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SOFR Passes COVID-19 Stress Test, Bolstered by Stability of Repo Market

The volume of repo transactions underlying the calculation of SOFR has remained strong as the coronavirus disrupted other markets.

US regulators’ recommended Libor replacement has performed strongly through the volatility roller coaster powered by the coronavirus. In fact, the overnight repurchase agreement (repo) market used to calculate SOFR has increased in daily volume to more than $1.3 trillion.

  • “With SOFR, you have good reason to be confident that it can always be calculated, and the rate you’re paying reflects actual transactions,” David Bowman, senior associate director at the Federal Reserve’s Board of Governors, told NeuGroup members at a recent virtual meeting. “Every market is challenged now, but the only one that really seems to be operating near standard capacity is the overnight treasury repo market.”

The volume of repo transactions underlying the calculation of SOFR has remained strong as the coronavirus disrupted other markets.

US regulators’ recommended Libor replacement has performed strongly through the volatility roller coaster powered by the coronavirus. In fact, the overnight repurchase agreement (repo) market used to calculate SOFR has increased in daily volume to more than $1.3 trillion.

  • “With SOFR, you have good reason to be confident that it can always be calculated, and the rate you’re paying reflects actual transactions,” David Bowman, senior associate director at the Federal Reserve’s Board of Governors, told NeuGroup members at a recent virtual meeting. “Every market is challenged now, but the only one that really seems to be operating near standard capacity is the overnight treasury repo market.”

Libor extension unlikely. The futures exchanges’ move to SOFR discounting in October, anticipated to ramp up SOFR hedging, and other significant developments this year may be delayed—but only briefly.

  • US regulators have little choice but to move forward with transitioning away from Libor, Mr. Bowman said, given banks’ unwillingness to submit their costs for wholesale, unsecured funding past 2021, when their agreement to continue submitting to Libor ends.
  • New York State legislation designed to facilitate the transition from Libor has recently stalled as coronavirus took priority; but earlier “discussions were positive” and efforts should resume when the crisis calms, Mr. Bowman said. The bill would impact a wide range of corporate transactions, such as purchase agreements where the late payment fee is based on Libor, that typically lack language enabling the fallback to an alternative rate.

Corporate concerns linger. Mr. Bowman described efforts by the International Swaps and Derivatives Association and the Alternative Rates Reference Committee (ARRC) to develop SOFR contractual language and best practices, respectively, for derivative and cash transactions, to facilitate the transition. Corporates, however, are concerned that a forward-looking term SOFR has yet to emerge, and payments must be calculated in arrears.

  • “We would want to see a full term structure, so we can base transactions off one-month and three-month SOFR,” said the assistant treasurer of a major pharmaceutical company, noting few corporates have issued SOFR-priced debt so far.
  • Mr. Bowman said the ARRC is “committed to doing everything it can” to ensure the production of a forward-looking SOFR term rate, and it anticipates borrowers having a choice of solutions.
  • He encouraged corporates to experiment with using SOFR calculated in arrears, noting that calculation needn’t occur shortly after the period ends but could be done five or 10 days before, giving more time to plan. “Don’t wait for a term rate—find out where you can use SOFR now,” Mr. Bowman added.

Calling all corporates. Mr. Bowman invited corporate finance executives to participate in his Friday afternoon office hours to discuss SOFR issues and to join ARRC committees and respond to its consultations. “Having you all help to shape the way this goes forward is vitally important,” he said.

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Using Bloomberg for “Nuisance” Trades

Avoiding the time-intensive process of requesting trades in a centralized structure, local cash managers speed the process with online access to Bloomberg.

During a recent NeuGroup virtual meeting of FX managers, one member said he has started to use Bloomberg for local affiliates’ “nuisance trades.” These are foreign currency-denominated accounts payable under a certain USD-equivalent threshold.

Avoiding the time-intensive process of requesting trades in a centralized structure, local cash managers speed the process with online access to Bloomberg.

During a recent NeuGroup virtual meeting of FX managers, one member said he has started to use Bloomberg for local affiliates’ “nuisance trades.” These are foreign currency-denominated accounts payable under a certain USD-equivalent threshold.

  • Local freedom. The member noted his company’s corporate treasury manages FX worldwide, so they were happy to find that local cash managers are able to load their trades by accessing Bloomberg online (which doesn’t require Bloomberg terminal access) for the centralized team in the US to execute.
  • Straight through. This process has eliminated an inefficient trade-request process using email across various time zones. The team’s normal e-platform for FX trading is not the best solution for this because many local banks don’t have the technology to connect to it. But they are all connected to Bloomberg. Affiliates only need a login and an internet connection to submit trade requests.
  • Multicurrency. Bloomberg also can execute onshore trades and NDFs in currencies the other platform might not support, so the FX team is able to trade INR, CNY, MYR, THB, KRW, and BRL, all onshore.
  • A small catch. There is a fee for access and authority to upload trades to Bloomberg. But for this company, it is well worth the cost to efficiently reduce the time required for this workflow.
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Supply Chain Finance Not Immune from Pandemic Pain Felt by Banks

Higher funding costs for banks amid COVID-19 mean wider spreads in SCF market. An assistant treasurer at a major consumer goods company learned from supply-chain-finance (SCF) vendors that banks financing SCF assets have asked for wider spreads to compensate for their own higher funding costs, at least temporarily. The banks had agreed to a fixed spread that was still attractive in early March but, in the midst of the coronavirus economic meltdown, is much less so today. “It isn’t as attractive an asset at this moment, but long term it’s a terrific asset for the banks,” the member said at a recent NeuGroup virtual meeting. Because the banks see it as a long-term asset, they’re unlikely to “pull the rug out,” he said.

