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Justin Jones In Libor SOFR, Risk Management

What an Extended Libor Deadline May Mean for Corporates

Takeaways on a proposal backed by the Fed that would allow more legacy Libor contracts to mature.

Libor relief? Monday brought news that US regulators welcome a proposal by Libor’s administrator to offer an additional 18 months—until June 30, 2023—for legacy contracts to mature before Libor fully winds down. Reuters called the plan a “stay of execution.”

Takeaways on a proposal backed by the Fed that would allow more legacy Libor contracts to mature.

What it means for corporates. We reached out to Amanda Breslin, managing director of treasury advisory at Chatham Financial, to get the significance of this for companies with debt or derivative exposure to Libor. Here, edited for space, are some of Chatham’s key takeaways and analysis.

A win. The extension of Libor is a win for market participants, allowing a more orderly transition from Libor to SOFR and letting debt and associated derivatives transition more naturally as legacy contracts mature.
1. But the reality is that corporates that are able to take advantage but decide to amend or refinance debt prior to the extended deadline would likely move to SOFR at that time regardless of the extension.
Complexity. The extension introduces complexity as corporates are navigating a wider array of potential fallback outcomes over a longer period of time. Different market participants will likely adopt a more aggressive move to SOFR at different paces, with corporates being subject to the pace of each of their counterparties and contract partners.
1. This means that there’s an extended period where a corporate might have legacy IBOR instruments, new SOFR instruments, and potentially even instruments where they’ve already negotiated some type of fallback provision or index reference change that may not be an exact match for either (e.g., a SOFR-based rate that compounds differently, or some non-standard spread adjustment, or a specific date for an index change to take effect).
Operational preparation. Market participants still need to be prepared to support accounting, system valuations and payment calculations for all Libor- and SOFR-based instruments, and may now have a wider range of operational support required over a longer time frame.
1. If the preliminary time frames hold, this only buys time out to 6/30/23. While certainly useful and definitely a big win, there are still many Libor-based instruments that do not mature until well after that, particularly on the debt side.
2. Clients still need to plan how they’d like their debt and derivatives documentation to align, and also to determine whether staying with Libor is a desirable strategy or just a convenient one.
3. Since many corporates now have debt with customized Libor fallback provisions, it may not be beneficial to leave the associated hedges unchanged. In essence, this creates one more possible path to align debt and derivatives, but it’s also one more avenue to misalign on Libor fallback provisions.

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Justin Jones In Banking, Technology

Corporates to Banks: Untangle Processes, Offer Simple Solutions

NeuGroup members want simple but powerful improvements to banking services.

In a recent meeting of treasurers for high-growth companies, sponsored by Bank of the West BNP Paribas, representatives from the bank opened a session with a question: how can banks improve treasurers’ experience? While not directing their response to Bank of the West specifically but rather to banks generally, the answer, overwhelmingly, was clear: simplify the day-to-day experience.

NeuGroup members outlined how banks can streamline basic authorization and documentation processes that corporates find overly clunky or time-consuming, which could reshape their overall experience.

Back to Basics. As banks continue to announce new initiatives with fintechs, some members expressed frustration that their highest priorities weren’t being addressed.

One member suggested banks first work with corporates to figure out their priorities. “A lot of the announcements really don’t apply to a good number of us,” he said. “I think that’s one thing we struggle with, that there’s a lot of interesting stuff, but we can’t use it.”
“Help us out with the nuts and bolts that all of us deal with here,” one member said. “Just get back to basics, that can go a long way.”

Portal to a new future. Though members find the goal of fully electronic bank account management (eBAM) unrealistic, one member proposed small but meaningful upgrades to banks’ online portals.

“I have not seen a bank actually provide who they have as the account signers on the banking portal,” the member said. “Even something like that seems like a relatively easy thing to implement, but every one of us could benefit.”
- One member said providing that information would put the onus back on the corporate to update outdated information and provide the supporting legal documents.
Another member shared similar issues getting in touch with banks on issues he thought could be solved by an improved online portal. “I can’t tell you the number of emails I’ve submitted over the last 10 years and had to chase down banks to get the simplest thing out there, like confirming a balance,” he said.

Documentation. A member described KYC documentation as a “horribly problematic” issue with banks and said an improved process “would be the biggest value add from a corporate treasury perspective.”

“Don’t ever send a PDF that’s not editable and fillable,” one member said. “If I have to hand-write validation on a PDF, it’s ridiculous in this day and age. If every PDF is at least editable, all I have to do is print and sign it.”
In another recent NeuGroup meeting, members also identified signatories as an area with “a lot of work left to do.”
- One member described “a very positive example” of a bank anticipating corporates’ needs in this area. Though the bank required wet signatures, it sent the member a pre-printed shipping label to return the document with ease.
- Another member has pivoted to digital signatures. “I don’t see that there’s a need to revert back and move away from e-signatures (after the pandemic),” the member said. “Our counterparties do what they need to ensure that they’re verifying and validating but I couldn’t imagine why we’d resort back to manual, printed documents.”
- But for a member who already largely uses e-signatures, there are still efficiency issues with the compatibility of different systems fitting into the company’s existing security protocols. “Most of our banking partners adopted e-signatures, so that made it a lot easier, but we use single-sign on,” he said. “So if there’s an application or a new system, that’s going to be the first hurdle: why aren’t we using single sign-on or multi-factor authentication?”

Authorizations. Members also found banks’ authorizations cumbersome, having to get approval for small tasks which build up, “consuming an inordinate amount of time for banks, the corporates and the auditors.”

One member, a treasurer attempting to complete an audit process, found many hurdles prolonging the process. The member’s team reached out to a bank via email and was told the treasury team wasn’t authorized to “sign off on our own audits, we would have to go to the CFO and the board.”
- The member continued: “Banks need to educate their customers and proactively reach out and say ‘Here is your account base with us, this is what your auditors can do for confirmation, here is a template letter and here is a workflow on how to submit it.’”

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Justin Jones In COVID-19, Risk Management, Treasury Management

Unearthing the Risks—from Printers to Stress—of Working from Home

Internal auditors discuss WFH challenges including data security and the mental health of employees.

