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

Crisis Team

By Joseph Neu

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

Here are a few takeaways I wanted to share: 

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

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

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

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

By Joseph Neu

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

Here are a few takeaways I wanted to share: 

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

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

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

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

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

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

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

  • Employers should, therefore, look to offer DC plan participants retirement income certainty options to keep retirees in their plans and
  • Work with the investment and insurance community to design better solutions. 
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Good Timing: Blowout Bond Deals Before and After the Meltdown

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Aligning Investment Strategy With the Shape of the Economic Recovery

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Aligning Risks to Inculcate Risk Awareness

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

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

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

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

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

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

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

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

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

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

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

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Pandemic Raises the Stakes for Banks to Double Down on Digital

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

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

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

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

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

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

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

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

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

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

More takeaways:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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ESG: A Leading Indicator of Quality for Federated Hermes

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

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

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

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

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

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

  • “There is a correlation between ESG leaders and lower volatility and more consistent profits,” he said. “ESG is a new quality factor—ESG leaders are additive to performance.”

Federated Hermes is doing its part to spread the word and get more businesses to engage in sustainability-focused risk management during the crisis and beyond. The company, a pioneer in active engagement, has pushed “stewardship” for investment managers for well over a decade and has a dedicated team, called EOS, that actively engages directly with company boards and executives. 

  • “EOS’s mission is to engage in a collaborative dialogue with corporate issuers to better understand material ESG risks and advocate for positive change,” Mr. Jarzebowski wrote in a recent blog post. “These dedicated engagers are ESG subject-matter experts who complement the fundamental research of Federated Hermes investment teams across all asset classes.”

The firm’s deep understanding of financially relevant ESG factors helps Federated Hermes’ global portfolio managers to assess the underlying quality of the companies in which they invest. And that, Mr. Jarzebowski argues, gives the company an edge against passive investing, which does not take the same approach.   

  • “By incorporating forward-looking ESG insights into our active investment process, we think we can better assess where the puck is headed relative to passive indexes, which are mostly judging quality through a rearview mirror,” Mr. Jarzebowski wrote.

Federated Hermes will share its insights on sustainable investing and how ESG can fit your company’s strategy in a webinar hosted by NeuGroup on June 9, 2020. Register for it here

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Pandemic Pushes Some Companies Away From Checks, Toward Real-Time Payments

U.S. Bank sees more clients opting for RTP in a bid to gain control and improve forecasting.

The COVID-19 pandemic appears to be persuading more companies to consider abandoning paper checks and start using electronic payment rails to pay bills — even though many corporate treasurers do not view speed as a major incentive to switch. That insight emerged during a presentation by U.S. Bank at a recent NeuGroup meeting it sponsored. 
 
Old, suboptimal habits in the US. Here’s some context for where US business stands now: Companies with $1 billion or more in revenue still make 39 percent of payments with checks, and the figure is higher for smaller companies, according to the Association of Financial Professionals’ 2020 Payments Fraud and Control Survey.

  • Among payment methods, checks are the most susceptible to fraud.
  • Forty-four other countries already have instant, electronic payment methods. 

U.S. Bank sees more clients opting for RTP in a bid to gain control and improve forecasting.

The COVID-19 pandemic appears to be persuading more companies to consider abandoning paper checks and start using electronic payment rails to pay bills — even though many corporate treasurers do not view speed as a major incentive to switch. That insight emerged during a presentation by U.S. Bank at a recent NeuGroup meeting it sponsored. 
 
Old, suboptimal habits in the US. Here’s some context for where US business stands now: Companies with $1 billion or more in revenue still make 39 percent of payments with checks, and the figure is higher for smaller companies, according to the Association of Financial Professionals’ 2020 Payments Fraud and Control Survey.

  • Among payment methods, checks are the most susceptible to fraud.
  • Forty-four other countries already have instant, electronic payment methods. 

The new normal. With most corporate mailrooms functioning minimally, businesses are trying alternatives to checks, including a system from The Clearing House called Real Time Payment (RTP), which U.S. Bank trailblazed as one of the earliest adopters.

  • “Over the last month we’ve seen the greatest number of clients opting for RTP,” said Anuradha Somani, a payment solutions executive in global treasury management at U.S. Bank. 
  • The timing is ripe, she said, since electronic payment rails have emerged that enable transactions to carry much more data, improving working capital, security, and analytics such as cash-flow forecasting.  

“Just in time” payments. Meeting participants agreed that payment speed was not the only priority, and Ms. Somani said that RTP’s key improvement is flexibility and control – meaning, no longer initiating a payment today and having to wait one or two days for settlement.

  • “It’s the ability to control payments at the precise time you want,” she said, noting that such control and the irrevocability of incoming RTPs, available 24/7/365, can dramatically improve cash forecasting. 
  • The treasurer of a major industrial company said, “What intrigues me is if I can have better information, and there’s something truly analytical about this to help enhance forecasting abilities.”

Data continuity: John Melvin, working capital consultant at U.S. Bank, called RTP “the biggest payments infrastructure change in the last 40 years.”  That change is the extensive data that transactions carry through the RTP network of connected banks.

Data-light ACH payments often receive remittance information through outside methods such as email or fax, which often requires searching for a payer’s identity in order to post the transaction. RTP’s request for payment (RFP) function instead allows billers to alert customers that payments are due by sending a message containing all the relevant biller information, facilitating reconciliation.

