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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 Capital Allocation, Capital Markets, Talking Shop

Talking Shop: Do You Use Barra Beta or Bloomberg To Calculate WACC?

Member question: “Is anyone using Barra to calculate WACC (weighted average cost of capital) or do you use another service provider?

  • “To calculate cost of equity, we use our beta available from Bloomberg. Over the last year, our beta has decreased. The lower beta results in a lower calculated cost of equity and then WACC.
  • “We think this could be a short-term impact and need to be very thoughtful about how to apply it in various analysis. In recent conversations, we have learned about Barra beta. My question: Is anyone using Barra beta and if so, how do you calculate it, or do you use a service provider to obtain this data?”

Member question: “Is anyone using Barra to calculate WACC (weighted average cost of capital) or do you use another service provider?

  • “To calculate cost of equity, we use our beta available from Bloomberg. Over the last year, our beta has decreased. The lower beta results in a lower calculated cost of equity and then WACC.
  • “We think this could be a short-term impact and need to be very thoughtful about how to apply it in various analysis. In recent conversations, we have learned about Barra beta. My question: Is anyone using Barra beta and if so, how do you calculate it, or do you use a service provider to obtain this data?”

Peer answer 1: “We use Barra beta. My understanding is that they use a black box model to create a ‘predictive’ beta. We subscribe to the service to have access to the data.”

Peer answer 2: “We use Barra beta but we’re evaluating switching from Barra to Bloomberg in the future. Here are several considerations for comparing Barra beta and Bloomberg’s beta:

  • “Barra ‘predictive’ lacks transparency. When we use the Barra betas of peers [in one country] as another data point to guide our own cost of equities estimation, they have very low Barra betas.
    • “I suspect the Barra method is probably running these companies’ correlation with a MSCI global index instead of [the country’s] domestic equity index.
  • “The Bloomberg beta method is transparent and allows customizing the index to correct such noise. Barra beta, I was told, also has an issue with new companies lacking trading history.
  • “We have introduced a moving-average tweak to our beta estimation to smooth out the noise.
  • “You may want to consider asking one of your bankers to provide a one-time look of several Barra betas and their history before signing up for the service.”

Peer answer 3: “We use Bloomberg’s five-year weekly adjusted beta. We look at Barra, but don’t like the lack of transparency.”

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Justin Jones
In Capital Allocation, Capital Markets

Spin-off Class: Perspective From a NeuGroup Member Pedaling Hard

Spin-offs mean complex, time-consuming work on capital structure, bank accounts, credit facilities and more.

Spin-offs are huge strategic undertakings for corporations looking to part ways with a subsidiary or business. And finance teams, including treasury, do a lot of the heavy lifting to manage a complex process that can take years to complete.

  • At a recent NeuGroup meeting, one member in the midst of a spin-off described the process as an “all-consuming activity.”
  • Afterward, he agreed to share some insights and perspective he’s gained from experiencing a spin-off firsthand.

Spin-offs mean complex, time-consuming work on capital structure, bank accounts, credit facilities and more.
 
Spin-offs are huge strategic undertakings for corporations looking to part ways with a subsidiary or business. And finance teams, including treasury, do a lot of the heavy lifting to manage a complex process that can take years to complete.

  • At a recent NeuGroup meeting, one member in the midst of a spin-off described the process as an “all-consuming activity.”
  • Afterward, he agreed to share some insights and perspective he’s gained from experiencing a spin-off firsthand.

Treasury’s role in untangling. To the extent the to-be-spun business is highly entangled, treasury support will be required to establish new entities, new banking operations (accounts and services like pooling and trade finance), and supporting policies and procedures. 

  • New authorities will need to be delegated, new signatories identified and likely changed more than once as colleagues are selected to support the spin company.
  • Credit facilities will need to be split between companies prior to all information about the spin company’s capital structure and credit rating. 

Degree of difficulty. Among other factors, the difficulty in executing a spin-off will be driven by the degree of entanglement of the operations with the broader business. 

  • That entanglement includes systems, people and processes; and a decision must be taken on how those systems and processes will be established at the spin company.
  • You can simply “lift-and-shift” what’s required or create new or optimized systems and processes that may allow a greater degree of customization and refinement.  

Capital structure: critical. Establishing the right capital structure for the spin company is a critical step in ensuring the right operational and strategic flexibility post-spin. 

  • Projecting the cash flow generation of the spin company in the critical months leading up to and immediately after spin is a complicated exercise, but required to deliver that desired flexibility. 
  • This will likely require cash flow forecasting at the entity level for any significant operations around the globe.

Talent task. In attempting to find the right talent for the spin-off company’s treasury team, there are options along a continuum. You can choose to identify staff to move to the spin company or engage staff to understand interest and capabilities that will serve the spin company well. 

  • A mix of internal and external talent will likely be required, and finding the right mix of capabilities will affect the spin company’s ability to hit the ground running. 
  • Of course there are local labor laws that must be followed in establishing the new team, and striking the right balance between appointment and self-selection is a challenge given minimum required staffing levels and budgetary constraints. 
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Justin Jones
In Capital Allocation, Capital Markets

Why Spin-offs Are Complex, Time-Consuming Affairs: A Lawyer’s View

The legal perspective on spin-offs from attorneys at Gibson, Dunn & Crutcher.

Spin-offs are intricate, multifaceted endeavors for corporates that decide to take a subsidiary and make it an independent public company. In addition to internal finance and tax teams, they can involve scores of investment bankers, auditors and lawyers.

  • At a recent NeuGroup meeting, one member in the midst of a spin-off described the process as an “all-consuming activity.”
  • For a look at some of what’s involved, NeuGroup Insights turned to Andrew Fabens and Steve Glover, partners at the law firm Gibson, Dunn & Crutcher, who work on spin-off transactions. Below are some of their insights along with some information from the firm’s presentation, “The Art of the Spin-off.”

The legal perspective on spin-offs from attorneys at Gibson, Dunn & Crutcher.

Spin-offs are intricate, multifaceted endeavors for corporates that decide to take a subsidiary and make it an independent public company. In addition to internal finance and tax teams, they can involve scores of investment bankers, auditors and lawyers.

  • At a recent NeuGroup meeting, one member in the midst of a spin-off described the process as an “all-consuming activity.”
  • For a look at some of what’s involved, NeuGroup Insights turned to Andrew Fabens and Steve Glover, partners at the law firm Gibson, Dunn & Crutcher, who work on spin-off transactions. Below are some of their insights along with some information from the firm’s presentation, “The Art of the Spin-off.”

“Spin-offs are complicated undertakings. The process is significantly more demanding than the process associated with a debt financing, and in many cases is more complicated than the IPO process.  Just a quick list of some of the tasks that need to be accomplished highlights this: 

  • The transaction planners need to move all of the assets and liabilities associated with the business being spun into a subsidiary.  
  • They need to prepare audited financial statements for the business and draft a disclosure document. 
  • They need to confirm that the spin-off will be tax free, which can take many months if the company seeks a letter ruling from the IRS. 
  • They have to decide on governance for the spin-off company and develop a capital structure. 
  • They need to decide on a management team, identify members of the new board of directors and develop compensation plans.  

