Insights

Peer-Validated Insight Distilled by NeuGroup

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

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 Markets, ESG, Technology

Best of NeuGroup Insights 2020

2020 was a year to remember—even if it left us with much we would rather forget. 

Editor’s note: The power to move forward is the best gift any of us will receive this year. In 2021, our team will use that gift to redouble our efforts to bring you valuable insights that help you thrive in an uncertain world. You can read those insights here on our website or by signing up for our email newsletter (click here).

2020 was a year to remember—even if it left us with much we would rather forget. 

Editor’s note: The power to move forward is the best gift any of us will receive this year. In 2021, our team will use that gift to redouble our efforts to bring you valuable insights that help you thrive in an uncertain world. You can read those insights here on our website or by signing up for our email newsletter (click here).

This week’s newsletter, our last of 2020, revisits a range of posts that resonated with readers, reflecting a year when ESG gained force, the pandemic forced finance teams to act fast and smart, and the country grappled with issues of race, social injustice and political strife.

To read it, please click here.

Read More Read Less
Contact Us
Justin Jones
In Banking, ESG

M&A Deals Reveal Growing Power of ESG Ratings, Research

In a recent NeuGroup Virtual Interactive Session, Deutsche Bank weighed in on the changing face of the players doling out ESG ratings which are increasingly important to investors and issuers.

  • As the graphic below makes clear, credit rating agencies and other companies are racing to get in on the action through acquisitions.

In a recent NeuGroup Virtual Interactive Session, Deutsche Bank weighed in on the changing face of the players doling out ESG ratings which are increasingly important to investors and issuers.

  • As the graphic below makes clear, credit rating agencies and other companies are racing to get in on the action through acquisitions.

Trisha Taneja, Deutsche Bank’s head of ESG advisory, identified MSCI and Morningstar as two popular ratings providers, adding that Moody’s and S&P are growing.

  • “The two current main ones are MSCI and Morningstar,” she said. “Those drive the most amount of capital total, not just fixed income, but across asset classes.
    • “MSCI’s data feeds into the ESG indexes which are licensed to a lot of asset capital.
    • “With Morningstar, Sustainalytics data feeds into their fund ratings, but also their standard research, so that also provides a lot of capital.”
  • Ms. Taneja said S&P and Moody’s are coming up fast because their “ESG ratings are more issuer-friendly, so there’s more engagement there.
  • “It’s more forward-looking because they’re based on interviews with management,” she added. “However, because they’re issuer-solicited, it is hard for investors to use it for portfolio construction.”
Read More Read Less
Contact Us
Justin Jones
In Banking, Capital Markets

Wild Rides: Three Treasurers Rise to the 2020 Financing Challenge

Lessons from three companies whose equity, debt and bank credit transactions required flexibility, speed and more.

The scramble for liquidity during the pandemic underscored the need for treasury to be prepared—at any point—to snap into action and access capital or credit. And while each company’s circumstances are different, there are some lessons that emerged from this year’s financings that should interest almost any treasury team.

Lessons from three companies whose equity, debt and bank credit transactions required flexibility, speed and more.

The scramble for liquidity during the pandemic underscored the need for treasury to be prepared—at any point—to snap into action and access capital or credit. And while each company’s circumstances are different, there are some lessons that emerged from this year’s financings that should interest almost any treasury team.

  • At a second-half meeting of NeuGroup’s Life Sciences Treasurers’ Peer Group, three members described funding transactions involving debt, equity and a revolving credit facility. Larry Williamson, head of healthcare coverage at Societe Generale—the meeting sponsor—moderated their discussion.
    • “Companies took appropriate actions in terms of managing their underlying business and undertaking financing to reinforce their balance sheets and ensure adequate liquidity,” Mr. Williamson said.

Be flexible, patient, unafraid. Volatile capital markets, illiquidity, fluctuating pricing and terms for revolvers created situations for some treasurers that required patience and flexibility.

  • One treasurer needed to ensure his company’s acquisition strategy would not be jeopardized by a lack of funding. He had counted on expanding the company’s bank group in a previous year to provide a deep pool of incremental credit commitments. However, the pandemic undermined the critical size of that option and “we had to go back to the drawing board,” he said.
  • The company “explored all corners of debt capital markets to see if we could structure something to preemptively reduce potential M&A execution risk” before initially moving toward a delayed draw term loan, to balance critical size objectives and the cost of carry.
    • Then other corporates starting paying down revolvers, a positive for banks. Ultimately, the company decided on a “massive short-term revolver,” but had to pivot a number of times. After first being told banks wouldn’t do anything longer than 364 days, the company ended up with a two-year revolver with commitments 100% larger than the required facility size.
  • Reaching what the treasurer called “an extraordinary outcome given prevailing market conditions” required going back to the board as the market outlook changed. “Don’t be afraid to go back if you can get a better deal,” he advises. “Don’t feel you’re locked into something and be willing to push internally if you can get a better outcome,” he said.

Don’t rule anything out. In March, as markets shuddered, another company’s senior management decided to say “no go” on a deal to refinance a security maturing in the fall. Waiting until May, the treasurer said he “threw all the spaghetti on the wall” as he looked at the cost of capital of multiple options and worked under a mandate not to affect the P&L.

  • In the end, the company “fell back to something we had done,” a convertible bond that the treasurer described as pretty vanilla but required treasury to be flexible and do a seven-year deal instead of a five-year.

Be prepared, fast, coordinated and aligned. A third treasurer’s financing demonstrated the value of being prepared to act fast to take advantage of an opportunity by working closely and intensely with other finance functions and leaning on bankers and lawyers to get a deal done when time is tight. The multifaceted deal, which the treasurer called “grueling,” involved equity, debt and bridge financing. Takeaways:

  • Don’t underestimate the amount of time it will take to produce and review multiple versions of documents. “We started as early as we could,” the treasurer said. “Thanks to the pandemic, everyone whose input was needed to get the financing done, including board members, was at home and available.”
  • Get internal buy-in and work closely in cross-functional teams. “That’s the only way to do this,” he said. Real trust emerged between the team members as they came together virtually, led by legal and treasury.
  • Be prepared to learn about the strength of your relationship with banks as you make them part of the deal team. When it came to bond allocations, “my goal was to make banks as least unhappy as possible,” the treasurer said, adding that everyone except the lead bookrunner ends up unhappy to some degree.
  • Align on bank roles and titles with senior executives before they field calls from banks, making sure everyone internally agrees that the decisions are fair and equitable. “The management team stood firm,” he said, adding that through it all, “I was really thick-skinned.”

More lessons on banks and boards. Don’t rely solely on your existing banks and service providers for a deal that meets your needs but may not be to their liking, one member said. For his financing, the treasurer broadened his bank group, bringing in several new, non-U.S.-based banks to diversify lender behaviors.

  • The same treasurer advised peers that members of your board may talk to members of other boards and could develop a fear of missing out—FOMO. That means treasury has to combat “doing something for the sake of doing it” (such as a bond offering) by having a lot of discussions about why “others are doing what they’re doing.” He added, “Always be prepared to talk about markets in general and relevant reference deals in particular.”
  • Another treasurer remarked that “the board dynamic is interesting to navigate,” requiring treasury to align on expectations with the C-Suite and “hold the line” on decisions about the banking group and other matters.

Keep it quiet. More than one treasurer emphasized the benefits of keeping information under wraps until it has to be shared with a broader audience.

