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Talking Shop: How to Respond to a New Rule on ESG Funds in 401(k) Plans?

Context:  On Friday, Oct. 30, the Department of Labor (DOL) issued a final rule clarifying the use by fiduciaries of investments in environmental, social and governance (ESG) funds. The regulation, according to some analysts, will end up limiting the use of ESG funds by some 401(k) and pension plans.

  • Proposed in June, the change was opposed by many asset managers and investment advisors; DOL says the final rule was changed in response to comments.

Member question: “Has anyone thought about this DOL regulation that effectively limits adding ESG funds to a 401(k) plan?”

Context:  On Friday, Oct. 30, the Department of Labor (DOL) issued a final rule clarifying the use by fiduciaries of investments in environmental, social and governance (ESG) funds. The regulation, according to some analysts, will end up limiting the use of ESG funds by some 401(k) and pension plans.

  • Proposed in June, the change was opposed by many asset managers and investment advisors; DOL says the final rule was changed in response to comments.

Member question: “Has anyone thought about this DOL regulation that effectively limits adding ESG funds to a 401(k) plan?”

Peer answer 1: “Yes, working on adding ESG in some form to our plans while not tripping the reg. More to come. Also pending election outcome.”

Peer answer 2: “Yes, in our fiduciary capacity we and our advisors are looking at this carefully, especially with regard to trying to balance the DOL’s stance against the requests of the vocal subset of our employees who would like more ESG choices beyond the self-directed brokerage option.”

Peer answer 3: “Yes, at our last 401(k) committee meeting this was presented and discussed. We think the ESG funds could show stronger performance than non-ESG peers, so that would pass the test in the reg.”

Peer answer 4: “Yes we’re very focused on exploring this, but conscious of the guardrails. Curious to hear how others are navigating.”

Peer answer 5: “Even before the reg announcement, our committee considered whether addition of ESG fund choices made sense and we decided against it, based mainly on limited employee demand.

  • “We felt that given the risks, it made more sense to allow employees to go the self-directed brokerage route if they felt that strongly about ESG. I’m not aware of any significant pushback from our employees since. Now with this DOL reg being issued, I doubt our position will change and probably only reinforces the decision we made earlier.”
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Preparing for More China-US Tension, New Current Account Rules in India

Key takeaways from the Asia Treasurers’ Peer Group fall meetings sponsored by Standard Chartered.

By Joseph Neu

India ties current accounts closer to credit relationships. Members wanted clarity on a Reserve Bank of India (RBI) circular released over the summer that seeks to restrict current accounts to banks with which companies have a local credit relationship—subject to thresholds.

Key takeaways from the Asia Treasurers’ Peer Group fall meetings sponsored by Standard Chartered.

By Joseph Neu

India ties current accounts closer to credit relationships. Members wanted clarity on a Reserve Bank of India (RBI) circular released over the summer that seeks to restrict current accounts to banks with which companies have a local credit relationship—subject to thresholds.

  • Standard Chartered’s presentation explained that going forward, banks cannot open a current account for a customer who has “availed” a cash credit or overdraft facility from others in the banking system. From now on, all transactions will have to be routed through the cash credit or overdraft account.
  • The good news, for some banks and corporates, is that the RBI this week extended the deadline for compliance with this part of the guidelines, from Nov. 5 to Dec. 15, 2020.
    • The RBI said it had been contacted by “banks seeking clarifications on operational issues regarding maintenance of current accounts already opened by the banks. These references are being examined by the Reserve Bank and will be clarified separately by means of a FAQ.”
  • The stated objective of the circular is improved transparency on client cash flows, but it also seems like an attempt to help banks in India maintain liquidity and share of wallet by tying assets to liabilities. In this crisis, visibility over liquidity is important to everyone.

All entity cash visibility and access. Indeed, MNC regional treasurers in Asia have been focused on cash visibility, including better forecasting, just like everyone else.

  • The regional treasury focus, however, is much more at the entity level in each country of the region and involves looking at liquidity as seen by their parent at headquarters. More than ever, there has been a focus on upstreaming liquidity and tweaking the cash plumbing to maximize assurance that the ability to upstream will remain.
  • Covid-19 and its economic impact have been a big driver, plus US MNCs have the added incentive to repatriate cash ahead of potential tax changes with a changing of the guard in Washington.

China bank scenario planning. Speaking of access and cash plumbing, another project members shared is looking at the potential for US-China tensions to result in sanctions or other formal and informal restrictions on banking operations in China.

  • This is especially important when it involves US or other international banks that MNCs rely on for transaction banking in China and cross-border.
  • It’s time for some to evaluate the pros and cons of shifting business to a local bank from a US or international one.
  • While adverse scenarios impacting treasury operations are deemed unlikely, having a contingency plan is always better than not.
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Nice Fit: A Matched Portfolio With a Hybrid Management Model

The benefits for one corporate of matching portfolio cash flows to debt payments and using internal and external managers.