Internal auditors are trying to keep on top of myriad risks brought about by millions of employees at thousands of companies working from home as a result of the pandemic. At a recent NeuGroup meeting, two of the risks discussed demonstrated the wide spectrum of issues companies face, ranging from the somewhat mundane (printers) to the very personal (mental health).

Risky printers. One member said her company is updating its policy to prohibit certain intellectual property and other highly proprietary documents to be printed at home, in an unsecure environment where such information could fall into the wrong hands. She noted that IT has tools to monitor when employees try to print such documents outside the office.

“You can ask for exceptions, but they have to be approved,” she said. “So I think most people just aren’t printing.”
“Good point,” exclaimed one peer, recalling that the spouse of a work colleague in the Bay Area works for a competing technology firm, “And they’re probably both printing stuff off at home.”

Break out the shredders. A member said his company had recently done an insider-threat audit that touched on the printer risk; and a confidentiality-focused audit a year ago found important documents left on printers in top executives’ offices. It highlighted the need to train staff to use shredders and other prevention controls that secure access to data—important for remote printing as well.

He said office settings tend to be highly secure in terms of access, but remote work continuing for an extended period would almost certainly increase such risks.
Another member noted the savings companies accrue from employees working remotely could fund an annual stipend enabling remote workers to purchase a shredder or otherwise secure their home offices.

Psychological and physical stress. The shift to remote work has resulted in many employees spending long hours in ergonomically problematic work environments. From an audit perspective, physical safety tends to be covered by crisis-management audits, one member said, noting that the new piece is the mental impact.

“We’re productive [in remote settings], but we’re pushing ourselves to the point where it may not be sustainable long term and we will start to see effects,” she said. “I haven’t started the audit yet, but I’ve heard it’s an elevated risk that management is anticipating.”
The member said her company has made a nutritionist and physical trainer available to all employees, and sends emails two or three time a week encouraging employees to live healthier.
- “I’ve heard rumors of an on-payroll psychologist, but I haven’t seen that rolled out yet,” she said.
Injuries sustained from working at home are now considered legally the same as those in the office, the member said, so it’s critical “to ensure employees are working the right hours, taking breaks, and have the right equipment and seating arrangement.”

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Justin Jones In Banking, FX, Talking Shop

Talking Shop: Whom Do You Pay Using Your Offshore Renminbi Account?

Member question: “Has anyone opened a CNH (offshore renminbi) account? And if so, what do you use it for? Do you: a) pay onshore China vendors, b) offshore vendors?”

Member question: “Has anyone opened a CNH (offshore renminbi) account? And if so, what do you use it for? Do you: a) pay onshore China vendors, b) offshore vendors?”

Peer answer: “Yes, we have a CNH account in Singapore. We bill to our local distribution entities in local currency and we use the account for intercompany receivables before converting to USD. We make FX settlement payments from the account.”

For more insights on trends in Asia from NeuGroup Members, read founder Joseph Neu’s key takeaways from the 2020 H2 Asia CFOs’ Peer Group meeting sponsored by Standard Chartered.

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Justin Jones In COVID-19, Regional, Technology

China’s Digitalization, Quick Covid Recovery and Tension with the US

Key takeaways from the 2020 H2 Asia CFOs’ Peer Group meeting sponsored by Standard Chartered.

By Joseph Neu

2019 as the 2021 baseline. China has been the economy to bounce back soonest from Covid-19 and is up substantially in H2.

Standard Chartered is forecasting 2020 GDP growth of +2.1% for China. Meanwhile, many of our member CFOs for greater China are hopeful that they will get back to flat for the year since some have had stellar Q3s and good Q4 outlooks, which makes 2019 essentially the planning baseline for 2021 growth.
With vaccines on the near horizon, how many other businesses will plan for growth using the 2019 baseline? I hope it will be most all of them, so the rest of the world can catch up to China in terms of economic recovery from Covid-19. But is this realistic? This is the key question for CFOs everywhere.

US-China relations driven by fundamentals. Standard Chartered’s perspective suggests that the economic growth of China and the trendline to overtake the US as the largest global economy is driving US-China tensions.

With China on pace to surpass the US by 2030 to 2035, no change in the Oval Office is likely to reduce tensions dramatically. What will change is the degree to which the tensions are managed on a multilateral vs. unilateral or bilateral basis.

How now for China’s digitalization advantage? CFOs of large Western corporates in China have been leading in adopting digital tools including RPA, algos and AI to bring digitalization to finance functions. This follows the more advanced digitalization trends that China has seen in consumer payment and retail models.

What then should we make of member frustration with the advancement in the digitalization of planning forecasting? Bots and AI have done a great job with processing, reporting and displaying data as well as overlaying controls effectively and efficiently on financial and business data.
Progress seems to be plateauing in predicting and forecasting. As a result, several members reported pausing projects to improve planning and forecasting with new digital technology and going back to the traditional budget and planning methods with humans. Watch this space.

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Justin Jones In COVID-19, Risk Management

Rightsizing and Reshaping: What Post-Covid Corporates May Look Like

Internal auditors assess risks as companies shift where and how employees work.

Members of NeuGroup’s Internal Auditors’ Peer Group (IAPG) agreed that the pandemic will quite literally reshape the physical look of companies—mostly large technology firms—as well as introduce a host of new risk concerns that are just starting to be considered.

Companies’ real estate is bound to shrink as they consider how and when to support the significant number of fully remote and hybrid employees—those coming to office less frequently—that are certain to remain post-pandemic.
This shift away from physical offices introduces cultural and legal implications as well as new risks.
Employee turnover has slowed during the pandemic but is likely to pick up again when economies reopen more assertively, bringing these issues and risks front and center.

Companies’ real estate is bound to shrink as they consider how and when to support the significant number of fully remote and hybrid employees—those coming to office less frequently—that are certain to remain post-pandemic.
This shift away from physical offices introduces cultural and legal implications as well as new risks.
Employee turnover has slowed during the pandemic but is likely to pick up again when economies reopen more assertively, bringing these issues and risks front and center.

