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Justin Jones In Banking, Capital Markets

A Tale of Two Bank Revolvers

One company has fewer than 10 banks in its revolving credit facility while the other has more than two dozen.

How many banks does a corporation need or want in its revolving credit facility? The answer, no surprise, is that it depends on the company, a point driven home at a recent meeting of NeuGroup for Mega-Cap Assistant Treasurers.

During the session, two members discussed how they arrived at very different answers based on the particulars of their companies.

One company has fewer than 10 banks in its revolving credit facility while the other has more than two dozen.

During the session, two members discussed how they arrived at very different answers based on the particulars of their companies.

Less is more. For one company, the answer is fewer than 10 banks, with each committing the same amount of capital. It’s a five-year revolver that is in excess of $3 billon.

This structure came about after extensive analysis and discussion at the company following a strategic acquisition that left it with about two dozen banks combined, which it reduced by about 30% initially.
Later, the question arose in treasury, “how few [banks] could we have and support the business we operate,” the member said. It also needed to know the approximate revenue each bank would need to earn on an annual basis to achieve its return targets, and whether the company’s recurring business would generate sufficient fee revenue for its banking partners over time.
The company first and foremost wanted to ensure it had a bank group that could provide investment and commercial banking services on a global basis. The results have been good, with the company being more able to award additional business and shift ongoing business based on value-added ideas and execution expertise.

Benefits from bigger. The second company has roughly three times the number of banks in its revolver as the first (but fewer than 30), with four tiers of commitment amounts. The revolver is less than $10 billion in total across one-year, four-year and five-year tranches.

This long-established structure provides ample liquidity to support the credit rating and commercial paper program related to its captive finance company which has $50 billion in assets. Some of the banks in this facility have relationships with the company spanning multiple decades.
For this member, whose company has a strong risk management culture, the banks provide a wide range of services including medium-term notes, commercial paper, asset-backed securities, foreign exchange, interest rate derivatives and cash management.
Like the other member, this company keeps close track of fees paid to its banks.

Big Picture. A poll during the session (see chart) revealed the member with fewer than 10 banks is in the minority of the corporates at the meeting. As the chart below shows, 20% have 10 or fewer banks in their revolvers, 30% have between 11 and 20 banks, and half have between 21 and 30.

In terms of dollar amount, the poll showed that half the group have revolvers between $3 billon and $5 billion; another 30% have revolvers between $1 billion and $3 billion.
Both members and other ATs who joined the discussion noted that the number of banks in a revolver means committing time and attention to coverage efforts by the bank group. Also, most members said the trend was to have fewer as opposed to more banks in their revolvers relative to where they are now.

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Justin Jones In Cash & Working Capital, Talking Shop

Talking Shop: Payments to Support Relocation for Russian Nationals

Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: [email protected].

Member Question: “As a result of the ongoing crisis in Ukraine, we have Russian national employees based in Russia who are looking to relocate and effectively become employees of our Dutch entity. Because of the restrictions on getting cash out of the country from employees’ personal bank accounts, we’re looking to support them with a one-time relocation allowance.

“Does anyone have experience with this type of effort and, if so, could you share how you supported this? We’re exploring prepaid debit cards, corporate cards, etc.; but no luck so far on a solution that helps support employees upon landing in the Netherlands.”

Peer answer: “Look into Payoneer. They offer digital wallets and standalone cards; we haven’t used them, but we did look into them for the same purposes.”

Western Union? In March, at one of NeuGroup’s frequent meetings for members to discuss how they’re handling the challenges presented by the crisis, one member shared with peers a Western Union B2C solution called Quick Cash to wire to money to fleeing employees once they reach other countries.

NeuGroup Insights reached out to that member this week for an update. “Fortunately, we did not need to use [Quick Cash],” he wrote. “Our primary plan was for refugees to get to a designated bank branch/bank contact where an account was quickly opened for several employees.
“The Western Union solution was to be used if there was situation where we couldn’t get an express account opened in each of the respective countries bordering Ukraine. But we did, thanks to Citi’s immense help with ensuring key local bank contact points.”

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Justin Jones In Capital Allocation, Cash & Working Capital

A Treasury Mind Shift: Focusing On Operational Cash

Many treasuries have grown complacent about cash levels, but concerns about a recession are triggering a renewed focus on optimizing the management of working capital.

The debate about whether the US economy is headed into a recession because of higher interest rates and the Fed reducing its balance sheet is heating up. While some economists are bullish, many corporate treasuries are not: In a poll last week, 71% of members of NeuGroup for Global Cash and Banking said a recession is likely or highly likely in the second half of this year (see chart.)

Many treasuries have grown complacent about cash levels, but concerns about a recession are triggering a renewed focus on optimizing the management of working capital.

The debate about whether the US economy is headed into a recession because of higher interest rates and the Fed reducing its balance sheet is heating up. While some economists are bullish, many corporate treasuries are not: In a poll last week, 71% of members of NeuGroup for Global Cash and Banking said a recession is likely or highly likely in the second half of this year (see chart.)

This sentiment was echoed in a NeuGroup Peer Research survey, Going Out the Curve: Benchmarking Investment Strategies. In follow-up conversations with respondents, NeuGroup found that not only are companies rolling off longer duration assets, but some are reallocating strategic cash into their operational and reserve cash “buckets.”

“Because this cash is so short-term, we are pulling money out of externally managed portfolios,” one NeuGroup for Cash Investment member explained. “We feel we have the expertise to manage this cash internally.”
In addition, NeuGroup has observed a growing interest among cash investment managers in investing in money market funds (MMFs) and setting up connectivity with MMF portals to facilitate the process.

Return to discipline. Significant corporate expectations of higher rates and a recession later this year is—or should be—a red flag for treasuries, especially at companies that issued or refinanced debt in the past few years. That’s because lower earnings can deplete liquidity buffers, and higher rates would make additional borrowing more expensive. That’s why 78% of participants in the global cash and banking group poll said they expect greater emphasis on working capital (see chart).

In NeuGroup’s 2022 Member Agenda Survey earlier this year, working capital ranked fourth in the list of priorities, after business partnering, capital structure and digital transformation. If we asked members now, would the survey results be different? To find out, we asked this very question during a research-debrief session at the H1 semi-annual meeting of the NeuGroup for Mid-Cap Treasurers.

“Working capital would rank higher,” one of the members said. At his company, optimization of working capital is now a big focus area for treasury.

Getting closer to the sources of cash. At the same mid-cap treasurers meeting, members reported that their role, and treasury’s scope, are expanding rapidly, e.g., to include credit cards, AP and parts or all of FP&A. On one side, the broader role is stretching some members’ capacity; however, on the other, it is elevating treasury’s profile and increasing engagement with the business.

Managing working capital requires getting into the weeds of incoming and outgoing cash by looking at customer-to-cash metrics such as days sales outstanding (DSO) and days payable outstanding (DPO) and the health of the AR portfolio. These metrics are important in two ways:
- They allow treasury to get involved in managing customer credit and payment terms, e.g., come up with strategies to hasten collections and delay payments, calculate the cash impact of offering early-payment discounts, etc.
- Also, the closer treasury is to cash, the more accurate its cash forecast, which takes on greater urgency during times of tight liquidity. For example, a deeper dive provides visibility to DSOs and thus a slowdown in incoming cash, which can be built into hedging ratios and duration.

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Justin Jones In Banking, Capital Markets

Why Morgan Stanley Sees US Economy Avoiding Recession

Economist Robert Rosener tells bank treasurers that rising wages supporting consumption and continued capex by corporates should keep GDP growth above trend.

Not everyone thinks the Fed will push the US economy into recession as it raises rates to fight inflation. Robert Rosener, senior US economist at Morgan Stanley, recently told members of NeuGroup for Regional Bank Treasurers that the firm sees just a 25% chance of recession over the next year.

“Avoiding recession is our base case, but markets will have to confront the rising probability of one regardless,” he said in a follow-up email with NeuGroup Insights.

Economist Robert Rosener tells bank treasurers that rising wages supporting consumption and continued capex by corporates should keep GDP growth above trend.

“Avoiding recession is our base case, but markets will have to confront the rising probability of one regardless,” he said in a follow-up email with NeuGroup Insights.

Reasons for guarded optimism. Morgan Stanley expects the US economy to grow 2% this year and 2.1% in 2023, Mr. Rosener said. One factor supporting this view is the longest stretch of such strong job growth on record—including another 428,000 new jobs in April—that has increased aggregate real wage and salary growth, despite inflation weighing on households’ real wages.

It helps that consumer balance sheets remain strong, if uneven, and around 90% of the household debt is fixed-rate and unaffected by higher rates.
Other factors, Mr. Rosener said, include continued capital expenditures by corporates and their efforts to rebuild pandemic-depleted inventories.
Annualized real GDP growth unexpectedly contracted by 1.4% in the first quarter. However, stripping out “noisier” components such as weak exports and the pullback in government spending reveals a more solid 3.7% growth rate, he said.
While slowing over the course of this year, Morgan Stanley expects that real GDP growth will remain above trend, with continued strong wage and job growth supporting consumption together with some lift from fiscal policy as infrastructure spending kicks into higher gear from the fourth quarter of 2022 onward.

What to watch. Responding to a member asking what would indicate persistent inflation as the year progresses, Mr. Rosener said Morgan Stanley sees Q1’s very high inflation run rate ebbing to between 4% and 5% for the year, still near double the Fed’s target (see chart). If the Fed’s front-loading rate hikes don’t tap down demand fueling inflation—the hoped for soft landing scenario—more aggressive tightening may be necessary.