  • Because RFP-prompted payments require payers’ approval, they dramatically reduce fraud, and “models can be created to reconcile payments, eliminating the need for shared service centers purposed for reconciliation,” Melvin said.

While the pandemic is likely to be one of the most challenging crises businesses will ever face, proactively taking stock of payments strategy can help plan for the future, according to U.S. Bank. And it says that no matter what the initial driver is – the pandemic, speed, data, superior control or the ability to forecast better, faster payments are here to stay. 

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ERM’s Profile Rises as Boards Focus on Risk Oversight Role

Corporate boards are taking their oversight mandate more seriously; that’s why they need ERM.

Today’s corporate boards need to fully understand the risks a company faces as well as their relevance to its strategy and risk appetite. That’s been the case since 2009 when the SEC started requiring disclosure of a board’s role in risk oversight, including the qualifications of its members and a description of how the board administers its oversight function.

  • The risks revealed by COVID-19 make this a good time to probe how enterprise risk managers fit into this picture.

Corporate boards are taking their oversight mandate more seriously; that’s why they need ERM.

Today’s corporate boards need to fully understand the risks a company faces as well as their relevance to its strategy and risk appetite. That’s been the case since 2009 when the SEC started requiring disclosure of a board’s role in risk oversight, including the qualifications of its members and a description of how the board administers its oversight function.

  • The risks revealed by COVID-19 make this a good time to probe how enterprise risk managers fit into this picture.

ERM’s role. ERM can help the board fulfill its mandate and gain satisfaction that the right risks are being addressed. That was among the takeaways from a discussion led by Dr. Paul Walker, executive director of the Center for Excellence in ERM at St. John’s University. It is the ERM function that can collate all the risks of the company and drill down to the most important ones. 

  • Dr. Walker added that practitioners can provide the satisfaction the board is looking for by benchmarking with peers and uncovering possible risks through conversations and other interactions with company managers. This risk discovery process helps ERM to map the connected risks of the company. Dr. Walker said ERMs should take those connected risks and “boil them down to a story.” It’s more art than science, he admitted, but it can be done. 

Ultimately, Dr. Walker said, these efforts will further arm ERM with the right answer when the board eventually asks: “How do we know we’re looking at the right set of risks?”
 
Here are some of Dr. Walker’s recommendations for engaging with the board:

  • Know the laws. Corporations have a growing list of requirements on risk and governance best practices. This is a chance to show your risk expertise.
  • Don’t go overboard. Some ERMs can give too much information or create big presentations; boards and presenters can end up in the weeds. The truth of the matter is, ERM will probably get 15 minutes in front of the board or even a subcommittee (i.e., risk committee), so make it concise.
  • Whisper campaign. With that brief amount of face time, try sharing any other risks concerns with colleagues. If those colleagues are going to report to the board, whether they be audit or other compliance functions, “whispering” the issues to them can help. “Maybe they’ll mention it to the board in their report,” Dr. Walker said.
  • Know your audience. Dr. Walker said getting to know the board, what they read, what they want or expect, can be especially useful. Who likes data? Who likes reports? Who likes visuals? This will require a bit of sleuthing on the part of ERM.
  • Ahead of the curve. More gumshoeing here: Stay ahead of the board’s expectations and questions.

In the end, Dr. Walker said, “Don’t give vanilla if they want chocolate chip cookie dough.”

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The Challenges for Corporates of Nonbank Payments

Treasurers in Asia discuss why regulation, technology and business models complicate nonbank payments in the B2C space.

The brave new world of nonbank payments presents both challenges and opportunities for finance teams at multinationals that have to collect cash from open platforms, a topic that garnered attention at a recent meeting of NeuGroup treasurers in Asia. 

Key issues. In the business-to-consumer (B2C) arena, the widespread use of tech intermediaries such as PayPal, WeChat and Alipay poses a problem for corporates because these open platforms are not meeting the typical segregation of duties and reconciliation protocols required by audits. The only options involve complex manual processes.

Treasurers in Asia discuss why regulation, technology and business models complicate nonbank payments in the B2C space.

The brave new world of nonbank payments presents both challenges and opportunities for finance teams at multinationals that have to collect cash from open platforms, a topic that garnered attention at a recent meeting of NeuGroup treasurers in Asia. 

Key issues. In the business-to-consumer (B2C) arena, the widespread use of tech intermediaries such as PayPal, WeChat and Alipay poses a problem for corporates because these open platforms are not meeting the typical segregation of duties and reconciliation protocols required by audits. The only options involve complex manual processes.

B2B dynamics. In the business-to-business space (B2B), payment service intermediaries such as TraxPay have emerged with offerings that present corporates with risks as well as opportunities, such as the ability to hold data in the cloud. Regulation, technology and business models also complicate the B2B payment landscape. The hope is that in the long run, platforms become more sophisticated. For now, there’s no immediate relief, a sore point for corporates.

Fintech and the trust Issue. Reliance on intermediaries in the B2B payments area raises a related issue facing finance teams at multinationals: How much do they trust fintechs? When it comes to payments, corporates trust banks far more than fintechs or ideas like crowdfunding. The issue is especially relevant when it comes to payment aggregators like PayPal, Stripe and Square. Corporates have to weigh the popularity of these systems and their ability to provide a neutral layer between them and a bank against the risks of giving data to businesses that don’t have to comply with bank regulations. The dependence of these systems on APIs also presents risks.