Should I stay or should I go? The hybrid approach appears to be gaining favor, partly because some employees want in-person interaction, and because companies may believe such interaction generates creativity and more effectively enables onboarding new employees.

“We’re finding a want or even a need for them to be in proximity to peers,” one member said, adding that it is less important for others, “So we’re looking into how we can group employees and make sure their professional development is taking place.”
Hybrid employees must travel to the office now and again. “Are there parameters we can provide in terms of distance and travel time to the office for different categories of employees?” one member asked. “And who foots the bill?”

Remote benefits. Sheltering in place has also revealed the benefits of remote work, both to companies and their employees.

Functions, including audit, for which there was concern initially about their effectiveness without face-to-face meetings have proved to be resilient and even conducted better remotely. “Our sales team is now able to work with customers any time of the day, so working remotely is easier for them,” one internal auditor said.
Several NeuGroup members agreed that working remotely has enabled them to hire talent that previously was out of reach.

Challenges. Potential hires are making their own demands. “We’re seeing candidates saying that unless we give them an ironclad guarantee that they can work from wherever, they’re not interested,” one member said.

Some current employees have decided they prefer working remotely and have relocated permanently to other geographies, creating potential administrative and legal risks.
“If an employee moves to a different state, now there are payroll implications, different cost centers, etc.,” a member said.

The incredible shrinking office. One IAPG member said her company will permanently close half its offices around the globe, a statement eliciting little surprise among peers. A significant reduction in employees coming to the office means a “rightsizing” of corporate real estate is coming. This also means new areas where management will need assurance that i’s are dotted and t’s crossed and all dotted and crossed properly.

For instance, what of leases that were signed just before the pandemic? “Do we want to carry the burden of those leases on our balance sheet, or treat them with a special disclosure or some other way?” another member asked. “There’s risk there with respect how companies will address that problem going forward.”
Another member said 80% of his company’s leases are coming due in the next 18 months. “There’s a huge assessment happening now,” he said. “We have 190 globally, so how do we reduce those and what will be the outcome from the cost savings?” he said.
After accumulating numerous offices worldwide, another member said his company is “starting to look at that and say, ‘If there are fewer than 50 people in them, we’re going to close them and consolidate our footprint in larger offices.’”

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Justin Jones In Pension and Benefits, Risk Management

Pension Puzzle: Insights for Managers Putting the Pieces Together

Willis Towers Watson weighs in on WACC, the efficient frontier and pension financing alternatives.

Pension fund managers evaluating alternative funding strategies should not necessarily use their companies’ weighted average cost of capital (WAAC) as a discount rate; the risks of the pension should be viewed differently than a normal project investment considered by the company.

That was among the key takeaways from a recent NeuGroup Virtual Interactive Session sponsored by Willis Towers Watson, “Relative Value: Pension De-risking in a Post-Covid World.”

Willis Towers Watson weighs in on WACC, the efficient frontier and pension financing alternatives.

Pension fund managers evaluating alternative funding strategies should not necessarily use their companies’ weighted average cost of capital (WAAC) as a discount rate; the risks of the pension should be viewed differently than a normal project investment considered by the company.

That was among the key takeaways from a recent NeuGroup Virtual Interactive Session sponsored by Willis Towers Watson, “Relative Value: Pension De-risking in a Post-Covid World.”

Example. Roger Heine, senior executive advisor at NeuGroup, illustrated the point: “The cost of paying an insurance company to accept risk transfer of low-balance participants above the participants’ strict annuity liability would be weighed against the present value of saved PBGC fees and other operating-type costs discounted at the company’s cost of debt.

“This would be lower than its WACC, since saved fees and costs are essentially riskless.”

Risk and reward. Willis Towers Watson presented the graphic below to make the point that companies evaluating pension options strictly using the company’s WACC as the hurdle rate may reject investments and miss out on opportunities that are relatively low risk or may make investments that look attractive but are “risk inefficient.”

Speed matters. Companies should also be prepared to act quickly on different funding strategies because opportunities that arise can quickly disappear. Mr. Heine gave these two examples from 2020:

The widening of corporate spreads in the spring meant that insurance companies would potentially reduce their cost to execute risk transfer of pension liabilities due to their ability to source corporate bonds at lower cost.
The sudden decline in interest rates combined with a recovery in the corporate bond market meant that companies could offer lump sum buyouts discounted at higher average historical interest rates funded by corporate debt based upon current, lower rates.
- One member whose company considered this said the HR department opposed the move over concerns that recipients of the lump sum would spend it instead of investing.

Debt and taxes. An in-session poll of members in attendance revealed that a large majority are not inclined to issue debt to fund the pension, with just 20% saying it’s likely in the next five years (see above). One participant did it right before tax rates went down under tax reform to capture the deduction from the contribution at the expiring higher corporate tax rate.

“But right now, with 80% of participants thinking that corporate tax rates are going to increase in the next couple of years, it makes more sense to try to defer contributions until the tax rates rise,” Mr. Heine observed.
“The possibility of further government funding relief also argues for deferring funding along with the fact that the recently rising stock market and tightening corporate spreads have returned many pension funds to the funding status where they began the year.”
Participants in one breakout session agreed that creditors and the rating agencies view a pension deficit as less “debt-like” than straight corporate debt despite published metrics equating the two.
- Mr. Heine added that issuing corporate debt to fund the pension “secures pension creditors ahead of unsecured corporate creditors.”

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Justin Jones In COVID-19, ESG, Insurance

The ESG Halo Effect, Insurance Pain and Financing Lessons Learned

Key takeaways from the 2020 H2 Life Sciences Treasurers’ Peer Group meeting sponsored by Societe Generale.

By Joseph Neu

A halo effect from the business we are in. In an exchange on ESG-related financing and ESG scores, our life sciences treasurers noted that sustaining life is core to their business; hence, sustainability is part of their companies’ DNA. Why then should they need to issue a green bond or execute some other sort of sustainability-linked financing to earn a so-called ESG halo effect?

In comparison to the ESG impact of the underlying business, if correctly measured, a financing instrument should not be required to create a halo. Instead, treasurers should look to have the business better reflected in ESG ratings to get full access to ESG-mandated investors.