The biggest risk right now, Mr. Rosener said, stems from supply chains, for which improvement has paused due to China’s Covid-related shutdowns.
- Inflation forecasts now depend heavily on whether goods prices return to pre-Covid levels and remain persistently elevated, he said, noting that after rising 50% over 2020 and 2021, used car prices fell more than 3% in March but have since flattened and even increased.
Rising energy prices prompted by Russia’s invasion of Ukraine could result in yet another wave of inflation, hardening expectations of persistent inflation and prompting rate hikes sufficient to create “slack” in the economy by increasing unemployment.
But, Mr. Rosener said, unemployment has never risen more than 50 basis points without a recession following.
The most recent data on inflation for the month of April showed little sign of cooling inflationary pressures, Mr. Rosener said this week. “While inflation has likely moved past its peak on a year-over-year basis, the latest data shows that sequential trends remain firm and a plateau may be forming, at least in the near-term, with inflation not far off of its peak and still above 6%,” he said.
- A slower rate of inflation in pandemic-sensitive categories like airfares, as well as further easing in goods price inflation are two key components that will be needed to get core inflation below that trend over coming months, he added.

Then there’s QT. The Fed is also seeking to shrink its balance sheet by letting Treasury and agency securities it purchased mature—so-called quantitative tightening (QT). How that impacts the slope of the Treasury curve will depend less on QT itself and more how the Treasury Department increases bond issuance to replace that lost funding.

That will be the biggest factor in whether the Treasury curve flattens or steepens, Mr. Rosener said, adding Treasury’s current bias toward bills and short-end coupons suggest those may be the biggest issuance segments to offset QT.
- “That increases our conviction the curve will be flat to slightly inverted by year-end,” he said. Morgan Stanley’s strategists’ latest forecasts see 10-year yields trading around 3.0% through 2H22 and moving sustainably above 3.0% in 1H23 with the 2s10s yield curve inverting again as the Fed hikes rates further.

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Justin Jones In Banking, Regional

Russia Reality: Paying Taxes to Shield Staff From Criminal Liability

Fear of criminal liability motivates corporates to pay taxes in Russia—but banks are rejecting some tax payments.

The threat of criminal prosecution of their employees in Russia is one reason some US-based companies continue to make tax payments in Russia. Meanwhile, several US companies report that Russian tax payments made by entities outside the US have been rejected by a US-based bank.

These takeaways emerged at the most recent NeuGroup session where members discuss the challenges facing finance teams at companies that continue to do business in Russia, have frozen operations there or are exiting the country.
- None of the companies present said they have stopped making tax payments.

Fear of criminal liability motivates corporates to pay taxes in Russia—but banks are rejecting some tax payments.

These takeaways emerged at the most recent NeuGroup session where members discuss the challenges facing finance teams at companies that continue to do business in Russia, have frozen operations there or are exiting the country.
- None of the companies present said they have stopped making tax payments.

No tax holidays. “We discussed how to negotiate with the authorities there in terms of a tax holiday,” one member said this week. “And the result of the negotiation was that if you don’t pay those excise taxes promptly and on time and in full, our representatives in Russia, executives, will be under criminal liability. So we made the choice to pay those taxes,” he said.

“We’re actively keeping our taxes paid for the same reason—criminal exposure to our employees,” another member responded. “We’ve discussed it, but we’ll be paying our taxes.”
Those statements came in response to a member who asked if any companies had decided not to pay taxes. She said someone on the tax team had raised the issue and, after some back-and-forth, the company had come to the same conclusion as its peers about legal liability. The member “wanted to find out what everyone else is doing” and bring that information back to the tax team.

Rejected payments. After NeuGroup senior executive advisor Paul Dalle Molle said that it appears that “everybody is rigorously paying” Russian taxes, one member quickly added, “So long as the banks will allow us to pay”—an allusion to one bank that members say has rejected Russian tax payments from entities based outside the US.

Three members said one US-bank had rejected Russian tax payments made by entities based the UK, Ireland and Switzerland. One of the members said the explanation he heard is that the bank’s Office of Foreign Assets Control (OFAC) license allows it to process tax payments for US entities only.
Another member notes that value-added tax (VAT) payments go to the Russian central bank, which is a sanctioned institution. That could create a need for the bank to get approval from OFAC.
One member said a different US bank located in London had successfully paid Russian taxes from a ruble account for a Swiss entity owned by his US-based company. “So it may depend on the bank itself or what license it has. We may be purely lucky,” he said.
As a result of all this, members are building in long lead times for tax payments. Even if payments are approved, delays are common as bank compliance checks can be laborious.
- Mr. Dalle Molle observed, “ When banks do sanctions checks on proposed tax payments, some appear to weigh more heavily the domicile of the remitting entity, while other banks weigh more heavily the ultimate country of ownership of the entity’s parent.”
- He also noted that tax payments are being made successfully both from outside Russia into Russia, and with domestic Russian transfers. Many companies need to do both because of how their businesses are structured.

Other takeaways. Members discussed a range of other topics during the session, producing these takeaways:

Treasury teams are seeking clarity from compliance and legal teams on new OFAC sanctions that prohibit US persons from providing accounting, trust and corporate formation, and management consulting services to any person in Russia.
- “Treasury services seem to be out of scope for this. But accounting support, so control or FP&A services, may be in scope. We’re waiting for our legal team to come back on this,” one member said.
Members report slow or no progress in opening accounts at Chinese banks in Russia as more US banks retreat or fall under counter-sanctions.
- One member said the two Chinese banks his company approached early in the crisis were “very reticent to do anything.” But given current circumstances and a dearth of Russian banks that are unsanctioned, “we may try to do another attempt.”
Several companies have stopped all FX hedging in Russia, citing high costs. And while some corporates continue to engage in balance sheet hedging, none are hedging cash flows.
- “For cash flow hedge purposes, it’s very expensive and there is uncertainty,” one member said.

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Justin Jones In Risk Management

Seeing Risks Before They Do Damage Isn’t Impossible

Members of NeuGroup’s corporate enterprise risk management group hear how they can divine unseen, emerging risks.

The ancient stoics often practiced premeditatio malorum or the premeditation of evils, which was basically the art of expecting the worst. In a sense, this is how enterprise risk managers must go about their jobs today, particularly when the timeline of 100-year disruptive occurrences has been compressed to every four to five years.

Social, geopolitical and environmental risks combined with the everyday risks of competition and markets have prompted ERM practitioners to look farther and wider for risks seemingly popping up everywhere.

Members of NeuGroup’s corporate enterprise risk management group hear how they can divine unseen, emerging risks.

Social, geopolitical and environmental risks combined with the everyday risks of competition and markets have prompted ERM practitioners to look farther and wider for risks seemingly popping up everywhere.

Keys to success. Doing a good job discerning those risks (and opportunities) will mean success for the company, according to Paul Walker, the James J. Schiro/Zurich Chair in Enterprise Risk Management and Executive Director of St. John’s University’s Center for Excellence in ERM.

Dr. Walker, who presented at a NeuGroup for Enterprise Risk Management meeting in April, said a recent survey he conducted showed that 94% of respondents agreed that “how well an organization anticipates, interprets and reacts to emerging risks, market changes, trends and disruption is the key to future success,” according to a white paper by Dr. Walker.
The way companies can do that is to “spend time to understand” and to locate emerging risks and then “tie them back to business the model,” Dr. Walker said (see chart). And whatever the decision is to meet that risk, it must include a plan of action. “Gotta be actionable,” he said. When practitioners “are standing in front of the CFO” they need to have a plan.
One member responded that being able to know “what’s around all corners” is crucial, but described being able to see what’s coming as one of the biggest challenges in his career as an ERM professional.
- “If something happens, the board always turns around and says, ‘Why didn’t you see this coming?’” he said. “The way I prepare for this is by sharing all the things that could ever happen that we have consolidated over the many years, from internal sources all the way to an alien invasion.”

Prioritize thorough plans. Plans need to be thorough, Dr. Walker said. He said one way to get that thoroughness is working with parts of the company already doing the analysis. “Some of you may have within your org … someone already doing” analysis of risk related to their specific function—say for financial planning or marketing—”get to know them,” Dr. Walker advised.

He cited one company he works with that “breaks down business impacts into social, tech, economic, environmental, political” categories and then gives them a score on dimensions of business impact.
An ERM member said his team looks at various trends and breaks them down into what impact those trends may have on the company. “What can they signal? And what would happen if you did nothing? How confident are you in the path?” Are actions required? And should they do a strategic deep dive?
“It comes back to, what do we change?” Dr. Walker said of the impact of trends. Is it the business model? The strategy? Or is it just making the company more resilient? “I think executives want to know [from risk managers], ‘what do we do?’”

The danger of irrelevance. Dr. Walker also said emerging risks aren’t all bad and some “are opportunities.” Quoting a senior strategy executive he’d worked with, he said “the greatest risk to any organization is irrelevance.” Therefore, organizations “must learn to see change and trends” and risk leaders cannot afford to miss “strategic pivot points” and end up losing the company massive value and risk going bankrupt.

Missing the boat has been a topic of other NeuGroup ERM meetings, with one member discussing how his company had the opportunity to acquire a budding rival and decided against it. Today, the company it didn’t acquire is larger than his company. His company has since acquired another company, paying top dollar for it in the process. This has prompted other worries, the member said, the main one being whether the previous missed opportunity caused them to overpay for the new acquisition.

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Justin Jones In Capital Markets, Cash Investments

Benchmarking Investment Strategies in a Rising Rate Environment

Higher rates mean higher yields, but 70% of respondents to a recent NeuGroup survey conducted with Clearwater Analytics do not intend to extend duration.

Surging inflation, a hawkish Fed and talk of a recession are prompting corporate treasuries to reevaluate their cash investment strategies.

