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Spotlight Features

Reverse Repo: A Safe Haven for Cash Amid Financial Turbulence

What the FASB’s Supply Chain Finance Disclosure Rules Mean for Corporates

The Science of FX Exposure Management

Justin Jones
In Cash & Working Capital, Technology

In Search of a Cash Forecasting Model for Use Across the Enterprise

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Spreading the Word: Investment Reporting and Who Sees What When

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

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

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

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

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

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

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

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

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

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

  • These meetings are used to set overall strategy, policy approvals, formal exceptions and compliance approvals, and grant approvals on a variety of topics as necessary. 
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Justin Jones
In Cash & Working Capital, Regional, Talking Shop

Talking Shop: Processing Fees for a Domestic Cash Pool in China

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

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

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

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

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

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

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

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

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

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

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Justin Jones
In Investment Management, Technology

What the Crypto Craze Means for Corporates Seeking Use Cases

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Shifting Winds of ESG Policies and Regs Have Risk Managers on Alert

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Gaining Ground on the Road to Diversity in Capital Markets Deals

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

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

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

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

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

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

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

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

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

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

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

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

Talking Shop: Use a Non-Canadian Bank for Cash Management in Canada?

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

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

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

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

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

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

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

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

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

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

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

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

Other peers use: JPMorgan, RBC and HSBC.

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Justin Jones
In Banking, Capital Markets

Deal Defense: Building a United Front When Debt Underwriters Grouse

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  • Two panelists said theirs were 3.5-4 times oversubscribed while a third said they were 6 times oversubscribed.
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Justin Jones
In Cash & Working Capital, FX

Improvements in Forecasting Open Doors for Hedge Changes

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  • The finance function at the business units tracks forecast accuracy quarterly and reviews with treasury and accounting to create a feedback loop so that forecast certainty drives decisions on hedge ratios and accuracy improves over time for a virtuous circle of improvement. 
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Justin Jones
In Cash & Working Capital, Technology

Overcoming Resistance: Integrating Data in Cash Flow Forecasting

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

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

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

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

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

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

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

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

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

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

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

A Virtuous Cycle Including Treasury Bolsters Sustainability Efforts

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

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

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

Building a framework sets the stage for green bonds—an umbrella to systematize initiatives.
 
Increased scrutiny of corporate sustainability efforts by investors and other stakeholders has made it essential for companies to place ESG initiatives into a clear framework.  

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

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

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

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

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

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

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

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

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

Talking Shop: SOX Entity-Level Control for Shared Service Centers?

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

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

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

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

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

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

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

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

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

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

Treasury’s Eternal Question: What is the Right Level of Liquidity?

Wells Fargo’s risk-adjusted liquidity ratio offers insights on how corporates view liquidity during recessions.

Setting a target for a company’s ideal liquidity level is never easy. Corporates use a variety of metrics and liquidity ratios to get it right. But what happens when events like the global financial crisis or the pandemic push the economy into recession and force corporates to go into crisis mode?

  • In theory, given that most companies revenues and expenses drop somewhat during a recession, they should be carrying less liquidity.
  • But in the 2008 financial crisis, every business sector increased liquidity despite reductions in all aspects of their businesses, including revenues, expenses, investments and working capital.
    • That’s according to an analysis from Wells Fargo, sponsor of the spring meeting of NeuGroup for Capital Markets (NGCM).

Wells Fargo’s risk-adjusted liquidity ratio offers insights on how corporates view liquidity during recessions.

Setting a target for a company’s ideal liquidity level is never easy. Corporates use a variety of metrics and liquidity ratios to get it right. But what happens when events like the global financial crisis or the pandemic push the economy into recession and force corporates to go into crisis mode?

  • In theory, given that most companies revenues and expenses drop somewhat during a recession, they should be carrying less liquidity.
  • But in the 2008 financial crisis, every business sector increased liquidity despite reductions in all aspects of their businesses, including revenues, expenses, investments and working capital.
    • That’s according to an analysis from Wells Fargo, sponsor of the spring meeting of NeuGroup for Capital Markets (NGCM).

