Insights

Peer-Validated Insight Distilled by NeuGroup

Sign up to get NeuGroup Insights by email—and share what you learn.

Spotlight Features

A Real Share Repurchase Alternative to ASRs and OMRs: eOMRs

Reverse Repo: A Safe Haven for Cash Amid Financial Turbulence

 

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.

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.

Read More Read Less
Contact Us
Justin Jones
In Regional, Talking Shop

Talking Shop: Does Anyone Have Credit Insurance in Russia? 

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: “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.”

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: “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.”
Read More Read Less
Contact Us
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.”
Read More Read Less
Contact Us
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.
Read More Read Less
Contact Us
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.”
Read More Read Less
Contact Us
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.”
Read More Read Less
Contact Us
Justin Jones
In Banking, Regional

Ripple Effects: ADP’s Russia Exit Fuels Search for Payroll Options

The payroll processor’s pullout is another snag facing corporates. Others: collecting receivables, payment delays, supply chain woes.

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

News that payroll processor ADP had notified one NeuGroup member company that it will cease payroll operations in Russia on June 30 generated plenty of discussion at our most recent weekly Russia crisis session. One treasurer called the information “pretty shocking.” Most multinationals continue to pay Russian staff even if the companies have suspended operations, meaning they still require payroll processing and payment services.

The payroll processor’s pullout is another snag facing corporates. Others: collecting receivables, payment delays, supply chain woes.

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

News that payroll processor ADP had notified one NeuGroup member company that it will cease payroll operations in Russia on June 30 generated plenty of discussion at our most recent weekly Russia crisis session. One treasurer called the information “pretty shocking.” Most multinationals continue to pay Russian staff even if the companies have suspended operations, meaning they still require payroll processing and payment services.

  • An ADP spokeswoman did not confirm the date of the company’s pullout from Russia. But in a statement, ADP said, “We have suspended all new sales of ADP services in Russia. We have a relatively small percentage of existing multinational clients, headquartered outside of Russia, with employees in Russia. While there are complexities to the work we do, we can confirm we are in the process of transitioning our operations out of the country while working closely with each client to limit any impact to their business and their employees.”

What now? It is theoretically possible that ADP could provide the processing from outside the country, but so far ADP has not provided any such guidance. So, members are looking for alternative processors. The most mentioned alternative is ABU, whose website says it is a partner of ADP in Russia. Another company named: Accace, a Slovakian company active in Russia.

  • One possibility is to separate the processing from the payments. One member mentioned that the former KPMG business in Russia and Belarus (which will change its name once its exit from the KPMG network is complete) can make the payroll calculations but not payments. He said sending domestic wire transfers in Russia to make payments did not appear to be a scalable solution.
  • Clearly, multinational companies want to outsource both payroll processing and payments to one supplier; making wire transfers themselves is the least preferable option.

Cross-border collections are very difficult. Several members have reported they have long-overdue receivables from customers and former partners in Russia that simply stopped paying after their companies announced exits. One member’s former partner even opened a bank account at a non-sanctioned bank to make the final payments under their contract. However, the funds are not forthcoming, and the partner blames the new bank for long bureaucratic procedures.

  • Other members believe that unpaid receivables are common in high-risk emerging markets when commercial relationships end. All of these are in the cross-border category, so the multinational company has very little recourse and low hopes of enforcing its claim.

But most domestic RUB collections are being made, sometimes slowly. Members report, so far, that most Russian customers are paying their domestic RUB obligations to the domestic subsidiaries of multinationals, even if there are some delays. Russian regulators have been allowing commercial transitions and payments to take place much as before, even as they are increasingly restricting dividends and especially intercompany loans.

Funds transfers are increasingly delayed or rejected. One member recounted a blocked payment caused by misspelling the name of the beneficiary, an issue that was ultimately resolved. Members also report that large banks have big payments backlogs as they make extra efforts to scrutinize the names and ownership of the sanctioned people, companies, institutions and assets.

  • Despite high-tech solutions at big banks, all exceptions or suspected inspections get careful human analysis, and delays are inevitable. Some payments are indeed rejected, but most are sanctions compliant and get processed. A few Western banks have declined to make legitimate, sanctions-compliant transactions out of an excess of caution, but these frustrating situations have mostly been resolved.

Supply chain problems and supply chain finance problems are stopping some in-country activity prematurely. One company’s production facilities could not get the needed inputs for logistical reasons, so its plant shut down even before the company had announced suspension of activity in Russia. Another company‘s supply chain finance supplier stopped processing transactions, so suppliers have halted shipments.

Members increasingly fear cyberattacks as punishment for suspending Russian business. NeuGroup is planning to dig more deeply into this problem in future sessions. One member offered to share her company’s global ransomware report (not specific to Russia or Ukraine) with other members for background. So far there are few reported attacks. Members speculate that this is thanks to the intense forewarning by US and EU officials that may have allowed companies to improve their defenses. Also, Russian hackers have their hands full attacking Ukrainian targets and fighting off the well-known efforts of Ukrainians and others to help Ukraine.

Tax audits as a counter-sanctions weapon? One member with substantial activities in the country is receiving regular inquiries from local tax officials regarding dividends, withholding taxes and other transactions. Another member reported last week that there are weekly inspections to make sure that the company’s premises are still open and staff are working.

Semi-official counter-sanctions? According to one member, a large US tech company that suspended retail and wholesale sales in Russia is being sued by a local consumer protection organization.The claim is that by ceasing operations in the country, the company effectively stopped servicing customers, violating local law. The member fears the company’s assets being frozen and seized to pay consumer claims.

Read More Read Less
Contact Us
Justin Jones
In Cash & Working Capital, Regional

High Hopes for a High-Tech Platform to Revolutionize Nordic Payments

Treasury teams frustrated by complexity in cross-border payments see reason for optimism as the ‘P27’ clearinghouse moves ahead.

Nordic countries are on the cutting edge of digitizing their economies by embracing new technologies and creating near-cashless societies. But until recently, they had ignored the myriad legacy technologies supporting cross-border payments systems that NeuGroup members say are needlessly complex. Sending money from one nation to another requires jumping through too many hoops, with each country using its own currency and payment infrastructure.

  • Now, though, to the delight of treasurers and their bankers who crave simplicity, that’s changing—an exciting development rooted in an initiative with a relatively bland name: P27. It’s a reference to the 27 million inhabitants of the Nordic region, which collectively form the 12th largest economy in the world.

Treasury teams frustrated by complexity in cross-border payments see reason for optimism as the ‘P27’ clearinghouse moves ahead.

Nordic countries are on the cutting edge of digitizing their economies by embracing new technologies and creating near-cashless societies. But until recently, they had ignored the myriad legacy technologies supporting cross-border payments systems that NeuGroup members say are needlessly complex. Sending money from one nation to another requires jumping through too many hoops, with each country using its own currency and payment infrastructure.

  • Now, though, to the delight of treasurers and their bankers who crave simplicity, that’s changing—an exciting development rooted in an initiative with a relatively bland name: P27. It’s a reference to the 27 million inhabitants of the Nordic region, which collectively form the 12th largest economy in the world.
  • At a recent meeting of NeuGroup for European Treasury, members said they are keeping a hopeful eye on P27, which is backed by banks and governments of Sweden, Denmark and Finland. It promises to establish a single clearinghouse to process all payments within the region.
  • “This is a way for the Nordic countries to build one payment infrastructure in one ecosystem to deal with all account-to-account payments in the euro [for EU member Finland], the Swedish krona and the Danish krone,” P27 Nordic Payments chief strategy officer Martin Georgzén told NeuGroup Insights.

Rolling out. After a few delays, the project secured its last approvals in 2021, and is scheduled to launch a service for Swedish mobile payments this year. Mr. Georgzén said the objective of the company, which is owned by Danske Bank, Handelsbanken, Nordea, OP Financial Group, SEB and Swedbank, is for “the biggest banks in each of these countries to develop one platform to take care of instant payments and batch payments, and also close down all old systems at the same time.”

  • The platform’s standards are aligned with SEPA, the EU’s payments system that Finland-based accounts can already use to make payments to accounts in the EU. This will mean that Denmark and Sweden will be in sync with SEPA’s standards for files and other protocols.
  • Though Norway helped lay the groundwork for P27, the nation withdrew from the project in 2019, and will continue to rely on its own clearing system, NICS.