However, 70% of respondents to a NeuGroup survey conducted in partnership with Clearwater Analytics, Going Out the Yield Curve: Benchmarking Investment Strategies, report they do not intend to extend duration to take advantage of the uptick in yield, and some are rolling off longer maturities. The primary reason: concern about increased market risk.

Higher rates mean higher yields, but 70% of respondents to a recent NeuGroup survey conducted with Clearwater Analytics do not intend to extend duration.

Surging inflation, a hawkish Fed and talk of a recession are prompting corporate treasuries to reevaluate their cash investment strategies.

However, 70% of respondents to a NeuGroup survey conducted in partnership with Clearwater Analytics, Going Out the Yield Curve: Benchmarking Investment Strategies, report they do not intend to extend duration to take advantage of the uptick in yield, and some are rolling off longer maturities. The primary reason: concern about increased market risk.

A Red Flag. “The yield curve is definitely signaling an inversion, particularly between the two- and 10-year rates and therefore an upcoming recession,” said one survey respondent in a follow-up interview in April.

“We are running scenario analysis using advanced analytics to determine our cash position given different recession scenarios.” In addition, his company and others are stress testing their portfolios against the potential fallout from the crisis in Ukraine.

Key Findings. The accompanying white paper highlights our findings as well as practitioner input from three, follow-up focus groups. Here are the three main takeaways:

Investible cash. Corporate investors expect their significant, strategic cash balances to remain steady or grow this year as they monitor current events and evolving market conditions.
Extending duration. The most common response to recent shifts in the market has been to maintain—or slightly shorten—duration, reflecting concerns about market volatility and rising interest rates.
External managers. The amount of investible cash on the balance sheet continues to play a factor in offering economy of scale to corporates, driving those with smaller portfolios to seek the expertise of external managers.

Click here to read or download the complete white paper.

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Justin Jones In COVID-19, Treasury Management

Talent Travails: Loose Lips About Pay and Hybrid Headaches

A younger generation’s transparency about what they earn creates another challenge for finance leaders coping with hybrid work woes.

A session on talent at a recent meeting of NeuGroup for Mega-Cap Assistant Treasurers revealed that finance teams already struggling to hire workers amid tight labor markets, demands by candidates for higher compensation and the unwillingness of some of them to spend much, if any, time in the office face additional, less publicized problems:

Many younger workers speak freely about how much they are earning, prompting dissatisfaction among existing, veteran staff who may learn that new hires are making almost as much as they are—or more. And not all efforts by treasury to get HR to make salary adjustments for current staff are succeeding.
New hires directed to work in offices are arriving on corporate campuses with very few workers, prompting them to ask why they have to commute and then work on nearly empty floors when more experienced finance team members remain working from home.
“We’re really struggling with this hybrid issue right now,” said an AT who started the session by presenting her observations to the group and whose comments resonated with many other NeuGroup members present.

A younger generation’s transparency about what they earn creates another challenge for finance leaders coping with hybrid work woes.

Many younger workers speak freely about how much they are earning, prompting dissatisfaction among existing, veteran staff who may learn that new hires are making almost as much as they are—or more. And not all efforts by treasury to get HR to make salary adjustments for current staff are succeeding.
New hires directed to work in offices are arriving on corporate campuses with very few workers, prompting them to ask why they have to commute and then work on nearly empty floors when more experienced finance team members remain working from home.
“We’re really struggling with this hybrid issue right now,” said an AT who started the session by presenting her observations to the group and whose comments resonated with many other NeuGroup members present.

Generation gap: talking about pay. Many senior treasury leaders have come to accept the need to offer more attractive pay and benefits packages to lure candidates in this environment. And that in some cases, they won’t be able to match another employer’s offer. But they have also been forced to accept that many younger people are far more willing to discuss what they earn than people from older generations. This new climate of pay transparency brings new problems.

“You never talked about what you made to your co-workers,” one AT said. “Now, it’s generational. I’ve got people in my office every day. They went to dinner with their co-worker and found out what they’re making compared to the other ones. ‘I’ve been here for years busting my butt to deliver; this person has no experience, yet I know they make more than me.’ And you hear the complaints, but HR keeps telling us there’s nothing they can do.”
Another member framed the pay issue surrounding existing staff this way: “How can I properly compensate them to help them to stay, number one? And then, as we’re hiring other people, my salaries are all out of whack. I’ve got people at one level making almost as much as people who have been there forever.”
Unlike the first AT, though, this member has been able to raise the salaries of some existing team members “who are deserving, who I was afraid would really leave a big hole.” But this member does not expect to have that lever to pull in the future.
Salary transparency is also being fueled by business schools that publish data on salaries in specific industries and individual companies, one AT said. That can create frustration for existing talent who learn that “fresh MBAs” at the company are making as much money or more than they are.

Hybrid headaches. Managing the generational divide over pay transparency is not the only talent balancing act that finance team leaders must perform. Another is balancing the desire to get new hires in junior roles into the office on a regular basis with the reality that many experienced workers mostly remain at home.

“The people with the experience don’t want to come in the office,” said one AT whose company has a campus built for several thousand people. “So we are struggling with that right now.”
Junior people, no surprise, don’t see the value of coming to an office and working on an empty floor. “They say, ‘why are we here and nobody else is? There’s really no benefit to us being here,’” one AT said. Another member said, “They go into the office but no one’s there, so they’re on video calls all day. And everyone’s, like, what’s the point?”
Some companies are using free breakfasts and happy hours to get people back in the office. One member said when a new hire starts, all of the treasury team go in to avoid having the new team member work alone in the office aside from a few IT workers.
At another company, the problem is not getting more experienced people in the office; it’s getting the junior people to see the value of joining them. “Maybe they don’t put the same value on those in-person interactions,” the AT said. “We’re really trying to find ways to make time in the office productive and meaningful and show value, but it’s a challenge.”

Big picture: the office obstacle. The member who kicked off the discussion was among 29% of respondents to an in-session poll who said hiring in the current environment is “very hard.” (About two-thirds described it as “relatively hard.”)

One of the biggest challenges for this AT is resistance to the company’s policy that workers spend at least three days a week in the office. “It’s really taken a lot of people out of the mix, which I find incredible, particularly for these levels,” the member said, referring to junior positions.
The member has started telling candidates about the policy from the get-go after enduring the frustration of making an offer after a lengthy vetting process only to learn the person would not agree to come in more than twice a week. In this case, “the candidate said, ‘No, it’s a deal breaker, won’t do it.’ I’m like, you’re kidding me, for one day to come into the office? It’s unbelievable.”
Another member said it took her six months to fill an analyst position and almost a year to hire a senior manager. She chalked up the difficulty in part to being clear about her unwillingness to bend on the requirement that candidates be in the office as much as five days a week. It’s based on the group’s belief that working in the office promotes collaboration and the development of skills that allow team members to work on ad-hoc projects and opportunities that pop up.
“I feel like it took me longer to fill the roles, but I didn’t have that back-and-forth. I was very upfront,” she said, adding that once someone accepts those terms and is hired, the company is flexible if they need to work from home occasionally.

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Justin Jones In FX, Senior Executive

Sharpen the Focus: Fostering More Productive FX Meetings

Approaches to more productive meetings include highlighting world events, more detailed program updates and updating dashboards.

After a recent quarterly risk meeting, a senior leader gave this advice to one FX risk manager to improve the productivity of future meetings: Highlight only new developments and events, come with any specific asks and leave anything else to pre-meeting reading materials.

Up to this point, much of the two-hour meetings consisted of a comprehensive update on everything the FX team had done in the previous month, including reviewing many specific hedges. That often left little time to propose any new initiatives or changes in strategy that would need to be approved by leadership.
But drastically cutting down the bulk of the meeting, the member said, presented a dilemma, one that resonated with other members at a summit for NeuGroup for Foreign Exchange sponsored and co-hosted by Chatham Financial: “What else can we talk about?”

Approaches to more productive meetings include highlighting world events, more detailed program updates and updating dashboards.

Up to this point, much of the two-hour meetings consisted of a comprehensive update on everything the FX team had done in the previous month, including reviewing many specific hedges. That often left little time to propose any new initiatives or changes in strategy that would need to be approved by leadership.
But drastically cutting down the bulk of the meeting, the member said, presented a dilemma, one that resonated with other members at a summit for NeuGroup for Foreign Exchange sponsored and co-hosted by Chatham Financial: “What else can we talk about?”

What’s new? Sometimes, the member said, pressing current events or updates on new hedging programs help to fill the entire time—but you can’t always count on that. Breaking down the impact of Covid, supply chain disruption and the crisis in Eastern Europe has occupied most of the time in recent risk meetings, “but you don’t always have a black swan event to respond to,” the member said.

Some members responded that the best use of this time is to dig deeper into currency updates and analyze the performance of hedging programs. Not content with only understanding the sources of unexpected FX gains or losses, also known as “noise,” one member shared that he takes an extra step, documenting causes of noise using reason codes.
- “We delve into the results in the key drivers, which requires being prepared for and understanding sources of noise,” he said. “Then, we can share if we are over-hedged or under-hedged, which the board appreciates.”
Since many members said that their teams only track hedging performance through Excel, preparing analysis and charts to visualize it can be very time-consuming. “We perform reconciliation and noise allocation, then identify high-risk currencies and prepare decks before we meet,” he said. “It can be a challenge to perform as much work as we can ahead of time.”

Dig into currencies. To address the challenge, one member set up automated dashboards for each currency in Power BI, which he said has been very beneficial in meetings with leadership, and essentially eliminates any prep time for reports by currency.

