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Bounce Back: Bank Loan Market Quickly Sees ‘Amazing Recovery’ 

U.S. Bank describes the speedy recovery of revolving credit facility issuance.

Talk about a rebound: In the depths of the Covid-19 pandemic, the value of bank loan facilities put in place by corporates tanked by more than 50% to about $200 billion. In the first quarter, it topped $500 billion, above the level reached a year prior (see chart), due in part to plummeting pricing.

  • This was among the key insights from a loan market update by Jeff Stuart, EVP and head of capital markets at U.S. Bank at a recent NeuGroup for Mid-Cap Treasurers meeting.
  • The loan market’s U-shaped recovery shows no signs of slowing. “I think we’re seeing a pretty amazing recovery in this market, and I think we’re going to see opportunities you won’t see for a while,” Mr. Stuart said.

U.S. Bank describes the speedy recovery of revolving credit facility issuance.

Talk about a rebound: In the depths of the Covid-19 pandemic, the value of bank loan facilities put in place by corporates tanked by more than 50% to about $200 billion. In the first quarter, it topped $500 billion, above the level reached a year prior (see chart), due in part to plummeting pricing.

  • This was among the key insights from a loan market update by Jeff Stuart, EVP and head of capital markets at U.S. Bank at a recent NeuGroup for Mid-Cap Treasurers meeting.
  • The loan market’s U-shaped recovery shows no signs of slowing. “I think we’re seeing a pretty amazing recovery in this market, and I think we’re going to see opportunities you won’t see for a while,” Mr. Stuart said.

Positive pricing. Mr. Stuart said the return of issuance levels is “nothing short of extraordinary. It is an amazing recovery over a very short period of time.”

  • “The part that’s really amazing about the past 12 months is the strength of the market through the crisis in terms of new money for M&A and expansion,” he said. That’s shown by the yellow and green bars in the chart above.
  • Pricing, after spiking during the pandemic, has returned to pre-Covid levels (see charts below).
  • “It’s almost like it never even happened, and in some cases pricing is even more aggressive,” he said. “Borrowers are testing new lows in pricing all the time. I think we might be there, but this is a far cry from where we were six months ago.”
  • In addition, he said, though three- and five-year revolvers were essentially abandoned during the depths of the pandemic in favor of temporary one-year facilities, he has seen one-year revolvers “fall off” and three- and five-year volume return close to normal.

Relief and reaction. In response to the market’s recovery, one member said, “I don’t think any of us sitting here this time last year would’ve really thought that, but I think that’s really good information for all of us.”

  • The member said companies are now ready to explore going back into the market, and her colleagues are “talking to our bankers about utilizing the various options out there.”
  • Mr. Stuart said, “Whether you’re thinking about a new facility or you’re thinking about renewing, this is an opportune time. Banks are really looking to recover asset growth.
    • “Whether you’re a leveraged borrower or an investment-grade borrower, now is a great time to be thinking about taking advantage of this strong bank market and raise some dry powder.”

Accordion or start over? One member whose company did not see a need to take any risk management actions during the pandemic is now looking to take advantage of the favorable pricing. But she wonders if the right move is through an accordion, adjusting the company’s current long-term facilities.

  • “We’re looking at more offensive plays, we have a pretty substantial accordion,” she said. “I’m curious if companies are going out and exercising those accordion options to increase committed dry powder.”
  • Mr. Stuart responded that, if corporates have the time, a full refinancing may be the better option. “What we’re seeing is not necessarily the use of accordions, but full refinancings at better terms,” he said.
    • “Borrowers are actually looking to reduce pricing, and in many cases redoing their deal as an amend-and-extend or as an upsize.”
  • Another member noted that, though this is an attractive option, it may not work if companies have an impending need for liquidity. “If you need to tap an accordion, you could probably do it in 30 days or less,” he said. “But for a refi, it’s going to take a lot longer. A lot of times you don’t have the luxury of redoing it.”
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A Look at the Inflation Crystal Ball: Morgan Stanley’s View

Morgan Stanley economist Ellen Zentner says people are becoming “more convinced that inflation is a real thing.”

The outlook for inflation and interest rates is a hot topic as the US recovery picks up steam. Here’s the view Morgan Stanley recently outlined for bank treasurers at a recent NeuGroup meeting:

  • Inflationary pressure will almost certainly continue, but even with upwards of $2 trillion in additional capital from the Biden administration’s Build Back Better initiative likely to arrive early next year, the Federal Reserve will probably not increase rates until third quarter of 2023.

Morgan Stanley economist Ellen Zentner says people are becoming “more convinced that inflation is a real thing.”

The outlook for inflation and interest rates is a hot topic as the US recovery picks up steam. Here’s the view Morgan Stanley recently outlined for bank treasurers at a recent NeuGroup meeting:

  • Inflationary pressure will almost certainly continue, but even with upwards of $2 trillion in additional capital from the Biden administration’s Build Back Better initiative likely to arrive early next year, the Federal Reserve will probably not increase rates until third quarter of 2023.
  • Ellen Zentner, Morgan Stanley’s chief US economist, told members that her forecast is consistent with the Fed’s new framework that recognizes short-term rates close to zero require waiting longer to raise rates, and then only gradually.
  • Morgan Stanley sees the core personal consumption expenditures (PCE) index peaking around 2.6% and longer-term falling to 2.3%, higher than the Fed and Wall Street consensus expectation of 2.0%.

Inflation surge. The bank anticipates a pop in inflation this year, stemming partly from comparing this year’s growth numbers to last year’s deflationary numbers.

  • Replenishing inventories and resuming services after the Covid-19 hiatus will also fuel price increases, as well shortages of goods and other distortions stemming from the economy unwinding from the pandemic.
  • However, core PCE, which anchors Fed policy, should recede in 2022 but remain elevated, Ms. Zentner said.
  • Seeking an average core rate of 2%, the Fed won’t rush to tamp down inflation, which has been stubbornly below that target for some time.

Rising 10-year rates. The 10-year Treasury bond rate fell from 1.9% pre-pandemic to as low as 0.50% during, and this year ramped up to 1.6% from below 1.0% at the start of the year. NeuGroup’s Scott Flieger asked whether that increase represented returning to a pre-pandemic environment or inflation.

  • “It’s mostly due to inflation compensation,” Ms. Zentner said, adding that while normalization has played a role, “The difference now is that people are becoming more and more convinced that inflation is a real thing.”

Higher inflation. Longer term core PCE should remain above 2%, Ms. Zentner said, partly because globalization has slowed long-time disinflationary pressure from lower import prices and labor costs.

  • Plus, the pandemic is likely to lead to sticky increases in labor costs, and households flush with cash, combined with low mortgage rates, have pushed up housing prices and rents.
  • Consumers are also likely to draw upon $2.1 trillion in excess savings.

Fed’s view. The Fed is assuming unemployment can return to as low as pre-Covid, around 3.5%, without becoming inflationary, Ms. Zentner said, although structural changes stemming from the pandemic may change that.

  • The Fed has recognized, however, that its old concept of full employment is not an inclusive goal, so it now seeks to achieve ‘maximum employment’ by running a tight labor market, focusing on objectives such as closing employment gaps among demographic groups.
  • Combining its inflation framework target with the concept of maximum employment, Ms. Zentner said, is why the Fed will keep rates on hold for so long while “running a high-pressure economy.”

Infrastructure raises productivity. The Biden administration’s infrastructure plan provides the biggest bang for the government buck.

  • Morgan Stanley anticipates infrastructure will be passed via reconciliation in October and start to trickle into the economy at the start of 2022.
  • Although a massive chunk of change, Ms. Zentner said, the Fed is likely to see it revving up currently depressed productivity levels in the long term. “You can get inflationary pressures at first because you might run into shortages with these big projects,” she said. “But higher productivity ultimately will put a lid on runaway inflation.”

Tax question. A bank treasurer asked whether failure to fund President Biden’s initiatives fully via taxes would prompt the Fed to purchase Treasury bonds to increase the money supply and liquidity in the financial sector.

  • If the Fed has to step up purchases, it will be because it has seen pockets of financial conditions tightening that must be offset to support its outlook, Ms. Zentner said. “Keep in mind the Fed may consider higher interest rates from more debt issuance perfectly acceptable given that infrastructure would also be boosting the economy’s prospects for stronger growth.”
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FinLync Brings API Bank Connectivity to an ERP-Native App That Spans Editions and Instances

ERP apps for Real-Time Treasury

Having conducted three focus groups of NeuGroup members over the last 6 weeks—targeting senior treasury managers, treasury and financial technology support specialists and AR/AP/Cash applications and general financial operations managers respectively—we can now share the key member-validated findings regarding FinLync and solutions like it. While the focus groups were comprised of members from companies with SAP as their principal ERP, many apply to companies with other ERPs. Plus, while FinLync is certified for SAP (from ECC 6.0 to S/4 HANA), it plans to release native apps for Oracle and MS Dynamics soon.