Matching assets and liabilities, a staple of pension fund managers, is central to how one NeuGroup member runs his technology company’s treasury investment portfolio—or at least a big chunk of it.

  • At a recent NeuGroup meeting, the member explained the benefits of the matched portfolio strategy as well as the advantages of what the company calls a hybrid management model—using internal managers for segments of its total investments and external managers for other segments.

The benefits for one corporate of matching portfolio cash flows to debt payments and using internal and external managers.

Matching assets and liabilities, a staple of pension fund managers, is central to how one NeuGroup member runs his technology company’s treasury investment portfolio—or at least a big chunk of it.

  • At a recent NeuGroup meeting, the member explained the benefits of the matched portfolio strategy as well as the advantages of what the company calls a hybrid management model—using internal managers for segments of its total investments and external managers for other segments.

Playing the match game. Treasury currently uses about half of its total portfolio to create an asset-liability match for its future debt maturities, helping to reduce interest rate exposure and eliminate refinancing needs, the member said, adding that, “It’s really an ALM portfolio.” The company calls the other main segment its strategic portfolio, which has its own objectives.

  • Matching various characteristics, including duration, key rates and the mix of fixed and floating-rate debt produces a consistent stream of net income and provides “natural” maturities in advance of pending debt repayments. 
    • “We don’t need to rely on liquidating bonds to pay our debt,” the member said. “We have that steady stream of maturities providing the cash to pay it off.”
  • The matching strategy also covers interest payments. “So when interest rates were rising, our floating-rate debt payments were rising, but so was our income,” he said.  “That was very helpful in smoothing out cash flows and P&L impacts.”
    • “Some of our peers issued fixed-rate debt at what they thought were low rates, but got whipsawed when rates dropped on their cash and they suddenly had a negative net interest margin,” he added.
  • The member showed a slide indicating that both yields and durations are about equal between the assets and liabilities. But at any particular point in time, the asset duration could be equal or slightly below the debt duration.
    • “It’s impractical to find bonds that mature on the exact same day as a debt repayment, so we would typically hold bonds that might mature a few weeks or months beforehand and sit on the cash temporarily until it goes to pay off the debt,” he explained. The company excludes long-term debt, including 30-year bonds, from the matched portfolio.

When matching makes sense. The strategy works best for companies that have more cash than debt and intend to pay down the debt, the member said, drawing a comparison with pensions.

  • “Pensions that are still open and growing liabilities are going to invest differently (more growth assets) than pensions that are winding down,” he said. “The ones winding down are going to de-risk and immunize by investing in matching bonds. That’s what we’ve done thus far.” 
  • An investment manager at another corporate told NeuGroup Insights, “That approach would make sense if I expected to be paying down debt and the maturities didn’t stretch too far into the future (maybe five or six years?). Many companies (including mine) are not paying down debt.”

What’s inside. Most of the matched portfolio is invested in short and intermediate-term credit managed by external fund managers in “target maturity” term funds.

  • For example, the company might have debt maturing in late 2023 and could set up a target maturity fund to be managed externally with bonds that would mature in 2023 or leading up to that date.
  • Part of the matched portfolio is invested in US Treasuries, which the company manages internally. 
  • “I think high quality corporate bonds and treasuries are the best way to match a portfolio with a debt payment schedule,” the member said.

The hybrid model. The company splits the management of its total portfolio—matched and strategic—roughly equally between internal and external managers. The decision of who will manage which asset classes is based on:

  1. Resource intensity—Does the company need in-depth credit research and full-time traders?
  2. Trading dynamics—Can the company get price transparency and best execution with online systems?
  3. Stability of balances—The company believes outsourcing is less effective when fund balances fluctuate.
  4. Fees

Hybrid highlights. The hybrid management model, as used by the member company, may be best suited to companies that have reasonably robust internal and external management capabilities.

  • The model “creates a fluidity of knowledge, where we can learn and share best practices and get partnership value from world leading fund managers,” the member said.  
  • As for any relationship between using a hybrid model and managing a matched portfolio: “I would say matching opens up some opportunities to use your internal capabilities to fine-tune what the managers are doing in the target maturity funds.”
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Time for Bonds: A Growth Company Learns the Ropes of Issuing Debt

A debut bond offering reveals the benefits of preparation in working with rating agencies, banks and the C-Suite.

Eight years after going public, one NeuGroup member company planned to refinance equity-linked capital with straight debt—in the middle of the pandemic. It successfully completed the issuance, and at a recent NeuGroup meeting the company’s treasurer described a process that was challenging at times but ultimately proved rewarding.

  • Along the way, the treasury team—which had never issued straight bonds—learned valuable lessons, including the need for consistent, clear communication with partners, vendors and the C-Suite.

