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Talking Shop: How Do You Restrict Trading for Currency and Bank Pairings?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By Joseph Neu

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

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

By Joseph Neu

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By Joseph Neu

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

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

By Joseph Neu

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Europe in Flux: Business Decentralization, ESG and Brexit

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

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

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

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

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

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

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

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

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What an Extended Libor Deadline May Mean for Corporates

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

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

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

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

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

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

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Corporates to Banks: Untangle Processes, Offer Simple Solutions

NeuGroup members want simple but powerful improvements to banking services.

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

NeuGroup members want simple but powerful improvements to banking services.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By Joseph Neu

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

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

By Joseph Neu

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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The ESG Halo Effect, Insurance Pain and Financing Lessons Learned

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

By Joseph Neu

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

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

By Joseph Neu

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

  • In comparison to the ESG impact of the underlying business, if correctly measured, a financing instrument should not be required to create a halo. Instead, treasurers should look to have the business better reflected in ESG ratings to get full access to ESG-mandated investors.

Risk transfer transformation needed. The insurance renewal market coming out of the Covid-19 crisis points to the continued need for risk transfer transformation. At a time when life science firms are being encouraged to move fast and break us out of a pandemic, insurers are seeing risk, so they are taking a pound of flesh in premium.

  • Treasurers are left wondering how much of this is their own product or liability risk and how much of it is insurers recouping losses on their investment portfolios. Traditional insurance is overripe for transformation and it’s a matter of when, not if.

Transaction shop-talk. Treasurers love to share and learn from each other’s funding transaction experience, be it a bank loan, convertible or bond deal.

  • Akin to a morbidity and mortality conference in the medical profession, life sciences treasurers benefit from identifying adverse outcomes from financings to exchange with peers, yet they are even more inclined to share what went well to secure needed funding.
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Monetization Magic: How Using a Hybrid Solved an Asset Riddle

MUFG helps one mega-cap use structured preferred shares to monetize a “difficult” asset.

In a session at the recent NeuGroup Tech20 annual meeting—the 20th annual no less—a guest speaker from a mega-cap communications company shared how his treasury found a great deal of success using structured preferred shares to monetize previously untapped assets on its balance sheet. All while managing its net debt within a target leverage ratio, with the assistance of meeting sponsor MUFG.

MUFG helps one mega-cap use structured preferred shares to monetize a “difficult” asset.

In a session at the recent NeuGroup Tech20 annual meeting—the 20th annual no less—a guest speaker from a mega-cap communications company shared how his treasury found a great deal of success using structured preferred shares to monetize previously untapped assets on its balance sheet. All while managing its net debt within a target leverage ratio, with the assistance of meeting sponsor MUFG.

  • Structured preferred shares are a type of hybrid instrument that can be used to achieve multiple corporate objectives, in this case deleveraging and asset monetization.
  • With MUFG’s assistance, the presenter, the treasurer of a company with one of the largest debt portfolios of any non-financial institution, said the deal was “a real success story” for the company.

Asset monetization. When the company entered a 30+ year deal to lease out some of its assets for a one-time fee, it faced a dilemma: what could it do with an essentially dead asset on the balance sheet?

  • “We couldn’t really securitize these things, and it would’ve taken us years to see any cash,” the presenter said. “So we looked around at different solutions and came to the idea of working with MUFG to (issue) structured preferred (shares). We liked it, it allowed us to monetize what was otherwise a difficult asset.”

A shared structure. The presenter worked with MUFG to reassign the assets into a separate legal entity and issued preferred shares, in which eight banks were buyers of a multibillion dollar facility.

  • “Ordinarily, when you think about preferred, you think about it being issued at a parent company,” said Terry McKay, head of Global Financial Solutions at MUFG. “But in the case of structured preferred shares, the issuer is a subsidiary.”
  • “The legal form of this subsidiary can be a corporation, a partnership or a trust, so there is a lot of flexibility,” he said.  “And in terms of the assets, there is also a lot of flexibility, and it’s critical to select the right assets; investors are focused on the critical assets.”
    • Thanks to this flexibility, the asset types can vary from core assets to inventory to even intellectual property.
  • Mr. McKay continued that structured preferred stock, though it is more expensive than a senior bond and does not include the ratings agency credit of traditional preferred stock, can be useful because of its tax deductible coupons, added liquidity and the ability to be strategic in financing and adapt to meet specific objectives.

Story of success. “It had a lot of benefits to it,” the presenter said. “It helped us really meet our objectives and gave us a chance to reward banks we’ve done significant business with.”

  • In its work with MUFG to issue structured preferred shares, the company was able to meet these three core objectives:
  1. Managing its debt tolerance, reducing its net debt by about 17% in the span of a year and a half.
  2. Achieving a target leverage metric which was contingent upon asset sales to be met.
  3. Acquiring an incremental source of liquidity and reducing the pressure on refinancing its bonds.
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Right on Target: Tracking Companies’ Changing Risks

One member’s “risk radar” facilitates explaining evolving risks to audit committees.

Corporate risk is no easy concept to convey, especially when risks are numerous and shifting in intensity over time. Equally challenging is explaining a risk’s evolving urgency to board members, who must concurrently digest reams of information.

  • Responding to a query about how peers justify urgent audit-plan changes to audit committees, a member of NeuGroup’s Internal Auditors’ Peer Group described the “risk radar” he presents quarterly to illustrate dynamically the comparative urgency of his company’s top 20 risks and mitigation efforts.
  • His description received raves from peers, with one quipping, “That’s very comprehensive. It makes the rest of us feel inadequate.”

One member’s “risk radar” facilitates explaining evolving risks to audit committees.
 

Corporate risk is no easy concept to convey, especially when risks are numerous and shifting in intensity over time. Equally challenging is explaining a risk’s evolving urgency to board members, who must concurrently digest reams of information.

  • Responding to a query about how peers justify urgent audit-plan changes to audit committees, a member of NeuGroup’s Internal Auditors’ Peer Group described the “risk radar” he presents quarterly to illustrate dynamically the comparative urgency of his company’s top 20 risks and mitigation efforts.
  • His description received raves from peers, with one quipping, “That’s very comprehensive. It makes the rest of us feel inadequate.”

Red, yellow, green. Split into four quadrants—strategic, compliance, financial and operational—the graphic’s red center (see chart below) signifies the most urgent issues and is surrounded by yellow and then green halos for less urgent matters.

  • The closer the stars representing the company’s risk issues—such as cybersecurity, sales growth and trade compliance—are positioned to the center of the round radar screen, the greater the risk urgency.
  • The stars change position quarterly, displaying not just each category’s inherent risk but the company’s evolving risk-mitigation efforts.
  • Built through the member’s enterprise risk management (ERM) process, the radar incorporates feedback from management. “So the board gets a very real perspective on risk, and it has all the context for why risks are moving closer to or away from the center,” the member said.

Customer impact. The executive noted Europe’s changing regulatory environment and privacy rules, including the July Schrems II ruling relating to transatlantic personal data flows, could dramatically change his company’s compliance requirements.

  • The risk is that uncertainty could unnerve potential clients concerned about ending up on the wrong side of the regulation. From the start of the year, the uncertainty has moved the regulatory star close to the radar’s center.
  • “But it’s not the end of the world,” the member told the group, because it opens the door for management to explain its road map to deal with the risk going forward. “We can say, ‘Given all the good work we’ve done, we’ve mitigated this risk.’”
  • He added, “The audit committee has what we consider a very frequent, very fresh review of all the risks associated with everything we do from a value chain perspective.”

Beneath the graphic. The committee can now visualize internal audit’s risk assessment, including the impact likelihood, the velocity of onset and management’s risk tolerance. And it can explore the five categories used to assess each risk and its overall priority.

  • Judgment plays an important role, but the audit committee can review the appendix to understand precisely how his team arrived at its conclusions.
  • And top management, he said, from the chief legal officer to the CFO and heads of engineering and data security, have “all bought off on the stars.”
  • The risk radar prioritizes the company’s 20 most significant risks, and while the board may be concerned with the top three, “from management’s perspective the top 20 is fantastic.”

The proof? “Our head of human resources has built her own risk radar for HR, our CFO now has his own risk radar for finance, and the head of engineering is talking about creating his own risk radar,” the member said.

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Counterparty Transparency: ‘Looking Through’ Money Market Funds

How a treasury investment manager finds out what assets are owned by the MMFs he owns.

For treasury investment managers, visibility into the credit and counterparty risks of their portfolios is essential, especially during times of heightened volatility and uncertainty—like the last nine months.

  • One member of NeuGroup’s Treasury Investment Managers’ Peer Group 2 told peers at a recent meeting sponsored by DWS that part of his assessment of counterparty risk involves “looking through” money market funds (MMFs) to see their underlying exposures.

How a treasury investment manager finds out what assets are owned by the MMFs he owns.

For treasury investment managers, visibility into the credit and counterparty risks of their portfolios is essential, especially during times of heightened volatility and uncertainty—like the last nine months.

  • One member of NeuGroup’s Treasury Investment Managers’ Peer Group 2 told peers at a recent meeting sponsored by DWS that part of his assessment of counterparty risk involves “looking through” money market funds (MMFs) to see their underlying exposures.

Going the extra step. One DWS executive found it intriguing that the member goes beyond examining the credit ratings of MMF managers. “You are taking it to another level,” he said. Many investment managers rely on the work done by the rating agencies, he said.

  • In response to a question from a peer, the member explained that he gets the data on the funds’ holdings by using Transparency Plus, a tool that’s part of the ICD money market portal. The data is then put in Excel.
  • He said extracting and analyzing hundreds of names is “challenging,” adding that he’d like to know if others “have a better way to do it.”

Not just prime funds. The member does not only look through prime funds that have credit risk, but those of government money market funds which own a lot of repos. “It’s interesting to see who the repo sponsors are,” he said, adding that the investments are “supersafe and over-collateralized.”

Big picture. For perspective on looking through MMFs, NeuGroup Insights checked in with Peter Crane, president of Crane Data and an authority on the MMF industry. Here are some of his insights:

  • “Almost all money fund portals and platforms offer transparency modules, which became popular after the 2008 financial crisis. ICD and BNY Mellon pioneered the trend, but State Street, FIS and many of the Cachematrix-powered portals soon followed.
  • “It wasn’t until the SEC mandated disclosure of monthly portfolio holdings for money funds in 2010 that they became useful and used. They tweaked these disclosure requirements in 2014 too.
  • “While most investors only are interested in looking through when something blows up, many need to check what their funds invest in more often.”
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Game Plan: Opportunistic Buybacks on the Open Market vs ASRs

Meeting sponsor SocGen sees corporates growing comfortable with flexible, open market buybacks amid recovery.

During the global pandemic, many corporates have slammed the breaks on share repurchase programs to save cash and avoid criticism from politicians as Americans lost jobs and some companies sought government bailouts.

  • At a recent NeuGroup meeting of treasurers at life sciences companies, Societe Generale’s David Getzler, head of equity capital markets for the Americas, forecast an increase in share buybacks in 2021 as the economy recovers and political scrutiny declines.
  • “From our perspective, it looks like people are more comfortable,” Mr Getzler said. Below are his forecasts for dividends and buybacks.

Meeting sponsor SocGen sees corporates growing comfortable with flexible, open market buybacks amid recovery.

During the global pandemic, many corporates have slammed the breaks on share repurchase programs to save cash and avoid criticism from politicians as Americans lost jobs and some companies sought government bailouts.

  • At a recent NeuGroup meeting of treasurers at life sciences companies, Societe Generale’s David Getzler, head of equity capital markets for the Americas, forecast an increase in share buybacks in 2021 as the economy recovers and political scrutiny declines.
  • “From our perspective, it looks like people are more comfortable,” Mr Getzler said. Below are his forecasts for dividends and buybacks.

Open market flexibility. Several members affirmed that their companies are buying back shares when the timing and price is right. “As long as you’re not taking government money,” said one treasurer. “We are looking at it opportunistically.”

  • SocGen’s Mr. Getzler expects more companies to use open market stock repurchases as opposed to accelerated share repurchase (ASR) programs.
  • Volatility and continued uncertainty about the pandemic and the economy are factors explaining corporates’ preference for open market purchases, he added. “Companies want to maintain flexibility in case the economy retreats.”

Open market vs ASR. In an open market purchase, a company buys its shares at the going rate. With an ASR, a company can transfer the risk of buying back stock to an investment bank.

  • “The banks give a guaranteed discount to VWAP over the period, typically two to three months, when they buy the shares in the market to cover their position,” Mr. Getzler explained. “The banks borrow the shares on day one and deliver to the company and then will cover the borrowed position by buying in the market over the period agreed.”

The debt factor. The level of share repurchases going forward depends in part on how companies manage their balance sheets. Many have issued debt in recent years to buy back stock, a trend that could resume as the economy improves, according to SocGen’s debt capital markets team. In addition:

  • Companies that raised liquidity during Covid may decide they have excess cash and buy back shares if and when the economy returns to normal.
  • Companies that added gross leverage may decide it’s more prudent to pay down debt than buy back shares. 
  • Leverage is up across the investment-grade space, so it could take a year for companies to get back down to pre-Covid levels before they look to re-engage in share buybacks.
  • Companies may choose to live with higher leverage so they can return cash to shareholders.
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Replacing Libor: No Criticism for Banks That Say ‘No Thanks’ to SOFR

Regulators say banks can price loans using any appropriate reference rate as they prepare for Libor’s end.

You may possibly have missed a development that happened three days after the presidential election: US banking regulators gave banks more confidence they can decide to use Libor-replacement rates other than the secured overnight financing rate (SOFR), which the Federal Reserve has endorsed but that some regional banks view as problematic.

Regulators say banks can price loans using any appropriate reference rate as they prepare for Libor’s end.

You may possibly have missed a development that happened three days after the presidential election: US banking regulators gave banks more confidence they can decide to use Libor-replacement rates other than the secured overnight financing rate (SOFR), which the Federal Reserve has endorsed but that some regional banks view as problematic.

  • “Examiners will not criticize banks solely for using a reference rate, including a credit-sensitive rate, other than SOFR for loans,” guidance from the Fed, the FDIC and the Office of the Comptroller of the Currency stated.

It’s OK to be different. The guidance bolsters Fed Chair Jerome Powell’s May statement recognizing Ameribor, an alternative to Libor published by the American Financial Exchange (AFX), as a “fully appropriate” alternative for banks.

  • “This is another step on the march toward the legitimacy of alternative benchmarks and for the market to decide what the replacements for Libor will be,” said Reed Whitman, treasurer at Brookline Bancorp.
    • He added that this gives more confidence that “products we develop tied to a non-SOFR rate will be accepted; it’s an additional accelerant.”
  • If regulators had warned banks against “using a different benchmark, that effectively would have shut down alternatives.” said Alexey Surkov, a partner with Deloitte Risk and Financial Advisory and a co-chair of a working group under the Alternative Rates Reference Committee (ARRC), a private group convened by the Fed to help guide the Libor transition.

The regional view. Regional banks have concerns about pricing their floating-rate products and funding over SOFR, based on the secured overnight repurchase agreement (repo) market, because it does not reflect their cost of funds.

  • Ameribor is instead generated from the rates at which financial institutions lend to one another over the AFX, an exchange launched in 2015 by Richard Sandor, an innovator in the futures market.
  • In an interview with NeuGroup Insights, Mr. Sandor called the guidance a “big step forward” since now all the banking regulators are “opining together.” He added that for those who thought Libor might sustain itself, “this is another nail in the coffin.”

Alternatives. Some institutions have considered the prime rate and Fed Funds as Libor alternatives, at least until transaction-based benchmarks become sufficiently robust. 

  • Some bank products currently reference those rates, Mr. Surkov said, and lenders may choose to stick with them. Credit cards, for example, often reference prime.
  • Similarly, mortgages priced over Libor are widely expected to transition to SOFR, but adjustable rate mortgages (ARMs) based on Constant Maturity Treasury (CMT) rates have existed for a long time, he said, and may very well continue.
  • Mr. Whitman said he foresees a combination of benchmarks, including SOFR, Ameribor and perhaps other indices that will be “repurposed for specific uses.”

Good timing. The ARRC recommends ceasing to use Libor to price floating rate notes by year-end and business loans and structured products by June 30, 2021.

  • “So this helps ready us for the next phase of the transition, where banks stop booking Libor deals and start booking SOFR or Ameribor deals,” Mr. Whitman said.
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Transforming Data Reporting and Analytics With a BI Tool

Qlik Sense has made one treasury risk manager’s team more efficient and nimble.

A financial risk manager at a manufacturer with a decentralized global treasury told peers at a recent NeuGroup meeting that the self-service BI analytics platform Qlik Sense has transformed the company’s data reporting and analysis.

  • A comprehensive report that used to take the member’s team several days to prepare can now be done in a matter of hours with Qlik Sense.
  • “[The data] impacts recommendations to leadership for currencies and commodities,” the member said. “The on-the-fly app creation can lead to on-the-fly analysis.”

Qlik Sense has made one treasury risk manager’s team more efficient and nimble.

A financial risk manager at a manufacturer with a decentralized global treasury told peers at a recent NeuGroup meeting that the self-service BI analytics platform Qlik Sense has transformed the company’s data reporting and analysis.

  • A comprehensive report that used to take the member’s team several days to prepare can now be done in a matter of hours with Qlik Sense.
  • “[The data] impacts recommendations to leadership for currencies and commodities,” the member said. “The on-the-fly app creation can lead to on-the-fly analysis.”

More efficient. “We became a lot more efficient,” she said. “This has made us a lot more nimble and provided additional value to the organization as well.”

  • The BI tool has made the difficult task of melding data from different regions for reporting far less cumbersome, in part by transforming data from the company’s multiple treasury management systems (TMSs) into a format that’s easy to use.
  • “It helps us organize, show rankings, visualize and pull basically any analytics,” the member said.
  • That’s especially important because the manager’s team is being asked to do more analysis and management reporting, including knowing the drivers of FX exposures down to specific product models and volumes.

How it works: inputs. In broad terms, Qlik Sense takes data inputs from a variety of sources and allows the company to analyze and output the data in a multitude of reports. The inputs include:

  • FXall
  • The company’s TMS
  • Exposure templates
  • Essbase (product volume data)
  • SAP

How it works: outputs. Once the data has been processed by Qlik Sense, the risk manager can “slice and dice” information using multiple parameters and filters to produce reports and dashboards showing:

  • Exposure analysis. Qlik Sense allows the team to monitor monthly product volume forecasts to identify potential exposure changes between collection periods, a feature the member called extremely useful.
    • Filters include countries of production, and dashboard pages show the country of sale.
  • Hedge position on a forward, 12-month, forward basis. Dashboards can be exported for management presentations.
  • Counterparty performance.
  • Share of wallet.
  • Volume analysis.
  • Cash flow at risk (CFaR)—period to period analysis, including which currencies and commodities contributed the most to CFaR.
  • SOX control performance.

Learning curve. The risk manager taking advantage of Qlik Sense has a technical background which has made learning and using the tool relatively easier than for some members of treasury who find it intimidating. A small subset of people within treasury use Qlik Sense, the member said.

  • This underscores the need for companies to provide appropriate training to employees who have a range of technical skills.
    • Treasury professionals will in all likelihood need to learn how to use self-service BI analytic tools to stay relevant as more finance teams are asked to do more work with fewer resources.
  • The risk manager is trying to learn more about other BI tools, including those used by many NeuGroup members: Power BI and Tableau.
  • Another member whose treasury team will be using Alteryx, said everyone the company is hiring seems to have a deep knowledge of Python, a programming language.
  • The member using Qlik Sense said she is teaching herself to use Python to keep up, saying, “I don’t think you’re going to get out of Python.”
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Looking Beyond Libor: Engage Vendors, Expect Some Frustrations

Corporates preparing for a transition to SOFR may need to push some systems vendors.

NeuGroup members appear to be making headway to transition floating-rate exposures to the secured overnight financing rate (SOFR) or an alternative Libor replacement. However, in a meeting in which two members detailed their preparations, a major concern arose about third-party vendors’ progress and the need to push them along.

  • Responding to polling questions during the meeting session, 70% said they have compared notes with peer companies about their efforts and progress toward the transition.
  • In terms of their current status, 57% said they were in decent shape, 13% far along, and 30% behind for various reasons.

Corporates preparing for a transition to SOFR may need to push some systems vendors.

NeuGroup members appear to be making headway to transition floating-rate exposures to the secured overnight financing rate (SOFR) or an alternative Libor replacement. However, in a meeting in which two members detailed their preparations, a major concern arose about third-party vendors’ progress and the need to push them along.  

  • Responding to polling questions during the meeting session, 70% said they have compared notes with peer companies about their efforts and progress toward the transition. 
  • In terms of their current status, 57% said they were in decent shape, 13% far along, and 30% behind for various reasons.  

Finding Libor. Systems involving Libor must be upgraded, including treasury management systems (TMSs) and asset systems, if a company has a captive financing arm.  It’s a process one member estimated taking 10 months.  

  • There may also be exposures to Libor, anticipated to no longer function as a benchmark after 2021, that are buried in late fees, intercompany agreements and other contractual arrangements. 
  • “So we’re working with our legal services team and general counsel to identify any agreement that may mention Libor,” an assistant treasurer said.  

Tight timetable. Given the time to implement systems changes and test them, the timetable is already tight, according to one member in discussions with regulators about large multinationals’ challenges, especially if new requirements such as the recently discussed credit-sensitive spread are introduced. 

  • “If market parameters change, and we’re not on that upgrade, that’s a challenge for us,” the member said. “So we’ve been very vocal with regulators about the time it takes to implement those systems.” 

Vendor concerns. No matter how vigilant corporates may be, much depends on vendors upgrading their systems, not just to accommodate using the new benchmarks, but also by transitioning legacy agreements and transactions.   

  • Noting “good engagement” with its vendor, one member said, “We’ve tried to engage them early and often, because a big part of our success will be around getting the consultants we want” to help with the upgrade. 
    • Another peer group member seconded the importance of reserving a consultant who understands the company’s systems. 
  • And good engagement doesn’t mean the upgraded system will solve all the issues. The AT said the TMS will still require treasury to terminate and re-enter new financial instruments, “and that’s a major undertaking.”  

Frustration rising. Another AT said attempts to seek updates on system upgrades from a different TMS vendor went unanswered for months. When the vendor responded to questions about fallback language to transition legacy transactions, it became clear this upgraded system would also require closing and re-entering every contract.  

  • “They claim that they have not been in contact with the ARRC (Alternative Reference Rates Committee, which is guiding the transition to SOFR), which was surprising to me, and they’ve been relying on auditors and customers for feedback on how to implement this,” the AT said.
  • Another member using the same vendor said his team had heard something similar. “There’s not a way to easily make the transition today,” the member said.  
  • Said the first member: “I don’t know who else is using [this vendor], but I would encourage you to get on the phone and push them as hard as possible.”  
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Talking Shop: Methods for Pulling Cross Rates From Central Bank Published Rates

Question:How does your company pull cross rates that are required to be pulled from central banks’ published rates?

  • “Looking for some teams to benchmark on how you all pull the cross rates that are legally required to be pulled from central bank published rates. Pulling these rates from central banks’ websites is inefficient and we wanted to know how others are doing this.”

Question: How does your company pull cross rates that are required to be pulled from central banks’ published rates? 

  • “Looking for some teams to benchmark on how you all pull the cross rates that are legally required to be pulled from central bank published rates. Pulling these rates from central banks’ websites is inefficient and we wanted to know how others are doing this.” 

Peer Answer 1: “We use Bloomberg’s data license program to get the rates via a file and upload them automatically to our enterprise accounting system. Refinitiv/Eikon/Reuters provides a similar service. We recently migrated to Bloomberg.”

  • In a follow-up, the responder confirmed using Bloomberg for both central bank published FX Rates (published once a day) as well as standard market FX quotes (traded continually).

Peer answer 2: We manually put the required central bank rates into our ERP system, the old school style.” : (

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Reality Check: Banks Dial Back PPP Loan Forgiveness Expectations

Delays in applications and action by Congress will affect banks’ NIM and NII forecasts.

Forget about forgiveness until early 2021. That, in a nutshell, was among the takeaways from a recent conversation between members of NeuGroup’s Bank Treasurers’ Peer Group.

  • The forgiveness at issue is for loans that banks made under the federal government’s $669 billion Paycheck Protection Program (PPP), part of the CARES Act enacted to help small businesses struggling during the pandemic.
  • The loans can be forgiven if companies used the money to maintain payrolls and meet certain other requirements.
    • The Small Business Administration (SBA) opened a portal for forgiveness applications in August, but some borrowers and banks are waiting for Congress to take action on legislation to automatically convert the smallest loans into grants.

Delays in applications and action by Congress will affect banks’ NIM and NII forecasts.

Forget about forgiveness until early 2021. That, in a nutshell, was among the takeaways from a recent conversation between members of NeuGroup’s Bank Treasurers’ Peer Group.

  • The forgiveness at issue is for loans that banks made under the federal government’s $669 billion Paycheck Protection Program (PPP), part of the CARES Act enacted to help small businesses struggling during the pandemic.
  • The loans can be forgiven if companies used the money to maintain payrolls and meet certain other requirements. 
    • The Small Business Administration (SBA) opened a portal for forgiveness applications in August, but some borrowers and banks are waiting for Congress to take action on legislation to automatically convert the smallest loans into grants (see below).