Risk transfer transformation needed. The insurance renewal market coming out of the Covid-19 crisis points to the continued need for risk transfer transformation. At a time when life science firms are being encouraged to move fast and break us out of a pandemic, insurers are seeing risk, so they are taking a pound of flesh in premium.

Treasurers are left wondering how much of this is their own product or liability risk and how much of it is insurers recouping losses on their investment portfolios. Traditional insurance is overripe for transformation and it’s a matter of when, not if.

Transaction shop-talk. Treasurers love to share and learn from each other’s funding transaction experience, be it a bank loan, convertible or bond deal.

Akin to a morbidity and mortality conference in the medical profession, life sciences treasurers benefit from identifying adverse outcomes from financings to exchange with peers, yet they are even more inclined to share what went well to secure needed funding.

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Justin Jones In Banking, Capital Markets

Monetization Magic: How Using a Hybrid Solved an Asset Riddle

MUFG helps one mega-cap use structured preferred shares to monetize a “difficult” asset.

In a session at the recent NeuGroup Tech20 annual meeting—the 20th annual no less—a guest speaker from a mega-cap communications company shared how his treasury found a great deal of success using structured preferred shares to monetize previously untapped assets on its balance sheet. All while managing its net debt within a target leverage ratio, with the assistance of meeting sponsor MUFG.

Structured preferred shares are a type of hybrid instrument that can be used to achieve multiple corporate objectives, in this case deleveraging and asset monetization.
With MUFG’s assistance, the presenter, the treasurer of a company with one of the largest debt portfolios of any non-financial institution, said the deal was “a real success story” for the company.

Asset monetization. When the company entered a 30+ year deal to lease out some of its assets for a one-time fee, it faced a dilemma: what could it do with an essentially dead asset on the balance sheet?

“We couldn’t really securitize these things, and it would’ve taken us years to see any cash,” the presenter said. “So we looked around at different solutions and came to the idea of working with MUFG to (issue) structured preferred (shares). We liked it, it allowed us to monetize what was otherwise a difficult asset.”

A shared structure. The presenter worked with MUFG to reassign the assets into a separate legal entity and issued preferred shares, in which eight banks were buyers of a multibillion dollar facility.

“Ordinarily, when you think about preferred, you think about it being issued at a parent company,” said Terry McKay, head of Global Financial Solutions at MUFG. “But in the case of structured preferred shares, the issuer is a subsidiary.”
“The legal form of this subsidiary can be a corporation, a partnership or a trust, so there is a lot of flexibility,” he said. “And in terms of the assets, there is also a lot of flexibility, and it’s critical to select the right assets; investors are focused on the critical assets.”
- Thanks to this flexibility, the asset types can vary from core assets to inventory to even intellectual property.
Mr. McKay continued that structured preferred stock, though it is more expensive than a senior bond and does not include the ratings agency credit of traditional preferred stock, can be useful because of its tax deductible coupons, added liquidity and the ability to be strategic in financing and adapt to meet specific objectives.

Story of success. “It had a lot of benefits to it,” the presenter said. “It helped us really meet our objectives and gave us a chance to reward banks we’ve done significant business with.”

In its work with MUFG to issue structured preferred shares, the company was able to meet these three core objectives:

Managing its debt tolerance, reducing its net debt by about 17% in the span of a year and a half.
Achieving a target leverage metric which was contingent upon asset sales to be met.
Acquiring an incremental source of liquidity and reducing the pressure on refinancing its bonds.

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Justin Jones In Compliance, Risk Management

Right on Target: Tracking Companies’ Changing Risks

One member’s “risk radar” facilitates explaining evolving risks to audit committees.

Corporate risk is no easy concept to convey, especially when risks are numerous and shifting in intensity over time. Equally challenging is explaining a risk’s evolving urgency to board members, who must concurrently digest reams of information.

Responding to a query about how peers justify urgent audit-plan changes to audit committees, a member of NeuGroup’s Internal Auditors’ Peer Group described the “risk radar” he presents quarterly to illustrate dynamically the comparative urgency of his company’s top 20 risks and mitigation efforts.
His description received raves from peers, with one quipping, “That’s very comprehensive. It makes the rest of us feel inadequate.”

Responding to a query about how peers justify urgent audit-plan changes to audit committees, a member of NeuGroup’s Internal Auditors’ Peer Group described the “risk radar” he presents quarterly to illustrate dynamically the comparative urgency of his company’s top 20 risks and mitigation efforts.
His description received raves from peers, with one quipping, “That’s very comprehensive. It makes the rest of us feel inadequate.”

Red, yellow, green. Split into four quadrants—strategic, compliance, financial and operational—the graphic’s red center (see chart below) signifies the most urgent issues and is surrounded by yellow and then green halos for less urgent matters.

The closer the stars representing the company’s risk issues—such as cybersecurity, sales growth and trade compliance—are positioned to the center of the round radar screen, the greater the risk urgency.
The stars change position quarterly, displaying not just each category’s inherent risk but the company’s evolving risk-mitigation efforts.
Built through the member’s enterprise risk management (ERM) process, the radar incorporates feedback from management. “So the board gets a very real perspective on risk, and it has all the context for why risks are moving closer to or away from the center,” the member said.

Customer impact. The executive noted Europe’s changing regulatory environment and privacy rules, including the July Schrems II ruling relating to transatlantic personal data flows, could dramatically change his company’s compliance requirements.

The risk is that uncertainty could unnerve potential clients concerned about ending up on the wrong side of the regulation. From the start of the year, the uncertainty has moved the regulatory star close to the radar’s center.
“But it’s not the end of the world,” the member told the group, because it opens the door for management to explain its road map to deal with the risk going forward. “We can say, ‘Given all the good work we’ve done, we’ve mitigated this risk.’”
He added, “The audit committee has what we consider a very frequent, very fresh review of all the risks associated with everything we do from a value chain perspective.”

Beneath the graphic. The committee can now visualize internal audit’s risk assessment, including the impact likelihood, the velocity of onset and management’s risk tolerance. And it can explore the five categories used to assess each risk and its overall priority.