“Treasury has a significant role to play in developing the spin-off company’s capital structure and anticipating adjustments of the parent’s structure. These are mixed economic and strategic decisions, with a healthy dose of legal work if the spin-off is of such significance that there are ‘all-or-substantially all’ (AOSA) debt covenant compliance questions at the parent level.”

  • An AOSA covenant can prohibit the disposal of “all or substantially all” of the assets of the parent unless all assets are conveyed to a single acquirer that assumes the debt obligation.

Keep one eye on the market. “The transactions that rebalance the capital structures must be executed with precision just as the other components of the separation all are finalized. You need to have one eye on the market and the other on the separation workstreams to get that timing right.” The methods used to do this typically include some combination of the following:

  1. New issue + repurchase. Elements include: new bonds issued by the spin-off company for cash; a special dividend paid to the parent; redemption and/or tender offer by parent for existing bonds; redemption or offer to purchase.
  2. Par-for-par exchange offer. Elements include: spin-off company offers to exchange new bonds for existing parent bonds; cash premium paid to participating bondholders; no cash proceeds to the spin-off company.
  3. Intermediated exchange. Elements include: tender offer by underwriters for existing parent bonds; underwriters agree to exchange tendered bonds for new spin-off company bonds; new spin-off company bonds sold by underwriters for cash; no cash proceeds to the spin-off company.

“When the pandemic struck, many companies put M&A and other significant strategic undertakings like spin-offs on hold. They wanted to understand better what implications the pandemic would have for their business, the capital markets and the broader economy before they proceeded with their plans. 

  • “To the extent companies had been facing pressure from stockholder activists or other investors to engage in spins, some of this pressure became less intense during the first several months of the pandemic.  Activists and investors also wanted to get better perspective on the impact of Covid-19.”
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Justin Jones
In Capital Markets, Risk Management, Tax

Buzzer Beater: A Treasurer’s Last-Second Debt Deal Scores Big Savings

One member cut his company’s tax bill by beating the clock to complete a debt refinancing.  

As one NeuGroup member’s fiscal year began to draw to a close, he saw an opportunity to save his company millions of dollars in taxes by completing a debt refinancing deal—but he had to race the clock get it done before the calendar changed.

  • Because of the pandemic’s impact, the company needed to save money, so it was critical that the debt deal go through in 2020.

One member cut his company’s tax bill by beating the clock to complete a debt refinancing.  

As one NeuGroup member’s fiscal year began to draw to a close, he saw an opportunity to save his company millions of dollars in taxes by completing a debt refinancing deal—but he had to race the clock get it done before the calendar changed.

  • Because of the pandemic’s impact, the company needed to save money, so it was critical that the debt deal go through in 2020.

Roller coaster. At the start of the year, the member’s company wanted to reduce its relatively high leverage ratio through a refinancing. The pandemic delayed the deal by freezing the debt markets.

  • The eventual thaw created a renewed capacity to get deals done and convinced the company to go through with its transaction “to get the risk off the table,” he said.
  • The member’s deal was an amend-and-exchange refinancing of a high-yield bond, which he said was economically favorable as “high yield markets are very hot right now.”

Dramatic ending. The member said the refinancing took considerable time to prepare and was “not easy” to do under tight deadline pressure. Executing the deal came down to the last day of the fiscal year, creating a bit of drama.

  • The close meeting started at 5:30 a.m. for the member. At the last minute, a lawyer had an issue with an area in credit agreements, and his team had to scramble.

After applying pressure and some back-and-forth with the lawyers throughout the day, the deal was able to get out the door with 90 seconds to spare before the end of the fiscal year. “I’ve never experienced such a harrowing close meeting,” the treasurer said.

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Justin Jones
In Banking, Capital Markets, Talking Shop

Talking Shop: How to Set Rates on Intercompany Lending Agreements

Member question: “We are in the process of reevaluating our intercompany (IC) loan rate-setting policy. I’m trying to benchmark to understand how this is managed at other companies. What is your company’s approach to setting rates on any intercompany lending agreements?

  • “I know reference rates are in flux with the Libor transition but I am specifically trying to understand, from a transfer pricing standpoint, if you set rates with a standard mark-up or based on the entity’s creditworthiness similar to a bank.”

Member question: “We are in the process of reevaluating our intercompany (IC) loan rate-setting policy. I’m trying to benchmark to understand how this is managed at other companies. What is your company’s approach to setting rates on any intercompany lending agreements?

  • “I know reference rates are in flux with the Libor transition but I am specifically trying to understand, from a transfer pricing standpoint, if you set rates with a standard mark-up or based on the entity’s creditworthiness similar to a bank.”

Peer answer: “For long-term IC loans, our internal funding team works with tax to determine an appropriate arm’s-length spread over benchmark. 

  • “That process has varied over the years, but typically involves either getting some local bank indicative loan rates for comparison or doing other local market research on comparable companies’ public debt issuance and/or credit indicators. 
  • “This would all be documented and retained as supporting evidence of the arms-length rate.

“For revolving (short-term) IC loans, we may use comfort letters and/or parent guarantees to backstop the subsidiary IC debt. 

  • “This has allowed us (in most cases) to have a fixed credit spread for our short-term IC loan portfolio. Obviously, that type of approach would need to be well established with tax.

“With the upcoming Libor replacement, there is an expectation that the credit component backed into Libor will need to be reflected in the updated rates plus the spread we use. 

  • “These details are still being worked out by our Libor replacement team.”

Using SOFR for IC. The Alternative Reference Rates Committee (ARRC) recently released recommendations for IC loans based on the Secured Overnight Financing Rate (SOFR). ARRC’s announcement does not specifically address transfer pricing.

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Justin Jones
In Cyber risk, Risk Management, Technology

Questions About Answers: Moody’s Cybersurvey Raises a Few Concerns

NeuGroup members want to know how the credit rating agency will use survey responses about cyber risk.

High-profile corporate cyberattacks have many companies reevaluating how they mitigate cyber risk. And over the past few months, some NeuGroup members have received a lengthy survey from Moody’s asking questions about their companies’ approaches to cybersecurity.

  • The survey, which Moody’s says has about 60 questions, has raised questions—and a few concerns—about what Moody’s will do with the answers.
  • Below is some of what members said about the survey at recent meetings and, where appropriate, the responses NeuGroup Insights received from Jim Hempstead, managing director of cyber risk at Moody’s.

NeuGroup members want to know how the credit rating agency will use survey responses about cyber risk.

High-profile corporate cyberattacks have many companies reevaluating how they mitigate cyber risk. And over the past few months, some NeuGroup members have received a lengthy survey from Moody’s asking questions about their companies’ approaches to cybersecurity.

  • The survey, which Moody’s says has about 60 questions, has raised questions—and a few concerns—about what Moody’s will do with the answers.
  • Below is some of what members said about the survey at recent meetings and, where appropriate, the responses NeuGroup Insights received from Jim Hempstead, managing director of cyber risk at Moody’s.

What’s in it? One member said the survey includes questions about the amount of money the company spends on cybersecurity, about cyber risk governance, how much oversight the board has and whether someone reports to the board on cyber risk.