Changing views. “We don’t think there will be any forgiveness until early next year,” one bank treasurer said, asking peers how their views had changed. His bank had originally expected half the amount of its PPP loans to be forgiven by year-end. “We’ve pushed everything into 2021.”

  • Another treasurer said his bank has “dialed back” its initial projections for forgiveness in Q4 2020. Another member agreed, saying he expects to wait “weeks into 2021.”

Ripple effects. In a follow up, one of the treasurers described how delays by the SBA in forgiving PPP loans will affect banks.

  1. “These are low yielding assets (1% coupon), so holding these longer than anticipated is a negative to net interest margin (NIM).
  2. “Many banks were anticipating that the forgiveness program would be more efficient; there is a fee component to these loans that the SBA is paying to banks as the loans are forgiven.  Currently, banks are accreting the total amount over the two-year maturity.
    1. “But if the loan is forgiven early, all of the remaining fee to accrete will accelerate to the forgiveness date.  So this also has net interest income (NII) and NIM forecasting implications.”
    2. This poses potential problems preparing investor decks that include NIM and NII guidance used by CFOs and CEOs.
  3. “Since PPP loans are 0% risk-weighted, they do not affect regulatory ratios. They do however affect the TCE (tangible common equity/tangible assets) ratio. The longer the PPP loans stay on bank balance sheets, the longer this ratio will be depressed.”

Action by Congress? The member also noted that many banks had hoped Congress would “come together and automatically forgive all loans that were under $150,000. This would account for a majority of the loans that were granted.  However, Congress doesn’t appear to be able to come together on any legislation at this time.”

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Risk Managers Face an Inflection Point Without a Clear Direction

NeuGroup Founder and CEO Joseph Neu shares his key takeaways from the FX Managers’ Peer Group 2 2020 H2 Meeting, sponsored by Societe Generale.

By Joseph Neu 

NeuGroup’s second-half meeting season got off to a great start with the FX Managers’ Peer Group 2. Here are my takeaways from the two-days’ sessions last week.

We are at an inflection point, but to what? With the economic impact of Covid-19 on business, early crisis concerns about liquidity pushing out liabilities, unprecedented monetary intervention and fiscal stimulus, plus a Fed policy shift to make it harder for inflation fears to move US rates off the zero bound, it feels like we are at an inflection point that requires MNCs to adjust their FX hedging. Yet to what exactly is a more difficult question:

  • Not everyone is convinced that the dollar is going from structurally strong to weak (even against the euro), for example.
  • And, while volatility is higher than pre-Covid, it’s higher off of extreme lows.
  • Plus exposure forecasts of underlyings are starting to become less cloudy.

So maybe its time to get more sophisticated at the margins such as to extend a layering program out another year or collar hedge gains, rather than make wholesale changes to your FX program.

  • Tail risk hedging would make sense, but given how markets are behaving what would work?

Key takeaways from the FX Managers’ Peer Group 2 2020 H2 Meeting, sponsored by Societe Generale.  

By Joseph Neu 

NeuGroup’s second-half meeting season got off to a great start with the FX Managers’ Peer Group 2 last week. Here are some key takeaways:

We are at an inflection point, but to what? It feels like we are at an inflection point that requires MNCs to adjust their FX hedging. The reasons include the economic impact of Covid-19 on business, early crisis concerns about liquidity pushing out liabilities, unprecedented monetary intervention and fiscal stimulus—plus a Fed policy shift to make it harder for inflation fears to move US rates off the zero-bound. Less clear is where we go from here. 

  • Not everyone, for example, is convinced that the US dollar is going from structurally strong to weak (even against the euro). 
  • And while volatility is higher than pre-Covid, it’s higher off extreme lows. 
  • Plus, forecasts of underlying exposures are starting to become less cloudy. 

So maybe it’s time to get more sophisticated at the margins and, perhaps, extend a layering program out another year or collar hedge gains, rather than make wholesale changes to your FX program. 

  • Tail risk hedging would make sense—but given how markets are behaving, what would work? 

Data repositories are in vogue. Despite working from home and the turmoil of Covid-19, several members have continued to push ahead. Their technology projects bring data into lakes, warehouses and other containers where it can be more readily viewed, analyzed with BI tools and fed into dashboards for on-demand reporting. 

  • Progress is promising and once quality data is in one place machines, algos and AI can learn from it. 
  • Bonus question: If the TMS is not relied on to be the data repository and the reporting and analysis are taking place outside of it, then how valuable is the TMS? 

Users vs. builders. Much of the code, analysis and BI tool building starts with power users in treasury who teach themselves to become builders. The trouble is that not everyone is a builder, nor can they always find the time to sustain their building skill and maintain the code to scale securely. 

  • The problem compounds when everyone is free to use whatever tool they have taught themselves to use on the web. 
  • This is where it is important to hand off to an IT center of excellence, which needs to have good finance function acumen, and a subgroup with good treasury function acumen. 

It’s the lack of ready access to these COEs that drives interested professionals in treasury to a self-service model and to teach themselves to become builders. 

  • So, CFOs and treasurers would do well to determine a balance between power users that become builders and investing in sufficient, dedicated builder professionals to serve the needs of their important specialty functions.
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Weighing Reward vs. Risk, Cash Investors Make Moves or Hunker Down

Some take advantage of opportunities to pick up yield; others play it safer and stick to government money funds.

The Covid crisis has illuminated where corporate cash investors sit on the risk tolerance spectrum—a point underscored in a Virtual Interactive Session sponsored by ICD this week that gave some NeuGroup members a clearer picture of where they stand relative to their peers.

Career risk vs. opportunity for yield. Hearing what some peers have done “reinforces how conservative we really are,” said one member whose company “took a hit” in an ultra-short duration fund as the pandemic unfolded and “was not used to seeing a dip” in its portfolio.

Some take advantage of opportunities to pick up yield; others play it safer and stick to government money funds.

The Covid crisis has illuminated where corporate cash investors sit on the risk tolerance spectrum—a point underscored in a Virtual Interactive Session sponsored by ICD this week that gave some NeuGroup members a clearer picture of where they stand relative to their peers.

Career risk vs. opportunity for yield. Hearing what some peers have done “reinforces how conservative we really are,” said one member whose company “took a hit” in an ultra-short duration fund as the pandemic unfolded and “was not used to seeing a dip” in its portfolio.

  • The company’s resulting risk aversion, “with everyone gun-shy,” has made taking any chances to “get a few more bips” an unacceptable “career risk kind of thing,” he said. The company is now sticking with government money market funds.
  • On the other end of the risk spectrum sat a multinational that, like others, raised lots of cash and liquidity in the early days of the pandemic. A member from this company took the stance that “we have to look for opportunities to invest that cash,” this member said.
  • “Although we didn’t know the exact timing or size of our cash needs, we were able to assume that the majority of this balance would be around for at least a number of months, so in that situation prime funds worked out.”

How to decide it’s time for prime. This member, whose company had never invested in prime money market funds, said the funds “eventually turned into opportunities” to “generate some yield.”

  • The company made the move after computing “the minimum number of days (how long) we need to stay invested in a prime fund to offset a small drop in NAV of that fund,” he said.
  • It calculates the number by taking “the additional yield that prime funds offer over the next best alternative investment. Using this, we back into the number of days the principal needs to be invested for, so that this incremental return is equal to the loss caused by a drop in NAV.
  • “For us, this just sets a baseline for what we deem to be the shortest possible duration, and we evaluate from there if we wish to proceed. If we do, we continually monitor the investment and any movements in the NAV.”
  • Another member said his company “didn’t do a good enough job of measuring the risk; we should have moved back sooner to prime, more proactively.”

Source: ICD

Identifying opportunities with the efficient frontier. ICD described a model it developed, based on modern portfolio theory, to help clients assess the relative risk-weighted investment opportunities in money markets by using efficient frontier analysis.

  • As the chart shows, prime money market funds (PMMF) and Federally Insured Cash Accounts (FICA) appeared above the beta line of one-month Treasury bills from May to June of 2020.
    • That indicates those investments provided more return than the risk associated with them, according to the model. One member said she wants to get more info on FICAs.

Beyond prime: deposits. Several members said they are making use of time deposits and short-term deposits with approved counterparties, suggesting that technology that helps assess and monitor counterparty risks is timely.

  • “We do time deposits and we’ve got approved counterparties that we will trade with. And we are able to pick up a good return, well into 25 to 35 basis points range on a one-month time deposit. That’s what we are doing to pick up additional yield and optimize,” one member said.
  • “30-day, that seems to be the [point] where you start to see rates a little bit better,” another member said. “And we stagger them so they’re every couple of weeks, so that way every few weeks we have our vision point to be able to collect cash back in and let it mature, or let it roll over. We’ve done a couple longer tenor, but nothing more than three months.”

Beyond the credit facility banks?  One member said his company had “maxed out” on depositing cash in interest-bearing accounts using banks in its credit facility. He turned to highly-rated banks outside the group that had approached the company offering attractive rates.

  • Another member, in the process of moving cash out of government MMFs and into demand deposit accounts, said he “hadn’t thought of going outside the credit facility.”
  • But, reflecting the range of risk appetite among companies, another member said he was staying away from bank deposits to avoid counterparty risk.
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Talking Shop: The Philosophy of Fees on Revolving Credit Facilities

Question:  “Do you pay the same arrangement fee for a 364-day revolver renewal as for a 5-year renewal?”

“We executed our first 364-day revolving credit facility last year (in addition to a five-year) and it is time to renew the 364-day facility. We only have 50% of the banks participating in the 364-day renewal.

  • We were thinking to pay a proportionate amount of arrangement fees to the lead banks. I don’t think they have to do very much since we have contacted all the banks; however, our lead arranger bank has suggested we should pay exactly the same arranger fee, i.e. a minimum fee.
  • What is your philosophy?”

Question:  “Do you pay the same arrangement fee for a 364-day revolver renewal as for a 5-year renewal?”

“We executed our first 364-day revolving credit facility last year (in addition to a five-year) and it is time to renew the 364-day facility. We only have 50% of the banks participating in the 364-day renewal.

  • We were thinking to pay a proportionate amount of arrangement fees to the lead banks. I don’t think they have to do very much since we have contacted all the banks; however, our lead arranger bank has suggested we should pay exactly the same arranger fee, i.e. a minimum fee.
  • What is your philosophy?”

Peer Member Answer: “We only pay an arranger fee to the admin agent on our 364 day renewal.  When we did the original 364 day deal, we also paid a fee to one other bank (who was the syndication agent).

  • We don’t pay arrangement fees to any of the other JLAs (joint lead arrangers), as they aren’t doing any work (other than what they need to do internally to provide their own commitment) and a 364-day extension is a pretty easy process. 
  • So we only pay those banks that are actively involved in the arrangement process, and not all of the JLAs.” 
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Friedman, Profits and Treasury’s Role in Stakeholder Capitalism

50 years after Milton Friedman’s landmark essay on profits, treasurers are trying to embrace stakeholder capitalism responsibly.

By Joseph Neu

Milton Friedman’s essay, “The Social Responsibility of Business Is to Increase Its Profits,” turned 50 this past Sunday. Many commentators are seeking to mark the occasion with efforts to either square stakeholder capitalism with Friedman’s view—helping stakeholders is good for long-term profitability—or call him out as myopic to the more equal, inclusive and sustainable future that young people—and others—now want.

50 years after Milton Friedman’s landmark essay on profits, treasurers are trying to embrace stakeholder capitalism responsibly.

By Joseph Neu

Milton Friedman’s essay, “The Social Responsibility of Business Is to Increase Its Profits,” turned 50 this past Sunday. Many commentators are seeking to mark the occasion with efforts to either square stakeholder capitalism with Friedman’s view—helping stakeholders is good for long-term profitability—or call him out as myopic to the more equal, inclusive and sustainable future that young people—and others—now want.

Milton Friedman

Today’s reality. The timing is telling. We see more and more of our members seeking to find a way to support corporate social responsibility, the S in ESG (environmental, social, governance), along with addressing racial inequality in favor of inclusiveness, helping the communities in which they operate and supporting a more sustainable future.

  • A repeating theme, however, is that members want to use capital, if not capitalism, to accomplish these good goals.
  • They also want to support stakeholders and communities in need in a manner that rewards authentic efforts to build their capabilities. And in ways that justify capital contributions (investments) with success measured in real key performance indicators (KPIs)—dare I say profits—as they might be more broadly defined.

Fiduciary duty. It is hard for treasury professionals to give up their fiduciary duty, be it to shareholders or some larger cohort of beneficiaries. So their first instinct is to do something to help disadvantaged stakeholders without doing anything they would not otherwise do—business as usual (BAU). For example:

  • Treasury needs to deposit excess cash in a bank, so why not a minority-owned bank lending to disadvantaged communities?
  • Treasury needs to retain broker-dealers to assist with buying back shares or to issue bonds or commercial paper; why not use some that are minority owned?
  • Treasury is being asked to invest corporate funds in a manner consistent with a risk-adjusted return mandate. Might investments in disadvantaged stakeholders mitigate risk (through diversification and supporting political-economic stability) to the extent that they meet that risk-return profile?

A goal for government. More prominent than 50 years ago, today’s backdrop to all this is the concern that the political process and government are too slow, ineffective or no longer capable of socially responsible actions sufficient to help stakeholders.

  • This would be less true if politicians took seriously their fiduciary obligation to act in their stakeholders’ best interests in the same way that treasury professionals do.
  • That is, if they sought to do good via BAU and to measure success with real KPIs, if not profits.
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Excitement Borne of Frustration Greets Ameribor 30-day Term Rate

Bank treasurers facing Libor’s end welcome news on a forward rate from the AFX.

Libor’s days are numbered and bank treasurers eager for the development of a forward-looking, term interest rate that has a credit component got some good news last week:

  • The American Financial Exchange (AFX) announced an indicative 30-day forward rate called Ameribor30 whose base rate is overnight Ameribor, which reflects the unsecured borrowing costs of more than 1,100 American lenders.
  • “I’m pretty excited about it,” one member of NeuGroup’s Bank Treasurers’ Peer Group said during a call with peers. “This is a step in the right direction that we haven’t seen yet.”
  • AFX said ServisFirst Bank will use the Ameribor30 rate to price a $20 million loan.

Bank treasurers facing Libor’s end welcome news on a forward rate from the AFX.

Libor’s days are numbered and bank treasurers eager for the development of a forward-looking, term interest rate that has a credit component got some good news last week:

  • The American Financial Exchange (AFX) announced an indicative 30-day forward rate called Ameribor30 whose base rate is overnight Ameribor, which reflects the unsecured borrowing costs of more than 1,100 American lenders.
  • “I’m pretty excited about it,” one member of NeuGroup’s Bank Treasurers’ Peer Group said during a call with peers. “This is a step in the right direction that we haven’t seen yet.”
  • AFX said ServisFirst Bank will use the Ameribor30 rate to price a $20 million loan.

Frustration with SOFR. Some of the enthusiasm for Ameribor30 voiced on the call stems from the frustration of many regional bank treasurers with the development of the secured overnight financing rate (SOFR), the overnight rate alternative to Libor endorsed by the Alternative Reference Rates Committee (ARRC).

  • The response by ARRC to banks’ desire for term rates and a credit spread adjustment was met with “that’s your problem, not our problem or charge,” one of the bank treasurers said. “It felt like it was being jammed down banks’ throats.”
  • By contrast, he said, Ameribor is “stepping forward—we got something we think could work” so banks can ultimately price term loans for borrowers, including corporates.

How will it work? AFX, in announcing the new rate, said Ameribor30 uses “methodology and transactions” that align “with macroeconomic theory and academic research on the term structure of interest rates.” Another source tells NeuGroup Insights:

  • The rate will be computed with a model that uses overnight Ameribor, some sort of commercial credit spread as well as employment rates and an inflation indicator.
  • In back testing, Ameribor30 aligned well with Libor but did not “gap out as much as Libor,” the source said.
  • AFX is looking at one of the rating agencies to serve as a calculation agent and will have a third party verify the model.
  • The new 30-day rate will begin appearing on the AFX website in the next week or two.
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Talking Shop: Disclosing Option Premium Expenses in Revenues

Context: In 2017, the FASB issued ASU 2017-12, which simplified and expanded the eligible hedging strategies for financial and nonfinancial risks.

  • The update goes into effect for all corporates this year, and some NeuGroup Members recently collaborated to share their approach to updated guidance on disclosing option premium expenses in their revenues.

Question: “Does anyone disclose option premium expense in their revenues due to ASU 2017-12?”

Context: In 2017, the FASB issued ASU 2017-12, which simplified and expanded the eligible hedging strategies for financial and nonfinancial risks.

  • The update goes into effect for all corporates this year, and some NeuGroup Members recently collaborated to share their approach to updated guidance on disclosing option premium expenses in their revenues.

Question: “Does anyone disclose option premium expense in their revenues due to ASU 2017-12?”

  • “As a consequence of the revised accounting for hedge costs under ASU 2017-12, our company is reviewing our typical script for option impact. Previously, we reported option premium expense to OiOE (other income/other expenses) but now it goes to revenue. Thus, our ‘script’ is no longer applicable.”

Peer answer 1: “We don’t directly call out option premium expense in the 10Q/K, but it’s embedded in the hedge results in the I/S line we’re hedging, e.g., revenue or expense.”

Peer answer 2: “Here, it has been long-standing practice to realize the premiums in our revenues. I don’t think we disclose the premiums anywhere.

  • “I recall all of our disclosed amounts represent a net gain/loss across applicable positions (e.g., disclosing one number for all securities maturing, which would be a mix of options and forwards across multiple currencies, with no further breakdown).”

Expert opinion: NeuGroup Insights reached out to hedge accounting expert Rob Baer, head of derivative accounting at Derivative Path. He said that from a rates perspective, his company sees disclosure of fair market value (FMV) and notional, but not premium.

  • “Typically we don’t see premium cost as a disclosure item,” he said.  “However, under the new hedge accounting rules, we see most clients exclude premium from the effectiveness assessment and amortize it straight line (the most common systematic and rational method).”
  • Other analysis: “To some extent, the premium might be disclosed when stating amounts excluded from hedge effectiveness assessments.”
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ESG Transparency Goals Create Hard Resource Allocation Decisions

The struggle to prioritize reporting requirements for a growing list of ESG standards and frameworks.

Some NeuGroup member companies are struggling to prioritize how to allocate the resources necessary to satisfy a growing list of reporting and disclosure standards as corporates strive to be more transparent about their environmental, social and governance (ESG) records.

  • That was among the key takeaways at a recent Virtual Interactive Session where an ESG officer raised the subject of determining what information is truly useful to investors evaluating companies on sustainability criteria.
  • “I’m just throwing that out as something we’re struggling with internally right now, trying to figure out how to prioritize, because we really recognize that we can’t do everything,” the executive said.
  • In a poll at the meeting, 65% of attendees said they are putting resources toward enhancing their disclosures, suggesting that the issue of resource allocation is widespread.

The struggle to prioritize reporting requirements for a growing list of ESG standards and frameworks.

Some NeuGroup member companies are struggling to prioritize how to allocate the resources necessary to satisfy a growing list of reporting and disclosure standards as corporates strive to be more transparent about their environmental, social and governance (ESG) records.

  • That was among the key takeaways at a recent Virtual Interactive Session where an ESG officer raised the subject of determining what information is truly useful to investors evaluating companies on sustainability criteria.
  • “I’m just throwing that out as something we’re struggling with internally right now, trying to figure out how to prioritize, because we really recognize that we can’t do everything,” the executive said.
  • In a poll at the meeting, 65% of attendees said they are putting resources toward enhancing their disclosures, suggesting that the issue of resource allocation is widespread.

Operational data: how useful? In response to a question, the executive said that a lot of what is called for by various disclosure frameworks is detailed operational data—some of questionable value.

  • For example, certain frameworks recommend disclosing a company’s number of cyberbreaches, something the ESG officer said raised several questions.
  • “Number one, whether or not you ought to be disclosing that,” the executive said. “How an investor would look at that? What’s a breach? We all know that we’re all vulnerable every day and so some of those numbers aren’t remotely useful to an investor.”
  • One recommendation for navigating all the various disclosure frameworks: Determine what the quality of the data ought to be and allocate resources only to the most useful programs.
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Auditors Eye Risks of Not Knowing Where Remote Workers Call Home

Employees who move to other states or countries raise tax issues, and others, for employers.

Everyone knows that millions of people are still working from home (WFH). But not every employer knows exactly where every employee is working—a potential headache discussed by members of NeuGroup’s Internal Auditors’ Peer Group (IAPG) at a recent virtual meeting.

  • “We’re super worried about it,” said one auditor about the various tax, legal and compensation issues WFH can raise for corporates.
  • It is critical that employers know where their employers are performing services, tax attorney Larry Brant of Foster Garvey said in a recent article. “The consequences of not knowing where your employees are working could be costly,” he wrote.

Employees who move to other states or countries raise tax issues, and others, for employers.

Everyone knows that millions of people are still working from home (WFH). But not every employer knows exactly where every employee is working—a potential headache discussed by members of NeuGroup’s Internal Auditors’ Peer Group (IAPG) at a recent virtual meeting.

  • “We’re super worried about it,” said one auditor about the various tax, legal and compensation issues WFH can raise for corporates.
  • It is critical that employers know where their employers are performing services, tax attorney Larry Brant of Foster Garvey said in a recent article. “The consequences of not knowing where your employees are working could be costly,” he wrote.

Tax troubles? Taxes are a big source of the potential problems raised by employees who have used the pandemic to relocate to states or even countries other than where the company operates.

  • Having an employee working in another state subjects employers to the tax regimes of that jurisdiction, Mr. Brant explained. Those may include income taxes, gross receipts taxes as well as sales and use taxes.
  • Employees working remotely in another state—even temporarily—could also affect withholding requirements that apply to the employer.

Lower taxes, lower pay? Compensation is another issue members discussed in the context of workers who have taken the opportunity presented by the pandemic to move to states with lower taxes and costs of living.

  • If an employee is Webexing in from low-tax Nevada vs. high-tax Silicon Valley in California, the employer may choose to pay them less—a subject that came up at a recent meeting of treasurers at life sciences companies.
  • At the IAPG meeting, one auditor said, “Salaries might get adjusted down if they’re in a cheaper place.” This auditor is one of a few members who have been investigating some WFH situations at their companies.

Where’s Waldo working? Auditing a corporation’s policies around remote work right now is challenging for members because there’s not much companies can do aside from asking employees where they are.

  • Unless there is a full-blown audit investigation, there is no way of knowing if employees are telling the truth. So far, no one in the IAPG has said their company is actively tracking where people are WFH.
    • That said, one company located an employee through the virtual personal network (VPN) the person used to access Netflix.
  • At least one company has told employees they need to declare where they are by Jan. 1, 2021.
  • Another member said his company is predicting that 10% to 20% of employees won’t come back to work in the office once the pandemic threat has abated.
    • The company has started using a document (via Microsoft’s SharePoint) for employees to “self-declare” where they are or where they will be working from.
    • “No one is going to say no” to the employee, the auditor said; he had decamped to Europe temporarily. “We just need to know when [they go] and where they are” to manage the related tax issues.

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Pandemic Clouds CECL’s Impact on Corporate Loans and Lending

New accounting may prompt more conservative lending terms post-Covid.

FASB’s new accounting for loan-loss reserves, current expected credit losses (CECL), directly impacts banks and other lenders and ultimately the loans they provide.

  • Tim McPeak, principal industry consultant in the risk research and quantitative solutions division of SAS, the data analytics provider, said that the current pandemic and economic downturn have blurred the impact of CECL, effective for larger banks and most public companies since the start of 2020.
  • Nevertheless, CECL will be a key factor in lenders’ credit decisions, and borrowers should query them about its impact on their loans.
  • Bankers may not point to specific changes in terms, but CECL could impact banks’ risk appetites, Mr. McPeak said, adding that in regulatory filings such as 10Ks management discloses the effects of accounting policy.

New accounting may prompt more conservative lending terms post-Covid.

FASB’s new accounting for loan-loss reserves, current expected credit losses (CECL), directly impacts banks and other lenders and ultimately the loans they provide.

  • Tim McPeak, principal industry consultant in the risk research and quantitative solutions division of SAS, the data analytics provider, said that the current pandemic and economic downturn have blurred the impact of CECL, effective for larger banks and most public companies since the start of 2020.
  • Nevertheless, CECL will be a key factor in lenders’ credit decisions, and borrowers should query them about its impact on their loans.
  • Bankers may not point to specific changes in terms, but CECL could impact banks’ risk appetites, Mr. McPeak said, adding that in regulatory filings such as 10Ks management discloses the effects of accounting policy.

What to watch for. CECL requires lenders to reserve upfront for potential losses they estimate over loans’ lifetimes, so the longer the loan, the greater the risk for potential loss, and the higher the associated reserve.

  • The average lifespan of corporate loans is less than, say, residential mortgages, so CECL’s relative impact will likely be less. However, Mr. McPeak said, it is a factor lenders must now consider when negotiating terms such as maturity and credit spread. “Since lenders will have to take all that reserve upfront, that may result in slightly higher spreads or shorter maturities,” he said.
  • Covenants and underwriting standards may also be affected,” Mr. McPeak said, adding that the lower a company’s debt rating, the greater CECL’s impact.
  • Masha Muzyka, risk and account solutions team lead at Moody’s Analytics, said that because CECL does not consider extending loans, banks may be incented to offer short-term instruments with extension options cancellable by the lender rather than the traditional longer-term instruments with prepayment options.
    • She emphasized, however, that CECL will be just one of several factors influencing their credit decisions. 
  • Corporate borrowers anticipating credit renewals would be wise to seek clarity about CECL’s impact from their lenders, Mr. McPeak said.