Judgment plays an important role, but the audit committee can review the appendix to understand precisely how his team arrived at its conclusions.
And top management, he said, from the chief legal officer to the CFO and heads of engineering and data security, have “all bought off on the stars.”
The risk radar prioritizes the company’s 20 most significant risks, and while the board may be concerned with the top three, “from management’s perspective the top 20 is fantastic.”

The proof? “Our head of human resources has built her own risk radar for HR, our CFO now has his own risk radar for finance, and the head of engineering is talking about creating his own risk radar,” the member said.

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Justin Jones In Capital Markets, Technology

Counterparty Transparency: ‘Looking Through’ Money Market Funds

How a treasury investment manager finds out what assets are owned by the MMFs he owns.

For treasury investment managers, visibility into the credit and counterparty risks of their portfolios is essential, especially during times of heightened volatility and uncertainty—like the last nine months.

One member of NeuGroup’s Treasury Investment Managers’ Peer Group 2 told peers at a recent meeting sponsored by DWS that part of his assessment of counterparty risk involves “looking through” money market funds (MMFs) to see their underlying exposures.

How a treasury investment manager finds out what assets are owned by the MMFs he owns.

One member of NeuGroup’s Treasury Investment Managers’ Peer Group 2 told peers at a recent meeting sponsored by DWS that part of his assessment of counterparty risk involves “looking through” money market funds (MMFs) to see their underlying exposures.

Going the extra step. One DWS executive found it intriguing that the member goes beyond examining the credit ratings of MMF managers. “You are taking it to another level,” he said. Many investment managers rely on the work done by the rating agencies, he said.

In response to a question from a peer, the member explained that he gets the data on the funds’ holdings by using Transparency Plus, a tool that’s part of the ICD money market portal. The data is then put in Excel.
He said extracting and analyzing hundreds of names is “challenging,” adding that he’d like to know if others “have a better way to do it.”

Not just prime funds. The member does not only look through prime funds that have credit risk, but those of government money market funds which own a lot of repos. “It’s interesting to see who the repo sponsors are,” he said, adding that the investments are “supersafe and over-collateralized.”

Big picture. For perspective on looking through MMFs, NeuGroup Insights checked in with Peter Crane, president of Crane Data and an authority on the MMF industry. Here are some of his insights:

“Almost all money fund portals and platforms offer transparency modules, which became popular after the 2008 financial crisis. ICD and BNY Mellon pioneered the trend, but State Street, FIS and many of the Cachematrix-powered portals soon followed.
“It wasn’t until the SEC mandated disclosure of monthly portfolio holdings for money funds in 2010 that they became useful and used. They tweaked these disclosure requirements in 2014 too.
“While most investors only are interested in looking through when something blows up, many need to check what their funds invest in more often.”

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Justin Jones In Capital Allocation, Capital Markets, Cash & Working Capital

Game Plan: Flexible Buybacks on the Open Market vs ASRs

Meeting sponsor SocGen sees corporates growing comfortable with flexible, open market buybacks amid recovery.

During the global pandemic, many corporates have slammed the breaks on share repurchase programs to save cash and avoid criticism from politicians as Americans lost jobs and some companies sought government bailouts.

At a recent NeuGroup meeting of treasurers at life sciences companies, Societe Generale’s David Getzler, head of equity capital markets for the Americas, forecast an increase in share buybacks in 2021 as the economy recovers and political scrutiny declines.
“From our perspective, it looks like people are more comfortable,” Mr Getzler said. Below are his forecasts for dividends and buybacks.

Meeting sponsor SocGen sees corporates growing comfortable with flexible, open market buybacks amid recovery.

During the global pandemic, many corporates have slammed the breaks on share repurchase programs to save cash and avoid criticism from politicians as Americans lost jobs and some companies sought government bailouts.

At a recent NeuGroup meeting of treasurers at life sciences companies, Societe Generale’s David Getzler, head of equity capital markets for the Americas, forecast an increase in share buybacks in 2021 as the economy recovers and political scrutiny declines.
“From our perspective, it looks like people are more comfortable,” Mr Getzler said. Below are his forecasts for dividends and buybacks.

Open market flexibility. Several members affirmed that their companies are buying back shares when the timing and price is right. “As long as you’re not taking government money,” said one treasurer. “We are looking at it opportunistically.”

SocGen’s Mr. Getzler expects more companies to use open market stock repurchases as opposed to accelerated share repurchase (ASR) programs.
Volatility and continued uncertainty about the pandemic and the economy are factors explaining corporates’ preference for open market purchases, he added. “Companies want to maintain flexibility in case the economy retreats.”

Open market vs ASR. In an open market purchase, a company buys its shares at the going rate. With an ASR, a company can transfer the risk of buying back stock to an investment bank.

“The banks give a guaranteed discount to VWAP over the period, typically two to three months, when they buy the shares in the market to cover their position,” Mr. Getzler explained. “The banks borrow the shares on day one and deliver to the company and then will cover the borrowed position by buying in the market over the period agreed.”

The debt factor. The level of share repurchases going forward depends in part on how companies manage their balance sheets. Many have issued debt in recent years to buy back stock, a trend that could resume as the economy improves, according to SocGen’s debt capital markets team. In addition:

Companies that raised liquidity during Covid may decide they have excess cash and buy back shares if and when the economy returns to normal.
Companies that added gross leverage may decide it’s more prudent to pay down debt than buy back shares.
Leverage is up across the investment-grade space, so it could take a year for companies to get back down to pre-Covid levels before they look to re-engage in share buybacks.
Companies may choose to live with higher leverage so they can return cash to shareholders.

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Justin Jones In Banking, Libor SOFR

Replacing Libor: No Criticism for Banks That Say ‘No Thanks’ to SOFR

Regulators say banks can price loans using any appropriate reference rate as they prepare for Libor’s end.

You may possibly have missed a development that happened three days after the presidential election: US banking regulators gave banks more confidence they can decide to use Libor-replacement rates other than the secured overnight financing rate (SOFR), which the Federal Reserve has endorsed but that some regional banks view as problematic.