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Crisis Forces Consideration of Unwinding Cash-Flow Hedges

The COVID-19 crisis has reduced exposures to a point where for many companies those hedges may not be needed anymore. Time to unwind?

If you’re planning on unwinding a cash-flow hedge, there are many things to think about before you do. Determining when and why to unwind, as well as how to view the transaction’s cost benefits, and what counterparty to use, are just a few of the factors to consider. This was the topic of discussion among NeuGroup FX Managers’ Peer Group 1 and 2 members in a recent virtual “office hour” meeting, which led to some interesting takeaways.

  • The “No Choice” camp. With hedge accounting being a big driver for most members, keeping hedges on the books when exposures are materially reduced – as they unarguably have for many sectors in the COVID-19 crisis – is not an option as you’ll be over-hedged. For some companies, the lost sales in the crisis might be made up for in a later quarter, but for travel and service business, it is unlikely the rebound will make up for all of it.

 

The COVID-19 crisis has reduced exposures to a point where for many companies those hedges may not be needed anymore. Time to unwind?

If you’re planning on unwinding a cash-flow hedge, there are many things to think about before you do. Determining when and why to unwind, as well as how to view the transaction’s cost benefits, and what counterparty to use, are just a few of the factors to consider. This was the topic of discussion among NeuGroup FX Managers’ Peer Group 1 and 2 members in a recent virtual “office hour” meeting, which led to some interesting takeaways.

  • The “No Choice” camp. With hedge accounting being a big driver for most members, keeping hedges on the books when exposures are materially reduced – as they unarguably have for many sectors in the COVID-19 crisis – is not an option as you’ll be over-hedged. For some companies, the lost sales in the crisis might be made up for in a later quarter, but for travel and service business, it is unlikely the rebound will make up for all of it.
  • Monetizing in-the-money hedges. If hedge accounting is a driver to unwind hedges that are in the money, the extra liquidity is welcome, nevertheless. But ITM hedges are also an opportunity to access additional liquidity, even if the hedges are still “good.” By unwinding them – cashing in – you get the extra cash immediately and if needed, you can enter into a new set of hedges for the remaining exposure at prevailing market rates.
  • Do you need to take the P/L right away? Talk to your hedge accounting people to see whether the gains/losses on the hedges are material enough to require that they be recognized in the current quarter or if they can be released in the quarter they otherwise would have occurred.
  • Do you need to sell the hedge? And if so, to the same counterparty? Not necessarily. If you don’t feel the pricing offered is attractive enough from the original counterparty, you can bid it out competitively if your trading processes permit. Or, you can dedesignate the hedge and enter into an offsetting cash-flow hedge for the “over-hedged” part for a neutral outcome.
  • Can you offset it on the balance hedge side instead? None of the members on the call said they could. In one case it was because of systems that prevented a cash-flow hedge to be “transferred” to the balance-sheet program. So instead, the cash-flow hedge needs to be dedesignated and an offsetting hedge to be put in place the same day.
  • How much extra work is it? Unwinding cross-currency interest rate swaps and other complex or multi-tranche derivatives can mean a lot of extra trading and processing work for the treasury team. That is less likely for relatively simple FX derivatives, most of which can likely be pushed through the regular trading process but will probably incur some more “manual” (spreadsheet) valuation calculations. This should take care of most of the push back from the treasury operations and accounting side.
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Cyberattacks: Post-Pandemic May Be Worse Than the Lockdown

Best practices pre-pandemic have become even more important as the economy reopens.

A top treasury concern for years, cyberattacks ramped up following the sudden transition to the work-from-home regimen prompted by the pandemic. They’ll likely ramp up even further when the economy begins opening up.

That was among the takeaways from a session on cybersecurity at a recent virtual NeuGroup meeting headed by Jenny Menna, deputy chief information security officer at U.S. Bank, and Chris Moschovitis, CEO of technology consultancy tmg-emedia.

Best practices pre-pandemic have become even more important as the economy reopens. 

A top treasury concern for years, cyberattacks ramped up following the sudden transition to the work-from-home regimen prompted by the pandemic. They’ll likely ramp up even further when the economy begins opening up. 

  • That was among the takeaways from a session on cybersecurity at a recent virtual NeuGroup meeting headed by Jenny Menna, deputy chief information security officer at U.S. Bank, and Chris Moschovitis, CEO of technology consultancy tmg-emedia. Below are more insights.

Beware of stuffed animals. When fear struck that the COVID-19 was in the US and spreading, the bad guys—criminals and state actors—saw opportunity. 

  • Almost immediately there was a jump in phishing emails that seek to exploit fears about the virus to lure employees into revealing private information. 
  • Malicious apps professing to come from key resources of information, and even stuffed animals with accompanying thumb drives arriving by mail, are designed to infect home computers. 

Don’t forget to patch. These best practices and defensive measures have become even more important:

  • Install the latest software patches on phones, personal computers and work laptops to guard against evolving malware.
  • Assume that requests from higher-ups, especially from a personal email account, to send money are bogus.
  • Don’t use personal email accounts for business. Don’t email company documents to a personal email account.
  • Home printers may be compromised; avoid attaching work laptops to them.
  • Change up Zoom and other virtual meeting-room passwords to avoid unwanted guests. 
  • Alert employees to the latest phishing scams and cyberattacks. The Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency (CISA) and the FBI regularly update the latest developments. 