CECL’s long-term impact. In late spring meetings, NeuGroup members discussed lenders’ pandemic-induced unwillingness to provide longer-term loans. The pandemic started shortly after CECL went live, so its impact on loan terms is blurry, Mr. McPeak said

  • “With the interest-rates so low, lenders’ search for yield, and the resulting competition, it may not move the needle all that much, but it’s likely a contributing factor,” Mr. McPeak said.
  • He described CECL as an “accelerant” likely to fuel more conservative terms after the pandemic is gone.

Less work for captives. Corporate captives providing financing options to customers are also subject to CECL, impacting their reserves, Mr. McPeak said, but complying with it should be simpler operationally.

  • “Captives’ loan types tend to be more uniform, with typically the same type of underlying collateral and loan structures,” Mr. McPeak explained.
  • Still, some captives, such as those financing heavy equipment, may provide longer-term loans with more creative structures, resulting in either putting up more reserves or more conservative lending. “Depending on the type of financing they’re providing and its duration, the impact could be meaningful,” Mr. McPeak said.
  • Those companies may securitize those assets, removing them from their balance sheets and lowering reserves, but institutions purchasing the loans would carry the reserve mantle.

Corporate portfolio impact. Most corporate treasuries place cash in money markets and other short-term investments unaffected by CECL. However, companies with longer horizons and/or oodles of cash may invest in longer-term securities classified for accounting purposes as “held-to-maturity,” and they may be subject to CECL.

  • “It gives treasurers more to think about in terms of the accounting treatment of the bonds their companies are holding,” Mr. McPeak said, adding that “it could impact the types bonds these companies hold.”
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Post-Labor Day Rethink: Reinventing Finance Teams and Redefining the Office

How should corporate finance and treasury roles adjust to extended remote work and further delay of in-person team interaction?

By Joseph Neu

NeuGroup exchanges with members about team (aka labor) performance during the Covid-19-induced work from home (WFH) period have been generally positive. Productivity has been good, even up, as team members take back time lost to commuting as they give up spontaneous communication and collaborative teaching moments. Sustainability is a concern, though, as WFH requires balancing work and home priorities including childcare and homeschooling, for women especially.

WFH works because teams used to be together. There is also a consensus that teams accustomed to working together in the office have made it easier to transition to remote work. This begs the question, then, what happens to teams that are put together with people who have not worked together in real life before?

How should corporate finance and treasury roles adjust to extended remote work and further delay of in-person team interaction?

By Joseph Neu

NeuGroup exchanges with members about team (aka labor) performance during the Covid-19-induced work from home (WFH) period have been generally positive.

  • Productivity has been good, even up, as team members take back time lost to commuting as they give up spontaneous communication and collaborative teaching moments.
  • Sustainability is a concern, though, as WFH requires balancing work and home priorities including childcare and homeschooling, for women especially.

WFH works because teams used to be together. There is also a consensus that teams accustomed to working together in the office have made it easier to transition to remote work. This begs the question, then, what happens to teams that are put together with people who have not worked together in real life before?

  • The long-term viability of remote work, in finance roles and others, will depend on the success of building high-performing teams outside of an office.
  • Everyone is scrambling to come up with viable hacks to maintain, renew and rebuild teams remotely.
  • Meanwhile, the bias is toward keeping teams as they are. But as we close in on a year of WFH, this bias will eventually have to be overcome.

Offices should return as team-building centers. Offices should become places to identify and develop high-performing teams and be designed accordingly. One member cited the Steve Jobs Building at Pixar, having recently rewatched “The Pixar Story” documentary on Netflix.

  • Steve Jobs designed the main building at Pixar HQ to promote encounters and unplanned collaborations among colleagues.
  • Another Steve Jobs Pixar design tenet was to put all functional areas under one roof, with creative functions on the right and technical offices on the left, while allowing them to come together in a large central space, the Atrium.
  • The design philosophy should carry over into team building, starting with virtual hacks and moving into return-to-office plans.
    • Build encounters and unplanned collaborations that cut across functional silos (e.g., finance and business team collaboration) and promote diversity and inclusion (bring together people from different backgrounds and parts of the world).

Space and time. In the meantime, the idea of the office also needs to adapt to the digital, virtual opportunity. This is an ideal time to connect and rebuild teams virtually across the globe to transcend space and time.

  • Maximize the hours of overlap in respective time zones to revitalize, if not reinvent the company culture, cross-fertilize best practices, strengthen governance and controls, and build resilience. 
  • Build global teams that follow the sun, oriented around global processes (e.g., cash forecasting), leveraging people at treasury, shared services and other centers of excellence worldwide.
  • Rotate high-potential talent virtually, across silos, and later offer to send them to meet team members face-to- face for work abroad stints if that is what is needed for high-performing teams.

Continue to invest in technology.  It is impossible to ignore that productivity in this pandemic has been made possible by technology enabling connectivity, starting with broadband internet. For this reason, business continuity planning scenarios where the internet goes down for sustained periods are getting a lot of attention now.

  • Connectivity needs to be made resilient; however, it is not the only sustaining technology.
  • Investing in technology to speed up work with data management, visualization, analytics, AI, machine learning, algos and smart bots is also critical.
  • Pivot more processes and transactions to digital, limit human work to an exception basis and provide human factor analysis and judgment overlays.
    • Then there is more time to invest in high-performing teams with virtual collaboration and foment unplanned encounters, as core work tasks get done in seconds vs. hours or days.

Reorient your labor. Along with using technology to shorten processing time and automating finance tasks comes the need to reorient labor, especially finance roles, toward things that humans do best.

  • For starters, take the lessons of the last six months about your ability to access financing, success in generating cash flow, shifting to contactless points of sale, changes in investment portfolio diversification thinking and policy shifts of central banks.
    • Then, apply them to the next six to 12 months so your business better serves humans—your customers, investors, team members and other stakeholders—for the remainder of this crisis and beyond.
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The Road Beyond Recovery: Corporates’ Upbeat View of Working Capital Management

A majority of companies in a recent Deloitte poll say that they are already in stabilization or growth mode.

Working capital is an issue never far from a treasurer’s thoughts, and the uncertainty the pandemic has brought to corporate cash flows has made it only more relevant. A recent survey by Deloitte of 1,500 C-Suite and other executives revealed what Anthony Jackson, a Deloitte Risk & Financial Advisory principal, called unexpected results.

  • A majority of respondents said their companies are in stabilization or growth mode, meaning 42.9% have stabilized liquidity, reduced leaking cash, and identified cost reductions and inventory strategies, while 13.2% in growth mode have unlocked capital for investment, can predict cash flow and reduce costs, and have improved financial forecasting.
  • Another 22.3% are still in recovery mode—starting to unlock liquidity, control of cash outflows, and other working-capital necessities—and 11.1% are in crisis mode. “I would have guessed a smaller number in stabilization and growth mode, and at a minimum more saying they were still in recovery mode,” Mr. Jackson said.

A majority of companies in a recent Deloitte poll say that they are already in stabilization or growth mode.

Working capital is an issue never far from a treasurer’s thoughts, and the uncertainty the pandemic has brought to corporate cash flows has made it only more relevant. A recent survey by Deloitte of 1,500 C-Suite and other executives revealed what Anthony Jackson, a Deloitte Risk & Financial Advisory principal, called unexpected results.

  • A majority of respondents said their companies are in stabilization or growth mode, meaning 42.9% have stabilized liquidity, reduced leaking cash, and identified cost reductions and inventory strategies, while 13.2% in growth mode have unlocked capital for investment, can predict cash flow and reduce costs, and have improved financial forecasting. 
  • Another 22.3% are still in recovery mode—starting to unlock liquidity, control of cash outflows, and other working-capital necessities—and 11.1% are in crisis mode. “I would have guessed a smaller number in stabilization and growth mode, and at a minimum more saying they were still in recovery mode,” Mr. Jackson said. 

Ever hopeful. Also surprising, Mr. Jackson said, was the optimism of respondents about their organizations’ state a year from now.

  • Only 3.1% saw their companies in crisis mode, still working to improve liquidity strains, accounts receivable delays, inventory stockpiles, etc., while 11.7% foresee being in recovery mode.
  • Most saw their organizations in either stabilization (26.9%) or growth (45.1%) mode.


Greatest strain. Pandemic-driven disruptions have hindered working-capital management with difficult forecasting ranked as most problematic (31.8%), followed by delays in accounts receivable (19.2%), reduction in liquidity (18.3%), and delays from shifting to a remote workforce (9.2%).

More frequent updates. Unsurprisingly, the pandemic has prompted nearly half of respondents, 48.5%, to update their working capital management efforts more frequently. Another 32.3% said they’ve seen no change, while 3.2% said the frequency has decreased. 

  • Mr. Jackson said companies are taking steps they wouldn’t have pre-pandemic, including increasing their use of data and analytics to identify opportunities within their working capital processes.
  • For example, he said, companies often have payments leaving accounts payable earlier than the due dates, even when they have policies in place to prevent that. “The question becomes, where are the breakdowns in the process that allow that to happen and how can that be changed,” he said. 

Avoid risky steps. Mr. Jackson said pushing back payments to vendors has been a popular way to conserve cash, but companies must carefully assess whether that’s truly beneficial in the long term.

  • If pushing out the term results in a key vendor leaving, it could have a big operational impact. “So you want to be very strategic and thoughtful about how you do that,” he said. 

Discount discipline. Mr. Jackson recounted one CFO’s belief that his company was taking all possible accounts payable discounts, but closer analysis found that was true only 85% of the time. Correcting the remaining 15% would improve the firm’s liquidity position by $8 million.

Long-term vision lacking? Deloitte concludes that many CFOs are still not focusing on long-term efforts to improve capital management, relying instead on short-term fixes.

  • Many companies have a false sense of security, perhaps counting on further government support to weather the pandemic.
  • And the significant percentage of companies that anticipate being in growth mode within 12 months may be another reason for avoiding more sustainable changes.
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Wild Ride: Pension Fund Managers Describe a Rebalancing Roller Coaster Amid Pandemic

NeuGroup members discuss successes, disappointments and potential changes to strategy.

Huge market swings, limited liquidity and high trading costs have tested the ability of corporate pension fund managers to rebalance portfolios during the pandemic. These challenging conditions have demonstrated the importance of speed and agility to make investment changes in times of crisis, and have forced some managers to take a hard look at asset classes and external managers.

  • These and other insights emerged during a recent NeuGroup Virtual Interactive Session sponsored by Insight Investment featuring presentations by two members, one who assumed responsibility for his company’s pension just as the pandemic took hold.
  • “The last six months have revealed which asset classes are most impacted by constrained liquidity and high transaction costs during periods of extreme volatility,” Roger Heine, senior executive advisor at NeuGroup, said after the VIS. “Contingency plans need to consider these constraints.”

NeuGroup members discuss successes, disappointments and potential changes to strategy.

Huge market swings, limited liquidity and high trading costs have tested the ability of corporate pension fund managers to rebalance portfolios during the pandemic. These challenging conditions have demonstrated the importance of speed and agility to make investment changes in times of crisis, and have forced some managers to take a hard look at asset classes and external managers.

  • These and other insights emerged during a recent NeuGroup Virtual Interactive Session sponsored by Insight Investment featuring presentations by two members, one who assumed responsibility for his company’s pension just as the pandemic took hold.
  • “The last six months have revealed which asset classes are most impacted by constrained liquidity and high transaction costs during periods of extreme volatility,” Roger Heine, senior executive advisor at NeuGroup, said after the VIS. “Contingency plans need to consider these constraints.”

Keep calm and carry on. That phrase from a 1939 British poster is how one of the members described his approach amid the major disruption in the markets and his company’s business.

  • “There’s not a lot the pension team did except to understand exactly what was going on,” he said. “We had a strategy for this situation and worked to have the right asset allocation to allow managers to take advantage of opportunities, and they did,” he said.
  • In the same vein, the other member said, “The middle of a crisis is not the time to reevaluate asset allocation,” saying that it’s essential to “play through” and “stick to your guns.”
  • He said his team’s commitment to rebalancing paid off when, at the peak of the crisis, it sold more than $1 billion in Treasury STRIPS—whose value had soared—and invested in beaten-down equities, which recovered far faster than expected.
  • Mr. Heine later observed that “having pre-established targets and defined investment flexibility is very important and helps avoid panicking” during crises.

Winners and losers. Actively managed domestic equity portfolios and hedge funds stand out as major disappointments during the last six months for one member, who said of hedge fund managers, “The long and the short of it is that those guys have gotten crushed.”

  • As a result, this member expects to move assets away from active managers and hedge funds in the next 18 months and rely on a more concentrated group of managers that his relatively small team can monitor closely.
  • Among the factors weighing against active equity managers has been the need to own just a handful of tech stocks (including Apple and Amazon) that have soared.
    • That helps explain why the best equity growth manager used by one member reported an 85% gain while the worst suffered a 17% loss. “These are diversified funds with more than 50 stocks,” the member said.
  • Shorting stocks has been a losing game as the Fed and the government pumped money into the financial system and economy. “The short guys have thrown in the towel on shorts,” one member said.
  • Both members noted the underperformance of value stocks, with one saying this period is raising the question, “What is value?”
  • Looking ahead, Mr. Heine suspects that “after the disruptions and failures of the last six months, companies will rethink how they select, direct and periodically review asset managers in order to tighten their control of precisely where pension assets are being invested.”
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Blockchain’s Increasing Popularity Raises Internal Control Issues

Applying the COSO framework addresses risks but raises some new ones.

Despite its mysterious origins, distributed ledger technology (DLT) is increasingly viewed by companies as vital to remain competitive. From an internal control (IC) standpoint, the technology has significant potential to reduce risk and improve efficiency but also introduces new risks, prompting a recently published report on how to apply the leading IC framework when adopting DLT, also referred to as blockchain.

  • “We wanted to put this guidance out there so concerns about controls are not an inhibitor to adopting DLT,” said Paul Sobel, chairman of the Committee of Sponsoring Organizations of the Treadway Commission (COSO), retired chief risk officer of Georgia-Pacific and a former NeuGroup member.
  • “The paper is intended to move blockchain to the next level by discussing the key risks and controls that we think organizations should be thinking about as it relates to distributed ledgers,” said Jennifer Burns, partner at Deloitte & Touche. Deloite and COSO teamed up on the report, “Blockchain and Internal Control: The COSO Perspective.”

Applying the COSO framework addresses risks but raises some new ones.

Despite its mysterious origins, distributed ledger technology (DLT) is increasingly viewed by companies as vital to remain competitive. From an internal control (IC) standpoint, the technology has significant potential to reduce risk and improve efficiency but also introduces new risks, prompting a recently published report on how to apply the leading IC framework when adopting DLT, also referred to as blockchain.

  • “We wanted to put this guidance out there so concerns about controls are not an inhibitor to adopting DLT,” said Paul Sobel, chairman of the Committee of Sponsoring Organizations of the Treadway Commission (COSO), retired chief risk officer of Georgia-Pacific and a former NeuGroup member.
  • “The paper is intended to move blockchain to the next level by discussing the key risks and controls that we think organizations should be thinking about as it relates to distributed ledgers,” said Jennifer Burns, partner at Deloitte & Touche. Deloite and COSO teamed up on the report “Blockchain and Internal Control: The COSO Perspective.”

Growing ubiquity. The report recounts the 2008 paper by Satoshi Nakamoto—identity still unknown—that set the stage for bitcoin and the blockchain technology behind it. DLT’s accessibility, transparency, and security has dramatically broadened its applications.

  • In Deloitte’s 2020 blockchain survey of 1,488 senior executives globally, 83% of respondents said that without adopting DLT their organizations or projects will lose competitive advantage.
  • An even higher percentage said their suppliers, customers and/or competitors are discussing or working on blockchain solutions.
  • Higher percentages of respondents also see compelling business cases for blockchain technology and anticipate it achieving mainstream adoption.

Risk reduction and creation. Viewing DLT through the five components of the COSO Internal Control – Integrated Framework 2013, most organizations already apply the framework by complying with Section 404 of the Sarbanes-Oxley Act, Mr. Sobel said. Still, there remain plenty of risk-reduction opportunities and also some concerns. These include:

Control environment. DLT may help facilitate an effective control environment because it minimizes human intervention.

  • However, the component primarily addresses principles involving human behavior, such as promoting integrity and ethics, that blockchain cannot assess.
  • Plus, blockchains with multiple entities participating and intertwining face greater complications managing the control the environment.

Risk Assessment. Through this COSO-framework component, DLT reduces risk by promoting accountability, maintaining record integrity, and providing a record that is distributed to all participants simultaneously, so it cannot be denied or refuted.

  • But companies must consider risks more broadly, such as other parties in the blockchain network with different risk appetites and risk monitoring standards.
  • DLT also introduces the potential for new fraud schemes or new ways to carry out traditional ones.

Control activities. Blockchain and related smart contracts, which automatically execute, control, or document contractual events and actions, can significantly improve business efficiency by reducing human effort and fraud.

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Ripple Effects: Will Institutional MMFs Start Waiving Fees to Stay Above Water?

Rock-bottom rates have pushed retail money funds to waive fees, and institutional funds may be next.

The Wall Street Journal this week gave prominent play to a story headlined “Money Funds Waive Charges to Keep Yields From Falling Below Zero.” That piqued our interest.

  • Money market funds (MMFs) are a staple of many treasury investment managers and an important product for many of the banks that help corporates manage short-term cash.
  • MMF yields have plummeted. Seven-day net yields for the average money fund slid to 0.05% in July from 1.31% at the end of 2019, according to research firm Crane Data, the Journal reported.

Rock-bottom rates have pushed retail money funds to waive fees, and institutional funds may be next.

The Wall Street Journal this week gave prominent play to a story headlined “Money Funds Waive Charges to Keep Yields From Falling Below Zero.” That piqued our interest.

  • Money market funds (MMFs) are a staple of many treasury investment managers and an important product for many of the banks that help corporates manage short-term cash.
  • MMF yields have plummeted. Seven-day net yields for the average money fund slid to 0.05% in July from 1.31% at the end of 2019, according to research firm Crane Data, the Journal reported.

Retail, not institutional. What theJournal story doesn’tsay is that the fee waiving is centered on funds aimed at retail investors, not institutions. Here’s what Pete Crane, President of Crane Data, explained at a recent webinar:

  • “Fee waivers are a big deal on the retail side, where money funds are basically having to cut their expenses by a percentage, or even in half in some cases, to keep yields staying above zero.
  • “Right now, two thirds of the funds out there are yielding 0% to 0.​01%, and one third of the assets. This is a simple average of asset weight; the big dollars are, of course, in lower expense funds. 
  • “The institutional assets have lower expenses so, they’​re not in that waiver boat nearly as much or if at all, as the retail funds.”

Portal pressure? We followed up with Mr. Crane to ask whether MMF platforms or portals used by some NeuGroup members have started to feel the effects of lower fees being borne by banks and brokerages.

  • “Portals should begin to feel some fee pressure as funds try and cut costs across the board to live with the new lower revenue environment,” he wrote. “A lot depends on how rates move going forward.”
  • Tory Hazard, CEO of the MMF portal ICD, said in an email, “The vast majority of institutional MMFs have yet to experience fee waivers this time around. However, it is expected fee waivers will become necessary in September to avoid negative net asset values. 
  • “When this occurs, fund companies and institutional distributors will share the cost to shield corporate investors from negative yields.
  • “At ICD, we are actively working with our fund partners to ensure minimal impact to our clients.”
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Leaving Libor in the Dust: Look for SOFR Loans in Early 2021

Banks could price corporate loans using SOFR sooner than ARRC best practices suggest.

The Alternative Reference Rate Committee (ARRC) guiding the US transition for cash products is pushing for Libor pricing to cease for certain types of debt by the end of this year, and other types of debt may soon follow.

  • Floating-rate notes, for example, should be priced by year-end using an alternative benchmark, according to best practices published in late May by the ARRC, which comprises mostly large banks and federal regulatory agencies.
  • Revolving credit, term loans and securitizations have until June 30, 2021, but may be priced much sooner over a replacement benchmark—presumably the secured overnight financing rate (SOFR) whose development the ARRC has guided.

Banks could price corporate loans using SOFR sooner than ARRC best practices suggest.

The Alternative Reference Rates Committee (ARRC) guiding the US transition for cash products is pushing for Libor pricing to cease for certain types of debt by the end of this year, and other types of debt may soon follow.

  • Floating-rate notes, for example, should be priced by year-end using an alternative benchmark, according to best practices published in late May by the ARRC, which comprises mostly large banks and federal regulatory agencies. 
  • Revolving credit, term loans and securitizations have until June 30, 2021, but may be priced much sooner over a replacement benchmark—presumably the secured overnight financing rate (SOFR) whose development the ARRC has guided.

Catalysts for change. Libor is a forward-looking term rate enabling corporates to forecast cash flows accurately, and so far there’s no such version of SOFR. In late June, the ARRC published a method to calculate the “in arrears” SOFR rate for syndicated loans, and on July 22 it published conventions for how and when to do it. 

  • The in arrears approach averages the rate over the past 30 and 90 days to provide a “good” estimate of what averaging SOFR over the next 30 or 90 days will be, according to Ian Walker, head of US middle-market research at Covenant Review, a Fitch Solutions service that analyzes debt contracts determining creditor rights. 
  • Mr. Walker said these moves make it easier to adopt SOFR. He added that the ARRC’s “early opt-in” option enabling conversion to SOFR before Libor ceases is likely to prompt lenders to push for transitioning revolvers and term loans to the new rate sooner rather than later, to reduce Libor-exposure risk.
  • Mr. Walker called the conventions and vendor systems’ ability to handle SOFR—the ARRC recommends by Sept. 30 on the latter—the “last two dependencies” before we see the syndicated loan market doing loans over SOFR instead of Libor. “I would not be surprised if we start seeing that phenomenon before the end of 2020,” he said.

Fallbacks sooner. Floating-rate notes and securitizations priced over Libor before year-end 2020 should have incorporated “hardwired” contractual fallbacks to an alternative rate as of June 30, the ARRC says, and corporate loans by Sept. 30. 

  • “Any company refinancing today should spend significant time considering the Libor fallback language in their debt, and ensure that they can operationalize it should it become triggered,” said Amol Dhargalkar, managing partner and global head of corporates at Chatham Financial.
  • While there’s more time to transition revolving and term credits to an alternative benchmark or adopt another benchmark for new borrowings, don’t procrastinate. 
    • The operational challenges are significant, especially for companies still using Excel instead of a treasury management system (TMS). “Can their systems even support different indices and how are calculations done using these indices?” Mr. Dhargalkar asked.

Corporates too passive? Despite the significance of the Libor transition, Mr. Dhargalkar said, corporates’ common response tends to be that “things are going to take care of themselves. It’ll be fine.” Many appear to be waiting for banks to make the first move, he said.

  • Corporates “tend to view themselves as price takers rather than price makers on this Libor transition, so they’re waiting for banks to come to them with a proposal, rather than them approaching banks and saying, ‘I want to borrow off something other than Libor,’” Mr. Dhargalkar said.
  • While financial institutions and governmental organizations have issued SOFR-priced debt, Toyota Motor Credit appears to be the only large, public corporate to have done so to date, said Yon Valtchev, a treasury credit specialist at Bloomberg who has followed the issue closely.  
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Saving Time in Brazil: Automating Tax Payments Speeds Product Delivery

A fintech helps a corporate cut hours on tax payments, allowing faster delivery and freeing up staff. 

The first thing a treasury professional learns about business realities in Brazil is that there are a lot of taxes and they take many hours to process. The space is ripe for disruption, and a fintech called Dootax is doing just that.

  • At a recent meeting of NeuGroup’s LatAm Treasury Peer Group, a member from a megacap multinational shared the progress of a project to automate certain tax payments related to the sale of equipment in Brazil. The local value-added tax (VAT) is a major priority.
  • The COVID pandemic has raised the pressure to deliver machinery on time, and the multistep tax process was manual and time-consuming, delaying deliveries unnecessarily.

A fintech helps a corporate cut hours on tax payments, allowing faster delivery and freeing up staff. 

The first thing a treasury professional learns about business realities in Brazil is that there are a lot of taxes and they take many hours to process. The space is ripe for disruption, and a fintech called Dootax is doing just that.  

  • At a recent meeting of NeuGroup’s LatAm Treasury Peer Group, a member from a megacap multinational shared the progress of a project to automate certain tax payments related to the sale of equipment in Brazil. The local value-added tax (VAT) is a major priority.
  • The COVID pandemic has raised the pressure to deliver machinery on time, and the multistep tax process was manual and time-consuming, delaying deliveries unnecessarily.

Automation transformation. The member’s multiyear effort to reduce, streamline and automate payments in the entire LatAm region was spearheaded out of a regional shared service center in Mexico. Brazilian fintech Dootax was selected to help automate the process involving the payment of several different local taxes. The new processes:

  • Increase accuracy.
  • Eliminate a vast number of banking platforms (ensuring better controls and fewer bank accounts and signers). 
  • Provide a platform for real-time metrics. 
  • Enable faster payments (and consequently faster product delivery). 