  • Another member noted that banks are struggling to syndicate risk from factoring programs as investors hoard cash, and they’re scrambling to find room on their balance sheets to keep their commitments.

Higher funding costs for banks amid COVID-19 mean wider spreads in SCF market.
 
An assistant treasurer at a major consumer goods company learned from supply-chain-finance (SCF) vendors that banks financing SCF assets have asked for wider spreads to compensate for their own higher funding costs, at least temporarily. The banks had agreed to a fixed spread that was still attractive in early March but, in the midst of the coronavirus economic meltdown, is much less so today.

  • “It isn’t as attractive an asset at this moment, but long term it’s a terrific asset for the banks,” the member said at a recent NeuGroup virtual meeting. Because the banks see it as a long-term asset, they’re unlikely to “pull the rug out,” he said.
  • Another member noted that banks are struggling to syndicate risk from factoring programs as investors hoard cash, and they’re scrambling to find room on their balance sheets to keep their commitments.

Beyond COVID. The consumer goods company is a big proponent of SCF and uses three solution providers. It turned to fintech Orbian rather than a major bank more than a decade ago, partly because it offered the ability to engage a wide group of relationship banks without having to set up multiple SCF programs.

  • The company was able to reward the third- and fourth-tier banks in its revolving credit facility by tapping them to be liquidity providers in the program.
  • Not only does that diversify liquidity providers, but it gives “ancillary business to these banks that, quite frankly, we have a hard time providing business to,” the AT said.
  • The other AT noted factoring programs can be used similarly. 

Beyond Orbian. A few years ago, the consumer-goods company’s CFO tasked the finance function with increasing days payable outstanding (DPO) and working capital. The first step, extending terms, required reworking contracts with thousands of vendors, before seeking to persuade them to use SCF.

  • To roll out an SCF program to a wider population of suppliers, the company signed on fintech Taulia, the AT said, partly because its innovative SCF onboarding procedure more closely resembles downloading an iPhone app than competitors’ documentation-heavy approach.
  • Taulia also offers dynamic discounting, typically aimed at smaller vendors with more urgent cash needs.
  • In addition, Taulia offers an e-invoicing portal to facilitate vendors’ invoice submissions that can be used by vendors that do not take part in SCF or dynamic discounting. 

Big strides. With the US, Canada and Western Europe covered in terms of SCF, the company sought a global bank last year to provide an SCF option to suppliers in Asia and Latin America. At this point, the company has made “noticeable strides in DPO,” jumping from the fourth quartile to the second quartile among corporate peers, the AT said.

  • Segmenting suppliers by size, sophistication, geography and other relevant factors is key. Larger and more sophisticated vendors typically opt for SCF, in which discounts resemble the investment-grade company’s revolving-credit rate, but smaller companies may accept dynamic discounts as high as 14%, “and I’ll do that all day long,” the AT said.
  • Speeding up invoice approval is also necessary for a successful SCF program, since slow approvals reduce benefits for all the parties. The company standardized invoices, and its policy is to no longer accept invoices by mail or even PDF.

Suppliers unable to submit electronic-data-interchange (EDI) invoices must send PDFs to Taulia, which converts them to EDI and processes them straight through to the company ERP. Both Taulia and Orbian plug and play into SAP.

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Closing a Quarter for SOX Can be Difficult in New, Remote World

An internal auditor describes what his company has done to successfully close a quarter when some physical tasks can’t be done.

Part of Sarbanes-Oxley, the internal controls act released in 2002, requires a corporate’s chief executive and financial officers to certify financial and other information contained in the issuer’s quarterly and annual reports. But what happens in a crisis? What if some of that info requires someone in place to record inventory or in-person meetings when employee movement is heavily restricted during the current pandemic?

An internal auditor describes what his company has done to successfully close a quarter when some physical tasks can’t be done.

Part of Sarbanes-Oxley, the internal controls act released in 2002, requires a corporate’s chief executive and financial officers to certify financial and other information contained in the issuer’s quarterly and annual reports. But what happens in a crisis? What if some of that info requires someone in place to record inventory or in-person meetings when employee movement is heavily restricted during the current pandemic?

Practice. One answer is the punchline to the joke, “How do you get to Carnegie Hall?” Practice, practice, practice. That’s essentially what one member of NeuGroup’s Internal Audit Peer Group has done over the past few years. The company developed a robust business continuity plan where SOX was a particular focus and has used it a few times over the years for natural disasters and has audited the plan several times. So with COVID-19, “We’re in pretty good shape,” the member said.