“An enormous project.” The mechanics of the project will require all banks in the three nations to change their connections, customer by customer, account by account, one solution at a time. “And this all needs to happen at about the same time,” Mr. Georgzén said. “We are quite far in this work and we intend to start with the mobile wallet payments in Sweden later this year, and migrating from old accounts early in 2023,” he continued.

  • Following the completion of the project in Sweden, Mr. Georgzén said P27 will continue “currency-by-currency, system-by-system until we migrate fully to the new platform. When you think about this, this is an enormous project.”
  • The company has released no other information about the timeline of the service’s rollout.

Building atop payment infrastructure. Once the standardized payment platform is implemented and all accounts in the three nations are, ideally, on an even playing field, Mr. Georgzén said he believes there will be a great deal of opportunity to innovate on top of the platform.

  • Following the initial rollout, P27 envisions a second layer on top of the single clearing platform, in which users could opt into using tools offered by the company for fraud management and digital invoicing, among other applications (see chart).
  • Standardizing payments would also create a broader base for fintechs to build a third layer, offering unique solutions that could be adopted by any user in Denmark, Sweden or Finland.
  • “Think of it like the internet,” Mr. Georgzén said. “Banks can build, fintechs can build, anyone can build on top of the solution,” he said. “You need a solid base, and that’s what we can create.”
Read More Read Less
Contact Us
Justin Jones
In Investment Management, Regional

Amid Turmoil, Keeping Steady With Portfolio Investment Strategies

Few corporate investment managers plan to make meaningful changes to their cash investment strategies, despite an unexpectedly hawkish Fed and continued war in Ukraine. 

A just-completed NeuGroup survey sponsored by Clearwater Analytics, Going Out the Curve: Benchmarking Investment Strategies, reveals most corporate investment managers have made no significant changes to their portfolios in response to recent market shocks. As the chart below shows, only 7% of respondents say they are making significant changes. Some, though, are going further out on the yield curve to take advantage of rising rates.

Few corporate investment managers plan to make meaningful changes to their cash investment strategies, despite an unexpectedly hawkish Fed and continued war in Ukraine. 

A just-completed NeuGroup survey sponsored by Clearwater Analytics, Going Out the Curve: Benchmarking Investment Strategies, reveals most corporate investment managers have made no significant changes to their portfolios in response to recent market shocks. As the chart below shows, only 7% of respondents say they are making significant changes. Some, though, are going further out on the yield curve to take advantage of rising rates.

“We know that corporate treasury is conservative and focused on driving corporations,” said Cody Lott, director of corporate treasury solutions at Clearwater Analytics. “Historically, we have seen that our clients do not move out of deposits until money market fund yields are noticeably higher, but once they are, they make the transition quickly. We also know that deposit yields trail MMF yields through hikes, so it would appear that this crossover could happen sooner rather than later.”

Monitoring the situation. “With the situation in Europe, we basically put a pause on new investments,” said a member of NeuGroup for Cash Investment at a focus session held to discuss preliminary findings. “We didn’t unwind anything, but we are doing more due diligence and keeping a closer eye on our allocations and our different partners,” he said. “We don’t have any long positions that we had to be super concerned about because our average duration is pretty short.”

  • For most of the survey participants, the outbreak of the war had little direct impact on their holdings. “As we have done with other market shocks, when the conflict started, we went to our external investment managers and asked them to take a look at our portfolio and assess what impact there could be from the Russia-Ukraine war,” another member said.
    • “We have a very conservative portfolio, and our holdings didn’t have much direct exposure, maybe secondary, but it wasn’t enough that we were all that concerned and would take much action.”
  • One member said his company had some holdings in one of the aircraft leasing companies that may incur significant losses stemming from leases to Russian airlines. But beyond that, “We’re really looking at what the knock-on effects are going to be.”

It’s a localized shock—for now. Most members view the crisis in Europe primarily as a localized event, versus, for example, the wider market shocks of the pandemic. “With the pandemic, there was a lot more impact and exposure to our portfolio in general, and we took a lot more action, because it was so broad to the market,” one said.

  • After the coronavirus outbreak, another member said, “We asked our portfolio managers to stop all investments and just allow securities to mature and cash to build up and sold off some assets, for example some [mortgage-backed securities]. We actually took cash back because we were concerned about liquidity.”

An ops story. Instead, with Russia, the primary impact is operational. “We have operations in-country. So we have had to make some adjustments of how our cash operations take place; we’ve publicly announced that we’re going to put a halt on manufacturing operations in the country. As far as investments, I do not have any specific investments that are impacted by the Russian sanctions.”

The uncertainty spectrum. The war in Europe added another element of uncertainty, especially after the Fed came out with a surprisingly hawkish announcement on March 16. The 25 basis point hike was not a surprise; however, Fed chair Jerome Powell’s tone and promise of seven more potential rate hikes was. “It is a very aggressive path of rate hikes that we are not used to, at least in the last two decades,” Subadra Rajappa, head of US rates strategy at Societe Generale, told NeuGroup Insights days after the announcement.

  • “The question here is whether this Fed will be a Fed that moves rates, or a Fed that signals hawkishly to provoke the market to price in higher rates,” Mr. Lott commented. “As we saw with the last hike, and through the last hike cycle, most Fed decisions lose sting because markets move yields before meetings. We have to remember why rate movements matter, and with the term ‘recession’ back in the vocabulary of most, the next few months will be critical.”
  • Speaking with members of NeuGroup for Tech Treasurers on March 17, Tom Porcelli, RBC’s chief US economist, said “monetary policy is a blunt tool, and core inflation is driven by forces that are outside the Fed’s control; so why so aggressive?” He added, “It’s about expected versus actual inflation, and expectations are showing signs of becoming somewhat unhinged. The Fed is playing catch up. The problem is there are already challenges dotting the landscape. The decision this week adds on another layer of risk. “
    • Mr. Porcelli also noted that “The median number of rate hikes in ’22 went from three to seven, when there weren’t really indications that the Fed would be this aggressive. It drives home the fact that they want to crush inflation as much as they can. Powell’s narrative is that they are going to do whatever it takes, even if it means growth falters.”
  • “Going back a month or so, I think there was some more certainty about how many hikes at and what levels we will see them happening, in response to inflation,” said one member. “But I think the war in Ukraine throws in some more uncertainty around that. The impact of all these unprecedented economic sanctions is still unknown. Prior to the war, there was a pretty clear path, but now I think it’s a little bit cloudy.”
  • Will the Fed deliver on its promise? At the March 16 session of the cash investment group, one member said he doubts there will be more than four hikes. “At the expense of growth does not mean at the expense of a recession.” He added, “The volatility following the announcement signaled fears of an overzealous Fed.”

Extending duration. Prospects of faster-rising rates, however, are convincing some members to push out maturities to benefit from the yield pick-up. “We’ve been busy buying bonds for the last month-and-a-half, as we expected, but I’m actually looking at extending it a little bit further,” one survey respondent shared. “Most of my duration is kept under two years. So, I won’t pick up 100% as we’re going along, but a lot of that expectation is already priced in the issuances today.”

  • The cash investment manager at another organization said he doesn’t view all cash as likely to be redeemed within in a one-year time frame. So, “depending on the purpose, we’re able to go longer.” This manager is looking to do that by buying floating-rate securities to both benefit from rising rates to avoid some of the mark-to-market volatility.
  • Floaters were popular with another company. “We’ve also been increasing our allocation to floating rate notes,” the investment manager said. “Some of the feedback we’ve gotten is that the pricing on those can be pretty rich right now as a lot of people look to get into them. So, where we find value and it makes sense, we are increasing our allocation.”
Read More Read Less
Contact Us
Justin Jones
In Banking, Regional

New Territory: An Expert’s Take on ‘Unprecedented’ Russia Sanctions

Attorney Adam M. Smith, a former senior advisor to the director of OFAC, shares insights and perspective on sanctions.

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

At this week’s NeuGroup Russia session, members heard insights on sanctions and the road ahead from Adam M. Smith, a partner at Gibson, Dunn & Crutcher’s Washington, D.C. office, who is a leading expert in sanctions compliance, international trade law, embargoes and export controls. Mr. Smith served as the senior advisor to the director of the US Treasury Department‘s Office of Foreign Assets Control (OFAC) and the director for multilateral affairs on the US National Security Council.

