Insights

Peer-Validated Insight Distilled by NeuGroup

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

Rating Agencies—Along With Everyone Else—Find Themselves in Uncharted Territory

Societe Generale provides perspective on how Moody’s and S&P are approaching COVID-19 effects.

Credit analysts are generally taking a “staged approach” to the new coronavirus’ impact on ratings, largely because current circumstances are unprecedented and have created uncharted analytical territory.

  • That was among the key takeaways from a session led by Societe Generale’s Karl Pettersen, head of rating advisory, at a recent meeting of NeuGroup’s AT30 peer group.
  • Each agency, he added, has adopted a slightly different mindset so far in approaching the crisis. As a result, rating agencies will also rely heavily on issuers to understand the mechanics of companies’ credit response to the virus.

Societe Generale provides perspective on how Moody’s and S&P are approaching COVID-19 effects.

Credit analysts are generally taking a “staged approach” to the new coronavirus’ impact on ratings, largely because current circumstances are unprecedented and have created uncharted analytical territory.

  • That was among the key takeaways from a session led by Societe Generale’s Karl Pettersen, head of rating advisory, at a recent meeting of NeuGroup’s AT30 peer group.
  • Each agency, he added, has adopted a slightly different mindset so far in approaching the crisis. As a result, rating agencies will also rely heavily on issuers to understand the mechanics of companies’ credit response to the virus.

Fishing expedition. One member said the analyst who covers his company at Moody’s Investors Service had reached out, fishing for information, but only vaguely responded to questions about how the agency might integrate that information into its analysis.

  • The Moody’s outreach was unsurprising, Mr. Pettersen said. In part, Moody’s got “burned” when it massively downgraded the oil and gas sector in the previous down cycle and has now opted for a more gradual and case-by-case approach. As a result, the agency has given individual analysts more latitude in building their cases with the agencies. 
  • S&P Global analysts have often been tight-lipped individually, but the agency is instead making “a lot of noise” at the policy level, announcing COVID-19 and oil price-related ratings actions affecting more than 1,000 issuers across the globe, including wholesale sector-wide credit watch or outlook changes. “That approach buys them time—60 days to figure everything out,” said Mr. Pettersen, adding S&P’s approach tends to be more formal and top down.

Credit vs. ESG. The advent of COVID-19 has also highlighted the question of how credit ratings and ESG ratings should intersect, Mr. Pettersen said. In addition:

  • The credit agencies’ traditional metrics are not designed to capture factors, often ESG related, that may permanently impair even highly rated companies’ credit trajectory. Thus, a reset in how ratings are defined may ultimately be necessary. 
  • The current situation highlights areas of complementarity or even contradiction between ESG and credit ratings. More bluntly, and more broadly, this tension is also embodied in the potentially competing priorities of economic and public health priorities today. In extreme cases, ESG and credit ratings can even be at opposite ends from each other.
  • The emerging issue’s poster child until recently has been Tesla, with its high ESG scores but deep-junk credit ratings. The current environment could accelerate questions around certain sectors such as oil and gas, and their fundamental ability to sustain credit quality over the long term.
  • One early consideration today is the extent to which market support (i.e. equity, debt, and bank capital markets, plus legislation/regulation) should be more formally incorporated and differentiated in credit ratings. For large investment-grade issuers, market access/support is an essential but mostly unspoken part of analysis, but which will come more to the forefront of analysis today, including through possible stimulus packages.

Read More Read Less
Contact Us
1
0

Preparing for a (Grand?) Reopening

Founder’s Edition, by Joseph Neu

How should finance and treasury professionals prepare for an economic reopening following the COVID-19 lockdown?

Since March 10, I have attended most of the 40-plus Zoom meetings NeuGroup has held with members. These include virtual peer group meetings, COVID-19 discussions, weekly office hours and interactive sessions devoted to other subjects. Below are some of my takeaways and insights.

Forecasting is paramount. The emphasis every company is placing on forecasting began with determining how long they could last with the liquidity on hand, without new cash flow. Then it incorporated expectations on new revenue expected in two weeks, one month, next quarter, in two quarters and so on, all under various scenarios, including a realistic worst case.

Founder’s Edition, by Joseph Neu

How should finance and treasury professionals prepare for an economic reopening following the COVID-19 lockdown?

Since March 10, I have attended most of the 40-plus Zoom meetings NeuGroup has held with members. These include virtual peer group meetings, COVID-19 discussions, weekly office hours and interactive sessions devoted to other subjects. Below are some of my takeaways and insights.

Forecasting is paramount. The emphasis every company is placing on forecasting began with determining how long they could last with the liquidity on hand, without new cash flow. Then it incorporated expectations on new revenue expected in two weeks, one month, next quarter, in two quarters and so on, all under various scenarios, including a realistic worst case.

  • Members continue to monitor collections closely and have switched on cash preservation protocols with varying severity, depending on the expected impact from COVID-19, how much liquidity they had, and how much access they had to new sources.
  • Forecasting, business planning and replanning now turn to the reopening and figuring out how soon lines of business may recover, how fast new cash flow arrives (and for how long) and what the recovery will look like—V-shaped, U-shaped, a flat-line or something else?

Stratification is key. The insight from China, courtesy of this week’s Zoom with our AsiaCFO peer group, is that financial planning must be stratified. For example, the recovery in China is V-shaped, helped by pent-up demand and stimulus. Yet there is great uncertainty and an expectation the recovery will be upset by demand and supply shocks caused by the global nature of the pandemic and the economic recession it has triggered. That means economic forecasts and corporate cash flow forecasts must factor in:

  • The impact in each country, region, sector and market. For example, food service and hospitality will be hit much harder than professional services in most markets, and areas with higher population densities will be affected more severely.
  • Timing differences. Companies must account for the different stages and severity of COVID-19 in different countries, from the initial curve of infections in their markets, in others they sell into or source from, and then the curve of subsequent infections until a vaccine emerges or the virus dies out. China is a few weeks to a month out of lockdown, Australia is midway, Thailand is just starting, and Singapore, Japan and South Korea are going through various second waves of lockdown.
    • In late Q1, MNC affiliates in China helped fund their parents by sending cash home to the US and Europe, as they were getting hit with the first wave.
    • Make hay while you can: April, May and June will be big months for a lot of business in China due to the reopening, before the next wave hits. Where can MNCs turn to next to make hay during another market’s reopening phase?
  • The opportunity to reacquire customers and competitors’ customers when the economy reopens. In many business lines, from food service to health care, homebound customers will be open to new products, new stores, new treatments. How aggressively will your company compete to reacquire and acquire them?

It can get complex quickly, and with each new forecast or plan, businesses need to balance the upside opportunity against the danger risk. Therefore:

  • Agility and smart decisions. “What sets the most successful firms apart in this environment is agility and decision making,” one Asia CFO from a consultancy said. “Agility is really critical, but also the speed of how you make decisions.” People need clarity on what decisions need to be made and when, and who needs to make them. And with so many decisions, there must be a good delegation process so employees can make them quickly and then take action.

Do we have enough capital? Given this complexity, uncertainty and opportunity, there is already a lot of second-guessing by those with access to capital: Do we have enough? Should we have issued more bonds? Should we go back into the market again? The second-guessing isn’t helped by the fact that bond offerings continue to be oversubscribed, spreads keep narrowing in secondary markets for those who have already issued, and bankers keep calling and emailing to ask issuers if they want to go back for more. So the internal conversations for reopening might shift from liquidity to growth capital for some.

  • This gets to the final stratification of haves and have nots in this new world: Those with liquidity and access to capital to survive and then thrive and those who do not. The former might possibly look forward to a grand reopening, whereas others are just hoping to reopen.
Read More Read Less
Contact Us
0
0

As Day Follows Night: China Exposures Grow and So Do the Hedges Against Them

Members whose companies have material exposure to the Chinese market exchange experiences with how to manage the currency risk.

What’s the best course of action when corporates need to blunt their growing cash-flow exposures in China? The answer, hedge. But what’s the best approach? Depends on the company of course. At a recent FX summit of NeuGroup’s two FX Managers’ Peer Groups – which due to COVID-19 was NeuGroup’s first-ever virtual peer group meeting – one session dealt with managing RMB risk. Two members shared their situations and planned or current approach, followed by virtual breakout discussions for peers to compare and contrast.

  • Company 1: As a company with many retail locations in China, Company 1’s cash-flow exposure is driven by the renminbi (RMB) royalties owed by RMB-functional entities to a USD-functional entity. The royalties are payable in USD and currently the onshore team processes RMB spot conversion to USD via a local payment bank. However, treasury is in the process of moving future royalty payments hedging, conversion and hedge settlement to treasury operations.
  • Company 2: This globally USD-functional company has expenses (capex and opex) in RMB related to the Chinese manufacturing of products (sold worldwide, priced in USD), as well as R&D and sales and marketing expenses. The company has a seven-person treasury front- and back office in Shanghai.

Members whose companies have material exposure to the Chinese market exchange experiences with how to manage the currency risk.

What’s the best course of action when corporates need to blunt their growing cash-flow exposures in China? The answer, hedge. But what’s the best approach? Depends on the company of course. At a recent FX summit of NeuGroup’s two FX Managers’ Peer Groups – which due to COVID-19 was NeuGroup’s first-ever virtual peer group meeting – one session dealt with managing RMB risk. Two members shared their situations and planned or current approach, followed by virtual breakout discussions for peers to compare and contrast.

  • Company 1: As a company with many retail locations in China, Company 1’s cash-flow exposure is driven by the renminbi (RMB) royalties owed by RMB-functional entities to a USD-functional entity. The royalties are payable in USD and currently the onshore team processes RMB spot conversion to USD via a local payment bank. However, treasury is in the process of moving future royalty payments hedging, conversion and hedge settlement to treasury operations.
  • Company 2: This globally USD-functional company has expenses (capex and opex) in RMB related to the Chinese manufacturing of products (sold worldwide, priced in USD), as well as R&D and sales and marketing expenses. The company has a seven-person treasury front- and back office in Shanghai.

Which market? The RMB is traded in two markets (onshore China, offshore China) with three curves: CNY (onshore), NDF (non-deliverable forwards) and CNH (offshore). Since mid-2018, offshore entities can access onshore FX rates in China and dividend payments and “forecasted” RMB exposure are eligible transactions. The CNY is traded on CFETS (China Foreign Exchange Trade System), run by the central bank, PBoC. Among the global banks, Citi, HSBC and Standard Chartered, for example, are CFETS members.

  • Company 1: As a buyer of USD, the CNH curve is more advantageous since the CNY curve includes a 150 basis point reserve charge.
  • Company 2: The CNY curve is better for a buyer of RMB like this company.

External and internal challenges: The implementation and ongoing running of a cash-flow hedge program faces some challenges of both external and internal nature, such as:

  • Documentation requirements from counterparties and regulators. Limitations as to what CFETS offers in products and tenors.
  • Since the CNY market is controlled, the USDCNY reference rate that is announced daily is open to manipulation.
  • The liquidity of the CNY NDF market falls off beyond the 1-year tenor mark.
  • Use and pricing of options/collars if and when the CNY market moves beyond PBoC’s +/- 2% guidance.
  • The counterparty credit risk is harder to quantify when dealing with locally regulated affiliates of multinational partner banks.
  • For company 2, if market conditions drive a shift from revenues in USD to CNY, what are the hedge program implications?
  • What do you lose when you centralize the hedge program to US? Local knowledge and contacts on the ground is particularly valuable in high-context cultural environments like China. How much of that will be lost in a drive to centralize hedging to HQ, many timezones away? It will be harder to communicate with the remaining team on the ground, as well as with trusted, regular bank contacts for FX and other local needs.

Accounting rate. Try to push for the use of the same accounting rate as the market you use the most; if you trade and hedge in the CNH market, push to use CNH as the accounting rate as well.

Hedge accounting. Does the choice of market have hedge accounting and effectiveness testing implications? For example, if CNY is the intercompany billing currency, would hedging in the NDF market require regression vs. only critical-terms match if you used the CNY market?

Internal collaboration:

  • Between FX, BU and AP teams for accuracy in forecasting and payment timing.
  • IT and TMS considerations: Can systems facilitate both CNY, CNH and NDFs?Will the system require the creation of a new “country” and assign the second RMB curve to that.
  • Legal and compliance: what amendments of key intercompany agreements are necessary?
  • Treasury: additional ISDA, KYC and other banking requirements.
  • Treasury Ops & Treasury Middle office: aligning settlement details, CNH (or CNY) accounts setup, Reval transaction flow.
  • Educating general internal stakeholders on the RMB market.

Note: Renminbi (RMB) is the name of the currency; a yuan is a unit of the currency; CNY is the onshore-traded yuan, CNH is the offshore-traded yuan; NDF is a non-deliverable forward denominated in CNY.

Read More Read Less
Contact Us
0
0

“Too Soon” Is Now “Let’s Do It”: Risk Managers Start Planning for Life Beyond COVID

Up until about a week ago, companies were so busy handling the immediate issues related to COVID-19, they were putting off thinking of future risks.

Enterprise risk management professionals are paid to look into the future and help companies prepare for it. But COVID-19 changed all that. “Too soon,” was the answer from most members of NeuGroup’s ERM peer group two weeks ago when we asked them about post-pandemic planning and their thoughts about the future.

  • One member back then said he was eager to get into longer-term thinking and “scenarios for one or two or three weeks or more.” However, the reaction he got from management was, “Now’s not the time.”

Today, though, that attitude is changing as senior executives adjust to the new normal. For example, one member in late March was delaying his annual risk outlook program, where heads of business units and direct reports suggest the biggest risks they see in the next few months to a year or more. This member was also hesitant to ask people to name their biggest risk “because they’ll just say pandemic.”

Up until about a week ago, companies were so busy handling the immediate issues related to COVID-19, they were putting off thinking of future risks.

Enterprise risk management professionals are paid to look into the future and help companies prepare for it. But COVID-19 changed all that. “Too soon,” was the answer from most members of NeuGroup’s ERM peer group two weeks ago when we asked them about post-pandemic planning and their thoughts about the future.

  • One member back then said he was eager to get into longer-term thinking and “scenarios for one or two or three weeks or more.” However, the reaction he got from management was, “Now’s not the time.”

Today, though, that attitude is changing as senior executives adjust to the new normal. For example, one member in late March was delaying his annual risk outlook program, where heads of business units and direct reports suggest the biggest risks they see in the next few months to a year or more. This member was also hesitant to ask people to name their biggest risk “because they’ll just say pandemic.”

  • But in mid-April, he said the program is starting up again, with C-Suite interviews and the creation of a heat map to present to the board in September.
  • Another member said he was now assigning teams to look at what happens after the crisis abates. Likewise, a member of NeuGroup’s Internal Auditors’ Peer Group, who also oversees ERM, said identifying post-crisis risks was getting a “better reception” among senior leadership.
    • “We’re starting to ID things that will need to be addressed,” she said. “What will it take for a recovery?”

Along with thinking about future risks, ERM at some companies has been assigned the project of updating the business continuity plan with takeaways from the pandemic. At another IAPG member’s company, the lack of a good BCP plan “is very top of mind” and managers are asking themselves, “How did we miss this?” He added that the company’s response has been “on the fly” and has been effective so far, but they don’t want to be as unprepared next time.

Read More Read Less
Contact Us
0
0

Revolvers to Recovery: Credit Markets and the Five R’s of COVID-19

US Bank on where credit markets have been, are now, and what (we hope) lies ahead: recovery and relaxation.

NeuGroup held a virtual meeting last week where members who work in treasury at major retailers heard a presentation on bond and loan markets from US Bank and discussed other topics of interest during this period of uncertainty, volatility and disruption. Here are some key takeaways as distilled by Joseph Neu, beginning with insights from US Bank.

The five R’s of COVID-19. US Bank described five stages of the debt and loan market’s progression in the wake of the coronavirus pandemic (see graphic). The funding market has moved through stage 1—revolver drawdowns—and stage 2—raise incremental liquidity—and is now in stage 3, repair, with covenant amendments and credit restructuring (to secured and asset-backed lending) with repricing along with that. Stage 4 brings recovery with the economy reopening, repayment of drawn lines and the bank market reopening for “regular-way” issuance extending beyond 364-days. Stage 5 is when we can all relax again.

US Bank on where credit markets have been, are now, and what (we hope) lies ahead: recovery and relaxation.

NeuGroup held a virtual meeting last week where members who work in treasury at major retailers heard a presentation on bond and loan markets from US Bank and discussed other topics of interest during this period of uncertainty, volatility and disruption. Here are some key takeaways as distilled by Joseph Neu, beginning with insights from US Bank.

  • The five R’s of COVID-19. US Bank described five stages of the debt and loan market’s progression in the wake of the coronavirus pandemic (see graphic). The funding market has moved through stage 1—revolver drawdowns—and stage 2—raise incremental liquidity—and is now in stage 3, repair, with covenant amendments and credit restructuring (to secured and asset-backed lending) with repricing along with that. Stage 4 brings recovery with the economy reopening, repayment of drawn lines and the bank market reopening for “regular-way” issuance extending beyond 364-days. Stage 5 is when we can all relax again.
  • Confirmation that accordions and incremental borrowing past a year are out. There was also confirmation that until the economy reopens (stage 4), banks will not offer anything but incremental short-term facilities priced above current revolver pricing (e.g., Libor + 225 basis points). The economics are best when done in conjunction with a bond deal and where revolvers remain undrawn. Lesser credits and smaller corporates may see Libor floors between .5% and 1%.
  • Debt issuance continues down the credit spectrum. Ongoing Federal Reserve efforts to bolster the credit markets—namely the primary and secondary corporate credit facilities—are helping to narrow credit spreads in the bond market. The expansion to include high-yield debt is helping the lower end of the investment grade market, too. The issuance trend will likely continue into fallen angels and convertibles as a result.
  • Essentials vs. non-essentials. Credit risk perception in both the bond and bank loan market is bifurcated by ratings as well as essential vs. non-essential businesses, with companies in the latter group also seeing their ratings downgraded on higher perceived credit risk. This expectation also helps explains why most of the draws were in the BBB space.
  • Some banks not participating in new lending. While the appetite for incremental lending varies based on the bank’s position in a company’s bank group, and there is more client selection going on than usual (with downsizing), some banks are not offering any more balance sheet at all. And foreign banks that cannot take US deposits are also reluctant to lend.
Source: US Bank

Member Insight

  • Prime funds same risk as government funds? One member asked where to put cash drawn from the revolving credit facility (or raised in the CP market). Peers said they are doing the regular counterparty risk checks on banks (CDS prices are rising, but still below 2008 levels). One member said he would share analysis his team is doing to test the hypothesis that, with all the Fed backstops, government-MMF risk and prime-fund risk may actually be pretty close, so why not take the extra yield offered by prime funds?
  • Credit card processor best practice. One member in a different group had been hit by a significant reserve request by BAMS; no one in the retail group has experienced that. This prompted an insight on processor best practice: Use multiple processors (three to five of the top ones) so you can shift volume when one does something to upset you; plus you can allocate based on stores (subsets of stores) and e-commerce.
  • China store update. One member shared that they are reopening stores in China by following the SARS 2003 playbook, which then saw getting back to normal taking five to six months. On a positive note, the current experience is tracking slightly ahead of that.
Read More Read Less
Contact Us
0
0

How to Protect FX From Newbies on Rotation

A NeuGroup member asks peers how to train people passing through the FX function without raising the risk of costly mistakes.

More often than not, specific corporate functions love a rotation plan where people from other areas come through to learn how the work in that function gets done, usually as part of a training and development program for high-potential talent. But for FX, more specifically trading, this can sometimes be a little tricky.

  • For instance, how, asked one FX manager during a recent NeuGroup virtual peer group meeting, do other members protect against FX newbies on a rotation making expensive trading errors? In other words, this manager said, “How do you make sure the rotation people aren’t doing what they’re not supposed to be doing?”

A NeuGroup member asks peers how to train people passing through the FX function without raising the risk of costly mistakes.

More often than not, specific corporate functions love a rotation plan where people from other areas come through to learn how the work in that function gets done, usually as part of a training and development program for high-potential talent. But for FX, more specifically trading, this can sometimes be a little tricky.

  • For instance, how, asked one FX manager during a recent NeuGroup virtual peer group meeting, do other members protect against FX newbies on a rotation making expensive trading errors? In other words, this manager said, “How do you make sure the rotation people aren’t doing what they’re not supposed to be doing?”

Limitations. Another member responded that his company sets parameters on amounts and types of trades, for example, so that rotating staff can be “allowed to do some things but there is a limit to how much damage they can do.” Shadowing or overlap also helps, whether it’s a rotation or someone taking another’s place for a different reason; one member said she trained the person taking her place for maternity leave for a month before she left.

Different strokes for different folks. Rotation programs come in several flavors and target different level staff. For instance, one member described a program he was familiar with that was two-tiered. This means there was a junior financial development program and a program for more senior financial people.

  • In the junior program, the young rotators would serve in more of a support role, doing things like analysis of counterparties, reporting and other functions that support the trader— but they weren’t actually allowed to trade. The more senior people rotating through could execute trades, but they were also held accountable for mistakes commensurate with their more senior status.
  • Even without rotations, training needs to be adequate for all the teams interacting with the FX team as well. One member said his treasury doesn’t do a rotation per se, but his company’s model is to “use the cash operations staff to be the FX back office.” But FX can be complicated and hard to learn even for a person from inside the organization who already knows the company well.

Trading’s the easy part. Whatever the philosophy on who can and cannot be let loose at the trading desk, one member thought that for training people in the FX world, trading was actually the easy part. “I think I can train anybody in one week” to do a trade, he said. “But the hard part is the strategy side. Strategic thinking, the accounting, the consequences, collaborating with all the business partners. That’s the hard part of the trade. For that, you need at least six months or a year or more.”

For big firms only? Finally, whether rotations are feasible depends very much on the size of the company and the treasury department, or finance function writ large. Ultimately, as a member pithily put it, “Rotations are the luxury of the large company.”

Read More Read Less
Contact Us
0
0

Treasurers Rise to the Challenge of Managing Teams Remotely

One treasurer shares how he keeps staff united and upbeat—and offers his take on leadership during a crisis. The COVID-19 pandemic has forced many treasurers to confront the challenges of managing finance teams remotely.

  • At a recent NeuGroup virtual meeting of mega-cap companies, one treasurer shared his approach to keeping his team cohesive, as well as an observation about how people perform during a crisis.

Together apart. To build a sense of togetherness and maintain unity when everyone is in a different place, the treasurer created a virtual “war room” where every morning each of his direct reports speaks up and updates the group on critical information including domestic and foreign cash levels.

One treasurer shares how he keeps staff united and upbeat—and offers his take on leadership during a crisis.

The COVID-19 pandemic has forced many treasurers to confront the challenges of managing finance teams remotely.

  • At a recent NeuGroup virtual meeting of mega-cap companies, one treasurer shared his approach to keeping his team cohesive, as well as an observation about how people perform during a crisis.

Together apart. To build a sense of togetherness and maintain unity when everyone is in a different place, the treasurer created a virtual “war room” where every morning each of his direct reports speaks up and updates the group on critical information including domestic and foreign cash levels.

  • He holds another war room call at the end of the day to learn, for example, about any cash shortfalls and ask his direct reports about the calls they’re holding with their teams and how the broader treasury group is functioning.
  • He also sends an email update to the entire treasury staff at the end of the day to reinforce the feeling that they are members of a team. He includes a fun fact about himself (first concert, favorite food, etc.). And he has received positive responses by sharing how he spends his workday.
    • “They are very interested in what your day looks like,” he said, adding that he would likely share some of what he got from the NeuGroup meeting that day.

Fun stuff. To keep things light and spirits high during an extremely tough time, the treasurer had people wear something fun for St. Patrick’s Day. (Another member jokingly suggested having an “ugly sweater day.”)

  • Every Friday, as part of the end-of-day call, the team has a virtual happy hour. The overall goal, he said, is to create a “good environment” in the virtual workplace.  

Crisis response. In mid-March, two weeks or so into working from home, the treasurer had observed that some members of his team had not yet stepped up as leaders or started thinking outside the box as they navigated “unchartered waters” created by the pandemic.

  • “Most people tend to do what they are comfortable with during a crisis, rather than hit it head on,” he said. “Top leaders tend to shine during a crisis.”
  • To help maintain focus and motivation, the treasurer does a weekly review, listing the major accomplishments from the treasury/risk team.
  • He also pays tribute to individuals who hit milestones, like a work anniversary, or who go “above the call of duty.”
Read More Read Less
Contact Us
0
0

Treasurers in Asia Alter Stress Tests, Grapple with Pandemic Challenges

Headaches include dividend repatriation, obstacles to execution of business contingency plans.

Repatriating dividends from China, India, Thailand and other countries is proving difficult for some treasury teams in Asia that are seeking to bolster their companies’ global liquidity in response to the coronavirus pandemic.

  • That takeaway and others emerged during a virtual meeting of treasurers in Asia facilitated by NeuGroup on Monday. Members at companies that had business continuity plans in place and had done stress testing before the crisis discussed some of the unforeseen consequences of this catastrophic outbreak.

Headaches include dividend repatriation, obstacles to execution of business contingency plans.

Repatriating dividends from China, India, Thailand and other countries is proving difficult for some treasury teams in Asia that are seeking to bolster their companies’ global liquidity in response to the coronavirus pandemic.

  • That takeaway and others emerged during a virtual meeting of treasurers in Asia facilitated by NeuGroup on Monday. Members at companies that had business continuity plans in place and had done stress testing before the crisis discussed some of the unforeseen consequences of this catastrophic outbreak.

Tax and audit issues. Few if any members assumed that the need for tax clearance and a full audit would thwart efforts to repatriate dividends. But the inability to access auditors and the closure of government tax offices has indeed made life difficult for some companies.

  • Treasury at one company solved the repatriation problem by doing back-to-back lending—leaving cash in China as a pledge to secure a loan to a subsidiary elsewhere.

New assumptions for stress tests. The repatriation issue underscores how the scope and effects of this pandemic exceeded the assumptions of many stress tests. As a result, companies are taking a hard look at those assumptions and making changes to reflect the new reality.

  • One company, for example, is now looking at how to build a cash buffer that will sustain it for two months without cash collection, up from one month under the old liquidity stress test assumption.

BCP steps: Not so simple. One member offered up an example of something in a business continuity plan that seems simple but is not working as advertised: The company had planned to shift some processes to India during the crisis but could not because logistical problems prevented the shipment of bank tokens there—meaning no access to the banking network.

Banks and documents. While some banks are accepting electronic signatures and the use of DocuSign, many are not, creating delays for corporates that then must get physical signatures and mail them to the bank. That raises the question of how far your banks will bend during this enormous disruption to business norms.

Business health. Companies in some industries have been devastated by the economic effects of the crisis. But among NeuGroup members, some at this meeting described doing quite well, particularly those in the technology and health care sectors. And only a small minority are considering the benefits of accepting government assistance.

Balancing act. On a personal level, members of treasury teams in Asia are confronting the same challenges of working at home described at all recent NeuGroup virtual meetings, especially by those with children who must be supervised because schools are closed. It’s another example of how the length and severity of the COVID-19 outbreak is forcing finance teams to adapt creatively to circumstances that everyone hopes will be much different by the second half of 2020 if not sooner.

Read More Read Less
Contact Us
0
0

SOFR Passes COVID-19 Stress Test, Bolstered by Stability of Repo Market

The volume of repo transactions underlying the calculation of SOFR has remained strong as the coronavirus disrupted other markets.

US regulators’ recommended Libor replacement has performed strongly through the volatility roller coaster powered by the coronavirus. In fact, the overnight repurchase agreement (repo) market used to calculate SOFR has increased in daily volume to more than $1.3 trillion.

  • “With SOFR, you have good reason to be confident that it can always be calculated, and the rate you’re paying reflects actual transactions,” David Bowman, senior associate director at the Federal Reserve’s Board of Governors, told NeuGroup members at a recent virtual meeting. “Every market is challenged now, but the only one that really seems to be operating near standard capacity is the overnight treasury repo market.”

The volume of repo transactions underlying the calculation of SOFR has remained strong as the coronavirus disrupted other markets.

US regulators’ recommended Libor replacement has performed strongly through the volatility roller coaster powered by the coronavirus. In fact, the overnight repurchase agreement (repo) market used to calculate SOFR has increased in daily volume to more than $1.3 trillion.

  • “With SOFR, you have good reason to be confident that it can always be calculated, and the rate you’re paying reflects actual transactions,” David Bowman, senior associate director at the Federal Reserve’s Board of Governors, told NeuGroup members at a recent virtual meeting. “Every market is challenged now, but the only one that really seems to be operating near standard capacity is the overnight treasury repo market.”

Libor extension unlikely. The futures exchanges’ move to SOFR discounting in October, anticipated to ramp up SOFR hedging, and other significant developments this year may be delayed—but only briefly.

  • US regulators have little choice but to move forward with transitioning away from Libor, Mr. Bowman said, given banks’ unwillingness to submit their costs for wholesale, unsecured funding past 2021, when their agreement to continue submitting to Libor ends.
  • New York State legislation designed to facilitate the transition from Libor has recently stalled as coronavirus took priority; but earlier “discussions were positive” and efforts should resume when the crisis calms, Mr. Bowman said. The bill would impact a wide range of corporate transactions, such as purchase agreements where the late payment fee is based on Libor, that typically lack language enabling the fallback to an alternative rate.

Corporate concerns linger. Mr. Bowman described efforts by the International Swaps and Derivatives Association and the Alternative Rates Reference Committee (ARRC) to develop SOFR contractual language and best practices, respectively, for derivative and cash transactions, to facilitate the transition. Corporates, however, are concerned that a forward-looking term SOFR has yet to emerge, and payments must be calculated in arrears.

  • “We would want to see a full term structure, so we can base transactions off one-month and three-month SOFR,” said the assistant treasurer of a major pharmaceutical company, noting few corporates have issued SOFR-priced debt so far.
  • Mr. Bowman said the ARRC is “committed to doing everything it can” to ensure the production of a forward-looking SOFR term rate, and it anticipates borrowers having a choice of solutions.
  • He encouraged corporates to experiment with using SOFR calculated in arrears, noting that calculation needn’t occur shortly after the period ends but could be done five or 10 days before, giving more time to plan. “Don’t wait for a term rate—find out where you can use SOFR now,” Mr. Bowman added.

Calling all corporates. Mr. Bowman invited corporate finance executives to participate in his Friday afternoon office hours to discuss SOFR issues and to join ARRC committees and respond to its consultations. “Having you all help to shape the way this goes forward is vitally important,” he said.

Read More Read Less
Contact Us
0
0

Using Bloomberg for “Nuisance” Trades

Avoiding the time-intensive process of requesting trades in a centralized structure, local cash managers speed the process with online access to Bloomberg.

During a recent NeuGroup virtual meeting of FX managers, one member said he has started to use Bloomberg for local affiliates’ “nuisance trades.” These are foreign currency-denominated accounts payable under a certain USD-equivalent threshold.

Avoiding the time-intensive process of requesting trades in a centralized structure, local cash managers speed the process with online access to Bloomberg.

During a recent NeuGroup virtual meeting of FX managers, one member said he has started to use Bloomberg for local affiliates’ “nuisance trades.” These are foreign currency-denominated accounts payable under a certain USD-equivalent threshold.

  • Local freedom. The member noted his company’s corporate treasury manages FX worldwide, so they were happy to find that local cash managers are able to load their trades by accessing Bloomberg online (which doesn’t require Bloomberg terminal access) for the centralized team in the US to execute.
  • Straight through. This process has eliminated an inefficient trade-request process using email across various time zones. The team’s normal e-platform for FX trading is not the best solution for this because many local banks don’t have the technology to connect to it. But they are all connected to Bloomberg. Affiliates only need a login and an internet connection to submit trade requests.
  • Multicurrency. Bloomberg also can execute onshore trades and NDFs in currencies the other platform might not support, so the FX team is able to trade INR, CNY, MYR, THB, KRW, and BRL, all onshore.
  • A small catch. There is a fee for access and authority to upload trades to Bloomberg. But for this company, it is well worth the cost to efficiently reduce the time required for this workflow.
Read More Read Less
Contact Us
0
0

Supply Chain Finance Not Immune from Pandemic Pain Felt by Banks

Higher funding costs for banks amid COVID-19 mean wider spreads in SCF market. An assistant treasurer at a major consumer goods company learned from supply-chain-finance (SCF) vendors that banks financing SCF assets have asked for wider spreads to compensate for their own higher funding costs, at least temporarily. The banks had agreed to a fixed spread that was still attractive in early March but, in the midst of the coronavirus economic meltdown, is much less so today. “It isn’t as attractive an asset at this moment, but long term it’s a terrific asset for the banks,” the member said at a recent NeuGroup virtual meeting. Because the banks see it as a long-term asset, they’re unlikely to “pull the rug out,” he said.