A debut bond offering reveals the benefits of preparation in working with rating agencies, banks and the C-Suite.

Eight years after going public, one NeuGroup member company planned to refinance equity-linked capital with straight debt—in the middle of the pandemic. It successfully completed the issuance, and at a recent NeuGroup meeting the company’s treasurer described a process that was challenging at times but ultimately proved rewarding.

  • Along the way, the treasury team—which had never issued straight bonds—learned valuable lessons, including the need for consistent, clear communication with partners, vendors and the C-Suite.

The credit ratings tango. A few months before the bond issuance, the company worked with Moody’s and S&P, and found the former easier to work with than the latter.

  • The member said that in a three-hour Zoom meeting, Moody’s was “well-prepared with a lot of very thoughtful questions. You could tell they were trying to find information that they could use for their research.”
  • S&P’s level of preparation left a different impression. “There was a lot of editing we had to do. We had to provide extra guidance prior to the final opinion being published.”
    • In response to a question, the member said he saw no need to secure a rating from Fitch at this time, given the time necessary to engage with S&P and Moody’s.

Making your case. The actual debt issuance taught the member the value of preparation and anticipating questions before communicating with both internal and external stakeholders.

  • The member’s preparation before discussing the proposed offering with the company’s new CFO—specifically, the reasons behind the timing of the deal—paid off and moved the ball forward.
    • The treasurer said that in addition to the economic benefits, straight debt aligned with the goal of transitioning from an emerging growth company to a stable, more established corporate.
    • Treasury kept the CFO in the loop throughout the process, communicating through a project manager.
  • The treasury team also benefitted by going through the process of helping prepare the CEO and CFO ahead of conversations with potential investors, which required working closely with the company’s investor relations team.
    • “From ratings, to the marketing people, the bond issuance, treasury prepared talking points for each of the slides, so we had the IR team really helping us in this process,” the treasurer said.

Managing bank relationships. The treasury team selected a lead bank it knew well, a decision that paid off in terms of a smooth and successful offering, the treasurer said.

  • “The process itself went fairly smoothly,” he said. “The bank did a lot of the heavy lifting including preparing for investor calls and doing a lot of due diligence in terms of all the documentation that we needed to complete.”
  • But the treasury team learned the challenges of managing the expectations of more than 10 banks, some of which were not happy with not landing a lead role.
  • That brought home the need for better communication with non-lead banks early in the process, preparing them for their role on the present deal and conveying what they might expect in future transactions.
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Will You Be Ready When Libor Is No Longer “Representative”?

Preparing for fallback language that could be triggered when a UK regulator deems Libor non-representative.

The global pandemic has not slowed the march toward Libor’s demise, scheduled for the end of 2021. And corporates have a lot to do long before then.

  • Just last week, ISDA launched a fallback supplement and protocol, marking what it called a “major step” in reducing the impact of Libor becoming unavailable “while market participants continue to have exposure” to it.
  • The supplement includes “robust fallbacks for derivatives linked to certain [interbank offered rates],” and the protocol lets participants incorporate the changes into legacy “non-cleared derivatives trades with other counterparties that choose to adhere to the protocol,” according to ISDA.

Preparing for fallback language that could be triggered when a UK regulator deems Libor non-representative.

The global pandemic has not slowed the march toward Libor’s demise, scheduled for the end of 2021. And corporates have a lot to do long before then.

  • Just last week, ISDA launched a fallback supplement and protocol, marking what it called a “major step” in reducing the impact of Libor becoming unavailable “while market participants continue to have exposure” to it.
  • The supplement includes “robust fallbacks for derivatives linked to certain [interbank offered rates],” and the protocol lets participants incorporate the changes into legacy “non-cleared derivatives trades with other counterparties that choose to adhere to the protocol,” according to ISDA.

The FCA and fallback triggers. At a recent meeting of NeuGroup for Capital Markets sponsored by Deutsche Bank, members heard Matthew Tilove, the bank’s co-head of risk management solutions, say that the UK Financial Conduct Authority (FCA), the administrator for Libor, could determine that Libor is “non-representative” before the end of 2021.

  • In a follow-up interview, Mr. Tilove said, “Under the ISDA fallbacks protocol, as well as under the ARRC-recommended fallback language for bonds and loans, such a determination could trigger the fallback to SOFR-based rates, even though Libor continues to published.”
  • He noted that earlier this year, FCA officials indicated a non-representative announcement could come as early as the end of 2020; the ISDA fallbacks supplement and protocol become effective on Jan. 25, 2021.
  • The law firm Michael Best & Friedrich observed that Libor-based derivatives contracts executed on and after Jan. 25 that incorporate 2006 ISDA definitions “will automatically be replaced by term-adjusted SOFR plus a spread when [Intercontinental Exchange] permanently stops publishing Libor, or when Libor is deemed to be ‘non-representative’ by the FCA.”