Attorney Adam M. Smith, a former senior advisor to the director of OFAC, shares insights and perspective on sanctions.

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

At this week’s NeuGroup Russia session, members heard insights on sanctions and the road ahead from Adam M. Smith, a partner at Gibson, Dunn & Crutcher’s Washington, D.C. office, who is a leading expert in sanctions compliance, international trade law, embargoes and export controls. Mr. Smith served as the senior advisor to the director of the US Treasury Department‘s Office of Foreign Assets Control (OFAC) and the director for multilateral affairs on the US National Security Council. 
 
Unprecedented response. Before addressing the specific concerns of corporate treasury executives and fielding questions on a variety of topics, Mr. Smith said members should keep in mind the unprecedented nature of the current situation, highlighting these points:

  • Never have sanctions been imposed against a country with an economy and a state infrastructure as large and sophisticated as Russia’s.  
  • Never have so many countries, 46, joined together so swiftly to sanction a country that is perceived to have broken generally accepted behavioral norms.
  • Never has European enforcement been so immediate and unhesitating.
  • Never have so many multinational companies, over 400, so quickly condemned a country and announced their exits or suspensions of activities there.

“We are experiencing an impressive, historic response in what can already be considered a multilateral ‘victory’ by countries and companies which are united in a sense of moral outrage,” Mr. Smith said. “How well all this will work in the long run remains to be seen, of course; but the response of Western democracies and multinational companies has been impressive.”

Friend or foe? One member raised a question about Russia’s decrees regarding “friendly” and “unfriendly” countries: Assume a company is ultimately owned and controlled by an entity headquartered in an unfriendly (US/EU) country, and does a transaction that is compliant with US and EU sanctions. Would that transaction also be compliant with Russian counter-sanctions if routed through one of the corporate’s subsidiaries in a friendly country? 

  • Mr. Smith pointed out that he is not a Russian counsel and that companies must consult their Russian advisors on such matters. Based on his frequent dialogue with Russian attorneys, he knows that the latter are also living with many unknowns, chief among them whether these counter-sanctions will be interpreted strictly or loosely by the Russian authorities, depending on how they serve Russia’s interests.
  • That said, his expectation is that over time, the Russian authorities are likely to interpret the decrees as looking to the ultimate country of ownership and control rather than to the country of a subsidiary.

Cautious banks. As at every session, members have asked many questions about banks, with some complaining that they seem to be excessively cautious, declining to help US or EU corporate clients with legitimate transactions that do not violate sanctions. Mr. Smith acknowledged this thorny issue, but his views contained a note of optimism. 

  • “There are over 250 banks in Russia. While the biggest ones are sanctioned, most are not,” Mr. Smith observed. “Over time, it should become clear to banks and companies which transactions are compliant with both sanctions and counter-sanctions, and it should be possible to avoid sanctioned banks.
  • “Let’s keep in mind that the way that sanctions are designed by the US, EU and others implies a willingness for some private sector international economic trade with Russia to continue, especially for oil and gas, agricultural goods, food, medicines, medical devices, minerals and other commodities.”
  • This also allows multinational companies to fulfill their payment obligations to staff, suppliers and for local taxes, he added. There are already OFAC general licenses for some activities, e.g., oil & gas exports, and there may be specific licenses forthcoming, he said.

Fear of imprisonment. When members raised the possibility that top Russian managers of multinational companies could be jailed if plants shut or operations halt, Mr. Smith said he has also heard this mentioned by some US and Russian contacts.

  • However, he is not aware of any actual instances of this happening, noting that only Russian counsel is qualified to provide an informed view.

Fear of nationalization. Mr. Smith recognizes that there is a real possibility that Russia will nationalize foreign-owned banks and companies. However, he once again sounded a cautiously positive note about the situation.

  • “So far, it seems that the Russian oligarchs and business professionals are recommending that their government not make wholesale nationalizations, for many reasons. The Russian authorities will do, of course, what they believe to be in the best interests of their country, but this reaction from the Russian professional community leads me to believe that selective nationalizations are much more likely than wholesale ones.”

Breach of contract. Companies must consider how “self-sanctioning,” the voluntary nature in which companies announced their exits from Russia or their suspension of activities there, affects their ability to recover value from their ceased operations. 

  • According to Mr. Smith, since no laws compel multinationals to leave, it would seem difficult to litigate against breach of contract lawsuits or to claim against force majeure clauses in contracts and with insurers.  Of course, every situation is unique, and every situation requires scrutiny by counsel.

Expert perspective on OFAC. Mr. Smith closed this session with some general comments on OFAC. He said Multinational companies need to keep in mind that OFAC is an extremely small agency, comprised entirely of professionals (no political appointees). Also:

  • Specific Licenses are difficult to get, don’t become public information unless disclosed by the grantee and often take a long time, although OFAC can act urgently in a true emergency. 
  • OFAC is not interested in the business cases or business effects of a proposed Specific License, but is concerned in their humanitarian effects and in the policy arguments being proposed.
  • He also said that OFAC is not trying to “play gotcha” and punish companies when minor violations occur in an otherwise vigilant, systematic attempt to comply.

Read More Read Less
Contact Us
Justin Jones
In Capital Markets, D&I

NeuGroup’s Strategic Finance Lab Podcast, Episode 2: Women in Finance: An Interview with Subadra Rajappa of Societe Generale

Step into a lab where innovation and digital transformation empower senior finance executives to become true strategic partners. NeuGroup Insights marks the end of Women’s History Month with a look at what needs to happen for more women to stay and advance in careers in finance.

In episode No. 2 of NeuGroup’s new podcast exploring the future of finance and the office of the CFO, NeuGroup’s Managing Director for Research and Insight, Nilly Essaides, interviews Subadra Rajappa, managing director and head of US rates strategy at Societe Generale.

Step into a lab where innovation and digital transformation empower senior finance executives to become true strategic partners. NeuGroup Insights marks the end of Women’s History Month with a look at what needs to happen for more women to stay and advance in careers in finance.

In episode No. 2 of NeuGroup’s new podcast exploring the future of finance and the office of the CFO, NeuGroup’s Managing Director for Research and Insight, Nilly Essaides, interviews Subadra Rajappa, managing director and head of US rates strategy at Societe Generale.

  • After a quick Q&A about rising interest rates, they dive into the challenges women face in rising in the ranks of finance organizations. Ms. Rajappa discusses the importance of mentorship and employee resource groups that bring people with similar backgrounds together and why her belief that one positive effect of the pandemic may be a better understanding at companies of the need for employees, including working mothers, to have the flexibility to advance their careers while raising a family.

Please listen to the podcast by hitting the play button above or by heading to Apple or Spotify. And to find out about Women in NeuGroup, or WiNG, a group created to help women in finance connect with each other and reach their career goals, please click here.

Read More Read Less
Contact Us
Justin Jones
In ESG, Investment Management

Mega-Cap Treasurers Mastering the Carbon Reduction Calculus

At Starbucks and other ESG leaders, treasury is using a range of financial tools and promoting the creation of others to reach net-zero. 

Treasurers at multinational corporations including Starbucks that have made ambitious, public commitments to cut carbon emissions are becoming experts in a range of tools, techniques and topics so they can better assist companies achieve net-zero and other carbon reduction goals.

  • That takeaway emerged at a recent meeting of NeuGroup for Mega-Cap Treasurers, where Starbucks treasurer Peter Filipovic outlined for peers the major levers the company is pulling to cut its greenhouse gas emissions by 50% by 2030—and the extent of the role treasury is playing in the process.

At Starbucks and other ESG leaders, treasury is using a range of financial tools and promoting the creation of others to reach net-zero. 

Treasurers at multinational corporations including Starbucks that have made ambitious, public commitments to cut carbon emissions are becoming experts in a range of tools, techniques and topics so they can better assist companies achieve net-zero and other carbon reduction goals.

  • That takeaway emerged at a recent meeting of NeuGroup for Mega-Cap Treasurers, where Starbucks treasurer Peter Filipovic outlined for peers the major levers the company is pulling to cut its greenhouse gas emissions by 50% by 2030—and the extent of the role treasury is playing in the process.
  • His presentation and comments by peers made clear that treasurers at companies committed to sustainability have a thorough knowledge of tax equity investments, green and sustainability bonds, renewable energy certificates or credits (RECs) and virtual power purchase agreements (VVPAs)—and are working with bankers and other partners to help find new solutions to reduce the footprints of suppliers, including farmers.

