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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 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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Justin Jones
In Banking, Libor SOFR, Neugroup

Pricing Loans Using SOFR: Wait for Banks or Take the Initiative?

Members discuss the Libor-SOFR transition, including contracts and other non-treasury Libor exposures.

Regulators want corporates and their banks to price new loans and other financial exposures using a USD Libor-replacement rate such as SOFR by the year-end deadline—just nine months away. But who should take the lead in this transition—the banks or the corporates?

  • That question and other issues that companies confront relating to the move away from Libor arose at a recent meeting of NeuGroup for Capital Markets sponsored by Wells Fargo.
  • The bottom line: Members and banks still have a lot to do and must face some big unknowns.

Members discuss the Libor-SOFR transition, including contracts and other non-treasury Libor exposures.

Regulators want corporates and their banks to price new loans and other financial exposures using a USD Libor-replacement rate such as SOFR by the year-end deadline—just nine months away. But who should take the lead in this transition—the banks or the corporates?

  • That question and other issues that companies confront relating to the move away from Libor arose at a recent meeting of NeuGroup for Capital Markets sponsored by Wells Fargo.
  • The bottom line: Members and banks still have a lot to do and must face some big unknowns.

First movers. In terms of pricing loans over SOFR, members said banks were in the best position to move first, given the size of their balance sheets and the large number of loans they hold.

  • But while it may seem perfectly logical that banks should take the lead because lending is what they do, discussions among bankers at NeuGroup meetings make clear that it’s not that simple.
  • The banks say they aren’t ready, one member said. He added that banks in the UK voiced similar sentiments about pricing his firm’s debt over SONIA, the UK equivalent of SOFR.
  • “We just said, ‘We’re doing it, here are the terms,’ and they all signed up for it.”

Follow the leaders. Proactively searching for and resolving Libor-related issues can devour treasury resources, and members agreed that other market participants with broader and deeper exposures have greater incentive to lead the charge.

  • Among the players and participants seen as appropriate leaders are other corporates, banks, custodians and trustees.
  • “So we can be fast followers,” said one member, adding, “But as the date gets closer my anxiety is starting to build.”
  • Another member is actively pushing for a solution in the securitization market where his company is a major player. “The leaders in specific segments have to be thoughtful and help solve issues,” he said.

Non-treasury exposures. One member raised the issue of who beside treasury has been involved with determining companies’ total exposure to Libor.

  • One member said his treasury is coordinating the effort but, “We’re relying on support from other functionaries to go through the contracts.”
  • Another member said his team had anticipated finding USD Libor exposure in leases and procurement contracts across the company but was pleasantly surprised to find it limited mostly to treasury.
  • A corporate restructuring by one company prompted it to search for Libor among tens of thousands of contracts. Only a few involved Libor issues, including late fee rates on one-off supply contracts. The issue for peers, the member said, “is whether to find them or deal with the small tail risk when it comes up.”
  • Two companies found employee stock ownership plans (ESOP) with Libor-priced loans spanning decades that will likely have to be negotiated bilaterally, and another found exposure in its captive financing unit.

Term SOFR? One member brought up banks that recommend a daily average of SOFR with observation shift, adding wistfully, “It would be really nice if there was a [forward-looking] term SOFR.” Other members agreed but expressed some doubts.

  • One member mentioned insufficient liquidity supporting a term SOFR raising concerns about renewing a revolving credit over a daily-average SOFR, since “flip” clauses in credit agreements could change the rate to the term version before enough liquidity emerges. “An opaque market is what got Libor into trouble in the first place,” he said.
  • Another member recalled a Fed official saying at a recent ARRC meeting that a term SOFR could increase banks’ hedging costs, prompting them to avoid such transactions or pass on costs to corporate clients.
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Justin Jones
In FX, Risk Management

Cut the Static: An FX Risk Manager Transitions to Dynamic Hedging

Standard Chartered guides a client to hedging that requires more analytics but aligns more with risk management goals.

The increased frequency of so-called black swan (or gray rhino) events roiling currency markets recently has more corporates establishing or revamping FX hedging programs designed to minimize earnings volatility. They face a host of decisions involving which exposures to hedge, timing, instruments and overall approach—static, dynamic or somewhere in the middle.

  • At a recent meeting of FX risk managers, sponsor Standard Chartered, along with a NeuGroup member that is a client of the bank, explained how and why the corporate shifted from a static hedging program to one that is dynamic—as well as the pros and cons of the company’s move and those of other approaches.

Standard Chartered guides a client to hedging that requires more analytics but aligns more with risk management goals.

The increased frequency of so-called black swan (or gray rhino) events roiling currency markets recently has more corporates establishing or revamping FX hedging programs designed to minimize earnings volatility. They face a host of decisions involving which exposures to hedge, timing, instruments and overall approach—static, dynamic or somewhere in the middle.

  • At a recent meeting of FX risk managers, sponsor Standard Chartered, along with a NeuGroup member that is a client of the bank, explained how and why the corporate shifted from a static hedging program to one that is dynamic—as well as the pros and cons of the company’s move and those of other approaches.

Static scorecard. Standard Chartered’s presentation described a static hedge execution style as one where a corporate hedges all its exposures at the beginning of the year, a simple approach with minimal execution costs.

  • The major downside of static strategies, though, is the year-over-year volatility they create, the bank said.
  • The NeuGroup member said the rigidity of the static approach also left the company “fully at the mercy” of markets and bank counterparties because hedging needed to be completed by a certain time each year.

Defining dynamism. To reduce volatility, better manage FX risk and allow treasury to take advantage of favorable markets, in the last year Standard Chartered has helped guide the corporate to a more dynamic approach.

  • The policy for forecasted cash flows prescribes hedge coverage levels for up to one year out. Now, though, the company is transitioning to a quarterly, layered hedging strategy, which also extends to forecasts beyond the one-year horizon.
  • In its presentation, Standard Chartered illustrated how a layered approach reduces quarter-over-quarter gains and losses from FX volatility.
  • The disadvantage of a dynamic approach is that it is more time consuming to track exposure changes and execute the resulting more frequent hedges. And the more flexibility you build into the program, the more time-consuming it becomes—which is why a decision framework is important.

Exception, not the rule. Today, the member is able to take several factors into account when deciding what to hedge, how much and when to meet established risk tolerance levels. That puts him among the one-third of members who said in an in-meeting poll that they can dynamically hedge their exposures; two-thirds of respondents have either no flexibility on timing hedge execution or some flexibility, but only within a month or quarter (see chart).

Exposure and confidence. The most important factor is confidence in the exposure forecast. For risk managers, higher confidence in exposure data allows a higher hedge ratio without risking over-hedging (important to avoid for hedge accounting reasons).

  • The company’s hedge ratios take into account the degree of certainty of forecasted exposures, while contractual exposures by their nature are more certain but may instead have some timing variances.
  • Balance sheet exposures should be “majority hedged,” according to the company’s presentation.
  • Its instrument tool kit includes outright forwards, swaps and NDFs, as well as options (calls, puts and collars).

A decision framework. Under the member’s new program, a decision framework helps determine which instrument or combination of instruments will be chosen to hedge at any given time.