Big savings. Time savings have been enormous: In the Brazilian VAT (ICMS) example the member shared, the old process, from order to shipping, took four hours and was subject to regular office hours. The new one is an automated Dootax process taking at most 30 minutes and is “open” 24/7:

When a product delivery is requested and an invoice created, the generation of the slip for the ICMS is initiated. This step was incorporated into the automated process that has eliminated touch points, or human intervention, for:

  1. Recording the ICMS in the ERP. 
  2. Funding requests requiring review and approval. 
  3. Creating the payment in the system.
  4. Initiating the payment in a bank platform, which also requires review and approval. 
  5. Sending ICMS payment proof to the warehouse so it can ship the product. Digital signatures add more speed in a country where signatures are often delivered by couriers on motorbikes. 

The human factor. The company is currently using automated tax payments for two different ICMS taxes and one federal income tax, freeing up a total of six full-time employees from the treasury or business side. 

  • Automation can be a tough sell if people feel they will lose their jobs. The member was able to reassign treasury resources to higher-value tasks that are seen as more interesting and career-promoting, helping get the team to embrace changes and automation. These opportunities should be communicated well to those potentially impacted by the new processes.
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Waiting Game: Fed’s Update on Dividend Regs Reflects Increased Back-and-Forth With Banks

Earnings hold the key to whether a bank qualifies for “expedited consultation” with regulators.

Recent clarification by the Federal Reserve about the timing of regulatory reviews of dividends paid by banks has raised a few questions and concerns for members of NeuGroup’s Bank Treasurers’ Peer Group.

  • Even before the guidance, banks have delayed or considered delaying their dividend declaration dates to provide more time for back-and-forth with regulators over the payout.
  • Experience suggests that approaching the Fed with a concrete plan and detailed analysis can help smooth and expedite the process.

Earnings hold the key to whether a bank qualifies for “expedited consultation” with regulators.

Recent clarification by the Federal Reserve about the timing of regulatory reviews of dividends paid by banks has raised a few questions and concerns for members of NeuGroup’s Bank Treasurers’ Peer Group. 

  • Even before the guidance, banks have delayed or considered delaying their dividend declaration dates to provide more time for back-and-forth with regulators over the payout. 
  • Experience suggests that approaching the Fed with a concrete plan and detailed analysis can help smooth and expedite the process.

Tricky times. As a result of the pandemic, more banks are facing a situation where earnings may not fully cover dividends. In those cases, what’s known as “SR 09-4” calls for banks to consult with regulators before a dividend is declared.

  • For banks that declare dividends in connection with earnings, this has created “a compressed timeline to finalize earnings, determine the dividend and, if necessary, consult with the Fed,” Ben Weiner, a partner at Sullivan & Cromwell, said to members on a recent NeuGroup call.
  • Given evolving views of bank dividends in the current macroeconomic environment and a shorter period to make decisions, it makes sense for banks to be proactive and talk to the Fed early, should SR 09-4 direct it to do so, Mr. Weiner said.

It’s all about timing. The amendment—called Attachment C—to SR 09-4 establishes criteria to determine whether a holding company can expect “expedited consultation” with its Federal Reserve Bank about its dividend plans. 

  • Generally, this applies when a holding company is “considering paying a dividend that exceeds earnings for the period for which the dividend is being paid,” Attachment C states.
  • The criteria for an expedited response include having net income available to common shareholders over the past year sufficient to fully fund the dividend (and previous dividends over the past four quarters). 
  • The expedited response time for qualifying banks is two business days; other banks will receive a response in five business days.

Change of plans.  One member said increased communication about the dividend with regulators following COVID-related loan losses caused his bank to delay its dividend declaration date. 

  • “We changed the dividend declaration date to be later, to the second month of the quarter, to be able to make the dividend request to the Fed. We have lived through this and changed the calendar to accommodate the Fed,” he said.
  • In past years, another member’s bank had to wait more than a month for a response from the Fed on a different issue. He expressed worries about regulators’ response time on dividends for those in the non-expedited tier.

Be prepared. Another member advised peers to initiate conversations with regulators early, to present a plan and to focus on the particular quarter.

  • “We’ve had quarterly losses, and we’ve had to go to the Fed with our plan,” the member said. “It is a quarter-by-quarter play. We went a week before and had a plan and presented it; by Friday they got back to us,” he added.

Looking ahead. Mr. Weiner, the attorney, said the full implications of Attachment C on banks likely won’t be known until the fourth quarter of 2020 or the first quarter of 2021, after it has been applied for one or two quarters. 

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Smart Move: Deploying Artificial Intelligence to Manage Cash as Inventory

A member’s quest to improve cash visibility begins to bear fruit just as the crisis hits.

“When there is a crisis, treasury becomes very important,” a member of the European Treasury Peer Group said at a recent meeting where he and a colleague shared their progress on a project to improve cash forecasting, in part by viewing cash as inventory to be optimized.

  • Cash forecasting, a critical concern for treasury teams at all times, is especially important amid the extreme uncertainty created by the pandemic.
  • “We get taken out of the shadows and up to the front,” the member said of crises. “Can we quickly ascertain where the cash is? Can we see it in real time?”

A member’s quest to improve cash visibility begins to bear fruit just as the crisis hits.

“When there is a crisis, treasury becomes very important,” a member of the European Treasury Peer Group said at a recent meeting where he and a colleague shared their progress on a project to improve cash forecasting, in part by viewing cash as inventory to be optimized.

  • Cash forecasting, a critical concern for treasury teams at all times, is especially important amid the extreme uncertainty created by the pandemic.
  • “We get taken out of the shadows and up to the front,” the member said of crises. “Can we quickly ascertain where the cash is? Can we see it in real time?”

Then and now. When this company’s multiyear journey to digitize treasury began, the team manually prepared custom spreadsheets for once-daily consumption. 

  • Pain points included balances in nonfunctional currencies and how cash stacked up against target balances. 
  • Today’s automated daily process generates mobile-friendly descriptive cash dashboards with current and historical data that users can drill into. 
  • This allows the cash team to be guided by hotspots that require action and to make better decisions on what cash to move where and how to use it. 
  • “The tool has to be able to tell us where we are today and tell us where we are going to be in three to six months” and whether there will be money for buybacks, dividends and M&A, the member said.

Cash as inventory. The team’s ultimate aim is to automate cash flow forecasting using analytics (AI models) to optimize cash levels, similar to how product inventory can be optimized. 

  • Next comes the optimization into the automated forecast, plus building in predictive analytics based on external economic indicators. 
  • By using data sets from the ERP and other sources of financial data, plus AI technology combined with a combination of traditional forecast algorithms, the company is building a hybrid model to forecast short- and long-term cash flows. 
  • It learns over time the way cash flows work and has demonstrated a high accuracy rate so far.
  • Of course, a forecast cannot do everything, i.e., tax hits and unexpected events, but it can help with the amounts that are able to be predicted with pretty good accuracy, freeing up treasury staff to take action on the information rather than producing it, the member said. 

Don’t expect overnight success. Not only was it trial and error to see which forecasting algorithms—and in what combination—produced the highest accuracy, it also took time for the machine learning aspect of the tool to work. 

  • “It was definitely a journey,” the presenter said, adding that it required “lots of exchanges with the data scientists.” 
  • Treasury went through multiple models, saw that different model mixes yielded different results, and tried “different combinations until we got to the right combo” for the different liquidity items that needed to be forecast.
  • It took many iterations until the model produced accurate results and it took time. “But as we progressed the machine learning started to kick in,” the member said.

ERP advantage. In addition to having data scientists, a single-instance ERP certainly helps the company, the member said. “We’re on one instance of SAP so it makes it easy.” 

  • Companies with multiple ERPs, several instances and a TMS will soon notice that “it can get clunky.” 
  • Clear ownership and KPIs for the project are also key to success.  

Optimizing cash as inventory = savings. By treating cash as an inventory to be optimized in each region and currency, the company will free up balances, earn yield on invested (vs. idle) cash, and optimize or reduce credit lines. In fact, one of the pilot regions managed to reduce idle operational balances by 46%!

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Balancing Act: The Realities of Working Capital Management

NeuGroup members and C2FO discuss the Fed, credit risk and negative cash conversion cycles.

Working capital management has taken on increased significance during the pandemic, and two members of NeuGroup’s Tech20 Treasurers’ Peer Group discussed the subject with an executive from C2FO at a NeuGroup Virtual Interactive Session this week. Here are some takeaways from the session by NeuGroup founder and CEO Joseph Neu.

NeuGroup members and C2FO discuss the Fed, credit risk and negative cash conversion cycles.

Working capital management has taken on increased significance during the pandemic, and two members of NeuGroup’s Tech20 Treasurers’ Peer Group discussed the subject with an executive from C2FO at a NeuGroup Virtual Interactive Session this week. Here are some takeaways from the session by NeuGroup founder and CEO Joseph Neu.

  • The growing importance of data. C2FO’s platform is a great way to use working capital efficiently and provide liquidity to suppliers, but the company also supplies data that can signal credit risk. If a supplier is ready to pay a high rate for a discount, that is a signal for the credit team to look into why. 
    • Bankruptcies are expected due to COVID-19, so internal credit teams are hypervigilant and conducting thorough credit investigations along with bucketing the credit winners from the credit losers. 
  • The Fed effect. The Fed flooding the market with liquidity allows working-capital conscious companies (and anyone who cannot compete with the Fed for liquidity provision) to pull back. This means that platforms like C2FO need to play up their other advantages and find ways to channel central bank liquidity into their platforms. 
  • China reality. There is more talk about supply chain moves outside of China than action, even as the shift in mindset is on to manufacture/supply the domestic market from China vs. produce for export. 
    • For a lot of the inputs to manufacturing of electronics and tech, it is not really that easy shift from China to another country, even though the contract manufacturers can readily shift the manufacturing capabilities to other parts of the world.
  • Cash conversion cycles. This measure of the time in days it takes for a company to convert its investments in inventory and other resources into cash flows from sales is one key metric of working capital management efficiency. Negative figures mean you’re paying suppliers or distributors after you receive payment from customers.
    • If the goal is to get to double-digit negatives, -30 days for example, companies have to carefully balance the impact on the manufacturer that is accepting later payment and the distributor being asked to pay sooner. Can their balance sheets and credit situation carry your working capital efficiency metric? The path to negative cash conversion cycles cannot be simply paying suppliers later and asking distributors to pay earlier.
  • Proliferation of no inventory retail and distributor models. One accelerating trend is no-inventory models, where even retail stores will not own the inventory but rather leave it on the books of the manufacturer or the brand until the scan at the time of purchase, at which time the transfer is made directly to the purchaser.
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Finance Teams Kept More Hands on Deck in Q2 to Navigate Rough Waters

The pandemic is taking a toll on working capital, leading to more rationing of cash, an FEI survey says.

Far fewer finance teams planned on cutting headcount in the second quarter of 2020 than in the first, according to a survey released this week by Financial Executives International in collaboration with Deloitte. Meanwhile, the percentage of companies reporting a drop in working capital balances in Q2 rose by a third as the pandemic took hold.

  • The survey of 170 of FEI’s members—CFOs and other senior finance executives—found that in Q2, 55.7% of respondents expected to maintain their headcount, while 24.5% indicated planned workforce reductions. In Q1, 46% of respondents expected to reduce headcount.
  • Among myriad reasons for retaining staff, said Dillon Papenfuss, manager of research and analysis at FEI, the most commonly cited one was uncertainty. “These are complex, volatile times and companies need ample supplies of human capital to not only survive but also find new avenues of long-term growth,” he said.
  • The survey found half of staff across all organizations will work remotely for the remainder of 2020, with 51.5% in the Northeast saying that, and 64.7% on the West Coast.

The pandemic is taking a toll on working capital, leading to more rationing of cash, an FEI survey says.

Far fewer finance teams planned on cutting headcount in the second quarter of 2020 than in the first, according to a survey released this week by Financial Executives International in collaboration with Deloitte. Meanwhile, the percentage of companies reporting a drop in working capital balances in Q2 rose by a third as the pandemic took hold.

  • The survey of 170 of FEI’s members—CFOs and other senior finance executives—found that in Q2, 55.7% of respondents expected to maintain their headcount, while 24.5% indicated planned workforce reductions. In Q1, 46% of respondents expected to reduce headcount.
  • Among myriad reasons for retaining staff, said Dillon Papenfuss, manager of research and analysis at FEI, the most commonly cited one was uncertainty. “These are complex, volatile times and companies need ample supplies of human capital to not only survive but also find new avenues of long-term growth,” he said.
  • The survey found half of staff across all organizations will work remotely for the remainder of 2020, with 51.5% in the Northeast saying that, and 64.7% on the West Coast.

Working capital blues. Nearly half of respondents, 43%, said their companies’ working capital balances decreased in Q2, compared to 33% in Q1.

  • The increase “illustrates a profound erosion of corporate cash flow,” FEI’s survey report says.
  • One Chief Financial Officer remarked that his organization is focused on conserving cash and that cash-related financial metrics have become the KPIs his team scrutinizes the most.
  • FEI said that if not for CARES Act funding the proportion of respondents reporting decreasing working capital would likely have been higher.
  • Financial executives expressed a preference for pausing various business actions instead of canceling or cutting them.

Forecasting challenges. Complicating decision-making, however, is difficulty forecasting in the current environment, cited by 66% of respondents. That difficulty is heightened by the uncertainty of COVID-19’s impact and the timing of a vaccine, the report says, noting that one senior-level executive said his team is planning for 2021 based on whether a vaccine is ready by the end of Q4.

  • Companies are often using different scenarios as part of their forecasting process, and in the current environment the inputs and outputs of the various scenarios have a high degree of variability,” Andy Elcik, national managing partner of accounting, reporting and advisory services, Deloitte & Touche, said in a statement. “To manage through this some companies are using rolling 12-month forecasts to help assess the evolving economic landscape.
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Paying Employees On Demand Brings Both Benefits and Risks to Corporates

The gig economy and the pandemic are boosting interest in pay solutions that may present legal and regulatory issues.

The pandemic and the gig economy are prompting traditional employers to explore their options for so-called on-demand pay services that put money in the hands of workers when they need it most. US Bank laid out the benefits and potential complications for corporates of some of these solutions at a recent meeting of the NeuGroup for Retail Treasury. Some basic background:

  • Today’s technology-driven early pay solutions and apps offer less costly alternatives to high-interest payday loans, credit cards or pawnshops for employees struggling financially during the pandemic.
  • Before COVID-19, large and small companies discussed with US Bank their need to offer on-demand wage services to employees to compete for talent in the gig economy.

The gig economy and the pandemic are boosting interest in pay solutions that may present legal and regulatory issues.

The pandemic and the gig economy are prompting traditional employers to explore their options for so-called on-demand pay services that put money in the hands of workers when they need it most. US Bank laid out the benefits and potential complications for corporates of some of these solutions at a recent meeting of the NeuGroup for Retail Treasury. Some basic background:

  • Today’s technology-driven early pay solutions and apps offer less costly alternatives to high-interest payday loans, credit cards or pawnshops for employees struggling financially during the pandemic.
  • Before COVID-19, large and small companies discussed with US Bank their need to offer on-demand wage services to employees to compete for talent in the gig economy.

Beyond gig workers. The use of on-demand pay solutions, common among new economy companies like Lyft and Uber, has spread to more conventional employers.

  • In a story this month, PYMNTS reported, “McDonalds and Outback Steakhouse began offering day-of payouts to employees two years ago…and Walmart…introduced a service that allows employees receive early payments through a specialized app.”
  • One member at a large US retailer said his company partners with a fintech called Even to offer employees on-demand pay and “we’ve had good success so far.” During COVID, employees at his company have paid nothing for the service, which offers budgeting tools and educational programs for users.

The employer-driven model. Even is an example of an employer-driven model for early pay. US Bank explained that under this approach:

  • The employer supplies information on hours actually worked by the employee.
  • Advances may be repaid through a payroll deduction or through other means before net pay is delivered to the employee.
  • The employer works with the service provider to set standards on how much of the fees they will cover, and the amount of each paycheck available.
  • Either the employer or the service provider fund the advances.
  • Other companies in this category include SAP FlexPay, PayActiv, Instant Financial, FlexWage and DailyPay.

The employee-driven model. Under this approach:

  • The employee provides work information through documentation and/or location tracking.
  • The service provider sets the standards for fees and what percentage of payment is available.
  • The employee authorizes repayment from a bank account.
  • Companies in this group include Earnin and Clover.

Legal issues and risks. Providing on-demand wages comes with risks and raises questions, some of them complicated, US Bank said. That’s one reason more employers have not adopted solutions yet. Here are some questions employers need to ask:

  • Does the payment trigger tax and withholding obligations?
  • Should wage statements be given?
  • Is this an advance or an assignment of wages?
    • US Bank’s presenter said employers need to ask on-demand wage providers how they manage state- to-state differences in how early pay is treated.
    • She said advances fall under a different body of law that has a long history. “Using technology is what’s making it new,” she said. At the state level, she added, there is a “wide variety of rules about advances.”
  • Is this lending?
    • This question is particularly relevant when the service provider funds the payments.
  • How are state and federal regulators and legislatures responding?
    • US Bank said 11 states are investigating advance payment to employees as unlicensed lending.
  • What happens when proceeds are paid to a payroll card?

Data integration. US Bank’s presenter said a lot of payroll services have relationships with earned-wage providers, so that the data integration to make the product work is already in place, meaning the technology lift is not so hard.  She recommended corporates selecting an on-demand provider find out which payroll processors have already done integration with the providers.

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Turning to Kyriba for Payments Helped One Treasury Centralize Operations

The benefits of using one TMS for treasury payments and retiring a homebuilt infrastructure.

One member of NeuGroup’s Global Cash and Banking Group recently shared the benefits of using Kyriba as a payment factory that handles about 85% of his company’s treasury payments. The advantages boil down to saving time while improving controls, oversight, visibility and efficiency, he said.

Ultimate goal. The treasury director said his company used Kyriba as a tool to achieve the primary goal of centralizing treasury operations across nearly a dozen large subsidiary companies, each with its own treasury department.

  • The company’s first major task when implementing Kyriba was to connect its largest cash management banks across the globe to Kyriba for both payments and reporting.  This allowed central oversight for corporate treasury to manage the day-to-day operations across each subsidiary, globally.

The benefits of using one TMS for treasury payments and retiring a homebuilt infrastructure.

One member of NeuGroup’s Global Cash and Banking Group recently shared the benefits of using Kyriba as a payment factory that handles about 85% of his company’s treasury payments. The advantages boil down to saving time while improving controls, oversight, visibility and efficiency, he said.

Ultimate goal. The treasury director said his company used Kyriba as a tool to achieve the primary goal of centralizing treasury operations across nearly a dozen large subsidiary companies, each with its own treasury department. 

  • The company’s first major task when implementing Kyriba was to connect its largest cash management banks across the globe to Kyriba for both payments and reporting.  This allowed central oversight for corporate treasury to manage the day-to-day operations across each subsidiary, globally.

No easy feat. The treasury director called the process of implementing Kyriba “a big undertaking” that usually takes 18 months but that the company did in nine months with the help of Deloitte.

  • Prior to the implementation, treasury used a different TMS vendor. The member said that most of its subsidiaries did not use TMSs, and just one used Kyriba.
  • He said Kyriba’s payments module and version of a payment factory solution is the “biggest advantage” offered by the TMS, adding that the company has put “a lot of eggs in that basket.”
  • A Kyriba fact sheet says its payments network features a pre-built format library with 800 bank format variations and 40,000 bank testing scenarios globally for 1,000 global banks, with the ability to reach up to 11,000 institutions via SWIFT.

Lessons learned. This member stressed the importance of getting buy-in early on across each subsidiary or division, including appropriate internal capabilities outside of treasury such as accounting and IT. 

  •  “These groups play a major part in the design and successful use of the TMS, so you want to give them a seat at the table early on during the planning and design phase,” he said.

Beyond treasury. The member’s company is now kicking off a six-month project to run nearly all the corporation’s AP payments through Kyriba. This will involve connecting four ERPs to Kyriba, he said. That means retiring “the homebuilt payment infrastructure” the company uses and has to maintain internally.

  • The old system meant sending files to an internally built and managed EDI infrastructure and then to various banks via host-to-host connectivity, each with its own protocol for payment formats —with prohibitive costs for adding banks.
  • Soon, an ERP connected to Kyriba will generate payment data coming from a supplier or customer invoice and send it to Kyriba. The TMS then puts the data file into the appropriate bank format and sends it to the bank through SWIFT. Payment files will pass through the TMS seamlessly to the bank without the need for human touch.
  • “Kyriba does all the work,” the member said. “We’re happy with it.”
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DIY: Improved Cash Forecasting and Visibility With In-house Tools

A cash awareness culture results in better forecasting of future flows to support growth.

Young tech companies thriving in the latter stages of a multi-year economic expansion when many investors had lots of cash to deploy can be forgiven for not always demonstrating disciplined cash preservation.

  • “We are cash rich and our culture is not sensitive to cash,” as one member put it during a discussion of cash positioning and forecasting at a recent meeting of the Tech20 High Growth Edition.
  • But as companies grow and confront crises like COVID-19, they need to take a hard look at liquidity.

A cash awareness culture results in better forecasting of future flows to support growth.

Young tech companies thriving in the latter stages of a multi-year economic expansion when many investors had lots of cash to deploy can be forgiven for not always demonstrating disciplined cash preservation.

  • “We are cash rich and our culture is not sensitive to cash,” as one member put it during a discussion of cash positioning and forecasting at a recent meeting of the Tech20 High Growth Edition.
  • But as companies grow and confront crises like COVID-19, they need to take a hard look at liquidity.

“You make it, we take it.” Awareness of cash generation, how cash moves through the company and who’s entitled to control it is an issue of corporate culture and education.

  • Just because treasury can lay down the law on owning the cash, clear communication on events that impact cash doesn’t spring up naturally. Treasury needs to develop the relationships to ensure that this communication is efficient.

Treasury technology: critical for scaling. Good technology goes a long way to bridge some of the communication gaps regarding cash-related events between business units and treasury.

  • Just over half of the companies participating in a short TMS survey reported having a TMS in place, while over a quarter have none and the rest use some variety of an in-house solution. One member said the decision to implement a TMS four years ago felt “early,” but that a TMS would be critical for scaling.

Cash positioning. For one member company, the culture is to “drink your own champagne” before seeking outside solutions. 

  • The company’s treasurer has worked with product development to bring more discipline and accuracy to cash positioning.
  • Some groundwork was already done, like direct bank integration for payroll, general ledger and accounts payable with its two main partner banks. This information goes to accounting but “we created a new security structure for the treasury team to use the same data but a ‘different lens’ without needing to go to bank portals and download,” the treasurer said.
  • This produces a daily global cash position dashboard showing 95% of ending domestic and international balances by legal entity, currency and financial institution.
  • It shows money market funds, fixed income balances from third parties, reflecting all transactions from the prior day, coded by type of accounts (ZBA, intercompany, etc.) and type of transactions.
  • If a new type of transaction occurs, it can be coded for automatic recognition going forward. “This is very handy in a pandemic when you get questions from the CFO about cash.”

Cash forecasting. With limited budgets and time for systems implementations, what do you do? One member, a data visualization company, looks at how its own product can be used.

  • The company has a large financial master data warehouse (using a big vendor in that space) with data around each legal entity, bank partners, bank accounts, categorization rules, account signers, etc.
  • It has several years of balances organized by categories and sub-categories like accounts payable, receivables, rent and tax, and allows the ability to drill down into cross-border FX and other types of transactions.
  • Treasury looks at forecasting on an individual account level and then a roll-up, and can do a 14-day daily view and an 11-week weekly view—and of course uses the historical data for a sanity check on the forecast.
  • FP&A forecasts on accrual basis and treasury on cash basis. “They rely on us for the cash forecast and we rely on them for revenues and expenses.” The company reports accuracy of more than 90%. 
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Life After Libor: Ameribor Holding Its Own as Regulators Back SOFR

Banks already price commercial loans over Ameribor and a term version is in the works.
 
Ameribor, the benchmark alternative interest rate to Libor devised by the American Financial Exchange (AFX), is managing to stay in the conversation despite the endorsement by the Federal Reserve of the secured overnight financing rate (SOFR). Ameribor reflects the unsecured borrowing costs of more than 1,100 American lenders.

  • This week, Citizens Financial Group, one of the nation’s 20 biggest banks, with assets of $177 billion, joined the exchange.
  • In late June, the AFX announced volume of $1 trillion transacted since its inception in 2015.
  • In late May, Fed Chair Jerome Powell—in response to a question by Senator Tom Cotton—wrote that Ameribor is “based on a cohesive and well-defined market” and is “fully appropriate rate for the banks that fund themselves through [AFX] or for other similar institutions for whom Ameribor may reflect their cost of funding.”

Banks already price commercial loans over Ameribor and a term version is in the works.
 
Ameribor, the benchmark alternative interest rate to Libor devised by the American Financial Exchange (AFX), is managing to stay in the conversation despite the endorsement by the Federal Reserve of the secured overnight financing rate (SOFR). Ameribor reflects the unsecured borrowing costs of more than 1,100 American lenders.