At the corporate level. Understand connections to vendors and other third parties, their cybersecurity policies, and your company’s dependency on them. 

  • Discuss in advance with outside counsel and the FBI how to respond to a ransomware attack, Ms. Menna said. Several large corporations have been hit recently.  

The internal threat. Mr. Moschovitis noted that 30% of cybercrimes are conducted by internal agents who understand how to bypass an institution’s controls.

  • Without any physical controls or eye-to-eye employee interactions that may provide hints of bad intent, any company-related queries by an employee outside his or her direct responsibilities or otherwise odd behavior should be escalated to HR.  

Prep now. A meeting participant mentioned fears that reopening the economy will accompany a flurry of activity fueling even more cyberattacks. 

  • Mr. Moschovitis agreed. The flood of overdue invoices and other documents may be overwhelming to process, creating opportunity for cyberattacks. “Our advice remains consistent: The minute something becomes abnormal, pick up the phone” to double-check, he said.
  • Many employees will continue working from home, so policies such as how the division of labor will occur must be developed. “Now is the time to have these conversations,” he said. “And it will involve having a lot of stakeholders around the table—the COO, CFO, IT, cybersecurity. All these folks need to be in the room to have this conversation.”
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Pandemic Reveals the Haves and the Have Nots: Asia Report

Examples of the varying effects lockdowns had on businesses, and how they’ve responded.

The coronavirus pandemic has provided more proof that crises affect some companies far differently than others. The reasons include what industry a company is in, its business model and how much cash it has on hand—the haves and the have-nots.

Perhaps less expected is that business units within the same company may weather a storm better than others. All this and more emerged in discussions among finance practitioners in Asia participating in a NeuGroup virtual meeting in mid-April.

Examples of the varying effects lockdowns had on businesses, and how they’ve responded.

The coronavirus pandemic has provided more proof that crises affect some companies far differently than others. The reasons include what industry a company is in, its business model and how much cash it has on hand—the haves and the have-nots.

Perhaps less expected is that business units within the same company may weather a storm better than others. All this and more emerged in discussions among finance practitioners in Asia participating in a NeuGroup virtual meeting in mid-April. Here are some takeaways:

  • Members who work for cash-rich companies expressed interest in making strategic acquisitions as asset prices declined in response to the pandemic. Potential deals in this environment must be evaluated not only based on price but the degree to which an acquisition will deplete the buyer’s cash pile.
  • Asia business units planning to provide funds to parent companies had different experiences. For at least one company, the process was relatively easy, thanks to its strong relationships with local partners. Others faced difficulties getting approvals from external auditors and clearance from tax authorities.
  • Companies without significant cash surpluses have made significant cuts in capital expenditures and discretionary expenses. They have also drawn down or increased bank lines of credit.
  • A member from a consumer goods company described declining sales of its products that are distributed to restaurants but solid sales of products consumed at home and purchased in convenience stores.
  • Those drugs requiring face-to-face-meetings between pharmaceutical salespeople and health care providers are not selling as well as other drugs companies produce.
  • Lockdowns—no surprise—put a huge dent in sales of companies that rely on foot traffic.
  • Companies with business models that have easily transitioned to remote work such as consulting are doing well and, in some cases, have seen an uptick in business.
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Seeking Incremental Credit? Refinancing Loans? Expect Hurdles

Insights from U.S. Bank on current market dynamics as corporates shore up their access to credit.

Defensive drawdowns of revolving credit lines have subsided and banks are selectively entertaining requests for new, incremental loans as well as refinancings of existing credit lines. But borrowers can expect some hoops, hurdles and different market dynamics. That was among the takeaways from a presentation by U.S. Bank, sponsor of a recent virtual NeuGroup meeting for treasurers of large-cap companies. Here are highlights:

  • Members heard that in the wake of the pandemic, U.S. Bank had received more than 150 client requests for incremental liquidity lines—both new revolving and term—and to date had closed over 70 facilities with many more in the works as of April 23.

Insights from U.S. Bank on current market dynamics as corporates shore up their access to credit.

Defensive drawdowns of revolving credit lines have subsided and banks are selectively entertaining requests for new, incremental loans as well as refinancings of existing credit lines. But borrowers can expect some hoops, hurdles and different market dynamics. That was among the takeaways from a presentation by U.S. Bank, sponsor of a recent virtual NeuGroup meeting for treasurers of large-cap companies. Here are highlights:

  • Members heard that in the wake of the pandemic, U.S. Bank had received more than 150 client requests for incremental liquidity lines—both new revolving and term—and to date had closed over 70 facilities with many more in the works as of April 23.

Refinancing season begins. U.S. Bank is working with two large borrowers rated single-A or higher that are rolling over their 364-day tranches but leaving five-year portions alone, rather than pushing them out a year as they once would have.

  • These borrowers are offering upfront fees. “They’re trying to keep the integrity of the existing deal but recognizing that banks are under strain and pricing is likely to go up, so they’re offering the fees to bridge that gap,” said Jeff Duncan, managing director of loan capital markets at U.S. Bank.
  • Covenant waivers and amendments are likely to increase, he said, as companies digest their first quarter earnings and look ahead.