  • One treasurer who received the survey said she had to collaborate with many different teams in the company to ensure accurate answers, in what ended up as a time-consuming process.
  • “Treasury contributed to questions about risk insurance,” the member said. “The bulk of [the survey] had to go to other offices, it was quite wide-ranging. I had to farm it out to several people.”

What happens with the answers? Moody’s, some members said, told corporates their answers would not affect their credit ratings. But one member said she was told that if the company’s cyber risk protocols or structures were “way out of line” with others, it might have an impact.

  • Moody’s purpose for collecting this data is to provide anonymized and aggregated information, so analysts at the agency can ask better questions of companies they cover and understand the answers better, Mr. Hempstead said.
  • Consistent with Moody’s best practices, if a company reveals something important in its survey responses that Moody’s did not know, the company’s credit rating will surely come up, he said. But he emphasized that the survey is only research and a starting point for more in-depth discussions with companies.
    • It is not meant to result in an overall cyber score, and Moody’s is not changing its rating methodology as it did with ESG.
  • Moody’s views cyber risk as rising, and says analysts need to deepen their understanding of the critical ways it impacts credit quality. And to also understand the practices used to mitigate the impact of cyber risk on credit— beyond the limited information companies disclose.
  • He also said that for issuers, the surveys are meant to raise awareness on cyber risk and how it relates to credit.

Voluntary or obligatory? Two members said the rating agency told them the survey was obligatory, while two were told it was voluntary. Mr. Hempstead said completing the survey is entirely optional, but the data will be more useful as more corporates complete the survey.

  • Moody’s sent the survey to thousands of global issuers over nearly a year, and has received well over a thousand responses, covering a wide range of companies by size, regional and industry sector, he said.

What’s next? After distributing the survey to electric utilities early last year, Moody’s published its findings. When the remaining surveys are collected by March, Moody’s plans to publish its findings for other sectors as well, provided that a diverse and large enough group of companies respond, Mr. Hempstead said.

  • After the sector data is analyzed, analysts will have metrics so they can compare the risk posed by individual companies’ cybersecurity policies and practices to other companies and a broader universe of peers.
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Justin Jones
In Banking, FX, Regional

Cash Pools in Asia for Corporates Trying to Access Funds in China

NeuGroup members describe cash pools designed to overcome obstacles and minimize taxes.

Several members of NeuGroup’s Life Sciences Treasury Peer Group have set up cash pools in China relatively recently, a topic they discussed at their fall meeting in 2020 and in follow-up email exchanges with NeuGroup Insights.

  • The pools are generally a means to an end: getting access to the funds in a country where that can be difficult and expensive.

NeuGroup members describe cash pools designed to overcome obstacles and minimize taxes.

Several members of NeuGroup’s Life Sciences Treasury Peer Group have set up cash pools in China relatively recently, a topic they discussed at their fall meeting in 2020 and in follow-up email exchanges with NeuGroup Insights.

  • The pools are generally a means to an end: getting access to the funds in a country where that can be difficult and expensive.

Two-way sweep. One member is using what she described as “a simple RMB cross-border two-way sweep under the nationwide scheme (not the Shanghai Free Trade Zone scheme).” The goal: “To get access to surplus funds that cannot otherwise be repatriated via a dividend without withholding tax implications,” the member explained.

  • “We started operating the pool in mid-2020 and have built up the pooled funds over time to the equity limit that applies to the national structure (50% of aggregate equities of all onshore participating entities).
  • “We took action in the fall to comply with the rule that the continuous net lending/borrowing cannot exceed one year.”
  • The pools are in both Singapore and China. There is an “in-country pool for several entities [tied] to a header account which is swept to a special RMB account,” the member said.
  • “Funds are then lent cross-border to an offshore header account in Singapore. The funds can then go onward from there.”

An in-house bank and hedging. Another member at the meeting described what his company is doing in China as follows:

  • “We set up a cross-border pool between our entities in China and Singapore last year. The objective was to access China cash on a temporary basis. The bank is only acting as an agent; our entity in China is the lender. The entity in Singapore is the borrower in the pool and the in-house bank that funds other entities in Asia and Europe.
  • “It is very challenging to get cash out of China and this pool partially solves that problem.  
  • “The funds are pooled in Singapore from our China entity. Singapore is USD functional and China is RMB functional.  So we hedge the RMB that needs to be converted in USD when they arrive to Singapore.  
  • “Because the functional currency is different for the two entities (USD and RMB), hedging is necessary to avoid losses when the loans in the pool are made and prepaid.”

Context on pools. For some perspective, NeuGroup Insights reached out to Susan A. Hillman, a partner at Treasury Alliance Group and an expert on cash pooling. “The ability to ‘pool’ in China has been around for a long time through a mechanism called an ‘entrusted loan’—whereby an enterprise with excess cash (RMB) puts money on deposit with its bank and receives a rate of interest on this deposit,” she said.

  • “These funds are then loaned by the same bank to an affiliate company at a higher rate. Newer cross-border arrangements are usually managed through a bank loan from an RMB account which allows excess funds to be utilized in the offshore bank account (same bank) in Singapore as a ‘loan’ to the parent,” Ms. Hillman added.
  • The funds can be used “onward from there” with some restrictions on tenor and amounts, she said.
  • “Trying to utilize excess funds in a restricted country without issuing a dividend and the withholding tax consequences has long been a problem and using a bank as an intermediary in the situation through a loan arrangement is common in such countries as Brazil.
  • “So rather than a cash management service, like pooling in Europe, it becomes a bank financing tool subject to the tax rules of any restricted country.”
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Justin Jones
In Libor SOFR, Talking Shop

Talking Shop: Seeking Help From TMS Vendors for the IBOR Transition

Member Question: “For anyone using Reval, I was wondering if you have used their IBOR Transition Assessment Service (ITAS) to help with the IBOR transition; and if so, what was your experience and approximate cost to use?

  • Or, if anyone has received any kind of system implementation help from their TMS, just curious what they were able to help with, how effective, and costs?”

Member Question: “For anyone using Reval, I was wondering if you have used their IBOR Transition Assessment Service (ITAS) to help with the IBOR transition; and if so, what was your experience and approximate cost to use?

  • Or, if anyone has received any kind of system implementation help from their TMS, just curious what they were able to help with, how effective, and costs?”

What ION said. A spokesperson for ION, which owns Reval, told NeuGroup Insights in an email, “In terms of the cost, we are not able to provide this as it is a tailored service depending on clients’ exposure to IBOR.

  • “We have a few different packages that we can offer depending on the support they are looking for. Essentially, we have small, medium and large offerings.”
  • The spokesperson also referred to the graphic below for details on Reval’s ITAS service.

What a peer who uses Quantum said. “Hi, we use Quantum (FIS) for TMS and derivatives repository and MTM calculations. FIS has not provided any particular services to help with the transition other than providing functional updates to their platform to accommodate the new rates and calculations.”

What FIS said. A spokesperson for FIS said, “FIS’ IBOR replacement functionality has been rolled out and we are engaging with clients through one-on-one conversations as well as broader group meetings and webinars.