The old playbook doesn’t work. “That tells me those liquidity ratios are really only useful during quiet, normal times, and it’s not the right amount of liquidity when times get tough, in a recession,” said Hans Tallis, head of quantitative corporate finance at Wells Fargo and an adjunct professor of finance at Columbia Business School.

  • The bank’s presentation concluded that “managers don’t size liquidity to static income or balance sheet values. Instead, a robust measure of liquidity should include risk.”
  • Mr. Tallis described a tool his team developed to provide the best explanation for how companies think about liquidity and when it can be adjusted.

A simple solution. After exploring numerous options, the team arrived at what Mr. Tallis described as the “very simple” risk-adjusted liquidity (RAL) ratio. It is the median liquidity—cash plus undrawn revolving credit—divided by “EBIT risk,” which is the difference between a company’s high and low earnings before interest and taxes (EBIT) over a short look-back period.

  • “We looked back two years at a given company’s top and bottom levels of EBIT, and tracked its EBIT range over that period,” Mr. Tallis explained.
  • Applying RAL to different industry sectors during the Great Recession more than a decade ago produced a more stable liquidity target for sectors, excluding healthcare and information technology, which held significant cash offshore that skewed the findings.
  • “I can’t say this is how every management team thinks about the right amount of liquidity, but it certainly seems a lot closer,” Mr. Tallis said. 

The Covid recession. Splitting NGCM members’ companies by sector, Wells Fargo found the companies adjusted their liquidity throughout 2020’s pandemic-prompted recession in different ways.

  • Most companies built up cash, tapping revolving lines of credit and issuing debt, while EBIT risk was increasing. That resulted in a fairly stable RAL ratio, Mr. Tallis said. See the chart below for details.

Member takeaway. The RAL ratio did a “reasonably good job” of characterizing the liquidity profiles of NGCM members throughout both recessions, Mr. Tallis said, and so it may be a useful guidepost to think about a company’s appropriate amount of liquidity.

  • “Once your earnings trajectory stabilizes and you’re confident that EBIT is stable or perhaps will inflect upwards, that may be the right time to think about reducing the amount of liquidity that the company is carrying on the balance sheet,” he said.
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Justin Jones
In Compliance, FX, Neugroup, Risk Management

Adding Complexity to Hedging: An Adventure in Entity Restructuring

An FX risk manager faces hedging and forecasting challenges amid changes made in response to BEPS regulations.

It’s no surprise that the 15-point action plan announced by the OECD in 2015 to address base erosion and profit shifting (BEPS) would create various headaches for finance teams at multinational corporations.

  • But a member presentation at a recent meeting of NeuGroup FX risk managers provided a fuller picture of some specific challenges facing companies as they comply with the new regulations.
  • At issue for the member: Transfer pricing and the ripple effects on hedging and forecasting following a necessary entity restructuring.

An FX risk manager faces hedging and forecasting challenges amid changes made in response to BEPS regulations.
 
It’s no surprise that the 15-point action plan announced by the OECD in 2015 to address base erosion and profit shifting (BEPS) would create various headaches for finance teams at multinational corporations.

  • But a member presentation at a recent meeting of NeuGroup FX risk managers provided a fuller picture of some specific challenges facing companies as they comply with the new regulations.
  • At issue for the member: Transfer pricing and the ripple effects on hedging and forecasting following a necessary entity restructuring.

Transfer pricing dynamics.  At one end of the spectrum is the relatively straightforward setting of interest rates on intercompany loans: They must be priced as if the two entities are independent, operating at arm’s length.

  • At the other end, the member described a much larger undertaking: Changing from a so-called commissionaire business entity structure to a buy-sell or limited risk distributorships (LRD) structure.
  • The member gave an overview of the change so far and what it has meant to the management of FX risk.
  • The short version: It went from relatively simple and convenient to more complex and cumbersome.

Before: simplicity. In a commissionaire structure, a foreign subsidiary faces the third party (customer) for billing purposes, but really acts as a pass-through for the transfer of foreign billings to the principal, which is an entity in a low-tax jurisdiction.