  • Treasury has built a spreadsheet “monitor” that looks at market spot and forward rates, forward points (carry), at-the-money options premium and the 25-delta skew (call-vs.-put volatility differential), which can be compared to their three-year historical levels.
  • Backtesting shows how instruments have performed under different circumstances and can be used to support the instrument decision.
  • The team is allowed to take in-house views on currencies, supported by purchasing-power-parity (the long-term fair value of currencies) and other factors, tempered by bank forecasts. A caveat on research is to pay extra attention to very divergent views to see if the publishing date of the bank’s forecast might explain it.
  • Depending on the strength of the in-house view, collar strikes may be set to incur some premium cost (vs. a zero-cost collar) to capture potential for upside participation.
  • The performance or success of instrument choices is benchmarked against a strategy using only forwards.
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Justin Jones
In Banking, Regional

Fight and Flight: Bank Fee on SEPA Payments From UK Sparks Pushback

Corporates respond by moving accounts to other countries, pushing banks to drop the fee and lobbying regulators.

The number of banks charging corporates a fee for payments going from the UK to countries in the single euro payments area (SEPA) is growing, and some NeuGroup members are taking action to minimize the impact.

  • Echoing what treasurers in Europe reported at a recent meeting, the head of cash product at a UK-based bank said that “a lot more banks in Europe are now charging” the fee, including some large institutions.
  • One member is working with a bank (that does not charge the fee) to lobby regulatory bodies to limit these types of fees and deductions. “We view this as a fee grab in a post-Brexit world of financial services,” he said.

Corporates respond by moving accounts to other countries, pushing banks to drop the fee and lobbying regulators.

The number of banks charging corporates a fee for payments going from the UK to countries in the single euro payments area (SEPA) is growing, and some NeuGroup members are taking action to minimize the impact.

  • Echoing what treasurers in Europe reported at a recent meeting, the head of cash product at a UK-based bank said that “a lot more banks in Europe are now charging” the fee, including some large institutions.
  • One member is working with a bank (that does not charge the fee) to lobby regulatory bodies to limit these types of fees and deductions. “We view this as a fee grab in a post-Brexit world of financial services,” he said.

Quick background. Corporates began seeing these so-called fees for receipt in January, following the last-second Brexit deal finalizing the UK’s exit from the EU and the European Economic Area (EEA). Withdrawal from the EEA meant banks could start charging for receipt of SEPA payments from non-EEA accounts. 

  • This put the UK in the same category as Switzerland, which is also a member of SEPA but not in the EU.

Unacceptable or fair? In some cases, the receipt fee is deducted from the principal payment by the beneficiary bank. As SEPA payments are mostly used for payroll and suppliers, members said they find this “unacceptable.” When the UK was still in the EU, payments were protected from deduction by a regulation called the Payment Services Directive 2.

  • The receiving banks for payroll and supplier payments are chosen by beneficiaries, making it very difficult to change banks. That gives the existing banks pricing power, at least in the short-term, to charge new fees.
  • “What does SEPA membership mean, if it doesn’t mean the absence of fees?” said NeuGroup senior executive advisor and former banker Paul Dalle Molle. “Why should Switzerland and the UK be a member of SEPA if this is the result? It doesn’t make sense.”
  • One bank with a large European presence told NeuGroup Insights that these “new fees are likely being applied to compensate for the increased costs caused by Brexit for the banking system.” The bank did not say whether it charges the fee.

Fighting back. In some cases, members report success contesting the SEPA payment fee. “I advise [you] to challenge the fee with the bank, or find another bank,” one member said. He acknowledged that is an unsustainable solution for corporates that may use a UK-based account for payroll across the continent.

  • To get around the fees, multiple members who once used UK-based accounts for payroll have opened accounts in other locations across Europe, with Dublin and Luxembourg emerging as hot spots. However, migration could prove costly for a company with a limited number of accounts.
  • Another member has resorted to issuing wire transfers, which incur higher fees than SEPA payments but are more predictable and guarantee protection of the principal payment.
  • “Lobbying, using wires, switching to EEA-based remitting accounts and switching banks are all smart things to do,” said Mr. Dalle Molle. “When the European regulators hear complaints and see a drop in SEPA volume, they’ll go back to the banks and say, ‘What are you doing?’” 
  • US and UK-based banks are also developing solutions to resolve the issue. For example, one member is working with a bank to develop a technical solution—a monthly subscription in which the bank guarantees protection of the principal and eats the cost of SEPA fees.

Varying fee sizes. As the fees are applied in a case-by-case basis, the amount charged can also vary. Depending on the bank, this could be applied as a fixed fee or a percentage.

  • One NeuGroup member said the fee charged was around three euros. But another member said he was told a large payment would incur a fee of 600 euros, which he called “bordering on the completely ludicrous.”
  • Another member said that his company is also seeing a charge based on volume, which he called “outrageous,” though he is only seeing it from “a select few [banks], it’s not yet across the board.”
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Justin Jones
In Banking, Talking Shop, Technology

Talking Shop: Payment Platforms; Supply Chain Finance; Bank Capital

Member question 1 (payment platforms): “We are having discovery calls with FIS, TIS and Fides to understand their value propositions.

  • “Our main pain points are having all sorts of e-banking portals, and arise when we onboard new entities (recently acquired) and penetrate new countries.
  • “Anybody having any experiences with the vendors listed? And suggestions how to best select (did you RFP this business?).”

Member question 1 (payment platforms): “We are having discovery calls with FIS, TIS and Fides to understand their value propositions.

  • “Our main pain points are having all sorts of e-banking portals, and arise when we onboard new entities (recently acquired) and penetrate new countries.
  • “Anybody having any experiences with the vendors listed? And suggestions how to best select (did you RFP this business?).”

Peer answer 1: “We have used TIS for some years now and are quite happy. They have a large number of banks in the system and it’s pretty easy to connect to these.”

Case study: NeuGroup Insights published an article on how TIS helped The Adecco Group. And watch this space for details about a NeuGroup virtual interactive session in May featuring TIS.

  • “However, we did make an amendment to the buyer joinder agreement to narrow the terms under which the direct debit may occur.
  • “It specifies that the debit is limited to amount in the payment instruction, or any obligation to pay an amount equal to any payment obligation, and so on.
  • “The SSC-A/P function then uses a clearing account process in SAP to ensure 1:1 matching to expectations.”

Member question 2 (supply chain finance): “[Our bank] is telling us that companies permit them to direct debit their accounts for supply chain finance (SCF) in EMEA due to ECB rules, and that that it is common practice.

  • “Is anyone else allowing direct debt in EMEA for SCF?”

Peer answer 1: “Yes, we are rolling out SCF in Europe and are allowing direct debit under [that same bank’s] process.

  • “However, we did make an amendment to the buyer joinder agreement to narrow the terms under which the direct debit may occur.
  • “It specifies that the debit is limited to amount in the payment instruction, or any obligation to pay an amount equal to any payment obligation, and so on.
  • “The SSC-A/P function then uses a clearing account process in SAP to ensure 1:1 matching to expectations.”

Member question 3 (bank capital): “I’m interested in getting some peer feedback regarding the internal monitoring of capital ratios beyond just the standard regulatory minimums.

  • “What types of reporting/tracking are people using? Are they utilizing multiple points of escalation based on various internal targets? Are the internal levels based on actuals, forecasts, both?
  • “If forecasts, what time frames are being used? How proscriptive is everyone when it comes to taking action based on dropping below an internal threshold?”

Peer answer 1: “We do monthly forecasts and ALCO where we report out actuals and provide an outlook for a few quarters (depending on the time during the year). 