Consider the value of connecting your treasury and financial operations teams via the ERP they all access to banks in real-time.

Having conducted three focus groups of NeuGroup members over the last 6 weeks—targeting senior treasury managers, treasury and financial technology support specialists and AR/AP/Cash applications and general financial operations managers respectively—we can now share the key member-validated findings regarding FinLync and solutions like it. While the focus groups were comprised of members from companies with SAP as their principal ERP, many apply to companies with other ERPs. Plus, while FinLync is certified for SAP (from ECC 6.0 to S/4 HANA), it plans to release native apps for Oracle and MS Dynamics soon.

  • One of the takeaways that cannot be ignored is that SAP, despite decades of working on it, has not managed to create its own solution to deliver on the promise of marrying transaction data from banks with that within the ERP, in a straight-through manner, without loss of data detail and in a timely way.

There are myriad reasons for this. The one that most resonates is that SAP itself tends to introduce functionality that works with the latest version, which very few SAP companies have implemented across all functions and instances, and even fewer see finance functions at the early phases of their upgrade timelines. Finance and treasury practitioners are thus used to waiting and usually end up implementing another solution that connects with banks while delivering needed functionality and that pulls data out of SAP instead.

  • FinLync’s key value proposition is that it has developed API links to banks, which is where connectivity to banking and financial services is moving, with direct access to ERP data tables across instances and versions of the ERP. With SAP, FinLync works with ECC 6.0 to the latest S/4HANA and delivers the modern Fiori user experience regardless.
  • For banks that are not API-ready, it also has a connectivity aggregator to connect via SWIFT, host-to-host or via a gateway bank or other provider.
  • There is the potential that banks in developing markets may choose to leapfrog to APIs’ connectivity, even before joining SWIFT.

While not all members are fully sold on the value of real-time treasury for everything, there is wide recognition that the quality, detail and security of data exchanged via API connections is a huge value add. For example:

  • API connections give real-time visibility not only to when the payment arrives at the beneficiary’s bank but the number of “hops” the payment made to get there and what fees were charged along the way.
  • API connections along with native integration with the ERP mean that machine learning and AI algorithms get better, faster at learning your patterns and analyzing all the data in the ERP to auto-reconcile and forecast cash flows. The typical 60% out-of-the-box accuracy can be higher and the path to 95% or better accuracy can be much shorter.
  • API connections are encrypted two-way communications between your ERP’s data tables and those of the bank’s system, so there is no writing to a data file that can be altered as it makes its way from your systems to the bank’s. This is an inherently more secure way to connect financial systems.

Further, treasury and financial operations cutting across commercial and treasury payments come together in new centers of excellence or global solutions centers. Thus, it is increasingly important to provide common applications that process all incoming and outgoing payments, along with all the data relevant to them, to drive better reconciliation, forecasting and, most importantly, insight about your business.

  • Embedding connectivity and applications in the ERP opens access to bank data beyond users with access to treasury systems and electronic banking portals—plus with better timeliness and data quality. No longer do you have to get licenses and implement the TMS at shared-service centers, for example.
  • Leveraging user familiarity, systems support and controls that come with ERP applications also empowers financial operations scalability and flexibility. Finance can rethink processes and who does what work end-to-end, plus shift more resources as automation, smart bots and AI take on more transaction processing and reconciliation activity.

And finally, as an application that installs easily into SAP, and soon other ERPs, and that helps transcend versions and instances with the delivery of desired functionality, many treasurers and their finance colleagues may be able to:

  • Fully justify the cost alongside a traditional TMS or other treasury systems that deliver functionality that FinLync does not, as well as duplicative functionality that FinLync delivers much better.

To learn more about FinLync, join us on Friday, May 21 from 12:00 to 1:30 pm ET as we discuss the above and other findings and give those who have not seen FinLync before a quick demo.

 

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Square’s Bitcoin Investment: The Early Steps of a Crypto Pioneer

Digital payment processor Square describes the details and nuances of its $220 million bitcoin investment.

Square, the digital payments company, has generated headlines by investing significant sums in bitcoin—along with crypto heavyweights like MicroStrategy and Tesla (which on Wednesday said it will stop accepting bitcoin for purchases but isn’t selling its stockpile). Allison Rossi, Square’s global treasury lead, recently described details of the company’s $220 million investment—about 5% of its cash— to members of NeuGroup Cash Investment 1.

Digital payment processor Square describes the details and nuances of its $220 million bitcoin investment.

Square, the digital payments company, has generated headlines by investing significant sums in bitcoin—along with crypto heavyweights like MicroStrategy and Tesla (which on Wednesday said it will stop accepting bitcoin for purchases but isn’t selling its stockpile). Allison Rossi, Square’s global treasury lead, recently described details of the company’s $220 million investment—about 5% of its cash— to members of NeuGroup for Cash Investment 1. 

  • Square allows users of its Cash App to buy and sell bitcoin. Its bitcoin revenue—the total sale of bitcoin to customers— rose 11-fold to $3.5 billion in the first quarter.
  • Square’s platform does not currently allow merchants to accept bitcoin as payment, in contrast to PayPal—which, interestingly, has not yet invested in bitcoin.

Reasons for bitcoin: know the goal. Square’s decision to buy bitcoin came in the context of investigating a “broader universe” of alternative investments in the wake of Covid and economic stimulus— including equities, gold and TIPS, Ms. Rossi said.

  • Diversifying with bitcoin may offer a hedge against inflation, given most of the company’s balance sheet is denominated in US dollars, she added. Other reasons:
  • Bitcoin is aligned with the company’s mission of “economic empowerment,” holding the potential to democratize global access to financial tools in places that are underbanked.
  • Square CEO Jack Dorsey, who also runs Twitter, is “a Bitcoin evangelist,” Ms. Rossi noted.
  • The investment is a way for the company to learn more about the cryptocurrency, she said. Her education included Coinbase publications and videos from MicroStrategy.

A business decision. Square framed the purchase of bitcoin as a business decision in support of its payment platform and Cash App, rather than an investment or liquidity allocation issue. “We don’t consider it as part of our investment policy,” Ms. Rossi said.

  • Square does not have a specific target for its bitcoin investments. Its initial purchase of $50 million was followed by one of $170 million. “We want to remain flexible,” Ms. Rossi said.
  • The downside: these one-off purchases each require separate conversations with senior leadership and the board, one reason Square may ultimately set a target or develop a decision framework that requires fewer discussions, she said.
  • If the target amount is a percentage of cash, a company will likely want to carve that out in its investment policy and will need the necessary approvals, she added.

Buying the bitcoin. To make its bitcoin purchases and maintain some privacy, Square used OTC desks at several liquidity providers, including Genesis, Coinbase and Kraken.

  • Corporates also need to pick custodians. Ms. Rossi says Fidelity is a popular choice because of the firm’s name and reputation; BitGo is another. Liquidity providers also offer custodial services.
  • Counterparty risk analysis is a good idea, as is a review of the custodians’ so-called cold storage systems, which are not connected to the internet.
  • Consider insurance. Ms. Rossi said custodians typically cover about $250 million worth of bitcoin in total. Dedicated coverage is also available; there are separate policies for cold storage and so-called hot wallets that are connected to the internet and pose a greater risk.

Accounting: not ideal. In setting thresholds or target amounts to buy, corporates need to take accounting into consideration. They want to avoid the need to constantly buy and sell when they’re basing a target on book value and then the market value rises to, say, 10 times that amount, Ms. Rossi said.

  • Impairment is an issue, as Square explained in its first quarter 10-Q filing: “Bitcoin is accounted for as an indefinite lived intangible asset, and thus, is subject to impairment losses if the fair value of bitcoin decreases below the carrying value during the assessed period.”
  • Square, using manual calculations currently, marks down its investment to the lowest price since the time of its purchases. But corporates don’t see any investment gain unless they sell. “So you’re not marking it to market; you’re just marking it down,” she said.
  • To learn more, she recommended resources including publications by Deloitte.

Get buy-in early and communicate. Bring in outside auditors as soon as you can, Ms. Rossi advised. Early stakeholder decisions should also include tax, legal, compliance, SEC reporting and IT/CISO teams. “As early as you can loop in all the different teams is what I’d recommend,” she said.