  • The subsidiary gets a commission on the billings but the structure is designed to minimize gains and consequently taxes in countries in which its products are sold.
  • The principal records the full amount of the billings as deferred revenue, which enables the company to hedge the revenue and lock in one FX rate for the entire period of the deferred revenue.
    • For example, an annual contract will have the revenue recognized monthly over the whole period.
  • This makes it simple to hedge the exposure at one time at the principal entity level; one FX rate applies to the entire contract period, and it’s smooth and easy to forecast USD revenues (a key performance metric) for the principal entity.

After: forecasting complexity. In the LRD structure, a taxable local-currency functional subsidiary is now the seller to the third-party customer. The billed amount is booked as deferred revenue at the subsidiary level instead, and local currency-denominated royalties are intercompany cost of goods sold (COGS) for the sub (see graphic).

  • For the principal, the forecasted intercompany royalty revenues in foreign currency—also recognized monthly—is now the recognizable exposure that can be hedged, using third-party transactions as proxy for hedge designation.
  • To hedge, treasury uses monthly layered cash-flow hedging with forwards, resulting in a smoothing effect from the different effective FX rates; but the monthly revenue recognition still means a new FX rate for each of the periods in the contract period, making for a nightmare to forecast the key performance measures for management.
  • That’s a problem because some of the most important management KPIs for the member’s company are revenues and free cash flows on a USD basis, making the ability to forecast them crucial. “Fun times,” the member joked.
  • Overall objectives for the conversion project include minimizing FX risk from foreign billings and revenues, protecting foreign cash flows and maintain hedge accounting.

Starting small. The company started in Asia Pacific, which represents a relatively smaller part of overall revenues, before moving on to EMEA, which represents the vast majority of global turnover. “It will become much more material as we convert more entities,” the member said.

Is there a deadline? The deadline for conversion may vary based on requirements by the different tax authorities and jurisdictions. Having a plan and being seen as making the required changes matter, so there are opportunities for deadline extensions on a case-by-case basis.

  • If you don’t have agreement with local tax authorities on your conversion timeline, you risk owing the taxes, so you want to convert or get out of higher-tax jurisdictions sooner than later.
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Justin Jones
In Neugroup, Risk Management, Technology

‘Heat Maps Must Die’: Out With the Old ERM Tools, in With the New

Critics say traditional tools are inadequate for illustrating risk; one ERM member has found success modernizing them.

Pity the poor risk heat map. This well-worn tool, traditionally used by ERM teams to provide a visual representation of the range of risks a corporate faces, is now an object of scorn for some risk managers, including NeuGroup members.

  • “Heat maps must die,” one member said at a recent NeuGroup meeting for ERM heads, a sentiment echoed by a number of his peers.
  • Also on the hit list of ERM tools that critics say are outdated, ineffective or insufficient: risk registers.

Critics say traditional tools are inadequate for illustrating risk; one ERM member has found success modernizing them.

Pity the poor risk heat map. This well-worn tool, traditionally used by ERM teams to provide a visual representation of the range of risks a corporate faces, is now an object of scorn for some risk managers, including NeuGroup members.

  • “Heat maps must die,” one member said at a recent NeuGroup meeting for ERM heads, a sentiment echoed by a number of his peers.
  • Also on the hit list of ERM tools that critics say are outdated, ineffective or insufficient: risk registers.

A substitute for thinking? “I have a campaign against heat maps,” the member quoted above added. “In our organization, they can tend to be used as a substitute for thinking and give an illusion of precision.”

  • He said that heat maps—or risk radars—aim to show exposure to risk as a simple way of visualizing the data found in a risk register; but he believes they are only marginally more useful than a spreadsheet full of numbers.
  • Another member echoed the displeasure with the simple tool and said, “The only utility I see in heat maps is a way to appease auditors.”
  • The member who has a campaign against heat maps works at a private company, minimizing the need for him to deal with auditors and leaving his team with “basically no reason to ever use [heat maps].”
  • When one treasurer became responsible for his company’s ERM program, he inherited a risk register that tracks the company’s exposures to risks but does not process or analyze the data in any way.
    •  He said it felt like a tool from a previous generation, a tracker that may be “filled with risks, but no one ever does anything with it.”