Take a photo. Despite the company being comfortable with remote working, there still are challenges to closing the quarter amid the global pandemic. This includes practices like obtaining “wet ink” signatures, getting people in place for inventory observation or cut-off testing for shipping.

  • In this case, the auditor said, the company “did what it could when it came to inventory.” Local managers took photos of inventory before they were told to leave the premises. And managers were able to obtain wet signatures while keeping in mind social distancing rules. Where this couldn’t be done, e-signatures like those provided by DocuSign were allowed.
    • In one of NeuGroup’s treasury peer group zoom meetings recently, one practitioner in Europe said his relationship banks were permitting DocuSign functionality for 90 days.
  • Preparation. The member’s company listed all the controls it thought it wouldn’t be able to use when people couldn’t access company buildings or managers had little access to each other.
    • “We identified the controls and have been able to postpone some reporting,” he said. “It’s going to be an interesting quarter, but I think we’ll be able to close with no problems.”
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Lock It Up: What You Need to Know About Pre-Issuance Hedging

The pros and cons of treasury locks and forward-starting swaps as bond issuance jumps.

 The crush of investment-grade issuers rushing to sell bonds as COVID-19 wreaks economic havoc has made pre-issuance hedging a relatively hot topic for many treasury teams.

  • Chatham Financial, sponsor of NeuGroup’s Virtual FX Summit, helped members get a firmer grip on the various ways to manage interest rate risk—and the associated accounting implications—during the summit and a subsequent Zoom meeting.

Here are some of the key takeaways:

The pros and cons of treasury locks and forward-starting swaps as bond issuance jumps.

The crush of investment-grade issuers rushing to sell bonds as COVID-19 wreaks economic havoc has made pre-issuance hedging a relatively hot topic for many treasury teams.

  • Chatham Financial, sponsor of NeuGroup’s Virtual FX Summit, helped members get a firmer grip on the various ways to manage interest rate risk—and the associated accounting implications—during the summit and a subsequent Zoom meeting.

Here are some of the key takeaways:

  • Treasury locks are quite efficient as a short-term hedge (even intra-day), but can be less efficient when debt issuance is further out than three months, so it can be difficult to apply hedge accounting.
    • They may be easier to explain to senior management than a forward-starting swap, but the market is also not as liquid nor as transparent. 
    • Another con: You’ll pay a “roll” premium if the tenor goes beyond the next treasury auction.
  • Forward-starting swaps can be efficient as both a short-term and long-term hedge, but are predominantly used for longer-term refinance risk.
    • While more liquid, forward-starting swaps also add an element of “basis risk” in the event that swap spreads compress over US treasuries, which in turn can add a layer of complexity when seeking senior management approval.
  • Have a plan. Chatham Financial stressed that regardless of which option a company chooses, it’s important to have a plan in place including internal approvals that would permit the treasury team to execute hedges quickly if markets moved in a favorable direction. This sort of “readiness book” also helps prepare teams to strike while the capital markets are in their favor.
  • Check out Chatham’s table below for more comparisons between treasury locks, forward-starting swaps and swaptions. And to dive deeper into the economic and accounting considerations, contact the experts.
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Go with the Flow: How Treasury Is Adapting to Churning Markets

Flexibility and resourcefulness are critical as treasury teams cope with fallout from COVID-19. Assistant treasurers at a virtual NeuGroup meeting last week exchanged numerous examples of resourcefulness and flexibility in coping with the effects of the pandemic on FX trading, capital markets and other areas of responsibility. Here are some top takeaways: Time for algos. One AT said spot trading in the FX market became “ridiculous” as liquidity vanished and spreads widened, making it difficult to close out small spot trades. That means the FX team is “one of the most impacted right now,” she said.

  • As a result, she said the team has opened its toolbox and is using algos “ridiculously more” than usual.
  • Algos search out and aggregate snippets of liquidity across the market over time, and sometimes are used to mask the market participant’s intentions.

Flexibility and resourcefulness are critical as treasury teams cope with fallout from COVID-19.

Assistant treasurers at a virtual NeuGroup meeting last week exchanged numerous examples of resourcefulness and flexibility in coping with the effects of the pandemic on FX trading, capital markets and other areas of responsibility. Here are some top takeaways:

Time for algos. One AT saidspot trading in the FXmarket became “ridiculous” as liquidity vanished and spreads widened, making it difficult to close out small spot trades. That means the FX team is “one of the most impacted right now,” she said.

  • As a result, she said the team has opened its toolbox and is using algos “ridiculously more” than usual.
  • Algos search out and aggregate snippets of liquidity across the market over time, and sometimes are used to mask the market participant’s intentions.

Meeting the market. A rebound in the credit markets and healthy liquidity in investment grade bonds allowed many corporates to sell debt last week—but not under typical circumstances and therefore requiring flexibility.