  • “Confidentiality was key; if information leaked ahead of announcing to the market, there would have likely been negative impact on the execution of the transaction,” one member said.
  • Another only kept the “lead left” informed up until the morning of issuance, saying, “We had been burned before when leaking affected pricing.”
Read More Read Less
Contact Us
Justin Jones
In FX, Risk Management

Laddering: FX Risk Management with Less Work, Fewer Transactions

Wells Fargo explains an alternative to layering for corporates hedging cash flow exposures. 

Who doesn’t want to get more for less? As in less work, more efficiency and fewer transactions, all while still meeting risk management goals. To take advantage, though, you have to be willing to look closer at the shortcomings of the very common cash flow hedging approach known as layering.

Wells Fargo explains an alternative to layering for corporates hedging cash flow exposures. 

Who doesn’t want to get more for less? As in less work, more efficiency and fewer transactions, all while still meeting risk management goals. To take advantage, though, you have to be willing to look closer at the shortcomings of the very common cash flow hedging approach known as layering.

  • During a recent interim meeting of NeuGroup’s two FX managers’ peer groups, the quantitative solutions team at Wells Fargo laid out an alternative to layering called laddering.

Layering rationale. A Wells Fargo survey in 2018 found 63% of the public companies that responded use layering in their cash flow hedge programs.

  • By adding in hedges over time to achieve a higher hedge ratio as the exposure gets closer and exposure forecasts get more accurate, the rationale is that the resulting dollar-cost averaging smooths out gains and losses from FX volatility. This achieves a more stable outcome year-over-year or quarter-over-quarter.  

The downside. The disadvantage of this approach is that it requires the ongoing execution of a large number of hedges, with all the accompanying process work from trade initiation, confirmation and accounting through reconciliation and settlement, not to mention the transaction costs.

  • Wells Fargo’s analysis demonstrates that for a monthly layered cash flow program with a 12-month hedge horizon, a company would have 78 outstanding hedges at any given time per currency, or 300 for a two-year hedge horizon.
  • Many companies choose quarterly layering programs, but that’s still a big number to keep track of, especially when also considering the hedge accounting documentation requirements. Automation helps, but not all companies have achieved that level of automation yet.

Another way. Laddering, by contrast, means hedging a higher percentage of the exposure earlier and for longer per hedge, i.e., “more notional but less frequently” or “sort of an infrequent layering program,” as Wells Fargo’s presenter put it.

  • The example uses a third of the exposure hedged from two years out with an added third starting a year out. This cuts down significantly on the number of hedge executions required and outstanding hedges per currency at any given time, especially as compared to a monthly layering program, of course.

Volatility. But does this increase volatility? Intuitively, if the rationale for frequent layering to increase the hedge ratio over time is to reduce volatility, less frequent would increase volatility. But Wells Fargo’s backtesting analysis for EUR, GBP, CAD and MXN, for example, shows that volatility reduction is better with this tenor extension than with more frequent execution, and lower still for a two-year program.

  • Why is that? Laddered hedging “maximizes the overlap of the rates you are picking up” for the currencies involved as compared to the classical smoothing of layering, the presenter explained.

Converts. So laddering, anyone? One member noted that by conducting similar analysis, her company has indeed transitioned to a laddering (sometimes called staggering) approach to reduce the operational burden of frequent layering while still achieving similar levels of volatility reduction.

  • Another member, however, has a dual mandate of volatility reduction and opportunism to do better than a fully systematic program. So her team needs flexibility to increase (or not) their hedge ratios (above a required minimum prescribed in the policy), and the layered program provides that.  
Read More Read Less
Contact Us
Justin Jones
In Risk Management, Talking Shop

Talking Shop: Net Investment Hedging When There Is No Underlying Income

Member question: “Do you hedge net investments where there is no underlying operating income or cash flows?

  • “Curious what philosophy or triggers companies have around net investment hedging—and if any companies do NIH where they don’t have an underlying positive cash flow or plans to liquidate? For example, a region where you may have a lot of fixed assets but no material underlying revenues.”

Member question: “Do you hedge net investments where there is no underlying operating income or cash flows?

  • “Curious what philosophy or triggers companies have around net investment hedging—and if any companies do NIH where they don’t have an underlying positive cash flow or plans to liquidate? For example, a region where you may have a lot of fixed assets but no material underlying revenues.”

Peer answer 1: “At our company, we have to raise debt regularly, so our NIH program is mostly foreign currency debt (both organic and synthetic via cross-currency swaps). Our NIH currencies happen to be in countries with material revenues.

  • “But for us, the thought process is that we’re going to raise debt and some of that capital will be deployed into other countries and currencies; why not raise some of that debt in the same currency in which the assets will be deployed as a natural hedge?
  • “We do also sometimes use forwards tactically as short-term NIH if we’re declaring a dividend or return-of-capital or putting money into a foreign sub prior to that sub making an acquisition.”

Peer answer 2: “We execute NIHs in anticipation of large dividend payments as a way to hedge the cash flow prior to dividend declaration.”

Read More Read Less
Contact Us
Justin Jones
In Capital Markets, Pension and Benefits

Dial It Down: Pension Fund Managers Cope With Lower EROAs

Key takeaways from a NeuGroup for Pension and Benefits meeting sponsored by Insight Investment and BNY Mellon.

Pension fund managers discussed best practices in selecting and evaluating investment managers, asset allocation and the impact of lower estimated return on assets (EROA) among other topics at a virtual meeting sponsored by Investment Insight and BNY Mellon. Here are takeaways from the gathering compiled by Roger Heine, senior executive advisor at NeuGroup.

Key takeaways from a NeuGroup for Pension and Benefits meeting sponsored by Insight Investment and BNY Mellon.

Pension fund managers discussed best practices in selecting and evaluating investment managers, asset allocation and the impact of lower estimated return on assets (EROA) among other topics at a virtual meeting sponsored by Investment Insight and BNY Mellon. Here are takeaways from the gathering compiled by Roger Heine, senior executive advisor at NeuGroup.
 
EROA expectations. Two-thirds of members are facing the reality that low interest rates are pushing down EROA assumptions, which ultimately reduce pension earnings under standard accounting.  Overall, EROA has eroded about 50 to 100 basis points over the past three years, according to figures presented by one member.

  • However, those pensions which still have large equity and risky asset allocations with higher expected returns are feeling less pain. 
  • With US interest rates now below expected inflation, actuaries and auditors have become less complacent with fixed income return assumptions based purely on historical returns—it seems almost impossible for these returns to be repeated going forward. 
  • Several members indicated that EROA analysis has evolved to weigh historical returns with forward-looking long-term estimates provided by fund managers and even actual recent performance. But several members expressed frustration with how much supposedly stable, long-term expectations can change year-to-year.
  • Several members emphasized that the EROA estimating process is performed independently of corporate management and is not influenced by the impact on reported earnings.

Adjustments to overall pension strategy? Despite all the market volatility in 2020, it appears most pensions stayed the course and have not fundamentally changed asset allocations as long-term strategies such as liability-driven investment (LDI) trumped sentiment that fixed income markets in particular have become overvalued.

Manager selection criteria. One member explained her very systematic process for selecting and retaining portfolio managers that starts with a highly quantitative approach, similar to analyzing each manager like a security under modern portfolio theory, based on historical data and evaluated almost continuously thanks to available software. 