“Examiners will not criticize banks solely for using a reference rate, including a credit-sensitive rate, other than SOFR for loans,” guidance from the Fed, the FDIC and the Office of the Comptroller of the Currency stated.

It’s OK to be different. The guidance bolsters Fed Chair Jerome Powell’s May statement recognizing Ameribor, an alternative to Libor published by the American Financial Exchange (AFX), as a “fully appropriate” alternative for banks.

“This is another step on the march toward the legitimacy of alternative benchmarks and for the market to decide what the replacements for Libor will be,” said Reed Whitman, treasurer at Brookline Bancorp.
- He added that this gives more confidence that “products we develop tied to a non-SOFR rate will be accepted; it’s an additional accelerant.”
If regulators had warned banks against “using a different benchmark, that effectively would have shut down alternatives.” said Alexey Surkov, a partner with Deloitte Risk and Financial Advisory and a co-chair of a working group under the Alternative Rates Reference Committee (ARRC), a private group convened by the Fed to help guide the Libor transition.

The regional view. Regional banks have concerns about pricing their floating-rate products and funding over SOFR, based on the secured overnight repurchase agreement (repo) market, because it does not reflect their cost of funds.

Ameribor is instead generated from the rates at which financial institutions lend to one another over the AFX, an exchange launched in 2015 by Richard Sandor, an innovator in the futures market.
In an interview with NeuGroup Insights, Mr. Sandor called the guidance a “big step forward” since now all the banking regulators are “opining together.” He added that for those who thought Libor might sustain itself, “this is another nail in the coffin.”

Alternatives. Some institutions have considered the prime rate and Fed Funds as Libor alternatives, at least until transaction-based benchmarks become sufficiently robust.

Some bank products currently reference those rates, Mr. Surkov said, and lenders may choose to stick with them. Credit cards, for example, often reference prime.
Similarly, mortgages priced over Libor are widely expected to transition to SOFR, but adjustable rate mortgages (ARMs) based on Constant Maturity Treasury (CMT) rates have existed for a long time, he said, and may very well continue.
Mr. Whitman said he foresees a combination of benchmarks, including SOFR, Ameribor and perhaps other indices that will be “repurposed for specific uses.”

Good timing. The ARRC recommends ceasing to use Libor to price floating rate notes by year-end and business loans and structured products by June 30, 2021.

“So this helps ready us for the next phase of the transition, where banks stop booking Libor deals and start booking SOFR or Ameribor deals,” Mr. Whitman said.

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Justin Jones In Capital Markets, Talking Shop

Talking Shop: Applying the End-User Exception From Dodd-Frank’s Swap Clearing Mandate

Context: In 2013, section 723 of The Dodd-Frank Act went into effect, which required all commercial end users of swaps to submit the swap to a derivatives clearing organization. A so-called “end-user exception” allows parties to claim exemption from the clearing mandate and continue executing uncleared swaps with their dealer counterparties if one of them:

Is not a financial entity
Is using the swap to hedge or mitigate commercial risk
Provides certain information to the CFTC, including how it generally meets its financial obligations associated with entering into non-cleared swaps.

Is not a financial entity.
Is using the swap to hedge or mitigate commercial risk.
Provides certain information to the CFTC, including how it generally meets its financial obligations associated with entering into non-cleared swaps.

Member question: “We’re looking into our annual application of the Dodd-Frank end-user exception. Curious to know which other corporates are using the end-user exception. For those that are not and are reporting trades, what drove that decision and how heavy of a lift is it? Appreciate any perspectives you have on this!”

Peer answer: “We have elected the DF EUE. The CFTC has not issued a clearing mandate for FX instruments as many initially feared, but there is still a clearing mandate for various IRS and CDS products. We seek BOD (board of directors) renewal annually to provide us the option to trade these instruments bilaterally without clearing, should the need arise.”

Expert opinion: NeuGroup Insights reached out to derivatives expert Amol Dhargalkar, global head of corporates at Chatham Financial. He said that its clients mostly do opt to use the end-user exception.

“Well over 95% of our corporate clients are using the end-user exception,” he said. “The only ones that aren’t are those who didn’t really qualify for it because they are a financial institution of some sort per the definitions.”
Other analysis: “While we have a few clients that have collateralized their trades, that’s often been out of necessity rather than choice. I know that some large corporates do trade on a cleared basis, though that tends to be those companies who have significant excess cash on their balance sheets.”

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Justin Jones In Banking, Libor SOFR, Risk Management

Mismatched Hedge Risk: Derivative Values May Change as Libor Ends

Standard Chartered, helping corporates prepare for risk-free rates, describes the potential risk of “valuation jump.”

The replacement of Libor by risk-free rates (RFRs) like the secured overnight financing rate (SOFR) in the US and the sterling overnight indexed average (SONIA) in the UK has been a hot topic at NeuGroup fall meetings where banks, regulators and other experts have been helping members prepare for Libor’s planned demise at the end of 2021.

At a second-half meeting of the Asia Treasurers’ Peer Group, sponsor Standard Chartered brought to light a topic that has received less attention than other issues: Corporates switching to SOFR for over-the-counter derivatives face the “potential risk of valuation jump”—meaning the size of their derivative books may change, creating mismatched hedges.

Basis risk. Standard Chartered’s presentation included two scenarios where valuation changes create the potential for basis risk—when a hedge is imperfect because the derivative does not move in correlation with the price of the underlying asset.

Case 1: A corporate has GBP fixed-rate bonds and entered into multiple fixed to floating-rate interest rate swap contracts to convert the bonds from fixed to floating (GBP 3M Libor +spread).
Case 2: An institution invested in a portfolio of GBP fixed-income instruments. In managing the interest rate risk, it entered into multiple fixed to floating-rate swap contracts to convert the return of the underlying bonds from fixed to floating (GBP 3M Libor +spread).
Problem: “The Libor discontinuation presents a potential risk of valuation jump in both cases,” Standard Chartered states. “Depending on the final transition methodology and levels being agreed upon after the transition, the cash flows and valuation of the swaps are likely to be based on the prevailing SONIA swap curve.”
Solution: “Corporates can consider a Libor/SONIA basis swap to hedge against the risk of valuation jump.”