  • Communication is key, both internal an external. Square chose to make external announcements for each of its purchases, in contrast to some other companies that only disclosed them in filings.
  • Internally, “employees are going to be really interested as to why you are doing this,” Ms. Rossi said. “It’s really important to get the messaging right. You’re going to get a lot of questions about it. Be ready for debate.”

Opportunities, risks. In the future, Square may consider making its bitcoin holdings available for lending, the equivalent of securities lending, to pick up additional income.

  • In response to a question about global regulators’ mixed views of private cryptocurrency, Ms. Rossi said regulatory risk is something the company discusses, including the implications of countries that may ban bitcoin.
  • Bitcoin’s future looks bright. But as Square notes in its 10-Q, “The regulation of cryptocurrency and crypto platforms is still an evolving area.”
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Planning Ahead: What Role Will Cryptocurrency Play in Treasury?

As cryptocurrency takes flight, market maker B2C2 teams with NeuGroup to shine a light on this new world.

More than half (52%) of the members at a recent NeuGroup meeting said they expect cryptocurrency to become a regular part of day-to-day treasury activity. To help get members up to speed, NeuGroup teamed with sponsor B2C2, a leading crypto liquidity provider, and other industry leaders.

  • Rob Catalanello, CEO of B2C2 USA, said, “There is a pretty big groundswell of interest from the institutional world, and by that I mean the very well-known names, who are looking into it for a variety of reasons. Either as a form of payment, as a store of value or just trading in a new asset class.”
  • Members from several NeuGroups attended the meeting, and expressed curiosity regarding how corporations may use cryptocurrency—but very few said they actually have hands-on experience (see chart below).

As cryptocurrency takes flight, market maker B2C2 teams with NeuGroup to shine a light on this new world.

More than half (52%) of the members at a recent NeuGroup meeting said they expect cryptocurrency to become a regular part of day-to-day treasury activity. To help get members up to speed, NeuGroup teamed with sponsor B2C2, a leading crypto liquidity provider, and other industry leaders.

  • Rob Catalanello, CEO of B2C2 USA, said, “There is a pretty big groundswell of interest from the institutional world, and by that I mean the very well-known names, who are looking into it for a variety of reasons. Either as a form of payment, as a store of value or just trading in a new asset class.”
  • Members from several NeuGroups attended the meeting, and expressed curiosity regarding how corporations may use cryptocurrency—but very few said they actually have hands-on experience (see chart below).

OTC and KYC. B2C2 aims to make cryptocurrency trading more private by providing an over-the-counter option for corporates looking to make relatively large trades without moving the market as they might on an exchange (see our story on Square).

  • Addressing concerns about the security of cryptocurrency trades, Mr. Catalanello said B2C2’s extensive KYC process enables the company to “only send coins to, or receive coins from, wallets where we know the beneficial owner of the wallet. We don’t send co-mingled, third-party or exchange wallets.”
  • “It’s not the Wild West,” Mr. Catalanello said . “But at the same time, it’s important for people to understand the market structure before they jump into it. There are a lot of people out there pretending to be things that they’re not. We encourage people to do the proper due diligence before getting involved.”

Beyond bitcoin. In a brief overview of the crypto market, Brian Kelly, CEO of BKCM, a digital currency investment firm, said he views bitcoin as similar to an S&P 500 index fund—an entry point into the larger world of crypto. “Bitcoin gets you into the space and provides general beta exposure,” he said.

  • But bitcoin alone is just the first step. “Then you have the alt-coins…that would include Ethereum,” he said. “These give you exposure to everything else that is going on, like DeFi and Web3…all those crazy things [people] talk about.”
  • Ethereum is a blockchain developed to support scripting and applications, which includes a native token called ether. DeFi, short for “decentralized finance,” is a term for financial apps built on top of Ethereum that cut out financial intermediaries; and Web3 is a collection of libraries, also built upon Ethereum, designed to become a privacy-focused evolution of the internet.
  • Mr. Catalanello stressed that bitcoin and ether aren’t the only coins in the market. “Stablecoins probably have more potential for actual payments, whether it’s B2B or B2C,” he said. “I would say it would be much easier to adopt any one of the stablecoins that are currently in the market,” he said.
    • A stablecoin is a type of cryptocurrency that aims to counter the high volatility of crypto assets like bitcoin by tying the token’s value to other assets, including sovereign currencies.

Bitcoin chicken and egg. One member at the meeting who has a growing direct-to-consumer business said he is most interested in accepting cryptocurrencies as a form of payment, which many members echoed. “It does feel like, in our initial research, the processing companies are in the process of accepting digital currencies as a form of payment and then settling with the end merchant—so, us—in US dollars,” he said.

  • “There is no direct demand from consumers at this point, but it’s one of these double-sided chicken-and-egg issues at this point,” said another member. “For it to be worthwhile for a business, you need the consumer to need there to be acceptance before you can really put it in place.”
  • One treasurer at a retail company said he isn’t quite ready to take any actions in the crypto space, but he thinks “inevitably it’ll be used in terms of payment acceptance from customers.”
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To Return or Not to Return? That Is the Question 

With control of the pandemic in sight in the US, finance teams confront how to manage a return to the office.

As the Covid infection rate in the US falls and vaccinations increase, the issue of when and how companies will bring employees back to the office is heating up. Assistant treasurers at a recent NeuGroup meeting said some staff will return to corporate offices starting in July, raising a bevy of issues for managers.

  • Who will return and how, and just what the workweek looks like, will vary by company. For many, spending five days a week in the office will likely become an anachronism.
  • The negative impact of having no communication in person has been a fear expressed in NeuGroup meetings since early in the pandemic. After a year of remote work, members mulled whether finance teams face long-term damage.

With control of the pandemic in sight in the US, finance teams confront how to manage a return to the office.

As the Covid infection rate in the US falls and vaccinations increase, the issue of when and how companies will bring employees back to the office is heating up. Assistant treasurers at a recent NeuGroup meeting sponsored by Societe Generale said some staff will return to corporate offices starting in July, raising a bevy of issues for managers.

  • Who will return and how, and just what the workweek looks like, will vary by company. For many, spending five days a week in the office will likely become an anachronism.
  • The negative impact of having no communication in person has been a fear expressed in NeuGroup meetings since early in the pandemic. After a year of remote work, members mulled whether finance teams face long-term damage.

Culture concerns. Many companies seek to develop positive and productive cultures that the remote work environment may be putting in jeopardy.

  • One member said that new hires are having difficulty integrating and getting a “good pulse” of the corporate culture. One reason is that for many people, remote learning is less efficient.
    • “When companies say they’re going fully remote, I don’t think they fully understand what that does to their culture over longer periods of time,” he said.
  • One assistant treasurer walked the floor of his company’s office and saw many cubicles without name tags because the company had reorganized and many employees had left. “With all these new people coming, I’m not sure how we can get them up to speed quickly,” he said.
  • Several members reported turnover and the need to hire staff. One had hired a treasury analyst remotely who initially wanted to telework. Now the person is looking forward to going to the office, interacting with colleagues and feeling more a part of the team.
  • Junior employees seem to want to come back to the office more than seasoned staff, one member said, “because they feel their careers are getting a bit short-changed without exposure to people.”

Hybrid hassles. Many employees prefer working remotely for at least part of the week, so coordinating when people come to the office to maximize interaction may be a challenge without mandates.

  • A member’s Singapore office has been open to all employees for several months and only requires wearing a mask. But “the office is still pretty empty,” she said. “Just as it was very difficult to start working from home, it’s going to be very difficult to bring people back to the office.”
  • And where the infection rate remains high and more restrictions are in place, one-on-one connections may still be difficult. “I’ll be damned if I’m going one-on-one with somebody if we each have to go into focus booths in the same building,” one AT said.

Liability issues. One member lamented that it would have been helpful if the US federal government had provided liability protection to companies in one of its rescue packages, because many difficult issues must still be resolved.

  • Can you only come back to the office if you’re vaccinated, and what proof is required? “If somebody gets sick, or worse very ill after they’ve mandated people to come back—that’s going to be a bigger issue,” the member said.
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A Fresh Look: Refining Financial Risk Management Programs

Streamlining a hedging portfolio can seem daunting, but there are advantages for corporates that take the plunge.

There’s a growing trend among corporates to take a new look at existing financial risk management programs. Some of the triggers for review are explicit events, such as financial reporting results or restatements, or changes in key personnel.