Preparedness. “Companies may need to be operationally ready to support SOFR-linked contracts, including daily compounding and resets in arrears, long before the end of 2021,” Mr. Tilove said, referring to the Secured Overnight Financing Rate endorsed by the Federal Reserve and the Alternative Rates Reference Committee (ARRC).

  • “Companies should also review their existing hedge relationships to identify potential situations where the hedge and the hedged item may be subject to differing fallback provisions,” he added.

Worst case scenarios. Other risk management experts told NeuGroup Insights that if documentation is in place and contracts fall back to SOFR-based rates, most of the very worst outcomes can be avoided. However:

  • If documentation is not in place, so that ISDAs, bonds and loans do not include suitable fallback provisions, the potential risks include a breakdown of economic terms and disputes with counterparties, including litigation.
  • If corporates are not prepared operationally to deal with the fallback rates, including daily resets and fixings in arrears, unfavorable outcomes include operational payment errors (and resulting reputational and legal risks), potential cash flow forecasting errors, accounting errors for interest accruals, lots of operational time and effort spent monitoring and fixing things.
  • If corporates do not adequately understand the economics of the various fallback provisions, possible problems include introducing mismatches in hedging relationships because of differences between the way the fallbacks apply to the hedge and the hedged item.
    • For example, a floating-rate note might fall back to term SOFR set in advance while the swap falls back to daily compounded SOFR set in arrears, introducing some risk between those two fixings.
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Looking Into the Capital Markets Crystal Ball: Trump vs. Biden

Uncertainty over the outcome after election day means more volatility, potential opportunities. 

Whether it’s Donald Trump or Joe Biden sitting in the Oval Office next year, many capital markets prognosticators expect the US economic recovery to remain on track and the Federal Reserve to keep interest rates low—relatively good news for investment-grade companies selling more debt, but troublesome for treasury investment managers searching for yield. Beyond that, things get more complicated.

  • A European bank that recently sponsored a NeuGroup meeting of treasurers from large-cap companies told members that corporates may have some short-term opportunities created by volatility if the election outcome is delayed. Longer-term considerations include the impact of a higher corporate tax rate should Biden win.

Uncertainty over the outcome after election day means more volatility, potential opportunities. 

Whether it’s Donald Trump or Joe Biden sitting in the Oval Office next year, many capital markets prognosticators expect the US economic recovery to remain on track and the Federal Reserve to keep interest rates low—relatively good news for investment-grade companies selling more debt, but troublesome for treasury investment managers searching for yield. Beyond that, things get more complicated.

  • A European bank that recently sponsored a NeuGroup meeting of treasurers from large-cap companies told members that corporates may have some short-term opportunities created by volatility if the election outcome is delayed. Longer-term considerations include the impact of a higher corporate tax rate should Biden win.

Dollar decline. The bank said that a disputed election will be bearish for the US dollar, noting that in 2000, when it took Al Gore a month to concede to George W. Bush, USD fell by 3.5%. The bank is also bearish on the dollar long-term.

  • A so-called blue wave resulting in greater government spending, the Fed likely expanding its balance sheet further, and US interest rates falling closer to Europe’s and Japan’s will all fuel depreciation of the dollar, the bank said.
    • Democrats winning the presidency but not the Senate, or vice versa, would be slightly dollar positive.
  • The bank sees the euro at the low end of its range against the dollar and likely to strengthen, an outlook that should prompt corporates to consider scaling back on euro liabilities.
  • “Many corporates have issued debt in euros or swapped dollars to euros to benefit from lower coupons, and while the coupons are still lower in euros, loading up on euro debt will inflate their balance sheets,” one of the bankers said.
  • Companies may also want to adjust their balance sheets or cash flow hedging policies, perhaps incorporating options to benefit from a potential euro appreciation.

Stock-drop opportunities. During the disputed presidential election in 2000, the S&P 500 dropped 12% between Election Day and Dec. 13, then rebounded 9% by the end of January 2001.

  • If an uncertain election outcome this year results in a sell-off of 10% to 15%, companies considering raising equity will have to wait until markets rebound.
  • Companies that have continued to buy back shares during the pandemic may want to set up programs with steep grid levels to allow for opportunistic repurchases, the bank said.

Higher corporate taxes? Most participants polled at the meeting saw a Biden win resulting in the corporate tax rate rising to between 25% to 30% from 21% now.

  • One member asked peers if the market had already “baked-in” higher taxes. He noted that as prospects for the Trump tax cut gained momentum his company’s stock price bumped up, but it only saw the full impact after the bill passed.
  • “It feels like we’re in the very early stages of that on the reverse side,” he said.

Not so fast. One of the bankers advised considering the amount of liquidity in the markets now compared to the last time the tax rate was adjusted. Higher corporate taxes might adversely impact stock prices normally, but these aren’t normal times. 