Discount rates, PV math. A risk of hedging mismatches also arises from the use of a different discount rate, such as SOFR, to determine the present value (PV) of a derivative that a corporate is using to hedge an exposure.

The change in the discount rate index can impact hedging if it is inconsistent between the underlying exposure and the hedge instrument.
For an over-simplified example, consider a $100 million asset discounted at a 2% risk-free rate to a PV of $98 million. To hedge, the corporate could have a derivative on its books with an exact, matching notional value of $100 million. But if that amount is discounted at a different risk-free rate of 1%, the derivative would have a PV of $99 million, creating a hedging mismatch.

Be prepared. Standard Chartered’s recommendations to prepare for the end of Libor include reviews of systems, documentation, processes and pricing—where it says to develop pricing mechanisms based on RFRs.

The bank says to consider changes to systems and processes, such as incorporating new interest rate curves, historical RFR data, RFR methodologies and market conventions, and new pricing and valuation methodologies.
In October, Chatham Financial, which helps corporates manage hedging programs, switched to using SOFR discounting on valuations for cleared swaps that trade on exchanges. It says that if your portfolio includes cleared swaps, you may need to take action to switch the valuation methodology from OIS to SOFR discounting.
Chatham expects that all uncleared USD transactions will move to be discounted on SOFR soon.
- The firm notes that many corporates are initially focusing on the operational impacts of ASC 848 elections and disclosures, determining whether ISDA Protocol adherence is appropriate, and ensuring they have access to accurate payment calculations, valuations and journal entries.

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Justin Jones In COVID-19, Technology

Retailers Connect With Customers Using Touchless Payments

Smartphone apps, some using QR codes, give customers another way to pay without touching keypads or swiping a card.

Members at a recent meeting of NeuGroup for Retail Treasury reported a significant drop in cash transactions since the start of the pandemic, and some are turning to what they’re calling touchless methods of payment to meet consumers’ needs.

These innovations depend on using smartphone apps and the internet instead of so-called contactless payments including Apple Pay and Google Pay. Those require a device or card which then charges the transaction to a digital wallet or bank account.
Contactless methods, though, require retailers to invest in technology that most US consumers do not yet use.

Smartphone apps, some using QR codes, give customers another way to pay without touching keypads or swiping a card.

These innovations depend on using smartphone apps and the internet instead of so-called contactless payments including Apple Pay and Google Pay. Those require a device or card which then charges the transaction to a digital wallet or bank account.
Contactless methods, though, require retailers to invest in technology that most US consumers do not yet use.

Finding new paths. Some members have embraced a simple approach: allowing customers to pay with the company’s own, so-called first-party app and then pick up their goods in person, while others sought out partners to allow smartphone payments at the register.

One of those partners is a member who works for a digital payments company that worked with retailers to introduce QR code-based payments. These allow a customer to pay by scanning a custom code on the retailer’s screen with their phone, accessing a credit or debit account.
- “We worked with existing ecosystem partners, so we don’t have to have the merchant install a new terminal or have specific hardware or software to enable solutions,” the member said. “We’re integrating within the solution.”
One member, who heads electronic payments at a US-based global retailer’s treasury team, said his company partnered with third-party payment apps in Asian markets for in-store checkouts, which “have really taken off.

A gift. Another member said he has found success in encouraging customers to purchase gift cards and load them into the retailer’s first-party app, eliminating fees paid to card issuers while enabling a touchless experience.

“Pre-Covid, our app had been about 40% of our [customer payments]; now we have about 50%,” he said. “I’m a true believer, and it may take a while, but we are going to go from that 50% to an 80% mark in the next few years.”

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Justin Jones In Talking Shop, Technology, Uncategorized

Talking Shop: Making Interactive Dashboards With Power BI and SQL

Member 1: “I was encouraged to hear that others are using SQL (structured query language) + Power BI tools to automate reporting and develop interactive dashboards. We have been on a journey the last three years to do the same and would welcome a breakout discussion on best practices and forward looking vision for using these tools.”

Member 2: “I’d be more than happy to share what we’ve developed and are working on! SQL is a great way to start in BI; it’s easy to see how your code manipulates data.

“Basically what we do is develop data warehouses (SQL) that we get data into, then distribute and manage access to that data in the Power BI workspace. If anyone is interested in learning how to make dashboards in Power BI, SQLBI is widely considered to be the best there is.
“Going forward, I have a lot of interest in using APIs more often. Large banks typically have their own developer portals, so you can basically build your own reports out of their systems, which you could integrate and distribute to users in the Power BI workspace. I believe this is best practice.
“I’m trying to connect with developers to learn how to navigate developer portals. I imagine that using them would reduce bank portal administration tasks significantly, which would be a huge time-saver.
“There’s tons of resources out there and I hope I can help anyone that wants to push themselves in that direction.”

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Justin Jones In ESG, Investment Management

Navigating Prime Funds and Social Impact Investing

Key takeaways from the Treasury Investment Managers’ Peer Group 2 2020 second-half meeting, sponsored by DWS.

By Joseph Neu

Reclaiming prime funds. Members are still skeptical of prime funds, yet they would not have been sorry had they kept their cash in them through the Covid crisis.

Prime funds could be helped going forward by some tweaks to the money market reform regulations concerning gates and fees, plus a pickup in CP issuance next year. However, what prime funds may really need is a publicity campaign highlighting how well they did in the Covid crisis and detailing the sources of liquidity at their disposal, including the Fed.
SMAs (separately managed accounts) to screen holdings for unique corporate risk preferences, meanwhile, will continue to proliferate.

Social impact screens on debt. The sophistication of ESG investment options—including social—continues to grow.

For corporates able to extend their cash investments to asset classes such as muni bonds or mortgage- or other asset-backed securities, asset managers are making it easier for you to select bonds or securities tied to specific social impact projects or communities.
In the past, this cherry-picking was employed to maximize risk-adjusted return or to mitigate credit risk. Now it can be used to micro-target communities and projects that companies want to support in line with ESG, diversity and inclusion (D&I) or corporate social responsibility (CSR) initiatives with their excess cash.
Credit risk concerns don’t disappear, especially under CECL. While yield benchmarks are easier to beat, preservation of principal is still a priority.