  • “Our focus tends to be common equity tier 1 and tangible common equity ratios, although we also show ALCO leverage, tier 1 and total risk-based. Our TCE ratio limit is self-imposed at [a certain percentage].
  • “For all other ratios we set the limits at the defined ‘well capitalized levels’ plus 1.0% to serve as an early warning limit. 
  • “We also share our typical operating range of the ratio, which is higher. If we were to break a ratio, there is a process in place to discuss with the enterprise risk committee of the board and settle on a course of action to bring it back under compliance. This hasn’t happened since I’ve been here.”
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Justin Jones
In Banking, D&I

Beyond Deposits: An FDIC Fund Aims to Boost Equity Capital at MDIs, CDFIs

Mission-Driven Bank Fund will offer corporates a way to infuse equity capital in banks serving minority communities.

Corporations looking to make impactful investments in minority communities, but not through bank deposits, may want to consider a new partner: the Federal Deposit Insurance Corporation (FDIC)—the federal agency that insures deposits.

  • Representatives from the FDIC and a large asset manager that is acting in an advisory role described what’s being called the Mission-Driven Bank Fund (MDBF) at a recent meeting of NeuGroup’s diversity and inclusion (D&I) working group.
  • The fund, slated to launch later this year, will offer corporates a path to provide equity capital to minority depository institutions (MDIs) and community development financial institutions (CDFIs) that serve low- and moderate-income communities at higher rates than mainstream banks, the FDIC said.

Mission-Driven Bank Fund will offer corporates a way to infuse equity capital in banks serving minority communities.

Corporations looking to make impactful investments in minority communities, but not through bank deposits, may want to consider a new partner: the Federal Deposit Insurance Corporation (FDIC)—the federal agency that insures deposits.

  • Representatives from the FDIC and a large asset manager that is acting in an advisory role described what’s being called the Mission-Driven Bank Fund (MDBF) at a recent meeting of NeuGroup’s diversity and inclusion (D&I) working group.
  • The fund, slated to launch later this year, will offer corporates a path to provide equity capital to minority depository institutions (MDIs) and community development financial institutions (CDFIs) that serve low- and moderate-income communities at higher rates than mainstream banks, the FDIC said.

Equity capital’s multiplier effect. One advantage of infusing equity capital into MDIs and CDFIs is that an equity investment “helps mission-driven banks far more than deposits,” according to an FDIC slide (see chart, below).

  • Every dollar of equity capital invested, the FDIC says, can increase lending by a multiple of the original investment, while every dollar of deposits can only increase lending up to the amount of the deposit.  
  • The treasurer of a large technology company that is an anchor investor in the fund said, “We’ve looked at a lot of different ways [to invest], we looked at deposits, but we wanted impact. We feel like we’ve moved up.”
  • Because of regulatory requirements governing capital ratios, many MDIs and CDFIs need equity far more than deposits so they can increase the amount of loans they make to borrowers.

Facts and figures. Once the MDBF launches, the FDIC says, it will be run by an independent fund manager selected by the fund’s founding investors. The FDIC will not be an investor and will play no role in fund management.

  • The FDIC’s goals for the MDBF are initial capital commitments in the range of $100 million to $250 million and a target of $500 million to $1 billion when fully established.
  • Once selected, the fund manager will work with an investment committee to hear quarterly proposals from MDIs and CDFIs for potential investments. Those could include:
    • Direct equity
    • Structured transactions
    • Funding commitments
    • Loss-share arrangements
  • The FDIC says it is targeting “a minimal rate of return to investors, who can reinvest any returns in the fund or in aligned non-profit enterprises that support mission-driven banks.”

Investment policy changes? One NeuGroup member from a corporate that worked with the FDIC said the fund meets the company’s priorities. “Our primary focuses are risk, then impact, and then return, in that order,” he said. “The beauty is you get to do it all in one product. They do all the work for you instead of needing to hire a team.”

  • The company did have to change its investment policy to accommodate investment of equity capital. “Lots of corporations are unable to do equity, but it’s an important part of [our] portfolio,” the member said.
  • Another member said that as long as the investment aligns with the company’s stated values and mission, this kind of change isn’t too difficult.
  • But in a survey at the meeting, half the members responding said it would be either somewhat or very difficult to change investment guidelines to allow or create exceptions to make investments in MDIs or CDFIs in the form of equity capital.
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Justin Jones
In Banking, Technology

A Push in the Right Direction to Simplify Bank Fee Analysis

As bank fee statements slowly standardize, corporates and banks can work together to make the analysis process simpler.

Analyzing bank fees to uncover outliers remains a thorn in the side of treasury teams—in no small part because the banks code their fees and transmit the files to corporates in many different ways. And while standardization is improving, companies should keep the pressure on banks to bring more clarity to the opaque world of bank fees.

As bank fee statements slowly standardize, corporates and banks can work together to make the analysis process simpler.

Analyzing bank fees to uncover outliers remains a thorn in the side of treasury teams—in no small part because the banks code their fees and transmit the files to corporates in many different ways. And while standardization is improving, companies should keep the pressure on banks to bring more clarity to the opaque world of bank fees.

  • That was among the takeaways at a recent NeuGroup meeting of assistant treasurers who were joined by Larry Williamson, head of healthcare, corporate and investment banking at Societe Generale and Tonette Palencia, a cash management sales manager at the bank.

Forcing the issue. “It’s perfectly appropriate to guide banks in the right direction,” Mr. Williamson said. “In the context of selecting service providers, I would be highlighting that a key criteria and consideration is for banks to provide their billing information in the forms that work for you and in line with more of a universal standard.”

  • He added, “If I’m a corporate client, I’d be saying ‘We want our billing to look like this, are you able to do that?’”
  • Ms. Palencia cited the example of a client that requested the corresponding service codes to the products on their billing statement as part of their analysis to evaluate and compare their banking fees.

State of play. As it stands, many reports from banks in the US come in what’s called EDI 822 statements, an e-billing file standard that one member described as “pretty raw.” The member said companies “have to have special programs to ingest it, or some pretty sharp programmers to decode it.”

  • Ms. Palencia said that many banks base these statements on AFP service codes, but some might classify products differently from others, so it is “a lot to reconcile, and it takes a bit more on [a company’s] side to analyze it more in-depth.”

Hope in BSB reporting? Bank Service Billing (BSB), including the Twist and ISO 20022 standards (camt.086), offer more standardization globally, since EDI 822 is used only in the US.

  • “At some point, you want to get to a common utility, and Twist may be a part of that, with one single electronic database providing inputs from banks instantly,” Mr. Williamson said.
  • One member said some of the international banks he works with use the Twist format, which “is almost like an XML format, it’s a little more standard.” The member said Twist files still need to be run through a software tool “to make heads or tails,” though it can be as simple as analysis in Microsoft Excel.
  • Twist is based on AFP’s service codes but has closer to 800 options, which offers a measure of simplicity.
  • SocGen is working on a project to roll out BSB files more broadly. “Because we’re a European bank, that’s where most of our availability is,” Ms. Palencia said. “But a lot of the banks have also rolled it out.”

Third-party solutions. Members spoke highly of solutions from Redbridge and Fiserv, which can make the analysis process simpler but whose costs need to be evaluated in the context of how much savings they bring.