  • This week, Citizens Financial Group, one of the nation’s 20 biggest banks, with assets of $177 billion, joined the exchange.
  • In late June, the AFX announced volume of $1 trillion transacted since its inception in 2015.
  • In late May, Fed Chair Jerome Powell—in response to a question by Senator Tom Cotton—wrote that Ameribor is “based on a cohesive and well-defined market” and is “a fully appropriate rate for the banks that fund themselves through [AFX] or for other similar institutions for whom Ameribor may reflect their cost of funding.” 

Pricing debt over Ameribor. With a few exceptions, corporates have yet to price floating-rate debt over SOFR, although that may start soon. Ameribor is already used for that purpose.

  • ServisFirst Bank, catering primarily to commercial clients, has priced all new and renewing corporate loans over Ameribor since the start of the year.
  • “Customers really haven’t resisted moving to Ameribor, after we show them the chart and why it’s better for them,” said Tom Broughton, chairman and CEO of the full-service, Birmingham-headquartered bank.
  • Richard Sandor, AFX CEO, said other banks—generally smaller regionals—are also pricing clients’ debt over Ameribor.
  • John Deere and American Electronic Power (AEP) have joined the AFX. How they are using AFX and Ameribor is unclear, but AEP said in May that the company wants to help “advance Ameribor as a benchmark rate.” 

Forward-looking terms. Both SOFR and Ameribor have listed futures contracts, and both are aiming to develop swap markets that will enable the generation of the type of forward-looking term rate corporates prize to forecast cash flows.

  • “We continue to do research on a forward-looking term Ameribor,” Dr. Sandor said, “In March and April we had record volume and the lowest volatility of any rate, including fed funds and Libor.”
  • Until a term Ameribor arrives, rates calculated in arrears are available for both SOFR and Ameribor that may differ from the current rate averaged over the specific time period, but not by much.
  • Amol Dhargalkar, managing partner and global head of corporates at Chatham Financial, said cutting off the period several days early or delaying payment so treasury can accommodate the difference are potential solutions. 

Have to hedge. Corporates and their lenders alike need to hedge floating-rate exposures. The Financial Accounting Standards Board (FASB) has already approved SOFR as a hedging benchmark rate, making it viable for hedge accounting.

  • AFX has asked FASB to add Ameribor to its list of approved benchmark interest-rate indices, so it qualifies for fair value hedge accounting treatment.
  • In the interim, Ameribor’s high correlation to the effective fed funds rate (EFFR) enables the latter to be used as a hedging index for Ameribor-linked assets and liabilities. That’s according to a recent note from Derivative Path, an electronic platform aimed at commercial and financial end users to manage interest-rate and FX over-the-counter derivatives.
  • Any difference between the contractually specified Ameribor borrowing rate and the EFFR would be recorded “through interest income/expense, but that basis would not be recorded as hedge ineffectiveness from an accounting perspective,” the note said.
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Automating FX Trades: How Heavy a Lift?

Key takeaways from 360T from a NeuGroup Virtual Interactive Session

Earlier this summer, technology provider 360T discussed some of the benefits of automating FX trades at a Virtual Interactive Session for NeuGroup members called “Demystifying Automated Trading Across the Trade Lifecycle.” Following are some takeaways as distilled by 360T about the technology lift involved in automating workflows and trade execution.

  • Although some of the treasurers expressed optimism that automated trading solutions could help improve their FX workflow and execution, there was clearly some trepidation about how onerous the lift on their end would be to actually implement any of these solutions.
  • Specifically, some of the participants said that the integration work with their existing technology stack—which included TMSs, ERPs, post-trade systems and in some cases 3rd part TCA systems—seemed intimidating.

Key takeaways from 360T from a NeuGroup Virtual Interactive Session

Earlier this summer, technology provider 360T discussed some of the benefits of automating FX trades at a Virtual Interactive Session for NeuGroup members called “Demystifying Automated Trading Across the Trade Lifecycle.” Following are some takeaways as distilled by 360T about the technology lift involved in automating workflows and trade execution.

  • Although some of the treasurers expressed optimism that automated trading solutions could help improve their FX workflow and execution, there was clearly some trepidation about how onerous the lift on their end would be to actually implement any of these solutions.
  • Specifically, some of the participants said that the integration work with their existing technology stack—which included TMSs, ERPs, post-trade systems and in some cases 3rd part TCA systems—seemed intimidating.

  • Although it was pointed out that there is a wide range of different automated tools available to treasurers today that require different degrees of implementation work, the consensus was that it is not an insignificant undertaking to introduce new technology to treasury operations.
  • However, it was highlighted that the process is not comparable to implementing a new TMS and that it takes a matter of weeks, not months or years to complete.
  • Moreover, with technology partners such as 360T willing to do all the integration work, and already being integrated with all the major TMSs, it was explained that treasurers only need to put resources towards testing and validation in order to gain the benefits of these automated trading tools.
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Virtual Accounts Help Treasury and Accounting Bridge Multiple ERPs 

The advantages of using virtual accounts for accounting and reconciliation across ERPs.

A member at a recent NeuGroup meeting described his company’s pilot initiatives with its primary transaction banks in Europe to roll out virtual accounts (VAs).

  • Treasury is doing the projects in partnership with accounting and are aimed at reducing the all-in cost of account reconciliation, cash application and account maintenance—which EY has estimated at about $4,000 per account—while also improving liquidity access and management.

The advantages of using virtual accounts for accounting and reconciliation across ERPs.

A member at a recent NeuGroup meeting described his company’s pilot initiatives with its primary transaction banks in Europe to roll out virtual accounts (VAs).

  • Treasury is doing the projects in partnership with accounting which are aimed at reducing the all-in cost of account reconciliation, cash application and account maintenance (estmated by the member at about $4,000 per account) while also improving liquidity access and management.

Tangible benefits. The VA advantages are even more tangible for the member’s company, because of recent large acquisitions that have resulted in the company operating multiple enterprise resource planning (ERP) systems.

  • VAs allow them to identify payments and separate account statements, helping to automate posting and reconciliation across various systems.
  • Physical accounts reside in one ERP, and VAs allow for more seamless reconciliation in the other.

Another member with as many as 70 ERP instances noted that his company was also looking into VAs to help with reconciliation and cash consolidation in conjunction with its cash pools.

  • The company may begin by using internal dummy, subledger accounts in the general ledger (GL) vs. VAs.

VAs vs. subledgers. This prompted a debate on the merits of VAs vs subledger accounts in the ERP or even the treasury management system (TMS).

  • “Replicating real bank accounts with virtual accounts was deemed the easier sell to accounting and other functions, since you can get the whole account infrastructure, MT940 reports from SWIFT included,” one member noted.
  • You can also establish clear account ownership with VAs to do the reconciliation.

Reporting benefits. Mark Smith, head of global liquidity at Goldman Sachs’ newly launched transaction banking unit offering Virtual Integrated Accounts, concurs that the benefits of the reporting capability of VAs have helped fuel their growth among corporates.

  • A key advantage to a VA is the unique identifier assigned to each incoming receipt and outgoing payment so that the bank’s VA solution can attribute it to the correct VA, and in turn the bank account with which it is associated.
  • These identifiers can be simple reference numbers, or they can be configured as a clearly-recognized account number, such as an International Bank Account Number or IBAN, so a payment instruction need only contain the VA identifier to be automatically posted and reconciled across associated physical and VAs.

Tax concerns. While accounting can be easily sold on VAs, tax departments are more leery.  

  • Several companies reported tax being concerned about assigning VAs to multiple entities, for example, which would help transform pay-on-behalf-of and receive-on-behalf-on structures and allow in-house banks to fully leverage them.
  • To work around this, treasury must get tax comfortable with affiliates using VAs with the parent or treasury center like they would an intercompany ledger.
  • To do that, they must properly organize their payment and receipt structure in the centralized entity.
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Cost-Cutting Corporates Need to Factor in ROI of Cybersecurity

Quantifying the value of cyber defenses as some companies look to cut costs amid COVID.
 
Cybersecurity is a major concern for NeuGroup member companies, and the pandemic has forced them to pay more attention to the risks of having so many people in finance roles working from home as the push for accelerated automation and digitalization grows.

  • At the same time, COVID-19 has also pushed companies to tighten their belts. But cutting spending on cyber defenses looks like a potentially costly mistake.

Quantifying the value of cyber defenses as some companies look to cut costs amid COVID.
 
Cybersecurity is a major concern for NeuGroup member companies, and the pandemic has forced them to pay more attention to the risks of having so many people in finance roles working from home as the push for accelerated automation and digitalization grows.

  • At the same time, COVID-19 has also pushed companies to tighten their belts. But cutting spending on cyber defenses looks like a potentially costly mistake. 

Return on investment. A recent survey of more than 1,000 companies globally by ESI ThoughtLab found that investing in cyber defenses provides double-digit returns on investment (ROI)—179% on average. The ROI analysis is based on how cybersecurity investments change a firm’s expected losses.

  • Training and improving staff skills, recruiting specialists and appropriately compensating cybersecurity staff provided the biggest bang for the buck, with an ROI of 271%.
  • “One of the things we found from the study is that the investment in people results in the highest decline in the probability of a breach,” said Davis Hake, co-founder of Arceo.ai, which specializes in cyber-risk analytics, who was on the survey’s advisory board.
  • The study found significant ROI from investments in cybersecurity-related processes and procedures (156%) and technology (129%). 

Costs and COVID. Cybersecurity—like treasury—is often considered a cost center, so cost cuts may be imminent.

  • The ESI study notes, “Our interviews during the pandemic show a divergence of views, with some companies, particularly those in hard-hit areas like retail and hospitality, expecting significant budget cuts, and others foreseeing increases to support more ambitious digital transformation plans.”
  • Research firm Gartner recently estimated that companies’ spending on protecting their information from cyberattacks will increase by 2.4% in 2020, down significantly from the 8.7% growth it forecasted in December 2019, as a result of the pandemic. 

The value of cyber insurance. Six in 10 respondents plan to spend more on cyber insurance over the next two years, the survey found. And of those firms most advanced in cybersecurity effectiveness and compliance—which ESI calls cybersecurity leaders—57% have coverage over $10 million, compared to 30% of non-leaders.

  • Mr. Hake, who is also an adjunct professor of cyber-risk management at the University of California, Berkeley, said, “I talk to my students about this—when you you look at the price per dollar, insurance is one of the best investments you can make from a financial perspective.” 

Cybersecurity leaders. ESI determined leaders by analyzing responding companies’ adherence to the NIST Cybersecurity Framework, success in thwarting actual cyberattacks, and the Verizon Business Cyber Risk Monitoring Tool, based on publicly available data from Bitsight and Verizon’s own data breach investigations.

  • Only 64 of 151 companies classified as leaders in NIST compliance are advanced in cybersecurity effectiveness, the survey found, while leaders adapt the framework to business goals, strategies and the company’s individual risk profile.
  • Leaders make cybersecurity hygiene a top priority and do more frequent backup restoration drills.
  • Leaders are more likely to make cybersecurity a shared responsibility, often between the CIO and CISO, and they report to the CEO, COO or the board.
  • Eight out of 10 leading companies conduct cyber-risk scenario analysis, assess the financial impact of risk events, and measure the impact of mechanisms to mitigate risk.
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Exploring Cashforce’s Forecasting Solution, Among Others

Bottoms-up, top-down, ERP or bank statments?

During a recent discussion about cash forecasting at NeuGroup’s Global Cash and Banking Group, one member asked if any of her peers had done demos of solutions from Cashforce.

  • Another member said his company had reached the point where Cashforce is “going demo something” once an NDA is in place. “We have found them to be very open-minded,” the member said.
  • That’s important because his company has decided it does not want a forecasting system that relies on bottom-up analysis of data sourced from ERPs, in part because the company has “so many” different ERP systems and is “looking for an  AI, robotics approach” using top-down analysis.
  • He said that Cashforce has “been incredibly engaged” and willing to design solutions based on a bank statement model rather than ERP data.

Bottoms-up, top-down, ERP or bank statements?

During a recent discussion about cash forecasting at NeuGroup’s Global Cash and Banking Group, one member asked if any of her peers had done demos of solutions from Cashforce.

  • Another member said his company had reached the point where Cashforce is “going demo something” once an NDA is in place. “We have found them to be very open-minded,” the member said.
  • That’s important because his company has decided it does not want a forecasting system that relies on bottom-up analysis of data sourced from ERPs, in part because the company has “so many” different ERP systems and is “looking for an  AI, robotics approach” using top-down analysis.
  • He said that Cashforce has “been incredibly engaged” and willing to design solutions based on a bank statement model rather than ERP data.

Multiple approaches. This member described the company’s journey, saying, “We are taking on multiple approaches, some internal, some external, trying to figure out what’s most cost effective.”

  • “We’ve talked to a number of different companies and vendors; what’s worked for one company may not work for us,” he said.
  • The company, the member said, is “engaging all the fintechs out there” and has found that some are focused on ERPs while others understand this company’s preference for a bank account approach.
  • But as the economic effects of the pandemic mount, this member said his company is “growing wary” of fintech companies because of the impression that “cash is drying up in fintech land.”
  • He said he would love to use cash forecasting supplied by a TMS, but that the experience of using the module offered by his TMS vendor is “just ok.” Sound familiar?
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Treasury’s Key Role as Corporates Support Black Communities

Treasurers weigh investments, deposits and transactions that will benefit Black communities.

Treasury teams within the NeuGroup Network are playing a key role at companies that are stepping up efforts to support Black communities and Black-owned financial institutions.

  • NeuGroup members discussed their initiatives and options at a recent Virtual Interactive Session (VIS) that followed a webinar in which Netflix detailed its commitment to allocate 2% of cash holdings—initially up to $100 million—into financial institutions and organizations that directly support Black communities in the US.

Treasurers weigh investments, deposits and transactions that will benefit Black communities.

Treasury teams within the NeuGroup Network are playing a key role at companies that are stepping up efforts to support Black communities and Black-owned financial institutions.

  • NeuGroup members discussed their initiatives and options at a recent Virtual Interactive Session (VIS) that followed a webinar in which Netflix detailed its commitment to allocate 2% of cash holdings—initially up to $100 million—into financial institutions and organizations that directly support Black communities in the US.
  • Director of treasury Shannon Alwyn told VIS participants that Netflix approached this project—an idea from someone in HR which treasury executed—by asking, “How can we make a difference in the normal course of business—how to do something without really doing anything—to make this more than a moment?”
  • Part of the answer to that question involved moving a portion of non-operating cash from one set of banking partners to other financial institutions.

The Netflix plan. Netflix is taking a first step by putting $35 million into two vehicles:

  • $25 million will be managed by the Local Initiatives Support Corporation (LISC), which will invest in Black financial institutions serving low- and moderate-income communities and Black community development corporations.
  • $10 million will go to Hope Credit Union in the form of a so-called transformational deposit to fuel economic opportunity in the South. This is a two-year CD with a 30-day call option in case Netflix needs the liquidity.

Big Picture. In general terms, companies looking to make an impact have three pillars to consider:

  1. Depositing cash into banks that directly serve Black communities.
  2. Using Black-owned institutions for financial transactions such as bond issues or stock buybacks.
  3. Direct investment of debt, equity or contributions in kind (e.g., technology, training and building housing).

There are obstacles to making investments that benefit communities. Investment policy constraints are among the biggest.

  • Most firms need peer benchmarks to ok carve-outs for depositing significant amounts of excess cash with smaller institutions and to approve equity investments that are said to have much more of a multiplier effect than loans financed by bank deposits.

Inspired by Netflix. A treasurer who attended the Netflix webinar and the NeuGroup VIS said his company, inspired in part by Netflix, is now looking to support Black-owned community development financial institutions (CDFIs) via options that include:

  • Making deposits directly into minority depository institutions (MDIs) that serve Black communities. This requires due diligence, partly because of the relatively small asset size of many Black-owned banks.
  • Using an intermediary similar to LISC that can help spread the company’s investment across a bigger group of Black-owned MDIs. “That’s what everyone is grappling with—trying to get adequate scale and diversification and some level of diligence,” the treasurer said.

Other paths to progress. The treasurer is also looking into options discussed by other companies who spoke at the VIS. They include:

  • A structured fund similar to one described by a member from a large technology company.
    • That tech company also uses the Certificate of Deposit Account Registry Service (CDARS) with a CDFI in New Orleans.
    • And the company makes use of the Insured Cash Sweep (ICS) service that involves hundreds of institutions.
  • A separately managed account (SMA) used by another company. The account is managed by RBC’s Access Capital, which helps financial institutions comply with the Community Reinvestment Act.
    • The SMA’s fixed-income investments include highly-rated issues from GSEs that support single-family loans and small businesses. The treasurer exploring his options called this “an elegant solution.”

Investment policy changes. The treasurer said it’s highly likely his company will need to amend its investment policy to accommodate whatever decisions senior management ultimately make. That will require approval by the CFO; the finance committee and the board will be notified.

  • During the Netflix webinar, Ms. Alwyn said, “We actually did have to get an exception to our investment policy for a certain portion of our cash in order to be able to do this. Because it is honestly taking on a quite a different risk profile than we’re used to. We decided that we need to take on a little bit more risk if we want to create change.”

Advice for peers. Ms. Alwyn said the company had to “carve out a specific portion” of its non-operating cash to devote to this initiative and “we kept that small.” She suggested that other treasury teams contemplating similar moves may want to think about:

  • Ratings from external agencies.
  • Duration requirements.
  • What size bank you’re willing to do business with.
  • “Getting comfortable with what level of risk you’re willing to take on as a company.”
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When an Auditor Puts on the Consultant’s Hat

How much and when should internal auditors report about projects outside of their audit plan?
 
Internal audit is increasingly being called upon to get more involved in nontraditional types of engagements—projects that don’t fall within the scope of the audit plan. These might include counsel, advice, facilitation, data analytics and automation. From company to company, managing these projects varies, according to members of NeuGroup’s Internal Auditors’ Peer Group.

  • In a recent virtual discussion with IAPG members, the question was whether they report these extracurricular activities to the audit committee (AC). The general answer is yes, extra activities usually get some mention; it’s just different degrees of mention. In other words, some go into more detail than others.

How much and when should internal auditors report about projects outside of their audit plan?
 
Internal audit is increasingly being called upon to get more involved in nontraditional types of engagements—projects that don’t fall within the scope of the audit plan. These might include counsel, advice, facilitation, data analytics and automation. From company to company, managing these projects varies, according to members of NeuGroup’s Internal Auditors’ Peer Group.

  • In a recent virtual discussion with IAPG members, the question was whether they report these extracurricular activities to the audit committee (AC). The general answer is yes, extra activities usually get some mention; it’s just different degrees of mention. In other words, some go into more detail than others. 

No report. One member says his department doesn’t issue a report after an advisory project. One reason is that the company’s legal department is sensitive about writing things down if it’s not a full-blown audit.

  • Another member is careful not to use audit language in any report or summary of work done. In other words, there are no words like “findings” or color codes for level of severity. “It can’t sound like an audit,” he said.
  • Still, the first auditor said, they do list the projects in IA’s quarterly report to the AC, putting them down as “other projects” so that committee members know what they’re working on.
    • The other reason they don’t create a written report is that stakeholders “get cagey” if audit says it will fully report something to the AC, especially if the stakeholder has called audit looking for help.

Reports and PPTs. Another member created a methodology where if the assignment is more than 150 hours of work and has assigned resources, he will report it. However, it would be in the form of a short memo and not a deep dive.

  • “For the small projects, we tend to just think of them more as minor engagements and want to give auditors the freedom to perform a variety of tasks, so typically not reported,” the member said. “But if we schedule the engagement and think it would be more then 150 hours and/or included multiple resources we would report the project to the AC in our summary.”
  • This member has hired someone to manage these special projects, which amount to about 5% of IA’s work.
  • Another member said this “non-audit advisory” totals about 10% of her team’s audit work. They create a PowerPoint of a slide or two where they offer recommendations for controls, i.e., for a Workday implementation they did a while ago. Smaller projects, like a recent charitable giving advisory project, don’t merit a PPT. 

Who do you work for? Members say that their boards are generally ok with these extra projects but want to make sure the work is not cutting into audit’s main purpose.

  • Said one member, “It’s kind of, ‘We don’t mind [you doing the projects] but you’re supposed to be covering our backs, so don’t go to far.’”
  • “Yes, do the projects but not at a cost to assurance,” said another. 

Just advise. Members also stressed that they are strictly offering guidance or advisory services. “When advising, we’re careful not to help build whatever it is; just recommend controls,” said a member.

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Treasurers Master Managing Remotely, Face New Challenges

Challenges facing treasurers include communication, hiring, reviews and figuring out what lies ahead.

The pandemic has demonstrated that treasury operations can function smoothly and without major problems when team members and managers are forced to work from home (WFH) for several months—while at the same time exposing the shortcomings and challenges of working and managing remotely.

  • That mixed picture, as well as unresolved questions about the future, emerged during a recent virtual discussion among members of the Life Sciences Treasury Peer Group, sponsored by Societe Generale.

Challenges facing treasurers include communication, hiring, reviews and figuring out what lies ahead.

The pandemic has demonstrated that treasury operations can function smoothly and without major problems when team members and managers are forced to work from home (WFH) for several months—while at the same time exposing the shortcomings and challenges of working and managing remotely.

  • That mixed picture, as well as unresolved questions about the future, emerged during a recent virtual discussion among members of the Life Sciences Treasury Peer Group, sponsored by Societe Generale.

“Generally positive.” That’s how one group member described the experience of overcoming “a lot of the challenges,” encountered while working and managing from home. Another treasurer said that “we’ve all discovered we can survive” remotely, but doesn’t think anyone really wants to do this permanently. “Zoom phone call exhaustion is part of our day,” he said.

Fans of Teams. Screen fatigue aside, more than one member mentioned their use of Microsoft Teams to keep the lines of communication open, with one describing the benefits of being able, with one click, to automatically connect to anyone on his team. “Any time you want to reach out and touch someone—they pick up right away,” he said.

Permanent remote? One treasurer shared that some people on her team are asking if they can work from home three times a week going forward—with others asking if they could go remote full time, allowing them to leave California, where the company is based, to save money.

  • “I have many introverts on my team,” said another member who is having similar conversations with team members who like working from home. Another member’s company did a survey that showed many people on his team want to go back to the office on a part-time basis only.
  • One treasurer raised the issue of paying people less if they move to areas with lower costs of living.
  • More than one treasurer said employees would have the option of working from home unti the end of 2020. One noted that Google employees can chose WFH for the next year. 

Whiteboards and watercoolers. Among the clear negatives of working and managing remotely is the loss of informal, impromptu communication when one team member or manager stops at a colleague’s desk or talks while grabbing a drink at the watercooler. “You lose that flow of information and that understanding,” one treasurer said, adding that people can end up feeling isolated.

  • One member said that conversations about career development have fallen by the wayside during the pandemic. “Development is something we’ll have to pick back up,” he said.

The hiring hurdle. Hiring, training and onboarding have become more challenging during the pandemic, members said. One member said culture is particularly important at his company and introducing someone new to it is “harder when you’re remote.”

  • Another treasurer who recently hired a senior manager described holding a lot of Zoom calls with the candidate and a broader set of panelists to compensate for the lack of in-person interviews. The treasurer is now meeting the new hire in person once a week while wearing masks and socially distancing.
  • One member expressed reservations about hiring junior staffers who are less able to self-manage than people in in senior roles.
  • A third treasurer who described hiring an intern as an “interesting experience” said the person has worked out quite well, emphasizing the need in times like this to hire people who have an ability to work on their own.
  • One member has recorded training sessions and saved them “forever” so she can bring new hires up to speed.

Reviews during WFH. Several members said they have emphasized the positive during remote, mid-year reviews; they expected year-end reviews that involve discussion of promotions and compensation to be more difficult if done remotely.

  • One treasurer said he wants to reward high performers but was troubled by penalizing people who have struggled for personal reasons during the pandemic. He asked how others would manage year-end ratings given this situation.
  • Another member said he is spending much more time understanding the personal challenges facing team members. His general message is that he doesn’t care when people work as long as they get the work done. “People are quite productive, so you give them some slack,” he said.
  • That kind of flexibility will be necessary as members prepare for the fall and the difficulties faced by team members whose children cannot return to school.
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Cash is King, Especially If You Know Where It Is at All Times

Pinpointing where all your cash resides—and how much you have—depends on good technology.

The COVID-19 crisis has highlighted the value of technology that allows treasury to know—in real time—how much cash is available and where it is.
 
A recent virtual meeting of NeuGroup’s Tech20HG—for treasurers of high-growth tech companies—revealed that the technology that treasury teams use varies: The pre-meting survey of members showed that 45% of respondents do not have a treasury management system (TMS), compared to 55% that do.Those with a TMS use well-known vendors, but no clear winner emerged (see pie chart). With the relative youth of the companies in the group, their ERPs are of recent vintage and acquisitions haven’t yet resulted in the use of multiple ERPs and/or multiple instances of the ERPs in use. From that point of view, things are under control.

Pinpointing where all your cash resides—and how much you have—depends on good technology.

The COVID-19 crisis has highlighted the value of technology that allows treasury to know—in real time—how much cash is available and where it is.
 