  • “The fundamentals are a bit out the window in most markets,” he said, “So until liquidity gets pulled out of the market a bit by the central banks, I wonder whether things like adjusting the tax rates will have less impact on individual stocks just because of the hunt for yield and returns.”
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The ESG Evolution: Finding Each Corporate’s Starting Point

Treasury’s role is critical as ratings agencies translate financial soundness into ESG readiness.

Credit rating agencies face daunting challenges, not only with old-fashioned credit ratings, but also their efforts to gauge corporates’ environmental, social and governmental (ESG) status. In fact, corporate treasury’s approach to the former can significantly impact the agencies’ views on the latter, according to Karl Pettersen, managing director and chief sustainability officer and the head of ratings advisory at Societe Generale.

  • ESG rating and scoring firms, some of which the credit rating agencies have recently acquired, all use very different data and methodologies, leaving companies uncertain about their standings.
  • “The language for ESG is changing fast, because of evolving taxonomies, market developments such as carbon pricing, and because social questions are becoming more pressing,” Mr. Pettersen said.

Treasury’s role is critical as ratings agencies translate financial soundness into ESG readiness.

Credit rating agencies face daunting challenges, not only with old-fashioned credit ratings, but also their efforts to gauge corporates’ environmental, social and governmental (ESG) status. In fact, corporate treasury’s approach to the former can significantly impact the agencies’ views on the latter, according to Karl Pettersen, managing director and chief sustainability officer and the head of ratings advisory at Societe Generale.

  • ESG rating and scoring firms, some of which the credit rating agencies have recently acquired, all use very different data and methodologies, leaving companies uncertain about their standings.
  • “The language for ESG is changing fast, because of evolving taxonomies, market developments such as carbon pricing, and because social questions are becoming more pressing,” Mr. Pettersen said.

Find a starting point. Mr. Pettersen presented a graphic with quadrants representing higher and lower levels of ESG risk and readiness and different starting points for companies to approach an ESG strategy

  • Those in the bottom left have lower ESG risk and a higher willingness to be a first mover (i.e. higher ESG readiness), so issuing a public green or social bond makes sense.
  • Those with a low risk/low readiness profile may be best served in engaging proactively in the social conversation, first through internal policy changes, and then through external relationships with diversity partners.
  • “When you’ve figured out your starting point, because ESG is a response to societal needs, it needs to be public and it should also be permanent,” Mr. Pettersen said. “Something that becomes part and parcel with what the company does and is consequential to its business.”

Treasury’s role. Given that ESG standards are still forming, traditional financial tools remain the most reliable, Mr. Pettersen said, noting SocGen’s research imbedding ESG into equity recommendations.

  • The “trust factor” has become increasingly important for credit ratings as the agencies navigate challenges to their traditional credit methodologies, and that trust carries over to ESG.
  • The more aggressively the rating agencies view a company’s financial policies, he said, the less likely they are to view it as less ESG ready—a “clear correlation.”
  • “And if they like your financial-policy track record, they’re more likely to trust you on ESG,” he said.

Unfair controversy. A treasurer noted skeptically that ESG rating firms disproportionally rely on independent sources reporting controversies, and Mr. Pettersen acknowledged such controversies may be unfounded but nevertheless affect a company’s ESG score.

  • As a former credit rating analyst, Mr. Pettersen said he advised companies to take control of the narrative. Noting an earlier NeuGroup poll indicating corporate America expresses sustainability as building a better world, he said companies should focus on what they can do to improve.
  • “That allows you to take control of the narrative a bit and define better what your actual starting point is,” he said. “And because not a lot of companies are doing this now, it may give you a first mover advantage.”

Evolving ESG conversation. A few years ago, the market wanted companies to show they were thinking about ESG and doing something about it, Mr. Pettersen said. “Now, it’s turning into, ‘Show me that when you’re taking risk, you’re doing it in a responsible and balanced fashion across your stakeholders.’”

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Why Parking Cash on the Balance Sheet May Trump Bigger Revolvers

Key takeaways from the NeuGroup for Capital Markets 2020 H2 meeting, sponsored by Deutsche Bank.

By Joseph Neu

Bond issues are the new RCF.  Discussion on the topic of how to divvy up extra liquidity in terms of cash on the balance sheet vs. a bigger revolving credit facility (RCF) yielded the recommendation that most firms with the ratings capacity are better off issuing bonds and parking cash on their balance sheet.

  • The bond market is supportive, and bank credit pricing is going to be more stingy unless, ironically, it’s paired with bond economics and the promise of a substantial wallet to pay for it.

Key takeaways from the NeuGroup for Capital Markets 2020 H2 meeting, sponsored by Deutsche Bank.