Loan split stays. The structure splitting loans into 364-day and five-year portions will likely continue, despite today’s challenges in rolling them over, because big companies can raise sufficient liquidity while keeping the bank group at a manageable number, Mr. Duncan said. Also:

  • A bank refusing to refinance the shorter piece while holding onto the five-year is effectively shutting off ancillary business. This gives borrowers leverage.
  • One member asked if seeking an incremental 364-day now would jeopardize refinancing an existing one in August. Ask the lead banks about syndicate capacity well in advance, said Jeff Stuart, U.S. Bank’s head of capital markets.
  • Coupling incremental loans with a bond deal incentivizes lenders with fees and reassures banks that the facility is temporary.

Big bank hiatus. A member looking for an unfunded revolver said the largest US banks were the least likely to step up, while European lenders, large US regionals, and Japanese banks even increased their allocations.

Prepare for the sprint. Given pricing volatility, U.S. Bank has led syndications that, from initial discussions to closing, have wrapped up in two weeks instead of the typical five or six, thereby meeting corporate clients’ accelerated funding needs.

Floors required, please. Libor floors on bank loans, guaranteeing a minimum yield, are becoming increasingly popular, most at 75 basis points and some at 100 basis points, Mr. Duncan said, and some banks are requiring floors in order to commit to incremental facilities.

  • “We’re seeing them more frequently at launch to take that issue off the table and maximize the number of participants getting into deals,” he said.

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Aligning on the Meaning of Risk Helps Companies Focus on It

The word risk means different things to different people; how can you agree on the definition across an organization?

“What exactly does risk mean to you?” one member asked during a recent virtual meeting of NeuGroup’s Corporate Enterprise Risk Management Group. The question was a bit rhetorical—the member answered it himself by saying risk means different things to different people. There is good risk, bad risk, strategic risk, operational risk and catastrophic risk.

  • This was true, said one member of an ERM team presenting to the group on risk alignment at her company. She said, “Initial definitions are easier to get consensus” on; but she observed that as you move away from those definitions and go out to the businesses, “That’s where we see more variation of risk.”

The word risk means different things to different people; how can you agree on the definition across an organization?

“What exactly does risk mean to you?” one member asked during a recent virtual meeting of NeuGroup’s Corporate Enterprise Risk Management Group. The question was a bit rhetorical—the member answered it himself by saying risk means different things to different people. There is good risk, bad risk, strategic risk, operational risk and catastrophic risk.

  • This was true, said one member of an ERM team presenting to the group on risk alignment at her company. She said, “Initial definitions are easier to get consensus” on; but she observed that as you move away from those definitions and go out to the businesses, “That’s where we see more variation of risk.”

Risk council. Another ERM member leading that alignment effort said that risk definitions need to be made uniform and that those definitions should be decided upon company-wide. To do it, ERM created a risk council by recruiting leaders from the regulatory side of the business, HR, accounting, R&D and the business units to help the broader company focus on ERM.

  • He added that since ERM reports into finance, he made sure not to “overload finance on the council.” The group sought to determine “where we were different and where were we the same,” when it came to nailing down the meaning of risk in different areas of the business.

No appetite for “appetite.” This member said the process was not straightforward because of the number of different personalities and agendas. “I expected we would stumble on some definitions,” he said, adding that, for instance, ERM’s “view of the world may be influenced by board personality.” Others might be influenced by other necessities; that means “there are words some people want to use and others they don’t want to use.”

  • For example, the company’s legal counsel didn’t like the term “risk appetite” and said the company had zero appetite for risk. He wanted to call it something else. Others saw it differently, which made it “challenging in some naming conventions.”

Higher profile. Nonetheless, this effort helped ERM “level set” what risk meant, the member said. The group then presented refined risk definitions to the board to get agreement. “The result has been active engagement.”

  • Overall, this and other efforts have raised the profile of ERM within the company. When he first took the position, ERM “was a board-reporting exercise; ERM was muted.” But now with the alignment project, the function is “now more of a presence.”

This has meant building more risk accountability and finding the right risk owners across the company. “The more we can get involved with individual regions or business, the more we can inculcate risk into the organization,” he said.

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COVID-19 Puts Buyback Programs on Hold—but Not for Everybody

Some companies are keeping share repurchases programs going while many others suspend them.

We are continuing to buy back stock,” said the treasurer of a cash-rich technology company in mid-March, speaking to peers during a virtual NeuGroup meeting of mega-cap businesses. “We haven’t pulled share repurchases either,” said the treasurer of a large health care company with a very healthy balance sheet and strong cash flow.

  • Later that day, a third treasurer—working from home—told the group that investor Bill Ackman was feeding market panic during an interview with CNBC. In it, he urged US companies to stop their buyback programs because “hell is coming.”

Some companies are keeping share repurchases programs going while many others suspend them.

We are continuing to buy back stock,” said the treasurer of a cash-rich technology company in mid-March, speaking to peers during a virtual NeuGroup meeting of mega-cap businesses. “We haven’t pulled share repurchases either,” said the treasurer of a large health care company with a very healthy balance sheet and strong cash flow.

  • Later that day, a third treasurer told the group that investor Bill Ackman was feeding market panic during an interview with CNBC. In it, he urged US companies to stop their buyback programs because “hell is coming.”

Suspending, scaling. In the month and a half since that day, as the coronavirus effectively shut down the US economy, many companies—including some NeuGroup members—have suspended share repurchase programs because of uncertainty about future cash flows, among other reasons.