  • “We encourage clients to come to us with any additional questions that they might have as they undergo this transition.”
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Justin Jones
In D&I, ESG, Regional

Walking the Talk on Diversity and Inclusion: One Company’s Steps

A member of NeuGroup’s European Treasury Peer Group outlines what his company is doing to promote D&I.

The push for increased diversity, inclusion and social justice following the murder of George Floyd last year has rippled far beyond US borders.

  • At a meeting of NeuGroup’s European Treasury Peer Group this fall, one member discussed his company’s conviction that now more than ever is the time “to further strengthen [the company’s] commitment to diversity and inclusion everywhere,” as his presentation put it.
  • This company’s efforts, the member said, have taken D&I “to a new level and given it the traction it deserves,” he said. Some of the steps his company has taken may provide direction to other MNCs.

A member of NeuGroup’s European Treasury Peer Group outlines what his company is doing to promote D&I.

The push for increased diversity, inclusion and social justice following the murder of George Floyd last year has rippled far beyond US borders.

  • At a meeting of NeuGroup’s European Treasury Peer Group this fall, one member discussed his company’s conviction that now more than ever is the time “to further strengthen [the company’s] commitment to diversity and inclusion everywhere,” as his presentation put it.
  • This company’s efforts, the member said, have taken D&I “to a new level and given it the traction it deserves,” he said. Some of the steps his company has taken may provide direction to other MNCs.

Context on targets. Before the member’s presentation, attendees were polled on whether treasury has specific targets to meet D&I objectives. As the chart below shows, only five percentage points separated those companies with targets (47%) from those without (42%).

  • Only a fifth (21%) of the respondents said their companies have specific investment targets to support underprivileged communities through affordable housing and other means.

Build a senior structure to support D&I efforts. The member’s company has a CEO diversity and inclusion council comprised of senior leaders (SVPs and above) across the corporation whose aim is to accelerate progress in D&I efforts. The treasurer is on the council.

  • The council advocates for solutions that support a culture of belonging and inclusion, both internally and externally.
  • The council focuses on several key strategic pillars, including transparency and representation.

Consider using employee resource groups. So-called ERGs are voluntary, employee-led groups whose aim is to foster a diverse, inclusive workplace aligned with the organizations they serve. 

  • ERGs at the member’s company are “key partners in our work to cultivate an inclusive culture for all employees around the world,” the company’s presentation said.
  • “These passionate employees offer their time, expertise and cultural insights to help us improve the workplace and be innovative in the marketplace.”
  • The company refers to the employees as “cultural carriers” who represent “all dimensions of diversity,” including Asian/Pacific Islander, Black, Hispanic, LGBTQ as well as people with disabilities, veterans and women.

Coffee talk. The company’s efforts include holding informal coffee chats with no agenda where employees feel safe to voice their views on racism, inequality and well-being in a confidential and compassionate forum.

  • The goal, the presentation said, is to foster an environment where “everyone feels heard, supported and, most importantly, where these issues can be discussed openly.”
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Justin Jones
In Banking, ESG

Carbon Credits 101: Introduction to Voluntary Emissions Reduction

BNP Paribas shares a guide for corporates looking into carbon emission markets.

A NeuGroup member at a large technology company recently asked peers on an online forum, “Does anyone have experience in purchasing carbon credits in voluntary markets?”

  • For guidance, NeuGroup Insights reached out to BNP Paribas, which has a long-standing presence in this area and is committed to developing origination capabilities in carbon offset markets.
  • The bank shared a presentation to help clients better understand the dynamics of the voluntary emission reduction (VER) market.
  • Understanding carbon markets can only help corporates ramping up their efforts to address environmental, social and governance (ESG) issues as pressures to embrace sustainability grow even stronger.

BNP Paribas shares a guide for corporates looking into carbon emission markets.

A NeuGroup member at a large technology company recently asked peers on an online forum, “Does anyone have experience in purchasing carbon credits in voluntary markets?”

  • For guidance, NeuGroup Insights reached out to BNP Paribas, which has a long-standing presence in this area and is committed to developing origination capabilities in carbon offset markets.
  • The bank shared a presentation to help clients better understand the dynamics of the voluntary emission reduction (VER) market.
  • Understanding carbon markets can only help corporates ramping up their efforts to address environmental, social and governance (ESG) issues as pressures to embrace sustainability grow even stronger.

Three carbon pricing mechanisms. The BNP Paribas presentation describes three main ways carbon is priced. Governments have been using the first two to reach carbon reduction goals.

  1. Carbon taxes. Applying a flat and predefined rate on all carbon usage.
  2. Cap and trade. Regulated entities are subject to an emission cap and can freely buy and sell carbon allowances, which are rights to emit carbon. BNP Paribas says that to some extent these entities can also use carbon offsets if deemed compliant by the regulator.
  3. Voluntary markets. At the same time, BNP Paribas explains, the creation of so-called voluntary markets has allowed companies to buy on a voluntary basis a certain type of carbon credits or offsets and redeem them to offset their emissions. The goal is to demonstrate the corporate’s business activity is carbon neutral.
    1. “By buying carbon offsets, a company could voluntarily compensate for its residual emissions and support the transition to a low-carbon economy,” the presentation states.
    2. Carbon offsets are units of carbon dioxide-equivalent that are reduced, avoided or sequestered to compensate for emissions occurring elsewhere through emission reduction projects (see below).
    3. BNP Paribas channels money to the emission reduction project developer to operate, perform and generate emissions reductions.

How to use VERs. The presentation explains that the first step is for a company to measure its carbon emissions and define reduction targets as part of its commitment to corporate social responsibility (CSR). VERs are one of the instruments of a comprehensive carbon offset strategy. The other steps include:

  • Reducing greenhouse gas emissions as much as possible as part of the CSR strategy.
  • Reporting on greenhouse gas emissions.
  • Compensating for emissions that cannot be avoided with carbon offsets and through verified emission reduction.

Carbon footprint offsetting process. The presentation notes that BNP Paribas holds carbon offset certificates and provides liquidity to this market, offering “a simple and cost-efficient setup to its clients to buy the necessary offsets to it remaining emissions.”

  • “VER is paying for past performance,” the presentation states. “A VER certificate is only issued when the carbon avoidance has already been achieved.”
  • Clients buy selected carbon offsets (spot and forward) from BNP Paribas via ad hoc negotiated documentation.
  • Each VER has a unique serial number with the objective to mitigate the risk of fraud and double counting.
  • At the time of the purchase the client can request BNP Paribas cancel the VERs on its behalf directly from the BNP Paribas registry. A certificate of cancellation is issued by the registry (Markit) and provided to the client.
    • Or the VERs can be transferred to and retained on the client’s registry, which needs to be set up.
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Justin Jones
In Banking, FX, Risk Management

Under the Hood: How Banks Price FX Swaps With Corporates

Wells Fargo explains credit and capital charges for corporate counterparties on derivative transactions.

Corporates that are using or considering using long-dated hedges such as five-year FX forwards or swaps can benefit from understanding the way banks price derivatives using a combination of credit and capital charges. That idea surfaced during a recent meeting sponsored by Wells Fargo for NeuGroup members who manage foreign exchange risk.