  • Following that, qualitative factors are layered in, such as the investment philosophy, risk management controls and whether there is an idiosyncratic edge to the manager’s strategy.
  • Another member made the point that it’s important to look at historical performance on a rolling basis; otherwise, one good year could impact three, five and even 10-year historical performance.
  • Regarding the number of managers, three seemed to be a minimum requirement for each asset class to get diversification benefits. Larger pensions can have many more, limiting each manager to 15% to 20% concentration.
  • Another member discussed how it is preferable to work with underperforming managers before firing them, as you don’t want to do that at the bottom of their performance.

Passive vs active managers. There seems to be a trend to shift more assets to passive funds, particularly in the most liquid markets where the opportunity for alpha in active funds is probably minimal anyway and management fees are a drain on performance.

  • But a key challenge with passive funds is concentration in the tech-heavy top six or seven largest companies, with the imminent addition of Tesla to the S&P 500 adding to the challenge.

Contributions. Several members discussed how increasing corporate contributions to the pension makes a lot of sense when they would reduce the high 4.5% variable PBGC fees. But PBGC fees are capped for lower funded pensions, which discourages contributions among high yield companies.

  • The low borrowing rates for strong companies compared to much higher EROAs are also encouraging contributions to pensions.
Read More Read Less
Contact Us
Justin Jones
In Banking, Capital Markets, Technology

Is the Corporate Bond Market Ready for Digital Transformation?

Former NeuGroup members look to convince today’s treasurers that the current system needs to change.

By Joseph Neu

In the wake of a record year for corporate debt issuance—around $2 trillion in the US alone, generating estimated fees for banks topping $8 billion—this is a good time to assess if the corporate bond market needs transformation.

  • As part of a new series of virtual interactive sessions on fintech solutions to perennial treasury and finance function challenges, NeuGroup hosted a session last week looking at a corporate bond issuance auction platform backed by several NeuGroup member alumni and created for corporate issuers.
  • This fintech’s solution stands apart from others in that it is created by treasurers for treasury.

Former NeuGroup members look to convince today’s treasurers that the current system needs to change.

By Joseph Neu

In the wake of a record year for corporate debt issuance—around $2 trillion in the US alone, generating estimated fees for banks topping $8 billion—this is a good time to assess if the corporate bond market needs transformation.

  • As part of a new series of virtual interactive sessions on fintech solutions to perennial treasury and finance function challenges, NeuGroup hosted a session last week looking at a corporate bond issuance auction platform backed by several NeuGroup member alumni and created for corporate issuers.
  • This fintech’s solution stands apart from others in that it is created by treasurers for treasury.
  • Members who attended the session and saw the platform demo expressed real enthusiasm for the transparency, control and efficiency it offers. After all, who wouldn’t want to pay less for more?

A striking lack of innovation. As one member noted during the opening session assessing lessons learned from the work from home (WFH) bond issuance experience, “There’s a striking lack of innovation—it feels like we are in the stone age.”

  • It starts with reporting and compliance workflow: “Our bond deal was almost derailed in March because the printer couldn’t print and file all the documents,” the treasurer noted.
  • There is little pre-sale data other than how an issuer’s bonds are trading in the secondary market, and that does not necessary reflect actual investor preferences with a new issue.
  • The sales process gets executed by banks, mostly by phone and chat, without sharing of information on the bids and allocations as they happen.
  • Bond deal pricing is not optimized for best price execution, and the bank’s fees are mostly fixed, which leaves little incentive to innovate.

The conclusion: During the pandemic, some workflow for deals had to change to adapt to WFH, including virtual roadshows. But fundamentally, bonds got sold the way they always have been.

Oversubscribed. Unless you were an issuer in distress due to Covid, your bond deal was oversubscribed this year (by a lot). This suggests pricing is not reflecting demand. According to research cited by the fintech, US corporate bond offerings have increasingly been oversubscribed since the 2008 global financial crisis and remain underpriced by an average of 32 basis points.

  • If bonds are priced to move, then how much work are the underwriters doing to earn their fees from issuers?
  • If demand exceeds supply, then why not allow for an efficient auction with reverse inquiry even before an issuer starts to test the waters?

Direct the allocation. So much is being sold directly in our increasingly digital world that the buy-side is growing more comfortable with the direct issuance of corporate bonds. That said, big bond investors with good relationships with the top dealer banks may be ok with the current system.

  • But issuers want to diversify their bondholders in favor of the buy-and-hold cohorts (no hedge funds, please), and bond investors who must practically beg to get bonds are also supporting electronic platforms.
  • This includes corporates themselves, who often must scramble to buy bonds for their pension and cash investment portfolios.
  • Some issuers help their peers by instructing underwriters to allocate a percentage of their deal to other corporates.
  • Growing interest in diversity and inclusion (D&I) has also shown up in allocating bonds to Black- and minority-owned institutions to sell and purchase. This is yet another driver of issuers wanting to have more control.
  • There are also green and other ESG-related bonds that issuers may want to see land with investors with specific ESG mandates they favor.

Roadblocks. Despite the need for change, there is some skepticism that the current economics of corporate bond issuance will allow real transformation to take hold.

  • The fees paid for bond issuance are a means for corporate treasurers to compensate banks for a wide range of other services, starting with credit facilities and loans, that do not reflect a true market cost of credit.
    • But should bond economics be allowed to continue if banks are still able to charge for underwriting and market making that they are restricted by regulation from performing in the same way they used to?
  • Corporates that have banks as significant customers must also factor in how much of their commercial relationship is factored into the bond economics.
  • Treasurers may only receive minor credit from bosses if they shave fees from a bond transaction; but they could lose their job if a major bond deal falters.
    • True or not, the impression persists that a banker might press an institutional investor to buy bonds to prevent a deal from failing.
    • “Saving some on fees is not worth the risk of a deal going south on you,” one treasurer said.
    • On the other hand, some treasurers get the impression that junior bankers are mostly those working the phones these day—and they may not have as much sway with investors. (We guess they can hand the phone to an MD if needed.)
    • Perhaps an algorithm can be made smart enough with the right data at its disposal to prevent a deal from faltering without calling upon personal relationships.

Status quo appeal. Another obstacle: Less experienced corporate debt capital market teams at infrequent issuers may want to stick with a status quo where banks guide them through the process.

  • “How does a platform offer the same kind of hand-holding as we get know from our banks?” one session participant asked.
    • Would the treasurers backing a platform arrange for handholding, including training and development without a pro-bank tilt, for inexperienced bond issuers?
  • Also, there are treasurers who work hard at wallet management and analysis and believe that they come out well under current bond economics. They say they pay less overall compared to market pricing for credit and other services.
    • Even if they are not convinced they are leaving money on the table with the fees banks are setting, they may still have reason to overpay for bond issuance.

First movers. With all this said, what is required for a digital transformation of the corporate bond market is for some issuer of stature to be a first mover. And most corporate finance types are reluctant to be a first mover. Still, the enthusiasm of those who see transformation as inevitable, spurred on by all the acceleration of change brought about by Covid, might just do it.

Read More Read Less
Contact Us
Justin Jones
In Functional, Treasury Management

Test Your Knowledge of Treasury! A Trivia Contest to Attract Talent

One treasurer uses a quiz to educate, promote communication and build interest in treasury among finance teams.

Treasury teams often struggle to attract talent when competing with more glamourous finance functions. Part of the problem is a lack of understanding of what treasury does.

  • To build awareness and interest in treasury and enhance communication with other finance teams at his company, one treasurer created a contest to test the knowledge of senior leaders.
  • He described the quiz at a recent meeting of NeuGroup’s Treasurers’ Group of Thirty, sponsored by Standard Chartered.