A recent virtual meeting of NeuGroup’s Tech20HG—for treasurers of high-growth tech companies—revealed that the technology that treasury teams use varies: The pre-meting survey of members showed that 45% of respondents do not have a treasury management system (TMS), compared to 55% that do.Those with a TMS use well-known vendors, but no clear winner emerged (see pie chart). With the relative youth of the companies in the group, their ERPs are of recent vintage and acquisitions haven’t yet resulted in the use of multiple ERPs and/or multiple instances of the ERPs in use. From that point of view, things are under control.


SaaS is where it’s at. Whether members choose to implement a TMS or special-purpose add-ons to existing systems, software-as-a-service, or SaaS, is what many consider the best way of availing themselves of new technology tools.

  • SaaS doesn’t require nearly as many internal IT resources to implement and maintain as installed software, and security protocols have improved to the point where IT chiefs are satisfied.
  • So, if your IT teams slow you down (when was the last time treasury was first in line for internal IT projects?), cloud solutions enable faster delivery of benefits, or “quick time to value,” according to Joerg Wiemer of bank connectivity and payments provider TIS, the meeting sponsor.

Too many bank accounts? Companies doing business in many countries across the globe are likely to have many bank accounts, too. Some companies have more than one per legal entity: One for collections, one for disbursements and local concentration accounts, and possibly single purpose accounts for local tax payments for example. In any event, the number of bank accounts usually exceeds what a treasurer wants to have.

Good bank account management is the foundation for good cash management. One advantage TIS says it has is that more than 10,000 banks are connected to its cloud platform.

  • TIS’s customers can then access cash balance statement data into one centralized point more seamlessly than in a heterogeneous environment where the data needs to be accessed via proprietary e-banking tools and then consolidated and analyzed.
  • TIS or not, the key is to have the capability to connect to both back-end systems and front-end banks to enable real-time data aggregation and accessibility. 

And if you don’t? Whether because of poor bank connectivity or local banks’ inability to deliver statement information, a 2019 study of 172 companies by PwC reported that about a quarter of companies did not have daily visibility of all their cash. In addition, a JPMorgan study, also from 2019, concluded that cash forecasting beyond 90 days is still a challenge for many US companies. There are many contributing factors to poor cash visibility. 

  • Decentralization: A complex business ecosystem in different geographies with various payment methods and banking partners using inconsistent messaging may result in fragmented data landscape.
  • Lack of systems integration exacerbates challenges stemming from multiple instances of different ERP systems, bank portals, additional TMSs and HR databases.
  • Poor data quality from too many manual processes. A manual data process is prone to mistakes, time consuming and the data is already outdated by the time it reaches the HQ.

Consequences of poor cash visibility. These effects are interconnected and can result in inefficiency, which can be expensive in the long run. Consequences:

  • No visibility over cash flows and no holistic view of actual cash position means outdated or missing cash information to guide business decisions.
  • Difficulty calculating excess cash for investing or paying down debt means that inefficient use of cash and funding costs may increase, leading to unnecessarily large cash buffers.
  • Inability to track foreign currency positions to hedge risks.
  • Longer time frames for creating cash flow reporting for C-Level.

On the other hand, analysis instead of data gathering. With streamlined access to balance information, treasury team members can free up their time; rather than gathering data, they can turn their analytical eye toward answering questions like:

  • Do we have enough cash even if the top line drops 30%?
  • Where is our cash and what is our cash position and cash exposure with our different banks?
  • What does our operating cash flow look like?
  • Do we run into problems with financial covenants?

Faster and cheaper. Ultimately, a well-executed technology strategy that enables access to data more seamlessly will produce returns not only in time savings from consistent and more automated processes, but also reduced bank fees, funding costs and increased cash efficiency.

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How AI Can Hit the Cash Forecast Bull’s-eye When the Wind Is Wild

What happens to your AI-based model when historical data and cash flow patterns are disrupted?

Cutting-edge cash forecasting models that make use of artificial intelligence (AI) and machine learning will, inevitably, require manual adjustments by humans to account for seismic disruptions like the pandemic. The good news is that AI models will eventually catch up with the new normal, becoming more accurate with less intervention.

  • That was among the insights offered by Tracey Ferguson Knight, director of solution engineering (treasury) for HighRadius, who participated in a recent NeuGroup Virtual Interactive Session, “Cash Forecasting During a Crisis.”
  • “That’s the key to machine learning, it’s going to adapt,” Ms. Ferguson Knight said in a follow-up interview. “The better the models are, the faster they will catch up.”

What happens to your AI-based model when historical data and cash flow patterns are disrupted?

Cutting-edge cash forecasting models that make use of artificial intelligence (AI) and machine learning will, inevitably, require manual adjustments by humans to account for seismic disruptions like the pandemic. The good news is that AI models will eventually catch up with the new normal, becoming more accurate with less intervention.

  • That was among the insights offered by Tracey Ferguson Knight, director of solution engineering (treasury) for HighRadius, who participated in a recent NeuGroup Virtual Interactive Session, “Cash Forecasting During a Crisis.”
  • “That’s the key to machine learning, it’s going to adapt,” Ms. Ferguson Knight said in a follow-up interview. “The better the models are, the faster they will catch up.”

Miles to go. Unfortunately, most NeuGroup members still rely on Excel and the knowledge of a limited number of treasury analysts, who don’t typically have data science skills.

  • If those analysts leave, treasury may be unable to make an immediate change to a forecast that they didn’t build and don’t always understand, Ms. Ferguson Knight said.
  • To address this, several members said they want to improve data sourcing, build better data models, standardize and share data science skills and tools across treasury and FP&A, establish a center of excellence and explore professional service firms as a backstop.

Pandemic pace. The uncertainty created by COVID-19 has magnified the importance of cash forecasting—especially for companies that are not cash rich—a theme heard often during exchanges among NeuGroup members in the last five months. And many companies are now forecasting more frequently.

  • More than one member said their company is now doing daily cash forecasts that go out 12 months, which one member called excessive. “I can’t count how many different scenarios we’ve done,” he said.
  • “Forecasting cadence has increased dramatically,” Ms. Ferguson Knight said. “Companies that use to forecast quarterly, they might be doing it monthly now. Those that were doing it monthly are doing it weekly. Those that were doing it weekly are sometimes doing it multiple times a day.”
  • Companies that rely on manual processes will have difficulty increasing the speed and accuracy of forecasts, she added. “With AI and data science and a vendor that’s providing better models, you’re able to increase accuracy.”

AI playbook. The odds of success at using AI to improve the accuracy of cash forecasts rise if you:

  1. Start with a baseline. This is where a master cash-flow model is helpful. And if you have used algorithms to produce cash forecasts with accuracy pre-crisis, you can use these as a baseline.
  2. Compare forecast to actuals. Use AI tools and treasury team members to review comparisons of forecasts to actuals.
  3. Consider manual changes. People may be aware of change or see things in the data that might prompt immediate manual changes in the forecast and the forecast model.
  4. Allow the AI tool to learn. From there, keep feeding the data into the AI-tool so that it can learn from the changing data patterns and errors between the forecast and actual result.  

AR and AP. HighRadius’ AI focuses heavily on accounts receivable (AR) and then accounts payable (AP). It will require:

  • A master list of data (customer or supplier variables).
  • Correlated data from related variables shown to influence predicted payment data by the customer with AR, for example.
  • Appling multiple algorithms to predict that payment date/receipt of the cash from AR for the cash or when your AP will pay for cash outflow.

Algorithmic accuracy. Your cash forecasting system should then switch to algorithms that show the most success in predicting the cash inflow and outflow. We learned in an earlier session on AI used in cash forecasting that certain algorithm types do better with unexpected changes in data patterns. How quickly the algorithms learn pattern changes to bring cash forecasts back up to the 90+ percentage accuracy levels will depend on:

  • The frequency and tenor of the forecasts. If you are doing monthly forecasts for the next month it will take longer than if you are doing a daily forecast for every day out a month. 
  • The granularity of your forecast. For example, if you pull data to forecast cash from each legal entity and bank account, the AI may learn faster than if you forecast by pooling entity or some other aggregate.
  • Corporates should aim for the most granular level of detail they can get and the frequency they can achieve reliably and aggregate from there. The more cash poor you are, the more there will be an incentive to forecast with more detail and frequency.
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On Track: Banks Adopting CECL Not Derailed by COVID-19

Regulators have allowed banks to delay implementing CECL, but most are well on the way to adopting the standard.
 
Banks have been given extra time to implement the FASB’s CECL standard, but most are continuing their push to adopt the measure. The CARES act passed by the US Senate back in March offered banks the option to pause implementation until either the end of the year or the end of the COVID-19 national emergency, whichever came first.

  • According to meeting material presented at NeuGroup’s Bank Treasurers’ Peer Group, the Financial Accounting Standards Board’s current expected credit losses standard has already been adopted by 93% of banks with more than $10 billion in assets.
  • These banks are also prepared, according to the bank sponsor of the meeting. Loan loss reserves are up by an average of 60% from the beginning of the year.

Regulators have allowed banks to delay implementing CECL, but most are well on the way to adopting the standard.
 
Banks have been given extra time to implement the FASB’s CECL standard, but most are continuing their push to adopt the measure. The CARES act passed by the US Senate back in March offered banks the option to pause implementation until either the end of the year or the end of the COVID-19 national emergency, whichever came first.

  • According to meeting material presented at NeuGroup’s Bank Treasurers’ Peer Group, the Financial Accounting Standards Board’s current expected credit losses standard has already been adopted by 93% of banks with more than $10 billion in assets. 
  • These banks are also prepared, according to the bank sponsor of the meeting. Loan loss reserves are up by an average of 60% from the beginning of the year.

Trouble. Unemployment and growth statistics point to trouble ahead, one banker presenting to the group said. The sponsor bank itself was “trying to figure out” what the next quarters will look like. Views are “very varied,” the banker said, adding that “everything is going to be impacted by COVID, no sector will be spared.” She said charge-offs “are low now but will increase.” One positive development is deposit growth, which she described as “good.”

Scenario planning. Other banks are also trying to determine the level of COVID-19-related uncertainty in their economic forecast. This in turn has driven the uncertainty in the predictive loan models that are key to the loan-loss reserve buildup for each bank. Most banks use multiple economic scenarios and may make qualitative changes to adjust for so much uncertainty. Many use economic scenarios provided by Moody’s with periodic updates. The methodology has been the focus of frequent questions in bank earnings calls.

As ready as ever? The bank sponsor also said banks were prepared for CECL impacts on their “Day 1” and “Day 2” reserves, the former being related to equity and latter related to quarterly income reports. The sponsor noted that Day 2 reserve build has been equal or greater than “Day 1 charge” for banks. But outcomes could vary depending on “portfolio mix and loss history.”

  • Reserves to loans range from 0.4% to 3.3%, with large US regionals at 1.7% and mid-caps at 1.3%, the sponsor bank’s analysis showed.
  • As such, “banks are acknowledging the likelihood of additional reserve build in 2Q, absent material changes in the current outlook.”
  • The pandemic-related delay applies to both the banks’ Day 1 and Day 2 reserve build, according to S&P Global. 

Noted in most earnings reports. The sponsor bank also noted that most banks had at least one slide related to CECL in their earnings calls, which suggests that there are plenty of COVID-sensitive loan portfolio exposures.

  • The bank said that about 15%-20% of banks provided more detailed loan disclosure breakdowns by loan type in their Q1 calls. Most of that percentage was for larger banks while mid-cap banks “generally disclosed information on higher risk portfolios.” Key exposures include health care, energy, hotel, restaurant, retail, entertainment, travel and transportation, the bank presenters said.
  • On the calls, sponsors noted that most all management teams expressed uncertainty about future economic conditions and offered different takes on their baseline assumptions on the shape and timing of recovery.
  • Many banks assumed negative GDP in Q2 and FY 2020, and high unemployment rates persisting into 2021. 

Forbearance response. The sponsor said banks were seeing a lot of forbearance requests and taking different approaches. For some, a client request was “the only prerequisite for many banks, while other banks are taking a more prudent approach and analyzing need.” Still, overall, there is a desire “to quickly process and assist customers.”

  • Most banks reporting forbearance actions “are reacting to customer inbound requests;” however, some banks are taking a proactive approach and “engaging in active dialogue with clients” about forbearance and client assistance initiatives that are available to them.

Slowdown in requests. Some banks disclosed an early spike in requests that have subsequently tapered off, suggesting that some clients may have foreseen economic difficulties ahead and/or fiscal initiatives are helping or are forecasted to help. This may change as COVID-19 resurges in many US states.

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Helping Hands: How Corporates Are Aiding Customers and Suppliers

Supply chain finance and how the “we’re in this together” approach to the pandemic is playing out.

The COVID-19 crisis has put the meaning of business community—emphasis on community—into sharp relief as some businesses have survived well or even thrived (tech, consumer staples), while others have suffered devastating losses (retail, travel and hospitality).

  • At few points in recent memory has the mutual reliance on comrades in commerce been more important; and as in families, it’s often the stronger of the business brotherhood who pitches in the most to see the tribe through tough times.

Supply chain finance and how the “we’re in this together” approach to the pandemic is playing out.

The COVID-19 crisis has put the meaning of business community—emphasis on community—into sharp relief as some businesses have survived well or even thrived (tech, consumer staples), while others have suffered devastating losses (retail, travel and hospitality).

  • At few points in recent memory has the mutual reliance on comrades in commerce been more important; and as in families, it’s often the stronger of the business brotherhood who pitches in the most to see the tribe through tough times.

At a recent Tech20 treasurers’ meeting, members shared what they were doing to keep business running—their own and that of all their value chain partners.

Who needs money? Can you collect later and pay earlier? Members across the NeuGroup universe—strong, global and investment grade, mostly—have shared throughout the crisis that they have been asked to extend collection terms to customers and pay suppliers earlier.

  • But that means being judicious and determining “how much capacity we have and how much credit to give,” said one member. “Some of our programs are more efficient and we can’t afford to be too generous.”
  • Nevertheless, typically the strongest credit in the chain, large corporates are the best positioned to partner with C2FO, Taulia or another supply chain finance specialist or with their banks for a proprietary offering.

Win-win: Change of business models may present opportunity. When the world as you know it grinds to a halt, what other avenues to reach customers are there? For brick-and-mortar retailers, going online, if they haven’t already, seems the natural step if customers cannot come to them. Some build their own; others join one of the branded platforms. 

  • By expanding a retail revival program already in place for underrepresented communities, one was able to onboard new sellers—mainstream small and medium-sized businesses that had never sold online—to its platform rapidly while also supporting them with a curriculum of educational tools on how to use it and thrive on it, plus a free trial period and free listings.

Speed and scale require ownership. Operationalizing a new program is one thing; scaling it is another. To deliver on promises made to new sellers at a faster pace than normal takes internal coordination. One idea is to have a special task force own it, with either treasury driving it or with significant involvement. 

  • Treasury can help creating educational tools addressing what to do when goods are sold and how the money comes into the seller’s bank account.
  • On the corporate side, this connects to the treasury and balance sheet implications of extending credit to customers (such as payment grace periods) as well as partnering with global billing to streamline while managing fraud risk.
  • It helps for treasury to also be the owner of collections.

Negotiating new terms to spread the pain. In situations where the company is a platform between a seller and buyer—new economy service companies come to mind—the fine print of agreements really comes into focus.

  • In cases where refund policies are subject to seller discretion and/or are too one-sided, the platform or broker may need to step in to ensure the pain of lost business is shared equitably between buyers, sellers and itself via an amended extenuating circumstances policy.
  • This requires careful thought on what will feel equitable to all involved to maintain brand goodwill, and how the broker itself can finance its part, including loans and dipping into reserves.
  • In addition, if refunds during the pandemic suddenly go from a relative exception to an avalanche of requests, it may also require a reengineering of the payments-reversal process to manage significant transaction volume.
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What Dollar Weakness and ‘Japanification’ Mean for FX Hedging Strategies

Corporate financial risk managers should be reassessing long-held assumptions as they look to redo their hedging.

Add a weakening US dollar to the growing list of reasons risk managers at multinational corporations need to take a long, hard look at their hedging programs and strategies.

  • That takeaway emerged at a NeuGroup Virtual Interactive Session last week featuring Societe Generale global strategist Albert Edwards, known for his provocative mid-1990s “Ice Age” thesis of bonds outperforming stocks.
  • Christophe Downey, a director in the bank’s market risk advisory practice, explored possible changes to FX risk policies for NeuGroup members looking to protect themselves or benefit from a weakening dollar and a strengthening euro.

Corporate financial risk managers should be reassessing long-held assumptions as they look to redo their hedging.

Add a weakening US dollar to the growing list of reasons risk managers at multinational corporations need to take a long, hard look at their hedging programs and strategies.

  • That takeaway emerged at a NeuGroup Virtual Interactive Session last week featuring Societe Generale global strategist Albert Edwards, known for his provocative mid-1990s “Ice Age” thesis of bonds outperforming stocks.
  • Christophe Downey, a director in the bank’s market risk advisory practice, explored possible changes to FX risk policies for NeuGroup members looking to protect themselves or benefit from a weakening dollar and a strengthening euro.

Japanification? Mr. Edwards’ thesis of a weaker USD (and deflation in the near term) is set against this backdrop:

  • The unprecedented intervention by the Fed directly into the real economy and not just the finance sector is backed by massive levels of fiscal stimulus that, like in Japan, will end up on the central bank balance sheet.
  • “We have crossed the Rubicon” Mr. Edwards said, from quantitative easing to something more like Modern Monetary Theory (MMT), and there is “no way we can go back.”
    • It has been increasingly apparent that risk managers and other NeuGroup members should be brushing up on the implications of this unprecedented monetary policy and the tenets of MMT.
  • The developed world has coasted on having weaker currencies than USD to help support their economies; but now, one by one, the reasons for dollar strength are vanishing.

Dollar doldrums. One of those reasons—along with the expansion of the Fed’s balance sheet—involves the collapse of the interest rate differential between the US and Europe that has underpinned the carry trade and has long played a key role in the FX rate outlook of many risk managers.

  • COVID-19, of course, is a key reason for the collapse of that rate differential as the US economy’s relative strength versus the rest of the world declines.
  • The eurozone has recently taken away the need for a weaker euro support with the decision to issue community debt to support fiscal stimulus. This will allow the euro to strengthen, and Mr. Edwards thinks the dollar might weaken about 10% against it.
  • Along with the outlook for the dollar, the economic fallout from the pandemic and the havoc it is wreaking on supply and demand means corporates must reevaluate their FX exposures.

Action levers. Assuming the risk management policy allows a view on currency direction to influence hedge decisions, the three levers for change FX risk managers have are hedge ratio, tenor and instrument choice. How they use them depends on if they need to buy or sell dollars (see table).

  • Hedge ratios have already been challenged because of the pandemic’s impact on business and exposures; but even if business has not been severely affected, dollar weakness may still prompt a look at hedge ratios, specifically lowering them for short USD exposures.
  • Shorter tenors are another response to forecast uncertainty, or an unfavorable carry on the currency.
  • Both of these approaches are risky in case of FX headwinds, as most corporates are looking to protect downside risk, Mr. Downey noted.

An optimal instrument mix. Assuming short USD exposures, SocGen back tested a two-year program with 24 hedges layered in monthly (for an overall P/L smoothing effect, all else equal).

  • In the tradeoff between smooth earnings with neutralized FX impact where forwards work best but realize large FX losses at times, and an all-put option strategy with premium costs but unlimited upside once recouped, those with policy flexibility should consider analyzing their exposures and currencies to determine where on the spectrum they will feel the risk is acceptable for their desired risk management outcome. 

More optionality. Societe Generale is recommending that corporates with short dollar positions incorporate more options into their product mix to capture upside from cash flows converted back to a weaker dollar with limited incremental volatility.

  • A vanilla put strategy (option to sell foreign currency/buy dollars) would provide the best trade-off between volatility and incremental cost (the payment of a premium is part of the cost of the strategy, like the carry cost of the forward strategy).
  • A collar (combination of a purchased option and a sold option to reduce the overall cost of the hedge) with sufficiently low delta would likely deliver the best P&L and hedge level in a multi-year USD weakening trend; but would come with some increased volatility.
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Scoring With Single Sign-On and Bank Portal Rationalization

One member’s winning use of single sign-on to access bank portals through Wallstreet Suite impresses peers.
 
A NeuGroup member’s success at implementing single sign-on (SSO) to provide access to bank portals through the company’s treasury management system (TMS) made a splash at the spring virtual meeting of the Global Cash and Banking Group.

  • Of equal interest was the member’s goal of taking away “as much bank portal access as possible” from employees, some of whom only need to see bank statements and don’t conduct cash transactions.
    • The result, the presenter said, was a “mass migration from bank portals into the TMS for visualizations.”

One member’s winning use of single sign-on to access bank portals through Wallstreet Suite impresses peers.
 
A NeuGroup member’s success at implementing single sign-on (SSO) to provide access to bank portals through the company’s treasury management system (TMS) made a splash at the spring virtual meeting of the Global Cash and Banking Group.

  • Of equal interest was the member’s goal of taking away “as much bank portal access as possible” from employees, some of whom only need to see bank statements and don’t conduct cash transactions.
    • The result, the presenter said, was a “mass migration from bank portals into the TMS for visualizations.”

Single sign-on safety. One of the main benefits of migrating users to TMSs from bank portals, the presenter said, is the added safety, security and control provided by single sign-ons—an authentication service where employees use one set of login credentials to access multiple applications.

  • The company’s TMS is ION’s Wallstreet Suite, which links to the company’s identity management system through single sign-on. Various bank portals connect to the TMS.
  • That means users who leave the company and lose access to its network immediately lose access to the TMS.
  • The single sign-on gives the company more control than bank portals in terms of segregation of duties and role restriction, helping the company “restrict to the exact level of detail,” the member said.

Bank portal rationalization. About three years ago, a substantial number of the company’s bank accounts were accessed through online bank portals. “Bank portals have no standards on security and user controls,” one of the presenter’s slides stated.

  • Centralize. To mitigate risk through rationalization, the company centralized portal management, moving read-only users to the TMS and moving payments to SAP where possible.
  • Challenges. Hurdles included resistance to change, insufficient staff from small business units for appropriate segregations of duties and slower speeds for same-bank payments using the TMS vs. a bank portal.
  • Success. The results of the company’s efforts include:
    • The elimination of more than 50% of its bank portals globally.
    • The reduction of bank portal user counts by more than 50%.
    • No single person having the ability to initiate and approve a payment.
    • A substantial reduction in the number of wires going through portals.

Customization question. One member listening to the presentation said her company has been struggling with bank portal rationalization.

  • One issue is how to customize access to the TMS and balance what users want with security concerns. “What if we don’t want to share all that info with an entity?” she asked.
  • The presenter said his company’s TMS can restrict users by bank account, entity or time period. “We had to create a complex set of profiles” to account for segregation of duties and the need to restrict access to initiate payments. “It is a lot of work,” he said.
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Pandemic Stokes Fire of Rising D&O Insurance Premiums

Corporates see no relief as insurers take a hard line on renewals amid rising fears of COVID litigation.
 
Premiums for directors and officers (D&O) insurance are surging, a pain point discussed at several NeuGroup meetings this spring, including the Tech20 Treasurers’ Peer Group and the Life Sciences Treasurers’ Peer Group.

  • Premiums were already on the rise at the beginning of the year and now, amid the pandemic, they continue to rise. That’s in part because COVID-19-related D&O claims are already being filed in US courts.

Corporates see no relief as insurers take a hard line on renewals amid rising fears of COVID litigation.
 
Premiums for directors and officers (D&O) insurance are surging, a pain point discussed at several NeuGroup meetings this spring, including the Tech20 Treasurers’ Peer Group and the Life Sciences Treasurers’ Peer Group.

  • Premiums were already on the rise at the beginning of the year and now, amid the pandemic, they continue to rise. That’s in part because COVID-19-related D&O claims are already being filed in US courts. 

Big percentage increases. During Tech20’s recent virtual meeting, members said they were seeing premiums rise by between 25% and 70%. According to insurance broker Marsh, rates on D&O policies in the US rose 44% on average in the first quarter from the same period a year ago. Marsh reported that 95% of its clients experienced an increase.

  • “The last few weeks have been bad,” said one member, adding that in some cases insurers themselves “have just walked away.” Another member was quoted an increase in the 30% range and considered himself lucky. “If someone gives you something good, take it.”
  • This advice was too late for one member. “We were told of a 30-35% [increase] in February, but now we’re told between 50%-70%,” she said.
  • At the NeuGroup for treasurers of retailers, one member’s D&O renewal experience involved “premium pressure on the lead portion, but more on the excess layers, where the premium pressure was outrageous.”

Reckoning and retention. After a “historic underpricing” of D&O premiums in London, the market is now witnessing a serious course correction, according to an account executive from Aon Risk Solutions who spoke at the life sciences meeting.

  • This reckoning, along with the pandemic, means the London market is not offering capacity and premiums are surging, he said.
  • Another takeaway from that meeting: higher retentions by corporates are not leading to significant premium relief.
  • Some members of the life sciences group reported having difficulty getting competing quotes for D&O coverage.

Litigation nation. At the LSTPG meeting, one insurance expert presenting noted that he was starting to see an increase in “litigation over the pandemic,” including lawsuits in the tourism sector. No one is immune,” he said, and treasurers should “anticipate seeing more and more [litigation].”

  • With this in mind, some treasures noted that underwriters were adding a pandemic or virus exclusion to policies going forward; current policies either don’t have the exclusion or are vague. 