Going beyond RECs. Mr. Filipovic began by describing the area where treasury is playing the largest role in his company’s emissions reduction effort: the move to using 100% renewable energy. To get there, Starbucks has been buying RECs for more than 15 years, but views them differently today.

  • “Now, if you want to be a leader in this space, it’s not just about buying RECs from existing projects,” he said. “A lot of the focus is on what you are doing to actually bring new green energy capacity to the US grid.”
  • Another treasurer said some of his company’s competitors purchase RECs to reach the 100% renewable energy goal faster; his company, though, wants to first exhaust additionality by financing projects that create renewable energy beyond what would have been produced anyway. “That’s making the grid greener,” he said.
  • Mr. Filipovic then described two finance vehicles that have helped offset 70% of the company’s carbon emissions (with the remainder covered by purchasing RECs): tax equity investments in renewable energy projects that provide capital to developers of, say, solar farms in exchange for tax credits; and VPPAs, a contract structure in which a power buyer (or “off taker”) agrees to purchase a project’s renewable energy for a pre-agreed price. 

Challenges and solutions. One obstacle, he said, is that demand by corporates for VPPAs and tax equity deals has increased significantly, making them harder to obtain and more costly. “The economics are not as good as four or five years ago.”

  • Cost is also an issue when trying to obtain RECs in China, Starbucks’ second biggest market, where the certificates cost three to four times as much as in the US, he said. So the company hopes to invest in solar and wind farms directly, through private equity funds that offer RECs in addition to a financial return. Mr. Filipovic encouraged other companies to consider investing in funds that help them offset emissions from their suppliers.
  • Another major source of the company’s carbon footprint derives from farms that produce the coffee and dairy Starbucks buys. To reduce these so-called Scope 3 emissions from its supply chain, treasury manages a global farmer fund that supports programs that help coffee farmers to engage in more sustainable practices.

Looking to the future. In his concluding remarks, the Starbucks treasurer said, “This whole space around carbon has been evolving quite dramatically and as we work with our banks, we are hoping for finance to catch up.”

  • Another treasurer looking toward the future identified investing in projects that promote sustainable forestry practices to boost carbon sequestration as another space that may attract corporates looking to create impact in cost-effective ways. He hopes other companies will join him in pushing for the creation of investment vehicles that could also help counteract some effects of deforestation, including in areas of South America.
  • He said that while treasury may not lead the effort to create such funds at companies with robust sustainability teams, it has a meaningful role to play in ensuring corporates make sound decisions.
    • “We are viewed as sort of the investment house,” he said. And just from the financial perspective, when you’re talking about structuring funds and doing other things, we have an opportunity to provide the financial voice of reason and ask, ‘does this really make sense and are you thinking about x, y or z?’”
  • He and another treasurer said this guidance extends to making sure people outside of finance at the company appreciate the intrinsic value of RECs the company earns by investing in renewable energy. That means making sure “people understand RECs are important and the centerpiece of an investment. We are ascribing a financial value to the REC and it’s making sure everyone is aligned to that,” the second treasurer said.
Read More Read Less
Contact Us
Justin Jones
In Banking, Regional

Russia Sanctions and Exits: Devil’s in the Details

Members discuss bank guarantees, clients that are in no hurry to pay and good news on intercompany funding—at least for now.

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

The war in Ukraine is now, sadly, one month old. With this milestone we also note an evolution of the concerns of NeuGroup members. They have more clarity on their companies’ decisions regarding Russia (to exit, suspend operations, stay), sanctions, counter-sanctions and local laws, as well as on the specific needs of their local staff. At this week’s Russia meeting, a few new issues surfaced, as well as wrinkles on familiar topics. Here are some highlights.

Members discuss bank guarantees, clients that are in no hurry to pay and good news on intercompany funding—at least for now.

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

The war in Ukraine is now, sadly, one month old. With this milestone we also note an evolution of the concerns of NeuGroup members. They have more clarity on their companies’ decisions regarding Russia (to exit, suspend operations, stay), sanctions, counter-sanctions and local laws, as well as on the specific needs of their local staff. At this week’s Russia meeting, a few new issues surfaced, as well as wrinkles on familiar topics. Here are some highlights. 

Open bank guarantees and letters of credit. Companies that have stopped operations may end up halting work for which they signed contracts, raising potentially challenging issues that one member raised. A corporate might be able to negotiate amicably and come to an agreement with Russian suppliers and customers, but that is not likely. 

  • The most probable scenario is that companies will eventually see drawings under bank guarantees and letters of credit, and a subsequent commercial dispute. What happens if a sanctioned bank is involved in that situation? How will such disputes be resolved under a sanctions and counter-sanctions regime? Going forward, this is likely to be a big source of headaches for multinational corporations (MNCs).

Customers who say they’re unable to pay. Members report that customers are less likely to feel pressure to pay for products already received after a company has announced it is no longer shipping product to Russia. That’s happening now.How will MNCs collect on these receivables? As time goes on, these will be increasingly categorized as bad debts and eventually written off, adding to the total cost of stopping operations. The short-term effect is that corporates will collect fewer rubles to use for paying suppliers, staff, rent and taxes, making their working capital situation worse. 

Domestic intercompany cash pools are working normally again, thanks to Russia’s Presidential Decree No. 126. There is unanimity among members on this point based on discussions with banks, accountants and lawyers. Intercompany deposits from Russia to foreign locations on the books prior to March 2 appear to be rollable without authorization, but no new cross-border deposits of this type seem possible.   

The big four foreign banks in Russia are increasingly the focus for multinational companies. These institutions—SG Rosbank, Raiffeisen, Unicredit and Citibank—have local bank charters. Other foreign banks have signaled that their local operations will wind down. Some new bank accounts are being opened, but this seems to be dependent on the corporate’s overall global relationship with a bank, and it is difficult to see a pattern emerge.  

The elephant in the room. A major issue is how to implement a corporate decision to suspend operations or exit Russia. Many companies seem to have accepted that their Russian businesses will be written down dramatically, so most are not too focused on the financial aspects of these decisions. Instead, companies with thousands of local staff and dozens of factories or industrial sites have continuing practical decisions to make. 

  • So far, member companies seem to have done everything possible to help keep their staff employed and paid, even if operations have stopped. But there is a lot of variation from company to company and sector to sector.
  • Some members report that Russian authorities are inspecting their foreign work sites weekly. One member said his company’s local managers in Russia are afraid they risk a jail sentence if a plant shuts down, based on their understanding of Russian law. Given such circumstances, at what point do companies stop paying staff? What is the legal mechanism for turning a business over to the employees to run? Add these to the list of questions for which there are not yet concrete answers.
Read More Read Less
Contact Us
Justin Jones
In FX, Senior Executive

Turn Down the Volume: Cutting Through ‘Noise’ in FX Hedging

NeuGroup members share their common sources of unexpected volatility in cash flow and balance sheet hedging programs.

One goal of a foreign exchange hedging program, one FX risk manager said at a recent NeuGroup meeting, is to minimize the risk that senior executives will face questions during quarterly earnings calls about the impact of currency on results. But uncertainty sparked by global issues like the war in Ukraine, inflation and fallout from the pandemic means this isn’t always possible.

NeuGroup members share their common sources of unexpected volatility in cash flow and balance sheet hedging programs.

One goal of a foreign exchange hedging program, one FX risk manager said at a recent NeuGroup meeting, is to minimize the risk that senior executives will face questions during quarterly earnings calls about the impact of currency on results. But uncertainty sparked by global issues like the war in Ukraine, inflation and fallout from the pandemic means this isn’t always possible.

  • Those issues can be one source of unexpected FX gains or losses, often called “noise” by treasury teams. And noise can highlight hedging challenges and invite questions from senior leaders who seek the source of the noise. “On a month-to-month basis that’s what we have to spend a lot of our time explaining to leadership,” one member said.
  • Members at the meeting, a summit for NeuGroup for Foreign Exchange 1 and 2 sponsored and co-hosted by Chatham Financial, said noise often comes from market volatility, forecasts that aren’t timely or accurate enough, or simple human error.
  • Attributing the noise to a source reveals if it’s an external factor the corporate can’t control, or may help identify errors and process improvements that can be remedied.