  • But many companies are finding that longstanding hedging programs may just no longer meet the original program objectives, or may have grown in silos and created pockets of cost inefficiencies throughout the supporting processes.
  • At a recent meeting of NeuGroup for Large-Cap Treasurers, one member, along with Amanda Breslin from meeting sponsor Chatham Financial, walked those at the meeting through the experience of streamlining the company’s hedging portfolio.

Streamlining a hedging portfolio can seem daunting, but there are advantages for corporates that take the plunge.

There’s a growing trend among corporates to take a new look at existing financial risk management programs. Some of the triggers for review are explicit events, such as financial reporting results or restatements, or changes in key personnel.

  • But many companies are finding that longstanding hedging programs may just no longer meet the original program objectives, or may have grown in silos and created pockets of cost inefficiencies throughout the supporting processes.
  • At a recent meeting of NeuGroup for Large-Cap Treasurers, one member, along with Amanda Breslin from meeting sponsor Chatham Financial, walked those at the meeting through the experience of streamlining the company’s hedging portfolio.
  • “Operational FX hedging can involve daily activities across the globe, triggering exposures, visible and hidden costs throughout the process, a wide range of stakeholder interests, complex accounting, and multiple technology tools,” Ms. Breslin said.
    • “It’s not surprising at all that program mechanics can get dislocated from objectives over time as a company evolves.”

Streamlined. After a holistic program review, the company went into action, making its risk management process more efficient by:

  • Reducing its portfolio trade count to less than 20% of its prior size, while maintaining risk reduction levels.
  • Using strategic layering to dollar cost average more efficiently.
  • Simplifying products and currency pairs within the portfolio to eliminate premiums, simplify settlements and reduce trade volume.
  • Integrating all workflows from exposure gathering through trading, accounting designation, and reporting, through ChathamDirect, Chatham Financial’s financial risk management platform.

Tech benefits. Technology often plays a key role in a hedge program review for a number of reasons, Ms. Breslin said. They include:

  • Manual workflows increase errors and limit the effectiveness of program controls.
  • Manual interventions take time and resources.
  • Data aggregation allows for real-time reporting through business intelligence tools.

Next steps. The member who successfully overhauled the process said she is “really happy with it,” and is now able to look ahead. “The next steps are really then to keep getting more visibility into our exposures, to add value by reducing exposures, and partner with procurement and FP&A to reach a full FX view of our financial statements for a cohesive conversation.”

  • The treasurer said her primary takeaway from the project is learning that treasury at her company doesn’t really own anything specific—”capital, currency, anything really”—but it owns the story. “We own the end-to-end process and the conversation around it,” she said.
  • “The CFO loves the fact that we’re digging in and we’re making a difference,” she said. “But it takes a lot of work, it takes thinking differently.”
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Talking Shop: Cash Exposure in Counterparty Risk Assessment

Editor’s note: NeuGroup’s online communities give members another forum to find answers to their questions. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: insights@neugroup.com.


Member question: “In counterparty risk assessment models, related to cash in bank accounts, do teams typically manage cash exposure using a percentage of the total or fixed dollar limits (or both)? If dollar-based, how are limits defined (and how much flexibility is employed)?”

Editor’s note: NeuGroup’s online communities give members another forum to find answers to their questions. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: insights@neugroup.com.


Member question: “In counterparty risk assessment models, related to cash in bank accounts, do teams typically manage cash exposure using a percentage of the total or fixed dollar limits (or both)? If dollar-based, how are limits defined (and how much flexibility is employed)?”

Peer answer 1: “We set deposit limits with our banks at fixed dollar limits. It’s not a perfect science, but we use several factors to set the overall dollar exposure limit per bank.

  • “These factors include credit rating, CDS spread and country risk. Country risk includes macroeconomic factors and events that can affect the bank’s risk profile.
  • “Generally, it is as simple as higher limits are given to banks with higher credit ratings in lower risk countries.”

Peer answer 2: “We set deposit limits at our banks based on dollar limits. The exposure limit includes cash, derivative exposure and direct investments in the bank. The limits are set by our risk management team, primarily based on credit ratings.”

Peer answer 3: “We set our counterparty investment limits based on a combination of a bank’s credit ratings and CDS scores. We set predefined ranges for each metric to break each into four different tiers and then set a predefined dollar limit for each tier.

  • “We test the credit ratings and CDS scores on a weekly basis. If a bank moves up or down a tier based on this testing, we require them to remain at the new tier for four consecutive weeks before adjusting their limit. In certain limited cases, we will seek an exception from senior management to increase a bank’s limit beyond what our model suggests.
  • “When we set our limits each year, we used a fixed percentage multiplied by enterprise assets to set the top tier counterparty limit. This percentage was set many years ago and there wasn’t too much science to it— just based on what we were comfortable with from a risk appetite perspective.
  • “So, the amount of exposure we are willing to take with a counterparty changes year to year as our enterprise assets change.”
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In Search of a Cash Forecasting Model for Use Across the Enterprise

One corporate in search of simplicity opted for developing a solution in-house vs. using third-party vendors.

An indispensable lesson from the pandemic is that revenues can drop unexpectedly and precipitously, and so cash forecasts must consider multiple scenarios and learn from the past. An assistant treasurer (AT) from a global industrial company explained at a recent NeuGroup meeting how his company is improving cash forecasting with machine learning and other new technologies.

  • A precise forecast was not the goal, but rather an estimate that aided business decisions without overburdening treasury.
  • Narrowing the gap between treasury’s bottom-up forecast and FP&A’s top-down approach could eventually lead to a single cash forecast for use across the company.
  • “We’re trying to go from a very laborious bottom-up approach to a much simpler machine learning-driven model,” the AT said.

One corporate in search of simplicity opted for developing a solution in-house vs. using third-party vendors.

An indispensable lesson from the pandemic is that revenues can drop unexpectedly and precipitously, and so cash forecasts must consider multiple scenarios and learn from the past. An assistant treasurer (AT) from a global industrial company explained at a recent NeuGroup meeting sponsored by Societe Generale how his company is improving cash forecasting with machine learning and other new technologies.

  • A precise forecast was not the goal, but rather an estimate that aided business decisions without overburdening treasury.
  • Narrowing the gap between treasury’s bottom-up forecast and FP&A’s top-down approach could eventually lead to a single cash forecast for use across the company.
  • “We’re trying to go from a very laborious bottom-up approach to a much simpler machine learning-driven model,” the AT said.

Vendor qualms. Pursuing the initiative, the company’s treasury team sought insight from peers and talked at length to several cash forecasting technology vendors.

  • A few vendors understood the company’s structure and needs, but reliance on a “plug-and-play” approach into the company’s multiple ERPs, accounts payable and other systems suggested unwanted complexity.
    • “Most of the fintechs are approaching this via ERP hookups, and with our landscape it wouldn’t have simplified the process like we’re after,” the AT said.
  • Another strike against third party solutions: Ongoing, monthly fees charged by the vendors for forecasts. “If we wanted to cut costs in the future, we’d lose our cash forecast,” the member said.
  • Plus, vendors may not be well-capitalized, “And we don’t know what the future brings,” he said.

Inside job. The member’s treasury, large enough to support a dedicated technology team as well as data scientists, “spun out” some models using machine learning. To pick up the pace, it signed up Big Four consultants to help build the system.

  • “With the approach we took, we’re paying for data science/machine learning up front and then we’ll maintain the models,” he said. And by doing this in-house, the company can:
  • Better maintain and optimize the technology.
  • Take advantage of the resources in a digital center of excellence built recently by the company’s broader finance organization that includes tax, investor relations and accounting.
    • The timing was fortuitous since the center had just begun piloting a methodology to eventually replace the FP&A process that took a similar approach to treasury’s cash forecasting efforts.
  • More easily adopt one forecast across the company as the digital technology matures and continues to improve. “We looked to the future to make what we thought was the right decision,” he said.

Key considerations. Perhaps the most important consideration, he said, is “change management,” since folks “get married to their cash forecasting processes.”

  • Engaging the relevant parties across the organization is critical, “understanding who is an influencer, who is a subject matter expert, and who can help champion” the initiative,” the AT said.
  • Also identifying the relevant data and whether it is sufficient and clean.

Moving ahead. This year, treasury plans to take the proof-of-concept models developed successfully for its US cash pool and apply them globally. The member acknowledged there is work still to be done. “We haven’t cracked the code yet so we can start selling this to every business out there.”