A smarter risk register. One member suggested that heat maps and risk registers are not useless. His company developed a sophisticated risk register that can generate heat maps. The automated solution tracks the company’s risks and sends notifications for required follow-up actions.

  • The member said this tool was borne out of a company-wide desire to create a culture of risk-awareness, like many others who have recently kickstarted programs to eliminate what has become a check-the-box ERM routine.
  • The solution employs a user-friendly interface designed with a data visualization software. It’s connected to the raw data for the company’s risks and analyzes those using algorithms.

Tell a story. The member said that other corporates may not necessarily need the full-scale automation used by his company, but recommends they adopt a similar mindset and are thoughtful when employing heat maps.

  • Presenting risk exposure to leadership, he said, is about storytelling first. “If all management has seen is one heat map after another, it will be hard for them to engage with the material,” he said. “The key to getting heat maps right is to present them alongside clear conclusions—in other words, explain why the heat maps matter.
    • “With any heat map, you should be able to study for 30 seconds and know the story. If it takes any longer, it’s bad.”
  • The member said there can be a tendency for functional teams to look at data and try to come up with as many ways as possible to present it. “That’s an incorrect process. The right process is finding the significance of data before presenting and developing meaningful, actionable metrics. When it comes to metrics, more is not always better—in fact, it can be worse.”
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Justin Jones
In Capital Markets, Neugroup

Fond of Fitch: Ratings Agency Gains Fans and Respect in Treasury

Members of NeuGroup for Capital Markets praise Fitch analysts and a ‘ratings-through-the-cycle’ approach.

For decades, Fitch Ratings has been the third ratings agency—behind Moody’s and Standard & Poor’s—used by Fortune 500 corporates that want to ensure they maintain the two investment-grade ratings necessary to remain in the Bloomberg Barclays Bond Index. That may be changing.

  • At a recent meeting of NeuGroup for Capital Markets, members said they have been impressed with Fitch’s analysis over the past few years, and especially during the pandemic.
  • Members also discussed how to approach credit analysts whose views about the company may be at odds with treasury’s.

Members of NeuGroup for Capital Markets praise Fitch analysts and a ‘ratings-through-the-cycle’ approach.

For decades, Fitch Ratings has been the third ratings agency—behind Moody’s and Standard & Poor’s—used by Fortune 500 corporates that want to ensure they maintain the two investment-grade ratings necessary to remain in the Bloomberg Barclays Bond Index. That may be changing.  

  • At a recent meeting of NeuGroup for Capital Markets, members said they have been impressed with Fitch’s analysis over the past few years, and especially during the pandemic.
  • Members also discussed how to approach credit analysts whose views about the company may be at odds with treasury’s.

More thoughtful. “They’ve really come a long way,” said one member whose company holds a Moody’s rating two notches above S&P’s, with Fitch in the middle, adding that S&P seems to be very numbers-focused post-financial crisis and during the pandemic.

  • “We felt that Fitch and Moody’s, from an issuer’s perspective, are taking more of a ratings-through-the-cycle approach,” the member said. “We think Fitch has been very thoughtful and we’ve been impressed by the analyst who has covered the company for a long time and the level of thought he’s put into our dialogue.”

Unsolicited but welcome. Another member said Fitch has rated his company on an unsolicited basis for more than a decade, but treasury treats the analyst no differently than those from other agencies.

  • “Same quarterly check-ins, annual business review and access to management,” the executive said.
  • One reason: The company wants to influence the narrative about itself to make sure it’s accurate and that “Fitch is not putting out stuff we don’t agree with.”
  • He added that Fitch has winnowed the list of companies it rates on an unsolicited basis over the years as its credibility has risen and more companies decide to pay.
  • “They have a good shop from what we’ve seen,” he said. “Our analyst there has been great—a very thoughtful, former sell-side analyst.”

Mixing industries. One member, whose company had acquired a business in a different industry, said the company’s longtime analyst at Fitch made a negative adjustment to EBITDA without fully understanding the new business.