  • Another member noted that banks are struggling to syndicate risk from factoring programs as investors hoard cash, and they’re scrambling to find room on their balance sheets to keep their commitments.

Higher funding costs for banks amid COVID-19 mean wider spreads in SCF market.
 
An assistant treasurer at a major consumer goods company learned from supply-chain-finance (SCF) vendors that banks financing SCF assets have asked for wider spreads to compensate for their own higher funding costs, at least temporarily. The banks had agreed to a fixed spread that was still attractive in early March but, in the midst of the coronavirus economic meltdown, is much less so today.

  • “It isn’t as attractive an asset at this moment, but long term it’s a terrific asset for the banks,” the member said at a recent NeuGroup virtual meeting. Because the banks see it as a long-term asset, they’re unlikely to “pull the rug out,” he said.
  • Another member noted that banks are struggling to syndicate risk from factoring programs as investors hoard cash, and they’re scrambling to find room on their balance sheets to keep their commitments.

Beyond COVID. The consumer goods company is a big proponent of SCF and uses three solution providers. It turned to fintech Orbian rather than a major bank more than a decade ago, partly because it offered the ability to engage a wide group of relationship banks without having to set up multiple SCF programs.

  • The company was able to reward the third- and fourth-tier banks in its revolving credit facility by tapping them to be liquidity providers in the program.
  • Not only does that diversify liquidity providers, but it gives “ancillary business to these banks that, quite frankly, we have a hard time providing business to,” the AT said.
  • The other AT noted factoring programs can be used similarly. 

Beyond Orbian. A few years ago, the consumer-goods company’s CFO tasked the finance function with increasing days payable outstanding (DPO) and working capital. The first step, extending terms, required reworking contracts with thousands of vendors, before seeking to persuade them to use SCF.

  • To roll out an SCF program to a wider population of suppliers, the company signed on fintech Taulia, the AT said, partly because its innovative SCF onboarding procedure more closely resembles downloading an iPhone app than competitors’ documentation-heavy approach.
  • Taulia also offers dynamic discounting, typically aimed at smaller vendors with more urgent cash needs.
  • In addition, Taulia offers an e-invoicing portal to facilitate vendors’ invoice submissions that can be used by vendors that do not take part in SCF or dynamic discounting. 

Big strides. With the US, Canada and Western Europe covered in terms of SCF, the company sought a global bank last year to provide an SCF option to suppliers in Asia and Latin America. At this point, the company has made “noticeable strides in DPO,” jumping from the fourth quartile to the second quartile among corporate peers, the AT said.

  • Segmenting suppliers by size, sophistication, geography and other relevant factors is key. Larger and more sophisticated vendors typically opt for SCF, in which discounts resemble the investment-grade company’s revolving-credit rate, but smaller companies may accept dynamic discounts as high as 14%, “and I’ll do that all day long,” the AT said.
  • Speeding up invoice approval is also necessary for a successful SCF program, since slow approvals reduce benefits for all the parties. The company standardized invoices, and its policy is to no longer accept invoices by mail or even PDF.

Suppliers unable to submit electronic-data-interchange (EDI) invoices must send PDFs to Taulia, which converts them to EDI and processes them straight through to the company ERP. Both Taulia and Orbian plug and play into SAP.

Read More Read Less
Contact Us
0
0

Closing a Quarter for SOX Can be Difficult in New, Remote World

An internal auditor describes what his company has done to successfully close a quarter when some physical tasks can’t be done.

Part of Sarbanes-Oxley, the internal controls act released in 2002, requires a corporate’s chief executive and financial officers to certify financial and other information contained in the issuer’s quarterly and annual reports. But what happens in a crisis? What if some of that info requires someone in place to record inventory or in-person meetings when employee movement is heavily restricted during the current pandemic?

An internal auditor describes what his company has done to successfully close a quarter when some physical tasks can’t be done.

Part of Sarbanes-Oxley, the internal controls act released in 2002, requires a corporate’s chief executive and financial officers to certify financial and other information contained in the issuer’s quarterly and annual reports. But what happens in a crisis? What if some of that info requires someone in place to record inventory or in-person meetings when employee movement is heavily restricted during the current pandemic?

Practice. One answer is the punchline to the joke, “How do you get to Carnegie Hall?” Practice, practice, practice. That’s essentially what one member of NeuGroup’s Internal Audit Peer Group has done over the past few years. The company developed a robust business continuity plan where SOX was a particular focus and has used it a few times over the years for natural disasters and has audited the plan several times. So with COVID-19, “We’re in pretty good shape,” the member said.

Take a photo. Despite the company being comfortable with remote working, there still are challenges to closing the quarter amid the global pandemic. This includes practices like obtaining “wet ink” signatures, getting people in place for inventory observation or cut-off testing for shipping.

  • In this case, the auditor said, the company “did what it could when it came to inventory.” Local managers took photos of inventory before they were told to leave the premises. And managers were able to obtain wet signatures while keeping in mind social distancing rules. Where this couldn’t be done, e-signatures like those provided by DocuSign were allowed.
    • In one of NeuGroup’s treasury peer group zoom meetings recently, one practitioner in Europe said his relationship banks were permitting DocuSign functionality for 90 days.
  • Preparation. The member’s company listed all the controls it thought it wouldn’t be able to use when people couldn’t access company buildings or managers had little access to each other.
    • “We identified the controls and have been able to postpone some reporting,” he said. “It’s going to be an interesting quarter, but I think we’ll be able to close with no problems.”
Read More Read Less
Contact Us
0
0

Lock It Up: What You Need to Know About Pre-Issuance Hedging

The pros and cons of treasury locks and forward-starting swaps as bond issuance jumps.

 The crush of investment-grade issuers rushing to sell bonds as COVID-19 wreaks economic havoc has made pre-issuance hedging a relatively hot topic for many treasury teams.

  • Chatham Financial, sponsor of NeuGroup’s Virtual FX Summit, helped members get a firmer grip on the various ways to manage interest rate risk—and the associated accounting implications—during the summit and a subsequent Zoom meeting.

Here are some of the key takeaways:

The pros and cons of treasury locks and forward-starting swaps as bond issuance jumps.

The crush of investment-grade issuers rushing to sell bonds as COVID-19 wreaks economic havoc has made pre-issuance hedging a relatively hot topic for many treasury teams.

  • Chatham Financial, sponsor of NeuGroup’s Virtual FX Summit, helped members get a firmer grip on the various ways to manage interest rate risk—and the associated accounting implications—during the summit and a subsequent Zoom meeting.

Here are some of the key takeaways:

  • Treasury locks are quite efficient as a short-term hedge (even intra-day), but can be less efficient when debt issuance is further out than three months, so it can be difficult to apply hedge accounting.
    • They may be easier to explain to senior management than a forward-starting swap, but the market is also not as liquid nor as transparent. 
    • Another con: You’ll pay a “roll” premium if the tenor goes beyond the next treasury auction.
  • Forward-starting swaps can be efficient as both a short-term and long-term hedge, but are predominantly used for longer-term refinance risk.
    • While more liquid, forward-starting swaps also add an element of “basis risk” in the event that swap spreads compress over US treasuries, which in turn can add a layer of complexity when seeking senior management approval.
  • Have a plan. Chatham Financial stressed that regardless of which option a company chooses, it’s important to have a plan in place including internal approvals that would permit the treasury team to execute hedges quickly if markets moved in a favorable direction. This sort of “readiness book” also helps prepare teams to strike while the capital markets are in their favor.
  • Check out Chatham’s table below for more comparisons between treasury locks, forward-starting swaps and swaptions. And to dive deeper into the economic and accounting considerations, contact the experts.
Read More Read Less
Contact Us
0
0

Go with the Flow: How Treasury Is Adapting to Churning Markets

Flexibility and resourcefulness are critical as treasury teams cope with fallout from COVID-19. Assistant treasurers at a virtual NeuGroup meeting last week exchanged numerous examples of resourcefulness and flexibility in coping with the effects of the pandemic on FX trading, capital markets and other areas of responsibility. Here are some top takeaways: Time for algos. One AT said spot trading in the FX market became “ridiculous” as liquidity vanished and spreads widened, making it difficult to close out small spot trades. That means the FX team is “one of the most impacted right now,” she said.

  • As a result, she said the team has opened its toolbox and is using algos “ridiculously more” than usual.
  • Algos search out and aggregate snippets of liquidity across the market over time, and sometimes are used to mask the market participant’s intentions.

Flexibility and resourcefulness are critical as treasury teams cope with fallout from COVID-19.

Assistant treasurers at a virtual NeuGroup meeting last week exchanged numerous examples of resourcefulness and flexibility in coping with the effects of the pandemic on FX trading, capital markets and other areas of responsibility. Here are some top takeaways:

Time for algos. One AT saidspot trading in the FXmarket became “ridiculous” as liquidity vanished and spreads widened, making it difficult to close out small spot trades. That means the FX team is “one of the most impacted right now,” she said.

  • As a result, she said the team has opened its toolbox and is using algos “ridiculously more” than usual.
  • Algos search out and aggregate snippets of liquidity across the market over time, and sometimes are used to mask the market participant’s intentions.

Meeting the market. A rebound in the credit markets and healthy liquidity in investment grade bonds allowed many corporates to sell debt last week—but not under typical circumstances and therefore requiring flexibility.

  • One member described deciding tenor and size for a large, multi-tranche deal by paying more attention than usual to meeting market demand, noting, “You can’t wait for the perfect day in this marketplace.”
  • “We had good demand and were oversubscribed across all maturities, but we let the market dictate our maturities when normally we would driven that ourselves,” he said.
  • The AT of a major consumer-goods company, which had issued late the week before, said there was plenty of liquidity but very few of the usual large investors showed up. “We actually had to ask our banking partners who some of them were,” he said, adding that it looked then like investors “were getting ready to park their cash and go home for awhile.”
  • The investors that did step up made a good bet. Another member said he had heard that the bonds issued by the first AT had tightened 66 basis points since issuance.

Documents still must be signed. Even when almost everyone is working remotely, bank documents and checks still need signatures. Two members said their teams have set up schedules to limit staff entering the building to perform that function. Another offered that a scanned phone version of the document can speed up the process, leaving signatures on the actual documents for later on.

New approach to earnings calls? One AT member asked peers about handling the Q1 earnings process, given most employees now work from home and her company’s earnings are scheduled for release in late April.

  • “We’ve had some internal discussions about whether to do the process like we normally do it, with a regular call, or do something different,” she said.

Another member whose company’s earnings are scheduled for early May said his team had tentatively mapped out a virtual call as part of its business continuity plan. Recent discussions have focused on setting a schedule to prepare for the event and planning mock calls.

  • “We’ve kicked off the effort, but it’s probably 50/50 that will actually do it [in early May] at this point,” he said, adding, “We’re testing feasibility over the next two to three weeks.”
Read More Read Less
Contact Us
0
0

Listen Up: A Banker’s Reality Check for Corporates Tapping Credit Lines

Societe Generale offers insights on bank pricing and priorities as companies seek cash safety. Companies determined to bolster their balance sheets by tapping revolvers or looking for loans, take heed: Bankers will view some drawdowns and requests much more favorably than others, and it pays to understand the bank’s perspective.

  • That insight and others emerged during comments by Guido van Hauwermeiren, Societe Generale’s head of coverage and investment banking in the Americas. He spoke this week during NeuGroup’s Assistant Treasurers’ Group of Thirty virtual meeting, sponsored by SocGen.
  • The meeting took place against the backdrop of some 130 companies drawing down $124 billion in credit lines since March 1, according to the Financial Times.

Societe Generale offers insights on bank pricing and priorities as companies seek cash safety.

Companies determined to bolster their balance sheets by tapping revolvers or looking for loans, take heed: Bankers will view some drawdowns and requests much more favorably than others, and it pays to understand the bank’s perspective.

  • That insight and others emerged during comments by Guido van Hauwermeiren, Societe Generale’s head of coverage and investment banking in the Americas. He spoke this week during NeuGroup’s Assistant Treasurers’ Group of Thirty virtual meeting, sponsored by SocGen.
  • The meeting took place against the backdrop of some 130 companies drawing down $124 billion in credit lines since March 1, according to the Financial Times.

Credit committee stress. Pent-up demand for new loans is stressing out bank credit committees, and that’s forcing bankers to pick who goes to the front of the line. As a result, Mr. van Hauwermeiren said, blue-chip companies that have funded long-term projects with short-term commercial paper (CP) may find banks unwilling to replace that inexpensive funding with a similarly priced loan.

  • “I’m not going to put requests from companies that have been financing project finance with CP on the top of the pile, or even in the pile,” he said.

Cash flow vs. buybacks. Client history will play a role in determining bank priorities. Companies with strong bank relationships that face disrupted cash flows or other types of financial duress can rely on the bank to do whatever possible. Those looking to fund share buybacks, less so.

  • “We’re saying there’s not enough money to go around, so you can’t do that,” Mr. van Hauwermeiren said.

Repairing and repricing. Revolving credit facilities (RCFs) have been the “lifeblood” for many companies, “but that system needs to be repaired, and I’m sure it will get repriced,” the SocGen banker said.

  •  Facilities priced between 30 and 45 basis points over LIBOR will likely see spreads widen to the 125 bps over Libor range, Mr. van Hauwermeiren said.

When to draw? An AT30 member asked if it was better to draw down a facility now, even if the company doesn’t need the liquidity, since it will face higher pricing anyway. Noting the new rules have yet to be written, Mr. van Hauwermeiren said he doesn’t foresee a stigma on corporates drawing down facilities, if it’s done the right way.

  • For example, he said, a highly rated company could request a new facility at the higher rate on top of its existing, inexpensively priced backstop, and promise to draw down only the new one if need arises. “That’s a sensible, relationship-type of play, and those borrowers will be viewed fondly,” he said.
Read More Read Less
Contact Us
0
0

DIY: Forming Mentoring Circles That Lead to Sponsorship

More takeaways from the Women in NeuGroup meeting featuring three senior executives at one company.

The Women in NeuGroup (WiNG) virtual meeting held last week highlighted the use of mentoring circles as a building block for sponsorship—where someone senior to you in the company advocates for your advancement. Our first story described how the process works at one major American multinational, as described by three senior executives. Below are more takeaways from the meeting as distilled by Anne Friberg, senior director of peer groups at NeuGroup.

  • Yes, you can build your own. It doesn’t really require corporate sponsorship to build mentoring circles like the one featured at the WiNG event. You can start your own with women (and men) whom you know and just go for it. The one stumbling block may be to get budget approval for things like traveling along with mentors to other company facilities, for example, but most of the suggested actions don’t incur much cost. (Of course, almost no one is traveling now, but that will change some day.)
  • Don’t be afraid to ask someone to be a mentor (or even sponsor). The worst that can happen is they say no. The key is not to let that dent your confidence, and the silver lining is that it also opens up for a conversation of what it would take for them to consider mentoring or sponsoring you.

More takeaways from the Women in NeuGroup meeting featuring three senior executives at one company.

The Women in NeuGroup (WiNG) virtual meeting held last week highlighted the use of mentoring circles as a building block for sponsorship—where someone senior to you in the company advocates for your advancement. Our first story described how the process works at one major American multinational, as described by three senior executives. Below are more takeaways from the meeting as distilled by Anne Friberg, senior director of peer groups at NeuGroup.

  • Yes, you can build your own. It doesn’t really require corporate sponsorship to build mentoring circles like the one featured at the WiNG event. You can start your own with women (and men) whom you know and just go for it. The one stumbling block may be to get budget approval for things like traveling along with mentors to other company facilities, for example, but most of the suggested actions don’t incur much cost. (Of course, almost no one is traveling now, but that will change some day.)
  • Don’t be afraid to ask someone to be a mentor (or even sponsor). The worst that can happen is they say no. The key is not to let that dent your confidence, and the silver lining is that it also opens up for a conversation of what it would take for them to consider mentoring or sponsoring you.
  • It can get awkward with close associates. What if you started out at the same level with a long-time colleague, but now you’re in a more senior role and you’re mentoring that person? And what if you really feel you cannot in good conscience sponsor this person for a promotion or joining your team? Remember the key tenets of productive mentor and sponsor relationships: They require trust, honesty, communication and commitment. When you’ve known someone for a long time and may be friends outside work, this is hard.  But—gulp—take a deep breath and be honest about why you cannot sponsor someone, and be generous about sharing what you believe the areas of improvement required for your sponsor support are.
  • Prepare yourself for being sponsored. Not everyone is as aware as they would like about their own skill set or what’s required for being “discovered” and sponsored. If that sounds like you, it may pay to take an assessment from StrengthsFinder or similar services. That way, you can be more confident in putting yourself forward for something that suits your strengths, or seek out opportunities where you may need to dig deeper and develop an area that’s less of a strong suit for you to balance out your skill set. And mind you, a sponsor who’s gotten to know you may well see strengths and capabilities more clearly than you do.
Read More Read Less
Contact Us
0
0

Beyond Revolvers: What NeuGroup Members are Talking About Now

More of Joseph Neu’s takeaways from virtual meetings dominated by talk of cash and liquidity. The waterfall of insights cascading from NeuGroup’s virtual meetings this month requires expert judgment on wringing out and distilling what matters most. One expert is NeuGroup founder Joseph Neu, who on Tuesday offered his take on tapping credit lines. Here are some of his other takeaways: Converts as an option. Industrial companies said they are looking at the convertible debt market as a financing option. Typically, these are the domain of tech and life sciences firms, so investors are said to be looking for diversification. Reviewing cash flow models. It pays to have a good cash flow model and members report reviewing those and watching key metrics. For example, recurring revenue companies: An increase in churn and pricing declines. Scenario plans are also being layered on top of these. “We are fine for a few months, but eight months is another matter,” one member said.

More of Joseph Neu’s takeaways from virtual meetings dominated by talk of cash and liquidity.

The waterfall of insights cascading from NeuGroup’s virtual meetings this month requires expert judgment on wringing out and distilling what matters most. One expert is NeuGroup founder and CEO Joseph Neu, who on Tuesday offered his take on tapping credit lines. Here are some of his other takeaways:

Converts as an option. Industrial companies said they are looking at the convertible debt market as a financing option. Typically, these are the domain of tech and life sciences firms, so investors are said to be looking for diversification.

Reviewing cash flow models. It pays to have a good cash flow model and members report reviewing those and watching key metrics. For example, recurring revenue companies: An increase in churn and pricing declines. Scenario plans are also being layered on top of these. “We are fine for a few months, but eight months is another matter,” one member said.

Cash forecasts not good enough. Even the best forecasters are challenged with the demand and supply shocks set off by this crisis. If you are hedging forecasted exposures, it really pays to be a hedge accounting whiz with hedged item designations and your effectiveness testing methodology. Even then auditors may want to put you into the penalty box, so be prepared to push back.  

Can you still concentrate global cash? Evaluate cash positions across the globe and the ability to centralize it under various contingencies, including currency controls being reimposed or tightened. This will become a bigger risk if FX rates continue to weaken.

Supply chain finance. Treasury should be working with banks and supply chain finance solution providers to take efficiency to the max level in onboarding and matching invoices for early payment to support key suppliers so they can focus their own balance sheet efforts on the most vulnerable suppliers that don’t have invoices to factor. One member noted the irony that a bank can hold their paper backed by supply chain finance obligations, but not its CP, which is a regulatory anomaly versus a credit risk economic issue. The member also noted that bank and investor demand for commercial-trade/invoice-backed financing for suppliers is said to be holding up well. This is huge given this context.

Signing documents. Tell banks and others allowing DocuSign (and other digital signature tools) that are allowing them as a temporary crisis fix that they should be good enough for the future, too. People to do company chops or process documents needed for cross-border transfers might not be available, which could delay cross-border transfers (see above).

Read More Read Less
Contact Us
0
0

Bonds in the Time of COVID-19: Timing Is Everything

Treasury teams need to be prepared to pounce as investor sentiment shifts wildly in capital markets.

Be prepared so you can be nimble. That’s the advice from a treasurer whose company pounced when investor sentiment in the investment grade corporate bond market allowed nine corporates to issue $25 billion in debt on one day this month before the window slammed shut again amid COVID-19 fear.

  • “You have to take what the market gives you and respond to the environment around you, which has seen a bear market in equities and severe liquidity stress in credit markets,” he said during a recent NeuGroup meeting of mega-cap multinationals.
  • Several peers congratulated the treasurer on his team’s ability to act fast, with one saying, “Thanks for going out there and being our golden child. Thank God you did it yesterday.”
  • Another treasurer said his company is working on a bond offering but wasn’t prepared to tap the capital markets as quickly.

Treasury teams need to be prepared to pounce as investor sentiment shifts wildly in capital markets.

Be prepared so you can be nimble. That’s the advice from a treasurer whose company pounced when investor sentiment in the investment grade corporate bond market allowed nine corporates to issue $25 billion in debt on one day this month before the window slammed shut again amid COVID-19 fear.

  • “You have to take what the market gives you and respond to the environment around you, which has seen a bear market in equities and severe liquidity stress in credit markets,” he said during a recent NeuGroup meeting of mega-cap multinationals.
  • Several peers congratulated the treasurer on his team’s ability to act fast, with one saying, “Thanks for going out there and being our golden child. Thank God you did it yesterday.”
  • Another treasurer said his company is working on a bond offering but wasn’t prepared to tap the capital markets as quickly.

Be prepared to call an audible. The treasurer said his company has had a liquidity planning playbook since the 2008 financial crisis and had been looking to tap the capital markets for the last month. The market’s violent swings forced him to change the company’s original plans several times.

  • “We pivoted from a debt exchange which exposes you to 10 days of market risk until closing to an unsecured bond offering which gets you in and out of the market in one day,” he explained.
  • “We decided to warehouse liquidity on our balance sheet as a sign of strength, and once the coast is clear we can consider liability management and debt repayment.”

Laying the groundwork. To prepare to act fast, treasury told the board to consider the debt offering as “relatively cheap insurance” even though “it was really scary to dip your toe into this market,” the treasurer said.

  • The company’s ability to take advantage of the open window also involved having disclosure decisions in place. The company filed an 8-K that said, “Due to the speed with which the situation is developing, we are not able at this time to estimate the impact of COVID-19 on our financial or operational results, but the impact could be material.”
  • The treasurer received many more calls than normal from investors and relied on the 8-K, which stated, “COVID-19 may affect the ability of our suppliers and vendors to provide products and services to us. Some of these factors could increase the demand for our products and services, while others could decrease demand or make it more difficult for us to serve our customers.”

Hedging advice. Given the volatile nature of markets, the treasurer had this advice for peers looking to reduce interest-rate risk: “I highly encourage folks to do intraday hedging if you’re hedging the market.”

  • As distilled by NeuGroup founder Joseph Neu, “Pre-issuance hedging using the full knowledge base on treasury locks, swap locks, including intra-day rate hedging, and the hedge accounting implications are a must in this market.”
Read More Read Less
Contact Us
0
0

Little or No Pushback Has Corporates Drawing on Credit Lines—At What Cost?

Founder’s Edition by Joseph Neu Insights on the reasons to tap revolvers and what the trend may mean for banks and treasury. One clear insight emerging during our first several NeuGroup virtual meetings as the COVID-19 crisis escalates is that corporates are taking a slew of steps to bolster their liquidity positions. Among the most notable: All but the most stellar credits are drawing on revolving credit facilities (RCFs), a move that has potentially profound implications for banks.

  • As Reuters noted recently, “After the 2008 financial crisis, several blue-chip companies drew down on revolving credit facilities, shocking banks that had charged minimal interest margins on the assumption the loans would remain unused (my emphasis).”

Founder’s Edition by Joseph Neu

Insights on the reasons to tap revolvers and what the trend may mean for banks and treasury.

One clear insight emerging during our first several NeuGroup virtual meetings as the COVID-19 crisis escalates is that corporates are taking a slew of steps to bolster their liquidity positions. Among the most notable: All but the most stellar credits are drawing on revolving credit facilities (RCFs), a move that has potentially profound implications for banks.

  • As Reuters noted recently, “After the 2008 financial crisis, several blue-chip companies drew down on revolving credit facilities, shocking banks that had charged minimal interest margins on the assumption the loans would remain unused (my emphasis).”

This time is different—kind of. The good news is that 12 years after the financial crisis began, banks are solid, have buffers and are in a good position to weather this storm; plus, central banks are backing them in a bigger way. Yet the pricing of RCFs, in the US especially, still largely assumes they will remain undrawn and often does not reflect the true cost of the credit.

  • If the stigma of drawing on an RCF for a company that normally relies on the capital markets goes away, then bank pricing of them will need to reflect that.
  • Indeed, it is happening already as banks have been adjusting the pricing of liquidity on RCFs, bilats, term loans et al. If you were used to 35 to 45 basis points over on an RCF, you should not expect any new lending at that price—it has gone up, said one banker to our members. If everyone one draws, and rating agencies start to rethink downgrading, banks are going to start to feel more pain and reprice their risk further. For some, their liquidity and capital ratios may come under duress. Banks will remember who drew when it comes time to renew.
  • So, if the drawing on RCFs continues, accordingly, treasurers should be prepared to kiss the RCF market they are used to goodbye. This will obviously have knock-on effects on the entire business model for bank pricing, fees and wallet analysis and bank relationship management.

Here are more of my takeaways on this topic from what we’re hearing from members and bankers so far:

Hoarding toilet paper. A banker invited to the opening of a Zoom meeting last week characterized the liquidity and capital markets situation as being like hoarding toilet paper: Those wealthy enough to buy and store it in bulk are creating shortages. They don’t need as much as they are buying, preventing those who really need toilet paper from finding any.

  • Similarly, high-grade corporates are taking as much liquidity as they can, hoarding cash and crowding out other market participants. Some are drawing on RCFs and term loans when they don’t have liquidity needs. Those with big needs are drawing down big facilities.
  • It feels like the stigma of this move signaling duress is gone.

No pushback. One member walked thought the thinking to draw a significant portion of his facility. “We spoke to the banks and our rating agencies and got no pushback.” One bank said “this is unusual, as we have not seen other companies in your sector do it,” but that was it. Rating agencies did not seem concerned “as our plan was to sit on the cash.”

CP market becoming hard work. A big reason to consider a draw is that the CP market is getting more difficult. One A2/P2 member has still been able to place paper even at one-month tenors (due to the quality of its name and business position in this crisis), but it’s been choppy. A1/P1 issuers are have only a bit better luck, but some quality names are reporting it’s taking more of an effort to place CP.

MAC clause concerns. A significant consideration in drawing before you need to is the MAC clause. If you think COVID-19 might trigger a material adverse change in the business, then it’s a reason to draw sooner.  

Deposit cash in banks you draw on. To mitigate some of the renewal repricing from drawing on your RCF, banks will advise you to deposit the drawn funds back with them. Unfortunately, the risk evaluation is not often the same for the banks you allow to provide you credit and those you will extend credit to in the form of a deposit. You also need to see if there is a set-off clause in the revolver.

Bank deposits or T-Bills? Part of the decision to draw on a facility is the bank risk, so one member said his plan is to put the cash into T-bills vs. bank deposits. Money market funds are also being watched closely. Prime funds (post reform) are facing their first crisis test, with some floating NAVs below $1, testing gates etc.

No to 8-K. While law firms have advised some members on the need to file an 8-K with a draw, other members got comfort that they could avoid the headline risk by foregoing an 8-K. They will have to note the draw in the 10-Q, but they have some time until the end of the quarter to determine if they want to pay it back before or not.

Read More Read Less
Contact Us
0
0

Communication Is Key When Drawing on a Revolver

Get buy-in from internal and external stakeholders as you guard against a COVID-19 liquidity crunch. Every day seems to bring news of another multinational corporation drawing down some or all of a revolving credit facility to weather potential liquidity disruptions created by market reaction to the coronavirus outbreak. News reports say private equity firms like Blackstone are encouraging portfolio companies to tap credit lines.

  • The companies recently tapping revolvers include Kraft Heinz, L Brands and Carnival.

Get buy-in from internal and external stakeholders as you guard against a COVID-19 liquidity crunch.

Every day seems to bring news of another multinational corporation drawing down some or all of a revolving credit facility to weather potential liquidity disruptions created by market reaction to the coronavirus outbreak. News reports say private equity firms like Blackstone are encouraging portfolio companies to tap credit lines.

  • The companies recently tapping revolvers include Kraft Heinz, L Brands and Carnival.

NeuGroup Insights reached out to the treasurer of a company whose SEC filing announcing the drawdown of its revolver described the move as a precautionary measure to increase its cash position and “preserve financial flexibility” in light of current uncertainty in the global markets resulting from the COVID-19 outbreak.

  • The form 8-K also said the proceeds are now on the company’s balance sheet and may be used for general corporate purposes.

Buy-in across the board. The treasurer said the decision to draw down on the revolver was agreed upon at the highest levels of the company. In addition to the reasons for acting now that are spelled out in the 8-K, the company wanted to avoid a situation where it could not access the full amount of the revolver, he said.

Proactive outreach. The treasurer said the company considered the perceptions of investors and the three credit rating agencies, in part because it wants to maintain its current ratings. The treasurer said the company is committed to transparency with the agencies and its banking partners and was proactive with each group. Its strong liquidity position and conservative financial policy—along with the reasons in the 8K—supported taking this prudent, precautionary move, he added.

Bottom line. In the end, a lot depends on what you do before announcing the decision to draw down a revolver. “It’s the matter of communicating with internal and external stakeholders to the extent you can,” the treasurer said. “You want to make sure they understand the intent and are not caught off guard.” And the common denominator in all these conversations and relationships, he said, are trust and transparency.

Legal stuff. Law firmsare offering recommendations and observations to corporates considering the drawdown of revolvers. The firm Fried Frank says borrowers should review their credit agreements for “force majeure” or similar provisions that might excuse a revolving lender’s obligation to lend in bad economic environments. But it adds that, typically, “committed facilities do not include such provisions.”

Here are some other takeaways, from White & Case:

  • SEC 8-K filings typically disclose the amount of the borrowing, the interest rate, and the total cash available to the company after giving effect to the borrowing.
  • Companies also include a short reason for the borrowing that may include, depending on the circumstances, that it is a precautionary measure to increase cash and preserve flexibility in light of uncertainties surrounding COVID-19 and the global economy.
  • Companies provide a short summary of the terms of the relevant credit facility and a reference to the initial filing in which it was disclosed and attached as an exhibit.
Read More Read Less
Contact Us
0
0

Using Mentoring Circles to Cultivate Organic Sponsorship for Women

Mentoring circles can help women find sponsors who can advocate for their career advancement.

Three women who are senior finance executives at a major multinational corporation described how their company organically builds sponsorship using so-called mentoring circles to support the development needs of high-potential talent. The three spoke this week at a Women in NeuGroup virtual meeting.

  • One of the women described mentoring circles as groups of 10 to 20 people led by more senior employees to discuss topics of common interest and engage in activities to support career development.

Mentoring circles can help women find sponsors who can advocate for their career advancement.

Three women who are senior finance executives at a major multinational corporation described how their company organically builds sponsorship using so-called mentoring circles to support the development needs of high-potential talent. The three spoke this week at a Women in NeuGroup virtual meeting.

  • One of the women described mentoring circles as groups of 10 to 20 people led by more senior employees to discuss topics of common interest and engage in activities to support career development.

Sponsor vs. mentor. “A mentor talks with you, and a sponsor talks about you.” That concise phrase captures a key difference between the two roles, as described in the panelists’ presentation. In addition:

  • A mentor helps you navigate your career, provides guidance, acts as an advisor or sounding board.
  • A sponsor uses strong influence to help you obtain high-visibility assignments, promotions; advocates for your advancement and champions your work and potential to senior leaders.

Why sponsorship matters. The presentation cited research showing:

  • 70% of individuals with sponsors felt more satisfied with their career advancement.
  • Women with sponsors are 22% more likely to ask for “stretch” assignments.
  • Women are 54% less likely than men to have a sponsor.

A Catalyst report also notes that among the benefits of sponsorship are increased loyalty and tenure and a willingness to give back by mentoring and sponsoring others.

Personal stories. One of the women cited her promotion from the senior director level to an officer role as the best example of how she benefited from sponsorship. She said a colleague took a calculated risk in recommending she take his job because he believed in her based on the work she did. Her advice: “You have to work for mentorship and sponsorship; it doesn’t just come to you.”

  • She and the other panelists agreed that doing a great job in the position you’re in is critical in building the trust necessary for a mentor to become a sponsor.

Sponsors cannot be assigned. No matter how structured and well-thought-out a program to advance the careers of women and other under-represented groups, you can’t force sponsorship. So the presenting company uses mentor circles “to create an environment” where a sponsor relationship can develop organically.