  • Nevertheless, he said, what treasury has learned so far has provided invaluable insight and forever changed the cash forecasting process. It may not be 100% machine learning a year from now, but at a minimum the technology will play a role.
  • “We feel it’s the way forward, to get a true view of what’s going in your business by leveraging the past,” he said.
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Spreading the Word: Investment Reporting and Who Sees What When

The head of investments at a large company with a sizable portfolio describes reporting processes and paths.

A member of one of NeuGroup’s two investment management groups who oversees a significant investment portfolio at a major tech company recently described to peers what reports he receives daily as well as what information is reported within the company and how often. The member receives approximately 15 reports daily by email, his preferred delivery method. The emails are sent to the team and include:

The head of investments at a large company with a sizable portfolio describes reporting processes and paths.

A member of one of NeuGroup’s two investment management groups who oversees a significant investment portfolio at a major tech company recently described to peers what reports he receives daily as well as what information is reported within the company and how often. The member receives approximately 15 reports daily by email, his preferred delivery method. The emails are sent to the team and include:

  • Trading information. Used to make decisions on whether or not to buy a security or a bank deposit or “a strategy you’re thinking of deploying,” the member said. “We need to make sure when we’re doing that kind of trading that we have the information in front of us.”
  • Managerial reporting. Includes a daily report showing the sale of securities made internally or externally (by manager, mandate and total gain or loss for the day and the quarter). “We want to make sure nothing got sold that shouldn’t have been or is unusual or resulted in large profits or losses,” the member said.
    • We do the same thing on the buy side so we know what we’re buying and don’t get surprised.”
    • The reports help track activities, manage gains and losses, as well as ensure consistency with current strategy.
  • Daily flash reports. These snapshots break down the portfolio by mandate, gain or loss, change day-over-day, duration and option-adjusted spread (OAS) of each mandate, and yield of the portfolio.
  • Daily credit reports. The member described these as “early warning systems.”

Governance: sitting down with management. These are weekly capital markets meetings scheduled for 30 minutes where a packet of information is reviewed by the company’s treasurer, assistant treasurer (AT) and others, including the treasury controller.

  • They review: market and economic developments from the week; cash balances; how does those affect other income and expense (OI&E); mark-to-market; strategies; upgrades and downgrades; noteworthy external meetings with managers and others; liquidity.
  • Decisions made at these weekly meetings include approving any exceptions on credit. “If something falls out of compliance, we need to assess and take corrective actions or get an exception,” the member said. His team provides a recommendation for a course of action. Other business includes:
    • Reviewing a credit watchlist, including discussion of strategies for assets on the list.
    • Liquidity positioning decisions, made in consultation with the treasurer, AT and head of cash operations, based on liquidity forecasting tools and reports.   
    • Asking for opinions if the investment team “wants to do something off the beaten path.”
  • A summary email of the meeting consisting of a 20-page deck is sent to the company’s CFO, who at times calls the member to ask a question.

Performance reporting. In response to a question from another member, the presenter said the company reports on managers at month-end, starting with how the overall portfolio did in relation to its blended benchmark. Also:

  • “We look at each mandate and ‘horse race’ each manager,” including portfolios the company manages internally, comparing performance to the mandate’s benchmark.
  • The company sends the horse race information to each manager, but doesn’t identify the names of other managers. It’s presented in one-month, three-month, one-year, three-year, five-year and since inception views.
  • The company produces a scorecard with qualitative and quantitative measures that are shared with the managers. 
  • Managers who consistently rank at the bottom, are not taking direction or not giving quality feedback may be replaced. The member said the company is always prepared with a vetted backup for each mandate.

Board meetings: less granular. Meetings with the board take place every three months and feature high-level reports. These involve an “internal board’ that includes the member and his team, the company’s CFO, treasurer, ATs and one or two company board members that join along with legal and other parts of treasury.

  • These meetings are used to set overall strategy, policy approvals, formal exceptions and compliance approvals, and grant approvals on a variety of topics as necessary. 
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Talking Shop: Processing Fees for a Domestic Cash Pool in China

Editor’s note: NeuGroup’s online communities give members another forum to find answers to their questions. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: insights@neugroup.com.


Member question: “Has anybody set up a China domestic cash pool? I would like to understand market practice on the bank’s processing fee for this.

  • “[Our bank] is charging us a 0.1% processing fee on the outstanding borrowed balance in the domestic cash pool. Can someone give me a benchmark for this?”

Editor’s note: NeuGroup’s online communities give members another forum to find answers to their questions. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: insights@neugroup.com.


Member question: “Has anybody set up a China domestic cash pool? I would like to understand market practice on the bank’s processing fee for this.

  • “[Our bank] is charging us a 0.1% processing fee on the outstanding borrowed balance in the domestic cash pool. Can someone give me a benchmark for this?”

Peer answer: “We have operated a domestic entrustment loan (cash pool) in China with several banks, including [your bank]. The entrustment fee we paid was 8 basis points at the time, but we moved to another provider within the last couple years.

  • “Our experience is that pricing is largely dependent on the size of the pool and related cash management activity with that banking partner.
  • “Overall, we concentrate a lot of our cash management activity to the six global transaction banks in our RCF, which results in significant pricing scale.”

Member response:  “This is very helpful. We have a very tight relationship with [the bank] globally and having this benchmark will help us to get some kind of market indication. I have tried to negotiate our fee down.”

For more on this topic, please see our post from Feb.:Cash Pools in Asia for Corporates Trying to Access Funds in China

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What the Crypto Craze Means for Corporates Seeking Use Cases

Treasurers eye the value of Bitcoin and other digital assets as payment methods, investments and tech tools.

The fast-paced, volatile and increasingly popular world of cryptocurrencies like Bitcoin and other digital assets is sparking interest, questions and a few concerns among finance and treasury professionals.

  • Discussion at a recent NeuGroup meeting of assistant treasurers pointed up how some corporates are approaching the decision about what role, if any, digital assets should play in their futures.
  • Other members are grappling with more granular issues, reflecting their relatively higher level of interest and engagement in crypto and, for some, the technology that enables it creation and use.

Treasurers eye the value of Bitcoin and other digital assets as payment methods, investments and tech tools.

The fast-paced, volatile and increasingly popular world of cryptocurrencies like Bitcoin and other digital assets is sparking interest, questions and a few concerns among finance and treasury professionals.

  • Discussion at a recent NeuGroup meeting of assistant treasurers sponsored by Societe Generale pointed up how some corporates are approaching the decision about what role, if any, digital assets should play in their futures.
  • Other members are grappling with more granular issues, reflecting their relatively higher level of interest and engagement in crypto and, for some, the technology enabling its creation and use.

Three buckets: Members agreed that, depending on companies’ needs, digital currencies should be viewed in three buckets:

  1. Payment vehicles
  2. Investment assets
  3. Technology underlying the currencies that may have innovative applications.

Use cases. An assistant treasurer said his tech company is exploring uses of the distributed-ledger technology supporting cryptocurrencies as well as their use as a form of payment and as an asset.

  • Private digital currencies may currently be more accurately viewed as assets, perhaps as an inflation hedge similar to gold, he said.
  • But be careful. Rather than providing diversification, the member added, Bitcoin’s rapid adoption may correlate it more closely to risk assets.
  • As long as private digital currencies such as Bitcoin and Ethereum remain very volatile—as the chart shows, bitcoin has fallen more than 20% since mid-April but increased in value by more than six times over the last year—they will be unattractive as a form of payment. And so, members agreed, customers, advertisers and others are not yet “clamoring” to accept them.
  • Government-sponsored stablecoins may be more acceptable as currencies. “But the dollar is already digital; why do I need to make it a stablecoin?” one AT asked.

Control issues. One member’s company has launched a profitable nonfungible token (NFT) business but is struggling with how to accept ethereum digital coins as payment, in part because the account is set up in one person’s name, contrary to the traditional notion of controls.

  • “We need to take a bootstrap operation and turn it into something that has a lot more scale and, frankly, governance around it,” he said.
  • A peer agreed, noting some crypto custodians require balances in the account at all times, “and we don’t necessarily want to hold or invest a large portion of our balances in these currencies.”
  • Members said they’re comfortable using crypto exchanges and other digital companies to hold digital assets, rather than waiting for traditional, financial services custodians to get on board—as long as there are “real controls” such as two-party authentication and approval for transactions.  

Regulation would help. A member said that cryptocurrencies could be an effective payment solution in Venezuela and other markets where USD is hard to come by, noting concerns about the lack of regulations around digital currencies.