Cloudy crystal ball. Cash flow hedging relies on forecasted exposures of foreign revenues and expenses over a company’s planning and hedging horizon. Forecasts that miss the mark are the biggest source of noise, according to a survey at the meeting (see chart below).

  • Increasing uncertainty since the start of the pandemic has caused forecasting to be far less reliable. One member said that even when volatility leads to increased sales, it makes life harder for the FX team.
    • “As we looked at our updated cash flows when Covid first happened and sales were expected to decrease, we started to be over-hedged, so we pushed out positions to make sure we were not,” he said. “In the end, we actually flourished from a sales perspective, but the unknown of Covid led us to be too conservative,” leaving the company under-hedged.
  • FX impact, cited by 22% of those surveyed as the largest source of cash flow hedging noise, stems from movement in exchange rates that hasn’t been hedged or modeled as an acceptable risk. “How do you differentiate between what the market is doing and the things you’re choosing to do from a hedging strategy perspective?” Chatham Financial’s Amanda Breslin asked the group.
    • “Many companies choose to hedge a subset of their exposures based on risk tolerance, cost to hedge, reliance on correlations or forecast visibility. Outcomes that deviate from the assumed degree of residual risk are where we see companies exploring the sources of additional noise.” She added that FX teams need to understand “from a hedge perspective, are they targeting the right ratios, currencies and tenors? It gets quite messy.”

Missing the match. For balance sheet hedging programs, the sources of noise identified by members are a bit broader, which can make solving the issue more complex. The common sources are mismatches in notional value, timing and currency rates (see chart below).

  • Mismatches in notional are similar to deviations from forecasts in cash flow hedging, as they can occur when forecasted exposures are fully hedged but the company’s actual balances are higher or lower than the forecasted amounts, or when currency exposures go unregistered and remain unhedged. Almost half (48%) the members surveyed identified this as their primary issue, which can also be caused by errors in bookkeeping.
    • “We identify errors, which have a huge impact on our balance sheet exposure notional,” one member said. “When we go to the ERP system, often times, [local teams that execute FX transactions] book the balance in a certain FX currency, but actually balance in a functional currency which is not part of the exposure.” Because of this, she said the forecast is often incorrect, resulting in a balance sheet that is either over-hedged or under-hedged.
  • For other members (26%), a mismatch in rates can cause a cacophony. This issue can arise when the spot rate used to revalue derivatives comes from a market rate, while exposures are remeasured using a company balance sheet rate. “If someone is using the wrong exchange rate, we’re creating a lot of noise,” one member said.
  • An equal share of members say the biggest source of unexpected results is a mismatch in timing. “We have data coming in from multiple ERPs and multiple systems,” one member. “I’ve seen a lot of companies, a couple days before the end of the month, start generating some forecast exposures to get an idea of what they think the balance sheet will look like.”
    • He continued that companies often do pre-balance sheet hedging to get the process started and then when the data becomes available, often five or six days into the month, will make additional hedges on top of that. “That presents a lot of issues,” he said. “You’re going to have timing mismatches, you’re going to have notional mismatches, you’re going to get some noise.”

Communication to turn down the volume. One FX head shared a simple approach to track a source of noise and tackle it, going one step further than simply being prepared to explain its origin.

  • “The first step is just having a conversation,” he said. Each month, the member meets with controllers for each currency and has a “kumbaya” moment to break down any noise and where it stems from.
    • “We talk about what the previous exposure was, what the upcoming one is going to be, and try to figure out why there were issues with the prior forecast,” he said.
  • After identifying the reason for the unexpected volatility, the team tracks the source using “reason codes” for recurring causes, creating a historical log that tracks the origins of noise. “Now we can identify whether it was a revenue mismatch, whether there was something wrong on the cost side or something wrong with tax, and these reason codes are specifically tied to the P&L impact of that mismatch,” he said. “It allows us to very quickly look back to see exactly what caused the problem and why, so we know who to talk to.”
  • Another member added that beefing up tracking of these noisemakers can be very valuable when meeting with leadership, which the member ran into when faced with an issue hedging deferred income, which “always comes out at a different rate than the prevailing monthly rate” due to a reliance on forecasting.
    • One senior executive who recently joined the company confronted the member’s team, expressing concerns about an unexpected $9 million loss due to this issue.
    • “But I showed him the data, and I said, ‘A forecast cannot be perfect, and that’s a big driver.’ And after that he said, ‘well, you know what, I’ve never felt so good about losing $9 million,’” the member said. “You just need to be able to translate what is happening in a way the business understands.”
Read More Read Less
Contact Us
Justin Jones
In Banking, Cash & Working Capital, Regional

Liquidity and Payments in Focus as Sanctions Deadlines Loom 

Top concerns remain paying salaries to staff and ensuring local businesses have enough liquidity to meet their obligations.   

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

Thousands of international companies have been weighing their options since Russia’s invasion of Ukraine. These range from full and immediate pullouts to doing business as usual—and many nuanced positions in between. Even corporates pausing operations or announcing exits face challenges to meet financial responsibilities to staff, suppliers, customers and governments.

Top concerns remain paying salaries to staff and ensuring local businesses have enough liquidity to meet their obligations.   

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

Thousands of international companies have been weighing their options since Russia’s invasion of Ukraine. These range from full and immediate pullouts to doing business as usual—and many nuanced positions in between. Even corporates pausing operations or announcing exits face challenges to meet financial responsibilities to staff, suppliers, customers and governments.

  • The details depend on a company’s level of investment, number of employees in the region and its industry. Businesses that sell humanitarian products such as pharmaceuticals and medical devices, for example, will keep operating in compliant ways, in some cases with an OFAC license, as in other sanctioned countries.

How to exit? Let me count the ways. Some companies that are willing to part permanently with their Russian business are stymied by the present situation. Let’s say you have a professional services company and would like to turn it over to your Russian employees. If your clients are mostly sanctioned companies or the government, would the employees want it? Does it still meet the Russian definition of a going concern that could be transferred, or must it be wound down and declared bankrupt?

  • This unprecedented situation is being reviewed by attorneys in Russia and around the world, looking to understand the rules and for answers on next steps.    

These challenges will go on for weeks, months and possibly years before companies definitively cut ties to Russia or—we can hope—the conflict ends and some sense of normalcy returns. Treasurers are hungry to share best practices to make sure that they can do what’s needed as some key banks reduce or withdraw local services and Russian counter-sanctions get rolled out.

  • Many eyes are now focused on the end of the transition period to full implementation of sanctions, with several NeuGroup members mentioning a March 26 deadline for some bank sanctions.

Here are other topics, comments and questions that surfaced this week:    

The top concern remains how to pay the salaries of Russian and Ukrainian staff, both those remaining in-country and those leaving. The consensus among members, though not unanimous, is that purely domestic payments in Russia may continue under sanctions. The Russian subsidiary of a foreign company with RUB liquidity at a non-sanctioned bank in Russia can instruct that bank to pay the company’s employees in RUB with a domestic funds transfer, even if some payments are made to employees with accounts at sanctioned Russian banks. 

  • In the same way that cross-border cash pools are no longer possible but domestic cash pools are functioning as usual, companies must make sure local staff initiate salary payments, with no cross-border nexus. As we have heard since the start of the crisis, corporates are asking employees in Russia to open personal accounts at non-sanctioned banks, but this is a slow and imperfect process. 
  • Dealing with the complexities of bank sanctions while paying employees requires “constant rejiggering of who can we touch, who can’t we touch,” one member said. “Is it the bank that can touch it, can’t touch it; is it us that can touch it, can’t touch it?” He and others are holding frequent calls with compliance and other teams to stay aligned on what’s allowed.
  • 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. Another is preparing to use a stablecoin if paying employees through banks proves impossible. He told NeuGroup Insights the company’s IT security group “put us in touch with outside vendors who specialize in helping companies with cryptocurrency, particularly for ransomware payments.
    • “While they have never done this particular structure before, they saw it as very feasible, subject to security protocols and regulatory clearance. Getting stablecoins to our Russian affiliate should be fairly simple. More of a challenge would be the affiliate using it to pay vendors or employees, but that should be solvable.”

The banking landscape continues to shift. The biggest foreign-owned Russian banks continue to receive praise from members for their positive attitude in finding solutions for payments that are compliant with sanctions and local law. That includes Citibank, which one member called “fantastic,” citing its efforts and ability to help the company get payments to employees fleeing Ukraine to other countries, in some cases using debit cards and the bank’s extensive regional network of offices, with limited bureaucracy.