  • The structure of the mentor circles at the company promote various opportunities to talk, travel and work together, allowing mentors to learn enough about their mentees to make a decision to sponsor some but not all of them. That means the sponsor uses her own reputational capital to influence decisions about promotions for the mentee.

Agree on expectations. Panelists and participants agreed that the best mentorship relationships begin with a clear intentions and goals. “Be very deliberate about it,” one panelist said. “It’s important to have a shared set of expectations.” She recommends seeking mentors in other areas of the company to whom you would not normally have access. Another panelist said that it pays to be flexible and find both women and men to serve as mentors and sponsors.

Know when to end the relationship. One panelist praised a former mentoring circle leader who was clear in saying, “Your name has been given to me, I want to invest in you; but when this is not valuable, let’s admit that and move on and give someone else the spot.”

Transparency matters. Some participants described being surprised at learning—after the fact—that someone had played the role of sponsor for them in supporting their advancement.

  • One woman only found out after she left her previous company that she had people in her corner who were very supportive of her work and capabilities. That could have made all the difference for her motivation to leave or stay.
  • In general, she said, knowing she has a sponsor will motivate her and make her feel nurtured. Absent that knowledge, it’s possible to “misinterpret how the organization feels about you,” she said.
Read More Read Less
Contact Us
0
0

A Coronavirus Crisis Treasury Playbook

Treasurers probably haven’t seen crises like this before. Here’s what they can learn from past events. The COVID-19 pandemic has presented the modern world with an almost unprecedented crisis. And the daily onslaught of worrying headlines—cancelled sports seasons and parades, Tom Hanks and wife infected, travel bans—seems to be triggering mystifying actions by panicked consumers, like the run on toilet paper. But despite COVID-19’s unprecedented nature, for treasurers there actually is precedent, so there should be no mystery about what needs to be done (and certainly, Microsoft is not going to run out of Excel spreadsheets).

Treasurers probably haven’t seen crises like this before. Here’s what they can learn from past events.
 
The COVID-19 pandemic has presented the modern world with an almost unprecedented crisis. And the daily onslaught of worrying headlines—cancelled sports seasons and parades, Tom Hanks and wife infected, travel bans—seems to be triggering, mystifying actions by panicked consumers, like the run on toilet paper. But despite COVID-19’s unprecedented nature, for treasurers there actually is precedent, so there should be no mystery about what needs to be done (and certainly, Microsoft is not going to run out of Excel spreadsheets).
 
During the eurozone crisis that began in 2009 and stretched into 2013, treasurers were guided by time-tested cash management principles honed in the US financial crisis of 2008 (and perhaps other crises like Argentina in the early 2000s). But they were also forced to create more comprehensive contingency playbooks addressing all aspects of business risk.
 
And although treasurers were caught off guard like everyone else by the speed of the current COVID-19 crisis, they can still check to make sure playbooks are up to date for whatever lies ahead. Generally speaking, these playbooks should include a range of risks and mitigation steps to ensure minimal disruption for clients and employees and are typically incorporated into a larger corporate-wide strategy that addresses all aspects of the business.  
 
The list below is culled from a late 2012 article, in which NeuGroup Insights’ predecessor, iTreasurer, asked members to list the important aspects that should be considered in the creation of their playbooks. We think it has aged well enough to be included in what now can be called the Coronavirus Crisis Playbook. Take a look:

Show me the money. Liquidity fears are one of the most prominent issues faced by members and are the subject of a variety of stress-testing scenarios and contingency planning strategies. It is important to understand how our organization will manage through extreme levels of volatility making sure that your cash is safe and accessible as needed. Extreme contingency plans have gone as far as holding levels of cash on hand in vaults and other secure locations in the event that banks are closed, and funds are unavailable for an extended period of time.

  • Making sure that the business can function after a significant event or during ongoing ones like now is of a primary focus for treasurers and their teams. It is possible that banks would close for a period of time and would impose capital controls or other reporting requirements or lifting fees, so it is critical that treasurers identify ways to keep the local office running as smoothly as possible. These important step-by-step details should be included in the overall contingency strategy.

2020 refresh: Ed Scott, retired treasurer of Caterpillar, recommends treasurers “pressure test their business plan” and suggests they “revise projections” to assume a one, two or three-month decline in revenue.
 

People management. All members agreed that it is important to ensure you have accurate updated employee contact information as well as a documented communication plan (call tree) so that you can quickly contact all appropriate stakeholders in the event it becomes necessary. Each member of the crisis team should understand their individual roles and responsibilities, and the business dependencies, in the event of market disruption.

  • This plan should be tested with sporadic “surprise drills” so that everyone can be sure the pieces are in place and are working as expected. It is always best to test contingency plans well before they are executed in real-time.

2020 refresh: Does your company have the technology in place for employees to work and meet remotely?
 

Payment and collections. Contingency planning for a disruption in your payment or collections activity should include a full understanding of your key customers, including their ownership and business location. You should know where your largest customers source their revenue so that you can determine potential downstream effects and plan accordingly. It is also important to understand the business details of your key suppliers; where they are headquartered and where they source their raw materials, so that you can plan for potential disruptions in the delivery of your raw materials to ensure production is not disrupted. 

  • It is important to identify a communication plan for large key clients and vendors so that you are ready to address payment terms if necessary. Some members have implemented supply chain finance programs in the event their key clients are unable to access bank funding. 

2020 refresh: Many companies now use suppliers from different regions as a redundancy measure. Are these other suppliers up to date on your business plans?

Trigger events. Each organization will need to address relevant trigger events that are specific to their individual organization. It is important to understand what trigger events you will monitor to ensure an early warning of potential disruption. Try not to predict what might happen, but instead use it as a contingency-planning tool. Understand where your cash is and how you can access it. Identify what key stressors exist in your supply chain and how can you contain risk to prevent significant business disruption.

  • Crisis management teams should meet periodically to address any changes to the status of the crisis and make necessary changes based on specific trigger events that may have occurred.

2020 refresh: “Each company should then determine what they can do to manage their variable expenses and cashflow,” Mr. Scott says.
 

Operations and technology. Have you stress-tested existing systems and procedures to manage changes in volume? Are you confident in the readiness plans of any third party providers? How soon will software providers be ready to accept new payment instructions or new currency codes? These questions should be carefully considered as part of the overall contingency strategy. The smallest detail can trip up a treasury team if it was not considered ahead of time. Some members have gone as far as to create new accounts with banks outside the “danger zone” to be opened upon the announcement of a country exit or bank closures.

2020 refresh: All TMS functions should be in the cloud.

Read More Read Less
Contact Us
0
0

Not All Bank Fees Are Created Equal

In good times and bad, treasury teams benefit from knowing how their banks look at the world. That’s one reason this chart, created by NeuGroup’s Scott Flieger, is compelling. It shows which products are especially important to banks by measuring both their relative profitability and how much balance sheet impact they have. A third dimension shows which products result in predictable revenue and which are more episodic in nature. Most members found the slide “directionally accurate” and helpful in explaining why…

In good times and bad, treasury teams benefit from knowing how their banks look at the world. That’s one reason this chart, created by NeuGroup’s Scott Flieger, is compelling. It shows which products are especially important to banks by measuring both their relative profitability and how much balance sheet impact they have. A third dimension shows which products result in predictable revenue and which are more episodic in nature. Most members found the slide “directionally accurate” and helpful in explaining why banks have been more aggressive on some products versus others. 

  • Mr. Fleiger explained that FX revenue is important to banks because of its high level of predictability. And while “flow” FX business such as spot FX transactions may not be terribly profitable, it allows banks to demonstrate their competitive strengths and commitment to corporates. It may also increase their chances of being selected when more lucrative opportunities presents themselves, including FX transactions associated with cross-border strategic M&A.
Read More Read Less
Contact Us
0
0

It’s Time for Nonfinancial Corporates to Gear Up Libor-SOFR Transition Plans

Founder’s Edition, by Joseph Neu

NeuGroup member calls with corporate treasury leaders reveal preparation gaps.

Some NeuGroup corporate members—nonfinancial institutions—are well on track with planning to transition off Libor before the end of 2021. One company, Ford Motor, has even joined the Alternative Reference Rates Committee (ARRC), a group of private-sector participants convened by the Federal Reserve Board and the New York Fed to help identify alternatives to Libor and develop strategies to promote their use.

However, the majority of members have work to do, as revealed by polling on two conference calls last week with David Bowman, the Fed’s senior staff liaison to the ARRC. Altogether, we had 184 member participants from 91 companies on these calls.

Founder’s Edition, by Joseph Neu

NeuGroup member calls with corporate treasury leaders reveal preparation gaps.

Some NeuGroup corporate members—nonfinancial institutions—are well on track with planning to transition off Libor before the end of 2021. One company, Ford Motor, has even joined the Alternative Reference Rates Committee (ARRC), a group of private-sector participants convened by the Federal Reserve Board and the New York Fed to help identify alternatives to Libor and develop strategies to promote their use. 

However, the majority of members have work to do, as revealed by polling on two conference calls last week with David Bowman, the Fed’s senior staff liaison to the ARRC. Altogether, we had 184 member participants from 91 companies on these calls.

  • Teamwork. 41% of members have not yet established a cross-functional team to manage the transition from Libor to SOFR, the Secured Overnight Financing Rate the ARRC and the Fed are promoting to replace Libor. A cross-functional team to include participants from treasury, accounting, tax, legal and procurement, credit and collections and other business finance leads is seen as the first big step in taking the transition seriously. An additional 27% have realized this and are planning to put a team together.
  • Information. By far the easiest preparation step is to sign up for the ARRC’s email updates. Just 18% of our members had signed up (before last week’s calls).  Every week, the ARRC publishes a free email update with important information on the Libor transition. You can sign up on the ARRC home page: https://www.newyorkfed.org/arrc.
    • A recent edition highlights an ARRC proposal for New York State legislation, as New York law governs most USD financial transactions, to deal with the permanent cessation of Libor that many contracts did not envision, which may also be difficult or impossible to amend.  
  • Timing. Although the phaseout of Libor is mandated for the end of 2021, liquidity is likely to shift away from Libor-referenced contracts sooner than that with a tipping point possible for many by the end of this year. As an example, Fannie Mae and Freddie Mac have said they will stop accepting adjustable-rate mortgages tied to Libor by the end of 2020. As soon as ISDA finalizes its fallback language protocol, expected for implementation in H2, liquidity in the markets for swaps and other rate derivatives markets will likely also tip away from Libor.

 Time to get busy.

Read More Read Less
Contact Us
0
0

FX Hedging Opportunities Amid Virus Volatility

Opportunistic FX managers are locking in favorable exchange rates to hedge exposures as markets gyrate. NeuGroup members have locked in favorable foreign exchange rates in the wake of volatility sparked by the coronavirus outbreak, plunging oil prices and speculation about more US interest rate cuts by the Federal Reserve.

  • “We’re taking advantage; this is something of an opportunity to layer in hedges,” said one risk manager during a NeuGroup’s Virtual FX Summit sponsored by Chatham Financial.
  • Amol Dhargalkar, a managing director at Chatham, said, “We are definitely seeing some opportunistic hedging of FX as it has moved to more favorable rates—depending upon the direction of the exposure, of course.”

Opportunistic FX managers are locking in favorable exchange rates to hedge exposures as markets gyrate.

NeuGroup members have locked in favorable foreign exchange rates in the wake of volatility sparked by the coronavirus outbreak, plunging oil prices and speculation about more US interest rate cuts by the Federal Reserve.

  • “We’re taking advantage; this is something of an opportunity to layer in hedges,” said one risk manager during a NeuGroup’s Virtual FX Summit sponsored by Chatham Financial.
  • Amol Dhargalkar, a managing director at Chatham, said, “We are definitely seeing some opportunistic hedging of FX as it has moved to more favorable rates—depending upon the direction of the exposure, of course.”
Source: Reuters

Yen strengthens. The summit began one day after the Japanese yen soared to a more than three-year high of 101.19 per US dollar on Monday as investors sought safe-haven currencies. It jumped 9.4% in 12 trading days.

  • One NeuGroup member whose company has restarted a yen cash-flow hedge program said the FX team locked in rates in the range of 102 to 104. Another member whose company is long the currency said locking in yen was “the main opportunity” for her team amid the volatility.

Winning from weakness. A third participant said the market turmoil allowed his team to layer in hedges for currencies where the company is short, including the Brazilian real, the Canadian dollar and the Mexican peso. The peso fell to a three-year low against the dollar on Monday and the real has plunged about 15% this year.

Not everyone. At least one person at the virtual meeting said her team has not been trading “because spreads are so wide.” For now, traders at this company are “just monitoring” market moves.

Beyond FX: One of the participants said that beyond FX, her company has debt maturing in a little over a year and is exploring options for the best time to refinance in light of the recent plunge in interest rates.

  • Mr. Dhargalkar said many companies have already taken advantage of extremely low fixed rates and are not in a position to do more now. “Companies that did nothing are coming back and saying maybe we should do something now,” he said.
  • Chatham continues to see more companies adding fixed-rate debt to their capital structures; recently, more of them are doing so synthetically rather than through new issuance.
  • Chatham is seeing more companies do pre-issuance hedging of future anticipated financings. “Many investment grade companies are rushing to hedge now for issuances as far out as two years,” Mr. Dhargalkar said.

Strategic opportunities Below are three suggestions listed in Chatham’s presentation on hedging opportunities. Insights will dive into these and other highlights from the Virtual FX Summit in future posts.

  • Extend hedges on floating rate debt to take advantage of pricing and lock in a low rate.
  • Consider a combination approach of caps and swaps to hedge floating rate debt.
  • For hedges maturing in the near future, consider executing forward starting hedges while rates are low.
Read More Read Less
Contact Us
0
0
Recent Stories

Virtual Accounts—Not Ready for Prime Time?

 Notes from a discussion on a product that treasurers would like to use—when it’s truly ready.

A presenter from Societe Generale at a recent NeuGroup Global Cash & Banking Group meeting said this about virtual accounts (VAs): “Imagine a world where you can open and close accounts at a moment’s notice, set up zero balance account (ZBA) structures, and not deal with KYC. That’s where banks imagine virtual accounts to end up.” This is the ideal world. That is:

  • They’re like ZBAs in the US with all the reporting behind them, but they’re not real accounts; they exist on a book- basis only and can send money to all your entities.
  • One member has been told VAs will allow them to close approximately 2,000 bank accounts and cut account costs by 40%.
  • Could VAs work better than an in-house bank? Several members are looking at VAs as an alternative to IHBs.

Notes from a discussion on a product that treasurers would like to use—when it’s truly ready.

A presenter from Societe Generale at a recent NeuGroup Global Cash & Banking Group meeting said this about virtual accounts (VAs): “Imagine a world where you can open and close accounts at a moment’s notice, set up zero balance account (ZBA) structures, and not deal with KYC. That’s where banks imagine virtual accounts to end up.” This is the ideal world. That is:

  • They’re like ZBAs in the US with all the reporting behind them, but they’re not real accounts; they exist on a book- basis only and can send money to all your entities.
  • One member has been told VAs will allow them to close approximately 2,000 bank accounts and cut account costs by 40%.
  • Could VAs work better than an in-house bank? Several members are looking at VAs as an alternative to IHBs.

The real world: The first hurdle is payables. Certain banks can open a series of accounts down to four tiers and only take receipts. Banks are still trying to build out the payables side. And from the banks’ point of view, the greatest interest is in using the accounts for notional pooling.

  • One member said there is a reconciliation issue—intercompany loans are not trackable in an automated fashion and only reported on the physical account, a big limitation. Once that’s resolved, they could potentially have an automated loan process. Another member said the biggest implementation hurdle of the VA model is intercompany loans.
  • You can only open VAs in certain countries where the bank allows it, so they may or may not be compatible with your treasury structure.
  • One member has been attempting to get rid of bank accounts and implement POBO and ROBO by leveraging VAs in SAP. However, VAs have proven more painful than the company hoped.
  • SAP is the system of record. Unfortunately, banks in this process like to have their system be the record of who owes whom, “which doesn’t work for our business,” the member said.
  • Another member tried to do virtual accounts in India; the company’s first attempt didn’t go well.

VAs in China

  • One member talked to three banks and sees the potential beauty of using VAs for payments in China: When you pay into China, you must pay a beneficiary and not someone else, so the VA structure would work.
  • The problem: VAs are not allowed in China and are not accepted by the PBOC for payments. Cross-border payments for China are always physical.
  • Banks said they can do cross-currency, but the member would need a pre-agreed FX spread with them (usually not a good one).
Read More Read Less
Contact Us
0
0

Concerns About the Transition from Libor to SOFR

Treasurers aren’t too happy about the fallback language for the Libor-to-SOFR switch.

Members at a recent NeuGroup meeting used some colorful language in discussing the challenging issue of changing fallback language in contracts that currently use Libor, the benchmark rate that’s scheduled to disappear after 2021.

The wording needs to specify what rate will replace Libor when it’s gone, what triggers the switch, and the pricing spread adjustment between Libor and the successor rate to account for differences between the two benchmarks.
Prepare for battle? One treasurer bemoaned the fact that regulators seem to “hope that people can agree” on the terms of fallback language and warned, “At worst, every contract could be hand-to-hand combat.”

(Editor’s Note–published November 29, 2019)

Treasurers aren’t too happy about the fallback language for the Libor-to-SOFR switch.

Members at a recent NeuGroup meeting used some colorful language in discussing the challenging issue of changing fallback language in contracts that currently use Libor, the benchmark rate that’s scheduled to disappear after 2021.

  • The wording needs to specify what rate will replace Libor when it’s gone, what triggers the switch, and the pricing spread adjustment between Libor and the successor rate to account for differences between the two benchmarks.

Prepare for battle? One treasurer bemoaned the fact that regulators seem to “hope that people can agree” on the terms of fallback language and warned, “At worst, every contract could be hand-to-hand combat.”

  • Behind that potential battle, of course, is the proposed transition in the US from Libor to the secured overnight financing rate (SOFR), a so-called alternative reference rate recommended by the Alternative Reference Rates Committee (ARRC). SOFR is a broad measure of the cost of borrowing cash overnight collateralized by US Treasury securities—the repo market.
  • A report from consultant EY describes issues that could fuel the combat: “The transition to [SOFR] may require renegotiating the spread due to the differences between LIBOR and [SOFR], such as credit and term premiums. If a bank comes up with its own approach for redefining the spread for its variable-rate instruments, the counterparties may find themselves on the losing end of the transition—which could lead to legal challenges and reputation damage.”

No term rates—yet. As an overnight rate, SOFR is not a direct replacement for Libor, which is typically quoted for one-, two-, three-, six- and 12-month terms. And one treasurer at the meeting said the biggest issue in his mind is the lack of SOFR term rates. He said when that issue is resolved, corporates will get serious.

  • But another treasurer noted that the ARRC has warned market participants not to wait for forward-looking term rates to develop before transitioning from Libor to SOFR.

Give your feedback. In early November, ARRC welcomed the release of a proposed publication of SOFR averages and a SOFR index. The New York Fed is requesting public comment on this so-called consultation by Dec. 4.

  • The consultation proposes the daily publication of three backward-looking, compounded averages of SOFR with tenors of 30, 90 and 180 calendar days. It also proposes a daily SOFR index to help calculate term rates over custom time periods. It plans to initiate publication of the averages in the first half of 2020.

SEC disclosure. In a final point about Libor’s demise, one treasurer noted that the Securities and Exchange Commission this summer gave guidance on responding to risks associated with Libor’s end. The statement says, “The risks associated with this discontinuation and transition will be exacerbated if the work necessary to effect an orderly transition to an alternative reference rate is not completed in a timely manner. The Commission staff is actively monitoring the extent to which market participants are identifying and addressing these risks.”

Read More Read Less
Contact Us
0
0

Cloud Accounting May Require New Controls, Impact Covenants

Treasury executives whose companies are relying more and more on cloud services should confer with their accountants.

Companies are increasingly choosing treasury management systems (TMSs) and other applications via the cloud rather than installing the software in their own data centers. The Financial Accounting Standards Board’s (FASB) new accounting standard aims make the accounting between the two approaches more similar by requiring companies to defer and amortize cloud-related costs rather than expensing them right away, as they do under current accounting.

“For companies that have these [cloud] arrangements, they will have to defer certain of those implementation costs to future periods, and that could impact some covenants, whether free cash flow, EBITDA, and other metrics,” said Sean Torr, managing director of Deloitte Risk and Financial Advisory.

Treasury executives whose companies are relying more and more on cloud services should confer with their accountants about new requirements that potentially could impact loan covenants as well as operational elements tangentially affecting treasury.

Companies are increasingly choosing treasury management systems (TMSs) and other applications via the cloud rather than installing the software in their own data centers. The Financial Accounting Standards Board’s (FASB) new accounting standard aims make the accounting between the two approaches more similar by requiring companies to defer and amortize cloud-related costs rather than expensing them right away, as they do under current accounting.

“For companies that have these [cloud] arrangements, they will have to defer certain of those implementation costs to future periods, and that could impact some covenants, whether free cash flow, EBITDA, and other metrics,” said Sean Torr, managing director of Deloitte Risk and Financial Advisory.

On the plus side, said Chris Chiriatti, audit managing director at Deloitte & Touche, some companies may have avoided software as a service (SaaS) solutions if there was a sizable initial investment because under current accounting they have to expense those costs immediately. “Now they can defer those costs, and it may open up opportunities to use the cloud,” he added.

Challenges. One of the more challenging aspects of addressing the new accounting, according to Mr. Torr, is that management must exercise judgment over the costs to be capitalized. In addition, internal controls will be required to ensure that the capitalized costs are amortized to the P&L over the appropriate term.

“Additional processes and controls may have to be put in place to correctly identify the costs that need to be capitalized under the new standard,” Mr. Chiriatti said. He added that since under existing accounting a lot of those costs were expensed as incurred, companies didn’t need processes to identify and scrutinize their activities.

New controls. Under the new standard, companies entering into cloud contracts frequently and those with decentralized organizational structures should consider whether internal controls are sufficient to handle all cloud arrangements. Additionally, organizations should consider internal controls to ensure management’s judgment is consistently applied and costs are being capitalized appropriately. If those judgments are being made in a decentralized fashion, “then the rigor of the control needs to be greater,” Mr. Torr said, adding that companies will also have to have controls around what information they disclose in financial statement footnotes.

Companies may already have frameworks in place to determine what gets capitalized or expensed if they’ve built solutions on premise. However, for companies that have aggressively pursued cloud solutions, the framework may have gathered dust and become outmoded. “So for those companies there might be additional work because they may not have the processes currently in place that they can leverage,” Mr. Chiriatti said.

Effective date. The accounting goes into effect Jan. 1, 2020, for any company currently deploying software to the cloud, buying cloud services or presently incurring cloud implementation costs. Companies can adopt the standard early for any quarters they have yet to issue financial statements for.

Lining up accounting practices. Mr. Chiriatti noted that from a functional standpoint today there’s little difference between a company using software in the cloud or in its own data center, and that was a major factor prompting the accounting standard-setters to conclude that the deferral model should be the same for both situations.

Read More Read Less
Contact Us
0
0

The Value of Treasury Finance to Growth Company

Founder’s Edition, by Joseph Neu

When venture capital isn’t enough, you need a treasurer.

Growth companies looking to disrupt industries outside software and pure internet plays (which are already mostly disrupted) can have significant capital needs. This is why traditional venture capital needs to be supplemented with new types of investors and innovative ways to access capital markets. Given the cost of equity, pre-IPO, non-investment grade, un-rated companies needing capital have to be creative about debt financing.

Founder’s Edition, by Joseph Neu

When venture capital isn’t enough, you need a treasurer.

Growth companies looking to disrupt industries outside software and pure internet plays (which are already mostly disrupted) can have significant capital needs. This is why traditional venture capital needs to be supplemented with new types of investors and innovative ways to access capital markets. Given the cost of equity, pre-IPO, non-investment grade, un-rated companies needing capital have to be creative about debt financing.

This puts a new spin on the need for a treasurer with solid capital markets experience to serve as head of corporate finance for a growth-company CFO wearing multiple strategic hats. Growth companies that can’t afford to bring one in-house should have access to one on an on-demand basis.

That capital markets experience should include:

  • Wide-spectrum asset-linked securitization. Disruptive companies often have unique assets and monetization strategies to spin off cash flows that require a visionary mind that can bundle them into financial securities. They need finance talent with experience working on such problems, identifying opportunities and packaging them properly. These asset-linked financings may start with AR factoring, but quickly move to contracted revenue securitization, for example, and even rights to cash-flow streams from future data monetizations.
  • Relationships with debt financing innovators. Treasury’s role as chief bank relationship officer can also be useful, to the extent it includes meaningful connections with incumbent banks and bankers who go against trend to be innovative. Yet it also must include relationships with creative finance minds who’ve left the incumbents to join fintechs, capital advisory firms and investor groups. These relationships often are critical to getting needed funding or funding with a sub-10% cost of capital versus a 40%+ dilutive equity round.
  •  A contingency/opportunistic financing mindset. While most treasury professionals understand that the best time to arrange for financing is when you don’t need it, growth companies need to take this thinking to the extreme. They continually need to look to expand the number of current and contingency funding sources for the capital plan to keep growing as well as funding and liquidity options to tap to survive in a stress scenario or crisis event. 

But the treasurer also needs to be capable of executing the basics:

  • Expand the funding toolkit. “From the earliest stages of a startup, the finance team needs to think about expanding their financing toolkit so that the number of funding sources keeps growing, from 2-3, to 5-6, 6-10, to 16 or more,” says Kurt Zumwalt, former treasurer of Amazon.com and NeuGroup member who’s more recently been advising growth companies.
  • Build a bank group. Start early to build what will become long-term relationships. “As soon as you can build a traditional bank group, so much the better, as bank credit opens avenues to more sources of funding,” notes Neil Schloss, former treasurer of The Ford Motor Company and CFO of Ford Mobility (and NeuGroup member). Plus, more banks are thinking creatively about lending opportunities; so why not target those banks for your facility?
  • Instill a cash culture. Finally, a professional with treasury experience, especially in a high-leverage environment will appreciate the importance of free cash flow and instilling a cash culture throughout the business and finance operations.

NeuGroup can help connect you with one if needed.

Perennial value of free cash flow. Any form of debt financing requires cash flow generation to service it—and it helps if it is cash available after capex and other critical outlays. Equally important, as mindsets shift from revenue and user growth to profitability as drivers of enterprise value, the ability to generate free cash flow does more than improve firm borrowing capacity, it creates a better overall valuation, too.

This renewed focus on cash flow for funding a firm to reach its private value potential with debt and realize its full initial public market value should put treasury finance expertise in demand earlier at growth companies.

Read More Read Less
Contact Us
0
0

Pushing Responsibility for Risk Gets Results

Sometimes you have to assign risk to reluctant BU leaders to get their attention.

Complying with internal audit’s requests isn’t always front and center in terms of business leader priorities. But prompting them to accept responsibility for identified risks can change that.  

In a lengthy discussion at a recent meeting of NeuGroup’s Internal Auditors’ Peer Group, members discussed the inadequate funding internal audit (IA) often receives to perform its function as well as the sometimes-low priority business leaders can give to complying with IA’s requests. The discussion was kicked off by one member noting that his company’s risk-committee chairman had challenged management to inform the board about the risks they’ll be accepting in the business. 

Sometimes you have to assign risk to reluctant BU leaders to get their attention.

Complying with internal audit’s requests isn’t always front and center in terms of business leader priorities. But prompting them to accept responsibility for identified risks can change that.  

In a lengthy discussion at a recent meeting of NeuGroup’s Internal Auditors’ Peer Group, members discussed the inadequate funding internal audit (IA) often receives to perform its function as well as the sometimes-low priority business leaders can give to complying with IA’s requests. The discussion was kicked off by one member noting that his company’s risk-committee chairman had challenged management to inform the board about the risks they’ll be accepting in the business. 

A plan is hatched. Recognizing an effective approach, the chief information security officer (CISO) sent an email to the COO, who had provided less funding than requested, to tell him he would have to accept responsibility for the ensuing risk. “Within a week the CISO received the funding,” the IAPG member said. 

  • The tactic can be effective across risk functions. The member said the board’s risk-committee chairman took a similar approach, requesting the heads of business units to present the risks they see to the committee. “It’s changing the conversation,” the member said.

Multipurpose use. Another participant noted that the approach can be used for a variety of situations, including IA’s perpetual challenge of seeking final closure from managers on audits that were completed quarters ago. By letting that time pass, the business leader is essentially telling audit that he or she is accepting the risk. 

  • “It boils down to the question: Are you taking an inordinate amount of risk or not, and if you’re accepting that risk, then explain to the risk committee why you’re comfortable with it,” he said. 

Of course, the business leader may respond that the identified issue is no longer a risk or question audit’s expertise on the matter and argue that it doesn’t pose a significant risk. Those are common challenges faced by IA, to which the member said that it is incumbent upon IA to help management understand the priority of issues—whether it’s a “drop everything and fix it now,” or a “do this when you have some time.”

Making it transparent. The first member added that his company typically gives the business the option to say by what date, from a priority standpoint, it will “mitigate” the issue. “This transparency goes up to the audit committee, which can then say, ‘The business says it will take two years,'” and management then has to defend that time frame. 

He added that regulators are raising questions about companies’ vulnerabilities, but corporate culture often passes the buck on taking on who is responsible in correcting or mitigating those weaknesses. 

  • “There needs to be that type of discussion about who has responsibility for these risks, and the audit committee needs to be in the firing line for these types of things,” the member said.  
Read More Read Less
Contact Us
0
0

Companies’ Buyback Addiction and Other Capital Allocation Insights

Why share repurchases become a drug for companies.

Responding to questions about their capital allocation priorities, assistant treasurers at a recent NeuGroup meeting acknowledged “regurgitating the standard [capital] deployment line,” as one participant put it, after organic growth captured nearly half the votes and M&A ranked second.

Stock buybacks ranked last, even though much of the discussion ended up focusing on that use of capital, which may be a clearer indication of capital priorities. Key insights included:

Why share repurchases become a drug for companies.

Responding to questions about their capital allocation priorities, assistant treasurers at a recent NeuGroup meeting acknowledged “regurgitating the standard [capital] deployment line,” as one participant put it, after organic growth captured nearly half the votes and M&A ranked second.

Stock buybacks ranked last, even though much of the discussion ended up focusing on that use of capital, which may be a clearer indication of capital priorities. Key insights included:

  • Like a drug. Returning capital to shareholders through stock repurchase programs often starts out as a way to dispose of leftover cash in a meaningful way. But soon the programs become a key element to achieve a targeted earnings-per-share (EPS), and then whatever remains becomes the leftover. “It’s like a drug that you can’t get off,” said a participant. “I’ve seen that in company after company.”
  • Analysis of buybacks’ value varies greatly. One member said her team performs extensive analysis on whether share repurchases are providing adequate returns. Another member said that if repurchases are the last choice in capital deployment, then there’s not a lot of value from examining their returns, although some may want to maximize even the returns of leftovers. 
     
  • A signal to investors. For fast-growing companies, noted the assistant treasurer of a major technology firm, announcing that cash will go to repurchases instead of capex tells investors the company no longer has opportunities in which to invest, and its business model is changing.
     
  • Downplaying repurchases. A company whose acquisition opportunities come in “chunks” may see repurchasing shares as a good way to return money to shareholders and even out cash levels. To downplay the importance of buybacks in managing their EPS, they may report earnings before share repurchases. 

    They have that line item because that’s what they want investors to focus on, a member said.

S&P 500 as a benchmark. Several participants acknowledged their companies assume the money they return to shareholders will earn S&P 500-type returns, so if a company’s stock is outperforming the index, it should slow repurchases, and vice versa. One member prompted peals of laughter by asking whether anybody had ever heard their CFO say the company’s current share price made repurchases too expensive to continue.

Accountability for allocation decisions? Sort of. Responses to a survey question asking whether there is accountability for ensuring that capital allocations generate anticipated returns were 53% affirmative and 35% saying no.

But further discussion revealed that for most members, the answer rests somewhere in between. Their companies may have rigorous accountability policies, but given the long-term nature of significant investments, the relevant decision-makers often have left the company or are in very different positions. Monitoring too closely for accountability can stifle innovation.

Read More Read Less
Contact Us
0
0

Shining a Light on Proxy Advisors as Activist Allies

Founder’s Edition, by Joseph Neu

Investors and corporates need to know about conflicts of interest when proxy advisory firms team up with activist investors against management. 

The former CFO of a company that successfully defended against an attack by an activist investor shared some key lessons learned from the experience at a NeuGroup meeting last week. Here’s a big one:

  • Management at even the most shareholder-friendly corporations must court passive investors to counter the inherent power of proxy advisors that support the activists. 

Founder’s Edition, by Joseph Neu

Investors and corporates need to know about conflicts of interest when proxy advisory firms team up with activist investors against management. 