  • That’s not entirely true, a peer said, adding that transactions that involve converting fiat to crypto and vice versa must comply with know-your-customer (KYC) and anti-money laundering (AML) rules.
  • “And they have to have money transmitter licenses if they’re not a bank,” he added. “So there’s some regulation, depending [on whether] a fiat currency is involved in any part of the transaction.”
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Shifting Winds of ESG Policies and Regs Have Risk Managers on Alert

The prospect of increased regulation and disclosure around corporate sustainability has risk managers preparing.

The likelihood of increased regulation and mandatory disclosure of ESG-related activities and risks under the Biden administration and across the globe has enterprise risk managers trying to get their ESG ducks in a row.

  • “From a risk management perspective, we audit all facts and figures in ESG reports we’re using internally,” said one member at a recent meeting of NeuGroup for Enterprise Risk Management. “The expectation is that sooner rather than later we’ll have to be publicly disclosing those; we want to make sure those are accurate.”

The prospect of increased regulation and disclosure around corporate sustainability has risk managers preparing.

The likelihood of increased regulation and mandatory disclosure of ESG-related activities and risks under the Biden administration and across the globe has enterprise risk managers trying to get their ESG ducks in a row.

  • “From a risk management perspective, we audit all facts and figures in ESG reports we’re using internally,” said one member at a recent meeting of NeuGroup for Enterprise Risk Management. “The expectation is that sooner rather than later we’ll have to be publicly disclosing those; we want to make sure those are accurate.”
  • “Like many here, we’re trying to formulate how we tackle this issue,” another member said. “Approaching ESG like you do other exposures is a good idea—some companies are setting up steering committees to tackle this.”
  • From a governance perspective, another member said, “Everybody at our company, rightfully, is interested in ESG, but we’re all still trying to figure out how we go about it in a holistic, cohesive manner.”

The lawyers’ perspective. The discussion featured insights and perspective from Holly Gregory and Heather Palmer, partners who lead the global ESG practice at the law firm Sidley Austin.

  • They gave an overview of the rapidly changing ESG regulatory and legal landscape, including what to expect under President Biden, litigation risks and evolving corporate practices.

Frustration with standards. The problem many corporates face is that no single set of ESG disclosure standards exists, leaving risk managers to devise their own practices amid a plethora of standard setters and framework developers.

  • “Both corporate leaders and investors have expressed frustration with a lack of coherent standards in this area,” Ms. Gregory said.
  • Ms. Palmer added, “There have been efforts by standard setters to try and consolidate, but it’s anyone’s guess in terms of how quickly they’re going to be able to do that.”
  • Investor demands for more disclosure of ESG risks and initiatives mean corporates have adopted standards voluntarily. “As regulators have been slow to act, the rate of voluntary standards has grown,” Ms. Gregory said, pointing to sustainability and corporate responsibility reports, and SEC disclosures related to material risks.

Watching the SEC. Now, though, the regulatory wheels are spinning faster and corporates are waiting to see what the new administration’s policies will mean for them. “Climate change, environmental justice and ESG issues are a primary focus of the Biden administration’s ‘all of government’ approach,” Ms. Gregory said.

  • “We’ve had a sustainability report for years,” one member said, but recent attention from regulators and agencies is “a good reminder that we all need to address our reporting infrastructure.”
  • Of critical interest is what action the Securities and Exchange Commission (SEC) will take. Last month, its Division of  Enforcement formed a new Climate & ESG Task Force; later in March, the SEC confirmed an “all-agency” approach and created an ESG landing page on its website.
  • “Some people are waiting to see what the SEC does now, and the approach they’ll take,” Ms. Palmer said. “One approach that some have advocated for is that the SEC will specifically recommend that your disclosures align with [one standard], and that’ll dictate it.”

Risks, corporate practices. In addition to breach of fiduciary duty shareholder lawsuits, Sidley Austin’s list of litigation risks facing corporates around ESG includes federal claims over material misstatements and omissions in securities offering documents as well as SEC enforcement actions.

  • The firm also notes that the FTC is reviewing so-called greenwashing complaints over allegedly deceptive environmental claims.
  • The presentation listed these evolving corporate practices and suggestions to help mitigate the risks:
    • Consider whether the board has the appropriate structure for ESG oversight.
    • Evaluate ESG risks from an ERM perspective.
    • Understand and revisit the existing compliance function and controls in place around ESG disclosure.
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Gaining Ground on the Road to Diversity in Capital Markets Deals

NeuGroup members discuss details of including firms owned by minorities and women in debt and other transactions.

Talk about timing. Members of NeuGroup for Capital Markets discussed diversity and inclusion (D&I) in capital markets transactions on the same day 11 firms owned by women, minorities and veterans joined Deutsche Bank Securities in closing a $750 million bond underwriting for the bank.

  • The role of the 11 firms—which received about 60% of the fees—underscores the momentum of the movement among banks and corporates to raise the profile and contributions of minority- and women-owned financial institutions.
  • “I’m definitely interested in learning about how we can more fairly divvy up what we spend with D&I firms and elevate them,” one member said.
  • Use of D&I firms by treasury has typically been prompted by the suggestion of a board member or another influential party, but that’s changing, he added.

NeuGroup members discuss details of including firms owned by minorities and women in debt and other transactions.

Talk about timing. Members of NeuGroup for Capital Markets discussed diversity and inclusion (D&I) in capital markets transactions on the same day 11 firms owned by women, minorities and veterans joined Deutsche Bank Securities in closing a $750 million bond underwriting for the bank.

  • The role of the 11 firms—which received about 60% of the fees—underscores the momentum of the movement among banks and corporates to raise the profile and contributions of minority- and women-owned financial institutions.
  • “I’m definitely interested in learning about how we can more fairly divvy up what we spend with D&I firms and elevate them,” one member said.
  • Use of D&I firms by treasury has typically been prompted by the suggestion of a board member or another influential party, but that’s changing, he added.

Authenticity. Another member, who works at a technology company that has used D&I firms for years, said a key consideration is determining whether they are fulfilling their stated missions.

  • The big question: Are they are doing what they set out to do and creating benefits for their communities and constituencies?
  • He noted using D&I firms for the company’s investment portfolio and starting a program that pays one firm slightly higher fees, with the understanding that it will use the money to fund new jobs for women, particularly minorities.
    • Either the D&I firm will offer the women full-time jobs or use its network or the company’s to seek offers at larger banks.
  • Asked how treasury tracks the D&I firm’s efforts, the member responded that, “We were very clear that the expectation is for it to effectively fund two new jobs, and we’ll be involved throughout the process to make sure that’s happening.”

Allocations and feedback. The member said D&I firms can diversify a company’s investor base and are expected to bring “quality orders” from accounts that are not covered by the large banks.  

  • “We spend a lot of time to make sure they get allocated their fill if it’s a quality order,” he said.
  • Then treasury provides the firms with feedback on what worked well and what didn’t, so they can “elevate over time. It’s something we take very seriously and we continually think about other ways we can engage them across our treasury function.”

Linked to credit? One member asked peers whether D&I firms brought into bond offerings were linked in any way to their credit facilities.

  • His company has added some foreign banks in the revolver that are not broker-dealers; so to give them a share of wallet in debt offerings, the banks share fees with D&I broker intermediaries who sell the bonds.
    • Many D&I firms currently have insufficient capital to participate in credit facilities.
  • “We’ve been reluctant to go beyond that and just bring folks in for the sake of bringing them in, from a wallet perspective,” he said. “We feel like we have to save every nickel for the banks in our credit facility.”
  • A peer responded that his company has a similar arrangement with a D&I firm partnering with a commercial bank. He said the arrangement may not please other banks in the revolver but doesn’t create a problem.
  •  “I feel there’s enough precedent,” he said. “Banks have accepted it and it’s just another part of the conversation when banks are vying for wallet share.”
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Talking Shop: Use a Non-Canadian Bank for Cash Management in Canada?

Editor’s note: NeuGroup brings members together to answer questions and help each other in a variety of forums, including online communities—one of many benefits of membership. Talking Shop shares valuable insights from these members-only exchanges, anonymously. Send us your responses: insights@neugroup.com.


Member question: “Has anyone successfully used a non-Canadian bank for its primary cash management bank in Canada? If so, who? If not, why, and which Canadian bank are you using?

  • “Our understanding is we need to have a Canadian bank, but we are struggling to validate if that is still true and why. We currently have many service and technical issues [with our bank].”

Editor’s note: NeuGroup brings members together to answer questions and help each other in a variety of forums, including online communities—one of many benefits of membership. Talking Shop shares valuable insights from these members-only exchanges, anonymously. Send us your responses: insights@neugroup.com.