One treasurer uses a quiz to educate, promote communication and build interest in treasury among finance teams.
 
Treasury teams often struggle to attract talent when competing with more glamourous finance functions. Part of the problem is a lack of understanding of what treasury does.

  • To build awareness and interest in treasury and enhance communication with other finance teams at his company, one treasurer created a contest to test the knowledge of senior leaders.
  • He described the quiz at a recent meeting of NeuGroup’s Treasurers’ Group of Thirty, sponsored by Standard Chartered.

Treasury 101. As many as 40 contestants compete for a small prize by answering a multiple-choice questionnaire called Treasury 101 that consists of 20 to 25 questions on subjects including:

  • Treasury organization
  • Cash management
  • Strategic objectives
  • Corporate finance
  • Risk management
  • Insurance

Time’s up. After the contestants have selected an answer, the subject matter expert tells them which one is correct and spends a few minutes providing more color, the treasurer explained.

  • “For instance, ‘How many people work in treasury?’ We might say 20, and then show the staff’s geographical dispersion or an organization chart showing who they are and what everybody does.”
  • As for results, he said, “We tend to find that most attendees have very little knowledge of the treasury function in general.”

The serious objective of having fun. The treasurer said the contest has three objectives:

  1. “To educate others about who is treasury and what we do.
  2. “Establish interest in treasury and create a bench of potential talent who might be interested in a career in treasury.
  3. “Have some fun and interaction with other finance departments.”

Positive results. In addition to the game being well attended and well received by participants, the member said the contestants are always a little more knowledgeable and appreciative of treasury’s role in the company after the event.

  • “It’s generated a lot of interest,” he said. And though participants in the game tend not to get too many questions correct, many participants reflect on how much they learned about treasury and how much fun they had.
  • While the game is better organized in an office location where lunch or snacks can be offered, in the current climate, it also works well virtually.
    • Anyone who thinks they can win by turning to the internet should know “they will not find the answers on Google—that’s for sure,” the treasurer said.
Read More Read Less
Contact Us
Justin Jones
In Banking, FX, Talking Shop

Talking Shop: How Do You Restrict Trading for Currency and Bank Pairings?

Member question: “Question on restricting trading for certain currency/bank combinations: We have a few currencies that some banks have trouble settling with us (such as RUB). I want to avoid trading with these banks for those currencies.

  • “Ideally, I could set up a rule in FXall to restrict specific bank/currency combinations. Does anyone have suggestions for doing this? Thanks!”

Member question: “Question on restricting trading for certain currency/bank combinations: We have a few currencies that some banks have trouble settling with us (such as RUB). I want to avoid trading with these banks for those currencies.

  • “Ideally, I could set up a rule in FXall to restrict specific bank/currency combinations. Does anyone have suggestions for doing this? Thanks!”

Peer answer 1: “I believe that in FXall’s QuickTrade set-up, you can select/designate standard counterparty banks to populate for specific currencies pairs. Although this won’t prevent users from changing the counterparty, it could help in pre-populating the counterparties in FXall when, e.g., RUB is pulled up.”

Peer answer 2: “Agreeing with Peer 1’s comments. We currently restrict trading certain currencies to a subset of banks and have configured FXall so only those banks appear as possible counterparties in the RFQ screen. I’m happy to walk you through the steps.”

Peer answer 3: “I am curious if Peer 2 automated this. We use the QuickTrade set-up as well to have default counterparties by currency. We have a spreadsheet we plot the ‘roster’ in before entering into FXall (as we actively rotate counterparties quarterly). A matrix we maintain in the spreadsheet makes sure we do not choose bank/currency combinations we don’t think make sense.”

Read More Read Less
Contact Us
Justin Jones
In Banking, Capital Markets, ESG

Corporates Seek Best Practices in Backing Black-Owned Banks, Brokers

Selecting which minority-owned institutions to include on deals requires asking the right questions. 

Netflix, Apple, PayPal, Microsoft and other companies launched prominent initiatives to support Black-owned banks and brokerage firms this year in the wake of the social justice movement sparked by the death of George Floyd in May.

  • Scores of other corporates are making or doubling down on commitments to support financial institutions serving minority communities. They’re doing it through bank deposits, investments in community development financial institutions (CDFIs) and by engaging Black-owned firms to participate in capital markets transactions, among other approaches.

Selecting which minority-owned institutions to include on deals requires asking the right questions. 

Netflix, Apple, PayPal, Microsoft and other companies launched prominent initiatives to support Black-owned banks and brokerage firms this year in the wake of the social justice movement sparked by the death of George Floyd in May.  

  • Scores of other corporates are making or doubling down on commitments to support financial institutions serving minority communities. They’re doing it through bank deposits, investments in community development financial institutions (CDFIs) and by engaging Black-owned firms to participate in capital markets transactions, among other approaches.

Seeking metrics and best practices. At several NeuGroup meetings this fall, including one devoted to capital markets sponsored by Deutsche Bank, members discussed the challenges of managing risk as they commit capital amid broader corporate mandates on diversity and inclusion (D&I) efforts.

  • Treasury teams are also seeking input on best practices for choosing and evaluating minority-owned firms and establishing metrics to measure the corporate’s efforts at effecting change.
  • “We have yet to find a good way to measure the effectiveness of including the firms—or which firms to include or exclude” from capital markets transactions, the assistant treasurer of a company that has used minority-owned banks for liability management and bond transactions said.
  • “We don’t have good way to assess them,” he added. “We need a more comprehensive strategy on how, why and when to do business with these groups.”

Capital and capabilities. In response, other members suggested questions to ask and criteria to consider when selecting minority-owned firms, including:

  • A financial institution’s capital levels and who has invested in it.
  • The longevity of the relationship the company has with the minority-owned bank. “Firms tend to pop up and disappear,” one AT said.
  • The firm’s breadth of coverage and distribution capabilities. “Can these institutions sell bonds if they are asked to?”

Authenticity. “What’s your diversity level inside the firm?” one AT asks companies. One red flag: too many people who are not part of minority groups attending a meeting to represent a minority-owned institution.

  • Another AT wants to know, “What are they doing for the communities they represent? How are they engaging and giving back? How are they using the fees they generate—do they use some to hire staff and do charitable work?”

Performance questions. The same member evaluates a firm’s performance in a deal by asking questions that include:

  1. What is the quality of the order book they brought in?
  2. Are they bringing in hedge funds who are going to flip the bonds?
  3. Are they bringing in large players who already submitted orders to lead underwriters but are trying to meet diversity mandates?
  4. Are they instead bringing in a number of small, high-quality investors not covered by the leads. “That’s where diversity firms can add value,” he said.

Allocation game plan. One AT receives “constant pushback” from lead underwriters when he asks for information about the orders placed by minority-owned banks and allocation decisions. After one bank proposed allocations the company didn’t agree with, “we ended up saying ‘here are the allocations; forget your allocation’.”

  • Another member’s company instructs the lead underwriter to “quarterback diversity orders” and lets them know “how well they do interfacing with the diversity firms will affect our view of the lead underwriter’s performance on the transactions.”
  • He added, “By evaluating the lead underwriter on this basis, the banks know that future lead-managed transactions are at stake.”
  • The company requires the lead to explain their allocation decisions. “We’re not looking for a billion dollars of orders,” from minority-owned firms, he said. “We want 15 orders of $10 million that we can allocate $7 million to,” he said.
  • In a follow-up interview, one of the ATs said, “I would add that companies should set out their expectations up front with both the leads and diversity firms. That way everyone has a clear understanding of what is expected, how you will measure their success, and how to explain the deal to their teams and investors. 
    • “Then, do not be shy about pushing the leads to give allocations that you want. We set aside time on every deal to talk to the lead and make them justify their recommended diversity firm allocations and then either accept it or make them adjust as needed.”
Read More Read Less
Contact Us
Justin Jones
In Compliance, Risk Management, Technology

How to Engineer Complicated Engineering Audits

Recruiting engineers to join audit teams bolsters accuracy as well as credibility.