“Like many others, our FX risk management policy focuses on reducing volatility,” he said. “What is very important is that we do active, monthly monitoring looking at FX results.”
Power BI pulls FX data from the company’s TMS and ERPs covering gains and losses on monitored currencies, their related balance sheet exposures and the company’s published monthly FX rates for each currency, as shown in the charts below.
“We have a dashboard in Power BI that key people have access to, and then we have a pack of dashboards that export so we can present at board meetings, but also can be a historical record,” he said.
- For now, more detailed analysis of hedging performance is still done in Excel, but the member said he is working to improve this process in a similar fashion.

Making use of extra time. If there is still time remaining after in-depth results and currency updates, one member said he comes prepared to present on concerns that may not yet be on leadership’s radar.

“If there is something we’re seeing as an issue in treasury, leadership may not have as nuanced of a view of it as we do, and we want our voice to be heard when they are talking with a distributor,” he said.
The member recently started using a vulnerability chart of the 10 top EM currencies that the company has exposure to, and plots each currency based on its vulnerability and cost to hedge. In the chart below, currencies (unidentified) are plotted by vulnerability, cost to hedge and exposure. The dotted red lines show how the company can set limits on when hedging becomes too expensive, or when a currency becomes too vulnerable.
“We’re trying to drive conversation with the business and be seen as a vital partner,” he said.

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Justin Jones In FP&A, Technology

Technology as the Backbone of Change

The importance of harnessing big data and implementing a holistic solution to drive finance transformation and process optimization.

The pandemic exposed the deficiencies in many companies’ planning processes and technology infrastructures. As events unfolded at a breakneck pace, FP&A leaders were expected to deliver quick insight to support critical strategic decisions. However, many were hampered by a lack of data visibility and inflexible and suboptimized forecasting and planning processes.

According to members of NeuGroup for Large-Cap Heads of FP&A, which met in Atlanta April 21, finance organizations are revving up their digital transformation initiatives, cleansing and consolidating disparate data sources and implementing foundational technologies that integrate operational and financial data so they can shed manual work and focus on delivering actionable insight. “My team needs to step up to become the CFOs of the functions we support,” one member said. While this vision will take time to realize, “we’re having the right conversations with the business leaders.”

The importance of harnessing big data and implementing a holistic solution to drive finance transformation and process optimization.

Moving forward faster, smarter. “It’s about the need for speed at the CFO level,” said Scott Stern, vice president of global product marketing and strategy at OneStream, which sponsored the meeting. Mr. Stern added: “At the same time, speed for speed’s sake is not useful.” Speed must be combined with strong governance. “We want to enable our teams in an environment of fractured data, within and outside of finance. The challenge is how to curate this data so it can be harmonized and used to support decisions.”

To get a seat at the table, according to Mr. Stern, finance must expand beyond its traditional realm. “Increasingly, we see the alignment of FP&A and the operation’s data and functionality requirements,” he said. “Good or ‘OK’ teams are still focused on the financials. The leading-edge ones are partnering with the business.”

The biggest issue for everyone is getting a handle on data that is typically stored in disparate systems. “There’s a ton of data,” said one of the participants, “and that’s our biggest challenge.”
“Our core data is a mess, even the actuals,” reported one member whose company is on a three-year transformation journey. That has to be sorted out first, even before buying a tool to curate and analyze it. “The challenge is to get everyone on board to make an enterprise-wide investment to fix these issues.”

Transformation 2.0. While many first-generation transformations were primarily focused on reducing head count, today’s initiatives embrace a broader mandate: scaling up while freeing up finance capacity to focus on strategic activities such as planning and analysis.

“Our priority is to set manual, operational work aside so we can focus on the strategic aspect,” one member said. This is good news for finance professionals: “No matter how automated things become, automation is not going to eliminate FP&A because its main job is the storytelling,” said one of the meeting attendees.
“We see massive growth on the horizon,” another member noted, “so finance has to scale up without a significant increase in head count.” In addition, his FP&A team is challenged with providing management with better insight into how to steer the business, e.g., via more sophisticated forecasting models. This combination underlies the company’s overhaul of its tech stack, including the consolidation of more than 100 finance systems into 20 to 30, and the establishment of a centralized and consistent data layer to support insight generation across functions.
In addition, this company and others expect economic and market conditions to continue to change at a rapid clip. In practical terms, this means transformation initiatives do not have an expiration date. “For us, transformation will be a continuous process,” the member above said. Another added: “My job is to keep one hand on a wheel while driving at 100 miles an hour.”

Technology as the backbone of change. The implementation of a new system is an opportunity to standardize and automate processes. “The stupidest thing is to optimize an existing process without first determining whether it’s even necessary or adding value,” cautioned one of the attendees. “Ask the question first: Should we even do this?” Members have taken different approaches for spearheading change.

“We started three years ago and set up a team dedicated to process improvement that included three Six Sigma black belts and a director.” This “SWAT” team worked with different functions to identify opportunities for change and was charged with building traction and getting the ball rolling. They are also the ones doing the postmortems.
Another way to make breakthrough improvement is by getting different parts of finance together to exchange best practices, according to another member. This also helps socialize the change and getting buy-in along the way. “We identified where the waste was and what needed to change,” he said.
At another company, transformation is its own pillar within finance. The benefit, according to the VP of transformation, is that the project does not lose steam and stays on target. It creates the right accountability. But there is a drawback. Depending on the culture of the organization, this may seem like a third party pushing through process change. The “happy medium” is to have transformation centralized but “have in-business champions to ensure people understand that you are there not to replace them, but to take away the worst part of their job.”

Which comes first? Among transformation leaders, fixing process before considering a solution has been a long-time mantra. Today we see a paradigm shift: enterprise-wide and function-specific new technologies are the trigger for process redesign. First, many tools come with “off-the-shelf” embedded best practice processes. In addition, the broader technology platforms create capabilities that did not exist before, for example regarding data aggregation and end-to-end process management.

At one member company, the change agent was the implementation of a new ERP. Not only is finance leveraging the project to consolidate applications, but it is also rethinking the way things work; for example, collecting and analyzing data to improve forecasting accuracy. “This is the time to think about what opportunities exist for the company and for finance, including the addition of new tools like predictive analytics and machine learning. Everything is on the table,” he said.

Changing the service delivery model. Technology is also sparking innovation in the way finance delivers services to multiple stakeholders, e.g., leadership, business partners and other SG&A functions. Several members reported they are migrating activities to shared service centers (SSCs) or centers of excellence (COE).

One company established a COE with junior-level staff who are responsible for basic reporting like actuals vs. budget. This way, the business partners can have the strategic conversation. The problem, he noted, is that the HQ staff is not necessarily ready to support the business as strategic advisors. “We found that not all of them are prepared for this conversation.”
At another organization, transactional work, specifically AP and AR, has been transferred to an SSC that relies on chatbots and other automations like RPA, to execute its processes, and managed to reduce headcount by 50%. “We have not gone into the strategic aspect—yet,” said this member. That is the next step.

Other key takeaways. The day-long meeting, which was facilitated by Brian Kalish, senior executive advisor and Nilly Essaides, NeuGroup’s managing director of research and insight, covered a range of topics: from technology- and data-enabled finance transformation, to talent management and the finance operating model of the future. The group discussed:

Automating to create strategic capacity, while directly addressing staff concerns about their future roles.
Leveraging technology to supercharge finance transformation journeys by consolidating disparate systems and creating a “blessed” data layer.
Emphasizing change management and cultural awareness as a critical ingredient of transformational change.
Scaling up through process standardization and automation to support rapid revenue growth.
Rethinking process improvement, i.e., challenge before optimizing/automating.
Establishing FP&A centers of excellence and migrating routine tasks (e.g., consolidations and reporting) to global business services organizations.
Harmonizing and cleansing data to enable decision support through advanced analytics.
Building more effective, AI or machine-learning-enabled, top-down P&L and cash forecasting models, which can pull in granular data from ops and the customer-to-cash process.
Aligning FP&A’s engagement model with the company’s operational strategy and providing a hybrid of centralized and “boots on the ground” support when necessary.
Addressing the challenge of a shifting talent profile (and a tight labor market) as FP&A sheds tactical work and focuses on business partnering and high-level decision support.

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Justin Jones In Banking, Cash & Working Capital, Regional

Slim Down: A Bank Tells Corporates to Cut Account Balances in Russia

Settling intercompany invoices emerges as the best option for some members to quickly reduce deposit balances in Russia.

A major US bank used by scores of NeuGroup member corporations in Russia has recently been making strong recommendations to some of them—in conversations, not in writing—that they find alternatives to the bank as the war with Ukraine enters its third month and the bank further reduces its exposure to Russia.

This development sparked discussion among members about contingency plans and how to reduce deposit balances at this week’s NeuGroup session on the fallout for finance teams from sanctions, counter-sanctions and the decision by hundreds of companies to suspend operations or leave the region altogether.

Settling intercompany invoices emerges as the best option for some members to quickly reduce deposit balances in Russia.

This development sparked discussion among members about contingency plans and how to reduce deposit balances at this week’s NeuGroup session on the fallout for finance teams from sanctions, counter-sanctions and the decision by hundreds of companies to suspend operations or leave the region altogether.
Despite the growing exodus, some corporate ties to Russia remain strong. In a poll to begin the session, 96% of member companies responding said they are still paying staff in Russia—a key reason corporates need banking services in the country.

Reducing balances, cutting credit. The big US bank is advising corporates to reduce their deposit balances in Russia, in one case requesting a member company cut the amount it holds at the bank in half in the next week or so. A member at a different company said, “What I heard is that for companies that have a lot of cash sitting there, they’re trying to really get their balances down.”

The bank asked another company in a recent conversation about its plan to reduce balances and exposures, which the corporate shared with the bank.
Members agreed that one of the best options to reduce balances—the only one for some companies—is the settlement of intercompany invoices. One company transferred several hundred million dollars out of Russia by one affiliate paying another for overdue invoices.
- The member said the large US bank was “really helpful” and processed the transaction very quickly, motivated by the bank’s desire to reduce its exposure to Russia.
Several members said their uncommitted lines of credit in Russia have been cancelled or frozen by the bank. “It didn’t really affect us because we didn’t plan on using it anyway,” one member said about a cancelled line of overdraft protection.