Wells Fargo explains credit and capital charges for corporate counterparties on derivative transactions.

Corporates that are using or considering using long-dated hedges such as five-year FX forwards or swaps can benefit from understanding the way banks price derivatives using a combination of credit and capital charges. That idea surfaced during a recent meeting sponsored by Wells Fargo for NeuGroup members who manage foreign exchange risk.

  • Credit and capital costs can impact unwinds and restructurings as well as new transactions, Wells Fargo said. The extent to which hedges are in or out of the money, and the remaining tenor of the hedges, drives these calculations.
  • The presentation included explanations of the relevant acronyms CVA (credit value adjustment), DVA (debit value adjustment) and FVA (funding valuation adjustment) used to calculate the charges.
  • Wells Fargo also addressed how companies may deal with these adjustments from an accounting perspective.

Why this is relevant now. The presentation made the case that credit and capital charges are relevant now by citing the results of a 2020 FX Risk Management Survey the bank conducted.

  • Almost half of public companies report hedging long-dated FX exposures. “Widening FX carry in recent years has been a driver in some cases,” Wells Fargo reported.
  • Also, “Changes in the accounting rules (see ASU 2017-12) and decreased cost of funding in foreign currency vs. USD has increased usage of net investment hedges.”

Understanding the acronyms. CVA is priced off of what is called “positive exposure”—the risk that the bank’s counterparty, the corporate, defaults. The higher the corporate’s credit default swaps (CDS) level is, the higher the CVA cost, the presentation explained. And the larger the potential exposure, the higher the CVA cost.

  • The CVA fee is embedded in the FX or interest rate quoted by the bank to the corporate for the derivative trade.
  • DVA is priced off of “negative exposure” and takes into account the credit risk of the bank, its likelihood of default. The credit fee would in part represent a netting of CVA and DVA.
  • The presentation noted that the “worst case” exposure from a $100 million, five-year cross-currency swap, where the company pays EUR fixed rates and receives USD fixed, could be “quite large”: $37.8 million (see below).
  • FVA is priced off of both positive and negative exposure and takes into account the bank’s funding cost.
  • Most banks, the presentation said, have made a policy decision to consistently use either DVA or FVA.

The capital factor. Banks are bound by regulators to hold equity capital for derivative transactions, one reason banks also charge corporates a capital charge.

  • The presentation included a graphic explaining three common methods of calculating derivative capital requirements, plus the standardized approach for counterparty credit risk (SA-CCR), the capital requirement framework under Basel III.
  • Credit and capital costs can vary from bank to bank, a Wells presenter explained. Most of this variation reflects differences in capital costs as banks have different return on equity (ROE) targets and different capital constraints given the makeup of their balance sheets.

What about credit support annexes? A Wells Fargo presenter explained that while corporate clients could avoid credit and capital charges by constructing a “perfect CSA,” one downside is the company must be confident it can come up with the necessary cash collateral at any time.

  • So corporates should consider the benefits of not having to post collateral when structuring hedging programs and when considering whether to unwind or restructure derivatives, he added.
  • Corporates that do have CSAs tend be companies on either end of the credit spectrum: the highest quality credits or those with the weakest credit profiles, the presenter said.
  • The presenter also noted that bank capital rules don’t provide for as much pricing benefit for most CSAs, other than “perfect” ones. And those have daily margining, low minimum transfer amounts and only allow for USD cash as collateral.”

Accounting. Wells Fargo made the point that for credit and capital charges, “We believe the accounting guidance indicates to include these charges in effectiveness tests, but as a matter of practice, many clients do not, or only include these charges for longer dated hedges where they’re material.”

  • The presentation noted that because market participants consider counterparty credit risk in pricing a derivative contract, a company’s valuation methodology should incorporate counterparty risk in its determination of fair value.
  • It noted that derivatives are unique “in the fact that they can potentially be in both an asset and liability position.”
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Justin Jones
In Banking, Regional

Unpleasant Surprise Post-Brexit: A New Bank Fee for SEPA Payments

NeuGroup members confront a fee for payments from UK to EU accounts that lands on beneficiaries.

Treasurers are still learning the full impact of the UK’s recent Brexit deal, and several who attended a recent NeuGroup European Treasury meeting shared their reaction to a banking fee that took some of them by surprise.

  • Some corporates making SEPA (single euro payments area) payments from accounts in the UK to the EU are now experiencing an additional fee for receipt, as some banks in the EU slap the fee on payments from accounts outside the EU to beneficiaries in their banks. That’s even though the UK remains a part of SEPA.

NeuGroup members confront a fee for payments from UK to EU accounts that lands on beneficiaries.

Treasurers are still learning the full impact of the UK’s recent Brexit deal, and several who attended a recent NeuGroup European Treasury meeting shared their reaction to a banking fee that took some of them by surprise.

  • Some corporates making SEPA (single euro payments area) payments from accounts in the UK to the EU are now experiencing an additional fee for receipt, as some banks in the EU slap the fee on payments from accounts outside the EU to beneficiaries in their banks. That’s even though the UK remains a part of SEPA.

Fighting fees. Members said the SEPA payment fee is an issue particularly with smaller banks in Spain, Italy and Portugal. One treasurer said this issue presented a challenge since he “hadn’t seen this one coming.”

  • Another member, who had dealt with the same problem when making SEPA payments out of an account in Switzerland, also a part of SEPA but not the EU, advised the member to ask that the beneficiary banks reimburse the charge and request that the beneficiary also challenge the fee, so “there is pressure on both sides.”
  • “Our interpretation of SEPA is that this wouldn’t happen,” the member said. “But apparently there is this loophole that can be used” by EU-based banks.

In-house bank? The member said the alternative to paying the fee, if it is not reimbursed by the bank, is to make payments via an in-house bank in the EU if you have one.

  • Otherwise, it may be just as cost-effective to ignore the charges or reimburse the beneficiaries for it, as a company might do if the payments are for employee T&E expenses, for example.
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Justin Jones
In Compliance, Risk Management

Documentation Overload: Internal Controls Over Financial Reporting

A survey of financial executives includes complaints of excessive documentation required by external auditors.

Finance executives at large US companies are finding it increasingly difficult to document internal controls over financial reporting (ICFR) to the satisfaction of their internal and external auditors, according to a study recently published by the Financial Executives International’s research arm.

A survey of financial executives includes complaints of excessive documentation required by external auditors.

Finance executives at large US companies are finding it increasingly difficult to document internal controls over financial reporting (ICFR) to the satisfaction of their internal and external auditors, according to a study recently published by the Financial Executives International’s research arm.

  • Several of the most difficult controls to design, implement and operate are common in corporate treasury.

Pain points. Controls around non-routine transactions—bond issuances, significant one-off payments and others endemic to treasury—topped the list of challenging ICFR, according to responses from 123 large public companies and interviews with 16 financial executives. Controls over access to data, fraud risk assessment and processing of data also made the top five.

  • “Controls tend to be one-off and the underlying data and structures vary from transaction to transaction and company to company, depending on their systems,” said Jeff Wilks, EY professor of accounting at Brigham Young University and part of the research team that conducted the two-year study.