Member question: “Has anyone successfully used a non-Canadian bank for its primary cash management bank in Canada? If so, who? If not, why, and which Canadian bank are you using?

  • “Our understanding is we need to have a Canadian bank, but we are struggling to validate if that is still true and why. We currently have many service and technical issues [with our bank].”

Peer answer 1: “My previous company experiences have led me to avoid using [the bank you use] in Canada. They are difficult to work with, don’t use standard BAI or payment formats, etc. These lead to difficult integrations with an ERP or TMS.

  • “On the other hand, I have had good experiences with ScotiaBank, RBC and Bank of Montreal. Only Canadian banks have the portals available to do the provincial tax payments, one reason to continue to use them. Collections are easier with a Canadian bank as your receipts bank.
  • “I am considering a split approach currently. For example, using [one US bank] for electronic payments (as they are a large provider for us globally for this) and leaving receipts, check payments and tax payments at one of our Canadian partner banks.”

Peer answer 2: “While we use a Canadian bank in Canada, we did explore using a non-Canadian bank, but that non-Canadian bank also cleared through the Canadian bank.

  • “From our experience, ordinarily, it wouldn’t be an issue, but if you have any deposits, etc. that you need to track, you get stuck with having to wait for the correspondent bank to respond.”

Peer answer 3: “We’ve gone through a similar transition. We were using [two US banks] for AR and payments. Both operated in Canada through partner banks at the time: TD Bank and RBC.

  • “In 2019, we transitioned to Scotiabank at the request of our local business who was having collections challenges working with [a US bank’s] structure.
  • “With any bank transition comes the usual change management issues, but the business is happy and there are no major pain points from a treasury perspective.”

Other peers use: JPMorgan, RBC and HSBC.

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Deal Defense: Building a United Front When Debt Underwriters Grouse

The weeks and days leading up to the sale of a company’s debt can be nonstop crazy. Then there’s the bank group.

After weeks of extremely busy days, late-night phone calls and early morning meetings, you’re just days away from a multibillion-dollar debt issuance. The phones are ringing and one (or more) of the calls is from a co-lead bank, still complaining about its share of the deal. After you manage to get off the phone, they call your boss to complain. Welcome to the rough-and-tumble world of debt offerings.

  • At a recent meeting of NeuGroup’s Treasurers’ Group of Thirty meeting, one member and two guests each walked the group through their experiences with recent bond deals.
  • What became apparent: You need nerves of steel, a finance team singing from the same hymnal and the ability to cope with discontented bankers.

The weeks and days leading up to the sale of a company’s debt can be nonstop crazy. Then there’s the bank group.

After weeks of extremely busy days, late-night phone calls and early morning meetings, you’re just days away from a multibillion-dollar debt issuance. The phones are ringing and one (or more) of the calls is from a co-lead bank, still complaining about its share of the deal. After you manage to get off the phone, they call your boss to complain. Welcome to the rough-and-tumble world of debt offerings.

  • At a recent meeting of NeuGroup’s Treasurers’ Group of Thirty meeting, one member and two guests each walked the group through their experiences with recent bond deals.
  • What became apparent: You need nerves of steel, a finance team singing from the same hymnal and the ability to cope with discontented bankers.

Different details, similar pushback. The presenters had underwriting groups and banks of varying sizes, with different configurations of leads and co-leads. But no matter the details, they all described general disgruntlement flowing from either individual banks or all of them over their roles in the deal.

  • “There is no lack of ego” with the banks, said one panelist, adding that all the big banks think they should lead the debt offering.
  • One of the issues that made each presenter displeased: There was always one bank more unhappy than the others that would fight to the end.
  • At the same time, the dissatisfaction of bankers is a sign to some treasurers that they are managing the process correctly. “You know you haven’t done your job if people aren’t complaining; but wow, do they complain,” said one presenter, referring to her syndicate.
    • Added another member, “If people are happy, I feel I did my job wrong.”

Defending against the end around. One panelist said dissatisfied banks have called her boss, asking for more and better. “You have to have a united front,” she said. And the CFO who takes that call should just say, “The decision has been made.”

  • Another panelist said she met with the CFO ahead of time. “I make decisions with boss jointly and get sign-off, [and] everyone knows why we’re doing what we’re doing.”
  • “You have to be a united front as an issuer,” said another of the panelists.

Keep raters updated. In preparing for issuance day, panelists said keeping the rating agencies informed was key. “Good to keep rating agencies in loop,” said one participant.

  • Thus, they “make sure they were quickly talking with rating agencies, and banks in our syndicate every quarter” after the decision to issue debt.

The time is right, no matter what. Panelists said they more or less stuck with their issue dates. One issuer had picked early January of 2021.

  • There was a lot of concern with January, what with the worsening pandemic, the storming of the US Capitol, and Georgia runoffs ahead.
  • There were a lot of questions about whether this “go date” would work, the panelist said. But treasury overcame the obstacles and produced a good outcome.

Oversubscribed. Despite all the Sturm und Drang in the lead-up to the debt issuance, all three panelists said their deals were oversubscribed.

  • Two panelists said theirs were 3.5-4 times oversubscribed while a third said they were 6 times oversubscribed.
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Improvements in Forecasting Open Doors for Hedge Changes

A move from a current-year to a rolling forecast allows one risk manager to fine-tune the cash flow hedging program.

A new CFO can mean a little change—or a lot. In the case of one NeuGroup member who manages FX risk, the new CFO drove an initiative to ensure budget forecasts would have a longer horizon and be available earlier.

  • Over the course of two years, this has enabled an evolution from a program that only hedged a year out from the budget to a longer-tenored layered program.

A move from a current-year to a rolling forecast allows one risk manager to fine-tune the cash flow hedging program.

A new CFO can mean a little change—or a lot. In the case of one NeuGroup member who manages FX risk, the new CFO drove an initiative to ensure budget forecasts would have a longer horizon and be available earlier.

  • Over the course of two years, this has enabled an evolution from a program that only hedged a year out from the budget to a longer-tenored layered program. 

The benefits of earlier forecasting. In the previous scenario, treasury would get the forecast for the following fiscal year, say for FY2021, very late in FY2020, and the multiyear forecast well into FY2021.

  • To maintain hedge accounting (a key objective), hedging was in effect limited to the budget year, i.e., 12 months out from the budget.
  • With a budget now available much earlier in the fiscal year, and the multiyear forecast, too, treasury can hedge further out sooner.
  • This has given way to an approach of layering the hedges systematically on an ongoing, quarterly basis up to 24 months out, but now with a minimum of 12 months out, not a maximum.

Strategic framework with flexibility for opportunism. The FX impact is measured in terms of risk contribution to the P&L. Treasury identifies the exposures (currencies) that contribute the most risk to the P&L.

  • Then, based on a maximum risk tolerance level (i.e., a maximum dollar amount of downside within a 90% confidence interval), it makes a hedge recommendation according to which currencies and hedge ratios reduce volatility the most and minimize the P&L impact.
  • The team will consider hedging exposures that represent more than 10% of exposures or where the risk contribution is over 7.5% from a VaR perspective. “We use cash flow at risk as a guide and a way to keep our focus; we don’t live and die by it,” the member said.

A decision model. The framework will soon include a decision model for variability in hedge ratios to be opportunistic based on certain market factors.

  • The CFO “doesn’t want to ever not hedge,” or have business unit leaders try to influence hedge decisions based on their view of favorable or unfavorable conditions, the member said.
    • “We want systematic criteria” for making choices on hedge ratios, underpinned by market signals like valuation, carry and momentum, he added.
  • Valuation is a long-term hedge signal: assuming currencies tend to mean-revert, is the currency over- or undervalued against measures like purchasing power parity (PPP)?
  • Carry: Historically, it’s rare that a currency depreciates as much as indicated by the forward points. Is the carry favorable or punitive?
  • Momentum is a short-term hedge signal: Simple measures like 100-day moving averages indicate currency trends that can inform decisions.

Expense side: predictability.  For the USD functional company, expenses are concentrated in a few currencies that treasury wants to hedge to a high degree (high hedge ratio) using forwards to create predictability on the operating expenses line.

  • Layering smooths out volatility, and for each of the four operating lines, the hedge ratio is raised quarterly as forecast certainty increases to maintain a constant 24-month hedge horizon.
  • By contrast, the revenues side stems from license royalties which by their nature (paid in arrears based on sales by licensees) are harder to forecast with the same degree of accuracy and therefore to hedge.
    •  Hence, the focus on predictability in operating expenses.