By Joseph Neu

Bond issues are the new RCF.  Discussion on the topic of how to divvy up extra liquidity in terms of cash on the balance sheet vs. a bigger revolving credit facility (RCF) yielded the recommendation that most firms with the ratings capacity are better off issuing bonds and parking cash on their balance sheet.

  • The bond market is supportive, and bank credit pricing is going to be more stingy unless, ironically, it’s paired with bond economics and the promise of a substantial wallet to pay for it.

Sustainability-linked finance about to rocket.  Finding qualifying use of proceeds limits green bond and related issuance that require direct linkage on how the funds raised are used.

  • Sustainability-linked finance rewards firms for meeting smart targets (that are scientifically measurable) across the full ESG spectrum, which will increasingly include diversity and inclusion (D&I) and social impact goals.
  • This is why a major asset manager in the fixed income space is excited about sustainability-linked finance products as an asset class and a $10 trillion market megatrend.

Six major ESG rating agencies? In a meeting where capital markets professionals from top corporate issuers expressed frustration about the pricing practices of credit rating agencies, we learned that the top three are about to be joined by three or four more.

  • This will be the result of ESG scores becoming both fully mainstream and integrated into credit ratings. Moody’s, S&P and Fitch are rapidly growing and acquiring ESG scoring specialists in anticipation of this outcome.
  • ESG scorers including MSCI, Sustainalytics, Bloomberg and ISS are vying to join them in the top tier of raters.
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Cash Pooling: What Treasury Teams at Multinationals Need to Know Now

An update of a story—one of NeuGroup’s most-read articles—about physical and notional cash pooling.

By Susan A. Hillman, Partner, Treasury Alliance Group LLC

Eight months into the global pandemic, liquidity and cash remain top-of-mind for many multinational corporations coping with uncertainty over the shape and timing of economic recovery. That makes this an opportune time to reexamine a critical liquidity management tool that has been around for decades but has always required careful evaluation before implementation: cash pooling.

An update of a story—one of NeuGroup’s most-read articles—about physical and notional cash pooling.

By Susan A. Hillman, Partner, Treasury Alliance Group LLC

Eight months into the global pandemic, liquidity and cash remain top-of-mind for many multinational corporations coping with uncertainty over the shape and timing of economic recovery. That makes this an opportune time to reexamine a critical liquidity management tool that has been around for decades but has always required careful evaluation before implementation: cash pooling.

  • Further due diligence is in order now in given tax and regulatory changes in the past few years that may bring more scrutiny of the objectives of a company’s cash pool structure and affect the ability of banks to offer cash pooling services.

Cash pooling defined. Cash pooling is a short-term cash management tool whose objective is to eliminate idle cash and reduce overdrafts among subsidiary operations that have varying daily cash positions. There are two approaches: physical and notional.

Physical pooling allows funds in separate subaccounts—at the same bank—to be automatically swept to and from a header account. The participating entities’ bank (sub)accounts are either in surplus or deficit position on an end-of-day basis. The physical concentration to the designated header account effectively zero balances the subaccounts. Physical pooling can be used across multiple legal entities, located in the same or different countries—but on a currency by currency basis.

  • Movements between accounts are categorized as intercompany loans to and from the header entity and the participating subsidiaries. Specific loan documentation related to the pool structure is prepared in advance. The holding entity should be designated as an agent for the group which allows the interest paid and earned to be treated as bank interest and is not subject to withholding tax.
  • The sweeping entries are documented daily through the bank transactions and arm’s length interest is paid or charged either monthly or quarterly. Physical cash pooling is a transparent and efficient liquidity management tool. The documentation and bank transaction detail leaves a sufficient audit trail that is appreciated by corporate tax and would satisfy even a conservative interpretation in a tax audit.

Notional pooling achieves a similar result but is accomplished by creating a shadow or notional position resulting from an aggregate of all the accounts, which can be held in multiple currencies. Interest is paid or charged on the consolidated position. There is no actual movement or commingling of funds.

  • The bank (or system) managing the notional pool provides an interest statement reflecting the net offset that is similar to what would have been achieved with physical pooling. As there is no physical movement of money, intercompany loans are not required to account for the offset.
  • Notional pooling across multiple currencies requires that these currencies are brought to a common basis (usually EUR or USD) before the pooling and interest offset can take place. In essence, a short-dated swap is executed by the pooling bank. This makes the process more problematic and not as cost effective, as treasury has no control over the rates or the timing of the swaps.
  • The multicurrency appeal of notional pooling is somewhat negated due to the complexity arising from the cross- jurisdictional nature of the arrangements and the need to accommodate multiple regulatory regimes. If accounts are maintained across several banks in different countries, there are complications with cutoff times to say nothing of extra transaction costs and bank fees. Due to the opaque nature of the arrangement, it can trigger tax scrutiny.