  • The member, armed with advice from fellow NeuGroup members and his bankers as well as equity and debt research, was able to persuade the analyst—and the analyst’s boss—to check with a credit analyst covering the add-on industry about how best to gauge the EBITDA impact.
  • “Fortunately, we won that, because of the workaround—getting help from our friends here and our banks,” he said.
  • Another member suggested making sure that annual meetings with the rating agencies include an analyst covering an acquired company’s industry. “Just to make sure you’re not telling your story multiple times and nothing is lost in translation,” she said.
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Justin Jones
In Neugroup, Risk Management, Treasury Management

Flying Higher: Moving ERM Beyond Safety Net to Strategic Partner

ERM is reaching new heights as risk exposures multiply and rising insurance premiums drive a search for options.

Enterprise risk management is having a moment amid a seeming explosion of risk exposures facing corporates since the pandemic began. And as the function grows in importance, at least a few ERM teams are heading toward inclusion in corporate strategy groups—a trend definitely worth watching.

  • One member at a late March meeting of NeuGroup’s Corporate ERM group said his goal since recently taking over the position “is to make ERM more strategic, to move it from ‘safety net’ to adding value.”
  • This means contextualizing ERM and company risks from a strategy perspective and making ERM “action-oriented,” or more proactive. “We want to change the mindset” around ERM, he said.

ERM is reaching new heights as risk exposures multiply and rising insurance premiums drive a search for options.

Enterprise risk management is having a moment amid a seeming explosion of risk exposures facing corporates since the pandemic began. And as the function grows in importance, at least a few ERM teams are heading toward inclusion in corporate strategy groups—a trend definitely worth watching.

  • One member at a late March meeting of NeuGroup’s Corporate ERM group said his goal since recently taking over the position “is to make ERM more strategic, to move it from ‘safety net’ to adding value.”
  • This means contextualizing ERM and company risks from a strategy perspective and making ERM “action-oriented,” or more proactive. “We want to change the mindset” around ERM, he said.

Strategic decisions. At some companies, a strategic approach to ERM is refining the decision-making process.

  • In a session on decision quality, the presenting member said that since business leaders and managers solve complex business problems every day, they need help making more informed decisions.
  • They can achieve this with a better understanding of the implications of strategic decisions and instill an “acute awareness” of resulting outcomes, intentional and unintentional.
  • One member joked that this was a good way of fixing mistakes before they’re made.

Where does ERM belong? Historically, one of the issues around ERM’s role within a corporate has been where it is housed and who runs the function.

  • Initially, when COSO (the Committee of Sponsoring Organizations of the Treadway Commission), elevated enterprise risk back in the early 2000s, it was seen as a way to reassure investors and credit ratings agencies. But it gave no indication as to where it should be housed.
  • As a result, ERM landed in a variety of places, including treasury, internal audit, compliance and sometimes legal. ERM’s placement within these functions meant the practitioner was usually doing it as a part of their regular job.
    •  For example, in treasury, the role often fell to an assistant treasurer.

Elevating ERM in treasury. Today, at some companies, ERM is being elevated to the top of corporate treasury’s to-dos. At a recent NeuGroup meeting of mega-cap companies, one treasurer said he now has responsibility for ERM in addition to everything else he’s doing.

  • The additional headcount and responsibilities are one reason his world has been turned “upside down,” forcing him to redefine his role and figure out how to split time between groups.

Another treasurer in charge of ERM said the function is now taking up significantly more time relative than debt capital markets, which has quieted down after a busy 2020. Today, business continuity management, weather and insurance risk are among his major priorities.

Eliminating check-the-box thinking. Several members of the ERM group said that when they took over the role, ERM had become a little too rote. “Aspects of ERM do lend themselves to a check-the-box setup,” said one participant. “Sure, you do your risk registers and scorecards,” but it needs to go deeper than that to achieve strategic value.