  • One member described deciding tenor and size for a large, multi-tranche deal by paying more attention than usual to meeting market demand, noting, “You can’t wait for the perfect day in this marketplace.”
  • “We had good demand and were oversubscribed across all maturities, but we let the market dictate our maturities when normally we would driven that ourselves,” he said.
  • The AT of a major consumer-goods company, which had issued late the week before, said there was plenty of liquidity but very few of the usual large investors showed up. “We actually had to ask our banking partners who some of them were,” he said, adding that it looked then like investors “were getting ready to park their cash and go home for awhile.”
  • The investors that did step up made a good bet. Another member said he had heard that the bonds issued by the first AT had tightened 66 basis points since issuance.

Documents still must be signed. Even when almost everyone is working remotely, bank documents and checks still need signatures. Two members said their teams have set up schedules to limit staff entering the building to perform that function. Another offered that a scanned phone version of the document can speed up the process, leaving signatures on the actual documents for later on.

New approach to earnings calls? One AT member asked peers about handling the Q1 earnings process, given most employees now work from home and her company’s earnings are scheduled for release in late April.

  • “We’ve had some internal discussions about whether to do the process like we normally do it, with a regular call, or do something different,” she said.

Another member whose company’s earnings are scheduled for early May said his team had tentatively mapped out a virtual call as part of its business continuity plan. Recent discussions have focused on setting a schedule to prepare for the event and planning mock calls.

  • “We’ve kicked off the effort, but it’s probably 50/50 that will actually do it [in early May] at this point,” he said, adding, “We’re testing feasibility over the next two to three weeks.”
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Listen Up: A Banker’s Reality Check for Corporates Tapping Credit Lines

Societe Generale offers insights on bank pricing and priorities as companies seek cash safety. Companies determined to bolster their balance sheets by tapping revolvers or looking for loans, take heed: Bankers will view some drawdowns and requests much more favorably than others, and it pays to understand the bank’s perspective.

  • That insight and others emerged during comments by Guido van Hauwermeiren, Societe Generale’s head of coverage and investment banking in the Americas. He spoke this week during NeuGroup’s Assistant Treasurers’ Group of Thirty virtual meeting, sponsored by SocGen.
  • The meeting took place against the backdrop of some 130 companies drawing down $124 billion in credit lines since March 1, according to the Financial Times.

Societe Generale offers insights on bank pricing and priorities as companies seek cash safety.

Companies determined to bolster their balance sheets by tapping revolvers or looking for loans, take heed: Bankers will view some drawdowns and requests much more favorably than others, and it pays to understand the bank’s perspective.

  • That insight and others emerged during comments by Guido van Hauwermeiren, Societe Generale’s head of coverage and investment banking in the Americas. He spoke this week during NeuGroup’s Assistant Treasurers’ Group of Thirty virtual meeting, sponsored by SocGen.
  • The meeting took place against the backdrop of some 130 companies drawing down $124 billion in credit lines since March 1, according to the Financial Times.

Credit committee stress. Pent-up demand for new loans is stressing out bank credit committees, and that’s forcing bankers to pick who goes to the front of the line. As a result, Mr. van Hauwermeiren said, blue-chip companies that have funded long-term projects with short-term commercial paper (CP) may find banks unwilling to replace that inexpensive funding with a similarly priced loan.

  • “I’m not going to put requests from companies that have been financing project finance with CP on the top of the pile, or even in the pile,” he said.

Cash flow vs. buybacks. Client history will play a role in determining bank priorities. Companies with strong bank relationships that face disrupted cash flows or other types of financial duress can rely on the bank to do whatever possible. Those looking to fund share buybacks, less so.

  • “We’re saying there’s not enough money to go around, so you can’t do that,” Mr. van Hauwermeiren said.

Repairing and repricing. Revolving credit facilities (RCFs) have been the “lifeblood” for many companies, “but that system needs to be repaired, and I’m sure it will get repriced,” the SocGen banker said.

  •  Facilities priced between 30 and 45 basis points over LIBOR will likely see spreads widen to the 125 bps over Libor range, Mr. van Hauwermeiren said.

When to draw? An AT30 member asked if it was better to draw down a facility now, even if the company doesn’t need the liquidity, since it will face higher pricing anyway. Noting the new rules have yet to be written, Mr. van Hauwermeiren said he doesn’t foresee a stigma on corporates drawing down facilities, if it’s done the right way.

  • For example, he said, a highly rated company could request a new facility at the higher rate on top of its existing, inexpensively priced backstop, and promise to draw down only the new one if need arises. “That’s a sensible, relationship-type of play, and those borrowers will be viewed fondly,” he said.
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DIY: Forming Mentoring Circles That Lead to Sponsorship

More takeaways from the Women in NeuGroup meeting featuring three senior executives at one company.

The Women in NeuGroup (WiNG) virtual meeting held last week highlighted the use of mentoring circles as a building block for sponsorship—where someone senior to you in the company advocates for your advancement. Our first story described how the process works at one major American multinational, as described by three senior executives. Below are more takeaways from the meeting as distilled by Anne Friberg, senior director of peer groups at NeuGroup.