  • One member that uses Weiland BRMedge from Fiserv said the system is effective in tracking “pops” in fees. “We rely on it to find anomalies, and we go back to the banks to get those fees reduced,” he said. “It’s been helpful, but it takes a lot of time and effort to maintain and get up and running.”
  • Another member, after researching the market for a few months, has a contract to implement Redbridge’s HawkeyeBSB later this year. “We’re expecting to be able to see 60% to 70% of our bank fees globally,” he said. “It does almost all the work with all the statements, and we just take a look at the analysis.”
  • Mr. Williamson expressed surprise that corporates need these tools to navigate around bank billing systems. “In this world of digitization, we’ve still got banks thinking of requiring corporate clients to work around the inefficiencies of billing, which surprises me,” he said.  
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Justin Jones
In Banking, Risk Management, Technology

A Goldman Risk Management Tool Flying Under the Radar

FX risk managers talk up a Goldman Sachs solution called Capital Markets Atlas to measure value at risk.

To no one’s surprise, a recent meeting of NeuGroup FX risk managers included plenty of talk about well-known vendors of exposure identification solutions like FireApps and AtlasFX, FX trading platforms including FxAll and 360T, and a variety of ERPs and TMSs.

  • But not everyone in the large virtual room had heard of a self-service tool from Goldman Sachs that some members are using to measure value at risk (VaR). Making matters a bit confusing: the name of the solution includes the word “atlas.” As in Goldman Sachs Capital Markets Atlas, which is part of the firm’s broader Marquee platform.

FX risk managers talk up a Goldman Sachs solution called Capital Markets Atlas to measure value at risk.

To no one’s surprise, a recent meeting of NeuGroup FX risk managers included plenty of talk about well-known vendors of exposure identification solutions like FireApps and AtlasFX, FX trading platforms including FxAll and 360T, and a variety of ERPs and TMSs.

  • But not everyone in the large virtual room had heard of a self-service tool from Goldman Sachs that some members are using to measure value at risk (VaR). Making matters a bit confusing: the name of the solution includes the word “atlas.” As in Goldman Sachs Capital Markets Atlas, which is part of the firm’s broader Marquee platform.

Self-service VaR. Goldman marketing materials say Capital Markets Atlas provides clients with “independent access” to the bank’s risk and pricing models with tools that help them understand how “active markets impact exposures and solutions” using a web-based application that is free for the bank’s clients.

  • The first member to mention Goldman’s tool at the meeting emphasized the benefit for risk managers of being able to perform VaR analysis without waiting for a bank to do it for them.
  • “You can run it on a real time basis on your own,” he said. “You run analysis whenever you need.”
  • In an interview after the meeting, Ketan Vyas, managing director in Goldman’s corporate risk analytics business, said, “What’s new is that you can do it yourself.”

More member buzz. Another member said he was impressed by a demo of the tool late last year. “I perform a lot of risk analysis monthly and it seems like the [Goldman] tool may be more user-friendly/point and click,” he said. “I am not sure it is as robust as the tools I use, but seems like a solid starting place for analysis if nothing else.”

  • One risk manager asked peers to contact him if they are using the Goldman Atlas tool for VaR. “I’m super interested in your thoughts on it. We just started using it, and it has come very far from where it was two years ago,” he said.
    • Goldman added the VaR tool to Atlas in 2018; Atlas debuted in 2015.
  • “The GS Atlas system is about value at risk, which is modeling that helps to quantify the risk,” the member said.  So given risk profile A, what is the potential impact of B if nothing is done? This helps a corporate decide what risk to manage (helps us decide what to do),” he said after the meeting.

Risk decomposition. The tool includes what Goldman calls a “risk decomposition model” that uses “market forwards, volatility and historical correlation parameters to quantify VaR on an individual and portfolio level.” Goldman says this allows corporates to:

  • Identify optimal hedge portfolios to meet risk and hedging cost goals.
  • Track the key drivers of currency risk to target hedges more efficiently.
  • Compare multiple hedging strategies across an array of risk metrics.

Sample portfolio. Goldman’s marketing material shows how VaR provides valuable insights for risk managers about their portfolios.

  • As the table above shows, the Canadian dollar (CAD) and the Mexican peso (MXN) contribute the largest amount of risk on an individual basis to a sample portfolio. See the figures marked 1.
  • “But when considered in the context of the broader portfolio of FX exposures, CAD actually represents a much lesser risk (~24% of the sample company’s total risk instead of ~38% if calculated on an individual basis),” Goldman’s slide says. “And MXN represents a much larger risk (70% in the context of the portfolio vs ~39% on an individual basis).”
  • The large difference in the figures marked 2 is explained by the differing levels of volatility of the two currencies.
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Justin Jones
In Pension and Benefits, Risk Management

Spring and Derisking in the Air for Defined Benefit Pension Plans

A strong stock market and higher interest rates plus regulatory relief bring smiles to some DB plan managers.

An upbeat mood befitting the beginning of spring prevailed at this week’s meeting of NeuGroup for Pensions and Benefits. With the yield on the 10-year US Treasury note rebounding to pre-Covid levels and equities trading in the vicinity of all-time highs, a summer of full funding is within sight for many plans.

A strong stock market and higher interest rates plus regulatory relief bring smiles to some DB plan managers.

An upbeat mood befitting the beginning of spring prevailed at this week’s meeting of NeuGroup for Pensions and Benefits. With the yield on the 10-year US Treasury note rebounding to pre-Covid levels and equities trading in the vicinity of all-time highs, a summer of full funding is within sight for many plans.

  • Below are takeaways distilled by NeuGroup executive advisor Roger Heine, who helped lead the meeting.

Derisking in fashion. Members at several companies did not stay on the sidelines—they jumped into the game by sticking to established policies to derisk as financial markets moved in their favor. More than one said their moves came after hitting glide path triggers.

  • These pension fund managers reduced equity exposure and increased fixed income, in some cases by using derivatives to move quickly with minimal transaction costs. 
  • Members are also well aware that some of the stocks within the big market indices such as the S&P 500 trade at bubble-level multiples, with investment managers steering clear of these potential reefs.

American Rescue Plan Act. More spring thawing arrived following the passage this month of the American Rescue Plan Act (ARPA).  Kevin McLaughlin, of meeting sponsor Insight Investment, described how alterations to complex funding calculations effectively mean no required pension funding for years to come.  

  • While this will particularly aid highly leveraged companies with big pension deficits, most of the NeuGroup participants with better funded plans really won’t be impacted.
  • These members indicated that their funding decisions are more driven by avoiding steep variable rate PBGC fees or potentially triggering tax deductions should corporate tax rates increase in the future.  
  • The ARPA also provides $86 billion to bail out qualifying multiemployer pension funds; but again, this has little impact on members except that these funds might compete for investment-grade fixed-income product down the road.

Covid mortality. In response to a member question, Mr. McLaughlin also addressed whether Covid mortality—approaching 550,000 in the US—will have any impact on mortality tables used to calculate pension liabilities.  

  • While there is a likely a onetime impact on liabilities, he said it is unlikely that there will be any material shift in life expectancy as negative factors such as deferred health screenings and weakened Covid survivors may be offset by better health practices and pharmaceutical breakthroughs following Covid vaccine innovations.
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Justin Jones
In Cash & Working Capital, Risk Management, Talking Shop

Talking Shop: How Do You Use Counterparty Exposure Information?

Member question: “Does your organization review counterparty exposure? If so, how do you use this information?