Excessive documentation. A general complaint emerging from the study is excessive documentation required by external auditors, especially if auditors have recently received negative reviews from the Public Company Accounting Oversight Board (PCAOB).

  • Executives say ICFR guidance in the COSO framework is good, but auditors often make highly specific demands—particularly as it relates to documentation—that the guidance does not address, Mr.  Wilks said, “leaving financial executives with little redress.
    • “And they’re doing it because the PCAOB is hovering over them,” he added.

Technology to the rescue? Study respondents pointed to technology’s help in addressing ICFR challenges, although for cost centers like finance, insufficient funding is an issue. Mr. Wilks noted that in addition to purchasing the technology itself, corporate finance teams’ often ad hoc processes must be cleaned up. 

  • “What treasury may not understand and what we’re hearing from controllers is that if you want to improve the technology around controls you have to first fund improving the controls,” he said. “Once those processes are cleaned up, the technology can automate them.”

Mostly plusses, a few big minuses. Implementing a treasury management system (TMS) to more efficiently track treasury activities may be an early step on the way to reducing ICFR risks, and other, emerging technologies like AI and blockchain may play a role.

  • Some of the ICFR risks that technology could reduce, according to survey respondents, include failures to detect material misstatements, internally and by external auditors; unauthorized alterations of accounting information; and failures to prevent material misstatements.
  • The biggest challenge in adopting new technologies is finding personnel qualified to use the technology. “Executives tell us everyone is looking for people with accounting and IT talent,” Mr. Wilks said.
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Justin Jones
In Banking, Libor SOFR

Cutting the Cord: When Banks Plan to Stop Making Libor Loans

A NeuGroup survey shows SOFR is the replacement rate for most banks, and many accounting systems aren’t yet ready.

The opportunity to give feedback on a plan announced in December to allow legacy USD Libor contracts to stretch to June 30, 2023—18 months beyond the initial deadline—ended Monday. Almost everyone expects Libor’s administrator to make it official and is planning accordingly.

  • At a recent meeting of the Bank Treasurers’ Peer Group, NeuGroup members reviewed the results of a survey on their plans for the transition away from Libor.

A NeuGroup survey shows SOFR is the replacement rate for most banks, and many accounting systems aren’t yet ready.

The opportunity to give feedback on a plan announced in December to allow legacy USD Libor contracts to stretch to June 30, 2023—18 months beyond the initial deadline—ended Monday. Almost everyone expects Libor’s administrator to make it official and is planning accordingly.

  • At a recent meeting of the Bank Treasurers’ Peer Group, NeuGroup members reviewed the results of a survey on their plans for the transition away from Libor.
  • The survey showed that most members (62%) said their bank is most likely to use SOFR in place of Libor, while 28% expect to use a mix of rates.
  • On the key question of when the banks will stop originating loans priced off of Libor, none of the respondents said they’ll cease this quarter. As the first pie chart below shows, 86% of the banks will cut the cord in the second half of 2021, split evenly between the third and fourth quarters.

The calculation conundrum. The second pie chart reveals that only one-third (34%) of the banks responding said their loan accounting systems are currently able to handle SOFR calculated in arrears. System readiness for the transition is among the the most challenging issues facing both banks and corporates.

How to bill customers? The final question of the survey asked treasurers how their banks plan to bill customers for loans set in arrears. Here are excerpts from some of the written responses, edited for length and clarity.

  • “The bank will send an interest bill about two weeks before the payment date, with an estimated amount due using the last daily reset variable rate, plus a credit spread for an estimated interest rate. Any difference between the interest actually accrued and paid (based on the estimate) will be adjusted in the next period.”
  • “We plan to give them an estimated amount assuming flat rates mid-month, then bill them in arrears using actual rates. This will at least give them a ballpark estimate of what to expect.”
  • “By using an outsourced solution until vendor readiness is reached.”
  • “We are hoping that a forward SOFR rate develops and is widely accepted.”
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Justin Jones
In Cyber risk, Talking Shop

Talking Shop: Which Area of Your Company Owns Fraud Risk and Training?

Member question 1: “Which area of your company ‘owns’ fraud risk?

  • “I am interested in benchmarking ownership of fraud risk management, from policy setting to training and compliance monitoring. The scope of the fraud risk management is broad and includes data security, wire transfers, general theft, IP protection, etc.
  • “Do you have one owner or is it co-owned by multiple departments (treasury, legal, auditing, etc.)?”

Member question 1: “Which area of your company ‘owns’ fraud risk?

  • “I am interested in benchmarking ownership of fraud risk management, from policy setting to training and compliance monitoring. The scope of the fraud risk management is broad and includes data security, wire transfers, general theft, IP protection, etc.
  • “Do you have one owner or is it co-owned by multiple departments (treasury, legal, auditing, etc.)?”

Peer answer: “For us, it is owned by different groups based on the source of the fraud. For example, fraud through phishing attacks is owned by infosec, fraud soliciting payment would be owned by treasury, etc.”

Member question 2: “Where does fraud awareness training responsibility fall within your organization?

  • “Who owns the development and maintenance the training content? Who owns the governance of ensuring your organization has received proper fraud training?”

Peer answer: “Fraud is broadly included in our annual global security and privacy training. The global security office rolls up under IT.

  • “These types of trainings are mandatory and managed through the learning portal or an outsourced service for on-demand learning. The data and privacy and compliance teams in legal also play a role in the content and establishment of governance.”
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Justin Jones
In Pension and Benefits, Risk Management

Pension Endgames: Insights for Managers Mulling Moves

A session sponsored by Insight Investment probes pros, cons and timing of transferring liabilities to insurers.

A key consideration for corporates with traditional defined benefit plans is whether to transfer pension liabilities to insurance companies as funding deficits narrow or plans go into surplus. The primary benefits of risk transfer are eliminating PBGC fees, which have escalated substantially in the last few years, and removing all risk from the company’s balance sheet—both interest rate and longevity risk.

A session sponsored by Insight Investment probes pros, cons and timing of transferring liabilities to insurers.

A key consideration for corporates with traditional defined benefit plans is whether to transfer pension liabilities to insurance companies as funding deficits narrow or plans go into surplus. The primary benefits of risk transfer are eliminating PBGC fees, which have escalated substantially in the last few years, and removing all risk from the company’s balance sheet—both interest rate and longevity risk.

  • Half of the members surveyed at a recent meeting of NeuGroup for Pension and Benefits sponsored by Insight Investment are undecided on the desired end-state of their plans (see chart below).
  • NeuGroup senior executive advisor Roger Heine moderated a discussion of the advantages and drawbacks of liability transfers and provided the key takeaways and analysis that follow.

Cost is the key concern. How much insurance companies charge corporates to take liabilities off their hands is the primary consideration for pension fund managers.

  • The amount charged reflects the insurer’s expected return on equity (ROE), and that typically leads to pricing that exceeds the accounting valuation of the pension liability used by the corporate.
  • Insight Investment says the “spread premium” insurers are currently charging to generate adequate ROE ranges from about 60 basis points for older, retired participants to up to 100 basis points for active employees.
    • So non-retiree pools can look prohibitively expensive to transfer relative to holding a matching fixed income portfolio.
  • Members are aware that risk transfers in many cases are more expensive than managing a plan in-house, which is also called taking a hibernation or self-sufficiency approach.