Tax reform.  US tax reform in 2017 meant multinationals had less tax inducement to have profits booked outside the US in a lower tax jurisdiction—a significant disincentive to tax inversion through an offshore location of regional headquarters. Initially, treasurers wondered if tax reform would affect current or planned cash pooling structures.

  • The short answer is no, in part because the US Treasury said the new law would not impact short-term arrangements such as physical and notional pooling.
  • Cash pooling is an arrangement to facilitate the management of daily working capital fluctuations between related subsidiaries—it is not used to keep large cash profits offshore.
  • The entity holding the pool header account is usually an offshore company and this continues to be advisable from both a tax and practical perspective.
    • Currency accounts are not used in the US, there are reserve requirements, overdrafts aren’t permitted and interest can only be earned through sweeps—not on current accounts.
    • From a time-zone perspective, the subaccounts will be held in other countries, so an end of day concentration is not logistically efficient.
    • A US company is not allowed to be a borrower in a cash pooling arrangement.
    • Europe remains the ideal geographic location for a pool structure due to access to financial and currency markets. Singapore is often used as an Asian center; Hong Kong’s attractiveness is declining due to uncertainty and Chinese political repression.

Regulatory scrutiny. Initiatives by the OECD (Organization for Economic Co-operation and Development) and BCBS (Basel Committee on Banking Supervision) within the past few years may impact cash pooling. That said, the actual adoption of these pronouncements is undertaken separately by participating countries and their central banks or regulators.

  • The OECD’s BEPS (base erosion and profit shifting) initiative addresses tax treaties, transfer pricing and any perceived financial sleight of hand. For treasurers, it means that now is not the time to push the envelope with complicated treasury structures that involve intercompany transactions—particularly with transfer pricing which may come under scrutiny.
    • Does this mean cash pooling is threatened? Not really, because it a well-established short-term cash management tool. However, it is important that treasury has good documentation in place, particularly related to the intercompany arrangements created by cash pooling.
  • BCBS’s Basel regulations impact banking services and costs. Basel III (2017) addresses the liquidity ratios banks need to meet, so banks are scrutinizing how business is allocated between transaction services and credit.
    • Basel IV (2023) will require banks to meet even higher maximum leverage ratios—particularly larger global banks. There will also be more detailed disclosure of reserves and other financial statistics required.
    • The Basel conditions will impact certain services that were previously standard and transaction costs will likely increase—this may affect both the availability and costs of cash pooling services, especially for notional pools.

Takeaways. The benefit of cash pooling arises from allowing separate subsidiaries to use internal corporate cash instead of bank borrowing for day-to-day working capital. A few caveats have always been important, but require closer adherence given tax and regulatory updates.

  • Pooling is not an arrangement to aggregate excess offshore cash in an attempt to earn a higher rate of return as interest rates are at zero or negative in Europe—and this also may draw scrutiny from regulators.
  • Banks must consider liquidity ratio requirements, so concentrating transactional business with the pooling bank is a good idea. Keep in mind that there are only a handful of global banks that offer cash pooling.
  • Clear intercompany loan documentation is essential and rates applied must be arm’s length.
  • Excess cash should be repatriated—the 2017 tax law makes this more palatable. So it’s important that aggregate pooled balances are not excessively high.
  • Long-term deficit cash in offshore subsidiaries should be handled through separate intercompany loans or other funding—not with cash pooling.
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Digital Signatures Deliver Relief and a Few Frustrations Amid Pandemic

Corporates report success using DocuSign with many banks, but Latin America presents challenges.

“Has anyone successfully used DocuSign with banks?” one NeuGroup member asked at a recent virtual meeting. “Yes” was the resounding answer from peers—more evidence that the pandemic has accelerated automation and digitization in finance. And one goal for many treasury teams is to make “wet” signatures a thing of the past.

Corporates report success using DocuSign with many banks, but Latin America presents challenges.

“Has anyone successfully used DocuSign with banks?” one NeuGroup member asked at a recent virtual meeting. “Yes” was the resounding answer from peers—more evidence that the pandemic has accelerated automation and digitization in finance. And one goal for many treasury teams is to make “wet” signatures a thing of the past.

  • The member who posed the question wants to use DocuSign’s electronic signature solution internally and externally—for intercompany loans, signatory changes and to open, close or change bank accounts.
  • One pain point that several members brought up: difficulties using DocuSign in Latin America. See the table below.
  • The takeaway is that corporates should keep applying pressure to financial institutions and regulators to allow broad use of digital signatures across the globe.

The good news. Members reported success in using DocuSign with banks including Bank of America, JPMorgan Chase, Citi, Wells Fargo and Societe Generale.

  • “We have used it in lots of places,” said one member.
  • “The banks will do it if they want your business,” another said, recommending that others push institutions to accept digital signatures. “Unless they can produce a regulatory reason, use DocuSign.”