Forecast confidence requires close collaboration. An effective hedge program is only as good as the forecasts that feed it. Without close cooperation with the forecasters in the business units, the program fails.

  • The finance function at the business units tracks forecast accuracy quarterly and reviews with treasury and accounting to create a feedback loop so that forecast certainty drives decisions on hedge ratios and accuracy improves over time for a virtuous circle of improvement. 
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Overcoming Resistance: Integrating Data in Cash Flow Forecasting

Treasurers at mid-cap corporates looking to use large-scale data analysis to enhance cash flow forecasting are finding colleagues hesitant.

The advantages of using sophisticated data analysis in cash flow forecasting are clear to a growing number of treasurers intent on improving accuracy and eliminating human error. But implementing and executing a data-driven approach often requires collaboration with teams outside treasury, such as AR and credit collections—and some NeuGroup members are meeting resistance.

Treasurers at mid-cap corporates looking to use large-scale data analysis to enhance cash flow forecasting are finding colleagues hesitant.

The advantages of using sophisticated data analysis in cash flow forecasting are clear to a growing number of treasurers intent on improving accuracy and eliminating human error. But implementing and executing a data-driven approach often requires collaboration with teams outside treasury, such as AR and credit collections—and some NeuGroup members are meeting resistance.

  • Solid support from leadership and showing the benefits of data analysis may make the transition smoother and help get members of other teams on board.
  • That key insight emerged from a recent discussion at a meeting of NeuGroup for Mid-Cap Treasurers, sparked by a presentation about data-enhanced cash flow forecasting from sponsor Cashforce.
  • “A data mindset requires an analytical filter,” one member said, and if another team does not thrive on data, it takes some effort to get colleagues to buy in.

Overcoming intimidation. “I like to be very data-driven,” one member said. “Sometimes that doesn’t go over well in our company. It can be intimidating to people.”

  • “When you start questioning trends, it doesn’t always make people feel very good,” she continued. “I think there can be a lot of defensiveness.”
  • Another treasurer said that, in his experience, “having access to data and showing it to [staff] kind of scares them. People say they want to change—people don’t want to change.”
  • Though there can be a learning and implementation period, he said he was able to find success by stressing how much time data analysis could save in the long run.

Navigating collaboration. Some members said teams that consistently set low expectations for cash flow are often obstacles to using data that produces different, more accurate forecasts. “There can be sandbagging in the forecast, people can be resistant to being more optimistic,” one member said. 

  • Another said that, though she would like to see the company implement a more data-focused model for cash flow, it would be too great a challenge to work with functions that don’t fit under the treasurer and do not share the data mindset.
  • One treasurer said his company is having these issues with its AR team, which does not report to him. “When you compare quarters, [we are] 10-15% over our forecast,” he said. “There’s a disconnect.”

Teamwork, dream work. That member said he was able to work with his company’s AR team to incorporate data and effectively eliminate the issue, though there was initial reluctance.

  • He recommends a single individual in a management role spearhead this kind of change. “If it is more driven by one leader, it is easier to shield criticism and make a right decision.”
  • The member said another source of friction can be FP&A and other finance or business leaders outside of treasury who want to maintain oversight of forecasts.
  • Though there is value in working together to incorporate data for forecasting, he said, “the entire organization needs to be ready to become more objective rather than try to manage divisions.”
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A Virtuous Cycle Including Treasury Bolsters Sustainability Efforts

Building a framework sets the stage for green bonds—an umbrella to systematize initiatives.

Increased scrutiny of corporate sustainability efforts by investors and other stakeholders has made it essential for companies to place ESG initiatives into a clear framework.

  • Building the framework to coordinate decisions and address investor inquiries more effectively requires communication among key parts of the company, with treasury playing a critical role.
  • These were among the takeaways from a recent meeting of NeuGroup for Capital Markets sponsored by Wells Fargo during which members learned about two companies’ journey to build such frameworks.

Building a framework sets the stage for green bonds—an umbrella to systematize initiatives.
 

Increased scrutiny of corporate sustainability efforts by investors and other stakeholders has made it essential for companies to place ESG initiatives into a clear framework.  

  • Building the framework to coordinate decisions and address investor inquiries more effectively requires communication among key parts of the company, with treasury playing a critical role.
  • These were among the takeaways from a recent meeting of NeuGroup for Capital Markets sponsored by Wells Fargo during which members learned about two companies’ journey to build such frameworks.

Virtuous cycle. One member at a major tech company noted its longtime focus on environmental issues, and its creation several years ago of a dedicated sustainability office.

  • Treasury executives have been “unleashed,” he said, with support from the treasurer and CFO to proactively find ways to incorporate ESG initiatives.
  • Working closely with the sustainability team in a “virtuous cycle” assures that financial initiatives are consistent with the company’s broader ESG objectives. “Collectively we can land that with senior leadership in a very effective way,” the member said. 

ESG bonds help. Another member’s company decided eight years ago to power its energy-hungry business completely with renewable energy. It reached 90% in 2019 when, coinciding with the arrival of a new CEO, it created a more formal program headed by the VP of investor relations that applied greater focus to green, social and diversity initiatives.

  • A recent green bond “was an accelerator that helped crystalize strategic targets and get buy-in from within the company for what the targets should be,” the member said.
  • Serious consideration of a green bond started when the company achieved investment-grade status. The sustainability office saw an opening and “they really took over in terms of creating the green framework,” the member said.
    • “It was a big lift coming up with the list of commitments the company would stand by and communicate externally.”
  • That involved reaching out to colleagues in operations, construction, procurement and other departments. “A massive undertaking led by the sustainability office, along with the bank we chose and treasury,” he said.

The payoff. The bond led to broadening the company’s ESG initiative to include constructing only LEED Gold-certified buildings globally, and investing in waste-water management and recycling as well as charging stations for electric vehicles.

  • “A structure was put in place for internal targets and a framework that the sustainability office could show externally,” he said.

Sustainability board. The member cited the benefits created by communication between treasury, sustainability and other departments, achieved partly through the company’s sustainability board.

  • It comprises more than 20 representatives from departments ranging from data-center construction, those responsible for powering and cooling the centers, folks constructing devices, perhaps with recycled materials, and those in charge of the company’s employee transfer programs.
  • “There is a virtuous cycle of ideation and innovation that can occur from bringing key ideas to that board for feedback, to make sure they are honed and as impactful as possible,” he said.
  • The company’s sustainability bond last year “put everything under one umbrella,” the executive said.
  • “It made it clearer to us in treasury that we could play a role in tying together the financial narrative, working with the communications team, IR and the stability office to build the connective tissue that connect sustainability, environmental and governance.”
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Talking Shop: SOX Entity-Level Control for Shared Service Centers?

Editor’s note: The NeuGroup Process brings members together to solve problems and answer each other’s questions in a variety of forums, including online communities for specific groups—one of many benefits of membership. Talking Shop shares valuable insights from these members-only exchanges, anonymously. We welcome your responses—and any questions you want answered: insights@neugroup.com.

Member question: “Does your company have a finance/accounting shared service center?

Editor’s note: The NeuGroup Process brings members together to solve problems and answer each other’s questions in a variety of forums, including online communities for specific groups—one of many benefits of membership. Talking Shop shares valuable insights from these members-only exchanges, anonymously. We welcome your responses—and any questions you want answered: insights@neugroup.com.


Member question: “Does your company have a finance/accounting shared service center?

  • “If yes, do you have a SOX entity-level control (ELC) related to monitoring the shared services center activities, e.g., error rates, reconciliations, journal entries, etc.?
  • “We’re doing a refresh of ELC’s this year and [our auditor] is suggesting we consider a new ELC specific to our shared services center.  We’re still considering the pros and cons, and have not made a final decision.”

Peer answer 1: “We have an accounting shared services center that includes payroll, accounts payable, accounts receivable, and international controllership functions.

  • “We do not have an entity-level control specific to the shared services center.
  • “Our SOX controls around reconciliations and journal entries are global controls and apply equally to whether it is done at the shared services center or elsewhere.”

Peer answer 2: “We have an accounting shared services center and we do not have an ELC related to monitoring around their activities, as the controls around reconciliations and [journal entries] are testing either at the shared services entity itself or globally. [We have the same] auditor now but we have not had discussions related to this.”

Peer answer 3: “We do have a shared services center, but we do not have an ELC related to the monitoring of those activities (naturally, individual controls within the various processes covered by our shared services are part of our SOX controls).

  • “Our auditor has not brought this up as issue. With that said, not all shared services are created equal and it is possible that in a different setup the auditor would be having the same discussion with us.”
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