Highly technical engineering audits can be among the most challenging for internal auditors. A member of NeuGroup’s Internal Auditors’ Peer Group (IAPG) queried fellow internal auditors in a recent meeting about what parts of engineering they audit and the makeup of those auditing teams.

Recruiting engineers to join audit teams bolsters accuracy as well as credibility.

Highly technical engineering audits can be among the most challenging for internal auditors. A member of NeuGroup’s Internal Auditors’ Peer Group (IAPG) queried fellow internal auditors in a recent meeting about what parts of engineering they audit and the makeup of those auditing teams.
 
Expertise in short supply. A peer said engineering takes up more than 30% of his team’s 100-audit plan, and one of the challenges is finding sufficient engineering expertise, even as a technology company that employs plenty of engineers.

  • She noted IA aims to have IT auditors and technical program managers as a part of the audit teams, “So we have expertise going in.”
  • She added those experts also engage in ISO audits that assure audit quality.

Credibility bolster. An IAPG member at another tech company behemoth described a recently completed nine-month project that engaged half a dozen quality and design engineers as part of the audit team and also took advantage of co-sourcing to provide specific skills.

  • Analyzing a major client product and the company’s two biggest data centers, the IA team took a deep dive into the relevant systems and how information is being stored.
  • Bringing on those quality experts as well as engineers spanning the product life cycle was “hugely successful,” he said, adding, “We’re hoping to build on that and have more engineering expertise, because it also gives more credibility to the work.”
  • In the year ahead, he said, his team will look at how audit work done on the engineering and design side can be applied to manufacturing, “And also how they link up with the product road maps and the decisions that were made.”

Tracking revenue leaks. IAPG members agreed to discuss, offline, in greater detail their strategies and findings for engineering audits. One member asked to be included in those discussions, in part because her team had just embarked on a project to trace financial transactions all the way back to the engineering databases and could benefit from engineering expertise. 

  • She noted this is the first time for such a coordinated effort, from end to end. “It’s an advisory engagement and we’re working collaboratively with [the relevant departments] to do this completeness and accuracy check,” she said.
Read More Read Less
Contact Us
Justin Jones
In FX, Risk Management, Talking Shop

Talking Shop: What Did Your Transition Plan to Hedge Accounting Look Like?

Member question: “What did your transition plan to hedge accounting look like?

  • “We are planning to adopt hedge accounting in the future. In terms of transitioning a book of hedges to designated hedges, we will close all existing undesignated hedges and put on a new book that is designated at inception.
  • “We are curious how others have put on these new hedges. How long did you take to put on hedges? Did you trade all at once, daily, weekly, etc.? Also, were there any lessons learned from executing your transition plan to hedge accounting?”

Member question: “What did your transition plan to hedge accounting look like?

  • “We are planning to adopt hedge accounting in the future. In terms of transitioning a book of hedges to designated hedges, we will close all existing undesignated hedges and put on a new book that is designated at inception.
  • “We are curious how others have put on these new hedges. How long did you take to put on hedges? Did you trade all at once, daily, weekly, etc.? Also, were there any lessons learned from executing your transition plan to hedge accounting?”

Peer answer 1: “We have transitioned five currencies to hedge accounting so far for our cash flow hedging program. We closed out our existing trades and placed the new trades for hedge accounting all at once in the same day.

  • “The project took much longer because we are utilizing a outsourced model for the accounting with Chatham because we did not have the capacity in accounting to bring it all in house, and our IT team had to build the API.
  • “We also implemented a new ERP system for one of the regions so we had to wait for that to be completed before we could launch that currency. But overall, the project has gone really well​.”

Peer answer 2: “If the hedges are identical (i.e., same value date, notional, etc.) as your existing hedges, I think a better approach may be to do a late designation. Basically, any mark-to-market up to the point of designation would remain mark-to-market through earnings, but once designated any future mark would go to other comprehensive income.

  • “The guidance does say designation needs to occur at the ‘inception’ of the hedge, but I have seen inception applied to mean more where you draw the line of capturing mark-to-market in OCI vs. earnings. (Unwinding hedges and entering identical hedges gets you to the same spot, absent the additional transaction cost). May be worth a discussion with your auditor if this is the fact pattern.”
Read More Read Less
Contact Us
Justin Jones
In COVID-19, Regional, Technology

Asia Tech Companies Optimistic for Post-Covid Growth

Key takeaways from the AsiaTech20 Treasurers’ Peer Group pilot meeting sponsored by MUFG.

By Joseph Neu

Be prepared for global optimism. The global economic outlook is overwhelmingly positive with Covid-19 vaccines nearing distribution. Plus, a new administration in the US brings an expectation for economic growth to take on a more global scope, with Asia expected to outperform.

Key takeaways from the AsiaTech20 Treasurers’ Peer Group pilot meeting sponsored by MUFG.

By Joseph Neu

Be prepared for global optimism. The global economic outlook is overwhelmingly positive with Covid-19 vaccines nearing distribution. Plus, a new administration in the US brings an expectation for economic growth to take on a more global scope, with Asia expected to outperform.

  • For this reason, tech treasurers in Asia have also pivoted from enduring the crisis through stockpiling capital and liquidity to preparing to go on offense, growing with the recovery and improving their standing in the market—with customers, distributors, suppliers or all three.

Growth dynamics in Asia capital markets. MUFG helped shed light on a number of interesting trends in Asia capital markets of which tech clients are taking advantage.

  • First, the traditional strength of bank lending to tech in Asia remains, especially in Taiwan, China and Australia. Tech treasurers reported success with renewing credit facilities, up-sizing or adding new loans, as well as amending covenants favorably.
  • Bond issuance by Asian tech firms has also grown and they find receptive investors in the US, especially if they get a rating, as well as in Asia. The depth of debt capital markets in Asia continues to grow, according to MUFG, so that issuers seen as investment-grade looking to raise over $300 million or even $500 million can get deals done in Asia.
  • Two drivers of recent capital sourcing: M&A, such as Taiwanese tech manufacturers selling mainland China assets to fund new assets offshore; and Chinese tech firms funding take-private deals as US and other offshore listings draw more scrutiny.
  • Growth optimism and positive sector tailwinds will likely drive broader acquisition financing as well as increasing capex to lean into post-Covid demand.

Standardizing processes in preparation for accelerating digitalization. A discussion of organizational change in the wake of Covid-19 revealed that tech treasurers in Asia have benefited from projects to standardize treasury processes ahead of the crisis.

  • One member noted her proximity to a company shared services center and standardizing across integrated financial operations. Alongside this, her staff has been educating themselves on data analysis and automation tools that have also made it easier to improve cash forecasts over the crisis period.
  • Her TMS has not delivered well with data integration, as system APIs on the enterprise side and on the bank side are not as open as they promise. This is where coming up with your own means of data integration, such as RPA, is important.
  • One large fintech company treasurer has taken this even further by using software engineers at his firm to develop a mobile treasury app with three-click access to real time cash and debt levels. The aim of all such efforts is to scale support for rapid tech growth without growing treasury headcount.
Read More Read Less
Contact Us
Justin Jones
In Libor SOFR, Technology

The Voyage to SOFR: TMS Headwinds for Some, Tailwinds for Others

Corporates weigh vendor readiness, the time and expense of updates and devise workarounds amid Libor transition.

