signatures. “I don’t see that there’s a need to revert back and move away from e-signatures (after the pandemic),” the member said. “Our counterparties do what they need to ensure that they’re verifying and validating but I couldn’t imagine why we’d resort back to manual, printed documents.”
    • But for a member who already largely uses e-signatures, there are still efficiency issues with the compatibility of different systems fitting into the company’s existing security protocols. “Most of our banking partners adopted e-signatures, so that made it a lot easier, but we use single-sign on,” he said. “So if there’s an application or a new system, that’s going to be the first hurdle: why aren’t we using single sign-on or multi-factor authentication?”

Authorizations. Members also found banks’ authorizations cumbersome, having to get approval for small tasks which build up, “consuming an inordinate amount of time for banks, the corporates and the auditors.”

  • One member, a treasurer attempting to complete an audit process, found many hurdles prolonging the process. The member’s team reached out to a bank via email and was told the treasury team wasn’t authorized to “sign off on our own audits, we would have to go to the CFO and the board.”
    • The member continued: “Banks need to educate their customers and proactively reach out and say ‘Here is your account base with us, this is what your auditors can do for confirmation, here is a template letter and here is a workflow on how to submit it.’”
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Unearthing the Risks—from Printers to Stress—of Working from Home

Internal auditors discuss WFH challenges including data security and the mental health of employees.

Internal auditors are trying to keep on top of myriad risks brought about by millions of employees at thousands of companies working from home as a result of the pandemic. At a recent NeuGroup meeting, two of the risks discussed demonstrated the wide spectrum of issues companies face, ranging from the somewhat mundane (printers) to the very personal (mental health).

Internal auditors discuss WFH challenges including data security and the mental health of employees.

Internal auditors are trying to keep on top of myriad risks brought about by millions of employees at thousands of companies working from home as a result of the pandemic. At a recent NeuGroup meeting, two of the risks discussed demonstrated the wide spectrum of issues companies face, ranging from the somewhat mundane (printers) to the very personal (mental health).

Risky printers. One member said her company is updating its policy to prohibit certain intellectual property and other highly proprietary documents to be printed at home, in an unsecure environment where such information could fall into the wrong hands. She noted that IT has tools to monitor when employees try to print such documents outside the office.

  • “You can ask for exceptions, but they have to be approved,” she said. “So I think most people just aren’t printing.”
  • “Good point,” exclaimed one peer, recalling that the spouse of a work colleague in the Bay Area works for a competing technology firm, “And they’re probably both printing stuff off at home.”

Break out the shredders. A member said his company had recently done an insider-threat audit that touched on the printer risk; and a confidentiality-focused audit a year ago found important documents left on printers in top executives’ offices. It highlighted the need to train staff to use shredders and other prevention controls that secure access to data—important for remote printing as well.

  • He said office settings tend to be highly secure in terms of access, but remote work continuing for an extended period would almost certainly increase such risks.
  • Another member noted the savings companies accrue from employees working remotely could fund an annual stipend enabling remote workers to purchase a shredder or otherwise secure their home offices.

Psychological and physical stress. The shift to remote work has resulted in many employees spending long hours in ergonomically problematic work environments. From an audit perspective, physical safety tends to be covered by crisis-management audits, one member said, noting that the new piece is the mental impact.

  • “We’re productive [in remote settings], but we’re pushing ourselves to the point where it may not be sustainable long term and we will start to see effects,” she said. “I haven’t started the audit yet, but I’ve heard it’s an elevated risk that management is anticipating.”
  • The member said her company has made a nutritionist and physical trainer available to all employees, and sends emails two or three time a week encouraging employees to live healthier.
    • “I’ve heard rumors of an on-payroll psychologist, but I haven’t seen that rolled out yet,” she said.
  • Injuries sustained from working at home are now considered legally the same as those in the office, the member said, so it’s critical “to ensure employees are working the right hours, taking breaks, and have the right equipment and seating arrangement.”
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Talking Shop: Whom Do You Pay Using Your Offshore Renminbi Account?

Member question: “Has anyone opened a CNH (offshore renminbi) account? And if so, what do you use it for? Do you: a) pay onshore China vendors, b) offshore vendors?”

Member question: “Has anyone opened a CNH (offshore renminbi) account? And if so, what do you use it for? Do you: a) pay onshore China vendors, b) offshore vendors?”

Peer answer: “Yes, we have a CNH account in Singapore. We bill to our local distribution entities in local currency and we use the account for intercompany receivables before converting to USD. We make FX settlement payments from the account.”

For more insights on trends in Asia from NeuGroup Members, read founder Joseph Neu’s key takeaways from the 2020 H2 Asia CFOs’ Peer Group meeting sponsored by Standard Chartered.

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China’s Digitalization, Quick Covid Recovery and Tension with the US

Key takeaways from the 2020 H2 Asia CFOs’ Peer Group meeting sponsored by Standard Chartered.

By Joseph Neu

2019 as the 2021 baseline. China has been the economy to bounce back soonest from Covid-19 and is up substantially in H2.

Key takeaways from the 2020 H2 Asia CFOs’ Peer Group meeting sponsored by Standard Chartered.

By Joseph Neu

2019 as the 2021 baseline. China has been the economy to bounce back soonest from Covid-19 and is up substantially in H2.