Better beyond D&O. The good news, according to Tech20 members, is that outside of some coverage areas like D&O and property, there haven’t been huge increases. “Coverage has remained stable,” said one Tech20 member, who added that there was “no constriction in terms and conditions.”

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A Green Light for Tax Equity Investments in Renewable Energy

There’s still time for corporates to benefit from federal tax credits and reap attractive returns.

The final session of NeuGroup’s final H1 meeting featured a presentation on green and sustainability-linked finance by U.S. Bank, sponsor of the NeuGroup for Retail Treasury. Below are some key takeaways from the session as distilled by Joseph Neu, founder of NeuGroup and leader of the retail group.

  • Update your view on the ROI of tax equity structures. Commenting on the cash flows from a transaction presented by U.S. Bank, one member noted that they looked more sizable than he remembered when looking into tax equity structures several years ago. This shows how the economics have improved significantly with the greater investment tax credit available, so it pays to do the math again if you have not looked at these in a while. Members confirmed that the immediate (end of year one) tax credit payback and subsequent operational cash flows make it relatively easy to meet your hurdle and do something good with renewable energy (mainly solar) tax equity investments.

There’s still time for corporates to benefit from federal tax credits and reap attractive returns.

The final session of NeuGroup’s final H1 meeting featured a presentation on green and sustainability-linked finance by U.S. Bank, sponsor of the NeuGroup for Retail Treasury. Below are some key takeaways from the session as distilled by Joseph Neu, founder of NeuGroup and leader of the retail group.

  • Update your view on the ROI of tax equity structures. Commenting on the cash flows from a transaction presented by U.S. Bank, one member noted that they looked more sizable than he remembered when looking into tax equity structures several years ago. This shows how the economics have improved significantly with the greater investment tax credit available, so it pays to do the math again if you have not looked at these in a while. Members confirmed that the immediate (end of year one) tax credit payback and subsequent operational cash flows make it relatively easy to meet your hurdle and do something good with renewable energy (mainly solar) tax equity investments.
  • It helps to work with a bank/broker with balance sheet. If you have your own source of funding it is easier to control the transaction while lining up investors and keeping the contractor and project moving. One member noted having a transaction fail with a broker that did not have its own funding and lost control of the project.
  • Investors needed. U.S. Bank says that there are multiples more projects needing financing than current investors in tax equity structures, so it’s a bit of an investor’s market. Also, even if the tax credits on offer though 2023 are not renewed, there is still ample time to get on board—and there is good likelihood that they will be.
Source: U.S. Bank
  • PPAs and VPPAs. Power purchase agreements (PPAs) and virtual PPAs are also a way to support renewable energy, but come with a bit more risk due to potential price fluctuations and the need to actually use the energy procured or the counterparty risk with the VPPA.  Tax equity structures tend to have a first loss guarantee by the bank to cushion performance risk.  
  • Do you have enough use of proceeds to issue in benchmark size?  When the discussion turned to green bonds, the first question was to look at your use of proceeds, including with three or more-year look backs, to see if you can justify a benchmark size issuance of $500 million or more.
  • If yes, then consider the fees/real asset economics. The second question asked was to what extent a green issuance can be justified based on the cost of issuance and pricing. All things point to the answer being yes— you can see a three to four basis point advantage to green bonds, as appetite by ESG investors and normal fixed income investors for ESG-friendly bonds is strong and growing stronger.
    • The only way to prove it without extrapolation of different tranches (green and non-green) issued at once by an issuer or by backing out the new issue premium differential from how green bonds trade in the secondary markets is for someone to issue a 10-year green bond and 10-year non-green bond of the same amount simultaneously.
    • One member said he would do that if bank underwriting fees were discounted to help him do it. These fees can be a bit higher because there is a bit more work on the part of the bank underwriter. There are also specialty accounting/audit fees to consider and those of a specialty ESG rater.
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Keeping That Resilient Posture Post-Pandemic

Having the resilience to survive the pandemic needs to extend into staying that way it as the pandemic abates (whenever that is).

One imperative that has informed the operations of most corporates during the pandemic is business resiliency. Through the stress of potential liquidity crunches, supply-chain disruptions and work from home pressures, companies have bobbed and weaved their way with great resiliency. But what about once the pandemic is over? What will BAU, “business as usual,” be like after the COVID-19 pandemic loosens its grip?

At NeuGroup’s recent European Treasury Peer Group (EuroTPG) virtual meeting, sponsor HSBC noted that in the early stages, COVID-19 was a supply crisis, hitting the large production city Wuhan, prompting a manufacturing shift to other Asian countries; it was only later that it became a demand crisis when countries mandated that wide swaths of their populations stay home.

Having the resilience to survive the pandemic needs to extend into staying that way as the pandemic abates (whenever that is).

One imperative that has informed the operations of most corporates during the pandemic is business resiliency. Through the stress of potential liquidity crunches, supply-chain disruptions and work from home pressures, companies have bobbed and weaved their way with great resiliency. But what about once the pandemic is over? What will BAU, “business as usual,” be like after the COVID-19 pandemic loosens its grip?

At NeuGroup’s recent European Treasury Peer Group (EuroTPG) virtual meeting, sponsor HSBC noted that in the early stages, COVID-19 was a supply crisis, hitting the large production city Wuhan, prompting a manufacturing shift to other Asian countries; it was only later that it became a demand crisis when countries mandated that wide swaths of their populations stay home. 

  • Treasurers can learn valuable operations, risk and treasury-structure lessons for the post-COVID world from how the crisis developed and how it affected their businesses. 
  • A risk scorecard to evaluate the exposure to risk factors like 2020 revenue impact, operational inelasticity, reliance on key suppliers, input prices, cash and available credit, impacts on costs and debt metrics, and of course time to return to BAU, can be particularly illustrative. 

Build a robust, centralized treasury with strong regional execution abilities. Large, global MNCs that have navigated the crisis well have shown the importance of having the right treasury structure, which emphasizes control and flexibility; the ideal set-up enables: 

  • Systems to deliver real-time, global exposure information.
  • A centralized liquidity and risk management framework.
  • Centralized policies and control structure and regional/local execution, where needed, via treasury hubs.   

Go for operational flexibility and endurance to stay the course. With a widespread and long-lasting crisis, what is the company’s ability to: 

  • Access sufficient cash levels and credit lines, and ability to “flex” capital expenditures? 
  • Serve customers (and for customers to purchase goods and services) while the pandemic rages?
  • Change its sales model, potentially increasing e-commerce and direct sales? 
  • Substitute and localize parts of the supply chains in a swift manner?
  • Not rely unduly on offshore sources of materials and components?
  • Recover lost revenues when the outbreak ebbs?

Supply chain finance was the original risk mitigation. Trade finance was “born as a risk management solution,” said HSBC in its session, and COVID-19 has put the spotlight on the importance of getting the supply chain in top form to withstand potential border closings and financing droughts. 

  • This has been borne out in reports from across the NeuGroup universe. Some members have had supply chain finance (SCF) vendors tell them that banks temporarily asked for wider spreads to compensate for their own higher funding costs. 
  • Other members worry more about how one unavailable link or part in the supply chain could metastasize into a larger material or component unavailability, thereby threatening a key product line.

Make someone happy. For its part, HSBC said it was also focusing on supporting the corporate supply chains of its current clientele while also extending its services to new customers. A presenter said the bank wants to support suppliers to avoid shortages by offering HSBC’s balance sheet for: 

  • Classical trade instruments to match liquidity generation and supplier risk mitigation: Here, supply chain programs should consider documentary payment terms to mitigate long receivables risk and enable financing; documentary payment terms are also cheaper than letters of credit.
  • SCF to support suppliers’ liquidity position and mitigate concentration risk via receivables finance and forfaiting.

Open-account financing to established, single-flow key suppliers. 

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Managing Bank Balance Sheets in a Low Yield Environment

NeuGroup BankTPG members hear ways to manage their balance sheets amid low interest rates (that may remain low a long time).

The Federal Reserve announced in early June that it would keep its benchmark interest rate near zero through 2022. While this might be good for borrowers, what does it mean for lenders? And are negative rates possible?

The first question has many answers, as members of NeuGroup’s Bank Treasurers’ Peer Group (BankTPG) heard at the 16th annual meeting. There were several strategies suggested by the meeting sponsor on what bank treasurers can do to manage the balance sheet amid this uncertainty. The answer to whether rates go negative: it is unlikely

NeuGroup BankTPG members hear ways to manage their balance sheets amid low interest rates (that may remain low a long time).

The Federal Reserve announced in early June that it would keep its benchmark interest rate near zero through 2022. While this might be good for borrowers, what does it mean for lenders? And are negative rates possible?

The first question has many answers, as members of NeuGroup’s Bank Treasurers’ Peer Group (BankTPG) heard at the 16th annual meeting. There were several strategies suggested by the meeting sponsor on what bank treasurers can do to manage the balance sheet amid this uncertainty. The answer to whether rates go negative: it is unlikely (see below). 

Like the Gershwin tune. “Low rates are here to stay,” one member of the BankTPG meeting sponsor team said, and thus would remain a challenge for banks. “Not a lot of yield to be had here,” he added. The bankers suggested that as with their own balance sheet, members should think about pass-throughs. 

  • “Given current mortgage rates, prepayments may increase and remain elevated, suggesting that bank portfolios should purchase lower dollar price assets in pass-throughs,” the sponsor said in a presentation.

Real estate could help. BankTPG members were told that GSEs Fannie Mae and Freddie Mac could be facing reform soon, although COVID-19 may delay things. Despite this, the housing market should stay strong, according to the meeting sponsors. Commercial real estate could be problematic but low rates could mitigate the impact. 

  • “There could be some challenges to commercial, but looking at it overall, it’s not bad because of low rates,” said one member of the sponsor team. “There are plenty of people with dry powder to buy in distress and otherwise.” 

Protect against volatility. Another strategy for the remainder of 2020 suggested by sponsors was to protect downside risk with hedges. “Shifting from linear derivatives into hedges with positive convexity like interest rate swaps may be risk accretive at current rate levels. Also, “as implied volatility hits multi-year lows, 0% strike interest rate floors and interest rate collars have become powerful hedging tools.” 

Certificates of deposit. The sponsor said some of its clients are investing in bank CDs with customized coupons. “There’s some risk there so don’t do in large size,” the sponsor suggested. 

Floating-rate SOFR. With the Fed’s Secured Overnight Financing Rate (SOFR) gaining traction, there have been many entities, including GSEs Fannie and Freddie, banks like Goldman Sachs, Credit Suisse and Bank of America issuing SOFR-referenced floating rate notes. The BankTPG sponsor said that despite this, SOFR FRNs are not that popular. 

  • On the other hand, the bank is “supportive of the move to SOFR; the transmission mechanism is good,” the sponsor said. Nonetheless, “it raises a lot of questions on how you want to be positioned right now.” And in terms of FRNs, “anything out there that is a lottery ticket if rates go negative.” 

Negative rates? The sponsor said negative rates in the US are unlikely, and members agreed. Across the NeuGroup network, the consensus is that US rates, while remaining near zero, will not go negative. 

  • “Our bank is trying to be disciplined and mechanical,” said one member who was reviewing whether to “unwind and reposition things” in case rates go below zero. The sponsors added that their bank was “trying to be disciplined and mechanical” about the market.” 
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NeuGroup for Retail Treasury Pilot Series Wrap-Up

Customer paying using mobile phone

In a series of Zoom sessions, the NeuGroup for Retail Treasury was launched in partnership with Starbucks treasury and sponsored by U.S. Bank. NeuGroup Founder and CEO Joseph Neu shares his key takeaways from the sessions as follows:

  1. Retail is a sector of haves and have-nots based on being deemed an essential business, the ability to offer and scale on-line offerings and/or deliver out-of-store, including via curbside pickup or drive through.
  2. Business norms are changing fast. In June, the focus for retailers shifted from Covid-19 to racial injustice and equity in a matter of two weeks.
  3. Point-of-sale payments are problematic. In the US, in particular, payment systems serving the point of sale have not kept up with digital payments, creating substantial problems for retailers, and Covid-19 has laid that bare.

By Joseph Neu

As part of our ongoing experimentation with new virtual formats, the NeuGroup for Retail Treasury pilot “meeting” was made into a series of Zoom sessions over the course of about six weeks, concluding this week. This group was launched in partnership with Starbucks Treasury on the member side and sponsored by U.S. Bank.

Here are my key takeaways as a wrap up to the series:

Covid-19 divides into haves and have-nots. Retail and other consumer-facing businesses, such as quick-serve restaurants, represent a sector of haves and have nots.

The haves:

  • Those deemed essential businesses that could remain open during the Covid-19 lockdown
  • Those that were prepared to offer/ramp online offerings as well as
  • Those that provided out-of-store delivery, including curbside pick-up or drive through are the more likely haves in this sector.

The have-nots:

  • Pretty much everyone else.

Protests prompt fast-changing norms.  In a session that happened to fall on Juneteenth, weeks after a session where a member in the Twin Cities shared his perspectives on the situation there, we took a good portion of our exchange on regulation and business norms to discuss an entirely unexpected crisis. We discussed how the retail sector, being consumer-facing and with storefronts made part of the protests, was confronting a crisis brought about by racial trauma and a lack of respect being shown for Black lives.

  • Underscoring the pace of change in business norms, the focus shifted from Covid-19 to racial justice and equity in a period of two weeks.

It was a fitting way to celebrate Juneteenth, however.

  • Several members attending also joined on what was a company holiday for them (a new holiday can be decided upon in days).
  • All spoke to what their companies have and will continue to do to show their commitment to, as one company noted: “to standing with Black families, communities and team members and creating lasting change around racial justice and equity.”
  • All also will be building on their foundations of diversity and inclusion to make what one member of color noted she hopes will be sincere actions to create lasting change.

Payments at the point of sale are problematic.  In the US, in particular, the payment situation at the point of sale is a huge problem and Covid-19 has laid that bare.

  • The problems start with interchange fees in this country that have not kept pace with digital forms of payment
  • They actually dissuade merchants from accepting contactless forms of payment, including the safest form using smartphones with biometric identify verification.

As a result, the US has seen growth in contactless forms of payment rise to 4%, from 0.4% in the last 18 months, while the rest of the developed world is growing it to over 50% of face-to-face transactions.

  • While members report that electronic payments are growing, including contactless, as a result of Covid-19, the cost involved in processing such payments is also a growing concern.

Cash transactions, meanwhile, have been hampered, at a time when customers are returning to in-store purchases, by the disruptions of coins in circulation. This is due to so many stores being closed in lockdown, coin recycling machines being turned off, and consumer reluctance to return to stores and use unhygenic cash and coin as payment. 

  • Without the ability to make change–given the cost of electronic payments on small-ticket sales and the number of customers who prefer or can only pay in cash– stores processing face-to-face payment at the point of the sale have had to scramble to cope with yet another issue detrimental to their business.
  • The state of play in the US with point-of-sale payments is an embarrassment and we should all do more to ensure that we don’t let it stand as it does.
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COVID Boosts Contactless Payments, Revealing Retailer Frustrations

Low adoption rates in the US and issues such as routing rights and interchange fees may present challenges for some retailers as contactless payment grows.

It’s no big surprise that the pandemic has pushed more US shoppers to use contactless credit and debit cards as well as mobile wallets. Tapping or waving a card or phone is a cleaner, safer way to pay than swiping or inserting a card.

  • But what stood out at a recent NeuGroup for Retail Treasury meeting was the frustration voiced by members about aspects of the shift to contactless payments—each aspect related in some way to costs.

Low adoption rates in the US and issues such as routing rights and interchange fees may present challenges for some retailers as contactless payment grows.

It’s no big surprise that the pandemic has pushed more US shoppers to use contactless credit and debit cards as well as mobile wallets. Tapping or waving a card or phone is a cleaner, safer way to pay than swiping or inserting a card.

  • But what stood out at a recent NeuGroup for Retail Treasury meeting was the frustration voiced by members about aspects of the shift to contactless payments—each aspect related in some way to costs.

One-sided investment? “This frustrates me,” said one member, adding that companies like hers were “forced to step up and invest” in technology enabling chips and contactless payments or risk being liable for fraudulent charges. The problem? Card issuers, she said, did not include contactless technology when they introduced chip cards—meaning retailers had to make “a one-sided investment” with respect to contactless payments.

The US as laggard. One reason that investment hasn’t paid off for many retailers is that very few US consumers are making contactless payments, even though about 75% of merchant locations can accept them and card issuers are now providing them. As the chart shows, only 4% of face-to-face transactions in the US are contactless, far below the global average of 50%.  

  • This discrepancy meant merchants have not benefitted significantly from faster transaction processing times or throughputs available with contactless payments, the member said. And employees of quick service restaurants with drive-through service had to keep passing cards back and forth with customers.
  • But the times are changing fast: More than half (51%) of Americans are now using some form of contactless payment, which includes tap-to-go credit cards and mobile wallets like Apple Pay, according to Mastercard. 

Pinless debit in peril? Another member pointed out that companies like his that process pinless debit transactions—which by law allow merchants to route transactions away from the big global card networks and pay lower interchange fees—may lose that ability if they opt for contactless payments.

  • “This is the networks’ way of eliminating pinless debit because of lost revenue,” he said.

Upside down. The last area of frustration discussed concerns the interchange fees merchants pay for contactless transactions over the internet using biometric technology in digital wallets, making them among the most secure transactions, one treasuer said.

  • He argued that this superior level of security should mean interchange fees for mobile transactions online are the lowest paid by retailers. They’re not.
  • They’re among the highest, he said, because they are treated in most cases as any internet transaction, which is less secure than when a customer is presenting a card in a physical store or restaurant.
  • That there is no correlation between the fees charged and the relative level of security doesn’t make sense to this treasurer.
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Pandemic Pushes Companies to Digitize Processes, Prioritize People

Treasurers at tech firms push to abandon legacy processes while focusing on keeping teams connected.
 
Many tech companies during the pandemic have been able to announce that they will not lay anyone off during the crisis—and have been able to keep their promise.
 
Unfortunately, that’s not universally true—some businesses have been particularly hard hit and have had to furlough or cut staff, and consequently do more with less. This prompted a hard look at projects and their prioritization for many members of NeuGroup’s Tech20 Treasurers’ Peer Group, who met virtually in May.

Treasurers at tech firms push to abandon legacy processes while focusing on keeping teams connected.
 
Many tech companies during the pandemic have been able to announce that they will not lay anyone off during the crisis—and have been able to keep their promise.
 
Unfortunately, that’s not universally true—some businesses have been particularly hard hit and have had to furlough or cut staff, and consequently do more with less. This prompted a hard look at projects and their prioritization for many members of NeuGroup’s Tech20 Treasurers’ Peer Group, who met virtually in May.
 
Mixed emphasis. Even for those members who didn’t have to downsize their teams, there was an effort to deprioritize certain projects to avoid the fatigue that creeps into teams as the work from home (WFH) regime drags on. But there may also be projects that should be accelerated.

  • A lack of automation and digitalization manifests itself sharply in uncertain times and calls for a mindset of taking advantage of the crisis to boost these efforts.
  • One simple example is the push for wider bank and regulatory acceptance of digital signatures (Adobe Sign, DocuSign) instead of the standard “wet” signature, not just on a temporary basis but permanently and globally.
  • And if you haven’t automated enough of your cash positioning, for instance, now is the time to do so to free up time for critical forecasting and analysis. 

Back in the office, or not so much? What will the future workplace look like, even if you have an office to go to? Even with smaller meeting sizes, half team in, half team out, masks on and temps checked—all of which will put a damper on the office enthusiasm—some employees might not have an office. One treasurer’s company had announced in May that it would reduce its real estate footprint by 50%; this has been something heard across NeuGroups.

  • “Hoteling,” with coworking and shared work spaces, is back again. Will this lead to a reversal of the California exodus trend, i.e., going to lower-cost states? If one of the key reasons for distributing teams out of the state is the cost of Bay Area real estate, will that go on to the same degree if the team can just work from home instead, saving cost on office space? At the very least, the calculus will look a bit different going forward. 

But really, what’s next? As one member noted, the new WFH paradigm is not likely to change any time soon and may become a permanent arrangement for some, or at least some of the time. What will that mean for recruitment processes, performance reviews, retention, team alignment and getting everyone to row in the same direction?

  • Focus on the folks. A member noted the emphasis on empathy and keeping the team feeling connected: “At other meetings, we used to talk to about systems, systems, systems, and now it’s people, people, people. And I can’t imagine losing any of my people now.”
  • When everyone’s remote, “it’s hard to recreate the ordinary dialogue you have” noted one of the RBC Capital Markets sponsors, referring to summer interns and new hires. That said, it seems that younger employees are thriving in the WFH environment and have grown more assertive; they were quieter in the office. As one member said, “On Zoom, everyone’s square is the same size.”
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Under the Hood of the Global Payments System: Complexity

How TIS helped The Adecco Group harmonize payment, reporting and bank account management processes.

So, you need to make payments? Sounds simple, but once you look under the hood of the global payments apparatus—which has developed differently in different places for different currencies—you will discover separate layers of complexity. That’s according to Joerg Wiemer, co-founder and CEO of Treasury Intelligence Solutions, or TIS.Put simply, there are three different sources of complexity.

  1. The connection and integration of the ERP and the bank system is incomplete, resulting in the use of multiple e-banking tools and a cumbersome cash visibility process.
  2. Payment formats, despite efforts to harmonize them, are not fully standardized, resulting in more time-consuming setup processes and/or costly payment fixes.
  3. Communication options like APIs are more like green bananas than the ripe fruit they are currently made out to be. Add to these the increased frequency of fraud attempts targeting the payments function.

How TIS helped The Adecco Group harmonize payment, reporting and bank account management processes.

So, you need to make payments? Sounds simple, but once you look under the hood of the global payments apparatus—which has developed differently in different places for different currencies—you will discover separate layers of complexity. That’s according to Joerg Wiemer, co-founder and CEO of Treasury Intelligence Solutions, or TIS.

Put simply, there are three different sources of complexity.

  1. The connection and integration of the ERP and the bank system is incomplete, resulting in the use of multiple e-banking tools and a cumbersome cash visibility process.
  2. Payment formats, despite efforts to harmonize them, are not fully standardized, resulting in more time-consuming setup processes and/or costly payment fixes.
  3. Communication options like APIs are more like green bananas than the ripe fruit they are currently made out to be. Add to these the increased frequency of fraud attempts targeting the payments function. 

High jump. The combination of these factors makes it hard for a treasury management system (TMS) to truly meet payment needs. And that’s before you consider that you will always need to make payments. A TMS, TIS suggests, can be a great “all-arounder” but is still like an Olympic decathlete in terms of required functionalities compared to the superior, focused expertise of a sprinter, long-distance runner, high jumper or javelin thrower.

A simplification case. At a recent meeting of the Tech20 High Growth Edition, NeuGroup for treasurers of high-growth tech companies, TIS co-presented a payments simplification case with a client, The Adecco Group. 

  • Adecco is a Fortune Global 500 recruitment and staffing agency based in Zurich, Switzerland, which operates 5,100 branches in eight regions and 60 countries. Over 60% of its EUR 23.4 billion FY2019 revenues came from Western Europe, and 19% from North America.
  • While the business is relatively stable and has some offsetting/countercyclical elements, 75% of revenues come from temporary staffing solutions with “retail-like” margins, i.e., not that generous. With processes involving up to 700,000 individuals at any given time, the emphasis is naturally on operating efficiency.
  • This entails digitization and automation in timesheets, recruitment (e.g., candidate portals), documentation, administration and, of course, payments. 

The handover. The payments function, often managed by treasury, is a handover point from many stakeholders, including treasury itself, accounting, shared services, IT or value-added process owners, and a variety of legal entities. It is similar at Adecco. The objectives of Adecco’s transformation journey are focused on:

  • Global cash visibility in the TMS, Kyriba.
  • Connection to all banks globally using TIS as the service bureau, ensuring communication efficiency (SWIFT, host-to-host, EBICS, BACS) depending on volume and complexity of local business needs.
  • Improved and harmonized payment, reporting and bank account management processes via a single, bank-independent e-banking system, provided by TIS (over 10,000 banks are connected via TIS’s cloud platform)—while also achieving compliance, bank-signature governance, risk reduction and cash centralization via pooling arrangements.  

A complicating factor is payroll payments: Salary and wage payments come from human resource systems where local rules and regulations for employee protections and taxes drive local differences, making this type of payment hard to harmonize.

The business case? Depending on your starting point, a “very high” ROI can be achieved primarily by:

  • Building in the ability to choose the most efficient communication option (bullet 2 above) for each payment. Over 90% of the traffic can go directly via non-SWIFT channels, meaning it’s cheaper: SWIFT has transaction-based pricing and TIS has “value-based” pricing where higher complexity means higher pricing (the number of bank accounts or ERPs is a proxy for complexity). But part of the TIS value proposition is reducing complexity with their project implementation.
  • Overcoming format-error driven payment delays (and costly fixes) with the use of TIS’s continuously updated and maintained payments “format library.” 

Success factors. Like many project stories, success lies in the effective coordination and collaboration of people.

  • Senior management sets the tone by driving change and expectations; also required is committed involvement from internal controls, compliance and IT/security, and strong governance from business, finance and treasury leadership.  

Test, test and test some more. For an end-to-end (E2E) process approach to be successful, test, test and retest all the formats and pathways thoroughly. And include deliberate errors to make testing as robust as possible.