  • Smaller foreign banks, especially branches, are rapidly curtailing activity, announcing exits, and informing members that they will not be continuing business as usual. And some banks consider overdrafts or drawdowns on uncommitted lines of credit to be “new business” and they are telling members that they will not do new business. 

Companies with excess ruble liquidity are, as far as we can tell, unwilling to swap or sell that liquidity to companies that are scrambling for more local funding in Russia. The reason? In a crisis the typical calculations of minimum cash go out the window. The priority becomes keeping the cash for essential payments to employees, suppliers and tax authorities. Having excess cash allows for flexibility in the future, including the unknown costs of winding down a business.  

  • One member reported that even lending excess rubles to an affiliate company looks to be compromised, at least temporarily, by a recent presidential decree that forbids Russian legal entities lending to other entities owned by a parent company located in an “unfriendly country.” Apparently, a company must apply for and receive a specific license from the Russian authorities for such inter-company loans. Members are seeking confirmation from their local regulators and attorneys. 

Many companies are negotiating with banks for early termination of hedges on the theory that negotiating calmly and openly with the banks, and having flexible timing, leads to better prices and eliminates the risk of settlement delays and failures. But not all companies are doing this, with some opting to maintain all their hedges to term and relying on the quality of their counterparties to deliver. There still appears to be no market appetite for rollovers or new trades. 

Read More Read Less
Contact Us
Justin Jones
In FX, Technology

Assembly Required: Closing Loops by Building Automations

One member, challenged to create a solution without external resources, automated FX processes through in-house ‘citizen developers.’

While a TMS can offer an integrated treasury technology solution, no single system can support the full range of automation requirements. In the case of one fast-growing, high-tech NeuGroup member company, the deficits surfaced in the area of FX transaction management and reporting. Faced with a need to improve the process, shorten cycle time and reduce cost with no additional resources, the company decided to build the automations in-house, leveraging its access to so-called citizen developers.

One member, challenged to create a solution without external resources, automated FX processes through in-house ‘citizen developers.’

While a TMS can offer an integrated treasury technology solution, no single system can support the full range of automation requirements. In the case of one fast-growing, high-tech NeuGroup member company, the deficits surfaced in the area of FX transaction management and reporting. Faced with a need to improve the process, shorten cycle time and reduce cost with no additional resources, the company decided to build the automations in-house, leveraging its access to so-called citizen developers.

  • The member who shared her team’s journey at a recent meeting of NeuGroup for Foreign Exchange 2 said her company’s revenue doubled in a short span of time, but her FX team remained the same size. On top of this, its TMS is only equipped to handle cash reporting, positioning and the majority of intercompany fundings, with all FX hedging handled separately.
  • “Thus, we augmented our processes with automation tools to better communicate with our fellow treasury cash managers,” the member said.

System for the self-taught. Members on the team trained themselves and one another through online coding boot camps and internal training sessions. They ended up implementing three tools that require increasing degrees of expertise while functioning together.

  • A license in the efficient (but relatively pricey) self-service data tool Alteryx Designer allows the team to access large datasets from its ERP, which are then pulled into the programming language Python to manipulate and analyze the data. Next, the data is exported into an Excel spreadsheet with a detailed set of macros scripted in VBA (visual basic for applications).
  • While the flow may sound complicated, in the end it dramatically cuts the amount of time the FX team spends by eliminating manual processes.

Top of the line. Alteryx Designer, which allows users to create automations using flow charts and a simple, drag-and-drop user interface, is the first stop. The member calls the tool “coding for dummies,” as its capabilities aren’t quite as open as a programming language, but she said it is very helpful for cleaning up large datasets pulled from SAP S/4HANA, “digging into the details and finding a needle in the haystack in a fraction of the time.”

  • The member was fortunate that treasury had a license to spare for Alteryx, as the tool requires a pretty steep resource commitment compared to free-to-use programming languages.
  • The team uses Alteryx to do the first step in updating balance sheet exposure by pulling a report, scrubbing the data and exporting it into a clean an Excel spreadsheet. A process that once took 20 minutes each day now happens in 11 seconds at the push of a button.

The second stop: Python. The most powerful tool the member uses is Python, an open-source programming language. It takes time to learn, but the member’s team now uses Python code to model and forecast the impact of cash flow hedges.

  • The company has millions of invoices per quarter for its four largest traded currencies, which she said caused it to “outgrow doing calculations in Excel, which was no longer an option. I’m sure everyone can understand how frustrating and impossible it is to manipulate massive amounts of data in Excel.” 
  • “From my experience, it’s actually not super difficult to get set up in Python,” she said. “I usually get a little intimidated trying to get set up with new technology, but this was actually pretty straightforward. It’s nice because there is no monetary cost to it: The world is your oyster.”
  • Leveraging her new skill with the tool and assistance from Python-proficient team members, the company now uses a Python function that takes the code from Alteryx and applies forecasting and cash flow hedging models, which previously ran on a manual basis.

Virtual connectivity. The data ends up in Excel, which the member admitted is not the best tool for processing large data sets. But VBA, which she called “the granddaddy automation tool,” allows users to create macros, which are simple, repeatable tasks within Excel that can assist with reporting.

  • At the member’s company, “FX produces a monthly forecast deliverable to FP&A surrounding cash flow hedging impact,” tracking the impact throughout the quarter, up to six times per quarter.
  • The employee in charge of the company’s use of VBA explained that team members were once doing thousands of calculations per quarter that are now  completed in an instant. “We hedge with options, about 60 options every quarter.” he said. The company amortizes its options out 12 months, “so if you take 300 options at minimum over 12 months, that’s 3,600 lines of information that needs to be accurate.”
  • Though he admits the process is pretty complicated, the member said it “has been very beneficial to provide quick and accurate information,” and the team couldn’t have done it without the assistance of automated tools.

Read More Read Less
Contact Us
Justin Jones
In Capital Markets, D&I

Lead by Example: Verizon Spotlights Fees Paid to Diversity Firms

Aggregated data shows which IG bond issuers paid diversity firms the most in dollars and as a percentage of total fees.

Verizon treasurer Scott Krohn this week presented data to his peers in NeuGroup for Mega-Cap Treasurers showing the top 20 issuers of investment grade (IG) debt ranked by the fees they paid in 2021 to banks and brokerage firms owned by women, Blacks, Latinos and veterans—so-called diversity and inclusion or D&I firms. Verizon is a recognized leader among corporates that have committed to giving more business to D&I firms in the past several years. More importantly, Verizon and some other companies are giving the firms more meaningful roles, including in green bond deals where Verizon has elevated some D&I banks from being co-managers to serving as active joint book runners.

Aggregated data shows which IG bond issuers paid diversity firms the most in dollars and as a percentage of total fees.

Verizon treasurer Scott Krohn this week presented data to his peers in NeuGroup for Mega-Cap Treasurers showing the top 20 issuers of investment grade (IG) debt ranked by the fees they paid in 2021 to banks and brokerage firms owned by women, Blacks, Latinos and veterans—so-called diversity and inclusion or D&I firms. Verizon is a recognized leader among corporates that have committed to giving more business to D&I firms in the past several years. More importantly, Verizon and some other companies are giving the firms more meaningful roles, including in green bond deals where Verizon has elevated some D&I banks from being co-managers to serving as active joint book runners.

  • The fee data was part of a larger presentation by Mr. Krohn that offered Verizon’s perspective on corporate issuers and D&I engagement and the company’s strategy of “investing for growth” as well as “differentiated economics” when selecting, engaging and paying D&I firms. Other data presented showed racial diversity at Wall Street firms; the representation of new corporate board directors who are women and ethnic minorities; Verizon’s green bond syndicate structures; D&I dealer equity capitalization and head count levels and trends.

Reading the rankings. The companies in the table below are ranked by the amount they paid D&I firms;  the first column of numbers shows the figure as a percentage of the total fees the companies paid for IG debt deals. In terms of leaning into meaningful economics, “all we really control from year to year in terms of policy and approach is the percentage, given varying issuance amounts and needs,” Mr. Krohn said. Verizon ranked No. 1 in dollar amount ($21.1 billion); by percentage of total fees (13.2%), it ranked third, behind Microsoft (15%) and Edison International (14.1%).