  • Standard Chartered is forecasting 2020 GDP growth of +2.1% for China. Meanwhile, many of our member CFOs for greater China are hopeful that they will get back to flat for the year since some have had stellar Q3s and good Q4 outlooks, which makes 2019 essentially the planning baseline for 2021 growth.
  • With vaccines on the near horizon, how many other businesses will plan for growth using the 2019 baseline? I hope it will be most all of them, so the rest of the world can catch up to China in terms of economic recovery from Covid-19. But is this realistic? This is the key question for CFOs everywhere.

US-China relations driven by fundamentals. Standard Chartered’s perspective suggests that the economic growth of China and the trendline to overtake the US as the largest global economy is driving US-China tensions.

  • With China on pace to surpass the US by 2030 to 2035, no change in the Oval Office is likely to reduce tensions dramatically. What will change is the degree to which the tensions are managed on a multilateral vs. unilateral or bilateral basis.

How now for China’s digitalization advantage? CFOs of large Western corporates in China have been leading in adopting digital tools including RPA, algos and AI to bring digitalization to finance functions. This follows the more advanced digitalization trends that China has seen in consumer payment and retail models.

  • What then should we make of member frustration with the advancement in the digitalization of planning forecasting? Bots and AI have done a great job with processing, reporting and displaying data as well as overlaying controls effectively and efficiently on financial and business data.
  • Progress seems to be plateauing in predicting and forecasting. As a result, several members reported pausing projects to improve planning and forecasting with new digital technology and going back to the traditional budget and planning methods with humans. Watch this space.
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Rightsizing and Reshaping: What Post-Covid Corporates May Look Like

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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The ESG Halo Effect, Insurance Pain and Financing Lessons Learned

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

By Joseph Neu

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

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

By Joseph Neu

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

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

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

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

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

  • Akin to a morbidity and mortality conference in the medical profession, life sciences treasurers benefit from identifying adverse outcomes from financings to exchange with peers, yet they are even more inclined to share what went well to secure needed funding.
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Monetization Magic: How Using a Hybrid Solved an Asset Riddle

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Counterparty Transparency: ‘Looking Through’ Money Market Funds

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  • Companies that raised liquidity during Covid may decide they have excess cash and buy back shares if and when the economy returns to normal.
  • Companies that added gross leverage may decide it’s more prudent to pay down debt than buy back shares. 
  • Leverage is up across the investment-grade space, so it could take a year for companies to get back down to pre-Covid levels before they look to re-engage in share buybacks.
  • Companies may choose to live with higher leverage so they can return cash to shareholders.
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Replacing Libor: No Criticism for Banks That Say ‘No Thanks’ to SOFR

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

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

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

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

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

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

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

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

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

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

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

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

  • “So this helps ready us for the next phase of the transition, where banks stop booking Libor deals and start booking SOFR or Ameribor deals,” Mr. Whitman said.
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Talking Shop: Applying the End-User Exception From Dodd-Frank’s Swap Clearing Mandate

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  • “Pre-Covid, our app had been about 40% of our [customer payments]; now we have about 50%,” he said. “I’m a true believer, and it may take a while, but we are going to go from that 50% to an 80% mark in the next few years.”
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Talking Shop: Making Interactive Dashboards With Power BI and SQL

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

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

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

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

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

By Joseph Neu

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

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

By Joseph Neu

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

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

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

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

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

  • Needed are better standards and consensus on frameworks and metrics for social impact investments. Then, corporate treasuries will need to incorporate them into policies and procedures governing cash investment.
  • It will be interesting to see what, if any, ESG metrics rise to the level of financial benchmarks after policy and procedures projects—that many members are launching or planning to launch next year—are completed.
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Taking a Hard Look at Structure, Resources and Where to Rationalize

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  • The deal market is building, he added, “so much so that the election might not matter.”
  • Despite the M&A dialogue, many companies “haven’t pulled the trigger” yet, awaiting clarity around Covid, Mr. Stuart said.
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Talking Shop: Should You Bank Where Your Customers Bank?

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

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

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

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

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

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

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

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

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The Benefits for Tech of Having More Than One Headquarters

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

By Joseph Neu

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

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

By Joseph Neu

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

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

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

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

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

  • While a Biden presidency may not shift policy that’s driving US-China decoupling, it is anticipated to slow its pace, allowing for a smoother transition, which would be good news for tech capital budgets and cash flow forecasts exiting Covid.
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Data-Driven Decisions Aided by Dashboards and Scorecards

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

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

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

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

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

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

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

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

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

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

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

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

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

  • “It surfaces issues for discussion and everyone knows where they stand.  So when we are adding or, unfortunately, subtracting assets, it’s typically not a surprise because they’ve seen some consistency of feedback.”
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A Technology Tool to Help Corporate Bond Issuers

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

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

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

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

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

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

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

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

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

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

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

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Policies Resembling Guardrails That Withstand Trigger Events

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

By Joseph Neu

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

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

By Joseph Neu

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

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

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

  • Member sharing during the projects and priorities discussion strongly suggests that two years from now, Excel will be replaced as the most important cash forecasting tool by business intelligence and other analytics applications alongside specialty forecasting modules that automatically pull data from the ERP and bank systems.
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No More Offices? Corporates Debate Making Work from Home Permanent

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  • Another recommended that members getting their feet wet with derivatives use so-called completion account managers, who in some cases coordinate the steps necessary to implement a pension de-risking process.
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Talking Shop: How to Respond to a New Rule on ESG Funds in 401(k) Plans?

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

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

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

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

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

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

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

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

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

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

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

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