Be ready for opportunities to lower costs. Companies may have the potential to transfer risk at a lower cost when corporate bond spreads widen, as they did briefly in early 2020 following the spread of Covid-19. That makes bonds cheaper for insurers to buy and increases the discount rates they apply to the pension liability.

  • Heightened competition makes insurers hungry to win risk transfer deals, which can also reduce pricing.
  • So it may make sense for corporates to complete all the work necessary before a risk transfer so the company is ready to move forward quickly if and when pricing becomes more favorable.

Lessons learned. The session benefited from one member who has recently executed a significant risk transfer and another who is seriously considering one and has many questions. This brought out several interesting observations:

  • The entire exercise is complex and can take six to seven months to complete after board approval.
  • There are experienced third party advisors and experts that can do the heavy lifting, know the other players and will execute well, avoiding the need for additional company staffing for the project.
  • Cleaning up the participant database is key, but records are generally already in good shape where participants are already receiving benefits.
  • Hiring a bank to hedge the execution cost makes the transaction feasible despite market volatility.   
  • Surprisingly, the only retirees who complained at the company that did a partial transfer were those who did not make the transfer pool; they would have preferred exposure to an insurance company with a household name.
  • The company took a charge on writing off unamortized losses but the market and equity analysts disregarded it.
  • The liabilities typically get transferred into a separate account within the insurance company where the plan assets directly protect the participants should the insurance company get into trouble.

Intermediate steps towards risk transfer. Risk transfer of participants with small balances—roughly a benefit of less than $500 a month—has been popular because of tangible positive NPVs from saving per-participant PBC fees (now $86 annually).

  • Voluntary lump sum offers to retirees or terminated-vested participants can be more economical than insurance company risk transfer because participants don’t get additional premium for a required return on equity. 
  • A lump sum offer can also provide an alternative to participants who may not want to be transferred to an insurance company.  But companies need to be careful not to offer lump sums too frequently, or they may be deemed a component part of the plan requiring regular offers.
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Justin Jones
In Accounting & Disclosure, Libor SOFR, Risk Management

Libor Transition Puzzle: FASB Provides Clarity, Relief to Corporates

Guidance from FASB clarifies accounting for all hedges impacted by the discounting transition.

The Financial Accounting Standards Board (FASB) started 2021 by clarifying accounting guidance aimed at facilitating the transition of corporate floating-rate transactions away from the Libor reference rate. The standard setter is also expected to resume progress this year on issues it had set aside to address the Libor transition.
 
Background. On Jan. 7, FASB issued ASU 2021-01, an accounting standards update that clarifies issues stemming from Topic 848, titled Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The Topic 848 guidance, issued in March 2020, eased the potential accounting burden arising from reference rate reform. The clarifications provide corporates with operational relief as they pursue transactions.

Guidance from FASB clarifies accounting for all hedges impacted by the discounting transition.

The Financial Accounting Standards Board (FASB) started 2021 by clarifying accounting guidance aimed at facilitating the transition of corporate floating-rate transactions away from the Libor reference rate. The standard setter is also expected to resume progress this year on issues it had set aside to address the Libor transition.
 
Background. On Jan. 7, FASB issued ASU 2021-01, an accounting standards update that clarifies issues stemming from Topic 848, titled Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The Topic 848 guidance, issued in March 2020, eased the potential accounting burden arising from reference rate reform. The clarifications provide corporates with operational relief as they pursue transactions.
 
Discounting relief. Last October, the CME and LCH swap clearing houses changed the rate used for discounting, margining and calculating price alignment to the Secured Overnight Financing Rate (SOFR), which has been referred to as the “discounting transition.” That provided a major boost to SOFR, which regulators and major financial institutions have promoted as the replacement for USD Libor.

  • However, concerns arose among market participants that the discounting transition impacted trades that did not reference Libor. They questioned the scope of Topic 848 and whether there were possible hedge accounting consequences.
  • For example, the index is not expected to change for centrally cleared Federal Funds interest rate swaps. However, they were impacted by the discounting transition, prompting questions whether those contracts required reassessment.
  • In ASU 2021-01, “The FASB clarified that trades affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848,” said Brittany Jervis, head of Chatham Financial’s corporate accounting advisory practice.

Saving net investment hedges. Stakeholders also raised concerns that “float-to-float” cross-currency swaps involving receive-variable rate and pay-variable rate legs could, under reference-rate reform, lead to a difference in repricing dates and intervals, disqualifying certain net investment hedges. The recent ASU clarifies that the discrepancy can be disregarded.

  • “The ASU allows companies to make an optional election that permits them to continue with the original designation,” Ms. Jervis said.  “So any of these trades that previously qualified as net investment hedges would continue to qualify and would not need to be de-designated and marked to market.”

What to watch out for. Under the original Libor cessation date, FASB’s Topic 848 guidance had a sunset date of Dec. 31, 2022. The ICE Benchmark Administration’s current proposal to extend support of Libor to June 30, 2023 would give corporate treasury more time to transition existing financial products priced over Libor to SOFR or other alternative reference rates. FASB is expected to consider pushing the sunset date of its guidance past that. 

Another hedging issue. With accounting changes around reference rate reform completed, other issues may advance. One is accounting for changing the hedged risk in a cash flow hedge, say, from one-month Libor to three-month Libor. Prior to ASU 2017-12, guidance triggered a de-designation of the hedging relationship and potential forecasting considerations when the hedged risk changed, putting hedge accounting treatment at risk.

  • FASB issued a proposal in 2019 to help clarify guidance allowing hedge accounting to continue when the hedged risk changed, as long as the hedge met the criteria to remain “highly effective,” raising concerns about the proposal’s application.
  • “FASB has been working on further clarifications based on feedback, and they’re hoping to issue that this year, now that they’ve wrapped up the ASU on reference rate reform,” Ms. Jervis said.
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Justin Jones
In Cash & Working Capital, Talking Shop

Talking Shop: What is Your Cash Flow Coverage Target?

Member question: “Looking to take a quick pulse of the group. What is your cash flow coverage target for your current fiscal year period? Coverage can be defined as hedges placed vs. earnings exposure estimate or maximum hedge accounting capacity.

  • “Our cash flow hedges are currently covering ~70% of our entire estimated earnings exposure (which closely aligns with our max hedge accounting capacity). This is up significantly from two years ago and is the culmination of a huge effort. Wanting to understand if this is within a normal range since I’m [being asked] to push coverage higher.

Member question: “Looking to take a quick pulse of the group. What is your cash flow coverage target for your current fiscal year period? Coverage can be defined as hedges placed vs. earnings exposure estimate or maximum hedge accounting capacity.

  • “Our cash flow hedges are currently covering ~70% of our entire estimated earnings exposure (which closely aligns with our max hedge accounting capacity). This is up significantly from two years ago and is the culmination of a huge effort. Wanting to understand if this is within a normal range since I’m [being asked] to push coverage higher.

Peer answer 1: “Our policy allows us to hedge up to 80% of the current year’s exposure in a cash flow program.”