  • Yes, you can build your own. It doesn’t really require corporate sponsorship to build mentoring circles like the one featured at the WiNG event. You can start your own with women (and men) whom you know and just go for it. The one stumbling block may be to get budget approval for things like traveling along with mentors to other company facilities, for example, but most of the suggested actions don’t incur much cost. (Of course, almost no one is traveling now, but that will change some day.)
  • Don’t be afraid to ask someone to be a mentor (or even sponsor). The worst that can happen is they say no. The key is not to let that dent your confidence, and the silver lining is that it also opens up for a conversation of what it would take for them to consider mentoring or sponsoring you.

More takeaways from the Women in NeuGroup meeting featuring three senior executives at one company.

The Women in NeuGroup (WiNG) virtual meeting held last week highlighted the use of mentoring circles as a building block for sponsorship—where someone senior to you in the company advocates for your advancement. Our first story described how the process works at one major American multinational, as described by three senior executives. Below are more takeaways from the meeting as distilled by Anne Friberg, senior director of peer groups at NeuGroup.

  • Yes, you can build your own. It doesn’t really require corporate sponsorship to build mentoring circles like the one featured at the WiNG event. You can start your own with women (and men) whom you know and just go for it. The one stumbling block may be to get budget approval for things like traveling along with mentors to other company facilities, for example, but most of the suggested actions don’t incur much cost. (Of course, almost no one is traveling now, but that will change some day.)
  • Don’t be afraid to ask someone to be a mentor (or even sponsor). The worst that can happen is they say no. The key is not to let that dent your confidence, and the silver lining is that it also opens up for a conversation of what it would take for them to consider mentoring or sponsoring you.
  • It can get awkward with close associates. What if you started out at the same level with a long-time colleague, but now you’re in a more senior role and you’re mentoring that person? And what if you really feel you cannot in good conscience sponsor this person for a promotion or joining your team? Remember the key tenets of productive mentor and sponsor relationships: They require trust, honesty, communication and commitment. When you’ve known someone for a long time and may be friends outside work, this is hard.  But—gulp—take a deep breath and be honest about why you cannot sponsor someone, and be generous about sharing what you believe the areas of improvement required for your sponsor support are.
  • Prepare yourself for being sponsored. Not everyone is as aware as they would like about their own skill set or what’s required for being “discovered” and sponsored. If that sounds like you, it may pay to take an assessment from StrengthsFinder or similar services. That way, you can be more confident in putting yourself forward for something that suits your strengths, or seek out opportunities where you may need to dig deeper and develop an area that’s less of a strong suit for you to balance out your skill set. And mind you, a sponsor who’s gotten to know you may well see strengths and capabilities more clearly than you do.
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Beyond Revolvers: What NeuGroup Members are Talking About Now

More of Joseph Neu’s takeaways from virtual meetings dominated by talk of cash and liquidity. The waterfall of insights cascading from NeuGroup’s virtual meetings this month requires expert judgment on wringing out and distilling what matters most. One expert is NeuGroup founder Joseph Neu, who on Tuesday offered his take on tapping credit lines. Here are some of his other takeaways: Converts as an option. Industrial companies said they are looking at the convertible debt market as a financing option. Typically, these are the domain of tech and life sciences firms, so investors are said to be looking for diversification. Reviewing cash flow models. It pays to have a good cash flow model and members report reviewing those and watching key metrics. For example, recurring revenue companies: An increase in churn and pricing declines. Scenario plans are also being layered on top of these. “We are fine for a few months, but eight months is another matter,” one member said.

More of Joseph Neu’s takeaways from virtual meetings dominated by talk of cash and liquidity.

The waterfall of insights cascading from NeuGroup’s virtual meetings this month requires expert judgment on wringing out and distilling what matters most. One expert is NeuGroup founder and CEO Joseph Neu, who on Tuesday offered his take on tapping credit lines. Here are some of his other takeaways:

Converts as an option. Industrial companies said they are looking at the convertible debt market as a financing option. Typically, these are the domain of tech and life sciences firms, so investors are said to be looking for diversification.

Reviewing cash flow models. It pays to have a good cash flow model and members report reviewing those and watching key metrics. For example, recurring revenue companies: An increase in churn and pricing declines. Scenario plans are also being layered on top of these. “We are fine for a few months, but eight months is another matter,” one member said.

Cash forecasts not good enough. Even the best forecasters are challenged with the demand and supply shocks set off by this crisis. If you are hedging forecasted exposures, it really pays to be a hedge accounting whiz with hedged item designations and your effectiveness testing methodology. Even then auditors may want to put you into the penalty box, so be prepared to push back.  

Can you still concentrate global cash? Evaluate cash positions across the globe and the ability to centralize it under various contingencies, including currency controls being reimposed or tightened. This will become a bigger risk if FX rates continue to weaken.

Supply chain finance. Treasury should be working with banks and supply chain finance solution providers to take efficiency to the max level in onboarding and matching invoices for early payment to support key suppliers so they can focus their own balance sheet efforts on the most vulnerable suppliers that don’t have invoices to factor. One member noted the irony that a bank can hold their paper backed by supply chain finance obligations, but not its CP, which is a regulatory anomaly versus a credit risk economic issue. The member also noted that bank and investor demand for commercial-trade/invoice-backed financing for suppliers is said to be holding up well. This is huge given this context.