Outlook is day by day. The bank’s inability to predict whether it will at some time in the future be subject to sanctions or counter-sanctions means its ability to do business in the country could change “from one day to another,” according to one member.

Others had heard a similar message, with one member saying the bank is communicating clearly that what it can do today may change tomorrow. “They are very, very careful to caveat that this is as of today. And this could change at any time.”
For another member, change is coming by the end of June, when his company’s primary bank is planning to leave Russia, news he got a few weeks ago. His backup bank, he said with slight laugh, is the big US bank other members had spent much of the session discussing.

Other banks? In one breakout session, members expressed interest in possibly opening accounts at Rosbank, the Russian bank Societe Generale sold to Interros Capital, controlled by billionaire Vladimir Potanin, a Russian oligarch. He has been sanctioned by Canada, but he and the bank have not been sanctioned by the EU or US—a situation members are following closely.

The member contemplating the exit from Russia of both his primary and backup bank summed up the situation facing corporates that plan to stay in Russia. “Companies are going to have to figure out what local Russian banks they’re comfortable with and try to form some strategic partnerships,” he said. “And then cross your fingers that they don’t become sanctioned banks.”

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Justin Jones In FX, Technology

AtlasFX: Empowering FX Data Masters

Scott Bilter, CFO of AtlasFX, discusses how the company’s platform helps corporates manage currency risk in an interview with NeuGroup founder and CEO Joseph Neu.

At a recent NeuGroup meeting, FX risk managers compared notes on which systems and technology they use to identify currency exposures and reduce risk. One member said that after weighing several options, his company picked AtlasFX, in part because its founders—Jonathan Tunney, Gavin O’Donoghue and Scott Bilter—impressed him with their subject matter expertise about FX hedging and the complex challenges it presents.

“When we talked with those guys, we just felt like they were absolute SMEs when it came to in-the-trenches trying to explain month-end results,” the member said. “There wasn’t a scenario where they said, ‘oh, we need to get back to you, we’re not quite sure what you’re describing or we’re not really 100% on the answer exactly.’ They just knew everything. In fact, they were correcting us. ‘Actually, not only do we know the answer, but this is what you’re doing wrong here, let us improve this for you.’ It was just a very good experience overall.”

In a video interview you can watch by clicking here or by hitting the play button below, Scott Bilter tells NeuGroup founder and CEO Joseph Neu that the three AtlasFX founders accumulated much of their deep knowledge of FX at Hewlett Packard. You’ll hear how part of that education involved wrestling with an “army of spreadsheets” including one called the “FX beast.” The good news for clients is that their experience helped plant seeds that have grown into a robust platform that uses advanced data analytics to help treasury, FP&A and accounting teams to optimize balance sheet and cash flow hedging programs.

Scott Bilter, CFO of AtlasFX, discusses how the company’s platform helps corporates manage currency risk in an interview with NeuGroup founder and CEO Joseph Neu.

“When we talked with those guys, we just felt like they were absolute SMEs when it came to in-the-trenches trying to explain month-end results,” the member said. “There wasn’t a scenario where they said, ‘oh, we need to get back to you, we’re not quite sure what you’re describing or we’re not really 100% on the answer exactly.’ They just knew everything. In fact, they were correcting us. ‘Actually, not only do we know the answer, but this is what you’re doing wrong here, let us improve this for you.’ It was just a very good experience overall.”

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Justin Jones In ESG, Sponsored Content

A New Approach for Corporates Reducing Carbon Footprints: Investing in Renewable Energy Private Equity Strategies

PE funds producing returns and carbon credits may attract corporates with business, suppliers and cash in China.

Mounting pressure on corporates to achieve net-zero carbon emissions or carbon neutral targets is prompting more of them to consider investing in private equity (PE) strategies focused on renewable energy assets. The trend is in its early stages, and companies need to thoroughly vet impact fund managers and understand regional investment characteristics before taking the plunge. But it’s clear that treasury and finance teams working with sustainability officers to meaningfully address climate change need to weigh the relative merits of impact investments that may contribute to reducing a corporate’s carbon footprint.

PE funds producing returns and carbon credits may attract corporates with business, suppliers and cash in China.

A spotlight on China. Interest in such renewable funds may be particularly strong among companies doing business in China, the biggest source of global greenhouse gas emissions as well as where many multinationals have key suppliers resulting in scope 3 emissions (carbon in a business’s value chain that it doesn’t control but which it indirectly impacts). The fund structure can offer corporates an investment opportunity for excess or trapped cash, producing a financial return in addition to carbon credits.

China is a critical growth market for many companies committed to climate neutrality but may present a challenge to those that want to purchase renewable energy. The good news is that the Green Electricity Certificates issued by the Chinese government to owners of renewable energy assets can be transferred from the asset holding company of a PE fund to a corporate investor in proportion to the amount invested in the fund. The transfer is only allowed once, to be used solely as an offset and not to trade, according to DWS.

Please click here to read the complete story, including the advantages of fund structures for renewable energy investments.

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Justin Jones In Technology, Treasury Management

Stepping-stones to Treasury’s Future Operating Model

Treasurers seeking to align with the rest of the finance org are turning to centers of excellence and shared service centers.

Shifting activities to centers of excellence (COEs) and shared service centers (SSCs) figures prominently in the plans of corporate treasury teams overhauling or refining their operating models to, in some cases, better align with the rest of a multinational’s global finance organization. That takeaway surfaced during a session at a recent meeting of NeuGroup for Mega-Cap Treasurers that featured two treasurers describing treasury transformation journeys fueled in part by automation and technology.

“When we look across treasury and tax and FP&A, we see a lot of similarities,” said one of the treasurers, whose company’s global finance team—but not treasury— has been shifting to a new operating model for the past few years. “And so the end goal for where we’re trying to go with the vision is to flip on its head where we’re spending our time.”
Specifically, treasury aims to spend less time on transaction processing and, “to the extent possible, do that through continuous improvements and/or leveraging technology, so that we can drive more insights to create value for the company,” he said.

Treasurers seeking to align with the rest of the finance org are turning to centers of excellence and shared service centers.

Shifting activities to centers of excellence (COEs) and shared service centers (SSCs) figures prominently in the plans of corporate treasury teams overhauling or refining their operating models to, in some cases, better align with the rest of a multinational’s global finance organization. That takeaway surfaced during a session at a recent meeting of NeuGroup for Mega-Cap Treasurers that featured two treasurers describing treasury transformation journeys fueled in part by automation and technology.

“When we look across treasury and tax and FP&A, we see a lot of similarities,” said one of the treasurers, whose company’s global finance team—but not treasury— has been shifting to a new operating model for the past few years. “And so the end goal for where we’re trying to go with the vision is to flip on its head where we’re spending our time.”
Specifically, treasury aims to spend less time on transaction processing and, “to the extent possible, do that through continuous improvements and/or leveraging technology, so that we can drive more insights to create value for the company,” he said.

What needs to change, what doesn’t. Moving treasury to an operating model that better serves the business requires clarity on what will change and what will remain intact. For one of the companies, which is early in the process, the point is not to make drastic changes to corporate treasury. “We’re still responsible for strategy, policy, governance; controls and compliance, core treasury processes,” the treasurer said.

What needs to change, though, is the number of other people—many of them accountants—in more than 100 business units, or divisions who spend “bits and pieces” of time on treasury activities. “There are a lot of people helping with forecasting, helping with identifying commodity exposures and bank account management,” the treasurer said. “We think there could be 200 to 300 people spending fractions of their time on treasury processes.”
Key to this company’s plan to address that issue is creating an “operations COE” and placing it between the corporate side overseeing strategy, policy and governance and the divisions that shape strategy and business partnership. “The value will come from moving the work that is done by many people to a COE,” he said, adding that he expects the operations COE will also reduce “transaction-related” work done by corporate treasury.

What’s in a name? This treasurer equated the COE to a captive shared service center that supports different functions of accounting for finance teams, but not treasury because of how the finance operating model was rolled out. “But with all the changes we’ve been making, we think now is a good time to rethink it from a treasury perspective.”

The other treasurer who presented at the meeting works for a company that is further along in transforming the operating model used by treasury and finance. He draws a distinction between COEs and SSCs. “We use the term COE as centers of expertise, and in treasury this is for higher risk areas that need expert oversight,” he said.
- “The work we send to shared services is more transactional or repeatable; so while the volume is much higher, the risk is lower because we have processes and controls in place. I think it depends on where a company is in its lifecycle of using shared services on what COE can mean.”
Nilly Essaides, NeuGroup’s managing director for research and insight, said SSCs typically host repetitive activities such as cash positioning or bank account reconciliation and are finance-wide and include tasks like general ledger accounting, order entry and periodic reporting. By contrast, COEs provide a valued service that is typically focused on a specific area of expertise such as analytics, automation or, potentially, tax strategy or strategic finance.
- She added, “While the first is more about migrating low-value activities to gain economies of scale and automation and end-to-end process management benefits, the latter is about amplifying the expertise of a group or groups in order to serve a broader audience within or outside of finance.”

Outsourcing and offshoring. The company that is farther along in its treasury operating model transformation outsources some processes to offshore third-party shared services providers in addition to internal shared service centers. The treasurer said that before outsourcing to third parties, treasury had to ensure that the processes and systems it used made sense and worked well. “Generally, we have an internal business services team who does intake of existing processes and coordinates with the shared service—internal or external—to work out transition times and pricing,” he said.