  • The shaded fields show banks—which took five of the top 10 spots. “The banks have started to walk the talk in certain cases,” Mr. Krohn said. He noted that Verizon pays close attention to where banks rank in percentage of fees paid to D&I firms when selecting lead managers for its green bond deals, as the company has added underwriter selection criteria focused on sustainability and diversity commitments to its green financing framework.

Context. Mr. Krohn noted that while the supply of investment grade debt in the primary market fell by about 18% in 2021 from 2020, the D&I fees paid by the top 20 issuers in 2021 exceeded 2020 fees by nearly 20%. “That highlights the overall market’s higher prioritization of engaging with D&I firms as part of broader social responsibility goals,” he said.

  • “Not shown in the table are the tremendous strides D&I firms are making to distribute bonds,” Mr. Krohn added. “It goes beyond cutting a check for D&I firms to grow. While increasing their capital base is important, so is the ability to enhance their distribution franchise to place bonds with investors. And there’s a call to action, with a role to play in providing a meaningful opportunity for D&I firms whether you’re an issuer, large bank or fixed income investor.”

The art of the possible. In discussing the value of showing data comparing the allocation of fees corporates pay to D&I firms, Mr. Krohn said, “One of the things we wanted to accomplish in this presentation and with this data is to help people understand what the art of the possible is. And for those that haven’t yet made a change but may be interested in making a change, we hope this data is helpful.”

  • With regard to bulge bracket banks, he added, “Part of my hope is that there are more of us that draw conclusions on who’s walking the talk, and that we demand more from our partners in the capital markets.”
Read More Read Less
Contact Us
Justin Jones
In ESG

NeuGroup’s Strategic Finance Lab Podcast, Episode 1: Finance and ESG Reality

Step into a lab where innovation and digital transformation empower senior finance executives to become true strategic partners.

NeuGroup is launching the Strategic Finance Lab podcast by zeroing in on the need for finance leaders to take a comprehensive approach to helping corporations make good on achieving their net-zero carbon reduction goals and ESG metrics. The pressure companies are feeling now will only grow, so now’s the time to learn more and do more.

Step into a lab where innovation and digital transformation empower senior finance executives to become true strategic partners: Nilly Essaides interviews Stephen Ferguson from The Hackett Group on the role of finance leaders in ESG initiatives.

NeuGroup is launching the Strategic Finance Lab podcast by zeroing in on the need for finance leaders to take a comprehensive approach to helping corporations make good on achieving their net-zero carbon reduction goals and ESG metrics. The pressure companies are feeling now will only grow, so now’s the time to learn more and do more.

  • Please listen to our first episode on Apple and Spotify to hear NeuGroup’s Nilly Essaides interview The Hackett Group’s Stephen Ferguson, who advises major European corporations on all aspects of finance. He says corporates face a major challenge as regulators start imposing new disclosure standards and companies are evaluated by investors and other stakeholders not only on their own records but those of their suppliers.

In the weeks and months to come, the Strategic Finance Lab will bring you probing interviews and discussions about how practitioners and providers are advancing finance’s transformation into a strategic partner to the business and driver of enterprise performance by providing data-driven insight to support management decision-making.

  • Plus, NeuGroup members will share their personal experiences in achieving career success and how they’re enabling others to reach their full potential. We can’t wait to bring you into the conversation.
Read More Read Less
Contact Us
Justin Jones
In Banking, Regional

Russia Crisis: Finance Navigates Complexity, Fluidity, Unknowns

Paying staff in Russia as companies exit and complying with complex sanctions increase pressure on finance leaders.

Editor’s note: NeuGroup is running weekly special sessions on the Russian-Ukrainian crisis to help members navigate the financial consequences of the war. NeuGroup senior executive advisor Paul Dalle Molle, a former banker with extensive European experience, leads the discussions, and we asked him to share his latest insights and takeaways. 

By Paul Dalle Molle

At this stage of the crisis, there are still, unfortunately, more questions than answers for corporate treasurers and their teams. They are struggling to take the right steps to help employees and businesses while respecting US and European sanctions as well as rules governing business activities within Russia. That said, as the war proceeds and the sanctions are published, thousands of people within treasury and on other internal and external teams are whittling away at these questions and helping to make the choices facing decision-makers clearer. This group includes lawyers, bankers, accountants, financial advisory firms and security advisors. Before delving into the details, two overall comments:

Paying staff in Russia as companies exit and complying with complex sanctions increase pressure on finance leaders.

Editor’s note: NeuGroup is running weekly special sessions on the Russian-Ukrainian crisis to help members navigate the financial consequences of the war. NeuGroup senior executive advisor Paul Dalle Molle, a former banker with extensive European experience, leads the discussions, and we asked him to share his latest insights and takeaways. 

By Paul Dalle Molle

At this stage of the crisis, there are still, unfortunately, more questions than answers for corporate treasurers and their teams. They are struggling to take the right steps to help employees and businesses while respecting US and European sanctions as well as rules governing business activities within Russia. That said, as the war proceeds and the sanctions are published, thousands of people within treasury and on other internal and external teams are whittling away at these questions and helping to make the choices facing decision-makers clearer. This group includes lawyers, bankers, accountants, financial advisory firms and security advisors. Before delving into the details, two overall comments:  

  1. Every multinational will strictly comply with sanctions. Some cynics have suggested that companies will find ways around sanctions, but I have seen just the opposite. Companies will do what they can to meet their obligations to Russian staff, suppliers, customers and regulators provided that their actions are permissible under sanctions. 
  2. While some companies withdraw from Russia or suspend operations, they must remain completely devoted to sanctions compliance and respecting local rules. Corporates have responsibilities that require numerous tactical responses that include paying staff as they exit, mothballing facilities, paying bills and taxes and collecting invoices. Finance plays a critical role in most of these obligations.

Each company is unique.  There are some common, major issues confronting all multinational companies, but the degree to which each issue affects a specific company relates to the nature of its industry and the corporate’s business model for Russia. For example, the problems in Russia facing a software company are quite different from those of a commodities firm or an industrial business. The answer to these questions and others will dictate the specific steps each corporate takes:

  • How big is your local staff in Russia? 
  • Do you need to import supplies or export production?  
  • Do you have your own distribution network or use third parties? 
  • How is your local business funded—from retained earnings in rubles, by periodic injections of foreign currency capital or by local borrowing? 
  • How do customers pay you in Russia—are you a B2C paid by credit cards, or a B2B with traditional collections from indigenous Russian companies? 

Even when a company pulls out or suspends operations in Russia, it means different things to different companies and their treasurers. So, keeping in mind that each specific corporate situation may call for unique answers, here are the most important topics that have emerged:

Paying staff in Russia, the top concern of corporates since the crisis began, introduces complexity. Right now, there is a conviction among treasurers and compliance specialists that it is permissible for the Russian subsidiary of a foreign company with RUB liquidity at a non-sanctioned bank in Russia to have that bank pay the company’s employees in RUB with a domestic funds transfer—even if some payments are made to employees with accounts at sanctioned Russian banks. But that same transaction would not be permissible if it arose from offshore and/or in foreign currency. Some companies are asking employees to open personal accounts at non-sanctioned banks to help further distance the companies from sanctioned banks, but this is a slow and imperfect process.   

Similarly, the tactic of paying salaries in advance has been a hot topic. Several companies have done this, paying employees three months in advance to avoid impediments. But other companies were counseled against this precaution and some were even told that such advance payments are illegal in Russia.    

Circumvention risk. Also, as always with sanctions, corporates need to be aware of so-called circumvention risk: US persons, as they are called by the Treasury Department’s Office of Foreign Asset Control (OFAC), cannot instruct non-US persons to engage in activity that would be impermissible for US citizens, such as dealing with a sanctioned bank, even in another currency. Members are consulting continuously with their legal teams to ensure that what they did last week is still permissible this week. Of course, if payments arise within the EU or are done in euros, the EU sanctions regime would apply and so the same careful analysis of permissible activities is taking place for the EU sanctions. 

Local Funding is extremely important and the focus of intense corporate activity. It appears that a new Russian regulation allows banks in Russia to lend to multinational companies only for salaries, rent and tax payments. If correct, this is relatively good news, as companies are very focused on paying staff, but bad news as it would appear to eliminate borrowing for all other working capital needs. For some companies that do not generate sufficient local free cash flow, that could mean finding compliant ways of bringing capital into the country or ceasing activity. Companies are systematically seeking to add RUB liquidity lines from non-sanctioned banks.   