Signing documents. Tell banks and others allowing DocuSign (and other digital signature tools) that are allowing them as a temporary crisis fix that they should be good enough for the future, too. People to do company chops or process documents needed for cross-border transfers might not be available, which could delay cross-border transfers (see above).

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Bonds in the Time of COVID-19: Timing Is Everything

Treasury teams need to be prepared to pounce as investor sentiment shifts wildly in capital markets.

Be prepared so you can be nimble. That’s the advice from a treasurer whose company pounced when investor sentiment in the investment grade corporate bond market allowed nine corporates to issue $25 billion in debt on one day this month before the window slammed shut again amid COVID-19 fear.

  • “You have to take what the market gives you and respond to the environment around you, which has seen a bear market in equities and severe liquidity stress in credit markets,” he said during a recent NeuGroup meeting of mega-cap multinationals.
  • Several peers congratulated the treasurer on his team’s ability to act fast, with one saying, “Thanks for going out there and being our golden child. Thank God you did it yesterday.”
  • Another treasurer said his company is working on a bond offering but wasn’t prepared to tap the capital markets as quickly.

Treasury teams need to be prepared to pounce as investor sentiment shifts wildly in capital markets.

Be prepared so you can be nimble. That’s the advice from a treasurer whose company pounced when investor sentiment in the investment grade corporate bond market allowed nine corporates to issue $25 billion in debt on one day this month before the window slammed shut again amid COVID-19 fear.

  • “You have to take what the market gives you and respond to the environment around you, which has seen a bear market in equities and severe liquidity stress in credit markets,” he said during a recent NeuGroup meeting of mega-cap multinationals.
  • Several peers congratulated the treasurer on his team’s ability to act fast, with one saying, “Thanks for going out there and being our golden child. Thank God you did it yesterday.”
  • Another treasurer said his company is working on a bond offering but wasn’t prepared to tap the capital markets as quickly.

Be prepared to call an audible. The treasurer said his company has had a liquidity planning playbook since the 2008 financial crisis and had been looking to tap the capital markets for the last month. The market’s violent swings forced him to change the company’s original plans several times.

  • “We pivoted from a debt exchange which exposes you to 10 days of market risk until closing to an unsecured bond offering which gets you in and out of the market in one day,” he explained.
  • “We decided to warehouse liquidity on our balance sheet as a sign of strength, and once the coast is clear we can consider liability management and debt repayment.”

Laying the groundwork. To prepare to act fast, treasury told the board to consider the debt offering as “relatively cheap insurance” even though “it was really scary to dip your toe into this market,” the treasurer said.

  • The company’s ability to take advantage of the open window also involved having disclosure decisions in place. The company filed an 8-K that said, “Due to the speed with which the situation is developing, we are not able at this time to estimate the impact of COVID-19 on our financial or operational results, but the impact could be material.”
  • The treasurer received many more calls than normal from investors and relied on the 8-K, which stated, “COVID-19 may affect the ability of our suppliers and vendors to provide products and services to us. Some of these factors could increase the demand for our products and services, while others could decrease demand or make it more difficult for us to serve our customers.”

Hedging advice. Given the volatile nature of markets, the treasurer had this advice for peers looking to reduce interest-rate risk: “I highly encourage folks to do intraday hedging if you’re hedging the market.”

  • As distilled by NeuGroup founder Joseph Neu, “Pre-issuance hedging using the full knowledge base on treasury locks, swap locks, including intra-day rate hedging, and the hedge accounting implications are a must in this market.”
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Little or No Pushback Has Corporates Drawing on Credit Lines—At What Cost?

Founder’s Edition by Joseph Neu Insights on the reasons to tap revolvers and what the trend may mean for banks and treasury. One clear insight emerging during our first several NeuGroup virtual meetings as the COVID-19 crisis escalates is that corporates are taking a slew of steps to bolster their liquidity positions. Among the most notable: All but the most stellar credits are drawing on revolving credit facilities (RCFs), a move that has potentially profound implications for banks.

  • As Reuters noted recently, “After the 2008 financial crisis, several blue-chip companies drew down on revolving credit facilities, shocking banks that had charged minimal interest margins on the assumption the loans would remain unused (my emphasis).”

Founder’s Edition by Joseph Neu

Insights on the reasons to tap revolvers and what the trend may mean for banks and treasury.

One clear insight emerging during our first several NeuGroup virtual meetings as the COVID-19 crisis escalates is that corporates are taking a slew of steps to bolster their liquidity positions. Among the most notable: All but the most stellar credits are drawing on revolving credit facilities (RCFs), a move that has potentially profound implications for banks.

  • As Reuters noted recently, “After the 2008 financial crisis, several blue-chip companies drew down on revolving credit facilities, shocking banks that had charged minimal interest margins on the assumption the loans would remain unused (my emphasis).”