  • One example: A consumer goods company that reported outstanding quarterly earnings in late April suspended its buyback program and withdrew guidance for 2020. The treasurer said the reasons include concerns about raw materials and—if infection rates spike—manufacturing sites. As a result, the company is “managing liquidity with a very different focus,” he said.
  • The capital markets manager of another large-cap company said, “We have a small buyback program in place and we’ve slowed it down over the last few weeks,” adding, “We’re waiting to get direction; the program is not cancelled but scaled back.”
  • A member who works at a company that began a repurchase program in late 2019 noted that buybacks in the current political and economic climate are “being frowned upon in some spaces.” He said his company may be scaling back on share repurchases and asked what peers are doing.
  • “We discontinued our share buyback program,” one treasurer said. “We think the world will understand.”

Not stopping now. The treasurer of the health care business said in the days leading up to a recent bond offering he was asked several times by investors if the company planned to stop buying back its stock. The answer—no—did not keep the deal from being a complete success, thanks to the company’s strong capital position, among other factors.

  • This company plans for its own “rainy day,” he said, adding it would undoubtedly pause the share repurchase program if it ever faced liquidity issues or needed government assistance—not its current situation.
  • The company, he said, will stick to its approach to repurchases, which includes buying when the stock trades below what leadership believes is the intrinsic value of the company.

A framework for buybacks. Back in 2018, as buybacks surged following US tax reform and the repatriation of assets, one NeuGroup member shared his three-point approach to designing a framework for repurchases. It involves:

  1. Achieving stated capital structure goals.
  2. Updating the valuation thesis regularly, validating repurchase decisions through retrospective analysis and adjusting for market conditions, changing business conditions or other factors.
  3. Execution: taking advantage of multiple buyback tools to manage through open markets and blackouts, while considering volatility, ADTV, VWAP and other factors to measure program success, bank execution and other factors.
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Time-Consuming and Intense: Due Diligence for Today’s Debt Deals

Corporates tapping the bond market should expect an in-depth, rigorous look at COVID-19 impacts.

Seller beware: Corporates selling bonds to bolster their liquidity this spring should expect a rigorous due diligence experience involving auditors, underwriters, internal counsel and external capital markets lawyers, among others.

  • The once seemingly perfunctory process for investment-grade issuers has become an intensive, multi-day, near round-the-clock affair, as banks and investors scrutinize issuer disclosures about COVID-19’s near- and long-term business impact.

Corporates tapping the bond market should expect an in-depth, rigorous look at COVID-19 impacts.
 
Seller beware: Corporates selling bonds to bolster their liquidity this spring should expect a rigorous due diligence experience involving auditors, underwriters, internal counsel and external capital markets lawyers, among others.

  • The once seemingly perfunctory process for investment-grade issuers has become an intensive, multi-day, near round-the-clock affair, as banks and investors scrutinize issuer disclosures about COVID-19’s near- and long-term business impact.

Be prepared. Once generic diligence questions are now very specific, even referencing unofficial public documents and news sources indicating business slowing that capital markets lawyers would never have used pre-pandemic.
“Things are happening so quickly, it almost gives us no choice,” Keith DeLeon, counsel at Sidley Austin LLP, told NeuGroup members at recent virtual meeting of treasurers at large-cap companies.

Extra time. In normal times, companies often issue debt immediately following Q1 financial filings, sometimes just before and sometimes on the same day. But now underwriters want more time to review.

  • “For first quarter and probably through the rest of 2020, underwriters are likely to recommend conducting the business and auditor calls a day or two following the filing of the 10-Q,” said Chris Cicoletti, a managing director of debt capital markets at US. Bank, which sponsored the meeting.
  • But don’t wait too long. Pre-coronavirus, offerings could take place weeks after the public filing, using a “bring-down call” with investors to fill in the gap. Few companies had filed 10-Qs so it’s hard to know, but that period may have shrunk to just a few days, Mr. DeLeon said, adding, “Diligence and disclosure, which clearly go hand-in-hand, go stale a lot faster.”

Groundhog Day. Mr. DeLeon observed that a current trend in the market involves diligence being refreshed overnight, because of new developments in between serial go/no-go calls.

  • “Deals are ready to go from a documentation perspective, there is a go/no-go call or market update that results in a decision to stand down, the diligence and disclosure are refreshed and the cycle repeats day after day until the deal gets done or stands down indefinitely,” he said.

Ready the big guns. Due diligence calls may once have been handled by treasury’s head of funding or investor relations. “It’s no longer delegated but handled by the C-suite officers,” Mr. DeLeon said.

  • Prepare for more underwriter questions. Full due diligence sessions are conducted with lead underwriters; now, co-managers and “passives” want the leads to ask more questions about coronavirus impact during a second call where the company updates underwriters on what may have changed since the first call.
  • “We don’t ask issuers to go through the entire diligence agenda again, but we do go through the biggest ticket items,” and that means the COVID-19 impact, Mr. DeLeon said.
  • Current practice suggests providing as much quantitative disclosure regarding the impacts of COVID-19 as possible, and other carefully worded qualitative disclosures regarding the actual and potential impacts of the pandemic in the risk factor and recent developments sections of offering and other disclosure documents.

Speed is of the essence. Quickly drafting disclosures as well as efficient mechanics, such as printing the offering documents, are vital to take advantage of optimal windows to issue bonds. The difference in pricing over just a few hours can be as much as half a percentage point given current intraday volatility. “Things like printer turnaround time have become critical in the current market given the often tight windows for optimal deal execution,” Mr. DeLeon noted.