He offered some informed advice about managing the outsourcing process. “Over the years, any work that has been outsourced to internal or external shared services tends to decline in accuracy as the teams have turnover or further outsource the work offshore. So things slip through that we’re used to catching or seeing earlier, and we find out later than we’d like. Building in clear KPIs, service levels and accountability to middle office is important.”
The treasurer whose company is in the initial stages of changing its operating model is not planning to outsource any core treasury activities to third parties. “In what we’re envisioning, it will be our resources; my team will be responsible for all the talent, even if it reports into that global businesses services function.”
He added, “We think there will be resources focused regionally on the business units in the Americas, another in EMEA, Asia Pacific. We’ll have a leader in there for treasury that will be part of the operations COE team, that’s more of a shared service focus, process efficiency, but they will be getting all their guidance and leadership from the corporate function.”

Bigger picture. To date, the trend toward the migration of transactional activities to SSCs has left treasury relatively untouched, and that is in part because treasury is not a major cost center in terms of headcount or a hub for massive volume of transactions (with some exceptions). Our data shows that only 17% of respondents participating in NeuGroup’s 2022 Member Agenda Survey (see chart) envision transferring work to SSCs.

In Ms. Essaides’ view, that is going to change, as finance organizations accelerate the pace of their adoption of SSC platforms. “If treasury expects to persist as a standalone function, it must take control of its destiny before leadership forces it to let go of a lot of operational activities.”
The treasurer in the early stages of the process sees other risks. “As the global finance team moves to that global finance operating model, if we’re not aligned to it, I see a lot of risks. We’re going to have things from a process perspective that could really slip through the cracks. So in our operations COE we’re going to be building out this treasury component.”

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Justin Jones In Senior Executive, Technology

AI-Enabled Analytics Drives Faster, Better Decision-Making

Author Larry Maisel says advanced analytics fueled by AI helps finance teams explain why something happened, what may happen next and what action to take to prepare for it.

NeuGroup managing director Nilly Essaides recently interviewed Larry Maisel, an analytics expert and president of DecisionVu, about his recently published book, AI-Enabled Analytics: A Roadmap for Becoming an Analytics Powerhouse. The book, co-authored with Robert J. Zwerling and Jesper H. Sorensen, focuses on how to leverage advanced analytics to drive unbiased and actionable insights that add value to enterprise performance.

Essaides: In your book, you make a fundamental distinction between analytics and analysis. How are they different, and why is it important for finance professionals to understand that difference?

Maisel: Analysis is arithmetic on data, simple multiplication and division functions that yield informative results. A finance example would be identifying the variance between budget and actuals. Analytics, on the other hand, is mathematics on data, or the use of statistical, algorithmic and other technique, which can produce insight, foresight and actionable information. So, analysis will tell me that I am under budget by 5%. Analytics, by contrast, will tell me about the drivers of underperformance; it will also provide insight into making decisions in order to take action.

Essaides: Given how far AI has evolved, should today’s finance professionals worry about being replaced by AI-enabled analytics?

Maisel: Not at all. AI is absolutely complementary. It is critical that decision-makers understand the right balance between analytics and human judgment and not lose that perspective. In doing the research for the book, I learned from the work of others, like Daniel Kahneman and Amos Tversky. These two long-time collaborators studied and introduced the concept of a two-system brain, and how that duality affects our decision-making regarding risk and uncertainty. System one is instinctive and based on gut feel. System two is slow, prodding and analytical. We use system one all the time, like when we go to the grocery store and pick a particular product off the shelf. In those cases, system one has an advantage. But when we come to business and making important decisions about our operations or about events, we need to be on guard against system one, because system one has biases, which may cause us to make decisions that might not be the best.

One example Kahneman and Tversky introduced is representativeness bias. That means that we assume things that look like others we’ve experienced before will remain the same going forward. That way of thinking incorporates preconceptions and therefore bias. To address business decisions, scenario analysis needs to recognize that bias; we need to apply mathematics to the data (i.e., analytics) to identify potential outcomes.

Essaides: Can you give us examples of how bias-free analytics can be applied to make decisions in the finance organization?

Maisel: You can think of it in treasury and FP&A as it relates to cash forecasting. Integral to the forecast is your ability to look at accounts receivable and predict the likelihood of which accounts will be paid within which period of time. That’s where AI-enabled analytics can help, by examining time series of data and performing trend analysis.

The sweet spot of advanced analytics is really in the transformation of FP&A from the reporter persona to an advisor persona that tells me not what happened, but why it happened, what may happen next and what action to take to prepare for it. As one of my CFO friends told me: “I don’t want to know something. I want to be smarter about something.” The whole point is to make the CFO more impactful, and the use of advanced analytics goes a long way toward building the CFO’s capabilities to work with the operations and be engaged and welcomed. Using this advantage, treasury and finance executives have an incredible opportunity to go beyond finance and impact strategic decisions.

Essaides: Finance organizations may be hesitant to adopt AI tools because they believe staff does not have the required skills. How concerned should they be?

Maisel: Today’s leading-edge AI tools rely on low- or no-code, with the algorithms already embedded in the solution. That means you don’t have to be a data scientist to make an impact. The tool we offer comes with built-in algorithms, so finance analysts don’t have to write and calculate a formula, for example, to identify correlations, as you would in Excel. It’s more straightforward. You don’t have to be an Excel “jockey” to test for correlations against different dimensions and drive down different paths of data, for example by product, customer or geography. What you need is the skill to be analytical and to be able to interpret what the data is revealing to you.

Essaides: We often hear our members complain about the attitude and response time of their IT organizations when they ask for a new tool. Is that getting better?

Maisel: I have a great deal of respect for CIOs, as many of them are beginning to welcome easy-to-use advanced analytics tools because they understand IT’s role is to bring that technology to the business in a way that contributes to its competitiveness and performance. I see a lot more collaboration between IT and their business partners. In the past, finance executives were often told this was not their domain, and implementations were very cumbersome. In today’s world, agility and quality of data are both very important, and you can achieve that by ensuring the CFO and the CIO work in collaboration. IT is really evolving from being the application guardian into the guardian of data.

Essaides: Your book’s subtitle is a “Roadmap for Becoming an Analytics Powerhouse.” Can the office of the CFO become that powerhouse, i.e., provider of analytics services to the rest of the company?

Maisel: From the CFO’s perspective, one critical step is to assign or hire an analytics champion, who would be an advocate for finance analytics capabilities within the company, as well as make sure the right talent is recruited or identified. A big part of the champion’s role is to ensure the organization has the right processes and tools, and that the analytics culture becomes embedded within the corporate DNA by demonstrating success. The key is to demonstrate how analysis contributes to profitability or improved performance.

In the book, we describe a hypothetical telecom company that was trying to understand the key drivers of its revenue performance. They started by mapping any causal factors that may influence financial results. Our role would be to work with them to run AI-enabled analytics in order to isolate the set of drivers that truly move the needle on performance. This way, you can validate and measure the impact of different elements, for example churn, by identifying critical trends and come up with corrective actions. In the case of churn, for example, this may be allocating more resources to reduce billing errors.

Essaides: For a CFO, treasurer or of head of FP&A, what are some of the things they should be thinking about to reach this new advisory role?

Maisel: The first thing is to identify a proof-of-value area within the company or within finance, for example sales analysis, where finance can apply AI-enabled analytics to support the sales forecast or work collaboratively with marketing to improve demand forecasting.

When you do the pilot, as the executive sponsor, you should make sure you provide sufficient budget and the right resources with the bandwidth to execute a successful project. You also need to make this a priority, so this does not become the flavor of the month. You have to demonstrate your conviction to stay with and focus on the project in order to prove its value.

If the pilot does not produce the expected results, learn from that experience and do another pilot in another area. The value is accumulative to the organization. Over time, as well as through market surveys, we have found that if you apply advanced analytics, compared to mere analysis, you can produce tangible value.

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Justin Jones In Regional, Talking Shop

Talking Shop: Does Anyone Have Credit Insurance in Russia?

Member question: “We are assessing the risk of losing the insurance that is currently applied to our receivables that were outstanding at the time of the conflict as they are still outstanding.

“Our specific interest is in any actions that your team perceives that, if taken, could give the insurance company the ability to cancel the insurance that is being applied to pre-conflict outstanding receivables.”

Member question: “We are assessing the risk of losing the insurance that is currently applied to our receivables that were outstanding at the time of the conflict as they are still outstanding.

“Our specific interest is in any actions that your team perceives that, if taken, could give the insurance company the ability to cancel the insurance that is being applied to pre-conflict outstanding receivables.”

Peer answer 1: “We have credit insurance covering our receivable account. It is split between Credendo and Atradius. The insurance providers are squeezing coverage and lowering limits; however, we still have it.”

Peer answer 2: “We are shipping parts to Ukraine; however, the value of the shipments is below the deductible from our provider of credit insurance. We have informed them as a matter of courtesy, and they have confirmed that they will continue to provide coverage; however there are some pre-conditions.”

Peer answer 3: “We have credit insurance covering local and cross-border third-party sales into Russia. Our risk management team manages credit insurance.”

NeuGroup Insights reached out to Aon and Willis Towers Watson, which help companies buy insurance and advise them on risk management. A Willis Towers Watson executive said for coverage of shipments made to Russia before the conflict, an insurer would generally only be able to cancel a policy if the premium had not been paid or because of fraud or misrepresentation by the buyer.

He added, “I’m surprised that others are stating that they continue to have coverage; we aren’t seeing that in the market. There will be no new coverage moving forward. In order to protect the coverage in place for the outstanding shipments, the policyholder will need to perform their duties under the policy and the best way to do that is consistent communication between the broker and the insurer, followed by documentation of a call, to ensure they are taking the right steps.”