  • “What exposure types do you include? Cash, bank products, derivative contracts, other?
  • “I understand that there are some organizations that set limits to how much exposure can be outstanding per counterparty. Does anyone have this practice in place?”

Member question: “Does your organization review counterparty exposure? If so, how do you use this information?

  • “What exposure types do you include? Cash, bank products, derivative contracts, other?
  • “I understand that there are some organizations that set limits to how much exposure can be outstanding per counterparty. Does anyone have this practice in place?”

Peer answer 1: “I monitor this frequently and have limits tied to my overall assets. Here are some items we look at for our liquidity providers:

  • Jurisdiction
  • Regulatory environment and views
  • Settlement process
  • Liquidity on their platform
  • Any policies and procedures that are shared; shared financials when applicable
  • Customer service, which is always a big one.”

Peer answer 2:  “We monitor our counterparty exposure closely, and formally review it at a leadership level at least once a quarter (part of our policy). We bucket our exposures into three different categories: operating cash, investments and derivatives.

  • “We have a pretty strict policy on investments/excess cash; so when monitoring/reporting, we’re making sure we’re within our global limits and call out any issues we have experienced or potentially could occur in the near future. We have many local markets that manage their cash directly, so we’re making sure we’re within limits from a global perspective.
  • “The derivative exposures are monitored from a collateral perspective and help when looking at new derivatives and deciding which banks we may choose to execute with. We don’t have a limit on the amount outstanding for derivatives; we just monitor to make sure CSAs are working as intended.
  • “The operating cash exposures are monitored differently as we’re required to have various bank accounts due to local market regulations. We don’t have a policy we’re adhering to for this section of cash but make sure we know where all our cash is—and where to focus first if something were to occur globally (Covid pandemic, financial crisis, etc).”
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Justin Jones
In Banking, FX, Risk Management

A Risk Manager Leveraging Flexibility to Benefit from Volatility

FX meeting sponsor Standard Chartered: Hedge policy flexibility may decide if volatility is treasury’s friend or foe.

Volatility in foreign exchange, commodity and other markets sparked by the pandemic presented risk managers with challenges to their hedging programs. And while some corporates ended up with financial pain, others turned the volatility to their advantage.

FX meeting sponsor Standard Chartered: Hedge policy flexibility may decide if volatility is treasury’s friend or foe.

Volatility in foreign exchange, commodity and other markets sparked by the pandemic presented risk managers with challenges to their hedging programs. And while some corporates ended up with financial pain, others turned the volatility to their advantage.

  • At a recent meeting of NeuGroup for Foreign Exchange sponsored by Standard Chartered, a representative of the bank used the positive experience of one member to underscore the benefits of hedging policies that give risk managers flexibility in how and how much to hedge, and for how long.

What you need to take advantage. “The volatility we’ve seen has been advantageous,” said the member. “We’re coming at it from a different perspective.” Unlike many members who have long exposures, in most countries, the company “is short, selling dollars, buying local currencies,” she explained.

  • The member described her company’s hedging policy as “very flexible; we use forwards and options—zero cost collars.” Treasury also has flexibility in how much to hedge, all the way up to 100% of the company’s exposures.
  • There are “no stipulations,” and the company’s traders “develop their own strategies” for hedging, she said.
  • “Right now we’re experiencing positive OCI (other comprehensive income) and mark-to-market gains,” the member told peers. “This is a good story for us.”

Nimble and quick. Standard Chartered’s head of client analytics said that policy flexibility like what exists at the member company gives corporates the ability to be “nimble and quick,” adding that, “Volatility can be your enemy or your friend depending on your flexibility.”

  • In addition to a flexible policy, an efficient trade approval process for trades also allow risk managers to add “interesting hedges to capture the volatility and momentum” of markets roiled by news and events, she said.

Options in theory, not practice. It appears that most risk management teams have the policy approval to use options in their hedging strategies but do not use them. As the chart below shows, about two-thirds of the companies surveyed at the meeting said options are allowed at their companies but are not in use.

Why not options? In response to questions from Standard Chartered, members gave several reasons why they are not currently using options to hedge risk other than the cost of option premiums:

  • “We have approval to use from an accounting, auditor and policy perspective. But there still seems to be a stigma against them internally. We are self-insured, and options often feel like insurance, so it’s a culture thing.  We just need a good business case to help us get to the finish line!”
  • “It’s a corporate governance issue; it takes time and effort to get approval, but we want to.”
  • “We’re trying to find the right time and haven’t found the right opportunity to dip our toes in.”
  • “Showing the value [to senior management] is the hurdle.”

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Justin Jones
In FX, Risk Management, Technology

Racing to Change Horses: A Risk Manager’s Quick Switch to AtlasFX

An FX risk manager changed exposure ID systems and implemented the new solution in just three months.

Changing horses in midstream is never easy, but sometimes it’s the right move. One FX risk manager who did it explained to members of NeuGroup for Foreign Exchange the benefits of jumping off his existing exposure identification system and hopping onto AtlasFX—in an extremely compressed timeline of three months.

An FX risk manager changed exposure ID systems and implemented the new solution in just three months.

Changing horses in midstream is never easy, but sometimes it’s the right move. One FX risk manager who did it explained to members of NeuGroup for Foreign Exchange the benefits of jumping off his existing exposure identification system and hopping onto AtlasFX—in an extremely compressed timeline of three months.  

  • The time and effort spent making the switch under pressure paid off big-time. “We now have our dream state,” he said at a March meeting sponsored by Standard Chartered.  
  • The new solution has boosted the company’s exposure accuracy, leaving the FX team more time for “value-add” activities, he said. Changing vendors also resulted in significant cost savings.
  • The member started his presentation by thanking peers at two companies he called “early AtlasFX explorers.”

Quick pivot. One day last year, the member told AtlasFX that he needed to stick with his company’s existing exposure ID vendor for at least another year.

  • The next day, for various reasons, he reversed course, set up a meeting with AtlasFX and explained exactly what he wanted, after the company asked him to describe his ideal state.
  • About five days later, the member told AtlasFX that he was all in. Key to the decision was having confidence in the AtlasFX team’s ability to deliver the dream state and “confidence they could pull this off in three months,” the member said.
    • He had to make a go-no-go decision immediately or would have to renew the contract with the existing vendor.

Making the dream real. His dream included opening up AtlasFX to see foreign exchange exposure data from his ERP, SAP, and current hedges from his TMS, Reval. And he wanted the ability to click a button to approve and move trade actions to his trading platform, FXall.

  • Further, after trade execution, he wanted the info straight-through processed to both Reval (to book external trades) and AtlasFX, where intercompany trades would be automatically generated and sent to Reval.
  • “To pull it off, there needed to be connectivity between all systems,” he said. “SAP, AtlasFX, Reval and FXall—and a new, novel connection between AtlasFX and Reval to automate back-to-back hedging at FXall trade rates.”
  • AtlasFX made it all happen, giving the member the ability to execute the company’s balance sheet hedge program (see chart below) the way he envisioned.
    • “I honestly thought that dream would be impossible to achieve,” he said.
  • He said the extent of the exposure discovery and automation the FX team has with AtlasFX was not possible with the previous vendor.
  • The solution AtlasFX devised to solve the member’s connectivity and automation issues can now be used by other corporates that use the same ERP, trading platform and TMS, he added.

Domain expertise. The member’s presentation listed several other reasons his company decided on AtlasFX, including “domain expertise provided routinely throughout implementation.” He noted that the fintech’s founders have experience as treasury practitioners, and said its representatives “are risk managers like us, they speak the language.”