Additional banking partners are being sought by multinationals. Companies must stop working with the sanctioned banks, so many are trying to add new relationships with the biggest foreign banks in Russia (SG Rosbank, Raiffeisen, Unicredit and Citibank), as well as other European and American banks, and Asian banks. Related to this is an attempt to understand how the Chinese CIPS payments clearing system could be used to transfer funds in and out of Russia without using sanctioned banks. This appears to be feasible, albeit cumbersome and potentially expensive, as the amounts will originate in USD or EUR and then be exchanged for CNY and finally into RUB.    

Hedging seems to have dried up. From what we have heard, there is no liquidity for rollovers and new trades, and settlement of existing trades are being completed, but sometimes with delays.   

Abiding by local Russian rules is difficult. Members say they have been told by counsel that companies that run unprofitable businesses in Russia for two years risk having their businesses confiscated. So corporates must adapt their transfer pricing system to consider the new costs of operating in that environment, to avoid generating losses in Russia. But should they do that immediately, or wait to see what happens with the war and sanctions? Such transfer pricing adjustments might need to occur on a weekly basis during wartime conditions. Members have also been told that they risk revocation of their business licenses if they fail to respect Russian rules about corporates paying employees on time and maintaining certain balance sheet ratios.   

Some legitimate commercial payments seem to now be nearly impossible due to sanctions or Russian rules. For example, a company that booked credit card payments from Russian residents and now must reverse those payments can no longer credit those customers because the credit card companies have suspended operations in the country. Will they send checks? Is there another solution? And if collections are due from customers who pay from sanctioned banks, how can the company receive the funds without violating sanctions?   

The rule requiring companies to convert 80% of FX proceeds into rubles has also raised more questions. The rule is retroactive to January 1. Members seem unclear about the deadline for converting the previous proceeds and have major accounting and liquidity management headaches to isolate the funds.   

Even if individual employees and executives working at US and European multinational companies are appalled at the unprovoked invasion and war, as corporate executives they must act in the best interests of their employees, customers, and shareholders. Until companies make the strategic decision to pull out of Russia entirely—and perhaps for months or years afterward—treasury and other finance teams will try and navigate both sanctions and local Russian business rules as best they can, being good corporate citizens in all the jurisdictions in which they operate. 

Read More Read Less
Contact Us
Justin Jones
In D&I, Treasury Management

Right Direction, Slow Progress for Women in Finance

The finance sector is notoriously male dominated. And despite some progress over the past decade, there’s still a long way to go before women have an equal voice.

By Nilly Essaides

Back in the early 1990s, when I started my career in finance, I was often the only woman in the room. And my colleague Anne Friberg, NeuGroup senior director and peer group leader, says that in the 2000s, when she was facilitating peer group meetings across the country, those rooms had a lot more men than women. “Now, the room looks more diverse,” she said this week.

The finance sector is notoriously male dominated. And despite some progress over the past decade, there’s still a long way to go before women have an equal voice.

By Nilly Essaides

Back in the early 1990s, when I started my career in finance, I was often the only woman in the room. And my colleague Anne Friberg, NeuGroup senior director and peer group leader, says that in the 2000s, when she was facilitating peer group meetings across the country, those rooms had a lot more men than women. “Now, the room looks more diverse,” she said this week.

  • Her impression is backed by data: Today, 31% of NeuGroup members are women. Women also make up a third of senior positions (treasurers and assistant treasurers) and 26% of all treasurers. “The rise in membership is indicative of progress,” Ms. Friberg said.

It is certainly an improvement. But the fact remains that there are not enough women seated around conference tables in rooms (virtual or otherwise) where finance is the focus.

It’s lonely at the top. At the highest levels of the finance profession, women are conspicuously absent. According to 2021 data provided to the WSJ by Crist Kolder Associates, only 15% of the CFOs at S&P 500 companies were women. The silver lining, if it can be called that, is that this number represents a 25% rise since 2017.

  • “When we talk about women in finance, we talk about them broadly but also in leadership. Just playing a numbers’ game is not going to cut it,” said the treasurer of a large tech company at a recent meeting of Women in NeuGroup (WiNG), sponsored by CNote and Seelaus Asset management, both women-owned firms. “While overall, we now have 50% women in finance, the question is how many are in leadership roles? That’s the metric we track,” she said.

Greater opportunities. Treasury is more diverse than finance, because “it offers a greater degree of flexibility in backgrounds and experiences as opposed to the rest of the finance organization,” another member said. For example, the accounting field remains more male-dominated because many of the staff have Big Four experience, and the Big Four have a long way to go towards greater diversity.

  • “I’ve really enjoyed the evolution in my lifetime. When I started, there were no other women, only men with no kids or with a stay-at-home wife,” said one NeuGroup member.

There is a long way to go. “The statistics continue to reflect a jarring reality, and while I appreciate the data is directionally positive, given demographics, women are still severely underrepresented,” said NeuGroup COO, Amy Kemmerer.

  • The pandemic has also slowed progress toward greater participation by women, as it forced more women than men to exit the workforce, due to additional childcare responsibilities. Our own data reveals that the participation of women in NeuGroup’s network essentially stalled between 2019 and 2022. “With restrictions lifting and schools once again open more consistently, I hope progress will resume,” Ms. Kemmerer said.
  • Of course, the urgent need to balance home and work life is not new: women were often the ones to pick up more than their fair share of work at home, while having to work even harder than men at the office just to be perceived as equals.

Building awareness. While many female treasury executives report they are heavily involved in diversity work within their own organizations, they also feel they have a responsibility to build broader awareness. “We have an opportunity to share and learn about how we can use the power of our positions to really solidify commitment to a more inclusive financial industry,” said Cat Berman at CNote.

  • “Sharing our experiences, intentionally, methodically, is so important. But it’s also important to be visible,” noted one of the members. “It’s one thing to work on D&I behind the scenes, but it’s different when you are visible and stating your priorities.”
  • Another member said when she was pregnant, she felt like she lost her seat at the table. “The CFO told me that he wasn’t coming to me with new projects because he was trying to be respectful. That’s the worst thing that can happen in your career.” She has responded by becoming more vocal, announcing what projects she wants to work on. “It’s a little pushy, perhaps, but you have to make sure people know what you want.”
  • Raising awareness also means raising the bar on what you expect from male colleagues. Gender equity is not just a women’s issue. Men, particularly in senior positions, must play an active role in advancing the careers of women on their teams.

Share of wallet. Female treasury leaders report that they often find they are the only women in a room full of bankers. Their advice is not only to say something but do something. “I brought up the issue of diversity with my bank team,” one member said. “I told them: ‘I am working on my team; what are you doing for yours?’”

  • Another member sent a poll to her banks to find out how many women were on their teams. “I felt that just asking the question is powerful.” Her question put her bankers on notice this is something they should be thinking about.
  • One member of WiNG took the opportunity to drive change when executing a lucrative bond deal. She asked the deal’s diversity coordinator to go through each of the participants and assess their commitment. “It delayed the transaction for 45 minutes, but it forced the bank teams to own up to what they’re doing.”

A generational change. Real change will take time. ““We need to continue to invest in and support future generations of women in finance and celebrate different mindsets,” Ms. Kemmerer said. From a practical standpoint, it means not only ensuring diversity in hiring but also continuing to nurture and develop talent. “We also need to support more young women to enter STEM careers.”

  • “We need to think about creating the next generation of accounting and finance professionals, and what are we doing to ensure that they all have a really rich career path,” one member said. To this end, her company created a library of training materials and ties continuous learning into staff’s  year-end feedback.
  • “We’ve been doing lunch and learn sessions where we show a video on a D&I topic and then move into breakouts where we discuss the videos and really dig into some hard-to-talk-about areas to raise awareness and understanding of each other as individuals,” the member said.
  • “People are starting to try different approaches and different solutions,” said Annie Seelaus. “And I think two, three, five years out, we’ll start to see if we’re changing the paradigm. We have to be thoughtful about what things are going to really change representation forever.”
Read More Read Less
Contact Us

Connecting Every Finance Professional Who Wants To Share And Learn

Learn more

Knowledge Exchange

About

Need help?

©2024 - NeuGroup, Inc.

Privacy Policy