  • This is what many members and guests at the ERM meeting were attempting to do by infusing risk awareness into company culture. It’s no small task; one member said he’d tried to kickstart a company-wide risk awareness culture, but it didn’t take.
  • The first time around, his audience—risk owners and business unit heads—were enthusiastic about the concept of making risk awareness part of the culture. But in practice, they weren’t that active. “They were happy to see me doing the actual work,” he said.

Insurance. Rising insurance premiums are key to understanding some of the spotlight shining on ERM. Companies are looking at ways to spend less, and through this lens, ERM is seen as an exercise in knowing better which risks require an insurance policy and which can be mitigated through thoughtful application of good risk management protocols.

  • For instance, instead of shelling out cash for extensive coverage of a cyber-risk policy, why not analyze where the weaknesses are and mitigate them through increased vigilance?
  • “We’re a facing hard insurance market,” said one member of NeuGroup’s Treasurers’ Group of Thirty. “If there’s opportunity to revisit risk retentions, ERM can help put it into context,” a discussion this member’s company is having around ERM.

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Justin Jones
In Banking, Cash & Working Capital, Neugroup

Tapping the Power of In-house Banks to Turn Cash Puddles into Pools

Mega-cap treasurers and PwC discuss multiple benefits of IHBs and some complexities of structuring them. 

Treasurers not sold on the value of in-house banks (IHBs) often tell Damien McMahon, a partner at PwC, “We have cash pooling already, and therefore we have a kind of in-house bank,” he recently told a group of NeuGroup members from mega-cap companies.

  • In reality, though, many of the treasurers may have what Mr. McMahon called “cash puddles,” not cash pools.
  • PwC and treasurers from two member companies described turning dozens of small puddles into large cash pools by implementing truly global in-house banks at each company.
  • Among the takeaways from one of the treasurers: The cost savings made possible by the IHB are an added benefit to the bigger goal of achieving the increased efficiency and control IHBs bring to liquidity management.

Mega-cap treasurers and PwC discuss multiple benefits of IHBs and some complexities of structuring them. 

Treasurers not sold on the value of in-house banks (IHBs) often tell Damien McMahon, a partner at PwC, “We have cash pooling already, and therefore we have a kind of in-house bank,” he recently told a group of NeuGroup members from mega-cap companies.

  • In reality, though, many of the treasurers may have what Mr. McMahon called “cash puddles,” not cash pools.
  • PwC and treasurers from two member companies described turning dozens of small puddles into large cash pools by implementing truly global in-house banks at each company.
  • Among the takeaways from one of the treasurers: The cost savings made possible by the IHB are an added benefit to the bigger goal of achieving the increased efficiency and control IHBs bring to liquidity management.

IHB objectives. Mr. McMahon said one of the treasurers was adamant that the IHB maximize the centralization of the company’s liquidity “back to the US,” a key, but often elusive, goal for most treasurers. The company’s other objectives included:

  • Simplifying cash pooling structures to address cash fragmented throughout the company.
    • The other treasurer that worked with PwC said the biggest driver for establishing the IHB was turning more than 50 “puddles” into two large, centralized cash pools, allowing the investment team to achieve higher yields. “That dwarfed from a value point of view all the other benefits.”
  • Minimizing the number of banks and bank accounts by insourcing services, reducing the fees paid to banks.
    • “A lot of this is to pull away the reliance on third-party banks and bring most of that back in-house,” the first member said. Doing that will produce an 80% reduction in the number of banks the company uses and a 30% drop in physical banks accounts (see graphic below).
  • Centralizing global FX exposures. “There were some trades happening in opposite directions on different sides of the Atlantic and that wasn’t efficient,” Mr. McMahon said about the first client.
    • The other client’s treasurer said, “We ended up with a lower set of exposures we needed to hedge, so it reduced the notional on our balance sheet hedging program,” reducing fees and raising efficiency.
    • “And we reduced the number and volume of spot FX trades we did because of all the intercompany settlement,” another source of savings.
  • Building a scalable and future-proof infrastructure to automate and streamline processes, critical for large, high-growth companies.

Icing on the cake. “When I went into this project it wasn’t really about a cost savings overall; it was mostly looking for efficiencies and control,” the treasurer who reduced bank accounts by 30% said. “But what we did get was a big dollar savings and I think that came holistically, which was a great way to look at it.”