  • The reps, he added, “learn a company’s process when implementing the solution.” This paid off when the AtlasFX team suggested a simplification of the company’s settlement strategy for derivatives, helping the FX team better “distribute our workload,” he said.

Exposure determination technology. The member said AtlasFX has so-called query software that “adapts to changes immediately” in the company’s general ledger, saving hours of maintenance time each month compared to what was required before.

  • He said delays in making this type of change can mean treasury misses exposures, potentially resulting in insufficient or incorrect hedges.
  • While exposure determination is faster using AtlasFX, setting up the automation, interfaces and workflows making that speed possible “was definitely more complex,” the member said.
    • “That took some deep thinking and partnership between fintech vendors, and we had to involve our IT team for the connection to SAP data.”

Performance analysis. Using its previous vendor’s solution, the company was not able to successfully configure end-of-month hedging analysis to determine how well its hedges performed relative to actual accounting losses and expectations. “With our prior vendor, we were only able to get 25% of the process working,” the member said.

  • He said that with AtlasFX, 80% of the process was working within a month. His presentation read, “AtlasFX: In process of configuring and testing—we will get there!”
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Justin Jones
In Capital Allocation, Insurance

Where Captives Fit in the Insurance Puzzle Corporates Want to Solve

Captives offer tax advantages and flexibility, but treasury teams must make sure trapping cash in them is worth the benefits.

Rising insurance costs are putting more focus on captives, a solution that offers tax advantages, flexibility and lower costs than traditional insurance.

  • For those reasons and others, several members at a recent meeting of NeuGroup for Retail Treasury said they plan to expand their captives to cover more risk.
  • Other members say captives are not a good use of capital for their companies.

Captives offer tax advantages and flexibility, but treasury teams must make sure trapping cash in them is worth the benefits.

Rising insurance costs are putting more focus on captives, a solution that offers tax advantages, flexibility and lower costs than traditional insurance.

  • For those reasons and others, several members at a recent meeting of NeuGroup for Retail Treasury said they plan to expand their captives to cover more risk.
  • Other members say captives are not a good use of capital for their companies.

The case for captives. “A captive brings a few benefits, and a few challenges,” one member said. “From a financial standpoint, managing the risk within the captive brings a lower general cost than translating those risks to a third party. There are some limits, but the day-to-day expenses for, say, worker’s compensation, can be lower.”

  • One retail treasurer whose company works on a franchise model said she had success with an offshore captive, which did a “bang-up job,” and proved a boon as insurance costs began to rise.
  • “Instead of paying premiums to the insurance company and the insurer keeping those profits, we are able to charge our stores individually for our expected losses; and when we didn’t reach those expected losses, we kept those profits,” the member said.
    • “Over a 10 year period, we were able to build up capital to increase our retentions, which minimizes the actual risk transfer insurance that we’re buying from an insurer, and we’re able to weather market swings much better.”
  • Members also discussed the non-financial benefits of captives, including a faster claims process and control over the standards used to handle claims.

Capital concerns. Saving on taxes and speeding up the claims process “may or may not be sufficient reasons to start up a captive,” one member warned. The big reason: captives trap capital.

  • “From a P&L perspective, [a captive] looks good, as it lowers tax expense,” another member said. “However, from a capital allocation perspective, we have trapped capital and it returns less than our WACC, and much less than the targeted ROIC we expect the business to return. So it’s not a good use of capital for us.
  • “It’s a capital allocation decision at the end-of-the-day,” she added. “You can allocate capital to the captive, to the business or back to shareholders. This would be a circumstance specific to each company.
  • “For instance, for us, many states do not allow us to self-insure workers’ comp without an insurance company backing the self-insurance. In this case, the captive acts in that capacity. We would need to analyze whether it’s worth the capital.”

Monitoring performance. To combat capital inefficiency, multiple members recommended incorporating routine strategic reviews, measuring a captive’s benefits against its cost.

  • During one of these reviews, one treasurer saw that a captive established before he had the job had more cash trapped than he found justifiable reduced the “static” balance in the captive by one-third without significantly impacting the captive’s tax benefit.
  • Another member learned during an internal review that the location of the company’s international captive was no longer viable due to recent regulation.
  • “The captive was set up because it could provide direct policies to some companies, saving us some fronting costs,” the member said. “Since recent policy has been implemented [in this country], we’ve found the capital requirements and solvency requirements overly burdensome.
    • “We undertook a study to see if there is a different domicile that we should be using for that risk and opened a new captive and shifted those policies over.”
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Justin Jones
In Banking, Cash & Working Capital, Talking Shop

Talking Shop: Do You Have One Banking Partner for AR and AP?

Member question: “In the US, do you have one banking partner for AR and AP, or do you split the business, with one bank for AR and a separate bank for AP?

  • “For those that split the business, is this a share of wallet decision or an operational decision? Are there any operational pain points associated with having two banking partners?”

Member question: “In the US, do you have one banking partner for AR and AP, or do you split the business, with one bank for AR and a separate bank for AP?

  • “For those that split the business, is this a share of wallet decision or an operational decision? Are there any operational pain points associated with having two banking partners?”

Peer survey results: The majority of survey respondents use a single bank, with about one-third splitting the business.

Peer answer 1: “We have historically had two AR banks (two different business units), and one of those was different than our AP bank. Recently, we awarded the other AR business to the same bank and now we are fully concentrated.

  • “This was more due to the other bank leaving the AR space. From a share of wallet perspective, it has created an issue for us where we are too concentrated with one bank relative to the credit participation.”

Peer answer 2: “We currently have our US AR and AP with the same bank, but we are in the middle of an RFP for the US AP business. The share of wallet is an important factor for us, but technological capabilities of the bank (e.g., supporting POBO) is an even larger factor in the RFP.”

Peer answer 3: “We use one US AR/AP banking partner. We actually had one banking partner for our global cash management operations, but transitioned to a regional strategy through an RFP about five years ago.”

Peer answer 4: “In the US, we split the business, one bank for AR and one for AP. This was driven by a share of wallet decision but also a risk diversification and business continuity decision, which has proven to be helpful for us.”

  • Response to another peer’s question: “[There are] no manual transfers [between AR and AP], everything’s automated. Frankly, there are so many ways to do so—you just need to be creative and ask your bank the right questions.”

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Justin Jones
In Banking, Capital Markets, Senior Executive

No Sale: Convertibles at Great Prices Fail to Impress IG Corporates

Companies rated investment grade expressed reluctance to issue convertible bonds, despite favorable conditions.

It can be a nonstarter to raise the topic of convertible bonds with treasurers at investment-grade companies that can already issue debt with very low interest rates and don’t want their stock diluted when investors convert bonds to equity.

  • But many NeuGroup members whose companies have high credit ratings, including some at a recent meeting of NeuGroup for Capital Markets, say all their banks have pitched convertibles. And some treasury teams are also getting questions internally from CFOs and board members.
  • One member, echoing others, said 0% coupons and conversion premiums in the range of 50% to 70%, along with updated FASB accounting standards (see chart) that could simplify the process, makes convertible bonds “more attractive, but it’s an odd gamble when rates [for straight debt] are below 3%.”

Companies rated investment grade expressed reluctance to issue convertible bonds, despite favorable conditions.