The former CFO of a company that successfully defended against an attack by an activist investor shared some key lessons learned from the experience at a NeuGroup meeting last week. Here’s a big one:

  • Management at even the most shareholder-friendly corporations must court passive investors to counter the inherent power of proxy advisors that support the activists. 

A powerful duopoly. An editorial in the Wall Street Journal on Monday highlighted the power of the proxy/corporate governance duopoly. It reveals:

  • In­sti­tu­tional Share­holder Ser­vices and Glass Lewis con­trol 97% of the proxy ad­vi­sory mar­ket.
  • ISS pro­vides rec­om­men­da­tions to 2,239 clients, in­clud­ing 189 pen­sion plans, and ex­e­cutes 10.2 mil­lion bal­lots an­nu­ally on their be­half.
  • Glass Lewis, which is owned by the On­tario Teach­ers’ Pen­sion Plan and Al­berta In­vest­ment Man­age­ment Corp., has more than 1,300 clients that man­age more than $35 tril­lion in as­sets.

More: “Stud­ies have found that the two firms can swing 20% of votes in proxy elec­tions. An Amer­i­can Coun­cil for Cap­i­tal For­ma­tion re­view last year found that 175 as­set man­agers with $5 tril­lion of as­sets voted with ISS rec­ommen­da­tions 95% of the time. Ac­tivist hedge-fund in­vestors of­ten en­list the proxy firms to shake up man­age­ment, for bet­ter or worse.”

SEC scrutiny. This power has invited scrutiny from regulators. On November 5, the SEC voted to propose amendments to its rules governing proxy solicitations “to enhance the quality of the disclosure about material conflicts of interest that proxy voting advice businesses provide their clients. The proposal would also provide an opportunity for a period of review and feedback through which companies and other soliciting parties would be able to identify errors in the proxy voting advice.”

Allegations made by companies include:

  • Disparity in governance ratings given to firms that pay ISS or Glass Lewis for consulting vs. those that do not.
  • Conflicts of interest when proxy advisors are paid by activist investors or other institutional investors with an agenda.
  • Lack of adequate means to dispute proxy advisor recommendations and even to correct factual errors.
  • Poor transparency on shareholder vote counts, including point-in-time ownership and associated voting rights.

Of course, corporate managements only have themselves to blame if they don’t hold themselves accountable to governance standards—and increasingly to environmental and social standards for corporate behavior (E, S and G).

  • Still, companies that do all they can to be good corporate citizens and look out for shareholders (and all stakeholders) should expect a fair hearing.

Don’t wait. The best advice is not to wait for a proxy battle to tell your positive story. “We had heard that good investor relations was to be proactive to passive shareholders,” the former CFO speaking to our members said. Not only IR, but the C-suite needs to meet regularly with investors to share the company’s business strategy along with its ESG story. This is the best way to counter the proxy duopoly.

Read More Read Less
Contact Us
0
0

Bank Account Rationalization: Taking a Page from Marie Kondo

One member’s approach to reviewing accounts, purging the inessential and optimizing.

A photo of a smiling Marie Kondo, author of The Life-Changing Magic of Tidying Up, helped set a positive tone for one member’s presentation on the thorny task of bank account rationalization. 

  • The treasury operations team’s embrace of purging clutter and keeping only what’s essential was fueled less by the desire to spark joy than the imminent, mundane chore of moving offices. That meant buckling down and weeding through each and every physical folder for every single bank account. 

One member’s approach to reviewing accounts, purging the inessential and optimizing.

A photo of a smiling Marie Kondo, author of The Life-Changing Magic of Tidying Up, helped set a positive tone for one member’s presentation on the thorny task of bank account rationalization. 

  • The treasury operations team’s embrace of purging clutter and keeping only what’s essential was fueled less by the desire to spark joy than the imminent, mundane chore of moving offices. That meant buckling down and weeding through each and every physical folder for every single bank account. 

Inventory overload. Taking inventory of bank accounts is an onerous task to say the least. In a quick poll of meeting attendees, about 95% of members have over 500 accounts, and only a handful have a formal bank account rationalization process. It is important to remember that a recently closed account can be just as important as an open one for audit and FBAR purposes.

  • Inventory checklists should evaluate the accounts’ ties to the overarching bank relationship, products and services, portal(s), and business/accounting purpose, usage and signers. 
     
  • To keep or not to keep, that is the question. With all the aforementioned information the question of “what do we do?” becomes easier to answer. The inventory process helps you discover accounts you may have overlooked and products and services you don’t use or aren’t using enough. And that drives decisions to help you achieve account optimization, improving efficiency.  

Leaner and nimbler. Starting with large amounts of bank account paperwork, the presenting company digitized bank account files for all open accounts and two years of previously closed accounts. Then it established an ongoing plan for maintenance as well as one designed for facing M&A integration projects. While recognizing that “no two integrations will be the same,” the focus is on keeping bank relationships but consolidating accounts wherever possible. 

  Pros:

  • Reduce administrative work, KYC, audit requests, online administration, account maintenance
  • Increase liquidity: concentrate cash balance, enhance and maximize yield on investable cash   

   Cons:

  • Time consuming up-front work
  •  Easy to accidentally overlook some bank products and services (example: letters of credit)

Cast a wide net and target end-goals. Involving all internal stakeholders such as tax, legal and payment operations allowed for transparency, educated account closures and keeping purpose-specific open accounts. The presenter advised other members that when tackling account rationalization in an M&A integration, the game plan should be established and clearly communicated, while being sensitive to human relations (i.e.: what is happening on the other side of the integration equation). 

Don’t forget where you came from. Unfortunately, bank account rationalization isn’t a one-and-done project. The presenter stressed that establishing timelines, setting milestone objectives and scheduling ongoing maintenance of the process is necessary for continued success. 

Read More Read Less
Contact Us
0
0

Flying High with a Rare Bird: A Decentralized Treasury

The treasurer of a decentralized team says he’s more influencer than boss. And it works—for him. 

The corporate treasurer of a fast-growing, global holding company that owns multiple brands explained at a recent NeuGroup meeting that each brand has its own treasury team but that treasurers at the brands report to local CFOs—none of them have a formal, direct reporting line to him.

The treasurer of a decentralized team says he’s more influencer than boss. And it works—for him. 

The corporate treasurer of a fast-growing, global holding company that owns multiple brands explained at a recent NeuGroup meeting that each brand has its own treasury team but that treasurers at the brands report to local CFOs—none of them have a formal, direct reporting line to him.

  • Why. The member inherited this decentralized structure, which corresponds to a business model where each brand manages itself and the holding company, following an acquisition, strives to retain the company’s founding members and corporate culture. 
     
  • A rare bird. This structure is relatively rare among multinationals, stood in contrast to the other members at the meeting who have centralized treasuries, and struck some of them as far less than ideal.

What he does. The member sets goals for treasury, controls the banking group (“Strategy gets set at the top of the house with me,” he said.) and establishes risk tolerances for this high-growth company.

Why it works. The member, who has decades of experience and has worked at world-class companies with centralized treasury models where the treasurer is boss, says in his current role the word that best describes him may be influencer. He says this model works not only because of his skills and background but because of his ability to listen. 

  • “I have been successful in doing this using strong influencing skills,” he said. “But another treasurer who needs formalized reporting lines would not find the same success.”
     
  • He works closely with the treasury teams at each brand and admits he confronts pushback at times and sometimes loses when pursuing an initiative. 

The bottom line. The treasurer emphasizes that ultimately, it’s not the structure or process that determines success—it’s having the right the people in leadership positions. That applies to him and all the people he works with in treasury. 

  • “I do not advocate for centralized or decentralized,” the treasurer said. “Instead I have tried to adapt and maximize the effectiveness of our strategy based on the company’s overall structure, which is decentralized.”
Read More Read Less
Contact Us
0
0

We’ll Get to Libor Later

Two surveys say nonfinancial firms are falling behind in Libor transition efforts.

Nonfinancial companies are taking a passive approach to prepping for the transition away from Libor, relying heavily on their banks and other financial firms to carry most of the burden. According to recent surveys, however, the financial community is lagging.

In its recently published “Liboration: A practical way to thrive in transition uncertainty,” Accenture spells out financial services firms’ lackadaisical efforts toward the transition, even though regulators have reinforced that they will no longer support the benchmark past 2021.

By John Hintze

Two surveys say nonfinancial firms are falling behind in Libor transition efforts.

Nonfinancial companies are taking a passive approach to prepping for the transition away from Libor, relying heavily on their banks and other financial firms to carry most of the burden. According to recent surveys, however, the financial community is lagging.

In its recently published “Liboration: A practical way to thrive in transition uncertainty,” Accenture spells out financial services firms’ lackadaisical efforts toward the transition, even though regulators have reinforced that they will no longer support the benchmark past 2021.

A survey of firms in the private equity, real estate and infrastructure sectors also found laggards. Conducted by JCRA, an independent financial risk advisory firm, and law firm Norton Rose Fulbright, it found that just 11% of derivative users in those sectors believe their Libor-referencing contracts contain provisions appropriate for the benchmark’s permanent discontinuation.

Furthermore, 38% of respondents described contract renegotiations to accommodate Libor’s discontinuation as “not having started,” while 26% said they were a work in progress, and 23% had yet to identify which contracts require amending. No respondents said they had completed renegotiations.

The seemingly less than urgent approach is of critical importance to corporates, which Accenture concludes are relying heavily on their financial services firms to aid their own transitions. Its survey describes numerous areas in which banks are lagging that corporate customers may want to inquire about:

  • Transition plans. More than 80% of survey respondents reported having a formal transition plan, but only 59% said they had a unified and consistent transition and remediation approach. Only a quarter of respondents plan to allocate funds to product design over the next three years, and just one in seven plans to invest in technology and one in ten in legal remediation, areas directly impacting customers and which Accenture calls critical to an effective transition. As far as corporates relying on their banks to hold their hands through the transition, the survey found less than a tenth of respondents expect to fund client outreach activities.
  • Preparedness. While 84% of respondents reported having a formal transition plan in place, only a third said those plans had been in place for more than a year. The survey found only 18% of respondents describing their plans as mature. In addition, “lower-level planning of granular detail and transition activities appear to have only begun in earnest in 2019,” despite regulators’ warnings since the summer of 2018.
  • Talent and capabilities. Only 53% of survey respondents reported having the necessary talent or capabilities to complete their transition by the end of 2021, the point after which Libor is likely to become “unrepresentative” of bank borrowing costs. And only 47% claim to have sufficient funding to support their Libor initiatives.
  • Pertinent to corporates. Accenture notes that “Banks and financial firms should also expect increased demand for information as the transition progresses and be prepared to provide updates on stress tests and risk forecasts as well as evidence of the changes put in place across the business and technology area to facilitate the transition.”
Read More Read Less
Contact Us
0
0

Prepping Pensions for Potentially Perilous Periods

Managers of frozen or closed pension funds need to be prepared for transitional periods. 

Managers of pension funds on a decumulation journey (with more cash flows going out of the plan than coming in) need to be wary of the different dynamics in this stage of the savings cycle. Investors are more vulnerable to shocks and more susceptible to forced selling, all with a greater time dependency on realizing returns.

This is particularly true during periods of major, rapid, institutional transitions that Abdallah Nauphal, CEO of Insight Investment, calls “interregnums,” which can create increased volatility in asset markets. Mr. Nauphal shared his views at our Pension and Benefit Roundtable, sponsored by BNY Mellon, of which Insight Investment is a part.

What to do?

By Joseph Neu

Managers of frozen or closed pension funds need to be prepared for transitional periods. 

Managers of pension funds on a decumulation journey (with more cash flows going out of the plan than coming in) need to be wary of the different dynamics in this stage of the savings cycle. Investors are more vulnerable to shocks and more susceptible to forced selling, all with a greater time dependency on realizing returns.

This is particularly true during periods of major, rapid, institutional transitions that Abdallah Nauphal, CEO of Insight Investment, calls “interregnums,” which can create increased volatility in asset markets. Mr. Nauphal shared his views at our Pension and Benefit Roundtable, sponsored by BNY Mellon, of which Insight Investment is a part.

What to do? Part of the answer for investors is to focus their investment strategies on achieving specific outcomes rather than focusing on short-term volatility. This can only be done if pensions have a strategy in place to manage their cash flows ahead of time.

Pension plan solutions need to be tailored to individual plans’ situations. For example:

  • Add certainty. The better funded a given plan is, the easier it may be to design a strategy to maximize the certainty of meeting its objectives, e.g., minimizing funded status volatility.
  • Add resiliency. For plans that are significantly underfunded, it also becomes important to find ways to increase the resilience of the overall portfolio construction/asset allocation.

This is consistent with what I wrote at the start of the year in that now is the time to think about resiliency, or what Nassim Taleb calls being anti-fragile.

In case you’re curious, the road map Mr. Nauphal laid out for the current interregnum would look like this (see graphic on page 1):

  • The key developed economies move from exploring the limits of monetary policy to pursuing a monetized fiscal expansion: “Governments are prepared like never before to intervene in our economies,” he noted, but this activism may not stave off a crisis.
  • Monetizing the fiscal expansion leads to inflation.
  • Inflationary conditions lead to a crisis from which a new order emerges.

So, let’s hope the new order that emerges is an extremely prosperous one—e.g., an Industrial Revolution 4.0 that’s fueled by smart machines and AI—and the crisis that it begets is not too painful. Meanwhile, more of us will want to get on the glide path that guides us through the current interregnum.

Negative-Rate Concerns Spread to Pension Funds

Although the likelihood of negative interest rates in the US still seems remote, in Europe they’ve been a reality for several years, and pension funds are now grappling with what that means.

In another discussion at the Pension and Benefits Roundtable, the head of pension investments at a multinational corporation (MNC) with several European funds noted it will be the first time in his company’s history that it will have to use negative interest rates to value liabilities, specifically in a Swiss fund. He noted looking at IFRS accounting rules that apply to European companies and concluding a negative number must be used in those calculations, “even though it doesn’t sound right. You promised a $100 pension to someone, and you knew it wouldn’t be more than that, but today you have to say that my liability is $105.”

Falling rates are no fun either. Other participants noted that falling rates, even if not yet negative, are also problematic given the growing pressure they put on banks, and ultimately their services. One noted the impact of falling rates on her company’s P&L and said her team is now concentrating on manager searches and debating the value of passive versus active managers. “Do we think active management would provide us with a bit more of a defensive posture, in our equity lineup?” she said.

Cutting costs. The topic of centralizing pension plans across European countries arose during the roundtable, to enable pensions facing the challenge of negative rates to cut costs while potentially smoothing out imbalances when some of an MNC’s funds across different countries are well funded and others in the red. A participant noted that Belgian law permits pooling pension-fund assets, and his team has considered the move with respect to funds in smaller European countries—Belgium, Austria, etc.—but the complexity has hindered progress. “We don’t see blending Germany and the UK, Switzerland and the UK, or those in other large countries,” he said.

Read More Read Less
Contact Us
0
0

Cyber Risk Committees and Related Governance Tips

Founder’s Edition, by Joseph Neu

Cybersecurity is now a board-level risk and that might justify a board-level cyber risk committee, NeuGroup members said during our recent Internal Auditors’ Peer Group meeting. 

In a discussion about cyber risk and a tangential conversation on separate audit and risk committees, chief audit executive members from tech and other IP-intensive firms highlighted the issue of cybersecurity expertise and experience at the board level. Directors on most audit or risk committees don’t necessarily have this specialty expertise in their backgrounds.

Founder’s Edition, by Joseph Neu

Cybersecurity is now a board-level risk and that might justify a board-level cyber risk committee, NeuGroup members said during our recent Internal Auditors’ Peer Group meeting. 

In a discussion about cyber risk and a tangential conversation on separate audit and risk committees, chief audit executive members from tech and other IP-intensive firms highlighted the issue of cybersecurity expertise and experience at the board level. Directors on most audit or risk committees don’t necessarily have this specialty expertise in their backgrounds.

  • Don’t wait for the mandate. While other specialty areas of expertise, e.g., finance, have been mandated, cyber risk is too important to leave off the list of desired qualifications for board of director recruiting.
  • A dedicated cyber risk committee would help with recruiting. Forming a separate committee for cyber risk would help focus minds on recruiting such directors. It would also elevate the CISO or Infosec head with a board committefe reporting line.

Separating the chief information security officer (CISO) or information security reporting lines from the chief technology officer or IT function was also a takeaway for several members. The reason: 

  • It’s too easy for the technology group to allocate budget away from cybersecurity-related projects to favor shiny-object, customer-facing or revenue-generating technology spend. 

Some firms thus have CISO/InfoSec reporting into the CFO if there is no CRO instead, but: 

  • A CISO/InfoSec reporting line to the chair of the board’s cyber risk committee would give them that much more autonomy. 

If you’re looking for a driver to push this initiative, look no further than the SEC’s  Commission Statement and Guidance on Public Company Cybersecurity Disclosures, which came out in February 2018. In the wake of Equifax and other breaches, the SEC had felt an increasing need to issue guidance on disclosures because senior executives were found to have sold company shares during the period when they were aware of an incident, but before it had been publicly disclosed.

Generally, once specific risk factors are called out for disclosure the need for governance of them also rises. The SEC guidance includes the following on board risk oversight:

  • Current SEC regulations “require a company to disclose the extent of its board of directors’ role in the risk oversight of the company, such as how the board administers its oversight function and the effect this has on the board’s leadership structure.” How does it look if the board doesn’t have cyber in one of its committee’s mandates?
  • Such disclosures “should provide important information to investors about how a company perceives the role of its board and the relationship between the board and senior management in managing the material risks facing the company.” This is where the reporting line to cyber risk head comes in.
  • “To the extent cybersecurity risks are material to a company’s business, we believe this discussion should include the nature of the board’s role in overseeing the management of that risk.” Yes, cyber risk counts as important!
  • “In addition, we believe disclosures regarding a company’s cybersecurity risk management program and how the board of directors engages with management on cybersecurity issues allow investors to assess how a board of directors is discharging its risk oversight responsibility in this increasingly important area.” Outlining the program in SEC reporting is one thing, but investors and regulators will also naturally look into the qualifications of the directors charged with cyber risk oversight.

Have you done your due diligence on the need for a cyber risk committee? Hint: Consider rolling privacy into their mandate, too.

Rolling in the Deep (Data)

As a related issue, data and data privacy are other areas that boards are going to need to have some knowledge of, particularly when it comes to requirements for last year’s general data protection regulation – GDPR – and now California’s similar California Consumer Privacy Act (CCPA).

Data collection, storage and management, as just about every corporation is learning (in some cases, the hard way), is critical to success. Like blood it needs to course through the company’s veins in order to stay competitive. However, if there’s a breach and that data starts pouring into cyberspace, it could cost the company dearly. That’s why governments are stepping in.

Both GDPR and CCPA are regulations that require companies to get a handle on their sprawling data troves, make sure they are secure and be ready when someone – the “data subject” – wants their personal data purged from wherever the company holds that data.

As IAPG members learned at their recent meeting, complying with the data subject part isn’t that easy.

  • What is personal data? What is personally identifiable information? GDPR thinks of them as two distinct things – but both critically important. And who will manage it all? The DPO of course. If your company doesn’t have a data privacy officer already, then it should be looking for one posthaste.  

But even with the best data organizing efforts, total control is elusive. As a presenter at the IAPG meeting pointed out, “100% GDPR compliance is an illusion.”

  • That’s because there are “many systems, files, hard copies containing personal data. Think about the human resources archives, systems backup and archives, one-time used Excel work files, etc. There is no company that has a complete and accurate inventory of personal data,” he said.

Nonetheless, companies should be able to show that they are making a solid effort. 

Read More Read Less
Contact Us
0
0

Containing the Cost of Hedging

Zeroing in on the cost of carry can help companies get a handle on hedge costs.

Volatile markets require an effective hedge program while ensuring the cost is reasonable for the level of risk reduction. At a recent FX Managers’ Peer Group meeting, in a session co-led by a member and a sponsor’s risk advisory team, the group pondered ways to contain the cost of hedging and the trade-offs.

Zeroing in on the cost of carry can help companies get a handle on hedge costs.

Volatile markets require an effective hedge program while ensuring the cost is reasonable for the level of risk reduction. At a recent FX Managers’ Peer Group meeting, in a session co-led by a member and a sponsor’s risk advisory team, the group pondered ways to contain the cost of hedging and the trade-offs.

A critical takeaway was that one of the first things practitioners must do is to consider the cost of carry. This is determined by the interest differential between the two currencies in the hedge (this, rather than basis spread, is the main driver of carry cost). In the currency market environment at the time of the meeting (September), that would indicate favorable hedge costs for long G10 exposures (ability to lock in a hedge gain with a forward contract) while hedging emerging markets (EM) currencies the same way would result in a loss. For companies with primarily short FX exposures, such as the presenting FX member, the scenario would be the opposite.

What’s your hedge “value for money?” Another way to view cost is using the ratio of dividing the carry gain or loss by the implied volatility for the considered hedge period. The higher that ratio is, themore value for money it is to hedge that currency risk. This ratio varies over time and can often tip from favorable to unfavorable, especially in EM currencies. And, the more volatile the currency, the more the timing of the hedge transaction matters.

What about correlation? Members were shown how the carry cost of developed markets (DM) currencies were strongly correlated to 3-month USD Libor where carry cost of EMs were not. Not only that, but because short-term rates are linked to economic cycles and central bank policies, forecasted rates changes are, more often than not, better indicators than forward curves. As one banker noted: “It’s good to look at forecasts, because banks are not always wrong.”

What’s the implication for corporate hedging? Because of correlation effects, offsetting exposures generally benefits those with both long and short exposures. For one member who revealed primarily short FX exposures, it pays to consider groups of currencies more, in this case DM/G10 vs. EMs. In periods like those of the last 12 months, when EM currencies have been negatively correlated vs. the USD, and the size of the exposure relative to the G10s is lower, there is a case for little to no hedging, unless a gain can be locked in from the get-go. For more material exposures (G10 for this company) where the correlations are also higher, a more careful approach is needed when the FX team is also mandated to contain the cost of hedging.

Read More Read Less
Contact Us
0
0

Fishing for Clarity: Murky Bank Fees and Whether to Pay to Reduce Them

Why paying for performance when trying to cut bank fees may not hold water.

The pain point of bank fees is not significant enough to justify paying vendors who promise to analyze and reduce them on a performance basis. This was the consensus of NeuGroup members discussing bank fee management—one of their top priorities—at a recent meeting. 

Why paying for performance when trying to cut bank fees may not hold water.

The pain point of bank fees is not significant enough to justify paying vendors who promise to analyze and reduce them on a performance basis. This was the consensus of NeuGroup members discussing bank fee management—one of their top priorities—at a recent meeting. 

While in theory it might make sense to pay a contingency fee based on how much a vendor saves a company, treasury operations managers are understandably reluctant. 

  • “We pay our banks a lot in fees, so paying a vendor a percentage of savings would amount to a significant payout,” one NeuGroup member said recently. 
     
  • Charging 30% of the savings as payment—what one vendor making the rounds has been quoting—is too high.

On a pure cash outflow basis, treasury has some idea of what it’s paying banks, but the full picture is murky since much of what banks earn off each client in the transaction banking realm is embedded in foreign exchange and interest-rate spreads. Indeed, sometimes an effort to reduce visible fees can lead to uneconomic decisions.

  • If your bank fee analysis vendor has an incentive to reduce fees, they may do so at the cost of better interest or FX rates, earnings credit rates (ECRs), or may push other economically irrational decisions.

Further, treasury needs to step back and consider how much it is paying in fees versus the level of bank service it is receiving, including the credit commitment. In other words, it needs to look at the total wallet. Here are three points to consider:

  • Is this worthwhile? One banker with experience in transaction banking at a global leader told me he thinks that the relentless focus on bank fees is akin to being obsessed with finding all the coins in your couch cushions.

    “Competition among banks has driven fees down, so it should not be as big a concern,” he said. NeuGroup members shot down this notion, however.
     
  • More clarity needed. The wallet considerations with bank fees for transaction banking services need to be clearer and banks do themselves a disservice by failing to adopt global standards to make them more transparent and comparable.
     
  • Rate environment is conducive to it. Now is the time to get a handle on fees. With persistent negative and lower interest, flatter yield curves, across much of the major developed economies, transaction banking is becoming more reliant on fees to sustain their businesses.   

The bottom line.  To fix the pain point of bank fees, banks and bank fee solution providers needs to:

  1. Establish more clarity on what bank fees represent, and the market price for them.
     
  2. Put them in the context of overall wallet management so treasurers can assess if the upcharge to pay for other services that are not market priced, like credit commitments, is acceptable.

This is the game being played: Banks deliver a range of services for which their corporate customers pay them X, aka the wallet; the allocation of that wallet to various services and fees is used to justify a credit commitment that is otherwise not fully paid for.

  • To pay a bank fee analysis vendor on contingency to reduce bank fees may be a fool’s errand unless the contingency fee is reflected in the total wallet picture. 
Read More Read Less
Contact Us
0
0

Rating and Ranking External Investment Managers

Key elements for designing a scorecard to evaluate external manager performance.

Members at a recent meeting of cash investment managers discussed effective external manager evaluations, including what belongs in scorecards. 

Big picture. The presenting member runs the credit portion of her company’s portfolio and considers various criteria to score managers. She is increasingly using more qualitative metrics in addition to portfolio returns. Her team’s key elements to evaluate managers are:

  1. Investment performance 
  2. Market and credit insight 
  3. Risk management and compliance 
  4. Client service and reporting
  5. Team stability; diversity and inclusion

Key elements for designing a scorecard to evaluate external manager performance.

Members at a recent meeting of cash investment managers discussed effective external manager evaluations, including what belongs in scorecards. 

Big picture. The presenting member runs the credit portion of her company’s portfolio and considers various criteria to score managers. She is increasingly using more qualitative metrics in addition to portfolio returns. Her team’s key elements to evaluate managers are:

  1. Investment performance 
  2. Market and credit insight 
  3. Risk management and compliance 
  4. Client service and reporting
  5. Team stability; diversity and inclusion

Evaluating the value proposition. The company’s deemphasis on performance and its decision to place greater value on the services managers provide involves evaluating:

  • Market and credit insight by way of macroeconomic interpretations, asset allocation recommendations and credit research expertise to provide valuable aid in investment decisions.
     
  • Risk management and compliance support via timely and accurate reporting to check off all regulatory and compliance boxes.
     
  • The responsiveness and reliability of client service and delivery on special requests.
     
  • The team itself should have a key contact in place, low turnover and diversity throughout to maximize the relationship. 

Dynamic design. Using a weighted average scoring system, the scorecard evaluates portfolio performance quantitatively by comparing a manager’s returns to market benchmarks and peers. All other categories involve subjective ratings of qualitative measures.  

Read More Read Less
Contact Us
0
0

Safety First: Investment Managers Reduce Risk, Shorten Duration

Cash investment managers are shying away from risk and heading toward safety and liquidity.   

The vast majority of members at recent NeuGroup meeting of cash investment managers expressed very little desire to increase the risk or duration of their portfolios to boost yield. Indeed, their priorities—in order—may be best expressed as SLY: safety, liquidity, yield. 

  • The inverted curve. One key factor in this low-risk stance was the inverted or flat shape of the yield curve at the time of the meeting. “We’ve liquidated all long-term investments, all treasuries and corporate bonds, because of the curve,” one member said. 

Cash investment managers are shying away from risk and heading toward safety and liquidity.   

The vast majority of members at recent NeuGroup meeting of cash investment managers expressed very little desire to increase the risk or duration of their portfolios to boost yield. Indeed, their priorities—in order—may be best expressed as SLY: safety, liquidity, yield. 

  • The inverted curve. One key factor in this low-risk stance was the inverted or flat shape of the yield curve at the time of the meeting. “We’ve liquidated all long-term investments, all treasuries and corporate bonds, because of the curve,” one member said. 

Changing stripes. Another member whose company once owned emerging market debt has derisked and the portfolio is now “very conservatively managed,” she said. It’s largely allocated to bank deposits, government and prime money market funds, commercial paper (CP), some asset-backed CP, mortgage-backed securities and munis. All of it is fairly short duration. 

Investment-grade reality check. Before the meeting, one member wrote:

  • “Our major point of interest related to the balance sheet is liquidity. There have a been a number of research pieces floating around suggesting that many corporate BBB bonds are actually BB. During a downturn, those bonds will trade with reduced liquidity. We’re scrubbing our portfolio to identify any concerns of that nature.”

Exceptions to the rule. A few members are willing to venture out the risk curve a bit and invest in high yield corporate debt. But with plenty of due diligence: One member in this camp said that his group “spends a lot of time on credit,” allocating the portfolio to the right geographies and striving to “optimize relative to risk and liquidity.”

The pendulum swing. The only constant, of course, is change. So don’t be surprised if some cash investment managers are singing a slightly different tune at the group’s next meeting about their appetite for risk.  

  • One of the members said her team is already asking, “Did we get too conservative?” At some point in the future, she said, there is a “high likelihood we’ll take more risk.”
Read More Read Less
Contact Us
0
0

The Art of Rising in Finance: A CFO’s Advice on Job Selection

One woman’s criteria for choosing new jobs that lead to higher rungs on the professional ladder.

At the latest Women in NeuGroup* event, held at Expedia in Seattle, Jenny Ceran, CFO of Smartsheet, suggested that women moving up the ladder should take chances—and take a job even if it means most of it would be learning. 

One woman’s criteria for choosing new jobs that lead to higher rungs on the professional ladder.

At the latest Women in NeuGroup* event, held at Expedia in Seattle, Jenny Ceran, CFO of Smartsheet, suggested that women moving up the ladder should take chances—and take a job even if it means most of it would be learning. 

Her path to CFO. After working in finance at Sara Lee and Cisco, Ms. Ceran won the treasurer’s job at eBay at age 39 ¾., achieving her goal of becoming treasurer by the time she turned 40. Also cool: She was a member of NeuGroup’s Tech20 Treasurers’ Peer Group.

  • After nine years in the role, she was ready for a new job at the company. She set her sights on investor relations, a learn-on-the-job opportunity for which she ended up earning accolades but was criticized for not having sharp enough elbows.
     
  • Not only that, in order to do investor relations, she also had to take on FP&A, a combination that can be too much for one person with a small team at a multi-billion dollar organization.

After eBay, she served as treasurer and head of IR at Box, before becoming CFO for the first time, at a publicly-traded digital coupon company. She took the CFO job at Smartsheet three years ago.

Shoulda done it earlier. The CFO job is a big one that requires a lot of energy. If she had to do it over again, Ms. Ceran would have gunned for the CFO job earlier in her career when she had more of it. Lesson: Don’t wait.

Picking the next job: Follow your heart. Ms. Ceran advises careful consideration of the following five criteria whenever faced with an opportunity for a new role:

  1. Find an industry that excites you. Work in industries that are compelling. The internet was a big draw for Ms. Ceran at the time internet-enabled businesses burst onto the scene, and that brought her to Cisco.
     
  2. What work will I be doing? Ask yourself, “Will I learn something new or just reapply skills I’ve already developed?”
     
  3. Who’s the boss? It’s important that you have chemistry with your boss. Remember: people don’t leave companies, they leave bosses.
     
  4. Is the corporate culture a fit? Does it require you to behave in ways that go against your character? If you speak up about unacceptable behavior, how will that be received? Women in particular need to look out for signs of a “bro culture.”
     
  5. The Money: Last and always last. Take the job if it fits your criteria, even if it’s less money. “I’ve taken jobs that pay less because they fit the above four so well,” Ms. Ceran said. “I ended up learning so much and it enabled me to pivot to greater things over the long-term.”

*The next WiNG event is in New York City in spring 2020. To receive an invitation, please email mkmoore@neugroup.com.

Read More Read Less
Contact Us
0
0

Another Reason to Keep on Top of Bank Fees

Only treasury is positioned to fully evaluate bank fees, so ensure your team does not provide reasons for other groups like procurement to intervene.

As organizations look to reduce spending on vendors and drive organizational savings, it is critical that treasury provide proper bank fee analysis to prevent other internal functions from viewing bank spend as a lever to hit savings goals. That key takeaway emerged at a recent NeuGroup meeting of cash managers.

Only treasury is positioned to fully evaluate bank fees, so ensure your team does not provide reasons for other groups like procurement to intervene.

As organizations look to reduce spending on vendors and drive organizational savings, it is critical that treasury provide proper bank fee analysis to prevent other internal functions from viewing bank spend as a lever to hit savings goals. That key takeaway emerged at a recent NeuGroup meeting of cash managers.

One NeuGroup member present said he’s afraid that if his team does not properly manage bank fees, the procurement team will attempt to take ownership of all bank spend.