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Keeping the Company Strong after the Initial Hit

Companies have survived the early impact of COVID-19; now the focus is keeping the concern going.

There is a lot of talk in treasury and risk circles lately about business continuity plans or BCPs. The talk is mainly around whether the plans worked and what lessons have been learned in the latest crisis. But there has not been as much talk about business resiliency, that is, whether the company, now in the throes of major health crisis, can hang in there and navigate ups and down. 

A recent Deloitte article on resiliency stressed that business leaders must be “vigilantly focused on protecting financial performance during and through the crisis … and making hard, fact-based decisions.” But what is also important, particularly in this crisis where lockdowns and employee isolation are the norm, is communications with those employees, keeping them engaged to help keep the company moving forward.

Companies have survived the early impact of COVID-19; now the focus is keeping the concern going.

There is a lot of talk in treasury and risk circles lately about business continuity plans or BCPs. The talk is mainly around whether the plans worked and what lessons have been learned in the latest crisis. But there has not been as much talk about business resiliency, that is, whether the company, now in the throes of major health crisis, can hang in there and navigate ups and down. 

A recent Deloitte article on resiliency stressed that business leaders must be “vigilantly focused on protecting financial performance during and through the crisis … and making hard, fact-based decisions.” But what is also important, particularly in this crisis where lockdowns and employee isolation are the norm, is communications with those employees, keeping them engaged to help keep the company moving forward.

Isolation stress. In a recent call with members of NeuGroup’s Internal Auditors’ Peer Group, several auditors said they were addressing the stresses that go with working remotely and the disconnect many employees feel as they isolate in their homes. 

  • In previous calls, members themselves have said that while working from home they often don’t know whether an action they take is just a shot in the dark with no result. “Is anything happening out there?” wondered one auditor.

Layoff fear. During the recent call, one member detailed how his company started doing a weekly check-in with employees, which included doctors and members of the human resources team. Doctors are there to answer health questions and HR can help with fears of layoffs. “Everyone feels like they’re out of touch and everyone is worried about layoffs at this point,” the member said. 

Another member said management at his company conducts similar calls, but in a more hierarchical way. They have calls with worldwide site leaders who in turn have calls with their employees. They also do calls with individual region leadership, like those in EMEA and Latin America. 

  • “They have very candid discussions,” the member said. Globally, employees can submit questions to managers that may or may not be addressed (due to volume) in any one of these calls. He said most of the questions regard layoffs.

Still another member said that his company’s HR is now providing support services for people isolated at home, which includes health services. 

Mapping the return. NeuGroup members continue to talk about returning to work and how that will all play out. One member said management meets with the CEO once a week to discuss locations and where stay-at-home orders are easing so they can start their back-to-work programs. 

  • Discussions also increasingly include reducing the company’s footprint by having some people work from home part time or on a rotational basis. “We’re looking at each location globally and doing the analysis,” said one member.
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Pandemic Lessons Learned by Treasurers in Asia

How finance teams respond to the need for cash depends in part on their ability to tap global cash pools.

As the pandemic brought  the world to a standstill, the primary concern of many multinational corporations centered on sustaining their operations, assuming no cash inflows for at least 30 days. For almost every company, that requires a lot of cash! That was among the takeaways from member comments at a recent NeuGroup virtual meeting of treasurers in Asia in early April.

Cash pools. Multinational companies best positioned to source emergency funds have access to global cash pools domiciled in jurisdictions where capital markets are liquid and central banks supportive, such as  London and  New York. To fund business activities elsewhere, companies rely on domestic banks or subsidiaries of foreign banks. 

How finance teams respond to the need for cash depends in part on their ability to tap global cash pools.

As the pandemic brought  the world to a standstill, the primary concern of many multinational corporations centered on sustaining their operations, assuming no cash inflows for at least 30 days. For almost every company, that requires a lot of cash! That was among the takeaways from member comments at a recent NeuGroup virtual meeting of treasurers in Asia in early April.

Cash pools. Multinational companies best positioned to source emergency funds have access to global cash pools domiciled in jurisdictions where capital markets are liquid and central banks supportive, such as  London and  New York. To fund business activities elsewhere, companies rely on domestic banks or subsidiaries of foreign banks. 

Other tools. Challenges arise when domestic credit is not sufficient to fund the company and its supply chain. To support loyal business partners, finance directors resort to traditional programs such as distributor and supplier financing. However, complex and paper intensive onboarding often holds them back. 

  • Likewise, declaring dividends from cash-rich subsidiaries to sustain cash-poor sister companies is challenging when both audit and tax clearance staff are themselves subject to lockdowns. Finance teams with long-standing relationships are more likely to break through. 

Government help. As a last resort, companies apply for direct government support. Members report that the application process is resource intensive and time consuming. To be effective, the country’s senior executive must lead a multi-functional team including tax, legal, government affairs, HR, and finance. The treasury team executes loan transactions and reporting, ensuring that new covenants do not breach existing agreements. 

Although it is too early to draw definitive lessons from the pandemic, it’s clear that the even the best business contingency plans never fully test the complexity of an unfolding crisis. Leveraging a global cash pool by concentrating a company’s firepower brings benefits well beyond a cost advantage. They give finance directors the space to look for practical local workarounds where needed.