It can be a nonstarter to raise the topic of convertible bonds with treasurers at investment-grade companies that can already issue debt with very low interest rates and don’t want their stock diluted when investors convert bonds to equity.

  • But many NeuGroup members whose companies have high credit ratings, including some at a recent meeting of NeuGroup for Capital Markets, say all their banks have pitched convertibles. And some treasury teams are also getting questions internally from CFOs and board members.
  • One member, echoing others, said 0% coupons and conversion premiums in the range of 50% to 70%, along with updated FASB accounting standards (see chart) that could simplify the process, makes convertible bonds “more attractive, but it’s an odd gamble when rates [for straight debt] are below 3%.”

Ideal conditions. One member with experience issuing convertibles before his company became investment grade said the most difficult part of the process was documentation, so the simplification by FASB is significant.

  • The FASB changes come amid market factors that have historically been good for convertible bond issuance:
    • Low interest rates
    • High equity prices and high valuations such as PE (pricing/earnings) ratios
    • High volatility levels
  • These condition have sparked a flood of companies with non-investment grade ratings, or no ratings, to issue convertibles. The Financial Times, citing Refinitiv, reported that in January and February, companies raised almost $34 billion, 68% more than in the first two months of 2020.

Dilution. The big downside to convertible instruments, NeuGroup members said, is dilution of a company’s common stock, which potentially makes the shares less valuable to shareholders.

  • “If the stock price goes to 10% above my strike price, my upper bounds, I’m diluting myself $4 billion, is that really worth 20 basis points of savings?” one member asked. “Your base is much higher because your company has doubled the wealth, but you still have to explain why you’ve taken $4 billion of dilution.”
  • The same member said, “As much as banks love to pitch convertibles because they can charge [more than for straight debt deals], some of our closest banks have been honest and been like, ‘You’ve heard about convertibles a lot I’m sure, but we don’t recommend them for investment-grade companies.’”
    • Another member added, “Some [banks] said, ‘If your stock goes up by a hundred percent, are you really still going to be worried about dilution?’ Economically, yes, I will.”
    • “I’ll echo those thoughts,” another member said. “Although there is great headline attractiveness, 50 basis points is not worth the risk of dilution.”

Pair convertible with a buyback? One member raised the intriguing idea of pairing a convertible issue with a stock repurchase plan to offset or hedge the dilution of additional stock. The member, however, said he’s still too skeptical of convertibles to embrace the strategy.

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Justin Jones
In Cash & Working Capital, Technology

Future State: Data Lakes, Straight-Through Processing and APIs

Takeaways from NeuGroup’s TMS working group featuring discussion of automation, consolidation of ERPs and more.

Straight-through processing (STP) that involves several systems, including payments and bank connectivity, sounds great. But members at a recent NeuGroup TMS Tuesday working group session agreed that efforts to accelerate STP first require a more detailed plan for the overall technology end state of treasury infrastructure.

  • For example, one member said his company is still unsure if it would be best to further integrate all payment processes into the ERP, or create a payment factory, which may sound like a nuance but requires technology process decisions.

Takeaways from NeuGroup’s TMS working group featuring discussion of automation, consolidation of ERPs and more.

Straight-through processing (STP) that involves several systems, including payments and bank connectivity, sounds great. But members at a recent NeuGroup TMS Tuesday working group session agreed that efforts to accelerate STP first require a more detailed plan for the overall technology end state of treasury infrastructure.

  • For example, one member said his company is still unsure if it would be best to further integrate all payment processes into the ERP, or create a payment factory, which may sound like a nuance but requires technology process decisions.  

Consolidation of ERPs. Members also discussed whether it is worthwhile to migrate all ERPs to one point, or to leverage the TMS to bridge several different ERPs. Conglomerates and serial acquirers usually end up with more ERPs than they want; but consolidating many into fewer or just one can be a slog.

  • A self-described “portfolio of companies” is leveraging its Kyriba implementation to connect multiple ERPs to it to enable all its vendor payments. 

Data lakes and one source of truth. For some very large companies in the NeuGroup Network, the number of ERPs and the enormous volume of payment transactions expose the vulnerabilities of a file-based process underpinning their payment execution.

  • More and more companies are driving initiatives to centralize all the data in a repository—a data lake—that can be the “source of truth” for a variety of systems tools supporting treasury processes like payments, rather than having data sent around in files.

Automating payments and compliance. Payment automation is a big challenge, but another is regulatory compliance, a job nobody gets a kick out of but that can cause problems in a complex world.

  • Managing bank account signers, FBAR reporting and KYC-related processes is high on the list of desired automation for members. Both FIS and ION have built bank account management tools; two members mentioned ION and said they were pleased with IBAM, its tool.

You have to start somewhere. With systems like FXall for FX trading and a TMS, the key is that all systems work together seamlessly.

  • Does that mean that the FX trading process, for example, needs to always start in one place for it to work? Not necessarily.
  • One member noted that the process can start either in FXall or in Reval, their TMS, and it will work either way. Other members concurred that both 360T and FXall have worked out the integration processes well.

With APIs, the key word is consolidator. APIs remain a hot topic, but MNCs with a large number of banking partners cannot have one API for each one. Similar to the service bureau concept, members agreed that they would not move from a direct connection like SWIFT unless there were some consolidator as a service-type vendor to reduce the APIs.

  • Separately, adopting APIs is something most members assume they will eventually do as part of another transformation or implementation, not as a standalone project.
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Justin Jones
In Capital Allocation, Capital Markets, Cash & Working Capital

Do Stock Buybacks Create Value or Just Return Capital to Investors?

Members at companies with excess cash discuss whether share repurchases generate economic value for shareholders.

ConocoPhillips on Wednesday announced it is resuming its share repurchase program, citing its “long-standing priority to return greater than 30% of cash from operations to shareholders annually.” The company is not alone:

  • A recent NeuGroup Peer Research Survey showed that 82% of respondents consider the return of excess capital the primary objective of their company’s share repurchase program. Only 9% said creating shareholder value was the primary goal.
  • However, 59% of respondents said they believe share repurchases generate economic value for shareholders (see chart) and another 27% agreed—but only if the share purchase price is below the company’s intrinsic value.

Members at companies with excess cash discuss whether share repurchases generate economic value for shareholders.

ConocoPhillips on Wednesday announced it is resuming its share repurchase program, citing its “long-standing priority to return greater than 30% of cash from operations to shareholders annually.” The company is not alone:

  • A recent NeuGroup Peer Research Survey showed that 82% of respondents consider the return of excess capital the primary objective of their company’s share repurchase program. Only 9% said creating shareholder value was the primary goal.
  • However, 59% of respondents said they believe share repurchases generate economic value for shareholders (see chart) and another 27% agreed—but only if the share purchase price is below the company’s intrinsic value.

Surprising result? The NeuGroup member who requested the survey expressed surprise at the number of his peers who believe buybacks generate economic value.

  • He told the group that when his company asks banks do analyses of its total shareholder return (TSR), “They ascribe zero value to repurchases and dividends. Their rationale is that this is capital that the shareholders have a claim on regardless of whether it’s in the company or in their pocket.”
  • “My view is that repurchases might create value if they are below intrinsic value, but as people said, intrinsic value can be tough to define,” he said in a follow-up email. “And the reality is that a company’s shares probably don’t trade below it very often anyway.”
  • In his follow-up, he also cited a white paper that he wrote: “There is no certainty that any gap between intrinsic and market value will ultimately close; additionally, a study by Fortuna Advisors, a strategic advisory firm, indicates that ‘over time the market sees through this engineered EPS growth and typically drives down the P/E multiple for companies that rely heavily on buybacks.’” 
  • The white paper also says, “There is evidence to suggest that newly announced repurchase authorizations cause at least temporary share price bumps, but this is due to the signaling effect (of companies indicating they are bullish on their future), not repurchases themselves.”