Corporate treasurers trying to prepare for the transition from Libor to new indices like SOFR and other alternative interest rates are assessing the readiness of their TMS vendors. Many need to decide whether to spend the time and money necessary to upgrade systems or rely on third parties or devise their own solutions instead.

Corporates weigh vendor readiness, the time and expense of updates and devise workarounds amid Libor transition.

Corporate treasurers trying to prepare for the transition from Libor to new indices like SOFR and other alternative interest rates are assessing the readiness of their TMS vendors. Many need to decide whether to spend the time and money necessary to upgrade systems or rely on third parties or devise their own solutions instead.

  • While a proposed extension for legacy Libor contracts may provide some relief, members at recent NeuGroup meetings have voiced concern about TMS vendor readiness and the cost of upgrades.
  • At the same time, some users of Reval’s cloud-based solution expressed confidence that Reval is prepared, and they anticipate a relatively simple, automated roll-out of an update for SOFR.

Relying on Excel and banks. Members not in a position to upgrade or migrate to a new system may turn to making necessary calculations by hand, although some treasurers say this strategy is not sustainable.

  • One treasurer said his company would have to pay to upgrade its TMS to have SOFR functionality, “which we’re not going to do for lack of resources. So it’ll just be up to manual calculations at that point, leaning on the banks for some help with the SOFR calculations.”
    • Another who uses the same system outsources the calculations to Chatham Financial rather than pay to upgrade. “We feel comfortable about [Chatham’s] capabilities—we just outsource all that.”
  • Another TMS requires clients to undergo a multiyear migration to a new version of its system to handle SOFR. A member in the midst of this process said she has concerns about the project’s timeline and Libor’s end date.
  • Until the upgrade process is complete, the member said her treasury team will need to pull SOFR into Excel from Bloomberg and calculate the compound interest on a daily basis.
  • For smaller companies, this may be a feasible long-term solution, but not for larger companies like hers. “There’s a risk introduced by the number of contacts and transactions we have within the system,” she said.

Waiting game. A member whose company is opting to pay to upgrade said implementation will take 10 months, with the TMS unlikely to include SOFR index functionality until Q2 or Q3 of next year.

  • “I am a little bit concerned with where our vendor is with even providing that basic functionality that we need in the upgrade,” she said. “We’re already behind schedule, and we haven’t even kicked off the project.”

A good experience. Some members using Reval expressed fewer concerns, saying the “user-friendly” vendor is well-positioned for the transition.

  • Automated updates make using Reval simple for one member who said he appreciates the rollout process. “In each of their user releases, they’ve highlighted the changes and provided user guides, even on Libor exposure reporting,” he said. “It shows you a dashboard where you can see where all your exposure is, to help people along the journey.
    • “You have the ability to pick a date you want to transition to the new base rates, the base rates are already reporting in there if you want to see what that means for interest going forward, forecasting-wise.”
  • Reval’s pricing evaluator came in handy for another member’s team, which uses it to “evaluate our debt differently, based on alternative reference rates or Libor. Overall, it’s been a good experience.”
Read More Read Less
Contact Us
Justin Jones
In FX, Risk Management, Technology

An Early Warning System to Flag Excessive Counterparty Credit Risk

One corporate’s proactive approach to measuring and managing FX and other counterparty exposures.

Using credit ratings from S&P, Moody’s and Fitch is one way corporates establish maximum credit limits with counterparties. But at a meeting of FX risk managers this fall, one company described some shortcomings of that “classic approach” and explained an alternate method that enables it to take action before exposures reach unacceptable levels.

One corporate’s proactive approach to measuring and managing FX and other counterparty exposures.

Using credit ratings from S&P, Moody’s and Fitch is one way corporates establish maximum credit limits with counterparties. But at a meeting of FX risk managers sponsored by Wells Fargo this fall, one company described some shortcomings of that “classic approach” and explained an alternate method that enables it to take action before exposures reach unacceptable levels.

Proactive vs. reactive The company’s director of liquidity and investment management said traditional credit ratings are reactive and sticky—they don’t move for long periods of time—and provide no insight into how risk is evolving in real time. He then explained the basics of the company’s new, proactive approach to managing counterparty credit risk.

  • It’s based on the Merton Distance to Default Model, developed by Nobel Prize winner Robert Merton.
  • The treasury team pulls data from public feeds, such as Bloomberg, then runs Merton model analytics in Python.
  • It uses a barrier option pricing model where spot is equal to market capitalization and the strike (barrier) equals total debt.
  • It uses option math to calculate the probability of exercise, which can be thought of as the probability of default.
  • “If we know our risk tolerance and the probability of default, we can calculate the maximum allowable credit limit for each customer or bank,” a slide in the company’s presentation said.

Counterparty risk exposure calculation. Instead of comparing current mark-to-market levels to the credit limit, the company compares limits to the maximum potential future exposure (MPFE).

  • It uses the Monte Carlo option pricing model to derive the 5th and 95th percentile forward curves for each currency pair for each quarter end over the life of the derivative.
  • The company models each derivative using those rates and groups them by counterparty to develop the MPFE.

Early warning. The presentation said this method produces an improved risk management system. Because exposures are measured on MPFE instead of MTM, “we have an early warning system that allows us to take action before our actual (MTM) exposure is at unacceptable levels,” one slide said.

  • To make the point, the presenter showed a slide showing that S&P had rated Lehman Brothers A+ at the end of 2007, while the company’s model produced an implied rating of B-.
  • On Sept. 12, 2008, S&P lowered Lehman to A while the model had put the company at triple-C on Sept. 9.
  • On Sept. 15, Lehman and the model downgraded Lehman to D—the level of a technical default. “That’s not a place we want to be, the presenter said.

Informed decisions. The example chart above shows the term structure of counterparty risk: how the risk could evolve over time (at the 95th percentile of forward rates) given the trades currently on the books with a given counterparty.

  • As trades expire, the chart declines; peaks indicate the point of maximum potential counterparty exposure.
  • “So, if you are bumping up against counterparty limits and the chart peaks in the three or six months before steeply falling off (due to trades expiring in that time frame) you may be willing to live with that exposure,” the presenter said.
    • “Whereas if the peak in the chart is two or three years out, you may be forced to decide how comfortable you are with that risk and whether any actions are warranted.”
  • This, he said, “allows you to be more thoughtful about” managing risk “without being in the heat of battle.” And that allows risk managers to decide if they want to limit exposure to short-dated trades “or do I want to trade with them at all.”
Read More Read Less
Contact Us
Justin Jones
In Insurance, Risk Management

Rethinking Risk: Who Needs Insurance When You Have ERM?

Relying on ERM instead of insurance is probably extreme, but robust risk management might reduce premiums.
 
Have surging insurance premiums got you down? One answer to controlling these costs could be to resurrect your enterprise risk management program or bolster an existing one. This was one takeaway from NeuGroup’s H2 Treasurers’ Group of Thirty (T30) meeting, where one member said his company was unwilling to pay increases in premiums that in some cases have more than doubled.

Relying on ERM instead of insurance is probably extreme, but robust risk management might reduce premiums.
 