An Aon executive who consulted with colleagues wrote, “We have not heard any negative news about monies in process (claim settlements, audits, return premiums) that have been held up or canceled due to the conflict.” Also:

“Capacities got reduced as well as scope of coverage driven by an increased amount of companies choosing prepay options.
“Traditional markets (Hermes, Atradius, Credendo, Coface) no longer offer capacities for new business.
“Russian local markets (SOGAZ, Sberbank and Soglasie) offer capacities but their financial security cannot be assessed at this point. All companies have been removed from the market security list. Some of them are under sanctions.
“It is estimated higher losses are what to expect in coming months/year. But it is still difficult to say as the trade activity may go down too.”

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Justin Jones In Capital Markets, Cash & Working Capital

The Beauty of CP Attracts Many—but Not All—Corporates

CP’s flexibility and low cost beckon, but liquidity risk is a key reason one member says his company is avoiding it—for now.

What’s not to like about commercial paper (CP)? This popular form of unsecured short-term debt used in the capital structures of many companies for working capital and other purposes gives issuers a relatively inexpensive, cost-efficient source of funding. Members at a recent meeting of NeuGroup for Capital Markets sponsored by Wells Fargo agreed that CP also gives them flexibility, relative ease of issuance and a way to gain floating-rate exposure without the need to swap from fixed-rate debt.

However, in introducing the session, Scott Flieger, NeuGroup’s senior director of peer groups and a former debt capital markets investment banker, noted that “companies look at the commercial paper market differently. There’s no right or wrong approach, there’s the approach that best suits the company.”

CP’s flexibility and low cost beckon, but liquidity risk is a key reason one member says his company is avoiding it—for now.

What’s not to like about commercial paper (CP)? This popular form of unsecured short-term debt used in the capital structures of many companies for working capital and other purposes gives issuers a relatively inexpensive, cost-efficient source of funding. Members at a recent meeting of NeuGroup for Capital Markets sponsored by Wells Fargo agreed that CP also gives them flexibility, relative ease of issuance and a way to gain floating-rate exposure without the need to swap from fixed-rate debt.

However, in introducing the session, Scott Flieger, NeuGroup’s senior director of peer groups and a former debt capital markets investment banker, noted that “companies look at the commercial paper market differently. There’s no right or wrong approach, there’s the approach that best suits the company.”

Optionality at a low cost. Flexibility is one reason CP suits one of the members who presented to the group. “If we wanted to raise $500 million tomorrow, we could do it and it’s pretty easy and it wouldn’t even take that long,” he said. “We’ve done that before. I think having that kind of optionality is pretty beneficial.”

Other members also cited the flexibility CP gives them to cover costs for working capital fluctuations, small acquisitions and accelerated share repurchase programs. One member’s company has significantly increased its CP program in the last year and said it can serve as a “bridge” between debt issuances.
Low cost is another major selling point. The weighted average cost for the presenting member’s outstanding CP is less than 50 basis points. “So it’s really cheap and it’s hard to ignore that for the low level of risk that we feel it presents our company. We’re trying to take advantage of that situation,” he said.
One reason for that low risk: The company generates cash on a steady, consistent basis and has the ability to reduce capital expenditures during a liquidity crunch, the member said. And CP represents a small percentage of its total debt complex.

Weighing liquidity risk. But one member who works at a company with an unpredictable cash flow cycle and large, outgoing payments that it doesn’t want disrupted decided against starting a CP program after weighing the pros and cons over the last two years. The main con: liquidity risk.

“It’s very attractive from a low-cost debt sampling, but for us, it adds liquidity risk,” this member said. “So it solves one problem while adding to the other problem. The part that we were really concerned about is that at the times when the CP market dries up is also the time when your liquidity is at most risk.”
The lack of a smooth cash flow cycle at this company means CP cannot be viewed as simply covering cash flow gaps, he said. That made the decision about whether CP would replace other, permanent debt in the company’s capital structure.
Given historically low borrowing costs, “it didn’t seem like the amount of savings we would get was worth the amount of risk and effort it would take to stand up a CP program,” he said. “I think as borrowing rates increase, as we move up in ratings to maybe A1/P1, that’s something would be more valuable.”

Where revolvers fit in. A Wells Fargo slide presentation on CP notes that credit rating agencies require that issuers maintain a “liquidity backstop” for outstanding CP notes. Most companies use revolving credit facilities (revolvers) to do this. The deck also says that the depth of market access for an issuer is “correlated to the level and stability of an issuer’s ratings.”

One member whose company is considering a new CP program said she thinks of CP as low risk because it’s backed by a revolver. In response, the member whose company decided against CP said, “We look at our revolver as kind of a ‘break glass when needed’ event and that’s the time when we want to keep all of our revolver capacity available.”
The member whose company issues CP said the company would not be alone if a situation arose where it could not “roll” its outstanding CP forward. “If it was so bad we needed to draw on our revolver to term CP, the signal that sends is the last of our worries in that scenario. At that point we feel everyone has an issue. The government is going to have to do something.”
Indeed, members noted that the Federal Reserve stepped in to provide a liquidity backstop when the CP markets froze at the onset of the Covid pandemic in 2020. The presenting member said the minimal disruption meant only that his company could not issue CP in certain tenors that were not available or too expensive. “But it wasn’t like you can’t get things done, at least for us.”

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Justin Jones In Banking, Compliance, Regional

Adding a Sanctions Checklist to a Crisis Management Playbook

Treasurers navigating the twists and turns of the deepening crisis in Ukraine took time out to hear about some best practices in crisis management.

Editor’s Note: NeuGroup is running weekly special sessions on the Russian-Ukrainian crisis. Senior executive advisor Paul Dalle Molle, a former banker with extensive European experience, leads the discussions.

By Paul Dalle Molle

Financial fallout from Russia’s invasion of Ukraine has put new focus on how multinational corporations plan for and manage geopolitical crises. And while all big companies devote resources to enterprise risk management and business continuity planning, not all of them entered this crisis with extensive experience with sanctions, counter-sanctions or self-sanctions.

That’s led finance teams at some NeuGroup member companies to revise, update or start creating playbooks, frameworks and checklists that will help them memorialize what they’ve learned so they can better plan for future crises that involve sanctions and counter-sanctions.

Treasurers navigating the twists and turns of the deepening crisis in Ukraine took time out to hear about some best practices in crisis management.

Editor’s Note: NeuGroup is running weekly special sessions on the Russian-Ukrainian crisis. Senior executive advisor Paul Dalle Molle, a former banker with extensive European experience, leads the discussions.

By Paul Dalle Molle

Financial fallout from Russia’s invasion of Ukraine has put new focus on how multinational corporations plan for and manage geopolitical crises. And while all big companies devote resources to enterprise risk management and business continuity planning, not all of them entered this crisis with extensive experience with sanctions, counter-sanctions or self-sanctions.

That’s led finance teams at some NeuGroup member companies to revise, update or start creating playbooks, frameworks and checklists that will help them memorialize what they’ve learned so they can better plan for future crises that involve sanctions and counter-sanctions.
Here are some insights and takeaways from one treasurer’s experience integrating sanctions into his company’s crisis management playbook.

Leverage existing playbooks, scenario planning and early warning systems. Companies with significant investments in high-risk emerging markets need to review those risks on a regular basis. The presenting treasurer’s company had extensive experience with financial crises in volatile markets and benefited from having a solid playbook, scenario planning and effective early warning systems that are updated by region two to three times a year.

In this crisis, the system warned the company of trouble ahead, giving senior leadership time to manage risk. That included, in part, making sure that their regular dividend was processed promptly, before Russia invaded Ukraine. The early warning system constantly monitors a region’s macroeconomic health using indicators that include:
- Country credit ratings
- Credit default swap spreads
- GDP
- Employment data
- Budget deficits
- Inflation rates
- Foreign currency reserves
The company’s “crisis market playbook” provides local business managers with tactics to respond to a crisis through three vectors that underscore and prioritize the importance of cash:
- How to recover margins? Use price increases, productivity gains, cost reductions.
- How to preserve liquidity? Employ internal lines of credit, credit from banking partners, faster collections, slower payments, reduced investments.
- How to protect balance sheet assets? Exchange rubles for USD as soon as possible to mitigate devaluation risk; establish balance sheet exposure limits; repatriate cash in excess of working capital needs. Among other factors, the company’s experience in moving money in and out of Russia after years of doing business there paid off.

Streamline channels of communication and concentrate crisis decision-making. Managing a crisis effectively requires clear guidance from the CEO, who needs to announce the principles that will guide the company and identify and empower the leaders who will make decisions.

This company immediately instituted three daily meetings with cross-functional members, and treasury participates in all three, chairing one.
- The business management meeting (with regional CEO and CFO, business heads, country heads) is empowered by the CEO to centralize all business decisions related to the crisis countries. This meeting produces business decisions every day.
- The cash flow meeting (includes tax, controller) is responsible for planning payments and liquidity. Because cash is key in a crisis, the company looked to accelerate cash flow where possible and instituted daily forecasting.
- The sanctions meeting (legal, government relations, others) is responsible for providing a complete understanding of all the sanctions, their effect on the company and what must be done to be compliant. The corporate relied very heavily on external advisors, even though this treasurer did discover his company had a good reservoir of sanctions understanding in its EMEA legal team.

Adding sanctions to the mix. The sanctions meeting is the new element in this company’s crisis management playbook. Its extensive planning had focused on financial crises, but the war (and the sanctions that followed) is a political crisis that has financial consequences. In the playbook, “sanctions” is now a sub-category, like devaluation and liquidity, to which managers must manage.