  • The member said that while it’s not clear if there would be material savings to wring out of bank fees, his concern is that procurement could seize on examples of unnecessary services (such as CD-ROM bank statement delivery) or off-market fees, and build a case for taking a leading role in pressuring banks to reduce fees.
  • “We can do better at bank fee analysis. We want to show the organization that treasury has it under control,” the member said. Many in the group shared his frustration with bank fee analysis.
  • At least one other member said she had to jump up and object when procurement at her company wanted “to treat banks like any other supplier.”

You can’t touch this. The overwhelming consensus of the group is that no one but treasury should have control over bank relationships, which are about far more than fees. The nuances of wallet management, one member said, are only understood by treasury and that’s where bank account management belongs.

  • “It’s not hardware,” another treasurer said in exasperation. “Nobody but treasury should be involved.”
Read More Read Less
Contact Us
0
0

The Heavy Lift of Automating Cash Flow Forecasting

Consider the time and money needed to put AI to use in cash forecasts.

The pain of accurate cash flow forecasting is all too familiar to treasurers used to struggling with multiple models, getting access to data and convincing business units of the importance of timely and accurate forecast submissions. No wonder many treasurers are eager to learn more about using artificial intelligence (AI) and machine learning to make the job easier.

 

Consider the time and money needed to put AI to use in cash forecasts.

The pain of accurate cash flow forecasting is all too familiar to treasurers used to struggling with multiple models, getting access to data and convincing business units of the importance of timely and accurate forecast submissions. No wonder many treasurers are eager to learn more about using artificial intelligence (AI) and machine learning to make the job easier.

Good news, bad news. The treasurer of a large multinational gave his peers plenty to think about at a recent meeting by telling them the encouraging news that his company has automated the process of cash flow forecasting successfully. The bad news: It took a decade. 

  • It took 10 years, he explained, because that’s how long it took the company to create and use a single instance of SAP. “One instance is necessary for an automated cash forecasting process,” he said. “It was a significant project.”

Single truth source. “Our forecasting uses machine learning and you can only do that with one data hub that is a single source of the truth,” the treasurer said, adding that senior management must mandate that everyone uses the hub, not just treasury. 

  • The universal data hub sits on top of SAP and takes information directly from Quantum and other systems, including those for budgeting, tax and logistics. Spotfire, from TIBCO, sits on top of the data hub for reporting. 

Share the financial pain. The treasurer said getting budget for the project was a big issue, but commercial groups shared in the cost, which was well into the millions of dollars.

Worth it. “The benefits significantly outweighed the cost given the ability to proactively identify where pools of cash would be created allowing early action to dollarize and repatriate excess cash,” the treasurer said. 

Read More Read Less
Contact Us
0
0

Diving Into UniCredit’s Russia Pooling Solution

The benefits of using nonresident and resident accounts in a cash pool. 

Ears perked up at a NeuGroup meeting of treasurers sponsored by UniCredit when the bank described an international cash pooling product to improve an MNC’s liquidity management in Russia while ensuring compliance with the local legal and regulatory constraints. Here are highlights:

The benefits of using nonresident and resident accounts in a cash pool. 

Ears perked up at a NeuGroup meeting of treasurers sponsored by UniCredit when the bank described an international cash pooling product to improve an MNC’s liquidity management in Russia while ensuring compliance with the local legal and regulatory constraints. Here are highlights:

  • UniCredit owns the largest foreign-owned bank in Russia and the solution gives clients the ability to manage RUB liquidity via a nonresident account as part of a cash pooling setup, providing maximum control over liquidity in Russia.
     
  • The parent company opens the nonresident account with UniCredit Russia, which is incorporated into the pool. “The pool is the way to establish a connection between the resident or subsidiary account and nonresident or parent company account,” one banker explained.
     
  • There are no limitations on the parent’s use of the nonresident account, which is not subject to Russian currency control legislation.
     
  • This structure will help facilitate intercompany financing, the underlying basis for transactions within the pool, from the parent to its Russian subsidiary.
     
  • The bank has a legal opinion confirming its cash pooling product is fully compliant with current Russian legislation. 
     
  • In an alternative funding solution, the nonresident account can be funded by the offshore parent by entering into a swap arrangement (USD/RUB) with UniCredit. The parent funds in USD and swaps with UniCredit, which sends rubles to the nonresident account. The swap ensures there is no ruble FX exposure; offshore USD cash flows avoid the risk of trapped cash; and the ruble funding level achieved is often more attractive than a local ruble loan.

“I found the UniCredit Russia presentation very interesting,” the treasurer of a large pharmaceutical company said. “It seems an efficient way to address exchange exposure and surplus cash in Russia.”

Read More Read Less
Contact Us
0
0

People Risk and the Cyberfraud Balancing Act

Treasurers walk a fine line as they try to reduce the risk of cybercrime by taking humans—often the last line of defense—out of vulnerable processes like payments.

Mitigating cyberfraud in the treasury and payments area (including AP) is tricky when it comes to people risk. 

  • On the one hand, people are the weakest link because they can be convinced by cyberfraudsters deploying social engineering to violate procedure to send out payments they shouldn’t. Or, being human and fallible, they click on a link that they should not or enter a real password into a phony site.       

Treasurers walk a fine line as they try to reduce the risk of cybercrime by taking humans—often the last line of defense—out of vulnerable processes like payments.

Mitigating cyberfraud in the treasury and payments area (including AP) is tricky when it comes to people risk. 

  • On the one hand, people are the weakest link because they can be convinced by cyberfraudsters deploying social engineering to violate procedure to send out payments they shouldn’t. Or, being human and fallible, they click on a link that they should not or enter a real password into a phony site.       

Get people out of the process. Human fallibility prompts cybersecurity experts, like one from JP Morgan at our Asia Treasury Peer Group Meeting in Singapore last April, to recommend straight-through, or machine automated, processing of payments. Machines can be programmed to stick with protocols and even evaluate the authenticity of change requests.

Keep people involved in oversight. On the other hand, there are plenty of anecdotes where human beings have proven to be the last line of defense. People who show good judgment or sense something is amiss can be the difference between a cyberevent succeeding or being stopped.

This tension was a focal point of a session on cyberfraud led by Societe Generale at our recent Global Cash and Banking Group meeting. The bank cited both the need for artificial intelligence and machine verification of IBAN numbers along with robust callback procedures (just make sure there’s a secondary verification that the person on the phone is who he or she says she is, even if it sounds like them).

  • “It’s important to have a balance,” one member said. She cited internal, red team exercises where the team’s efforts to hack into treasury systems are often recognized by the treasury team after noticing that something does not look right. “People are part of the defense.”

If people are to be part of a balanced approach to cyber risk, then they have to remain educated and aware of what to look for. This is one reason treasurers updating their cybersecurity practices at our Treasurers’ Group of Mega-Caps meeting recently cited increasing the frequency of meetings with information security heads to at least quarterly. 

  • “The types of attacks and various vulnerabilities change so fast now, that we need to keep up,” one treasurer noted.

People pleasers beware. Customer service (aka business support) oriented roles or individuals with a service mind-set are often those targeted. 

Remote country staffers. Another area of vulnerability is people with access to payment systems at the periphery, such as joint ventures or minor affiliates in remote countries far from headquarters. 

  • So don’t ignore these cohorts when balancing cybersecurity systems and people training.
Read More Read Less
Contact Us
0
0

Digital and People Savvy Applicants Desired

What skills should corporate finance functions look for? AI understanding, yes, but a human touch, too.

Today and certainly in the not-too-distant future, success will come to finance leaders who find the right balance between digital savvy and human self-awareness to solve problems and perform at a high level; and do this with a diverse set of people across the enterprise. 

What skills should corporate finance functions look for? AI understanding, yes, but a human touch, too.

Today and certainly in the not-too-distant future, success will come to finance leaders who find the right balance between digital savvy and human self-awareness to solve problems and perform at a high level; and do this with a diverse set of people across the enterprise. 

  • Digital savvy and will to learn. HR finance leads who joined our treasury peer group members at a recent meeting noted how experienced finance professionals need to show a willingness to become digital savvy. Learning from digitally native millennials and Gen Zers is a good place to start.
  • Mentor and mentee. The give-to-get is to mentor the digitally savvy on finance specialty skills and show how finance supports the business (all while absorbing a little digital savviness).  

This will transition us to an AI future where machines do the heavy lift of processing transactions, accounting, auditing, pulling data and doing logical analysis based on learned technical procedures. Humans will then tell the stories that motivate action, adhere to culture and judge whether machine-made decisions are appropriate for us as human stakeholders.

Accordingly, human skills will become increasingly important with time.

  • EQ and self-awareness. Perhaps the most important part of the skill wheel is a high emotional quotient, in order to be aware of your own emotions and those around you. It’s important to be socially aware and able to read people in order to best share and learn from them and manage them as a team.
  • Read the culture. A big part of this is being able to read and play your role in line with the organizational culture. There’s a lot of emphasis these days on diversity and inclusion, which also means people with different skill sets, specialist and generalist finance experiences, as well as those intimately familiar with the business. Each may look at a problem differently.
  • Dance when invited. As one member put it, “Our organization goes out of its way to invite everyone to the dance, but people still have be willing to dance.” 

But what do you do when the super specialists and digital savvy don’t know that they have to dance? Can EQ, self-awareness and becoming more human be learned in a leadership development program or elsewhere on the job?

This is where mentoring and coaching are important. Future finance leaders, like today’s, will need to learn how to speak to people on the phone, make eye contact and understand how they “show up” in meetings. To be relevant in the future, however, those that can will also need to be digitally savvy enough to interface with the apps and intelligent machines that will be processing the data to support and make key finance-related decisions in order to make them human.

Read More Read Less
Contact Us
0
0

What’s Keeping Bank Treasurers Busy This Fall

Banks should get ready for “a relatively active fall” when it comes to capital and liquidity, as well as Basel rules, one expert said.

Ben Weiner, a partner at law firm Sullivan & Cromwell, told members of NeuGroup’s bank treasurers group to be ready for lots of activity when it comes to managing capital and liquidity. New rules like accounting for current expected credit losses (CECL) have dominated the conversation but there are other areas that need to be considered:

Banks should get ready for “a relatively active fall” when it comes to capital and liquidity, as well as Basel rules, one expert said.

Ben Weiner, a partner at law firm Sullivan & Cromwell, told members of NeuGroup’s bank treasurers group to be ready for lots of activity when it comes to managing capital and liquidity. New rules like accounting for current expected credit losses (CECL) have dominated the conversation but there are other areas that need to be considered:

  • Trading book review. The Basel Market Risk Capital Standard, which is referred to as a fundamental review of the trading book, is on the horizon, Mr. Weiner said. He said this issue was on the regulatory agendas published by the OCC and the FDIC this past spring, indicating that the release of a proposal to revise market risk capital requirements is a priority of the banking agencies. 
     
  • Basel IV. There’s the more comprehensive implementation of what’s commonly referred to by industry participants as Basel IV, which are the standards that the Basel committee released in December 2017.

    This again presents complex questions that relate to many different aspects of the bank capital framework, including the future role and relevance of the advanced approaches (that is, the internal ratings-based approach for credit risk), how the standardized approach for operational risk will factor into the overall capital and stress testing framework, and which banking entities will be subject to the revised Basel standards.
     
  • Share repurchases. Mr. Weiner also discussed what has changed for non-CCAR bank holding companies in terms of the overall requirements for share repurchases. He said the reg requirements relating to share purchases developed over time and the framework “as it exists now has duplicative, overlapping and inconsistent requirements.”

    For a long time, there’s been a rule that requires bank holding companies to provide notice and gain prior approval for repurchases in some circumstances if they would make aggregate repurchases net of any issuances that exceed 10% of their net worth. 

    In 2009, the Fed released SR letter 09-4, which established a supervisory expectation that bank holding companies would consult with supervisory staff and seek a non-objection before repurchases in some cases. The Basel III capital rules introduced graduated constraints through the “capital conservation buffer,” as well as a stand-alone requirement that banking entities obtain prior approval for any repurchase of common stock. 

    The stand-alone prior approval requirement, which was eliminated in the simplifications rulemaking, had presented significant practical difficulties for non-CCAR bank holding companies, especially when they sought to conduct repurchases promptly in response to market conditions.

    Tailoring. The Fed and other banking agencies have proposed tailoring the application of capital and liquidity requirements, as well as enhanced prudential standards, to large domestic banking organizations and the US operations of foreign banking organizations. Agency principals have signaled that the goal is to finalize the proposals this fall, by the 18-month anniversary of S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act.
Read More Read Less
Contact Us
0
0

Treasurers Grapple with the Prospect of Negative Interest Rates in the US

The only thing that’s certain about interest rates is uncertainty and divided opinions.

In Europe. Treasurers at a NeuGroup meeting sponsored by Unicredit last week heard a senior bank executive say he expects to see negative interest rates in Europe for the next two to three years. More than $17 trillion in debt now carries negative yields.

  • This week, Unicredit’s CEO told a French TV channel that the bank is working on measures to transfer the European Central Bank’s negative rates “onto big companies or some big clients”—those with deposits of more than 100,000 euros. 

The only thing that’s certain about interest rates is uncertainty and divided opinions.

In Europe. Treasurers at a NeuGroup meeting sponsored by Unicredit last week heard a senior bank executive say he expects to see negative interest rates in Europe for the next two to three years. More than $17 trillion in debt now carries negative yields.

  • This week, Unicredit’s CEO told a French TV channel that the bank is working on measures to transfer the European Central Bank’s negative rates “onto big companies or some big clients”—those with deposits of more than 100,000 euros. 

In the US. At an earlier meeting of assistant treasurers, members held sharply different views about whether negative rates would cross the Atlantic. They also discussed how companies should prepare for the possibility.

It could happen here. One member whose company requires significant cash on its balance sheet was gloomy about the direction of fed funds, which have been cut twice by 0.25% in as many months, and now rest between 1.75% and 2%. The company also has a large bond portfolio, and treasury will be discussing the negative-rate issue with the board of directors later this year. 

  • The assistant treasurer said the Fed appears to have bowed to President Trump’s wish for lower rates—he recently called for rates at zero or below—if not to the extent the president wants. 
     
  • Given where fed funds stand today and the likelihood of an economic downturn prompting further cuts, the possibility has become less far-fetched. Former Fed Chair Alan Greenspan said in an August interview with Bloomberg that there is no barrier to US treasury yields falling below zero. 

It can’t happen here. Most participants argued that fed funds would remain in positive territory, with one member mentioning two Fed studies that argue against negative rates. “Since the Fed’s own studies say don’t go there, they probably won’t,” he said.

  • The San Francisco Fed concluded in a late August study that negative rates actually decreased rather than increased Japan’s immediate and medium-term inflation, with the caveat that its economic deterioration could have been steeper without them. 
     
  • However, another San Francisco Fed paper argued in February that negative rates could have mitigated the depth of the Great Recession and sped up economic recovery.

If it does. One option may be for companies to lower cash balances by making payments faster, members said, or when parking cash, go further out the yield curve and take on more credit risk. One member suggested returning more cash to shareholders, but then questioned whether they would want it. 

  • In the end, said the pessimist, companies concerned about the stability of the market may simply resign themselves to negative rates. “It’s negative, but it’s a known negative.” 
Read More Read Less
Contact Us
0
0

CECL to Reshape Credit Products

As new rules on how banks account for credit losses approach at the start of next year, corporate borrowers may want to start asking their lenders how their loans and other credits may be affected.

The Financial Accounting Standards Board’s Current Expected Credit Loss (CECL) standard, which becomes effective Jan. 1, requires banks to recognize on day one the losses expected over the life of their credit products. Several banks, including JPMorgan Chase, Citigroup, Discover Bank and Synchrony Financial have reported their loan-loss reserves are likely to increase by double-digit percentages, although one bank, Wells Fargo, anticipates a sizable decrease.

As new rules on how banks account for credit losses approach at the start of next year, corporate borrowers may want to start asking their lenders how their loans and other credits may be affected.

The Financial Accounting Standards Board’s Current Expected Credit Loss (CECL) standard, which becomes effective Jan. 1, requires banks to recognize on day one the losses expected over the life of their credit products. Several banks, including JPMorgan Chase, Citigroup, Discover Bank and Synchrony Financial have reported their loan-loss reserves are likely to increase by double-digit percentages, although one bank, Wells Fargo, anticipates a sizable decrease.

It’s banks’ earnings, stupid. Most corporate credit and corporate-loan products tend to be relatively short term, but non-investment-grade products and even high-grade products may, by definition, still experience losses. Banks will have to estimate those losses upfront and set capital aside for them, unlike the current incurred-loss method that recognizes losses when they become probable.

“Banks are going to have to shift the way they do business somewhat, to avoid the hit to earnings from setting aside more capital,” said Richard Bove, financial strategist at Odeon Capital Group and a long-time banking-industry analyst.

Mr. Bove said banks will consider the extent to which a commercial loan may increase required reserves. If it is an additional 1% or 2% reserve against the loan, borrowers will have to make up the difference in terms of price, since tying up capital will impact a bank’s earnings.

Some borrowers impacted more than others. “You have to believe that bankers are spending a lot of time with ‘what if’ models to try to determine where they should be lending their money and what will represent the highest potential return on that money,” Mr. Bove said. “It may prompt some banks to shift their asset allocations, to avoid increasing their loan-loss reserves significantly. So which industries will benefit from such changes in asset allocation and which will be hurt?”

Capital structure fallout. Corporate borrowers planning to seek credit or refinance existing lines in the first part of next year should discuss with their bankers what changes are likely to come down the pike and if their credit will be affected. In some cases, especially for leveraged companies, the changes may prompt rethinking capital structures.

Jon Howard, senior consultation partner at Deloitte & Touche, noted regulators have raised the concern that banks may man-date shorter terms for companies seeking unsecured credit.

“The company may want to lock up its rate for five years, and the bank may prefer a shorter-term loan and be willing to come back to the table more frequently,” Mr. Howard said, adding that he thinks it is unlikely the accounting change will significantly impact good business decisions, since if the first bank won’t provide a certain product, the borrower can seek it from another lender.

Read More Read Less
Contact Us
0
0

Treasury Taking on a Greater Role in Compliance Management

A surprising percentage of companies have no plan in place for monitoring and/or managing regulations, while more of that responsibility has shifted to the treasury function.

In its 2019 Compliance Survey, Peachtree City, Ga.-based Strategic Treasurer found that one in three companies has no plan in place for monitoring and/or managing ever-increasing regulations. Among companies that do, the treasury function is increasingly taking on that role in some capacity—over half today, compared to just a third of companies in last year’s survey that said they use treasury for that purpose.

“More companies’ treasury groups are getting involved in regulations and compliance, and that shows healthy progress by some firms,” said Craig Jeffery, managing partner at Strategic Treasurer.

A surprising percentage of companies have no plan in place for monitoring and/or managing regulations, while more of that responsibility has shifted to the treasury function.

In its 2019 Compliance Survey, Peachtree City, Ga.-based Strategic Treasurer found that one in three companies has no plan in place for monitoring and/or managing ever-increasing regulations. Among companies that do, the treasury function is increasingly taking on that role in some capacity—over half today, compared to just a third of companies in last year’s survey that said they use treasury for that purpose.

“More companies’ treasury groups are getting involved in regulations and compliance, and that shows healthy progress by some firms,” said Craig Jeffery, managing partner at Strategic Treasurer.

When monitoring is in place, only 31% of large companies assign it to an individual in treasury, and only 16% of companies have a dedicated regulatory team or person at the corporate level.

Tech underutilized. The survey also found that companies do not appear to be taking advantage of available technology to automate aspects of compliance. In fact, 76% of the 150 respondents reported that they do not leverage a technology solution that provides compliance-related functionality or modules.

Mr. Jeffery said that high percentage was surprising, given that most treasury management systems (TMSs) today offer compliance-related modules, and that there are stand-alone solutions as well.

“It takes time to adapt to new regulations, but given the level of regulations today, that so many don’t have solutions in place to help them is a concern,” he said, adding that is especially so given two-thirds of responding companies said they anticipate regulations increasing in the next one to two years.

Other survey findings include:

  • Know your customer (KYC) requirements generate the most concern, and were cited by 72% of large companies, while 66% cited FBAR reporting about foreign accounts.
  • However, among companies that do have compliance-related solutions, only 50% help with FBAR and 36% with KYC.
  • Bank account management (BAM) is seen by 69% of respondents as the area most in need of solutions to facilitate compliance management.
  • Dedicated BAM systems are used by 26% of large companies, and 28% use a SAAS or installed TMS solution.
  • Only 18% of large companies have fully automated the FBAR process, with 44% partially automated.
  • 23% of large companies have a SWIFT identifier code, and 13% use a SWIFT service bureau.
  • Staff security training is feeble. Only 13% of responding companies provide annual training on customer security programs, while 17% have set up a one-time training session, 25% are in the process of developing training, and the rest either do not offer or plan to offer training, or they’re unsure
Read More Read Less
Contact Us
0
0

Tassat Offers Less Volatile Method of Corporate Blockchain Payments

Company creates practical application for blockchain for banks.

 The hype about blockchain technology has subsided as financial institutions and their corporate clients have set to work on developing practical applications. Tassat Group, known as trueDigital until a recent rebranding, launched just such an application last December that is being used by New York-based Signature Bank’s customers, and soon a large investment bank may make the service available to its corporates. 

“We’re working with another top-tier investment bank on a use case similar to what we have with Signature,” said Thomas Kim, Tassat’s CEO. 

Last December Signature Bank, a $40-billion-asset commercial bank servicing corporate clients, launched its Signet digital-payments platform based on Tassat’s blockchain technology. Several million dollars in domestic and international payments are currently made daily among the bank’s institutional clients, according to Signature Bank Chairman Scott Shay.

The hype about blockchain technology has subsided as financial institutions and their corporate clients have set to work on developing practical applications. Tassat Group, known as trueDigital until a recent rebranding, launched just such an application last December that is being used by New York-based Signature Bank’s customers, and soon a large investment bank may make the service available to its corporates.

“We’re working with another top-tier investment bank on a use case similar to what we have with Signature,” said Thomas Kim, Tassat’s CEO, adding that it “falls right in line with folks who would read iTreasurer.”

Last December Signature Bank, a $40-billion-asset commercial bank servicing corporate clients, launched its Signet digital-payments platform based on Tassat’s blockchain technology. Several million dollars in domestic and international payments are currently made daily among the bank’s institutional clients, according to Signature Bank Chairman Scott Shay.

American PowerNet, an independent power-supply company based in Wyomissing, Pa., has used Signet to facilitate real-time payments in the renewable energy sector. The blockchain service enables the company to settle with power generators on a daily basis once schedules are confirmed, compared to the traditional 30-day payment structure.

First the downside. The payments must be made between Signature Bank clients, and opening an account at the bank requires a $250,000 minimum average monthly account balance and going through the bank’s intensive regulatory-vetting process.

Then the plusses. Payments can be made 24x7x365, and funds are exchanged directly between Signature Bank clients, with no transaction fee. Mr. Shay noted that instantaneous settlement and eliminating credit risk have been a major draw, and so has the bank’s vetting process, given the finality of instant payments. Tassat does not employ a tradable cryptocurrency to facilitate payments, which can be highly volatile—better known digital-payment firm Ripple’s XRP has fluctuated alongside cryptocurrencies such as Bitcoin and Ethereum. Signet instead partners directly with banks and allows them to create their own “digital coins” to facilitate transactions. Each coin, or signet, represents $1 held in a deposit account at Signature Bank.

Mr. Shay pointed to cargo-shipment companies engaging in thousands of smaller transactions and companies selling digital products as particularly interested in Signet, in part because the blockchain-based record it provides is immutable and time-stamped.

“We wanted to build a tool—not a token—that would aid American PowerNet in both the purchasing and payments sides of the renewable energy business,” R. Scott Helm, CEO of American PowerNet, said in a statement. “To meet this goal, we identified Signature Bank’s Signet as the most secure way to settle in US dollars in real-time without introducing currency risk into the ecosystem.”

Read More Read Less
Contact Us
0
0

Low Rates Deliver an Early Christmas

Corporates issuing debt at rock-bottom rates exult after reaping major savings.

“Sometimes the market gives you a gift,” exclaimed one treasurer at a recent NeuGroup meeting while recapping highlights from the last few months. In this case, the gift came in the form of $300 million in net present value savings after the company took advantage of the late-summer swoon in interest rates.

  • The company cashed in by calling—at par—30-year-bonds yielding 4.2% and replacing them with debt yielding 3.1%. And yes, the timing of low rates matching up with the bonds’ call dates was sweet serendipity. 

Corporates issuing debt at rock-bottom rates exult after reaping major savings.

“Sometimes the market gives you a gift,” exclaimed one treasurer at a recent NeuGroup meeting while recapping highlights from the last few months. In this case, the gift came in the form of $300 million in net present value savings after the company took advantage of the late-summer swoon in interest rates.

  • The company cashed in by calling—at par—30-year-bonds yielding 4.2% and replacing them with debt yielding 3.1%. And yes, the timing of low rates matching up with the bonds’ call dates was sweet serendipity. 

Another treasurer who joined the cavalcade of corporates issuing debt last month—Bloomberg reports that companies sold more than $308 billion of notes in September, the first time ever that corporate issuance has topped $300 billion in a month—said strong demand for his company’s big debt deal produced “massive” NPV savings, making the issue a “home run.”

Timing is everything. Members agreed that treasury needs to have the ability to take advantage of the opportunities—or gifts—that fixed-income markets provide. “Timing in volatile markets is critical,” one participant said. That recalls a key takeaway from a NeuGroup meeting of mega-cap treasurers in 2017: 

  • Winning authority from the board to go to capital markets opportunistically is a best practice. Treasury needs to have authority from the finance committee to refinance or issue debt when market stars are in alignment. This provides the flexibility to act fast, and members agreed it’s ideal for everyone as long as there’s full transparency between treasury and the board of directors.

    One member said his department does not have multi-year authority but hopes to get there. Another half-joked that the finance committee thinks it’s smarter than it is. 

The flexibility to say “no go.” Equally important to having the authority to strike while the market iron is hot is having the right and judgment to say “no go” to the banks underwriting a bond issue if conditions have soured the morning the deal is scheduled.

“You want to give yourself the timing flexibility from a funding, liquidity and organizational standpoint to provide a larger window of timing options so that you aren’t boxed into one specific date,” one treasurer at the meeting said.

Read More Read Less
Contact Us
0
0

Strategic Finance Leaders to Overtake Career Treasurers in Talent Race

In the race toward the future of finance, should talent development programs be molding leaders for general finance, separate from specialist functions like treasury?

Our talent-themed treasurers’ meeting last week at the University of Washington’s Foster School of Business revealed a deepening fault line between treasurers who are part of strategic finance leadership rotations and those who are career treasury. 

  • It also showed that more rotational programs designed to foster talent and develop future finance leaders will include specialist (read: treasury) function leadership roles.

In the race toward the future of finance, should talent development programs be molding leaders for general finance, separate from specialist functions like treasury?

Our talent-themed treasurers’ meeting last week at the University of Washington’s Foster School of Business revealed a deepening fault line between treasurers who are part of strategic finance leadership rotations and those who are career treasury. 

  • It also showed that more rotational programs designed to foster talent and develop future finance leaders will include specialist (read: treasury) function leadership roles.

“Welcome to the specialist side.” That’s what one member, newly arrived in treasury as part of her strategic finance leadership rotation, was told when it was announced she got the role of treasurer.  

  • Treasury and tax tend to be specialist assignments that are not always integrated in finance leadership or rotational programs. The mind-set of being different is often part of the culture. 

We are different. The “we are different” mind-set was underscored by another member who, at the conclusion of a discussion of finance leadership and rotation programs, pointed out that treasury mostly lies outside these at his company. But that’s quickly becoming the minority view, which he acknowledged. 

Next-generation treasurers likely to be part of a strategic rotation. Indeed, at the meeting of our Treasurers’ Group of Mega-Caps in the spring, I asked the treasurers who have been in the role for 10 years or more whether they thought they would be replaced by a strategic finance leader or a treasury veteran.

  • Most said that a strategic finance leader was more likely. Meanwhile, the strategic leaders may flow through the AT or senior director position.

Here are two reasons why strategic finance leaders will absorb specialist functions: 

  1. Technical skills will be embedded in machines. The specialist function silos are likely to break down further in future finance roles where smart machines and AI do the heavy lifting on executing hedge programs and even issuing debt. People will be migrated to human activities like problem solving and business support coordination. 
  2. Coverage model for the business. The business support function of treasury needs to start at the top. One member who is part of the strategic rotation treasurer cohort noted that she has been speaking with other treasurers about how to better support the business from treasury.

The best way is to elevate the business support role to the highest level and double-hat treasury leaders with a business coverage role, akin to how banks cover clients. Having someone in the role who has been directly engaged with the lines of business through their career will help.

The key success factor missing from many treasury organizations with treasury business support or consulting roles is that they are not at a high enough level to have the needed impact.

  • The need to put business support at the top of the org chart for each area of the finance function is likely what will put specialist functions like treasury into every strategic finance leadership rotation before the end of the next decade.   

Question everything. The final impact that strategic finance leaders rotating into treasurer roles will have is to question and revalidate much of what treasury does. This is increasingly the mandate CFOs are giving them. 

  • One example is questioning the extent to which treasury dominates the procurement of financial services, banking and insurance, in particular. Another is how the company approaches risk management—with a focus on bringing a more integrated framework to manage the various risk factors enterprises face. 
Read More Read Less
Contact Us
0
0

Can the Great Libor Migration Happen?

Trillions of US dollars need to start referencing SOFR, the Fed’s new overnight funding rate, very soon. Can the market handle it? Does it want to? Presentations at several NeuGroup meetings in the last few weeks have delved into those questions and the likely demise of Libor. 

In just a few short years – possibly by the end of 2021 – the London Interbank Offered Rate, otherwise known as Libor, may cease to exist. This means that almost $200 trillion linked to the tainted rate, things like derivatives, CDOs, student loans, structured products, adjusted-rate mortgages and the like, will need to be moved to the Fed’s Secured Overnight Financing Rate. 

Trillions of US dollars need to start referencing SOFR, the Fed’s new overnight funding rate, very soon. Can the market handle it? Does it want to? Presentations at several NeuGroup meetings in the last few weeks have delved into those questions and the likely demise of Libor. 

In just a few short years – possibly by the end of 2021 – the London Interbank Offered Rate, otherwise known as Libor, may cease to exist. This means that almost $200 trillion linked to the tainted rate, things like derivatives, CDOs, student loans, structured products, adjusted-rate mortgages and the like, will need to be moved to the Fed’s Secured Overnight Financing Rate. 

It won’t be easy. At both recent NeuGroup FX Managers’ Peer Group meetings, members were told that the FCA might declare Libor as an unrepresentative benchmark, which means the FCA will no longer compel banks to submit Libor quotes. Then what? It’s all in the language of change, specifically, fallback language.

  • Fallback language is a key transition element because it facilitates moving existing transactions priced over Libor to a new benchmark. The Fed and its ARRC, along with the International Swaps and Derivatives Association (ISDA), have both proposed such language, the latter in contracts for derivatives referencing Libor and other key interbank offering rates (IBOR). 
  • By the way, ISDA’s proposal drew comments from 147 organizations, and according to association’s results published in December, only seven came from nonfinancial corporates. After that fallback language kicks in. 
  • Good to know. About 95% of Libor contracts are for derivatives

Don’t let it get that far. Although fallback agreements are a good safety net, market players shouldn’t let it get to that point. The easiest solution is for all market participants to transition to the new rate before 2021. But it’s tough sell.

  • Libor: breaking up is hard to do. “Here we are in September of 2019, and I would say that across our client base we really haven’t seen clients pulling away from Libor-based products in advance of the 2020-21 time frame with as much urgency as some have advocated for,” Andrew Little, managing director at Chatham Financial, said in a recent NeuGroup Bank Treasurers’ Peer Group webinar. “As a matter of fact, given the shape of the curve, we’ve seen some clients actually extend the duration of their Libor exposure well out to seven years, 10 years and beyond.

Just what is SOFR? On one hand it’s a mouthful of Fed-speak. In reality, it’s an overnight, risk-free reference rate that correlates closely with other money market rates and is based on actual market transactions. So, it’s a repo rate, and thus backward looking (vs. the forward-looking Libor) and is calculated as a volume-weighted median of transaction-level tri-party repo data collected from the Bank of New York Mellon as well as GCF Repo transaction data and data on bilateral Treasury repo transactions cleared through FICC’s DVP service, which are obtained from DTCC. 

  • The good news is that since SOFR is based on transactions that happened in the tri-party repo market, it’s not easily manipulated. The bad news is that it can be very volatile. During last week’s liquidity crunch, SOFR spiked to a record 5.25%, according to the Federal Reserve Bank of New York, yanked higher by borrowing rates for overnight repurchase agreements, or repos.