Have surging insurance premiums got you down? One answer to controlling these costs could be to resurrect your enterprise risk management program or bolster an existing one. This was one takeaway from NeuGroup’s H2 Treasurers’ Group of Thirty (T30) meeting, where one member said his company was unwilling to pay increases in premiums that in some cases have more than doubled.

  • As has been well-documented in NeuGroup meetings this year, premiums—particularly for directors and officers (D&O) insurance—are surging. Premiums already were on the rise at the beginning of 2020 and the pandemic did nothing to arrest that trend. Members in several virtual peer group meetings have said they were seeing rates rise by between 25% and 70%.
  • One peer group member actually balked at a quote 25% more than the year before. He searched for a better price but couldn’t find one. What’s worse, when he went back for the 25% increase, it was now upwards of 50%. “I wish I took the 25% increase,” he said.

Enter the risk managers. Faced with the same problem, the T30 member said his plan to mitigate the increases was to cut coverage and concurrently resurrect the company’s ERM program to help prevent insurance events from happening in the first place.

  • “We took much less coverage than in the past,” the member said. “And then took this opportunity to reinstate the ERM program and pay more attention to process controls and the like.” He added that he felt the company was “in good shape” following the change.
  • Another member took a similar tack, using ERM to flesh out “what risks can break our company.” This exercise, he said, would better inform them as to “where to spend our insurance dollars.”

Getting out front. The idea of getting ahead of risks is gaining currency, not just in ERM but in internal audit, too. This means IA and ERM would need to be part of strategic discussions. One ERM member said one of his goals for 2021 was better decision-making across the company and management.

  • “Better decision quality can be affected at all levels,” the risk manager said. He added that he was going to “pitch a decision-making plan” to management, hiring a third party to educate the management team and others.
  • Echoing this sentiment, one internal auditor in another meeting said recently that her IA shop was “moving away from the traditional way of auditing and asking questions ahead of big decisions.”
  • “We want to drive the behavior instead of chasing things down in an audit later on,” she said. “When you’re there at the beginning, it makes it easier.” She brought up an example of systems implementation and offering advice on how it should go.
Read More Read Less
Contact Us
Justin Jones
In Capital Markets, Technology, Treasury Management

Strengthening Treasury’s Capabilities by Developing Internal Talent

Key takeaways from the Treasurers’ Group of Thirty 2020 H2 meeting, sponsored by Standard Chartered.

By Joseph Neu

Move up the treasury learning curve. This group has a disproportionate number of treasurers who are new to their role. Several come from the tax side and a few were brought in to build or expand their company’s treasury capabilities.

Key takeaways from the Treasurers’ Group of Thirty 2020 H2 meeting, sponsored by Standard Chartered.

By Joseph Neu

Move up the treasury learning curve. This group has a disproportionate number of treasurers who are new to their role. Several come from the tax side and a few were brought in to build or expand their company’s treasury capabilities.

  • All are moving quickly up the learning curve and helping their bosses appreciate the importance of strategic treasury capabilities. Covid-19 has helped make their case—in terms of both coping with crisis concerns for adequate liquidity and the post-crisis mandates to support new business pivots.
  • The treasury learning curve may be steep, but this is an opportune time to move up it and help others within your organization better understand what treasury can do. It’s also a way to attract internal talent to the treasury team.

Remote talent management favors the young and the bold. Challenges to onboarding new hires remotely have more members focused on filling open positions internally and training people for advancement. Younger people are generally more open to branching out and being trained remotely.

  • The younger generation is also more receptive to the automation and data analytics skills and tools that have become even more of a priority recently. Having said this, more experienced employees can adapt to changing roles in a remote work setting, if they are bold about change.
  • One member who started her new role not long before Covid hit noted that she has learned to adapt to a new CFO whom she has never met in person, as the CFO joined the company post-Covid.
    • According to the treasurer, “It has worked out surprisingly well and we’ve aligned to get so much done that I would have said it was impossible before,” she said. “Remote work puts the focus on unrelenting execution.

Corporates can do more in response to negative rates. Banks appear to have done a good job of shielding corporates from the impact of negative interest rates by helping them to sweep cash into dollars and access funding at low, if not negative rates.

  • There is not a sense of real urgency to change funding or cash investment fundamentally in response to persistent negative rates in the eurozone, Japan, Denmark and Switzerland.
  • However, with negative-yielding debt climbing back towards its 2019 record of $17 trillion in the wake of Covid-19 and almost $800 billion in euro corporate debt within 25 basis points of negative territory, perhaps corporate treasurers should become more aggressive in managing their balance sheets with an eye to negative rates.
  • On the asset side, Standard Chartered suggests, for example, diversifying further into positive yielding currencies with strong correlations to the reporting currency and low vols to optimize risk-adjusted returns (with or without the aid of FX hedges).
  • On the liability side, the bank suggests looking at collateralized EUR loans (using positive rate currency cash) matching more EUR debt to funded EUR assets, or using a floating rate swap to get around loan floors, for example (it may also help with Libor transition).
Read More Read Less
Contact Us
Justin Jones
In ESG, Risk Management

Verifying Virtue: Who’s Checking on Those ESG Promises?

Assuring ESG numbers is coming, but for now internal audit is stepping lightly.

Members of NeuGroup’s Internal Auditors’ Peer Group (IAPG) agreed that their companies’ environmental, social and governance efforts (ESG) often felt like marketing campaigns. Internal audit (IA) has so far provided little assurance regarding the validity of reported ESG numbers, but that likely is about to change.

Assuring ESG numbers is coming, but for now internal audit is stepping lightly.

Members of NeuGroup’s Internal Auditors’ Peer Group (IAPG) agreed that their companies’ environmental, social and governance efforts (ESG) often felt like marketing campaigns. Internal audit (IA) has so far provided little assurance regarding the validity of reported ESG numbers, but that likely is about to change.

  • One member said his technology company’s investor relations team had for the first time reported out ESG numbers according to frameworks established by organizations including the Global Reporting Initiative, the Sustainability Accounting Standards Board, and the Institutional Shareholder Servicers group.
  • “As you can imagine, we didn’t score well on some, and we identified a number of areas where we need to improve our metrics and reporting,” he said, adding, “I see a lot of alignment with ESG and what we’re doing around enterprise risk management (ERM).”

IA’s role? Another member said that marketing had engaged an external auditor to provide assurance, and for now his team would let them “stick their necks out on that.” Nevertheless, he queried, “Am I missing something? Have other folks gotten more involved?”

  • The general feedback was that IA has yet to take a deep dive into ESG but that some members will soon test the waters, especially for important and measurable ESG metrics such as greenhouse gas emissions, and water use and management.
  • “We may take a look at that this year, and at least review the process of how those numbers are being reported,” he said, adding the ever-increasing importance of ESG reporting calls for some level of IA participation, if not for the whole report.

Missing data. Another member expressed concern about what’s not being reported. This, he said, is “the other side of the coin where we probably don’t look so good, but that hasn’t been included to provide the full picture.”

  • A fellow member said her team recently stepped in that direction and found missing greenhouse-emission data according to current standards and guidelines. She noted that it is not yet mandatory for companies to be at a “mature level” in terms of meeting those guidelines and standards, “But we don’t have good data now and we need to get there.”
  • Another member said his team is mapping out the ESG numbers his company has external assurance on, such as those related to the supply chains or conflict minerals. It is also differentiating more reliable numbers, such as factory-emitted gasses, from more judgmental ones such as employee generated community-service hours.
  • “And one I’m curious about that has come up in our audit plan discussions for 2021 is some of the [ESG-related] funds we’ve created,” he said, noting a $100 million diversity-initiative fund. “We haven’t done that type of audit yet, but have others?” he asked, receiving no responses.