The hardest thing about integrating sanctions into daily crisis management is their sheer number and complexity. They come from multiple jurisdictions, bear different terms, and are applied to hundreds of different institutions, people, and assets.
This is further complicated by the need to interpret the company’s own policies (“self-sanctions”) such as “no new investments.” Sanctions compliance requires an extreme attention to detail that has no precedent. For this, the corporate depends on the robust data sets and systems developed primarily by legal and banking partners.
Countersanctions also significantly complicate matters, particularly when they are in direct conflict with sanctions.

Technology tools. Some companies, however, such as those in the commodities space, have their own in-house versions of screening tools that have been developed not only for sanctions but also for anti-money laundering purposes. Members mentioned using Bridger Insight and Kyriba to screen for sanctioned names.

So far, the Russian sanctions have proved too numerous and too complex even for these robust systems to handle quickly, so even these more sanctions-sensitive companies rely ultimately on their banking and legal partners for compliance.

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Justin Jones In Risk Management

Better Questions, Better Data: Making Risk Tracking Strategic

ERM heads discuss shifting risk survey strategies to improve risk registers and add more value to the company.

“Every day in the last two years, it feels like I’ve woken up to a new crisis.” That’s how the head of ERM at one multinational described the current risk environment at a recent meeting of NeuGroup for Enterprise Risk Management. Therefore, he added, even though it often feels like swimming upstream, keeping a comprehensive risk register that keeps track of and scores all enterprise-level risks is more important now than ever.

ERM heads discuss shifting risk survey strategies to improve risk registers and add more value to the company.

“Every day in the last two years, it feels like I’ve woken up to a new crisis.” That’s how the head of ERM at one multinational described the current risk environment at a recent meeting of NeuGroup for Enterprise Risk Management. Therefore, he added, even though it often feels like swimming upstream, keeping a comprehensive risk register that keeps track of and scores all enterprise-level risks is more important now than ever.

Nearly everyone in attendance reported efforts to improve risk registers, though members shared different approaches to assemble and sort this data, from bolstering surveys with live interviews to dramatically increasing the number of top risks identified.
“The last year led us to spend a lot of time injecting strategic thinking into ERM, which didn’t exist before,” one ERM head said. “To keep ERM relevant and add value, we need to understand how we can adapt to a world where the nature of risks changes each year.”

Surveys no longer cut it. A number of members said their companies’ standard risk surveys, which are sent out to hundreds of senior staff members and ask simple, open-ended questions about the risks posed to the company, are outdated.

For members just starting to improve their risk aggregation processes, the first step is to bolster the broad surveys through in-depth interviews with employees in leadership roles. “The best way to understand the risks facing each team is through unaided, open-ended conversation,” one member said.
A few members said they have completely abandoned surveys and self-reporting of risks, now relying only on these discussions with key individuals. “Surveys just aren’t great, they don’t provide enough context,” one member said. “We want ERM to be seen as more proactive.”

Let’s get strategic. The buck doesn’t stop at just having these conversations. One ERM leader said the questions his team was asking in risk interviews didn’t dig deep enough and he saw room to add more value. The member, who has a background in corporate strategy, took over the company’s ERM team in January 2021.

“We certainly made a lot of changes in the questions we ask and the outputs we’re tracking,” he said. “We wanted to add value in strategic risk tracking by asking better questions and driving dialogue.”
“Let’s say, for example, one of the survey questions is ‘what is a strategic risk for your business?’ People will respond that competitive risks are a big exposure for the business in a strategic sense,” he said.
- All this would mean is that the employee believes there is strategic exposure based on the competition around them. A better way to ask that question, the member said, is: “How do you see the competitive landscape changing in a way that creates exposure to your business?
- “It’s a richer question—instead of asking what is the risk, you’re asking a better question to qualify the nature of that risk in a more purposeful way.”
- This way, the member said, an employee could identify what the competition is doing, what the internal strategy has been in response, and the implications for the business.
To start asking better questions, the member said to think about the internal and external context. “Meaning: What does an internal environment mean and where is an external environment headed in the context of the mindset of the company.”

Getting granular. One member said that for ERM teams, the path to creating strategic value can actually route through expanding tactical, granular data.

Her ERM team, which used to identify 25 of the company’s top-level risks, now sorts 12 categories of top risks, each of which have five to 12 components—potentially totaling up to 144 individual risks, six times the previous number.
- For example, previously, the company only identified “Workforce” as a single risk in its top 25. Now, “Human Capital” is one of 12 categories, with components including retention, recruiting, workforce and more.
“Getting more granular is definitely a trend among ERM teams,” the member said. The expectation for risk management teams is obviously to track enterprise-level risks, but more are now paying more attention to granular data, as well as tactical actions to mitigate these risks.
“The more ERM enables teams to address immediate or tangible risks, then the more the organization will appreciate your value,” she said.
- “It becomes easier for them to make the association between ERM and strategic value: Risk aggregation is no longer a separate activity. It’s now interactive, and it’s relational.”

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Justin Jones In Capital Markets

Go Figure: Swapping to Floating Rates as the Fed Hikes May Pay

It may be counterintuitive, but data shows that issuers swapping from fixed to floating as rates start rising can save.

Corporates that loaded up on fixed-rate debt during the pandemic but believe that now—as the Fed starts a rate hike cycle—is not the ideal time to swap some of their debt to floating rates may want to think twice.

That takeaway emerged in a session of the spring meeting of NeuGroup for Capital Markets sponsored by Wells Fargo that featured present value back-testing data for swaps from prior rate hike cycles.
The data show that, with some exceptions, issuers that did five- or 10-year swaps to floating rates around the time rate hikes began in 1994, 1999, 2004 and 2015 ended up reaping positive net present value savings on an annual basis from those swaps.

It may be counterintuitive, but data shows that issuers swapping from fixed to floating as rates start rising can save.

Corporates that loaded up on fixed-rate debt during the pandemic but believe that now—as the Fed starts a rate hike cycle—is not the ideal time to swap some of their debt to floating rates may want to think twice.

That takeaway emerged in a session of the spring meeting of NeuGroup for Capital Markets sponsored by Wells Fargo that featured present value back-testing data for swaps from prior rate hike cycles.
The data show that, with some exceptions, issuers that did five- or 10-year swaps to floating rates around the time rate hikes began in 1994, 1999, 2004 and 2015 ended up reaping positive net present value savings on an annual basis from those swaps.

Counterintuitive but not illogical. A banker from Wells Fargo presenting the data acknowledged that swapping to floating rates as the Fed raises rates to fight inflation may seem misguided. “It’s a little counterintuitive to think the time to go floating is when the Fed’s just starting off its hiking cycle,” he said.

“But the rationale here is that markets are forward looking and, often at that time, the market has somewhat correctly predicted what the Fed’s going to do and even overestimated it and given you a margin of safety, which you effectively profit from if you go floating.”
Another Wells Fargo banker noted the “asymmetry” of how long, on average, rates remained at the trough level during the four rate hike cycles examined—46 months—compared to the average time they remained at peak levels—nine months.
That underscores that corporates that swapped to floating paid lower rates for longer periods, in part because the Fed has erred on the side of leaving rates lower for longer out of fear of derailing an economic recovery, he said.
Now, though, the Fed is in a mode where most observers say it is behind the curve, perhaps meaning the market is pricing in a jump in rates that may overshoot the reality, leading to a recession and rate cuts.

What the data reveals. As the first table below shows, the present value savings realized from swapping to floating in the 1994 rate cycle totaled 123.6 basis points for a 10-year swap executed on the day of the first rate hike; so the rate cycle was priced in on the first day it began. However, an issuer that waited for nine months after the first rate hike would have saved 256.3 basis points.

Why? The presenter said, “A reasonable theory is that the market thought it had the Fed figured out in ’94; but over the first nine months of hiking, it got scared that the Fed was going to hike even more. The interesting part is the market was right on the first day, so the additional hikes priced in later turned out to be an overreaction—one that someone paying floating thereafter benefited from.”
He noted that in 1994, five-year swaps done three months before or on the day of the first rate hike did not pay off, with losses of 15.5 and 1.8 basis points, respectively. But waiting for nine months after the first rate hike to swap saved the theoretical issuer 169.4 basis points.
The savings for a 10-year swap done on the first day of the rate hike cycle in 1999, seen in the second table, totaled 233.6 basis points; that jumped to 287.8 basis points for a 10-year swap executed nine months after the first rate rise.
In the 2004 and 2015 cycles, the presenter said, “the optimal time to execute got closer to the first rate hike, or even before it.”
Bottom line: the data demonstrate that issuers in past rate hike cycles that swapped within a year of the first rate hike would have realized savings.

The yield curve question. Wells Fargo also presented data showing that prior periods with flat or inverted yield curves—as is the case now—have been good times to swap to floating rates. For example, in the 1989 and 2000 inversion cycles, the swap performance was the best when executed within the three months of the curve inversion, according to the presentation.

The problem, members said, is that it’s hard to convince management to swap to floating when there is, initially, no positive carry on the swap.
“While we all know that initial carry is not an indicator of how well the swap is going to do, it is a lot easier to get your management on board if you tell them that on day one I’m going to start saving 120, 130 basis points, 150 basis points,” one member said.
For that reason, corporates often layer in their swaps over time, to minimize risk. “We don’t like to take too much exposure on one day. We’re trying to take more bites of the apple over the course of time,” the member said.
The Wells Fargo presenter acknowledged the challenge facing treasury teams advocating for swaps to floating at times like this. “It is very hard as a corporate to go floating when the curve is inverted, precisely because there is not that immediate carry that is often easy to explain around the organization to drive the decision to go,” he said.
“And yet economically, I think the rationale behind why these savings are so good is the fact they’re recession predicting. That as much as there aren’t immediate savings, if it’s highly likely a recession follows and/or rates get cut, that’s a great time to be floating. You want to capture as much as that time when you’re at the trough period.”

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