Other IHB benefits. Other members shared additional benefits their companies have reaped from IHBs:

  • Reduced credit exposure. One member called the reduction of credit exposure to banks made possible by his company’s IHB structure one of the biggest benefits. The company, he explained, has higher ratings than a majority of its banking partners.
    • “We’ve eliminated significant counterparty credit exposure” by being able to invest excess cash in US treasuries or prime funds, for example, he said. The company’s alternatives in countries including Argentina and Indonesia aren’t as “robust,” he added.
  • Tax. “There can be some huge tax synergies from this, depending on how it’s structured, where it’s located, etc.,” this treasurer said. “We have found this to be a real value-add both on a pre-tax as well as a tax basis.”
  • Cash ownership. Another treasurer noted that cash is a corporate asset managed by treasury, not business units. “By centralizing and aggregating everything up into an in-house bank or pooling structure, it kind of removes that business unit sense of ownership of that cash,” he said.

One big pool? One of the treasurers listening to the presentation asked what Mr. McMahon called the million-dollar question: “We have two cash concentration structures, one in the US and one offshore. And my big question is how do I get to one pool? How do I move that liquidity daily from our international pool? But if tax law changes I want to be able to unwind it quickly.”

Complexity. The answer is not simple, given that multiple tax, accounting, banking and legal considerations must be evaluated and the exact answer will depend on each companies’ unique facts and circumstances, Mr. McMahon said.

  • However, the two PwC clients found that the complexity could be reduced by establishing an international IHB entity and an overarching US IHB entity, he explained. Each consolidates the positions and settlements for their participants.
    • Liquidity flows can then be settled across these two entities, and participants can also settle global intercompany flows between each other in a controlled way via the IHB entities.
  • Both entities and their positions are managed using one single system and a standard set of processes and automations to take care of the detailed position keeping, accounting and reporting required to manage one combined global liquidity structure.
  • “It should be noted that a careful modelling and tax compliance study should be carried out to understand how much liquidity can be shared and what guardrails are needed to avoid adverse tax and accounting consequences,” Mr. McMahon said.
  • The added advantage of the two IHBs is that treasury can also have a ‘follow the sun” model of treasury support for the business as well as for global liquidity management.

Flexibility. As one treasurer remarked, this structure can also give the flexibility to efficiently manage tax compliance under both the existing tax rules enacted in 2017 and also any reversal or amendment of those rules passed during the Biden administration.

Good, not perfect. And the PwC client said while his company did not opt for the most efficient structure possible from a treasury perspective, “This is what makes legal happy, treasury happy and tax happy.”

  • Treasury and PwC evaluated three structures, each with sub-options. “We came to a realization that option 1 is the best. But within option 1, we have option 1a and option 1b that can still both work and that’s what we’re [working on] today.
  • “And we’re very close. We’re just about there to having the full structure in place.”

 

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Justin Jones
In Functional, Neugroup, Risk Management, Treasury Management

Making the Devil’s Advocate an Angel on Your Shoulder

NeuGroup risk managers make space for contrarians to question decisions and combat overconfidence.

Rather than shunning contrarians for challenging conventional thinking, corporates need to make sure their decision-making processes always include a constructive devil’s advocate—someone who forces teams to consider all the ramifications of whatever action—or inaction—a company is contemplating.

  • This was among the key pieces of advice given by Michael Zuraw, head of enterprise risk management at ON Semiconductor, during a presentation on decision-making at a recent ERM-focused NeuGroup meeting. He said this best practice applies to all collaborative teams.
  • “Cognitive biases can occur at any link in the [decision-making] chain,” Mr. Zuraw said. “When you’re making a big decision, you need a contrarian thinker who says, ‘Why do we believe that? What if we’re wrong?’”

NeuGroup risk managers make space for contrarians to question decisions and combat overconfidence.

Rather than shunning contrarians for challenging conventional thinking, corporates need to make sure their decision-making processes always include a constructive devil’s advocate—someone who forces teams to consider all the ramifications of whatever action—or inaction—a company is contemplating.