Still needs a spread component. Since SOFR is a collateralized or secured overnight rate and Libor is uncollateralized term rate reflective of bank credit, there needs to be some sort of credit spread to adjust for the basis between the two rates.

  • At this point SOFR is too young to create a credit component. When it is more robust then a term rate can be developed, experts say. Regulators also don’t want SOFR to become the new Libor, i.e., a new tool for people to manipulate the market. This means it must be IOSCO compliant and have more of a track record. The International Organization of Securities Commissions published a set of standards for approved global benchmarks back in 2013.
  • Chatham reports that there is a strong interest from the market to develop one soon, although the path forward is still unclear. “I think most of the [Libor-SOFR] conversation reduces in some way to the desire to replicate the time-varying credit spread that is inherent in Libor,” says Todd Cuppia, managing director at Chatham. That reality has increased the relevancy of what he calls the “alternative, alternative reference rates.” The two leading contenders are Ameribor and the ICE Bank Yield Index.
  • Take comfort. For longer-dated Libor contracts, banks and the market may take some comfort from the fact that the historical spread method has already started to be priced into the forward curves. By that measure, “some may say that the transition is becoming priced in to the extent you believe that current basis markets and historical averages are going to be in range of what the different working groups have suggested, which was a multiyear average or median of those rates,” Mr. Cuppia said.
  • “If you look at fed funds as a reasonable proxy for SOFR and you look at the basis between fed funds and Libor, you can see a pretty meaningful decline in those basis rates to what could be a fair representation of their historical average,” he said. “I believe that’s what could be guiding the thinking of those who are using those much longer-term Libor contracts relative to what their alternatives may be.”

No magical thinking, please. Don’t assume that there is a possibility that Libor is staying. Along with the FCA, both the SEC and Fed say that it is going away. Still even the Fed sees resistance (or futility of forcing the issue).

  • “Tellingly, contracts referencing US dollar Libor, without robust fallback language, continue to be written,” the New York Fed’s John Williams said in a speech this summer. He acknowledged the shortcomings of SOFR and replacement benchmarks, but said, “don’t wait for term rates to get your house in order. Engage with this issue now and understand what it means for your operations.”

Perhaps the FCA, Fed and SEC take a lesson from Abraham Lincoln’s observation on a man and his pear tree. “A man watches his pear tree day after day, impatient for the ripening of the fruit. Let him attempt to force the process, and he may spoil both fruit and tree. But let him patiently wait, and the ripe pear at length falls into his lap.”

Read More Read Less
Contact Us
0
0

The Downside of Precision, the Hulk Inside Life Sciences and Thinking Cash, Cash, Cash

Three takeaways from 2019 H1 peer group meetings selected by NeuGroup founder Joseph Neu.

Here are three insights that stood that stood out to me from our first half meetings:

Sometimes precision works against you. Too much precision can muddle the early stages of assessing risk. When pursuing the first steps, risk professionals may want to look past their desire to employ precise information and start instead with ballpark estimates

Three takeaways from 2019 H1 peer group meetings selected by NeuGroup founder Joseph Neu.

Here are three insights that stood that stood out to me from our first half meetings:

Sometimes precision works against you. Too much precision can muddle the early stages of assessing risk. When pursuing the first steps, risk professionals may want to look past their desire to employ precise information and start instead with ballpark estimates

  • “As you get more precise, the culture of some companies or groups within companies will tend to get into debates about whether a precise risk measurement is right or wrong,” said a member of the Internal Auditors’ Peer Group at a recent meeting. “To avoid going in that direction, we try to simplify.” The PDF is here.

Why it matters: The spectrum of risks continues to grow in scope and potential impact. When tackling enterprise risk management or internal audit, therefore, it’s critical not to get too hung up on detailed quantification. It might suffice to ask, “Is this a material risk to the survival of the company, or not,” for example.

Binary reality: life sciences companies swing from the Hulk to Bruce Banner. Treasurers grapple with capital allocation issues as cash flows wax and wane with drug approvals, expiring patents and other ups and downs. There’s nothing like dramatic stock price moves to illustrate the feast or famine nature of revenue and cash flow at life sciences companies that live or die by the success or failure of clinical trials for drugs or devices. 

  • To kick off a discussion on how this binary reality affects financial strategy, one member of the Life Sciences Treasurers’ Peer Group showed his peers a chart of his company’s stock dropping fast from the upper left to the lower right. 
  • The firsthand account of this company’s binary bind sparked a wide-ranging discussion about the challenges of capital allocation and structure at companies that one day resemble the Incredible Hulk (successful drugs coming out of the pipeline, fast growth, high margins) and then revert to being a not-so-incredible Bruce Banner (drugs going off patent, sluggish pipelines, flat revenues)—and back again. PDF is here.

Why it matters: Expected values, including VaR and even NPV may not fully capture binary events. If you are on the wrong side of the option tree, you can be totally off course, so it’s best to understand potential binary outcomes in financial planning and analysis.

Broaden scope to think cash, “end to end.” Treasury organizations can drive home the idea of the entire organization thinking about cash. A member shared his treasury organization and the plan to scale it with the growth of the company while containing cost increases. The underlying structure—one that encompasses a broad treasury and finance organization (TFO)—will support this objective in many tangible and intangible ways. 

  • Consolidating all the company’s functions that touch cash and forecast and manage exposures under the treasurer, including FP&A and credit and collections, makes for a large group, but it bolsters the treasurer’s strategic influence at a leadership level. From our Tech20 meeting. PDF is here.

Why it matters: Rescoping finance as a growth company, before turf grows to protect, can make the finance function exponentially more scalable and effective. Doing this around cash also is transformative. 

Members will find the full meeting summaries on their communities. Enjoy!

Read More Read Less
Contact Us
0
0

Different Views on the SOFR-Libor Waiting Game

Never put off till tomorrow what may be done day after tomorrow just as well.” 

That cheeky line from Mark Twain turns on its head conventional wisdom on taking action. It also might apply to how some treasury teams are approaching preparation for Libor’s demise. And there are other variations on the “what, me worry?” theme.

Never put off till tomorrow what may be done day after tomorrow just as well.” 

That cheeky line from Mark Twain turns on its head conventional wisdom on taking action. It also might apply to how some treasury teams are approaching preparation for Libor’s demise. And there are other variations on the “what, me worry?” theme.

  • One participant at a recent NeuGroup meeting of cash investment managers said, with a smile on her face, “We’re not worried about Libor; someone will figure it out. We haven’t taken any action.” She expects the company’s banks will clear the path to a smooth transition. 

A slightly different view of preparedness surfaced at a meeting last week of assistant treasurers:

  • ATs appeared to be well-versed, if stuck in place, regarding regulators’ push to move away from Libor to the secured overnight funding rate (SOFR). Yes, treasury must understand the company’s Libor exposures and make sure there’s fallback language in those contracts. But otherwise, right now it’s a big waiting game with a shortage of to-dos. 
  • Coincidentally, on the same day as the discussion, the Alternative Reference Rates Committee, charged with guiding the transition to SOFR for cash products, released a “practical implementation checklist” to implement the risk-free rate. Any takers?
Read More Read Less
Contact Us
0
0

Sustainability and Smart Investing: Why the Buzz About ESG Is Growing

Interest in ESG investing is blossoming as companies search for purpose beyond profits. 

WHY: You can do good and do well. Academic research cited by DWS “provides strong evidence that environmental, social and governance factors positively influence corporate valuation and investment performance.” Also:

  • “ESG data can potentially help mitigate against both idiosyncratic and systematic risks.
  • 90% of ESG study results demonstrate that prudent sustainability practices have a “positive or neutral influence on investment performance.
  • Key takeaway: Think about ESG as another risk factor in your screening criteria which aligns closely with other credit risk factors. This alignment will only strengthen as more investors employ ESG criteria. 

Interest in ESG investing is blossoming as companies search for purpose beyond profits. 

WHY: You can do good and do well. Academic research cited by DWS “provides strong evidence that environmental, social and governance factors positively influence corporate valuation and investment performance.” Also:

  • “ESG data can potentially help mitigate against both idiosyncratic and systematic risks.
  • 90% of ESG study results demonstrate that prudent sustainability practices have a “positive or neutral influence on investment performance.
  • Key takeaway: Think about ESG as another risk factor in your screening criteria which aligns closely with other credit risk factors. This alignment will only strengthen as more investors employ ESG criteria. 

Hard data: DWS says that, historically, moving higher in ESG ratings in a portfolio has not resulted in a significant loss of yield opportunity. Check out these facts and figures:

  • Bloomberg Barclays Credit 1-3 Year Index recently yielded 2.16%.
  • DWS created a portfolio from the index consisting of “true ESG leaders,” “ESG leaders,” and “upper midfield” issuers; it eliminated “lower midfield,” “ESG laggards” and “ESG true laggards.” That produced a yield of 2.13%
  • Eliminating everything except true ESG leaders and ESG leaders resulted in a yield of 2.03%
  • The actively managed DWS ESG Liquidity Fund consistently ranks No. 1 on Crane Data’s list of institutional money market funds, and recently sported a seven-day yield of 2.29%
  • Starbucks, which attended the NeuGroup meeting, worked with DWS to launch the ESG money market fund in September 2018. The fund has $459 million in assets.
  •  Fitch says global assets in ESG money funds increased 15% in 2019 H1 to $52 billion

Soft but significant: JPMorgan Chase CEO Jamie Dimon and the Business Roundtable are promoting sustainability as part of a rethink of the purpose of a corporation that emphasizes the interests of all stakeholders and not just shareholders. 

  • DWS noted this shift in part reflects the recognition that consumers, especially young ones, place real importance on the values of the companies they patronize. 
  • Bottom line: More companies will embrace sustainability to boost their brands and make money. Those companies and their investors will likely outshine peers that fail to adapt to this new paradigm.

HOW: DWS outlined a variety of approaches for corporates that want to incorporate ESG into their investments. Think of a ladder that starts with a passive, minimalist approach to ESG and climbs toward more active commitments designed to have significant impact:

  • Rung 1: Avoid the bad stuff. It’s called negative screening and it means avoiding controversial sectors like coal and tobacco. Check out an ESG money market mutual fund to dip your toe in the (clean) ESG water. 
  • Rung 2: Embrace good stuff. Consider an ESG separately managed account (SMA) for excess cash and review the criteria based on sustainable development goals (SDG) as defined by the United Nations Development Program, including affordable and clean energy and responsible consumption and production.
  • Rung 3: Carbon offsets. Think about purchasing renewable energy credits (RECs). Or buy renewable energy from operating projects. DWS notes the former is a pure expense on the P&L and the latter may mean paying a premium for the energy purchased. 
  • Rung 4: Higher impact solutions. These include using strategic cash to reach specific goals, such as tech companies investing in affordable housing.
  • Rung 5: The investment management model. The idea here is to purchase assets like renewable energy plants and manage them to achieve sustainability goals and an economic return. 
  • Rung 6: The corporate venture model. DWS described a pooled investment vehicle to make direct investments in technologies and products to promote sustainability generally as well as for the companies investing. This also is designed to produce economic returns but involves more risk.

This sparked a discussion of what, if any, role treasury teams play in their companies’ venture capital arms.

WHO & WHAT: In a live poll at the NeuGroup meeting, 40% of those participating said their companies are currently exploring ESG investing. 

  •  Another 12% are adopting and integrating ESG investing to the extent possible while 4% are implementing or testing it.
  • More than a third (36%), though, said ESG investing either does not interest their companies or is outside of treasury’s scope to pursue. Another 8% have evaluated and passed on ESG investing. 
  • One presenter said the only reason his company is not invested in ESG money funds is its current decision not to use prime funds, something he said will change when it has more stable cash balances.
  • Another NeuGroup member told the group her company invests in carbon credits as part of the company’s allocation to less liquid, higher-return assets. The company plans to double that allocation this year.
  • One participant said that in addition to ESG investing, his company is exploring an ESG-linked debt structure and revolvers with a pricing grid tied to the company’s own sustainability scores.

What’s your take on ESG? We want to know what you’re doing—or not doing—and why. 

Read More Read Less
Contact Us
0
0

Sharing the Horse Race Information

Reasons to tell asset managers where they rank in the race against peers.

A discussion of asset manager scorecards at last week’s NeuGroup meeting on corporate cash investment management prompted the question of whether, during review meetings, you should tell external managers where they rank among peers on the performance metrics you track. In other words, should you reveal the results of the horse race to the horses?

  • Share results and compare to peers. The consensus was that yes, treasury should provide the information on win, place, show and below—although no one reveals the names of other asset managers in the horse race. Most tell the asset manager across the table which line was theirs so they can see how they stack up against peers.

Reasons to tell asset managers where they rank in the race against peers.

A discussion of asset manager scorecards at last week’s NeuGroup meeting on corporate cash investment management prompted the question of whether, during review meetings, you should tell external managers where they rank among peers on the performance metrics you track. In other words, should you reveal the results of the horse race to the horses?

  • Share results and compare to peers. The consensus was that yes, treasury should provide the information on win, place, show and below—although no one reveals the names of other asset managers in the horse race. Most tell the asset manager across the table which line was theirs so they can see how they stack up against peers.

Why share the information? According to members, the reason to reveal the results is to show the asset manager where they are doing well, e.g., return performance, and perhaps not so well, e.g., customer service. 

  • If the manager is a top performer, acknowledging that in the results table can motivate them to remain one, especially if they see where exactly others behind them stand (hopefully close). 
     
  • But it really helps if you need to fire a manager. Where the ranking reveal is most helpful is when it comes time to dismiss a manager, which members noted can be a hard thing to do.
    • “If you’ve shown that the manager is underperforming over multiple performance review meetings, they kind of know it’s coming, and it makes it much easier to relay the news,” as one member noted. Plus, you have given them the opportunity to improve.

Track the information to share. While portfolio performance on total return and other hard data can be obtained via Bloomberg or Clearwater, members suggested using a customer relationship management (CRM) tool to track various, soft scorecard criteria, such as the number of visits with the asset manager. Sharing the information in the review meeting also forces treasury to justify and add context to the results. 

  • A potential point of contention is if the manager was told not to invest in a certain name or names and that ends up affecting its result. Is it really fair to assess a manager’s performance if they are not given free rein within the mandate?

Beyond this stable. While this discussion applies to scorecards for external asset managers, the advice also serves for scoring any treasury relationship. So why not create scorecards for all those relationships—and then share the horse race results with everyone involved?

Read More Read Less
Contact Us
0
0

The Double Whammy Threatening Corporate Pension Plans

Low rates may reduce asset returns and lower discount rates, hiking liabilities.

Lower interest rates may be great if you’re tapping the bond market. Not so much if you’re trying to fund a corporate pension plan. 

Low rates may reduce asset returns and lower discount rates, hiking liabilities.

Lower interest rates may be great if you’re tapping the bond market. Not so much if you’re trying to fund a corporate pension plan. 

Returns on assets fall. William Warlick at Fitch Ratings said the sudden dive in interest rates in July and August—10-year Treasuries fell below 2%, and by early September yielded about 1.5%—potentially creates a “double whammy.”

The first whammy is that yields remaining low for an extended period will eventually reduce returns on pension funds’ fixed-income portfolios, which have been growing as pension-fund managers shifted away from riskier equities. 

Liabilities grow. As the return on assets shrinks, pension-fund liabilities are likely to increase, also potentially widening plan funding gaps. When treasury and high-grade corporate bond yields fall, plan administrators’ discount rates fall along with them, so a given set of future cash flows related to plan-participant liabilities is discounted back at a lower interest rate. That’s the second whammy. 

“That means the present value of the liabilities is higher and the pension’s funded status could worsen,” Warlick said. “So the pension fund could either have a deficiency of asset returns or higher liabilities than expected.”

Good behavior lowers risk. Fortunately, lower tax rates and persistently solid investment returns have enabled most companies with large pension plans to significantly improve their funded status. The 150 companies Fitch reviews saw their median funded status improve to 85% from 81% between 2014 and 2018. 

The problem: “We could be entering an environment where, despite a recent period of voluntary contributions, required contribution could go up,” Mr. Warlick said. 

NeuGroup and BNY Mellon are hosting a Pensions & Benefit Roundtable in New York on October 2 for treasurers with oversight of pensions. If you would like to participate, please contact Chris Riordan at criordan@neugroup.com.

Read More Read Less
Contact Us
0
0

SocGen: You Have Less Floating-Rate Debt Than You Think

One big eye-opener for many attendees at NeuGroup’s Tech20 2019 first-half meeting was sponsor Societe Generale’s suggestion that their floating-rate debt capacity was higher than they (most likely) currently thought it was—provided they hedge their FX, that is.

Why? Because, according to this view, the FX hedge program reduces one’s net floating-debt exposure. In addition, if you agree that a recession is coming, rates will be staying put or going lower, making floating debt even cheaper.

One big eye-opener for many attendees at NeuGroup’s Tech20 2019 first-half meeting was sponsor Societe Generale’s suggestion that their floating-rate debt capacity was higher than they (most likely) currently thought it was—provided they hedge their FX, that is.

Why? Because, according to this view, the FX hedge program reduces one’s net floating-debt exposure. In addition, if you agree that a recession is coming, rates will be staying put or going lower, making floating debt even cheaper.

It pays to favor floating-rate exposure to interest rates now. Treasurers often fight against the bias that locking in fixed-rate exposure to interest rates is best. In fact, most studies show that relying on floating-rate debt is cheaper. Backtesting by SocGen showed that since 1990, a 10-year floating strategy was cheaper 100% of the time, with average savings of around 3% vs. a fixed-rate strategy.

Now it may be even better. In the US, for instance, an anticipated rising rate environment was suddenly paused by the Fed, and monetary policy indicators increasingly suggest that not only are we unlikely to see interest rates normalize any time soon, but they may well be headed down again. When the yield curve flattens or inverts, moreover, as it has, the timing to increase floating-rate exposure to ride interest rates lower cannot be better.

Include FX hedging program in offsets. Disciplined asset-liability management seeks to offset floating-rate liability exposure with floating-rate assets. Depending on a firm’s risk profile and appetite, the offsets can match completely, or the floating-rate assets can be seen as a means to increase floating-rate liability further. This is where Societe Generale’s insight caught our members’ attention, namely that the FX hedging programs—factoring the cost of hedging long cash-flow and balance-sheet exposures—for many US firms represent a floating-rate liability offset.

How it works: Decreasing USD rates increase cost of hedging. Seen from the perspective of FX swap points that comprise the forward rates of foreign exchange, a US firm paying very low EUR rates and receiving higher USD rates (that could be trending lower) represents an offset to floating-rate debt exposure. The reduction in carry gain (e.g., on EUR) or increase in carry cost (on MXN, for example), from a 100bps decrease in USD rates increases the ALM capacity for floating-rate debt exposure.

Read More Read Less
Contact Us
0
0

A Master Cash-Flow Model for All Firms

Efficient capital usage and building a cash culture to accurately forecast cash flow starts with building a model of how cash flows through your company.

With so much focus these days on transforming revenue models, finance teams also need to encourage their companies to build a model to better understand and improve visibility of how cash flows through the business—now and as it is transformed.

At a NeuGroup meeting last May, an AT member from a technology company shared her effort to model her firm’s cash flow. 

Why it matters. 

Efficient capital usage and building a cash culture to accurately forecast cash flow starts with building a model of how cash flows through your company.

With so much focus these days on transforming revenue models, finance teams also need to encourage their companies to build a model to better understand and improve visibility of how cash flows through the business—now and as it is transformed.

At a NeuGroup meeting last May, an AT member from a technology company shared her effort to model her firm’s cash flow. 

Why it matters. Here are three key reasons to build a master cash-flow model:

  1. A company’s long-term cash-flow model forms the basis of its capital structure and supports the capital allocation and deployment planning process—i.e., efficient use of capital requires it. 
     
  2. A model of firm cash flows can be a key educational tool to bolster the cash culture, shifting perspective from how earnings happen to free cash flow and how cash comes in and goes out. This perspective shift is exponentially enhanced if a firm discloses and provides guidance on cash flow to shareholders.
     
  3. A master model can streamline and standardize existing cash forecasting methodologies to improve cash forecasting. 

What to ask for. When our member AT queried different departments about whether and what cash-flow models they used, she asked what each did (its objective), how they sourced data, and to whom and when their output was sent to the executive suite and board. For example:

  • FP&A’s model was used to report the company’s P&L and cash position to the CFO; 
     
  • Corporate strategy employed a long-range forecast to understand the impact of M&A and other strategic moves. 

A need to bring it all together. “So, the company had many forecast models, but they often disagreed with each other, frustrating management,” the AT said. “Now corporate treasury has ownership and can reconcile a lot of these models.”

What to deliver? The AT asked each of her firm’s cash-flow-model users about the level of granularity they expect from a central cash model, including the forecast’s range, whether they just need it at the parent-company level or stepping down to the regional or legal-entity level, and how often the cash-flow model should be updated.

  • The result should not be a treasury model but a corporate model that can serve multiple constituencies and materially increase senior management’s confidence in its use to make important decisions.

Key Insight: There are too many pain points for treasury to establish a master cash-flow model for every part of a company on its own. Therefore, treasury, or whoever builds the master model, must share ownership of the inputs and outputs across corporate functions and levels—e.g., with FP&A—or incorporate these functions into a master cash operations function—expanding the scope of treasury in conjunction with FP&A, A/R and A/P. Shared responsibility for the model helps everyone share and learn about cash to build a cash culture.

Read More Read Less
Contact Us
0
0

A SOFR Shortcoming: Where’s the Spread?

One difference between Libor and SOFR is the lack of a credit component.

The move to a SOFR rate benchmark without a credit component was described at recent NeuGroup meeting of bank treasurers as an assault on the regional banking business in a friendly, yet heated discussion with the panel of Libor-transition experts led by Tom Wipf, the Alternative Reference Rates Committee (ARRC) chair.

The conclusion emerged that overlaying a credit component on SOFR was not in the ARRC mandate, so regional banks should propose their own and advocate for a credit component overlay solution that would mitigate the issue of borrowers’ arbitration of a risk-free SOFR rate in the next crisis.

One difference between Libor and SOFR is the lack of a credit component.

The move to a SOFR rate benchmark without a credit component was described at recent NeuGroup meeting of bank treasurers as an assault on the regional banking business in a friendly, yet heated discussion with the panel of Libor-transition experts led by Tom Wipf, the Alternative Reference Rates Committee (ARRC) chair.

The conclusion emerged that overlaying a credit component on SOFR was not in the ARRC mandate, so regional banks should propose their own and advocate for a credit component overlay solution that would mitigate the issue of borrowers’ arbitration of a risk-free SOFR rate in the next crisis.

What the ARRC says. According to the ARRC recommendation, Libor and SOFR are different rates and thus the transition from Libor to SOFR will require a spread adjustment to
make the rate levels more comparable. As noted above, Libor is produced in various tenors and SOFR is currently only an overnight rate.

Another critical difference between Libor and SOFR is that Libor is based on unsecured transactions and is intended to include the price of bank credit risk. SOFR, on the other hand, is a near risk-free rate that does not include any bank credit component, as the transactions underpinning SOFR are fully secured by US Treasuries.

Looking ahead. A working group was formed at the meeting to coordinate with other working groups out there and explore proposals being surfaced to use TRACE data on either bank or customer borrowing rates to build a credit spread on top of SOFR. They might also turn to the USD ICE Bank Yield Index or the AFX Ameribor for ideas. (See A New ‘Bor on the Block)

Read More Read Less
Contact Us
0
0

What Should Your Working Capital Be Used For?

Insights on how young, fast-growing companies should use their cash.

How is short-term cash funded? Treasurers at high-growth tech companies at a recent NeuGroup meeting discussed funding working capital and whether a company should target cash and short-term investment balances to cover anticipated working capital needs or pay for committed short-term bank credit facilities to cover seasonal or unexpected short-term funding requirements.

Part of this is communicating to management and shareholders that committed facilities have their own value as opposed to sitting on unproductive cash.

Insights on how young, fast-growing companies should use their cash.

How is short-term cash funded? Treasurers at high-growth tech companies at a recent NeuGroup meeting discussed funding working capital and whether a company should target cash and short-term investment balances to cover anticipated working capital needs or pay for committed short-term bank credit facilities to cover seasonal or unexpected short-term funding requirements.

Part of this is communicating to management and shareholders that committed facilities have their own value as opposed to sitting on unproductive cash.

Payables-receivables magic. Another opportunity the group identified was that increasing payables terms is just as valuable as decreasing receivables terms. Management often focuses on receivables given their important relationship to revenue, but overlooks the payables side of the equation. But cash flow is cash flow, whether it comes from the receivables or payables side of the ledger.

Growth and bank partners. Confronting the challenges of capital structure and working capital requires the right partners on the bank side. As a company grows, is its bank partner booting it out of its current group and into another? At different stages of growth, how do you know you have the right partners and how does treasury get a seat at the table?

This emphasizes the need for treasury to articulate what services it requires from the banks: global cash management infrastructure and the ability to syndicate a credit facility and provide access to capital markets, debt or equity.

Read More Read Less
Contact Us
0
0

The Art of Managing Bank Expectations

How one treasurer gives banks in his revolver a share-of-wallet reality check.  Banks that agree to commit capital to a multinational’s revolving credit facility expect treasury to reward them with other, more lucrative work, such as bond underwriting. So treasurers have to deal with complaints when some bankers, inevitably, are not satisfied with their share of the company’s wallet. Ward off the whining. One large-cap treasurer told members at a recent NeuGroup meeting that his method for managing banker dissatisfaction around…

How one treasurer gives banks in his revolver a share-of-wallet reality check. 

Banks that agree to commit capital to a multinational’s revolving credit facility expect treasury to reward them with other, more lucrative work, such as bond underwriting. So treasurers have to deal with complaints when some bankers, inevitably, are not satisfied with their share of the company’s wallet.

Ward off the whining. One large-cap treasurer told members at a recent NeuGroup meeting that his method for managing banker dissatisfaction around share-of-wallet issues is to clearly communicate to each bank what they can—and cannot—expect from his company in terms of banking services.

Five tiers, clear lines. The first two tiers of this member’s five-tier revolver consist of banks that have made the largest capital commitment to the credit facility.

The banks in these tiers can expect to be named active or passive book runners in any of the company’s bond deals and play leading roles in any M&A transactions. They also would conduct interest-rate hedging transactions.

Tiers three, four and five. Banks in the third tier may be named senior co-managers or passive book runners in a capital markets transaction. Banks in the fourth tier might play a role in a bond deal depending on the size of the transaction.

Tier five banks, which commit the least to the revolver, underwrite letters of credit and may be used for FX hedging and cash investments.

The bottom line. The treasurer says the benefit of being explicit about what each bank can expect is that it allows each bank to run its model and get an accurate picture of what it will likely make over the next five years.To help treasurers figure out what banks expect to earn, check out How Much Money Banks Expect to Make to Be in Your Credit Facility.

Read More Read Less
Contact Us
0
0

Does AI Mean Our Labor Days Are Over?

Founder’s Edition, by Joseph Neu

How finance leaders can keep their teams relevant as artificial intelligence transforms the world of work.

Jack Ma and Elon Musk created buzz last week debating at the World Artificial Intelligence Conference in Shanghai. And with Labor Day now behind us, this is a good time to think about how AI will change the work done by finance professionals.  

Founder’s Edition, by Joseph Neu

How finance leaders can keep their teams relevant as artificial intelligence transforms the world of work.

Jack Ma and Elon Musk created buzz last week debating at the World Artificial Intelligence Conference in Shanghai. And with Labor Day now behind us, this is a good time to think about how AI will change the work done by finance professionals.  

On the plus side, Mr. Ma, the Alibaba chairman and co-founder, claims AI will create more personal time:

  • A 12-hour work week. With AI, people should work three days a week, four hours a day, according to Mr. Ma. “I think that because of artificial intelligence, people will have more time to enjoy being human beings,” he said. 

The danger, says Tesla and SpaceX CEO Elon Musk, is that AI may have no need for us:

  • Smarter than humans. Mr. Musk said that the biggest problem with AI is that humans will not be able to keep up. “I think generally people underestimate the capability of AI – they sort of think it’s a smart human,” he said “But it’s going to be much more than that. It will be much smarter than the smartest human.”  

How quickly AI is taking over the finance function will be a topic for NeuGroup meetings this fall, as we examine   the future of finance talent and the role of AI in it. 

To help prepare, I turned to “Exponential Organizations,” a best-selling book by Salim Ismail, the founding executive director of Singularity University and co-founder and chairman of OpenExO, which connects professionals with organizations seeking exponential growth. He argues that companies that adopt certain key attributes will tap digitalization to grow their businesses exponentially, much like Moore’s Law drove microchips. 

  • AI accounting and transaction management. Mr. Salim says AI will influence accounting and transaction activities to include automatic AP and AR, with software-enabling automatic reminders and payment, automatic tax management, and AI watching for errant behaviors in transaction flows.
     
  • Everything is a transaction. But AI will not stay in the back office: “Note that pretty much everything in the modern world is a transaction, be it communications, social agreements, and, not least, commerce.”

So what will be left for humans to do? 

  • Humans are needed for less logical, human pursuits.  As Jack Ma emphasized, AI is unsurpassable at things that have a logic to them, but humans may be needed for the things that don’t. Interacting with other people successfully (lovingly) is something that is often irrational and where we still work best. 

My thinking: If AI and other machine automation will give us more time to become more human, then we also will have more time to interact with one another and learn to do it better. As AI takes over more transactions, finance leaders should encourage their teams to engage in more human interactions and build skills based on what they learn in those exchanges—to ensure finance supports a broader human purpose. With that in mind, even as AI’s power grows, our work at NeuGroup—thankfully—has a future. 

Read More Read Less
Contact Us
0
0

Trying to Make Sense of Bank Fees

The challenges of comparing fees when banks don’t use the same terms to describe similar services.

The problem for treasury teams at multinational corporations is not that they have to pay bank fees. It’s that they often don’t have enough visibility to compare those fees among banks or know what exactly they’re paying for or exactly how much something costs. GCBG members addressed these issues and discussed solutions with representatives of Greenwich Associates and Redbridge Debt & Treasury Advisory. Here are some highlights:

The challenges of comparing fees when banks don’t use the same terms to describe similar services.

The problem for treasury teams at multinational corporations is not that they have to pay bank fees. It’s that they often don’t have enough visibility to compare those fees among banks or know what exactly they’re paying for or exactly how much something costs. GCBG members addressed these issues and discussed solutions with representatives of Greenwich Associates and Redbridge Debt & Treasury Advisory. Here are some highlights:

The bank fee challenge. One member whose treasury has relationships with about 15 banks said, “We want to get our arms around” the fees they’re paying and to find out if “we are using all the things that we’re paying for.” Her company is considering using bank fee analysis services offered by Redbridge, NDepth (Treasury Strategies/Novantas) or Weiland BRMedge (Fiserv).

The Greenwich presentation included these comments from respondents to a survey about the biggest challenges with banks’ cash management fees: 

  • “One of the biggest challenges is understanding what a particular service represents on the analysis statement and then being able to compare that with a similar type service that you might be paying a fee for at another bank.”
     
  • “The biggest challenge is each bank seems to have different terms for different types of fees and weeding through an analysis statement to understand what exactly is being charged and how often it’s being used and if we’re using it.” 

The problem with AFP service codes. The problem with using codes from the Association of Financial Professionals (AFP) to compare fees among banks is that, as the Redbridge presenter said, “No two banks call an apple the same thing.” In other words, each bank uses a different description for services that are essentially equivalent. For example: 

  • Account maintenance
  • Monthly fee
  • Maintenance
  • Maintenance charge 

About three-quarters of the participants indicated they have used AFP codes, which the presenter said can be both a blessing and a curse. “The job of assigning standardized AFP codes to bank services usually falls to someone within the bank or is left to the practitioner to figure out,” he said. They’re “exactly the wrong people” to ensure the proper use of one standardized set of codes, he added. And this state of affairs means there is no way to answer key questions that are part of a bank fee audit, such as: 

  • Which of my banks is giving me the best price on these services?
  • How much is my company spending on maintenance fees as a whole?
  • Which countries are the most expensive for me to bank in? 

An accreditation solution. The Redbridge representative said the only true solution to the code problem is AFP’s creation of an accreditation service for banks that use standardized service identification codes. Redbridge is a partner with the AFP and is the designated facilitator of the AFP Service Code Accredited Provider program. Banks provide a list of all their billable services (current mappings, definitions of service, unit of measure, etc.) and AFP audits and assign US and Global AFP Codes to each service ID by geographical region.

The flat fee solution. One member of the group offered a different approach—paying banks a flat fee that covers everything for the year. The former banker said he’d done that when working in treasury and said at the end of three years an accountant is likely to ask if you overpaid. The Redbridge presenter said he’s seen examples of flat fee models that work.