Sustaining ESG measures. Should IA take on establishing criteria for ESG programs and how to measure them, it will also be held accountable for ensuring their sustainability, since their performance inevitably will be compared year over year. One member said her team is in discussions about how to do that operationally and is talking to investors to gauge what they look for.

  • “We’re treading lightly to make sure we don’t get into something and then it disappears in our next disclosure,” she said.
Read More Read Less
Contact Us
Justin Jones
In Insurance, Risk Management

Softening the Blow of Rising Insurance Rates With Differentiation

Risk managers at life sciences companies hear analysis, share pain, discuss options. 

Virtually no company is immune to the ongoing pain meted out by rising insurance premiums in the wake of the pandemic. But one way to soften the blow, when possible, is differentiating yourself from the pack.

  • That takeaway and others emerged this week at a NeuGroup meeting for life sciences treasurers featuring an update on property insurance and directors and officers (D&O) coverage by Brad Zechman, an account executive at Aon who also addressed the group in June. “I wish I was coming back under better circumstances,” he said.

Risk managers at life sciences companies hear analysis, share pain, discuss options. 

Virtually no company is immune to the ongoing pain meted out by rising insurance premiums in the wake of the pandemic. But one way to soften the blow, when possible, is differentiating yourself from the pack.

  • That takeaway and others emerged this week at a NeuGroup meeting for life sciences treasurers featuring an update on property insurance and directors and officers (D&O) coverage by Brad Zechman, an account executive at Aon who also addressed the group in June. “I wish I was coming back under better circumstances,” he said.
  • Members across the NeuGroup Network have been sharing details of the increases they’re paying for renewals this year and offering advice on coping with markets that show no signs of softening anytime soon.
  • The unfavorable conditions are motivating some corporates to consider options including the potential use of captives. They also underscore the need for alternative risk transfer solutions. As NeuGroup founder Joseph Neu wrote recently, “Traditional insurance is overripe for transformation and it’s a matter of when, not if.”

Shop early. One valuable lesson learned: Start the renewal process as soon as you can. “You can never start early enough,” one member said, adding that getting rate quotes has been taking longer under current market conditions. Another treasurer said, “You need to be engaged throughout the process; you can’t wait for the total tower to be built.”

Explaining the pain. As the chart above shows, companies faced average increases for property coverage of about 33% in the third quarter. “Many insurers are continuing to push rates higher toward what they believe are sustainable levels to address increased risk and natural catastrophe losses,” Aon’s presentation stated. Increases are higher for companies with quota-share programs as opposed to single carrier program structures.

Differentiation. One key to lower premium hikes, Mr. Zechman said, is “how you differentiate yourself from everybody else,” citing the higher rates paid for programs with higher levels of catastrophic exposure and reduced scrutiny for companies with lower CAT exposure or “low claim activity.”

  • Business and contingent business interruption exposure for companies with complex or outsourced supply chains is another differentiator because underwriters are scrutinizing those exposures.
  • That scrutiny means transparency is key and companies are advised to provide as much information on their vendors as possible. “Take it as far as you can,” Mr. Zechman said. “All the detail helps.”
  • One treasurer pushed back when an insurance company justified a rate increase based on a false assumption. “They try to grab onto anything to raise prices,” he said.
  •  Another emphasized the need to educate insurers that not all life sciences companies present the same level of risk. “Make sure they are very clear on differentiation and that safety is not being compromised,” he said.

Covid exclusions. Insurers are mandating Covid-19 exclusions to “clarify their intent to not cover losses from it and other pandemics,” according to Aon’s presentation. The “Covid environment has put additional pressure on premiums” for both property and D&O coverage, Aon notes, adding that 17 Covid-related securities class action lawsuits were filed through October 2020.

The D&O landscape. In addition to detailing D&O rate increases for life sciences companies (see above), Aon made these observations about the market, which it says “continues to firm” amid rising claim costs and frequency.

  • The London insurance market still faces capacity challenges. Some companies are being denied B&C coverage and going with side A only. Others, in the US and elsewhere, are going with side A only to cut costs.
  • Going with side A only, Mr. Zechman said, is a more straightforward and “easier conversation” because it’s taking exposure off the table.
  • But companies converting B&C coverage to A only are not seeing the bang for the buck they have in the past, he said. The discounts for side A only are not as significant as they once were in the US and are virtually nonexistent in London. Retentions are rising for most companies, particularly in high-risk industries.
  • The good optics for corporates engaged in developing vaccines and antibodies are not, by and large, helping to lower D&O costs. Life sciences companies “are still one of the most challenging industries for D&O insurance,” Mr. Zechman said.

Read More Read Less
Contact Us
Justin Jones
In ESG, Regional, Treasury Management

Europe in Flux: Business Decentralization, ESG and Brexit

Key takeaways from the European Treasury Peer Group 2020 H2 meeting sponsored by Standard Chartered.
 
By Joseph Neu

Agile businesses with centralized support functions. Covid-19 and the need for business pivots have, at some companies, sparked calls for the pendulum to swing back toward decentralized business authority to promote agility and swift decision-making.

Key takeaways from the European Treasury Peer Group 2020 H2 meeting sponsored by Standard Chartered.
 
By Joseph Neu

Agile businesses with centralized support functions. Covid-19 and the need for business pivots have, at some companies, sparked calls for the pendulum to swing back toward decentralized business authority to promote agility and swift decision-making.

  • Treasury in turn is asking how best to support decentralized business accountability with the efficiencies and controls of a centralized corporate support function. It’s a perennial challenge. But now there is empowering access to data, new cloud-based technology and digital platforms to transcend distributed business structures.
  • Treasurers should therefore be able to maintain the corporate perspective on risk, cost of funding and liquidity access at scale, to better support business decisions. Globally-connected technology will allow scale to be achieved across far-flung nodes of agile businesses that are likely to deploy similarly cloud-based digital tools.
    • These ensure that data flows to the center, while also parsing out the impact of decisions along the edges that can be mitigated independently by the centralized support functions.
    • And speaking of functions at the center, now is also an opportune time to rethink the nimbleness and distribution of corporate support functions and transcend legacy thinking about what’s treasury, what’s shared services, AP, credit and collections and look at processes that support the businesses end to end.

ESG derivatives to hedge ESG-linked finance. If ESG sustainability-linked finance is the new megatrend, with Europe ahead in the game, then it’s time to think about ESG derivatives, both to manage use of proceeds financing and sustainability- or performance-linked financing. Standard Chartered shared examples of:

  • FX forwards to hedge export pricing in Asia where the FX rate is discounted if targets in support of sustainable development goals are met.
  • Interest rate swaps where the credit spread is linked to the company’s performance against sustainability targets, measured by Sustainalytics.
  • Green cross-currency basis swaps where the payments of either party rise if they do not make good on green initiatives.

Britain has no way out. Almost four and a half years after the referendum, we are still talking about Brexit with just a bit better than a 50 percent chance of a deal in the near term. Perhaps there is no way out of the EU. Members report building up inventory and pulling out excess cash from UK header bank accounts in preparation for the worst, but Britain seems to have gotten lost on the way out and may just end up getting back on the train.

Read More Read Less
Contact Us

Connecting Every Finance Professional Who Wants To Share And Learn

Learn more

Knowledge Exchange

About

Need help?

©2024 - NeuGroup, Inc.

Privacy Policy