In the yes camp. One of the members who believe share repurchases create value for investors if the price is below intrinsic value said his company “beats VWAP (volume weighted average price) more than we don’t.” He explained his strategy for executing buybacks and emphasized the goal is not to be a day trader but to “buy back as many shares as I possibly can” using the amount allocated for buybacks by the board.

  • Another member in the yes camp explained some of his reasoning in a follow-up email, writing, “Part of adding shareholder value is minimizing agency costs (arising from a lot of things but fundamentally to misaligned incentives and interests between management and shareholders). 
  • “So distributing excess cash is a way to reduce this, with the idea that when you get rid of excess cash by buybacks, in addition to a neutral cash distribution, you’re minimizing agency costs.”

Not convinced. The treasurer who requested the survey said the discussion at the meeting did not prove to him that repurchases generate economic value.

  • “The arguments mostly seemed to circle back to whether repurchases are beating VWAP, which in itself does not indicate they’re creating economic value,” he said.
  • That said, he does agree that the “avoidance of agency costs, i.e., the risk of making bad investments just because the cash is available” is one of the valid reasons to do a buyback.

Other reasons to do buybacks. This treasurer’s other main reasons to do repurchases include moving “inefficient capital off the balance sheet. Excess cash is inefficient capital; bank deposits, money market funds, etc. earn well below WACC (weighted average cost of capital).”

  • His white paper offers another reason to buy back stock: “Investors frequently redeploy the proceeds of stock sales to other investments in the economy, essentially shifting capital from companies that have more than they need to companies that need capital to grow. 
  • “This cycling of capital is healthy for the economy. According to Lloyd Blankfein, former CEO of Goldman Sachs, the proceeds investors receive from selling shares get ‘reinvested in higher growth businesses that boost the economy and jobs.’”

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Justin Jones
In Cash & Working Capital, Investment Management

Counting Cash: Many Companies Will Maintain or Up Cash Levels in H1

An ICD survey also shows steady and growing use of money market funds and higher interest in ESG products.

Cash on corporate balance sheets reached a record in 2020, topping $2 trillion, as companies responded to economic uncertainty created by the pandemic. New data from money market fund portal ICD suggests that a majority of corporates do not plan to cut cash levels in the first half of 2021.

  • 61% of the 150 treasury clients surveyed by ICD plan to maintain or increase their cash balances in the first half, with 39% expecting to reduce cash levels.

An ICD survey also shows steady and growing use of money market funds and higher interest in ESG products.

Cash on corporate balance sheets reached a record in 2020, topping $2 trillion, as companies responded to economic uncertainty created by the pandemic. New data from money market fund portal ICD suggests that a majority of corporates do not plan to cut cash levels in the first half of 2021.

  • 61% of the 150 treasury clients surveyed by ICD plan to maintain or increase their cash balances in the first half, with 39% expecting to reduce cash levels.

Prime funds. The survey also showed fewer than half (47%) of the companies are invested in or plan to invest in prime money market funds in 2021. That’s down from 64% in 2019, ICD said. Many companies moved out of prime funds and into government funds before and during the pandemic.

  • But as the first chart below shows, nearly all respondents (86%) plan to maintain or increase their overall money market fund investments this year.

Growing interest in ESG. The second chart shows that 41% of respondents expressed interest in ESG products. That’s up from 32% in 2020, according to ICD. In Europe, about half (49%) of the treasury professionals ICD surveyed plan to invest in ESG or socially responsible investing products.

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Justin Jones
In Banking, ESG

Green Discount: Treasury Wins With a Sustainability-Linked Revolver

After a corporate successfully launched a sustainability-linked revolver, the treasurer’s phone started ringing.

When it came time for one NeuGroup member to renew an existing five-year revolver, he saw an opportunity to improve pricing and generate positive PR by leveraging the ESG goals that the company had recently put in place.

  • The member’s company worked with BNP Paribas and Unicredit to structure a multibillion-dollar sustainability-linked revolver, the first one in its industry sector.
  • “I’ve received a lot of calls from other treasurers in the last few months asking how we did it and what it entailed,” the member said. “So I’m sure you’re going to see more in the next few months.”

After a corporate successfully launched a sustainability-linked revolver, the treasurer’s phone started ringing.

When it came time for one NeuGroup member to renew an existing five-year revolver, he saw an opportunity to improve pricing and generate positive PR by leveraging the ESG goals that the company had recently put in place.

  • The member’s company worked with BNP Paribas and Unicredit to structure a multibillion-dollar sustainability-linked revolver, the first one in its industry sector.
  • “I’ve received a lot of calls from other treasurers in the last few months asking how we did it and what it entailed,” the member said. “So I’m sure you’re going to see more in the next few months.”

Link to realistic goals.  Sustainability-linked loans incur cost penalties in the form of higher rates or fees if companies do not meet agreed-upon goals. That’s one reason that Martin Rogez, vice president of sustainable finance at BNP Paribas, said banks work with corporates to identify goals the company can realistically achieve and still have a measurable impact.

  • These vary from sustainability-focused key performance indicators to the company’s official ESG rating. The member’s company had two linked goals, based on a five-year plan for reducing greenhouse gas emissions and workplace injuries.
  • Mr. Rogez said these deals typically do not require much time investment on the corporate’s end, as long as it already has an ESG strategy in place. He said he recommends the company appoint a “sustainability coordinator” to help manage and monitor its ESG goals, someone the bank works with throughout the process.

Setting the rate framework. Mr. Rogez said the interest rate for the revolver is determined by starting with the classic lending criteria of the borrower’s credit profile and a corresponding base rate.

  • The bank and the company then agree on a pricing adjustment, which he said is typically a handful of basis points (the same amount for discount and penalty) and depends on the ambition of the goals set, among other factors.
  • The pricing impact of meeting the ESG goals could be applied to the loan’s interest rate, its commitment fee or both, he said.
  • Each year, a company reports whether it met the goals, and the impact is applied. If the company meets its goal, the discounted rate will apply. If not, the penalty or premium amount will be added to the base rate.

Sending a message. The amount of the impact for the member was ±5 basis points on the interest rate for the revolver’s drawn price, and ±1 basis point on the undrawn fee. The member suggested that before the pandemic these numbers could have been higher.

  • And while the pandemic and the company’s credit rating will keep the ESG discount from having much impact on the company’s bottom line, the member said the deal was worthwhile. “Even though it’s not a huge number, symbolically it’s an important message to send.”
  • The member said that his company’s revolving credit facility is typically not used; so only having a discount on the revolver’s drawn price “would not be as compelling.” A smaller discount or premium applies to the undrawn price for the company’s revolver as well.

European banks. The member said European banks have more experience working with ESG loans, which is why he chose BNP and Unicredit to be the deal’s primary ESG banks.

  • Because there is so much public interest in ESG, the member said it was easy to attract banks. He had the opportunity to choose between 10 banks vying to be partners on the ESG component of the loan.
  • The member said he used this opportunity to help one bank to tier one of the credit facility.
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