  • This was among the key pieces of advice given by Michael Zuraw, head of enterprise risk management at ON Semiconductor, during a presentation on decision-making at a recent ERM-focused NeuGroup meeting. He said this best practice applies to all collaborative teams.
  • “Cognitive biases can occur at any link in the [decision-making] chain,” Mr. Zuraw said. “When you’re making a big decision, you need a contrarian thinker who says, ‘Why do we believe that? What if we’re wrong?’”

Designate the devil’s advocate. Mr. Zuraw recommends team leaders designate a team member to play devil’s advocate in meetings. “You need to be able to identify, and provide space for, the realist in the room,” he said.

  • “This is the one who’s going to do a check and keep you honest with yourself and is going to help you identify and recognize biases that can creep into your decision.”
  • One member had worked at a company whose culture discouraged contrarian positions, going so far as to not invite staff members who always added a wrinkle to the latest plan with an objection or contrary opinion.
  • To combat this, the company implemented an idea endorsed by Mr. Zuraw: A devil’s advocate rotation that allows everyone on staff to play the role. “So everyone learns the skill of asking those questions, and everyone recognizes that it’s not frowned upon, it’s a value-add to the process.”

Learn from mistakes. One member said his company had once passed on making an acquisition, a decision the team is still “haunted” by. The problem: a failure to consider the risk of not doing the deal left the corporate too hesitant to pull the trigger.

  • When opportunity arose again, a willingness to question themselves—as a devil’s advocate would—prepared the team to make a better decision, resulting in the company’s largest acquisition ever.
  • “It was an enormous risk,” the member said, but by considering all sides, he believes the company made the right decision. “We would not be able to be as effective and efficient for our customers without the acquisition,” he said.

An object in motion. Many teams with established processes have what one member called a “bias toward inertia,” where teams are set in their ways and have a resistance to making any changes—another reason to include contrarians unafraid to voice doubts and bring up any potential risk.

  • To further combat inertia and paralysis, Mr. Zuraw also recommends what he calls a “pre-mortem” meeting right in the midst of a process to take stock, challenge key assumptions and prevent overconfidence.
    • “Making no decision is as big of a risk as any decision you could make,” he said.
  • “I think the concept of a gray rhino is a good one, and that speaks to the need for a pre-mortem,” one member said. “There are natural disasters, but a lot of things that do happen people thought about [and] knew was on the horizon, but nobody spoke up.”
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Justin Jones
In Banking, Neugroup, Talking Shop, Treasury Management

Talking Shop: Who Is Allowed to Open Bank Accounts at Your Company?

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

Member question: “We are trying to do some benchmarking: Do your board resolutions allow the treasurer (and others?) to open bank accounts or is it just limited to the CEO and CFO?”

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

Member question: “We are trying to do some benchmarking: Do your board resolutions allow the treasurer (and others?) to open bank accounts or is it just limited to the CEO and CFO?”

Peer answer 1: “Our resolutions, and in some cases powers of attorney (depending on the locale/type of entity), all point to the treasurer as having this authority.

  • “I suppose technically our CFO could also, but in practice it just isn’t realistic for [the CFO] to be involved in those activities.
  • “We also took it a step further and implemented a specific policy statement as well stating that, in effect, only the treasurer can do (or delegate) treasury related things with the typical list of what those are.
  • “We did this to cover ourselves in those challenging geographies where local entity board members claim they cannot legally abdicate their authority to others to do things like open bank accounts.
  • “So our policy [basically provides air cover to prevent local management executives from doing anything that we have decided to limit to the treasurer].”

Peer answer 2: “We have a treasury committee comprised of our CFO, controller and me. For bank accounts, we need approval from two members of the committee.”

Peer answer 3: “Resolutions empower me and my cash management directors in addition to key executive officers. Two signatures, like others. Almost never CFO or CEO involvement.”

Peer answer 4: “Ours specifies the treasurer can open bank accounts, and we no longer even put the CEO or CFO as signatories to our bank accounts.”

Peer answer 5: “Our company only allows the CFO to open bank accounts.”

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