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Funding Is Top Priority for Treasurers amid Pandemic: Poll

Treasurers have funding on their minds as they deal with COVID-19. BCP and supply chains also a concern.

Securing funding is a top priority for corporate treasurers thrust into the role of organizing companies’ financial response amid the COVID-19 pandemic, according to a recent poll by Bloomberg and Greenwich Associates. Following funding, treasurers say their attention is also on business continuity plans and suppliers.

Many treasurers have been tasked with making sure key suppliers have the resources to stay in business and providing the needed parts and material.

Treasurers have funding on their minds as they deal with COVID-19. BCP and supply chains also a concern.

Securing funding is a top priority for corporate treasurers thrust into the role of organizing companies’ financial response amid the COVID-19 pandemic, according to a recent poll by Bloomberg and Greenwich Associates. Following funding, treasurers say their attention is also on business continuity plans and suppliers.

Many treasurers have been tasked with making sure key suppliers have the resources to stay in business and providing the needed parts and material. 

  • The Bloomberg-Greenwich survey revealed that treasurers (49% of respondents) are taking a closer look at customer and supplier credit, receivables and financing. 

“One of the most intriguing results of our poll was that it revealed the most important risk focus for treasurers is the credit position of their supply chain and customers,” said Ken Monahan, senior analyst at Greenwich Associates. 

  • “This even rated above improving relationships with their own creditors,” he added. “This is interesting because the most observable phenomenon has been the rush to funding. The scrutiny of the supply chain and the customers goes on behind the scenes but is a top priority nonetheless.”
  • NeuGroup has heard similar responses in weekly interactions with its members. Several companies mentioned making sure their suppliers remained viable. And early on they said they were looking to underpin balance sheets by tapping revolvers or looking for loans. 

However, at the same time, they noted that some bankers were viewing drawdowns and requests much more favorably than others. Realizing this, treasurers are communicating with banks. According to the Bloomberg-Greenwich poll, 39% of respondents said they “increased conversations with our banks.”

The poll was conducted during a Bloomberg webinar on Greenwich Associates’ recent report, “Changing KPIs force treasurers to improve their risk technology.”

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Looking for Yield: Investment Managers Mull Prime Funds, Short-Duration SMAs

After fleeing prime funds, corporates are asking if now is the time to return.

Treasury investment managers interested in picking up additional yield for short-duration cash are not yet returning to prime money market funds (MMFs) that they exited as the coronavirus pandemic emerged. That was one of the key takeaways at a NeuGroup virtual meeting this week where several managers expressed interest in what one of their peers is doing: Using separately managed accounts (SMAs) for liquidity investing.

  • None of the participants is currently invested in prime funds. “We got out and went into more government funds and stayed there,” one member said. Several others used almost the exact same phrase.

  • The speed of the fixed-income market’s reaction to COVID-19 reflected that, in the wake of the 2008 global financial crisis, “Everyone had a playbook for duration, counterparty risk and prime funds,” one investment manager said. “Once they realized it was for real, they acted on it quickly.

After fleeing prime funds, corporates are asking if now is the time to return.

Treasury investment managers interested in picking up additional yield for short-duration cash are not yet returning to prime money market funds (MMFs) that they exited as the coronavirus pandemic emerged. That was one of the key takeaways at a NeuGroup virtual meeting this week where several managers expressed interest in what one of their peers is doing: Using separately managed accounts (SMAs) for liquidity investing.

  • None of the participants is currently invested in prime funds. “We got out and went into more government funds and stayed there,” one member said. Several others used almost the exact same phrase.
  • The speed of the fixed-income market’s reaction to COVID-19 reflected that, in the wake of the 2008 global financial crisis, “Everyone had a playbook for duration, counterparty risk and prime funds,” one investment manager said. “Once they realized it was for real, they acted on it quickly.

Now what? Now that credit markets have stabilized, “We are curious about prime,” one member said. No wonder: The Federal Reserve’s moves to support markets with backstops for MMFs and commercial paper have some corporates wondering if the risk of prime funds is nearly comparable to that of government funds, making it worthwhile to take the extra yield offered by prime.

Prime problem. One reason to avoid prime funds, members said, is the gates that temporarily impose restrictions on redemptions if the funds breach weekly or daily liquidity requirements. Despite the Fed’s support, there are “still concerns,” one member said, adding that in the current situation you may unfortunately find out that you “have cash but don’t have the cash.”

  • He noted that Goldman Sachs and Bank of New York Mellon pumped money into their prime funds in March as redemptions surged.
  • An asset manager addressing the peer group told the managers, “If I had your jobs, I would not have a dollar outside the government funds” that is earmarked for a short-term, liquidity bucket. He said the floating or variable NAV of prime funds “can cause panic” in volatile markets.
    • As for the Fed’s backstop facilities, he said that when investing in commercial paper or other debt, “I want to buy a credit because it’s a credit that I think is solid and a fair valuation—not because the Fed is providing a backstop.” In short, he added, “There is no substitute to credit work.”

The SMA option. Several participants were happy to hear from one member that using SMAs for cash invested for as little as two-months can be worth the cost of hiring an external manager. That’s thanks to a “strong relationship with a manager” who charges a “very low fee,” the member said.

  • “I had always viewed the SMA route only for a weighted average life of a year or so,” one member commented. “But even for shorter duration it seems compelling now.”

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