Read More Read Less
Contact Us
0
0

The Future of Treasury and Banking is APIs

Deutsche Bank explains what treasurers should know about APIs.

Even treasury professionals who know that API stands for application programming interface and that so-called open APIs have been touted as the future of payment technology may not really understand what an API is or why it matters for treasurers and their bankers. So a presentation by Deutsche Bank at NeuGroup’s Global Cash & Banking Group (GCBG) first-half meeting gave members both a refresher course and a deeper dive into APIs and why they should care about them.

Deutsche Bank explains what treasurers should know about APIs.

Even treasury professionals who know that API stands for application programming interface and that so-called open APIs have been touted as the future of payment technology may not really understand what an API is or why it matters for treasurers and their bankers. So a presentation by Deutsche Bank at NeuGroup’s Global Cash & Banking Group (GCBG) first-half meeting gave members both a refresher course and a deeper dive into APIs and why they should care about them.

Mega messengers. APIs enable one system to connect to another, acting like messengers, looping requests to one system and responses back to the originator. In many cases, APIs are being used to transmit information to and from bank portals. Deutsche Bank expects more than three-quarters of banks will have invested in API or open banking initiatives this year, pushing this technology further into the cash operations space.

Timing is ripe for treasury applications. Yes, APIs have been around for what seems like forever. But new regulations, better technology and a competitive landscape have all advanced the cause of using APIs to create faster, more efficient customer experiences. For treasury, this means more real-time payments and faster reconciliations. Additional benefits include payment tracking, push payments and “requests-to-pay,” various risk management features (i.e., counterparty verification and KYC data) and alternative payment methods (i.e., paying into a “wallet”).

Interoperability with SAP. The presenter said Deutsche Bank is working with SAP to create an app so services offered by the bank can be plugged into a corporate’s ERP/TMS. Apps are downloaded from a marketplace and installed on the ERP or made accessible from the ERP through the cloud. That lets clients work with Deutsche Bank directly within the ERP, allowing them to, for example, select invoices, pay automatically on the due date and track all payment flows for these invoices.

What’s next? One member indicated that SWIFT already uses APIs, so it feels as if she’s moving backwards if she sets up separate APIs with each of her banks. Deutsche Bank’s presenter was quick to point out that the flip side is that using bank APIs allows for faster, real-time communication across the board for better cash visibility. He stressed that BAI payment files will not change, just the communication surrounding the initiation and completion of payment.

Bye-bye bank portals? One member asked if Deutsche Bank saw the use of APIs eventually replacing direct use of banking portals and was, perhaps surprisingly, answered with a “yes!” The happy prospect of a possible future without bank portals ranked high on more than one member’s key takeaways from the meeting. 

Read More Read Less
Contact Us
0
0

Bloomberg Exits KYC and the Market Moves On

Bloomberg Entity Exchange is closing up shop soon, but there are plenty of players out there. Bloomberg confirmed in early April that it plans to shut down Entity Exchange, a know-your-customer (KYC) solution that was supported by Citibank and adopted by multinational corporations including Coca-Cola. Industry insiders say an internal management change led to a review of Bloomberg’s product portfolio, with Entity Exchange and the company’s sell-side execution and order management solutions businesses getting cut. Bloomberg, they say, was looking…

Bloomberg Entity Exchange is closing up shop soon, but there are plenty of players out there.

Bloomberg confirmed in early April that it plans to shut down Entity Exchange, a know-your-customer (KYC) solution that was supported by Citibank and adopted by multinational corporations including Coca-Cola.

Industry insiders say an internal management change led to a review of Bloomberg’s product portfolio, with Entity Exchange and the company’s sell-side execution and order management solutions businesses getting cut. Bloomberg, they say, was looking to focus on its core offerings. A Bloomberg spokesperson would only say that “the company’s intention is to exit its KYC business.”

But a look at the current state of the AML/KYC sector (AML being anti-money laundering) shows that at least for KYC, Bloomberg was up against stiff competition and facing an uphill battle just to get into the market. Large, established players, lots of new technologies being adopted, and looming industry disruptors likely forced Bloomberg to conclude it was better to put the resources toward more profitable business lines.

REFINITIV LEADS
The current size of the AML/KYC market is about $750 million and growing, according Burton-Taylor, an international consulting firm. The market includes not just AML/KYC, but also services relating to financial crime and compliance activities. And it is “a major area for budget increases,” with estimated global spending projected to grow 18.3% in 2018, Burton-Taylor says, generating an estimated five-year compound annual growth rate of 17.5%.

Refinitiv’s AML/KYC solution, formerly a Thomson Reuters product, leads the industry with over a quarter market share, with Dow Jones, LexisNexis, Moody’s Analytics’ Bureau Van Dijk, Regulatory DataCorp and a handful of smaller players making up a large part of the rest of the market. Burton-Taylor says it considers Refinitiv “to be the largest provider of AML/KYC data and information in the world.”

Meanwhile, Bloomberg’s planned departure has intensified competition among other companies scrambling for market share.

Burton-Taylor reports that “M&A activity and in-house development” have had a big impact on the market in the last decade as providers look to “meet existing and new client needs with advanced technology and granular data.” This has meant a “new wave of technology-savvy market entrants is coming forward to supplement, and challenge, the offerings of more established, data-centric suppliers.”

Bloomberg was part of the smaller group of tech-savvy entrants, which includes info4c, Acuris Risk Intelligence, Arachnys, Opus, ComplyAdvantage, NominoData, and Kompli-Global. Also, SWIFT, the international payments network, said recently that beginning in Q4 2019, all 2,000 SWIFT-connected corporates will be able to join its KYC Registry and use it “to upload, maintain and share their KYC information with their banks.” All of these companies, both established and newcomers, bring different expertise to different areas of AML/KYC.

The established players have vast searchable databases while the newcomers offer innovative technology.

BLOCKCHAIN
Among the players hoping to gain momentum from Bloomberg’s departure are companies touting the benefits of solutions that don’t depend on a centralized “utility,” or third party that stands between a bank and a corporate client. Blockchain is the answer to solving the problem, they argue. “I strongly believe this is the moment for decentralized KYC solutions,” says Gene Vayngrib, CEO of Tradle, which has developed a blockchain-based KYC solution. “In addition to not having a central store, Tradle leaves the data in the hands of the rightful owners, the treasurers,” he said.

Another company that is trying to gain a foothold, Aptiv.IO, is using blockchain to create what it calls company “trust vaults that allow companies to distribute their private information on their terms.”

With a trust vault, “You decide how you want to communicate with the outside world,” says CEO Guy Mounier. “It’s ‘privacy by design’ and uses zero trust architecture,” he says. Zero trust architecture works by employing a network-centric data security strategy, which in turn provides specific access only to those who need it. So if a company is giving out sensitive information through blockchain, it can better control who has access to that data.

Although blockchain can be considered a disruptor of the current model of centralized data, “This is not replacing anything,” Mr. Mounier says. “It can fit into what you have and you can map out where the data goes. It’s data enrichment as a data service.” He adds that data can be auto-refreshed as people, data or situations change.

NOT JUST KNOWING YOUR CUSTOMER
While they are known as AML/KYC providers, it goes beyond that. Many companies also offer continuous monitoring of the web, the dark web and other so-called “darknets” like The Onion Routing project, Tor or Invisible Internet Project, for any negative news or mentions of a company or the sale of IP or customer data.

“Companies don’t just want these static databases that just sit there,” says Jennifer Milton, an analyst at Burton-Taylor and author of the firm’s research on AML/KYC. “They want dynamic databases that can constantly search the web and the dark web.” She adds that machine learning is helping shape this kind of technology, where context can help detect references to companies even if the names are spelled incorrectly or hidden in some way.

THE LEGACY OF ENTITY EXCHANGE?
The end of Bloomberg Entity Exchange doesn’t mean the end of the influence it may have on the market. Several competitors say the company helped shine a light on KYC’s importance. Prior to the last couple of years, companies were reluctant to invest significantly in a cost center like compliance. “But now they are forced to spend,” says Jennifer Milton, an analyst at Burton-Taylor. “Who are you dealing with and how do you know them are important questions that companies can run into trouble with if they don’t have the answers; if there’s not an audit trail of transactions.”

Read More Read Less
Contact Us
0
0

The Five Cash Management Initiatives Treasurers Should Consider

When it comes to cash management, treasurers must keep their focus on ways to make it more efficient and cost effective.

The year 2014 has been one focused on efficiency and innovation as treasurers consider outside-the-box strategies for unlocking working capital and improving the tactical aspects of treasury. Major initiatives including SEPA and the internationalization of the renminbi (RMB) have proven to be catalysts for greater global change both from a strategic and practical treasury perspective.

When it comes to cash management, treasurers must keep their focus on ways to make it more efficient and cost effective.

Editor’s note: This article was originally posted on iTreasurer.com on October 09, 2014.

The year 2014 has been one focused on efficiency and innovation as treasurers consider outside-the-box strategies for unlocking working capital and improving the tactical aspects of treasury. Major initiatives including SEPA and the internationalization of the renminbi (RMB) have proven to be catalysts for greater global change both from a strategic and practical treasury perspective.

Looking ahead to 2015, structural rationalization is the major topic as treasurers continue to review all aspects of their global treasury strategy to ensure the most efficient, most cost-effective structure possible.

“Rationalization is still a big theme,” says Martin Runow, Head of Cash Management Corporates Americas, Global Transaction Banking, Deutsche Bank. “It is one of those areas everyone’s looking at; how to become more efficient and get more control.”

So where should treasurers spend their time and resources in 2015? What projects will provide the greatest value? According to Mr. Runow and colleague, Arthur Brieske, Regional Head of Trade Finance and Cash Management Corporates Global Solutions Americas, Global Transaction Banking, Deutsche Bank, the following five initiatives should be part of treasurers’ overall budget and resource planning process for 2015.

  • Going Beyond SEPA
  • Global Account Rationalization
  • In-House Bank Structures
  • Maximizing Excess Cash
  • RMB Internationalization

GOING BEYOND SEPA
Initially rolled out as an approach for risk mitigation for commercial payment transactions in euro, SEPA adopters have found that SEPA, or the Single Euro Payments Area, provides a more efficient way to transfer and collect funds across borders without managing all the different legal payment frameworks of each country.

SEPA has allowed corporate treasurers to consolidate accounts and improve process efficiencies with the use of the new ISO20022 XML format to ensure the highest level of standardization across their SWIFT network. This format provides consistency in the financial messaging exchange between counterparties and is expected to gain greater efficiencies going forward. According to Mr. Runow the launch of SEPA has driven a lot of efficiencies that most corporate treasurers have been seeking for years. “It has taken ten years to get it up and running,” he says, “but we are there now and there is a lot of good to come of it.”

Many companies have used SEPA as an opportunity to consolidate accounts, allowing for simplification and optimization of structures including centralized accounts payable and accounts receivable, cash pooling and in-house bank structures.

But despite the many bright spots of SEPA, “reconciliation can still be a challenge,” says Mr. Brieske. Seeing a need for a single account with a single currency and a single infrastructure, Mr. Brieske says Deutsche Bank created a solution called Accounts Receivable Manager (ARM) for SEPA, which, according to Deutsche Bank is an automated payer identification solution that enables auto-reconciliation of incoming SEPA credit transfers and reduces the need to maintain multiple bank accounts for separate lines of businesses.

In fact, SEPA has been such a force for change that Deutsche Bank is rolling out this ARM solution so that companies can use it outside of the eurozone. “This model is going to expand beyond SEPA, in India for example, where banking can be complicated for companies,” Mr. Brieske says.

There are still “many more benefits to be had” with SEPA, Mr. Runow notes, but as of now, “a lot of large companies are reaping the benefits of their investment in SEPA and a lot of people are getting true value out of this beyond Europe.”

GLOBAL ACCOUNT RATIONALIZATION
As noted above, the SEPA initiative has acted as the catalyst for other global projects, with high priority placed on account rationalization. By reducing accounts across Europe, many large US multinational corporations are realizing significant savings in both hard- and soft-dollar costs. “In the SEPA environment, all corporates need is one account for payments and one account for receivables across the SEPA landscape,” says Mr. Brieske.

The downstream effect of reducing the number of physical bank accounts accentuates the ongoing challenge of managing banking relationships around the globe. Issues like overall cost, allocation of bank wallet, management of counterparty risk, and supporting the needs of the operating business, are all equally important when deciding which bank provider receives what level of business within your organization.

Keeping every bank happy is a tough job, if not impossible. However, being able to spread the wallet across fewer banks is one of the positive by-products of a bank consolidation.

IN-HOUSE BANK STRUCTURES
Treasurers have continued to find ways to alleviate the growing cash balances that have become strategically more important to their organizations as they face increased pressure to refine their cash management initiatives to provide more efficient movement of these cash balances.

Based on recent NeuGroup peer group survey results, nearly 70 percent of respondents have up to 50 percent of their total cash “trapped,” with everyone putting a focus on the ability to use these trapped balances when local entities require funding. Structures like in-house banks (IHBs) are becoming more commonplace as organizations take the next step to further enhance their global liquidity models. Many times these structures can bring a significant amount of processing efficiency and can help unlock trapped cash by allowing the funds to be loaned out across participating subsidiaries, thus reducing trapped cash.

Considerations for establishing an IHB start with choosing a favorable location, along with important tax structure considerations, local regulations and withholding tax impacts. These primary areas of focus should be defined prior to kicking off an IHB project.

The practical considerations for the evolution of the IHB can be directly attributed to global expansion and increased revenue mix overseas in addition to complexities related to time zones, language, growth of regional shared services and decision execution.

Traditionally, IHBs have been set up to alleviate the voluminous amount of intercompany transactions between legal entities and to comply with tax policies. The natural evolution of these structures then focused on cross-entity liquidity management, while maintaining clear segregation to avoid commingling of funds. Next, was the consolidation of cash balances on a regional level with centralized oversight using tools like notional pools to add efficiency. Structures continued to evolve to include centralized cash forecasting and foreign exchange management with the final phase of development being one of global consolidation with one global account for pay on-behalf-of (POBO) and one for collections on-behalf-of (COBO) across all business units.

The Dodd-Frank Act and Basel III regulations have placed greater scrutiny on banks and have mandated stricter guidelines on the amount of capital a bank must hold for certain types of transaction activity. As a result of this and other regulations focused on anti-money-laundering, banks have placed stricter compliance requirements on their KYC process.

Mr. Brieske says, “The challenges IHBs will confront are likely to stem from the challenges banks are facing with increased regulation. So indirectly, regulations will impact them, but it is the banks that will be responsible for the regulations.”

Mr. Runow adds that those MNCs that establish an IHB structure will need to ensure everything is tightly buttoned-up and that reconciliations and account reporting are thorough and diligent. “There’s no room for sloppiness, no cutting corners,” he says.

RMB INTERNATIONALIZATION
As a result of the ongoing RMB regulatory changes, there has been a significant improvement in the ease of making cross-border RMB payments via China. “Chinese regulators have certainly shown that they have a strong interest in RMB payments going global by making it easier to transact in RMB,” says Mr. Runow. But the RMB is still a fairly new currency on the international scene.

He acknowledges that “flows are going through the roof;” however, they are still modest compared to the US dollar or euro.” Despite this, Mr. Runow and Mr. Brieske expects this will change in the next few years.

The RMB can now be integrated as part of a corporation’s overall liquidity management strategies with pooling of RMB and cross-border RMB lending becoming commonplace. On February 20, 2014, the People’s Bank of China announced its support of the expansion of RMB cross-border usage in the China (Shanghai) Free Trade Zone (Shanghai FTZ), which now allows for the following activities:

  • Simplified document check requirements for current and direct investments in the Shanghai FTZ
  • Cross-border borrowing for corporates and non-bank financial institutions registered in the Shanghai FTZ
  • Two-way RMB cross-border cash pooling
  • Cross-border RMB POBO/COBO

The RMB internationalization project has begun to pick up steam over the second half of 2014, with many global MNCs looking to launch new cash management strategies in Asia. Those who are taking the time to create these new structures are able to unlock China’s previously “trapped cash” challenge, and optimize their cash held in this part of the world where many opportunities lie for them.

According to Mr. Brieske, the loosening of these regulations will eventually have a downstream effect moving from very large corporations to small local businesses. “As deregulation happens, you will not have to wait to see the pent up demand to kick in — it is already happening.” The result will be a rapid increase in payment volumes, which is likely to result in the RMB moving to the top five SWIFT currencies within the next several years.

MAXIMIZING EXCESS CASH
According to Mr. Runow, most MNCs today are still very risk-averse and focused on principal preservation. “The dilemma is corporates are looking for yield but there is little appetite to go into risky assets,” he says. Mr. Runow adds that from what he has seen investment policies actually have become “stricter rather than more lenient.”

This has been supported by feedback from recent NeuGroup peer group meetings. With the continuation of low yields, it is little wonder that cash portfolio asset allocations are heavily weighted toward money market funds, US Treasuries and agency debt, corporate bonds above the single-A threshold and corporate commercial paper and certificates of deposit.

Mr. Runow says, “Corporates continue to be very strict and highly conservative, tending to seek return of invested money over return on investment.”

With the continuation of low rates expected through a good part of 2015, treasurers may be well served to consider implementing an IHB so that their growing levels of excess cash can work harder around the globe versus sitting in a very low-yielding investment asset.

LOOKING AHEAD
The tagline “less is more” has been the mantra for practitioners since the onset of the economic crisis and now well into the recovery; unfortunately, for most it looks like it will remain the mandate for some time to come. Therefore, treasurers will have to continue to work smarter when it comes to rationalizing structures, cutting expenses and most importantly, getting the company’s cash to safely work harder. They will also have to remain alert to new possibilities of maximizing cash where it is sometimes considered trapped. With this in mind, extra attention will have to be paid to the RMB and its continued growth and ease of use.

Read More Read Less
Contact Us
0
0

Fintechs Transforming Supply Chain Finance

Fintech companies continue to streamline the buyer-supplier experience, eliminating age-old tensions and adding powerful new tools.

Multinational corporations (MNCs) face a myriad of challenges and arguably the most important one is staying competitive during periods of uncertainty and increasing regulation, as global interconnectedness continues.

Fintech companies continue to streamline the buyer-supplier experience, eliminating age-old tensions and adding powerful new tools.

Editor’s Note: This story originally ran on iTreasurer.com on December 19, 2016.

EXECUTIVE SUMMARY
Multinational corporations (MNCs) face a myriad of challenges and arguably the most important one is staying competitive during periods of uncertainty and increasing regulation, as global interconnectedness continues. In order to successfully navigate this uncertain environment, MNCs must develop sustainable working capital strategies and build cash positions that underpin these strategies, whether they are for expansion, M&A, dividends or buybacks.

One way they can succeed is through the company’s supply chain via supply chain finance (SCF). It is here where treasurers can take what was once a one dimensional program used to release working capital and can now implement a new sophisticated, multifaceted strategy to deploy flexible financing, optimize working capital and create competitive yield. Suppliers can gain access to low cost financing and both parties benefit with improved technology, program scalability and advances in automated invoicing and payment processing.

Yet despite these obvious benefits, MNCs have not rushed to implement such programs. Anecdotal evidence and survey data from The NeuGroup suggest many companies do not have structured supply chain finance programs, although many have some of the components. Many still cling to old and manual trade finance processes and practices, which have the potential of weakening their supply chains. Moreover, despite this becoming more of a cash and working capital play, treasurers in many cases are still not involved.

But with the growth of fintech, companies are beginning to listen. New players are changing how buyers and suppliers approach their supply chain. Leveraging technology, these fintech companies are alleviating the age old tensions between buyer and supplier, making it easier to capture SCF’s benefits by making it more efficient and more equitable for both sides. Buyers can pay when they want without putting their suppliers’ cash position at risk, and suppliers can choose to get paid earlier at a cost of financing that would otherwise not be available to them.

Fintechs also provide accumulated data to help companies streamline their supply chains and help both buyer and supplier select the most beneficial payment terms.

As buyers and suppliers get more comfortable with these programs, there will less money tied up in DSO and DPO. MNCs stand to lose out on billions of dollars in revenue trapped in their financial supply chain if they do not take action now.

UNLOCKING THE VALUE IN THE SUPPLY CHAIN
Today’s multinational corporations face no shortage of challenges when it comes to staying globally competitive. Since the financial crisis and prior, MNCs have faced uncertainty and with an ever evolving business climate, now more than ever, MNCs must maintain and protect their company’s financial position and manage working capital to support business operations.

As new ideas to improve working capital arise, treasurers are more than eager to listen. One area that treasurers have been focusing on over the last few years is unlocking value from the company’s supply chain via supply chain finance. The emergence of SCF began when large companies wanted to extend payment terms and needed an offset mechanism. This continued as these companies look to meet two objectives: first, becoming more commercially lean through releasing working capital and driving down costs and, two, offering affordable liquidity to their entire supply chain, recognizing the need to support them. Further, companies recognize that this responsibility must be managed internally versus banks to ensure healthier, stronger relationships with their suppliers.

New entrants to the supply chain finance world are enabling companies to maximize the value of their supply chains by utilizing a technology-led approach. These fintech companies have been showing multinational corporations that through technology, true program scalability can be reached and a tremendous financial opportunity can be uncovered from their supply chain. But beyond scalability and the financial benefits, these new entrants are also helping companies creates stronger and healthier supply chains by smoothing out tension that can exist between buyer and supplier.

THE BUYER-SUPPLIER DANCE
Historically, companies delayed payments to their suppliers as a strategy to extend DPO. According to a recent survey of The NeuGroup’s Assistant Treasurers Peer Group Large Cap, extending payment terms (82%) and accelerating collections (41%) were the most common approaches to improving working capital.

This was particularly true after the 2008 financial crisis when the term cash preservation was the leading mantra of many cash management programs. The treasurer’s duty then was to keep a healthy cash pile available for any possible merger, acquisition, or other downturn. Paying suppliers was one victim of this thinking, with payments going from 30 days to 45 days or in other cases, from 60 to 90 days.

“There is a centuries old friction between suppliers and buyers,” says Maex Ament, Cofounder and Chief Strategy Officer at Taulia, the financial supply chain company. “Suppliers want to get paid as early as possible, while buyers want to pay as late as possible.” A study conducted by Taulia last year showed that small and midsized business suppliers are waiting longer and longer to be paid after delivering goods. This trend has a big impact on operations because cash flow is one of the biggest concerns facing small and midsized businesses, Taulia noted in its study.

However, the “delay pay strategy” does not create a healthy environment in which the supply chain can operate, irrespective of the size of the supplier company. In fact, delaying payment to hold on to cash longer can negatively affect suppliers’ cash flow and puts them at risk of going out of business, resulting in unnecessary pressure on the supply chain.

Alleviating this pressure is one area where fintech companies have been making great strides by providing more affordable financing options to more suppliers. These supplier finance facilitators, along with companies and banks, are working together to help suppliers stay healthy while enabling companies to unlock the cash potential from their supply chains.

By taking the “delay” out of the equation, fintechs are creating a win-win situation for both suppliers and buyers. Fintechs are leveling the playing field so that more suppliers, including smaller businesses that were previously excluded, can now participate in these next generation supply chain finance programs, which historically only focused on the largest suppliers.

“We democratize access to supplier financing,” says Cedric Bru, Chief Executive Officer at Taulia. Through an innovative platform and technology that enables true scale, buyers can provide access to supplier financing products to their entire supply chain, “any supplier, regardless of size and regardless of spend. They can join our program, and do it unbelievably easily.”

CHANGE AGENTS
The true fintech revolution in supply chain finance began shortly after the 2008 financial crisis. The financial regulations that followed the crisis created an opportunity for fintechs to step in and help banks and businesses manage the rules and make compliance easier.

Mr. Ament noted that the financial crisis was an awakening and a catalyst for fintech growth. “Banks were made safer, which was good for the financial system, but bad for companies needing cash as it left a gap.” This resulted in making a highly regulated space—finance, banking, and insurance—“ripe for disruption.”

Fast forward to 2016 and fintech companies are transforming supply chains all over the world. Banks, having struggled under the burden of regulation for several years, which hampered their innovation efforts, have joined forces with fintechs.

This has led to companies, like Taulia, Ariba and C2FO, transforming the supply chain process, and facilitating transactions between buyers and their suppliers. By offering a wide array of automated products, like electronic invoicing, supplier financing and supplier self-services, they enable both the buyer and supplier to improve their working capital, improve their yields and lower their operating costs. This includes providing flexibility to when a buyer pays and a supplier gets paid. This benefits both sides, providing greater liquidity and less variability in the timing of payments.

Feedback from The NeuGroup peer group meetings as well as some research suggests this is the case. Members of several peer groups have said the main driver for implementing a supply chain finance program was working capital improvement.

In the Assistant Treasurers Group of 30 (AT30), while only a third of respondents have a supply chain finance program, nearly all of those respondents said the incentive was working capital improvement. And in a survey of members of The NeuGroup’s Assistant Treasurers’ Leadership Group (ATLG), most respondents cited extended payment terms (84%) as the main tool they used to maximize working capital; accelerating collections was the next most used at 41.2%.

One member of The NeuGroup’s Asia Treasurers’ Peer Group (ATPG) said using his company’s strong cash rich balance sheet to gain discounts on supplies was a better use of short term cash than investing in treasuries, money market funds, commercial paper or short term bonds. For this company, a US tech firm, early payment discounts translated into the positive business impact of improved yield on current idle cash, without taking on credit or counterparty risk. And for its suppliers, it was an alternative source of funds, which was cheaper, quicker and more reliable.

ONBOARDING
Another area where fintechs have made a big impact is in the onboarding process for suppliers joining a supply chain finance program. Not only have these buyers managed to offer access to more suppliers, they also made the process faster, easier, and more efficient. Often in traditional supplier programs, the onboarding process can be cumbersome because of the amount of paperwork and outdated manual processes. This requires an enormous amount of resources, such as people, time and money.

Because of these tedious processes, a legacy supply chain finance program sometimes can only onboard a buyer’s top 50 or 100 suppliers. Latest technology developments have made it possible for the onboarding process to be less than 90 seconds per supplier, eliminating manual processes. This enables companies to onboard thousands of suppliers in the same time it might take banks to onboard a few. For example, Vodafone, a Fortune Global 500 company and winner of the 2016 Supply Chain Finance Award, leveraged the Taulia platform to quickly ramp supplier adoption, leading to over 1,400 suppliers onboarded in just 9 months. Taulia’s platform is also agnostic with where the financing comes from; financing can come from banks, funds, pension funds or from the buyers themselves.

Fintechs have also greatly improved the buyer-supplier interface to make it easier to understand and navigate. Their intent has been to create a platform that can easily scale to thousands of suppliers and make it incredibly simple to use.

This gives suppliers true transparency fast: the ability to easily login and view all outstanding invoices immediately, their statuses, and options for early payments. “That was Taulia’s aim,” says Mr. Bru. “Suppliers can onboard to our platform within 90 seconds and be fully eligible to take early payments immediately.”

DATA ANALYTICS
Not only are fintechs transforming slow, manual processes to be faster and more efficient, they also have years of accumulated trade data. For companies like Taulia, this means they can go beyond its core supplier financing mandate and offer more predictive analytics and problem solving. This means enhancing its technology offerings by, for example, helping buyers streamline their list of suppliers and mapping out the best approach to their financial supply chain. Buyers are able to decide on “who, how and why” they might invite certain suppliers to a specific program.

For instance, in The NeuGroup’s Assistant Treasurers Group of Thirty (AT30), one member described how his company had to decide on the best way to pay a supplier. Buyers have many ways to pay suppliers depending on the type of product or service, the size and frequency of the transactions, or the type and size of the supplier. In some cases there may be concern that one payment method would be less favorable to a supplier than another method. In the AT30 member’s case, the company was worried that there would be exposure by putting some suppliers on a payment card program when there was a better SCF program available. The upshot is that suppliers need to be reviewed and carefully assigned the appropriate payment method, or perhaps even be given appropriate options. This is where analytics can help.

On Taulia’s platform, data can also provide companies with insights into the number of suppliers that might choose to opt in for automatic acceleration (e.g., all invoices, all the time with no need to request payments) versus manual acceleration (e.g., select invoices, one at a time) for early payment offers. And Taulia’s own research confirms that suppliers in most instances automatically accelerate more than 50% of early payments. This demonstrates the need for suppliers to access cash consistently.

MONEY LEFT ON THE TABLE
While companies and treasurers in particular are turning to technology to help them in a world where running lean departments is the norm, there is still not enough being done to extract value from the supply chain.

According to survey results from NeuGroup surveys, accounts payable balances remain a substantial component of the capital deployed for the companies, approaching almost 40% of the outstanding debt and almost 10% of total assets. On the receivables side, trade receivable balances also are a substantial component of the capital deployed, approaching 35% of the outstanding debt and almost 10% of total assets. So there is plenty of money there to justify the effort.

And with the help of fintech companies, setting up programs to extract value from the supply chain is getting a lot faster and more efficient. For buyers, that means increased DPO and the ability to redeploy capital into other more profitable areas of the business, cost reduction in the company’s financial supply chain and the ability to provide suppliers with a less costly form of financing to help reduce transaction costs and potentially negotiate a product discount.

On the supplier side, comfort levels are rising when it comes to participating in buyer programs, especially when they stand to profit or keep their balance sheets healthy. According to Factor Chain International, global factoring is over $2.3 trillion annually and still rising so suppliers are financing already. That means faster repayment and reduced DSO by discounting invoices due any time prior to maturity and vastly improved cash flow forecasting; it also equates to lower financing costs, which means access to higher levels of working capital financing.

As global multinational corporations continue to streamline working capital management to make every dollar work harder and more efficiently, the effort should include mastering and extracting value from the supply chain. In the end, benefits will continue to grow for all sides of global trade transactions.

RECOMMENDED NEXT STEPS
Four key steps to take in understanding whether SCF is something that you as a treasurer need to consider, and if so, how a fintech solution might help deliver the required goals and benefits sought:

  • Treasurers should seek to engage internally to understand the financial priorities. Is this centered around working capital management, yield, supply chain liquidity, or more?
  • Review what strategies and operations are already in place to deliver these goals—are they working? Engage with our key stakeholders to determine the wider business strategies focused on the supply chain—Procurement, Accounts Payable and Finance.
  • Evaluate the market to understand how/whether fintech may play a complementary role to enhance or kick-start programs.
  • Quantify potential projects through hard business cases.

While this is by no means a comprehensive project plan, it is designed as a simple check list to get thoughts and actions moving.

Read More Read Less
Contact Us
0
0

Beware Zero-Based Floors

Chatham: Banks embedding zero-based floors in the fine-print on some floating debt.

With rates going negative around the world, banks are embedding zero-based floors into the floating-rate loans they provide, and while on the surface that seems like a plus, they can end up carrying a big price.

Chatham: Banks embedding zero-based floors in the fine-print on some floating debt.

With rates going negative around the world, banks are embedding zero-based floors into the floating-rate loans they provide, and while on the surface that seems like a plus, they can end up carrying a big price.

That was one of several insights on today’s uncertain financial markets that Kennett Square, PA-headquartered Chatham Financial provided in a recent market update titled. “Global uncertainty packs a local punch.”

Zero-based floors are valuable when interest rates are falling, because when they drop below zero, as they have across the Eurozone as well as in Japan, the borrower is obligated to pay the loan spread but zero interest on the floating rate component.

“On the surface, this seems like a pretty good deal. If rates go below zero, the borrower only pays its loan spread,” said Casey Irwin, a hedging consultant at Chatham, who conducted the recent webinar along with Amol Dhargalkar, managing director and head of Chatham’s global corporate sector.

Ms. Irwin noted that most banks “are not very upfront about” such floors effectively embedding the derivative into the company’s loan agreement, that the derivative is a sold floor, and that the floor can have a meaningful amount of value. “Unfortunately, clients discover the full value of these floors when they go to hedge these loans from floating to fixed,” Ms. Irwin said.

She added that in order to perfectly hedge a loan holding an embedded floor with a swap, the borrower must buy back the sold floor, and the cost of the floor is typically embedded back into the rate. Buying back the floor on a swap effectively locks in the interest rate at a static amount, Ms. Irwin said, adding that instead proceeding with the sale of the floor removes the loan’s ability to pay the borrower interest in the event the index resets below zero.

The borrower “is not only paying the agreed upon fixed strike of a vanilla swap to its counterparty, but it’s also going to owe the difference between zero percent and the [index] reset rate to the swap counterparty,” she said. “This is because its loan isn’t reflecting that negative interest rate.”

Buying back the sold floor is more expensive than selling the floor and proceeding with a straight vanilla swap, since it’s a one-sided market and most market participants are looking to buy back the floors. So is it worth it?