Balancing finance with impact metrics. Corporate cash investors continue to care deeply about their fiduciary responsibilities as they look to invest cash for positive social impacts.

Needed are better standards and consensus on frameworks and metrics for social impact investments. Then, corporate treasuries will need to incorporate them into policies and procedures governing cash investment.
It will be interesting to see what, if any, ESG metrics rise to the level of financial benchmarks after policy and procedures projects—that many members are launching or planning to launch next year—are completed.

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Justin Jones In Cash & Working Capital, Technology, Treasury Management

Taking a Hard Look at Structure, Resources and Where to Rationalize

A cash manager with staff across the globe considers how technology may reshape and resize his team.

Strategically important goals are the new organizational focus for one NeuGroup member who leads a cash management team of nearly 50 people at a sprawling global company that has a new CEO.

At a recent meeting, the member described the structure and responsibilities of his staff today and how rationalization and an increased focus on technology may change his use of resources in the future.

A cash manager with staff across the globe considers how technology may reshape and resize his team.

Strategically important goals are the new organizational focus for one NeuGroup member who leads a cash management team of nearly 50 people at a sprawling global company that has a new CEO.

At a recent meeting, the member described the structure and responsibilities of his staff today and how rationalization and an increased focus on technology may change his use of resources in the future.

Centralized control, regional expertise. The member explained that the company’s current “centralized control structure” consists of regional treasury centers in Asia, Europe and the Western Hemisphere along with a central technology and accounting solutions team.

A table he presented showed the number of directors, managers, supervisors, analysts and admins or interns in these areas.
The regional centers focus on supporting the business, optimizing liquidity, and protecting the cash held at the company’s 1000+ bank accounts across 125 banks in about 80 countries.

The importance of audits. “We spend a lot of time and energy on audits,” the member said. Peers were intrigued by a slide he showed indicating whether a given activity performed by cash management required a low, medium or high “resource requirement” in each of the three regions and the solutions group.

Audits of electronic banking platforms, signatories, and self-audits drive “high” resource requirements in each of the four groups.
In response to a question, the member said the requirements mandated by Sarbanes-Oxley (SOX) partly explain the intensity of the audit process. Also:
- “We’re very controlling as an organization, so we’re going to audit the heck out of everything,” he said.
Other categories on the resource requirement table include accounting, analytics, core treasury, cash concentration and settlements, and special projects.

How to rationalize? “There are a lot of things we want to do differently,” the member said. The driving factors in figuring out what will change involve the increased focus on technology, consolidating tasks and eliminating non-value added activities. A summary of initiatives along these focal points was shared with the group, including:

Automation: The treasury solutions team is piloting robotic process automation (RPA) to minimize or eliminate human touch points in daily processes. RPA coding will be done within treasury with assistance from the company’s robotics center of excellence within the IT function.
Consolidation: Opportunities exist to consolidate same or similar tasks done in all regional treasury centers, yielding efficiency and expertise benefits. Examples include administration of electronic banking platforms and of bank guarantee and trade letters of credit.
- The company did mapping with a consultant to determine if and how areas can be consolidated and asked, “Why can’t we do this in one spot?” he said.
Elimination: An emphasis on truly important goals creates an opportunity to review all existing work to determine what is absolutely necessary. This means “challenging every process” and asking, “Can we turn this off?” he said.

Feedback. In a great example of how the NeuGroup Process works best, the member made clear he wanted feedback from his peers on the structure and staffing of his cash management organization.

One member said while his company has a similar number of people in cash management, there is no accounting arm within treasury.
Another member said of the staffing levels, “These numbers look a little high,” adding that accounting at her company is part of shared services.
A third person said she found reviewing the presenter’s staffing levels “extremely valuable” and that looking at the time and resource intensity of various processes is a “good starting point” to leverage going forward.

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Justin Jones In Banking, Capital Markets

Time to Talk Revolving Credit as Signs of Recovery Emerge

Banks are eager for business as loan markets improve and more M&A dialogue takes place.

Debt and loan markets are still in repair mode as they were back in April, so it’s time for corporates to talk to their relationship banks about their credit needs, particularly as it relates to revolving credit. That’s according to Jeff Stuart, EVP and head of capital markets at U.S. Bank.

Revolver trends. Mr. Stuart, presenting his view of revolvers and more at NeuGroup’s Assistant Treasurers’ Leadership Group second-half meeting, said companies had paid down most of their “Covid crisis drawdowns” of revolving credit lines over the course of the pandemic. Nonetheless, they were keeping those lines of liquidity open just in case.

Borrowers are paying down revolver draws and refinancing incremental loans with longer-dated bond issuances, which is a positive trend, Mr. Stewart noted in his presentation.
As for keeping the lines open, Mr. Stuart told members that it’s “not time to cancel your liquidity yet,” particularly as another growing wave of Covid-19 infections sweeps across the world.
Mr. Stuart also noted that for higher-rated issuers, pricing has returned to pre-pandemic levels. “Five-year tenors are coming back; that’s a good sign.”

Don’t wait. If company revolvers are to be extended, right after the election might be a good time to do it, Mr. Stuart said. He added that even if your current revolver doesn’t need attention until next year, most banks have fresh budgets in January and are looking to book new loans in the first quarter. “Don’t wait until your revolver matures,” he said.

He also encouraged companies to use the revolver as they see fit, because banks and rating agencies aren’t giving drawdowns the negative weight they used to. “The stigma of drawing down your revolver is over,” he said.

Deal debt. Following a big decline in M&A loan issuance, there more recently has been “a lot of dialogue about M&A in the last few months” between banks and corporates, Mr. Stuart said.

The deal market is building, he added, “so much so that the election might not matter.”
Despite the M&A dialogue, many companies “haven’t pulled the trigger” yet, awaiting clarity around Covid, Mr. Stuart said.

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