This time is different—kind of. The good news is that 12 years after the financial crisis began, banks are solid, have buffers and are in a good position to weather this storm; plus, central banks are backing them in a bigger way. Yet the pricing of RCFs, in the US especially, still largely assumes they will remain undrawn and often does not reflect the true cost of the credit.

  • If the stigma of drawing on an RCF for a company that normally relies on the capital markets goes away, then bank pricing of them will need to reflect that.
  • Indeed, it is happening already as banks have been adjusting the pricing of liquidity on RCFs, bilats, term loans et al. If you were used to 35 to 45 basis points over on an RCF, you should not expect any new lending at that price—it has gone up, said one banker to our members. If everyone one draws, and rating agencies start to rethink downgrading, banks are going to start to feel more pain and reprice their risk further. For some, their liquidity and capital ratios may come under duress. Banks will remember who drew when it comes time to renew.
  • So, if the drawing on RCFs continues, accordingly, treasurers should be prepared to kiss the RCF market they are used to goodbye. This will obviously have knock-on effects on the entire business model for bank pricing, fees and wallet analysis and bank relationship management.

Here are more of my takeaways on this topic from what we’re hearing from members and bankers so far:

Hoarding toilet paper. A banker invited to the opening of a Zoom meeting last week characterized the liquidity and capital markets situation as being like hoarding toilet paper: Those wealthy enough to buy and store it in bulk are creating shortages. They don’t need as much as they are buying, preventing those who really need toilet paper from finding any.

  • Similarly, high-grade corporates are taking as much liquidity as they can, hoarding cash and crowding out other market participants. Some are drawing on RCFs and term loans when they don’t have liquidity needs. Those with big needs are drawing down big facilities.
  • It feels like the stigma of this move signaling duress is gone.

No pushback. One member walked thought the thinking to draw a significant portion of his facility. “We spoke to the banks and our rating agencies and got no pushback.” One bank said “this is unusual, as we have not seen other companies in your sector do it,” but that was it. Rating agencies did not seem concerned “as our plan was to sit on the cash.”

CP market becoming hard work. A big reason to consider a draw is that the CP market is getting more difficult. One A2/P2 member has still been able to place paper even at one-month tenors (due to the quality of its name and business position in this crisis), but it’s been choppy. A1/P1 issuers are have only a bit better luck, but some quality names are reporting it’s taking more of an effort to place CP.

MAC clause concerns. A significant consideration in drawing before you need to is the MAC clause. If you think COVID-19 might trigger a material adverse change in the business, then it’s a reason to draw sooner.  

Deposit cash in banks you draw on. To mitigate some of the renewal repricing from drawing on your RCF, banks will advise you to deposit the drawn funds back with them. Unfortunately, the risk evaluation is not often the same for the banks you allow to provide you credit and those you will extend credit to in the form of a deposit. You also need to see if there is a set-off clause in the revolver.

Bank deposits or T-Bills? Part of the decision to draw on a facility is the bank risk, so one member said his plan is to put the cash into T-bills vs. bank deposits. Money market funds are also being watched closely. Prime funds (post reform) are facing their first crisis test, with some floating NAVs below $1, testing gates etc.

No to 8-K. While law firms have advised some members on the need to file an 8-K with a draw, other members got comfort that they could avoid the headline risk by foregoing an 8-K. They will have to note the draw in the 10-Q, but they have some time until the end of the quarter to determine if they want to pay it back before or not.

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Communication Is Key When Drawing on a Revolver

Get buy-in from internal and external stakeholders as you guard against a COVID-19 liquidity crunch. Every day seems to bring news of another multinational corporation drawing down some or all of a revolving credit facility to weather potential liquidity disruptions created by market reaction to the coronavirus outbreak. News reports say private equity firms like Blackstone are encouraging portfolio companies to tap credit lines.

  • The companies recently tapping revolvers include Kraft Heinz, L Brands and Carnival.

Get buy-in from internal and external stakeholders as you guard against a COVID-19 liquidity crunch.

Every day seems to bring news of another multinational corporation drawing down some or all of a revolving credit facility to weather potential liquidity disruptions created by market reaction to the coronavirus outbreak. News reports say private equity firms like Blackstone are encouraging portfolio companies to tap credit lines.

  • The companies recently tapping revolvers include Kraft Heinz, L Brands and Carnival.

NeuGroup Insights reached out to the treasurer of a company whose SEC filing announcing the drawdown of its revolver described the move as a precautionary measure to increase its cash position and “preserve financial flexibility” in light of current uncertainty in the global markets resulting from the COVID-19 outbreak.

  • The form 8-K also said the proceeds are now on the company’s balance sheet and may be used for general corporate purposes.

Buy-in across the board. The treasurer said the decision to draw down on the revolver was agreed upon at the highest levels of the company. In addition to the reasons for acting now that are spelled out in the 8-K, the company wanted to avoid a situation where it could not access the full amount of the revolver, he said.

Proactive outreach. The treasurer said the company considered the perceptions of investors and the three credit rating agencies, in part because it wants to maintain its current ratings. The treasurer said the company is committed to transparency with the agencies and its banking partners and was proactive with each group. Its strong liquidity position and conservative financial policy—along with the reasons in the 8K—supported taking this prudent, precautionary move, he added.