Peer answer 2: “We target 40-60% but can go as high at 75%, one year and in.”

Peer answer 3: “Our coverage targets depend on our position (long or short) and our views on if the currency is expected to come our way or if it is moving against us. We are allowed to hedge up to 100% of our rolling 12-month net cash flow currency exposures. We watch very closely if we get between 70%-80% of our accounting cash flow exposures.”

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Justin Jones
In Banking, Capital Markets, Treasury Management

Tear Down, Rebuild: A Treasurer Lays a Foundation for Best Practices

How a newly hired treasurer revamped her company’s capital structure, banking group and her team. 

Soon after arriving at a fast-growing midsized multinational company, a newly-hired treasurer with extensive experience in loan restructurings and amendments launched a loan compliance cleanup. That was the first step on the path to establishing best practices at a company that had never had a treasurer with experience in treasury.

  • The treasurer described what she did and her thinking at a recent meeting of NeuGroup’s Treasurers’ Group of Thirty and in a follow-up interview.
  • While each company’s situation is different, this member’s experience provides insights for peers committed to implementing new treasury practices, policies and procedures that meet an expanding business’s rapidly changing needs and help set it on a course for more growth.

How a newly hired treasurer revamped her company’s capital structure, banking group and her team. 

Soon after arriving at a fast-growing midsized multinational company, a newly-hired treasurer with extensive experience in loan restructurings and amendments launched a loan compliance cleanup. That was the first step on the path to establishing best practices at a company that had never had a treasurer with experience in treasury.

  • The treasurer described what she did and her thinking at a recent meeting of NeuGroup’s Treasurers’ Group of Thirty and in a follow-up interview.
  • While each company’s situation is different, this member’s experience provides insights for peers committed to implementing new treasury practices, policies and procedures that meet an expanding business’s rapidly changing needs and help set it on a course for more growth.

Triage, fixes, goals. The treasurer’s knowledge of loan covenants, operational limitations in credit agreements, technical defaults and compliance certificates allowed her to quickly conclude that the loan compliance situation needed immediate attention. “I saw there were some things that we needed to fix,” she said. The good news: “There was an understanding at the company that this was an area that needed an upgrade and a fresh set of eyes,” she said.

  • Following a relatively “easy negotiation” with banks over cleaning up the credit agreement, the treasurer set about stress test modeling on the company’s credit facility and reviewing existing covenants.
  • She then seized the moment to initiate significant changes as she engaged with senior management and the board to focus their attention on the strategic importance of capital structure.
  • Before embarking on projects of this scale, “You have to be mindful of the time frame to achieve your goals,” the treasurer advises. Ask yourself, “What can you realistically accomplish within the first 12 to 24 months to get some quick wins?
  • “And thinking to the future, what is it you need over the next couple years to really expand what you’re doing? When you go into these new situations and you’re in a rebuilding mode, you’ve got to show some accomplishments.”

New terms, new flexibility. Her goals set, the treasurer realized “we needed to have more flexibility within our capital structure given the size of the company and the fact that we were much more global than we had been several years prior. And I knew that we needed to work with more than just two banks.

  • “It was all about crafting a credit agreement that would work with not only where the company was, but where it’s going,” she said. “The company had very good financial performance so it was really the right time to lay out what it is we needed, what were the exact terms that we were looking for.”
  • The revamped capital structure now features a five-year credit facility and a seven-year term loan. “It was really structuring this so we could have a good runway for the next couple of years.”
  • As a result, “Our pricing went down and our flexibility went up because I took it out to four or five different banks who came back and presented term sheets to us. We also bid out the international banking business at the same time.” The company used its newfound flexibility relatively soon, she said, declining to elaborate.

The people part. The member also put her stamp on the treasury team. “The positions needed to be reworked, the personnel needed to be switched out, essentially,” the treasurer said. Among her moves:

  • The elimination of an assistant treasurer position, in part because of overlapping capabilities with the treasurer.
  • An “opportunistic hire” of a senior manager of treasury with international experience at a large tech company looking for broader treasury experience.
  • The creation of a cash manager position staffed by someone in the company’s accounts receivable area who had treasury experience.
  • “What worked out well for me is I was able to use a combination of internal and external people. I didn’t go 100% external, and that was important, at least within our organization,” the treasurer said.

In focus now. Having laid a solid foundation for treasury, the member has her team focused on investment policy, cash forecasting and position, assessing foreign exchange risk and other areas requiring “some more refinement,” she said.

  • After tackling big areas like capital structure and bank groups, treasurers have to meet the challenge of showing senior management the value of addressing other areas that may seem less exciting or important.
  • The engagement this requires is made more difficult by the pandemic, working from home and the absence of “informal communication,” the member noted.

Needed: support, hard work. Not surprisingly, the feasibility of entering a new company and revamping the capital structure and the banking group and making other major changes requires the support of senior management.

  • “You’ve got to have the support from your manager to really go in and assess what is existing, what are the positions, what is the structure, what do you need immediately to accomplish your goals,” the treasurer said.
  • Don’t underestimate the amount of work involved in pushing a company to shift gears and adopt best practices. And then make the most of the opportunity.
  • The treasurer told herself, “You don’t get to do this a lot. It’s kind of an unusual experience and even though it’s a lot of work I’m going to take advantage of it.”
  • Sure enough, “It was a lot of work, it took a lot of energy,” she said. “But I think it has paid a lot of dividends for the company.”
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Justin Jones
In Banking, Capital Markets

Borrowing Authority and the Board: How Often Do You Renew?

NeuGroup’s survey results on the frequency of borrowing authority renewals, use of carve-outs for M&A and more.

Nearly two-thirds of the treasurers responding to a recent NeuGroup survey renew their borrowing authority with the board on an ad hoc or as-needed basis, while about one-third do it every year. That’s shown in the first pie chart below.

  • But at a follow-up meeting to discuss the results, the general consensus seemed to be that an annual review made the most sense, as it can be part of the overall conversation with the board regarding capital structure.
  • The second chart shows that for the majority (59%) of companies that responded, the full board grants borrowing authority, with the finance committee of the board playing that role at 29% of the companies.

NeuGroup’s survey results on the frequency of borrowing authority renewals, use of carve-outs for M&A and more.

Nearly two-thirds of the treasurers responding to a recent NeuGroup survey renew their borrowing authority with the board on an ad hoc or as-needed basis, while about one-third do it every year. That’s shown in the pie chart on the left, below.

  • But at a follow-up meeting to discuss the results, the general consensus seemed to be that an annual review made the most sense, as it can be part of the overall conversation with the board regarding capital structure.
  • The second chart shows that for the majority (59%) of companies that responded, the full board grants borrowing authority, with the finance committee of the board playing that role at 29% of the companies.

Context. The importance of borrowing authority flexibility was underscored at another NeuGroup meeting in 2019. The takeaways then included:

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

Other observations from the more recent meeting:

  • Some companies with a specified dollar amount ceiling for borrowing have carve-outs which do not require additional approval for purposes such as M&A financing, where borrowing needs are discussed during the normal evaluation and approval process.
  • Members do not share details of their borrowing authority with the rating agencies, but rather provide a range of borrowing which might occur in the upcoming year.
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