In an example provided by Chatham, a 10-year Euribor swap with a swap rate of 20 bps adds 40 bps to the rate when the borrower buys back the zero-based floor. Ms. Irwin noted that when the Euribor rate is a positive 1%, the only difference in the borrower’s net effective rate if it doesn’t buy back the floor—the vanilla swap scenario—is the additional cost of buying back the floor, or that 40 bps.

But if Euribor resets below zero, say at a negative 1%, the borrower will have to make an additional payment to the swap counterparty, resulting in an effective rate of 120 bps, or twice what it would have owed if it had bought back the floor. “So the mismatch between your hedge and your debt is actually creating interest-rate risk, because the more negative the index resets at, the higher your interest expense becomes,” she said.

In a brief case study, Mr. Dhargalkar noted a Chatham client that had entered into a term loan extension and was considering hedging it. The corporate client didn’t anticipate the amendment would in any way change the terms of the loan, but after showing the agreement to Chatham it became clear that the USD loan now contained a zero-based floor. The advisory firm discussed the various options with the client, and ultimately it was able to work with the client and the lending group to put in place a conditional floor that would only apply if the loan were not hedged.

“That had a huge impact on the transaction the client was looking to put in place; specifically, it saved several million dollars on the hedge from a structuring standpoint, and it also gave them a nice template for future dealings with their bank,” Mr. Dhargalkar said.”

Read More Read Less
Contact Us
0
0

On-Behalf-Of Structures: Lessons Learned

More companies are moving to streamline their payments and collections with on-behalf-of structures. Here are some lessons from the field.

Being a trailblazer is always nice but sometimes it pays to be the one who comes along next and learns from the trailblazer’s mistakes. And certainly, the more multifaceted the effort, the bigger the lessons learned. Such is the case with corporate payment and collections, part of the growing importance of supply-chain management and global cash management in general.

Corporates have long recognized the benefits of channeling payments and collections through a single legal entity via an on-behalf-of set up (POBO/COBO). They see reduced bank fees, simplified banking relationships, better operational efficiency and more control and visibility. Deutsche Bank has been one bank at the forefront of implementing on-behalf-of structures and has strengthened its product and advisory offerings in this area. iTreasurer asked Drew Arnold, Director, Trade Finance and Cash Management Corporates – Global Solutions Americas, Deutsche Bank, to explain some of the lessons learned in his experience implementing POBO/COBO structures. Mr. Arnold said that while all companies are different, there are some lessons that just about all companies can learn.

More companies are moving to streamline their payments and collections with on-behalf-of structures. Here are some lessons from the field.

(Editor’s Note—Original publication date: May 5, 2015)

Being a trailblazer is always nice but sometimes it pays to be the one who comes along next and learns from the trailblazer’s mistakes. And certainly, the more multifaceted the effort, the bigger the lessons learned. Such is the case with corporate payment and collections, part of the growing importance of supply-chain management and global cash management in general.

Corporates have long recognized the benefits of channeling payments and collections through a single legal entity via an on-behalf-of set up (POBO/COBO). They see reduced bank fees, simplified banking relationships, better operational efficiency and more control and visibility. Deutsche Bank has been one bank at the forefront of implementing on-behalf-of structures and has strengthened its product and advisory offerings in this area. iTreasurer asked Drew Arnold, Director, Trade Finance and Cash Management Corporates – Global Solutions Americas, Deutsche Bank, to explain some of the lessons learned in his experience implementing POBO/COBO structures. Mr. Arnold said that while all companies are different, there are some lessons that just about all companies can learn.

More Complex, More Benefit
One lesson that Mr. Arnold has drawn from years of helping corporations navigate the path to both POBO and COBO structures is that companies often shy away from them because they think their organizations are too complex.

Very often, Mr. Arnold said, he hears from companies that say, “We’re too complex” or “We have too many operating companies.” But what’s ironic, he said, is that “the more complex [a company is] the greater benefit they can get from an on-behalf-of model; that complexity shouldn’t be a hurdle to doing an on-behalf-of model.”

It will mean performing more due diligence, however, Mr. Arnold acknowledged. But for doing that extra legwork companies can get “much greater benefit than someone who has a more simplified organization. In fact, he said, if a company has a very simplified legal entity structure, “there might not be any benefit to doing an on-behalf-of model, or the benefits are so low they don’t justify the costs of doing it.”

On the other hand, if it does seem too daunting or perhaps the resources aren’t available for a full-blown POBO/COBO campaign, another route is to take it one country or one subsidiary at a time. If one country has a lot of legal hoops to jump through, Mr. Arnold said, then companies should consider moving on to a different country that’s easier to navigate. As for subsidiaries, they can also be added piecemeal.

“You don’t have to include one hundred percent of your legal entities in a structure to be able to get the cost-benefit equation that makes sense for you,” Mr. Arnold said. “If a company can include 50 percent [of its subs] in a structure, and they’re going to see great cost savings and efficiencies by including that 50 percent, that alone may justify putting in an on-behalf-of model.”

And then over time if it makes sense to include other entities or if regulations or market practice change in the previously bypassed countries, they can be added as they make sense. “So one hundred percent inclusion of countries or legal entities is not a requirement to be able to build a business case that justifies going ahead with an on-behalf-of model,” Mr. Arnold said.

Worth the Effort
Similarly, Mr. Arnold observed that many companies finish the POBO/COBO process and say that it was the toughest implementation they’ve ever been through. But, he added, no one who has gone through the set up ever regrets it.

“Many people say they were not aware of how long it would take,” Mr. Arnold added. They go on at length about all the difficulties, the challenges “not realizing how long it would take to put in service level agreements (SLA) between businesses or to define services or get the IT to work.” The challenges and work is definitely more than they expect, which is usually the case on any big project, Mr. Arnold said. “But then I always ask the question, ‘Knowing what you know now of what you had to go through to get where you are today, would you make the same decision?’ And they always say, ‘Absolutely.’”

This is certainly not something that one hears after many other large implementations, Mr. Arnold pointed out.

Welcome to Documentation
One of the more cumbersome areas in the work load—and one that Mr. Arnold said companies underestimate—is documentation. When companies use banks for payments and collections or they open an account, the bank provides the documentation that the client reads, signs and sends back to the bank. In other words it lays out all the terms and conditions and other relevant items.

“But when you go to an on-behalf-of model [now], that legal entity no longer signs all of its bank documentation, so instead of getting documents from the bank you now get them from the in-house bank,” Mr. Arnold said. “And the complexity is that there is no documentation that exists; it has to be done from scratch—SLAs, fee schedules (i.e. transfer pricing) and whatever it may be, because there is this arm’s-length relationship between the in-house and the legal entity. It’s sort of out-insourcing.”

Companies now have to do all this documentation on their own and between themselves, which can take time for a company to create. On the bright side, however, once the documentation is established the work is much less, but at the beginning it can be very complicated and time-consuming.

And again, Mr. Arnold said, it can vary by country which is one of the reasons bank documentation is so complex in the first place. “It’s not because we love complex documentation it’s just because of regulatory challenges in countries, and so now with an on-behalf-of model, companies have to take care of this themselves.”

Laying the groundwork
Like most big corporate projects, success depends a lot on the effort put in at the beginning. As Abe Lincoln famously said, “Give me six hours to chop down a tree and I will spend the first four sharpening the axe.” And so it should be in setting up a POBO/COBO structure. Getting the right team together and including all the parties from the outset will make the job easier to do and lessen the headaches along the way.

POBO/COBO “is highly complex and touches on many different parts of an organization,” Mr. Arnold said, “from treasury, to payables and collections teams, service centers, tax, legal, and both at the global and regional levels as well.”

Of those parts of the company, Mr. Arnold stresses it is the tax department that often can prove most critical. That’s because much of a corporate’s global strategy includes tax—if not actually built around tax issues. “All global corporates have developed their legal entity structure with a lot of input from tax,” he said, “So when moving to an on-behalf-of model you have to make sure that whatever you do will not in any way endanger or call into question the tax and legal-entity structure of the corporation.”

Mr. Arnold added that he’s seen several instances where treasury gets excited about doing a POBO/COBO project and after spending a considerable amount of time on it, brings it to the tax department where it gets shot down. “Tax takes the position that it has things set up in a certain way and you can’t go changing things,” he noted. “But if tax is involved early on in the discussion and it hears from a third party about what other companies have done… it becomes a lot easier.”

Mr. Arnold also stressed that POBO/COBO should not be sold as anything more than “an efficiency play.”

“The on-behalf-of model is not set up for any legal entity or tax optimization strategy,” Mr. Arnold said. “It’s purely an efficiency play: efficiency of making payments, collecting payments, managing the company’s liquidity, reporting at the entity level for the correct legal and tax reporting. So it’s efficiency; it’s cost savings.”

It is also a risk mitigation tool because you have greater visibility and greater centralized control, Mr. Arnold added, so you have reduced risk and a greater view into counterparty risk. “Once tax sees that, they’re more receptive to it.” Another consideration of laying the groundwork is to consider making it a long-range goal. “If you think you’re going to go to an on-behalf-of model anywhere in the near future, or within 5 years, you have to put in the building blocks.”

When opportunity knocks
When is the best time to start the project? Mr. Arnold said it’s often best to embark on a POBO/ROBO project when there is another big project coming up or when there’s a bank change coming.

“If you’re going to go through some major bank changes due to acquisition or divestiture or because you’re moving businesses between relationship banks” then it can be good idea,” Mr. Arnold said. In an acquisition, for instance, treasury will have to open up new accounts, set up all new payment flows using the current set up in any case, so why not start up that new acquisition right away with an on-behalf-of model? “Why go through all the set up and then a year later… go to an on-behalf-of model? Why not combine them?”

Overall, what a company should do is clearly lay out the as-is structures and processes and then lay out the perfect-world scenario, or what Mr. Arnold calls “the blue sky to be.” And then break down that journey into phases. “Define the objectives very clearly in how they’re going to get there and put in that plan,” he said. “That plan might take multiple years to get to where they’re going.”

Strategic opportunity
POBO/COBO structures are increasingly recognized as an efficient way to manage global cash. Although the initial set up of such a structure requires close coordination with tax and other partners, the ongoing benefits thereafter are well worth the initial legwork. That’s because it allows to treasurers to stop spending time on some of the mundane tactical responsibilities, allowing them to focus on the strategic, which ultimately adds more value to the company.

Sponsored by Deutsche Bank

Read More Read Less
Contact Us
0
0

Treasury Center as Profit Center

The silver lining in the new scrutiny of global transfer pricing is that treasury might finally escape from its cost center box.

The context here is the mess treasury is going to face with tax, cleaning up after the OECD BEPS Actions. The silver lining is that the new scrutiny of global transfer pricing might serve as justification for treasury to become a profit center, or at least set up treasury centers and in-house banks that get better compensated based on arm’s-length pricing for services rendered. Few external banks are offering a treasury services where they don’t earn a profit, unless the services are part of an overall “wallet” that is profitable–so why should an in-house bank not be generating profit when providing treasury services for group affiliates?

The silver lining in the new scrutiny of global transfer pricing is that treasury might finally escape from its cost center box.

(Editor’s Note—Original publication date: March 17, 2015)

The context here is the mess treasury is going to face with tax, cleaning up after the OECD BEPS Actions. The silver lining is that the new scrutiny of global transfer pricing might serve as justification for treasury to become a profit center, or at least set up treasury centers and in-house banks that get better compensated based on arm’s-length pricing for services rendered. Few external banks are offering a treasury services where they don’t earn a profit, unless the services are part of an overall “wallet” that is profitable–so why should an in-house bank not be generating profit when providing treasury services for group affiliates?

The context here is the mess treasury faces with tax, cleaning up after the OECD BEPS Actions. The silver lining is that the new scrutiny of global transfer pricing might serve as justification for treasury to become a profit center, or at least set up treasury centers and in-house banks that get better compensated based on arm’s-length pricing for services rendered. Few external banks are offering a treasury services where they don’t earn a profit, unless the services are part of an overall “wallet” that is profitable–so why should an in-house bank not be generating profit when providing treasury services for group affiliates?

Arm’s length = profit
To say that an arm’s-length price must have a profit margin in it, may be simplifying things a bit, but it helps get to the argument that treasurers should be overseeing profit centers in response to growing scrutiny on transfer pricing. They should make this argument because it helps them with the biggest issue they face: being starved for resources despite the huge value-added role treasury plays, because they have only relatively soft performance metrics to point to (compared to profits) when asked to cut costs.

Here is just one service where arm’s length pricing should generate a profit for treasury:

Centralized exposure management for affiliates. Paragraph 69 of the OECD Discussion Draft on BEPS Actions 8, 9 and 10 (on revisions to Chapter 1 of the Transfer Pricing Guidelines, including risk, recharacterisation and special measures) lays out the logic [bold is our emphasis]:

“Often a MNE group will centralise treasury functions with the result that the implementation of risk mitigation strategies relating to interest rate and currency risks are performed centrally in order to improve efficiency and effectiveness. It may be the case that the operating company reports in accordance with group policy a currency exposure, and the centralised treasury function organises a financial instrument that the operating company enters into. As a result, the centralised function can be seen as providing a service to the operating company, for which it should receive compensation on arm’s length terms. More difficult transfer pricing issues may arise, however, if the financial instrument is entered into by the centralised function or another group company, with the result that the positions are not matched within the same company, although the group position is protected. In such a case, an analysis of the conduct of the parties may suggest that the treasury function is not entering into speculative arrangements on its own account, but is taking steps to hedge the specific exposure of the operating company and has entered into the instrument essentially on behalf of the operating subsidiary. As a consequence the treasury company provides a service…”

Risk is an important component of proposed transfer pricing revisions, since the entity that assumes the risk (as does the entity that receives capital) should have a capability to add value with it (a new take on substance). This gets to transfer pricing rewarding the entity with the capability, not just one contracted to assume risk (or capital). [Note: There will be a public consultation on these transfer pricing matters on March 19-20 at the OECD Conference Centre in Paris.]

Treasury is often the function with the most capability to manage financial risk and thus arm’s-length transfer pricing should reward treasury for the services it provides in managing it, especially when it involves risk transfer between affiliates, but even risk management done on their behalf.

High value vs. low value-adding services
In contrast to high value-adding risk management activities, there are low value-adding services that require arm’s length transfer pricing: Enough to reflect the service rendered, but not so much to shift profits unfairly by charging well in excess of their value add. The discussion draft for BEPS Action 10 (on Proposed Modifications to Chapter VII of the Transfer Pricing Guidelines Related to Low Value-Adding Intra-Group Services) suggests that financial transactions would fall outside the definition of low value-adding services, which may have transfer pricing determined on a more simplified cost-center basis.

However, one comment letter from bMoxie, a boutique Belgian professional services firm specializing in tax and transfer pricing, notes that financial transactions can be wide ranging, and thus not all treasury services would be high value:

“It is unclear what is meant with financial transactions. We tend to strictly define this is as the exchange of (financial) assets, and accordingly not be as broad as the full spectrum of financial services or services that relate to the financial position of companies. Indeed many multinational groups organize their financial services or treasury departments centrally to enable an efficient and effective service to the group members, which may include the execution of financial transactions, but also certain financial services. These services in turn may be fitting or not fitting the definition of low value-adding services. It is not uncommon that group treasury centers also provide auxiliary services that fit the examples of what is provided in paragraph 7.48 – i.e. that are merely of an accounting or administrative nature, and that do entail processing and managing of accounts receivable and account payable. In other words, the scope of a treasury department typically includes investment and funding activities, and may include other financial services that do require the assumption or control of substantial or significant risk, but may very well include services that could be considered low value-adding services, in the view of bMoxie.

Taking it one step further, even for instance in the light of a cash pool, that entails the exchange of assets, it may well be that the cash pool manager is only to be considered economically to be performing a pure clerical function when it contractually vis-à-vis the cash pool bank and the participants does not assume any risk, however in practice this would not unlikely be the case that the cash pool manager. We just wanted to make the point that even in the light of services auxiliary to financial transactions, there may be a certain division of activities amongst stakeholders that could lead one of the service providers rendering services that could technically qualify as low value-adding services.”

This sort of thinking will not get treasury out of its cost center box. It may also warrant more careful consideration going forward of what activities get put in a treasury center or in-house bank (e.g., payment and collection activities) vs. a shared services center, merely to keep the transfer pricing categorizations clean and the treasury-as-profit-center silver lining intact.

Read More Read Less
Contact Us
0
0

Checklist: What You Should Know About ISDAs

Understanding the standard document used to govern over-the-counter derivatives transactions.

Based on many discussions with practitioners in The NeuGroups’s peer groups here is a checklist of things to consider when implementing ISDAs.

One of the first considerations is whether it is worth bothering to set up an ISDA with every counterparty.

Understanding the standard document used to govern over-the-counter derivatives transactions.

Based on many discussions with practitioners in NeuGroup peer groups, here is a checklist of things to consider when implementing ISDA Master Agreements (ISDAs).

One of the first considerations is whether it is worth bothering to set up an ISDA with every counterparty.

  • Only value-add banks, please. With limited trading capacity to spread around—as well as treasury bandwidth—practitioners agreed that firms should focus on the banks that are able to add real value from an dealer standpoint. If they don’t, why waste time and energy on negotiating an ISDA?
  • Invest in a good ISDA template. Many treasurers also agreed that it is worth the money to pay a specialist attorney to create an ISDA template. This could be used as a starting point for negotiations with counterparties (or ending point, if firms are prepared to walk away if a bank does not accept the basic tenets of the template agreement).

Consensus has it that a template should be doable for anywhere from $50-100K in legal fees (fees should be coming down as more corporates turn to ISDAs and the more corporate-oriented clauses become part of law firms starter templates).

The need to involve internal counsel to cross-check these templates might raise the legal costs. Finally, while the first instinct might be to limit the ISDA to FX, it usually is more effective to consider the broader counterparty risk across asset classes, when preparing the template.

  • Choose your vintage. It pays to keep track of what the major differences are between the different “vintages” of ISDA templates (in practice, 1992 or 2002; see sidebar below), and be prepared to argue for the “preferred” one. Several members have mentioned how hard it is these days to have all their banks of the same vintage but that they have still been reasonably successful.

“We try to keep them standard,” said a treasury head whose company is “99 percent” on 2002 ISDAs; another has managed to keep all its banks to 1992 ISDAs. Marc A. Horwitz, an attorney formerly with Baker McKenzie (now with DLA Piper), noted: “For end users (corporates), we prefer 1992, particularly for FX trading.”

  • Banks are different. Each bank has a different risk tolerance and will focus on different areas, such as the definition of early termination, settlement, or credit committee concerns. Overall, members agree that non-US banks are harder than US banks, and Japanese banks, for example, are very conservative.
  • Don’t hesitate to stick to your guns. Treasury should not be afraid to play hardball with banks when negotiating their ISDAs, or if they are up for renewal. One way is the template approach; another is to flag the clauses that are a source for concern and stand firm regarding those. Check with senior management of course, but if you don’t like the terms a bank is offering, be prepared to say “no thanks” and walk away.

Also, just as banks have their pet peeves about what they consider important aspects of the ISDA to protect themselves, in the end, said one FX risk director, “you have to carve out various aspects of the [ISDA] contract you don’t like.”

  • Beware multiple-branch clauses. When specifying entities covered by the ISDA in the “schedule,” it is also important to be clear on the language on multiple branches, as this can help determine whether it’s better to book trades, for example, with the local Citi branch or Citi New York. One FX director noted that no matter which branch executes his company’s deals they are always “booked” with the London entity of the trading bank. One of his peers in the NeuGroup’s European Treasurers’ Peer Group (EuroTPG) agreed: “We insist on dealing with the main bank or branch, nobody else.”

Whether pricing is influenced by where the trade is executed is something to watch out for. A firm in the large-cap bracket with a bank in one region of the world may be covered by the medium-cap group in another, due to the relative size of its presence there. This could be true for one or several banks.

Banks should also not be allowed to book trades from branches located in jurisdictions which prohibit offshore FX transactions unless the ISDA is in the name of the onshore sub.

OTHER CRITICAL CONSIDERATIONS

  • Cross-default thresholds. A cross-default provision (under which all outstanding trades covered by the ISDA can be terminated if the counterparty defaults on third-party debt) can be elected in the ISDA schedule, but firms should consider whether to have it. When opting for the provision, it is important to set a threshold amount such that a cross default is not triggered unnecessarily by technical but not material events, and is not lower than existing credit agreements’ cross-default thresholds.
  • Termination settlements. In the 1992 ISDA form (see below), there are two methods for calculating an early termination settlement (triggered by “default” and “termination” events defined in the contract):

1) “Loss” (or “unpaid amounts”); and

2) “Market quotation.”

The former considers the amount that would make the counterparty whole on the trade. The latter requires four market quotes and the ultimate price is the average of the two middle quotes.

“Some corporates take strong views on which they prefer,” noted Mr. Horwitz, based on their experience with closeouts or what types of trade they plan to use most.

Market quotes work well for vanilla trades because it’s considered likely the trades will be priced fairly. The “loss” method works better for highly structured trades.

  • Confirmation supersedes ISDA. After a few corporate derivatives debacles in the 1990s, banks favor inserting a “non-reliance clause” into the 1992 ISDA (it is in the pre-printed 2002 form) in which the bank basically says “you (the company) know what you’re doing, so we’re not responsible.”

Very few corporates manage to negotiate out of the non-reliance clause. Because trade confirmations supersede ISDAs, those that don’t have the clause should take extra care that the clause does not get reinserted into the trade confirmations.

On the other hand (and this is another “score” for SWIFT), a corporate practitioner pointed out that using SWIFT confirmations helps in this regard as there is “not much room for sticking in additional terms or changes.”

THE TABLES ARE TURNED

While ISDAs may have been insisted on by banks in the past, it is now corporates that are scrutinizing them to ensure they are properly protected when banks look vulnerable. Firms, therefore, should take extra precautions to guard against events that may work against them at some future point in a trading relationship, when banks again look less vulnerable, starting with a mutually agreeable ISDA.

WINE AND ISDAS: VINTAGE MATTERS
Should a firm opt for the 1992 or 2002 form of ISDA? The major differences between the two, said Baker McKenzie (now DLA Piper) attorney Marc. A. Horwitz, are:

Grace period for failure to pay. The grace period in the 1992 form is three business days, in the 2002, only one. For treasuries with limited bandwidth, three days’ grace can prevent mistakes and non-payments not due to credit default events from unduly punishing the firm or result in terminated trades.

Scope. The 2002 form includes a broader range of specified transactions, such as repos, reverse repos and securities loans. “For corporates, we generally prefer 1992; you don’t want an unexpected event in a non-ISDA trade to permit the bank to unwind this ISDA trade,” Mr. Horwitz said.

Force majeure. The 2002 form has a force majeure clause which governs termination of trades that are impossible to make payments on, after an eight business-day waiting period.

Right of set-off. The pre-printed 2002 form includes a set-off provision, which the 1992 form does not (it can be inserted).

Settlement. The 1992 form permits “loss” or “market quotation” as basis for the settlement price upon early termination. The 2002 form has a pre-determined method, a “hybrid” between the two, which doesn’t require four market quotes. There have been efforts within ISDA to migrate end users to the close-out amount, and while firms on the 1992 form can opt for this protocol, it “hasn’t taken that well with corporates,” Mr. Horwitz noted.

ELECTIVE EARLY TERMINATION
As counterparty risk concerns remain pronounced both on the corporate and the bank side, corporates are reporting that banks are showing increasing interest in inserting an elective-termination clause into the ISDA (in the Other Provisions section).

For example, one bank has requested to insert it into a 1992 ISDA master with a corporate, which would allow either side to terminate a derivative six months after inception, and every six months thereafter.

The concern with such a clause is that the company is at risk of the bank terminating a long-term hedge by invoking this clause, leaving the company unhedged. This could cause unintended cash-flow consequences and, more importantly, problems with the hedge qualifying for hedge accounting treatment even at inception.

While the ISDA forms have specified “default” and “termination” events that are standard and bilateral, elective early termination clauses are not common, nor are they recommended in an ISDA governing a relationship, and that may cover a multitude of trades over a long period of time. Former Baker McKenzie (now DLA Piper) ISDA attorney Marc A. Horwitz pointed out that, absent a compelling regulatory or credit reason for such a clause, corporates should push back on banks trying to insert it.

A hedge, after all, is for protecting the corporation, not the bank, as a risk manager pointed out, and corporates already have a way to get out of hedges: by unwinding them; this, however, should be the firm’s decision, not the bank’s.

Read More Read Less
Contact Us
0
0

Crossborder Pooling: Notional vs. ZBA

For many MNCs, an emphasis on effective management of working capital has translated into renewed urgency in rationalizing liquidity structures.

The tight credit market—combined with general economic weakness—has forced a strong focus on cash and liquidity management for both cash-rich and cash-poor companies.

As the ability to generate cash (or borrow it) has declined, MNCs report an increased need to have a clear view of their cash position globally. Visibility, however, is not enough. Treasurers also need effective techniques and procedures to manage their global liquidity. That task increases in complexity as a result of geographical spread, multiplicity of banking relationships, cross-currency flows and corporate structure issues (e.g., tax).

For many MNCs, an emphasis on effective management of working capital has translated into renewed urgency in rationalizing liquidity structures.

(Editor’s Note—Original publication date: June 16, 2003)

The tight credit market—combined with general economic weakness—has forced a strong focus on cash and liquidity management for both cash-rich and cash-poor companies.

As the ability to generate cash (or borrow it) has declined, MNCs report an increased need to have a clear view of their cash position globally. Visibility, however, is not enough. Treasurers also need effective techniques and procedures to manage their global liquidity. That task increases in complexity as a result of geographical spread, multiplicity of banking relationships, cross-currency flows and corporate structure issues (e.g., tax).

A consolidated view of cash

One of the most useful liquidity-management tools in the treasury toolbox is cash “pooling,” an arrangement whereby the credit/debit positions of different accounts are viewed from a single summary perspective.

This approach gives treasurers a chance to view cash on a regional and global basis, at the same time allowing affiliates to utilize their collective liquidity more effectively (i.e., instead of one subsidiary borrowing while the other is flush with cash).

Companies planning to centralize cash for multiple international subsidiaries have two basic options available:

• Zero balance accounts (ZBAs); or

• Notional cash pooling.

While both achieve the same ultimate objective, there are technical differences, which can then have significant organizational and tax consequences to either approach.

Zero-balance accounts (ZBAs)

ZBAs refer to linked accounts at the same bank and in the same currency and country. Funds are physically transferred in/out (zero-balanced) from subaccounts to a main account daily.

ZBAs: Key Aspects

The following are the key characteristics of a ZBA pooling arrangement:

• Same bank/same branch

• Same country

• Same currency

• Segregation of subaccounts which are then linked to a main account

• Completely automatic (bank), no manual transfers required

• Intercompany lending arrangements if separate legal entities participate, which means an arm’s-length interest rate must be assessed.

This primary account is usually held in the name of the Corporate Parent, Country or Area Headquarters/Holding Company or a Regional Treasury Center, such as a BCC, IFSC or OHQ.

If the subaccount holders are divisions of the same legal entity (such as branches, sales offices or plants), there are no tax issues. Indeed, often companies use ZBAs as a simple method to segregate different types of activities, such as receipts and disbursements, even if there is no regional or organizational segregation already in place.

However, if the subaccount holders are separate legal entities (i.e., subsidiaries), the funds movement into the main account constitutes an intercompany loan from the subsidiary to the main account holder and vice versa; this, in turn, generates some tax and accounting issues.

Audit trail and accounting. For example, documentation must be maintained for audit trail purposes and the main account holder (e.g., central treasury) must charge an “arm’s length” interest rate to the participating subsidiaries. Although banks provide separate statements for each subaccount, they will not typically do the accounting, manage the loan portfolio or assess/pay interest. (Some banks do run separate businesses which provide these services on an outsourced basis, usually out of Dublin.)

So unless this aspect of recordkeeping etc. is handled by a bank or third-party outsourced service, it must be done internally. Many treasury workstations and ERPs provide intracompany loan-management functionality as part of their core offerings. If the activity is at all substantial, spreadsheet solutions may not be sufficient (and certainly won’t provide the layer of automation of both interest allocation/payment and reporting that makes this cost effective).

Cost benefits. In-country ZBA arrangements are very common and have been a staple of managing US cash for years. Yet they are not universally possible. In certain countries, such as Korea, ZBAs may not be permissible at all, and in countries where there is an assessment of debit tax on transactions out of a bank account, such as Australia, a ZBA arrangement may end up being not cost effective.

For treasurers managing subsidiaries in multiple countries/currencies, the ZBA structure can be set up as an overlay, but funds must first be physically transferred from country A, B or C to the concentration location.

Two-tier approach. Often there is a daily pooling/ZBA in the originating country first, and then a sweep or manual transfer to the location of the main account, with less frequency. Thus the cross-border ZBA is usually a two-tiered structure. Weekly transfers are fairly standard. Daily transfers cannot be cost justified except with the very largest multinationals.

Therefore, in assessing the efficacy of overlay ZBA arrangements, a cost/benefit analysis is essential to establish the target level of cash required at the local level, and the frequency of transfer to the main account. Also overlay options may require opening additional in-country accounts, which can get expensive.

But perhaps the main drawback or limitation of ZBAs is that they’re only available on a single-currency basis. Thus, at the treasury level, there must be a main account for each separate currency.

Notional cash pooling

That’s where notional cash pooling enters the picture. With notional pooling, there is no physical movement of funds between accounts; rather, credit and debit interest are offset. Interest is paid/charged on the net balance position, but the legal/tax separation of separate subsidiaries owned by the same parent is maintained.

The initial (or direct) benefits of pooling come from the reduction of overdraft interest expense by centralizing the company’s liquidity position (see example in table below).

Legal hurdles. Notional pooling is great in theory. In practice, however, this pooling arrangement is not permitted in all countries. In these countries ZBA arrangements are used.

The big benefit to this arrangement, however, in the countries where it is most common, such as the UK, Netherlands and Belgium, is that there’s minimal or no withholding tax on interest earned. Often, too, (unlike physical pooling/ZBA arrangements) it’s not necessary to have a main or header account; the offset is simply among the participants. However, some countries (such as France) do require that there is a holding company in place.

The key advantage of notional pooling is that it allows for a multicurrency view of cash.

Notional: Key Aspects

The following are the key characteristics of a notional pooling arrangement:

• Same bank/ different branches

• Same country is most common

• Multicurrency pooling is extremely sensitive from a tax and accounting perspective—Spain can’t participate, for example due to local tax regulations

• Cross guarantees are required by the bank, regardless of the cash position of the participants

• Interest actually charged/paid to participants is optional—but may be advisable from a tax perspective.

However, in order to pay/charge interest on a single consolidated basis, the bank will use an interest rate differential to avoid currency conversion, similar to how a short-dated swap is handled. From a company’s perspective, this may ultimately affect the cost effectiveness of the arrangement. The company typically ends up paying forward points, thus reducing the interest-rate earned for a positive consolidated balance.

There is also a risk factor involved, as treasury is actually outsourcing this activity (to a bank). This means treasury may lose some control over the counterparties involved in the transaction.

Virtual pooling. In reality (or in virtual reality), treasury can achieve similar effects by using internal systems to execute the loans or interest offsets, and then generating the appropriate entries into the accounting system (i.e., an in-house bank). Also the rates achieved for investing excess cash would be higher. In fact, although a few large banks do offer multicurrency pooling, they are not entirely comfortable with it. (One of the very large banks simply decided not to offer notional pooling, only ZBAs are used; notional pooling was too fraught with difficulties).

In all cases, however, the bank will not act as a tax advisor, will insist on a sign-off from the company’s tax counsel and require cross guarantees between the participants. (That’s a hurdle for many MNCs.)

Loan by every other name. Pooling ostensibly gets around the issue of putting intercompany loans into place, because it is notional. However, it is a variant of a short-term intercompany loan arrangement, allowing a bank service to handle the periodic cash-reserve ups and downs of different entities.

If there were a permanent or long-term mismatch in liquidity, companies would more effectively use intercompany loans as the mechanisms. That’s why tax authorities will look carefully at pooling arrangements, and still may require some type of arm’s length interest depending on the amount and tenor of the offsets.

Also, if the company is always in an excess cash position, the concept of a notional offset makes no sense. And using a notional multicurrency pool as an investment vehicle is counterproductive, as the interest raid paid on the pool will be far lower than what individual currency pools will be able to achieve.

As a treasury management technique, cross border pooling is primarily used in Europe and to a more limited extent on Asia, where there are still regulatory issues that limit the participation of certain countries.

It is not used at all in Latin America (regionally) where there are significant regulatory issues and withholding tax restrictions on intercompany lending. Thus, the essential first step in evaluating any cross-border pooling arrangements is to focus on the management structure of the company and what tax implications may arise.

Read More Read Less
Contact Us
0
0
Recent Stories
Recent Stories
Recent Stories
Recent Stories
Recent Stories
Recent Stories
Recent Stories