Next up: From batch to instant payments. TIS does not consider APIs quite ready for prime time yet, and cites country-by-country differences (apps, clearing systems, amount thresholds and the varying API libraries banks have) as the primary reasons. They are nevertheless a big development and will bring many benefits in time.

  • People use Adecco’s app to find jobs; when their work is done and approved, nothing really stands in the way of settling the payment for that work.
  • “So we envision moving from batch to instant payments,” André van der Toorn, senior vp of treasury at the Adecco Group, said. Adecco’s associates (employees for whom Adecco is the employer of record) may be keen to accept that, even if it means they will get paid slightly less. Instant payments may come very soon, based on the success of a live test with a digital client in a remote part of the world.

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Obstacle Course: Cash Forecasting Challenges in Latin America 

Treasurers in Latin America are coping with the pandemic, M&A activity and working capital needs.
 
Many of the cash management challenges currently facing treasurers in Latin America are being complicated by a variety of factors, including the omnipresent COVID-19 crisis. But also in the mix is recent M&A activity in the region (think integration and its opposite, divestiture), along with difficult financing conditions affecting working capital management.
 
COVID chaos. Latin America is no exception in regions contending with the difficulties brought on by the pandemic. As in other parts of the world, work from home (WFH) processes have had to be invented on the fly and then executed.

Treasurers in Latin America are coping with the pandemic, M&A activity and working capital needs.
 
Many of the cash management challenges currently facing treasurers in Latin America are being complicated by a variety of factors, including the omnipresent COVID-19 crisis. But also in the mix is recent M&A activity in the region (think integration and its opposite, divestiture), along with difficult financing conditions affecting working capital management.
 
COVID chaos. Latin America is no exception in regions contending with the difficulties brought on by the pandemic. As in other parts of the world, work from home (WFH) processes have had to be invented on the fly and then executed.

  • This has led to some turnover, part of which stems from the paradoxical situation where WFH often means more work and burnout; this then leads to companies onboarding new people either virtually or in person while maintaining social distancing protocols.
  • Members pointed out that this highlighted the importance of written, up-to-date policies and procedures. 

M&A chaos. Acquisitions, and in one case a divestiture, bring their own challenges to accurate cash forecasting. Integration of the entities involved must take place country by country. The message here is that there is a lot to do, in multiple tax and regulatory environments that generally do not allow cross-border solutions. Of course, the whole forecast philosophy can vary—forecast as needed vs. regular forecasts. Also, the need to repatriate regularly or leave the cash where it is requires major adjustment and training.

  • Where treasury management systems are involved (and the accounting systems that feed them), there is the need to reconcile different approaches to the requirements of the new combined (or separated) entity. 

Working cap scrutiny. Communicating the expected cash needs of the new company is an important issue to management ahead of earnings calls. Going along with this is the focus on working capital, and in particular short-term assets like accounts receivable (DSO’s) and inventory (months of sales).

  • Often overlooked is the opportunity presented on the liability side. Companies with historically strong cash flow may have slipped into a practice of just paying the bills as presented.
  • By paying according to terms, or negotiating payment terms to industry benchmarks, companies can add to cash on hand the same way collecting sales faster adds to cash. 

Cash rules. Treasury needs to work closely with in-country managers to identify where there are opportunities to increase cash on hand and then determine how to get that cash to where it is needed, whether to pay down debt or pay equity investors.

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Why Swapping Fixed-Rate Debt to Floating Is Still Worth Considering

Wells Fargo shared insights on liability management at the pilot meeting of NeuGroup for Capital Markets.

At a spring meeting of NeuGroup for Capital Markets, sponsored by Wells Fargo, several members said they had used interest-rate swaps to shift more of their debt to floating rates, a move that paid off as rates fell in the second quarter amid the pandemic.

  • A few participants had regrets about having swapped from floating to fixed rates.
  • One member said his team is “spending a lot of time trying to get the right mix” of fixed and floating rates as it asks if “it makes sense to do swaps.”

Wells Fargo shared insights on liability management at the pilot meeting of NeuGroup for Capital Markets.

At a spring meeting of NeuGroup for Capital Markets, sponsored by Wells Fargo, several members said they had used interest-rate swaps to shift more of their debt to floating rates, a move that paid off as rates fell in the second quarter amid the pandemic.

  • A few participants had regrets about having swapped from floating to fixed rates.
  • One member said his team is “spending a lot of time trying to get the right mix” of fixed and floating rates as it asks if “it makes sense to do swaps.”

Conversations and convincing. One of the members who swapped from fixed to floating said it had required “convincing management this was right” from an asset liability management (ALM) perspective, adding that treasury had lots of conversations with the CFO “to make him comfortable.” She said much of the focus was on timing which, fortunately, “worked out.”

  • As a result, some of this company’s hedges are in the money, raising the question of whether it makes sense to unwind or enter into offsetting swaps to monetize the hedge gains. The member asked for input on accounting and other considerations.
  • This company had also done some pre-issuance hedging and was doing more of it at the time of the meeting.

Magic formula? One of the presenters from Wells Fargo asked, rhetorically, how many people at the meeting had been told there is a “magic formula” for the ideal debt mix, such as 75% fixed to 25% floating.

  • Formulas aside, the key question investment-grade (IG) companies must answer before using interest-rate swaps, he said, is how much volatility in corporate earnings (before interest and taxes) will result from changes in rates. The answer, he suggested, depends on the cyclicality of the business and its “absorption capacity.”
  • It’s important to ask why you put on the swap, especially in this environment when fixed to floating-rate swaps went into the money, the Wells Fargo presenter said. What’s important is determining how much potential eps volatility it creates and whether “you can add it and not create heartburn,” he said.

What now? Another presenter from Wells Fargo said that, as a result of lower savings now available from swapping fixed to floating rates, “I think people have written off swaps to floating.” But he said the savings are still decent, meaning it makes sense to keep swaps on the radar screen and that corporates should “keep thinking” about them.

  • In a follow-up call in early July, he said his views still hold in the current market and pointed to data Wells Fargo presented during the meeting to illustrate that swaps to floating make sense even when rates are flat.
  • It shows that over the last 23 years, the savings on a 5-year swap, even in an adjusted market environment where interest rates remain flat and trendless, still amount to nearly 100 basis points.
  • This may be especially relevant today given that so many companies boosted liquidity as the pandemic shut down the economy by issuing fixed-rate debt.
  • As a result, Wells Fargo’s presentation says, the liability portfolios of many IG issuers are overweight fixed-rate debt.
  • The bank also noted an “asset liability mismatch (debt versus cash/short-term investments) creating ‘negative carry drag’.”
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Brain Game: Using Artificial Intelligence to Improve Cash Forecasting

ION’s plans to tap machine learning, deep learning and neural networks to help treasurers.  
 
Making better use of technology to improve cash flow forecasting (and cash visibility) has taken on greater importance during the pandemic for many companies where it was already a high priority. That was among the key takeaways at the spring virtual meeting of the Global Cash and Banking Group, sponsored by ION Treasury.

  • ION sells seven different treasury management systems (TMSs), including Reval and Wallstreet Suite.
  • Among the cross-product solutions ION is focused on is a cash forecasting tool leveraging artificial intelligence (AI), mostly in the form of machine learning (ML) and deep learning neural networks.
  • One of the ION presenters said advances in AI and ML have produced an “opportunity to reimagine how cash forecasting can be done,” noting something treasurers know too well—that no one yet has truly “solved in a great way” one of the top challenges facing finance teams.

ION’s plans to tap machine learning, deep learning and neural networks to help treasurers.  
 
Making better use of technology to improve cash flow forecasting (and cash visibility) has taken on greater importance during the pandemic for many companies where it was already a high priority. That was among the key takeaways at the spring virtual meeting of the Global Cash and Banking Group, sponsored by ION Treasury.

  • ION sells seven different treasury management systems (TMSs), including Reval and Wallstreet Suite.
  • Among the cross-product solutions ION is focused on is a cash forecasting tool leveraging artificial intelligence (AI), mostly in the form of machine learning (ML) and deep learning neural networks.
  • One of the ION presenters said advances in AI and ML have produced an “opportunity to reimagine how cash forecasting can be done,” noting something treasurers know too well—that no one yet has truly “solved in a great way” one of the top challenges facing finance teams.

Define your terms. Another ION presenter explained that AI is any intelligence demonstrated by a machine.

  • ML—a subset of AI—involves the ability to learn without being explicitly programmed.
  • Deep learning (DL) is a subset of ML and includes so-called neural networks inspired by the human brain. The algorithms powering neural networks need “training data” to learn, enabling them to recognize patterns.
    • The ION presenter gave the example of a neural network within a self-driving vehicle that processes images “seen” by the car. 

Building on data and business knowledge. For cash forecasting, the learning process starts with entering historical data into the model that is “cleaned” by tagging the inflows and outflows appropriately and removing outliers that would significantly skew trends. Models are trained via algorithms that apply rules and matching inputs with expected outputs.

Validation required. Like many learning curves, it takes time for the model to reach a high level of performance and requires treasury professionals to validate that the algo knows what it is doing by comparing the forecast to actual variances.

  • Similarly, people—not machines—will have insider knowledge of significant changes within the organization and must make tweaks to the model where appropriate. 

Measuring the models. Various statistical approaches feed neural networks’ underlying algorithms. When building their AI cash forecasting solution, ION tested everything from simple linear regression to multivariable linear regression to the Autoregressive Integrated Moving Average (ARIMA) model, which adds layers to the neural network and process non-linear activities.

  • ION’s research suggests that linear regression-based learning models perform well for businesses with stable, growing cash flows, but less well with cash flows subject to seasonal peaks.
    • ARIMA models perform better, but need extra modeling for seasonality while neural networks require careful attention to training data to learn from, as well as supplemental intervention when non-repeating events occur—such as global pandemics.
  • Still, you can get 90%-95% accuracy most of the time, in seconds vs a day or more using manual methods. ML for cash forecasting has the potential to be 3,000 times faster than common manual processes companies employ, according to ION.
    • Other benefits include improving accuracy, overcoming human biases, picking up anomalies that could mean fraudulent activity, and realizing monetary gains from more predictable cash positions.
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Managing the Team Through WFH Takes Effort

Powering an effective team through tough times – snacks and all.

For all the talk about how well NeuGroup peer group members and their teams have navigated the pandemic – quarter closes, bond issuances, insurance renewals, revolver negotiations, even hostile takeover attempts – there is a nagging feeling that “this can’t go on forever” without more problems manifesting themselves in some way. 

After almost four months of a near complete “work from home” or WFH regime, it will still be a while before the full strength of the treasury team is back together in the office. Some companies have announced recently phased-in returns as early as mid-June while others have been told to stay home through the end of the year. What can be learned from the experience so far as the situation stays fluid? Here are some thoughts from NeuGroup’s recent Tech20 Treasurers’ Peer Group meeting.

Powering an effective team through tough times – snacks and all.

For all the talk about how well NeuGroup peer group members and their teams have navigated the pandemic – quarter closes, bond issuances, insurance renewals, revolver negotiations, even hostile takeover attempts – there is a nagging feeling that “this can’t go on forever” without more problems manifesting themselves in some way. 

After almost four months of a near complete “work from home” or WFH regime, it will still be a while before the full strength of the treasury team is back together in the office. Some companies have announced recently phased-in returns as early as mid-June while others have been told to stay home through the end of the year. What can be learned from the experience so far as the situation stays fluid? Here are some thoughts from NeuGroup’s recent Tech20 Treasurers’ Peer Group meeting. 

First, all the BCP work pays off. Treasury’s essential focus of keeping the lights on no matter the catastrophe has long required detailed business continuity plans to ensure access to liquidity, collections capabilities and the ability to make payments away from a compromised office site. 

  • So, arguably, no team was better prepared than treasury going into the pandemic-driven mandate for staff to take up their posts at home. Some treasurers noted with relief that they had recently tested the BCP and that things had worked out as planned when the order came. 

Not much change for some. Global corporations of a certain size already have regional treasury centers in other places of the world, and – especially if based in the high-cost San Francisco Bay Area – varying levels of distributed teams in lower-cost regions of the US, e.g., Florida and Texas. The ability to lead those teams may have taken on a different nuance in the WFH environment, but managers were already used to leading remote team members. 

  • “We were already very remote so we had that down, and the [quarterly] close wasn’t a problem,” said a Tech20 member who leads both the treasury and tax teams. Nevertheless – and despite a significant redistribution of ergonomic chairs from offices to homes across the Bay Area – several companies gave a stipend of up to several hundred dollars to set up a home office. 

Reassure the team with leadership, transparency. With the airwaves filled with COVID-19 news and the increased focus on cash and forecasting facing a very uncertain future, it is natural that people start worrying about losing their jobs. Some companies, including one Tech20 member who shared her company’s approach to leading in times of COVID-19, announced that there would be no layoffs in 2020. 

  • This company also makes a lot of effort to show empathy with employees and demonstrates its own focus on well-being to reassure others that it is OK to nor just power on as usual. The cadence of communication is important.

Set boundaries, examples. Particularly in situations where the whole family is at home, it’s important to demarcate work time and home time. Our presenting member said her husband oversees schooling the kids and she does “after school” activities. This means she is not available for meetings for a set number of hours in the afternoon and encourages her staff to set similar limits. 

  • Another member, who also emphasized mental well-being after the intensity of weeks upon weeks of blurred work/home lines – especially for single parents with young kids, and since taking vacation seems pointless if you can’t go anywhere – said he would take a Friday off on a regular basis, signaling that similar actions by staff are acceptable. 

A lot of mileage out of small morale boosters. Coffee breaks and happy hours by Zoom, a dedicated Slack channel for office chitchat and family pictures, checking in on the singles on the team, and online trivia game time are examples of team building and maintaining a sense of team and inclusion. The tax and treasury chief from above organized a “remote offsite” meeting to connect with the team and from time to time sends much-welcomed healthy snack packages (from Oh My Green) to her staff. 

  • All this combined with the moratorium on layoffs have rewarded the presenting company’s management with their highest employee satisfaction numbers, despite the challenging period. 
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Do Pensions Need to Bolster Post-Retirement Resources?

Pension managers could be doing a better job of guiding retirees with their post-work pension planning.

For decades, defined contribution (DC) retirement plans have helped address the needs of individuals leading up to retirement. However, plan sponsors have made little progress in addressing individuals’ needs during retirement itself, according to Insight Investment, a sponsor of the NeuGroup for Pension and Benefits’ recent meeting. 

Retirement anxiety. There is a lot of unease for employees on the verge of retiring, as they worry about funding their non-working lives. It also remains a major concern among the population still working, given the disappearance of defined benefit pension plans, near-zero interest rates and highly volatile equity markets.

Pension managers could be doing a better job of guiding retirees with their post-work pension planning.

For decades, defined contribution (DC) retirement plans have helped address the needs of individuals leading up to retirement. However, plan sponsors have made little progress in addressing individuals’ needs during retirement itself, according to Insight Investment, a sponsor of the NeuGroup for Pension and Benefits’ recent meeting. 

Retirement anxiety. There is a lot of unease for employees on the verge of retiring, as they worry about funding their non-working lives. It also remains a major concern among the population still working, given the disappearance of defined benefit pension plans, near-zero interest rates and highly volatile equity markets.  

“Surveys are showing that this is a concern for individuals,” said Bruce Wolfe, head of individual retirement strategy at Insight Investment. “The first step is to understand how the decumulation phase differs from the accumulation phase and create a framework to deliver the steady, predictable lifetime income that retirees generally desire.” 

  • Mr. Wolfe believes many of the “hurdles for plan sponsors to do more are only a matter of perception.” This means steps do exist for those managing the plan to not only educate soon-to-be retirees but also offer solutions to help manage their assets at separation “giving them firmer footing for the next phase of their lives.”
  • Meeting attendees basically agreed that while it was generally good to offer their employees a range of investment products – including environmental, social and governance options – within their retirement plans, there was little interest in what exiting employees did with their savings after they leave the company. While companies may offer some simple retirement planning tools, they do not want to risk appearing to be fiduciaries. 

Decumulation in the spotlight. The lack of tools has put decumulation in the spotlight for many plan sponsors, a recognition that most retirees are lost when it comes to what is, in practical terms, fairly sophisticated financial analysis. For example, only 5.5% wait until age 70 to start taking social security benefits when most retirees should wait as long as possible given longevity protection and inflation hedge that social security uniquely provides. For 401(k) participants seeking help there are some positive developments including:

  • 41% of plans have at least some form of “retirement income” solutions available, although plan sponsors acknowledge more innovation is needed.
  • The Setting Every Community Up for Retirement Enhancement (SECURE) Act cleared away some legal impediments to offering more retirement income products, particularly annuity-related ones.
  • QLAC products (Qualified Longevity Annuity Contracts) can be offered with limits within DC plans providing participants access to lifetime annuity contracts starting when individuals reach their 80s.   

This means plan sponsors need to “think harder about the escalating challenges they will face through the ‘decumulation’ phase of their investment lifecycle,” the Insight Investment team told meeting attendees. 

Unsteady footing. “Uncertainty is building as we find ourselves in an ‘interregnum’ between the post-war economic order and a brand-new economic era,” said Abdallah Nauphal, CEO at Insight Investment. “COVID-19 has provided an idea of how liquidity challenges, rebalancing and tail risk concerns can be elevated in stressed market conditions.” 

  • This means investors should prepare for future crises accordingly.
  • “Plans may need to consider adding additional tools to the toolkit, such as completion, overlay, asymmetric payoff and cost-effective downside equity risk management strategies to help ensure full funding and manage pension risks,” said Shivin Kwatra, Insight Investment’s head of LDI portfolio management in the US.
  • “We also believe investors need to focus on high quality investments to help ensure they meet their return and cash flow requirements with the highest level of certainty,” Mr. Kwatra said.
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Preparation Pays Off for Microsoft in Debt Exchange Offer

Liability management success: Microsoft received exchange interest of $12.5B, 56% of the targeted notional amount.
 
Treasury teams managing their debt portfolios have a menu of liability management transactions to choose from, including bond tenders, open-market repurchases, consent solicitations and debt exchanges. To use most of these tools, corporates need to offer investors a reasonable amount of time to decide, ranging from five to 20 business days.

  • So a successful liability transaction such as a debt exchange depends, in part, on a generally stable underlying market. COVID-19, of course, wreaked havoc on markets and sent volatility levels spiking. But monetary actions by the Fed and fiscal stimulus help calm markets, resulting in a sharp drop in volatility. And that opened the door for companies including Microsoft to take action.

Liability management success: Microsoft received exchange interest of $12.5B, 56% of the targeted notional amount.
 
Treasury teams managing their debt portfolios have a menu of liability management transactions to choose from, including bond tenders, open-market repurchases, consent solicitations and debt exchanges. To use most of these tools, corporates need to offer investors a reasonable amount of time to decide, ranging from five to 20 business days.

  • So a successful liability transaction such as a debt exchange depends, in part, on a generally stable underlying market. COVID-19, of course, wreaked havoc on markets and sent volatility levels spiking. But monetary actions by the Fed and fiscal stimulus help calm markets, resulting in a sharp drop in volatility. And that opened the door for companies including Microsoft to take action.

Laying the foundation. At a recent NeuGroup for Capital Markets office hours session, Microsoft’s treasury team discussed their recent debt exchange, announced on April 30, 2020 and settled on June 1, 2020.

  • Like any successful capital markets transaction, the preparation done in the months before by the treasury team laid the foundation for a debt exchange which accomplished the company’s financial and strategic objectives.
  • These objectives were driven by the primary principle to maximize economic value, including reducing the annual interest rate paid and being P&L accretive. 

Debt exchange details. On April 30, the company announced a registered waterfall exchange offer targeting 14 series of notes across two separate pools with maturities between 2035-2057, all with coupon rates above 3.75% (the existing notes) in exchange for cash into $6.25 billion of new notes due 2050 and $3 billion of new notes due 2060.

  • Microsoft set a waterfall prioritization based on economic value and registered the exchange via an S-4 filing requiring a 20-day offering period. It included an early exchange time on May 13, 2020 which offered investors better economics by exchanging their notes earlier than the official expiration date on May 28, 2020.
    • The strong interest by investors in the exchange allowed Microsoft to increase the amount of the new 2060 note to $3.75 billion. The final coupons on the new 2050 notes and the new 2060 notes were 2.525% and 2.675%, respectively. 

Banks with strong LM credentials. Working with joint dealer managers, Microsoft was able to tap into the knowledge and insights of two banks with strong credentials in liability management.

  • These banks were able to form a consensus on important details including what spreads over US Treasuries to use for both the existing notes and the new notes, modeling analysis, supporting logistics, the identification of holders of the existing notes and their likelihood of participating in the exchange, and potential ways to hedge interest rate movements.
  • At the end of the day, the transaction generated significant interest savings, and extended Microsoft’s debt maturity profile. The exchange also established new, liquid, par securities by allowing investors to move out of high dollar-priced bond issues.

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Cash and COVID-19: A Tale of Two Companies

One company asks, “Where is the cash?” while another reevaluates operational processes.
 
The economic upheaval unleashed by the pandemic divided the universe of companies at a recent virtual meeting of the Global Cash and Banking Group into two camps: Those with ample liquidity that were able to manage cash and conduct business as usual; and those forced to play defense and go “back to basics,” as one member in the latter camp put it.

  • Two member companies sharing very different perspectives on the pandemic’s impact on their businesses embodied this dichotomy: One, a tech giant, presented opportunities it found for process improvements; the other, a travel and leisure company, described an all-hands-on-deck liquidity crunch involving stress tests and turning over every stone for cash.

One company asks, “Where is the cash?” while another reevaluates operational processes.
 
The economic upheaval unleashed by the pandemic divided the universe of companies at a recent virtual meeting of the Global Cash and Banking Group into two camps: Those with ample liquidity that were able to manage cash and conduct business as usual; and those forced to play defense and go “back to basics,” as one member in the latter camp put it.

  • Two member companies sharing very different perspectives on the pandemic’s impact on their businesses embodied this dichotomy: One, a tech giant, presented opportunities it found for process improvements; the other, a travel and leisure company, described an all-hands-on-deck liquidity crunch involving stress tests and turning over every stone for cash. 

Tech tools. Liquidity was not an issue for the tech company and “we probably weathered the crisis better than other industries because of all the tech tools we have,” the member said, adding that the “crisis has raised opportunities” to improve processes.

  • The company was completely prepared to shift gears to work remotely so the challenge became how to overcome various geographical shutdowns and stay-at-home orders across the globe that affected access to stores, lockboxes and, in some cases, payroll.
  • Another technology company found opportunities on the check issuance side, saying that some vendors wanted to switch to ACH payments to improve their liquidity; but ACHs also made sense because it was pointless to send checks to locations (stores, lockboxes, etc.) that were closed. 

Tokens vs. mobile apps. During the pandemic, the first tech company lifted some restrictions on the use of mobile banking apps; when a token doesn’t work and treasury isn’t “in the building” the ease of a mobile app can save the day, especially since the company’s internal process requires three people to move money across the board.

  • However, future thought must be given to the continued use of mobile banking because in the case of termination or employee’s departure, it is easier to collect a token than disable a feature on their phone.

Are wet signatures a thing of the past? The pandemic also presented an opportunity to see how far banks would go in accepting DocuSign.

  • Members said the answer depends on the bank, with the member from the tech company saying, “We adjust to whatever the banks can support.” That said, many banks have made allowances that members hope will continue when things return to “normal.”

Where is the cash? On the flip side to these operational improvement opportunities, many treasury departments across industries scrambled to get a handle on all cash everywhere as the pandemic squeezed liquidity.

  • Hard hit. The travel and leisure industry in particular has been hard hit by mandated travel restrictions and months of consumer cancellations, resulting in a big blow to liquidity. For one member in that industry, prudent cash management and operations have been imperative to keeping the company’s balance sheet strong.
  • No treasury outside treasury. A centralized treasury department has helped with tackling the liquidity pinch for this member, allowing for global transparency and examination of onshore and offshore cash.
    • Because onshore does not equate to accessibility, her treasury department has re-bucketed cash by availability to determine true cash positions across horizons and established an internal task force with legal and accounting to establish minimum balances required for operations.
  • Scenario analyses and stress tests. Good cash forecasting has never been so important— treasury has been called to turn over models, run various scenario analyses and stress test base cases to safeguard the business. 
    • This treasury team tested base, prolonged recovery and severe impact analyses to consider various economic scenarios and protect minimum operating requirements.

Teamwork. The company formed a global finance task force to explore what more can be done to generate cost savings, defer tax and bolster receivables. The member said she was pleased to have employees volunteering from various departments and teams, coming together to help keep the company strong.

  • Similarly, with working capital management, different approaches are being taken with treasury in mind. Previously, departments would seek approval from the CFO based on anticipated ROI; now these teams are talking to treasury first to see if the use of cash makes sense before seeking sign-off. 

I will remember that. Members in similar boats agreed that some banks have gone out of their way to help them while others have been more strict, pushing back on requests and acting as though treasury was asking too much.

  • That prompted one member to say, “The banks who gave us the hard time—we won’t give them business.”
  • On the subject of accessing money invested in term deposits, she advised peers to always look at force majeure clauses in bank agreements to make sure they are not one-sided—allowing the bank to terminate but not allowing the investor to get money back early.
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