Bottom line. In the end, a lot depends on what you do before announcing the decision to draw down a revolver. “It’s the matter of communicating with internal and external stakeholders to the extent you can,” the treasurer said. “You want to make sure they understand the intent and are not caught off guard.” And the common denominator in all these conversations and relationships, he said, are trust and transparency.

Legal stuff. Law firmsare offering recommendations and observations to corporates considering the drawdown of revolvers. The firm Fried Frank says borrowers should review their credit agreements for “force majeure” or similar provisions that might excuse a revolving lender’s obligation to lend in bad economic environments. But it adds that, typically, “committed facilities do not include such provisions.”

Here are some other takeaways, from White & Case:

  • SEC 8-K filings typically disclose the amount of the borrowing, the interest rate, and the total cash available to the company after giving effect to the borrowing.
  • Companies also include a short reason for the borrowing that may include, depending on the circumstances, that it is a precautionary measure to increase cash and preserve flexibility in light of uncertainties surrounding COVID-19 and the global economy.
  • Companies provide a short summary of the terms of the relevant credit facility and a reference to the initial filing in which it was disclosed and attached as an exhibit.
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Using Mentoring Circles to Cultivate Organic Sponsorship for Women

Mentoring circles can help women find sponsors who can advocate for their career advancement.

Three women who are senior finance executives at a major multinational corporation described how their company organically builds sponsorship using so-called mentoring circles to support the development needs of high-potential talent. The three spoke this week at a Women in NeuGroup virtual meeting.

  • One of the women described mentoring circles as groups of 10 to 20 people led by more senior employees to discuss topics of common interest and engage in activities to support career development.

Mentoring circles can help women find sponsors who can advocate for their career advancement.

Three women who are senior finance executives at a major multinational corporation described how their company organically builds sponsorship using so-called mentoring circles to support the development needs of high-potential talent. The three spoke this week at a Women in NeuGroup virtual meeting.

  • One of the women described mentoring circles as groups of 10 to 20 people led by more senior employees to discuss topics of common interest and engage in activities to support career development.

Sponsor vs. mentor. “A mentor talks with you, and a sponsor talks about you.” That concise phrase captures a key difference between the two roles, as described in the panelists’ presentation. In addition:

  • A mentor helps you navigate your career, provides guidance, acts as an advisor or sounding board.
  • A sponsor uses strong influence to help you obtain high-visibility assignments, promotions; advocates for your advancement and champions your work and potential to senior leaders.

Why sponsorship matters. The presentation cited research showing:

  • 70% of individuals with sponsors felt more satisfied with their career advancement.
  • Women with sponsors are 22% more likely to ask for “stretch” assignments.
  • Women are 54% less likely than men to have a sponsor.

A Catalyst report also notes that among the benefits of sponsorship are increased loyalty and tenure and a willingness to give back by mentoring and sponsoring others.

Personal stories. One of the women cited her promotion from the senior director level to an officer role as the best example of how she benefited from sponsorship. She said a colleague took a calculated risk in recommending she take his job because he believed in her based on the work she did. Her advice: “You have to work for mentorship and sponsorship; it doesn’t just come to you.”

  • She and the other panelists agreed that doing a great job in the position you’re in is critical in building the trust necessary for a mentor to become a sponsor.

Sponsors cannot be assigned. No matter how structured and well-thought-out a program to advance the careers of women and other under-represented groups, you can’t force sponsorship. So the presenting company uses mentor circles “to create an environment” where a sponsor relationship can develop organically.

  • The structure of the mentor circles at the company promote various opportunities to talk, travel and work together, allowing mentors to learn enough about their mentees to make a decision to sponsor some but not all of them. That means the sponsor uses her own reputational capital to influence decisions about promotions for the mentee.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Not All Bank Fees Are Created Equal

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

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

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

Founder’s Edition, by Joseph Neu

NeuGroup member calls with corporate treasury leaders reveal preparation gaps.

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

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

Founder’s Edition, by Joseph Neu

NeuGroup member calls with corporate treasury leaders reveal preparation gaps.

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

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

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

 Time to get busy.

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FX Hedging Opportunities Amid Virus Volatility

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“Yes,” the group responded in unison.

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

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

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

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

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

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

McKinsey’s advice on this point is outstanding:

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

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

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

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

Moving on, other questions to ask: 

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

And perhaps most importantly: 

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

Here is what NeuGroup is doing

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

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

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

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

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

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

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

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

Other advice and insights:

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

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

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

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

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

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

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

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

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

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

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

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

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

October 09, 2019

By Ted Howard

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

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

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

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

October 09, 2019

By Ted Howard

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

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

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

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

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

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

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

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

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

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

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

Libor Exposure Breakdown

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

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A Look Back at Our Enterprise Reconciliation Insight

Founder’s Edition, by Joseph Neu

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

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

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

Founder’s Edition, by Joseph Neu

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

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

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

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

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

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

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

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

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

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

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