The problem. Regulatory issues and how banks interpret different rules and laws in dozens of countries are one reason using digital signatures can prove challenging for corporates.

  • Many companies at the meeting use Citi to bank in Latin America and most of them reported having difficulties using DocuSign in the region.
  • “They’re requiring originals for everything,” one member said.
  • “We’re hearing it’s more the regulatory environment,” said another, adding that it may also may reflect a more conservative approach by Citi.
  • Another said, “My assumption is that it is banks’ interpretation of country-specific regulatory rules that drive the compliance/non-compliance with digital signatures. But I don’t have clarity from the banks on why they will or will not accept DocuSign.” This member’s company also uses a stylus to sign documents on an iPad.

Citi and DocuSign.  Driss Temsamani, Citi’s head of digital channels and data for Latin America, told NeuGroup Insights that DocuSign is embedded in the CitiDirect BE Digital Onboarding platform, adding that onboarding is the key priority in the bank’s digital transformation strategy. In Latin America, the platform was introduced in Brazil in 2019.

  • The platform is now in use in 12 Latin American countries and Citi clients can use digital signatures in all but four of them. The exceptions include Mexico and Uruguay, where regulatory approval is pending.
  • El Salvador and Panama do not have laws covering digital signatures and the DocuSign feature on Citi’s platform is disabled in those countries.
  • Asked how he would respond to corporates expressing frustration with using e-signatures in Latin America, Mr. Temsamani said he would need each client to tell him more about its specific issue so he could better understand and address their feedback. “Whenever a client tells me something, it’s always valid and a top priority,” he added.

Editor’s Note: The table below was provided by a NeuGroup member company and is the treasury team’s documentation of its experience with various banks.

The table is not based on any information provided to NeuGroup by the banks listed and does not claim to represent the banks’ policies or the experience of any other company.

“Digital Signature” refers to the member company signing a document using a stylus on a tablet; DocuSign is its preferred method.

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A Homegrown ESG Dashboard in Search of Better Data

A tech company builds its own tool to get a holistic view of ESG ratings but bemoans social data quality.

Many companies in the NeuGroup Network are devoting significant resources to better address environmental, social and governmental (ESG) issues that are increasingly critical to how investors and other stakeholders view corporates.

  • But not many treasury teams have access to an ESG dashboard, something one member who works at a large technology company described to peers at a recent meeting of treasury investment managers

A tech company builds its own tool to get a holistic view of ESG ratings but bemoans social data quality.

Many companies in the NeuGroup Network are devoting significant resources to better address environmental, social and governmental (ESG) issues that are increasingly critical to how investors and other stakeholders view corporates.

  • But not many treasury teams have access to an ESG dashboard, something one member who works at a large technology company described to peers at a recent meeting of treasury investment managers.
  • The company built the dashboard itself, thanks in part to “people good on Python,” the member said. “We are lucky.”
  • The dashboard offers a “holistic” view of the ESG ratings of all the company’s investments—those managed internally as well as assets managed in separate accounts.
  • The member said one goal is to make sense of managers who “all have different ways of measuring ESG.” The company wants investments that are consistent with its goals of reducing carbon emissions and promoting more representation of women and minorities, among others aims.
  • The dashboard uses ESG ratings data from MSCI and the company plans to add other sources as it implements targets for its ESG investments.

Data deficit. The problem, the member said, “is that there is not that much data out there,” especially regarding social metrics. The only information some companies provide about women is how many of them are on the board of directors, she added.

  • An ESG asset manager for Morgan Stanley, sponsor of the meeting, agreed that compared to data on environmental records, there is “a massive gap on the social side.” He mentioned difficulty getting information on how companies ensure the safety of employees.
  • The manager said investors—whether or not they have a dashboard—need to take ESG scores with “a pinch of salt.” His team tries to re-rate companies and look at them through “our own lens” to make the ratings “more relevant.”
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How Corporates Are Measuring Counterparty Risk as Cash Builds

Companies reviewing limits amid Covid have varied approaches to calculating risk thresholds.

The abundance of cash corporates have collected on their balance sheets to deal with pandemic-related volatility has prompted some to review their counterparty risk limits.

Participants at a recent NeuGroup meeting of large-cap companies described a variety of approaches to the issue, which should remain especially relevant for treasury teams reducing the size of bank groups, a trend discussed in recent meetings.

Companies reviewing limits amid Covid have varied approaches to calculating risk thresholds.

The abundance of cash corporates have collected on their balance sheets to deal with pandemic-related volatility has prompted some to review their counterparty risk limits.

Participants at a recent NeuGroup meeting of large-cap companies described a variety of approaches to the issue, which should remain especially relevant for treasury teams reducing the size of bank groups, a trend discussed in recent meetings. 

  • A member explained that higher deposit rates at one bank prompted his team to consider whether to exceed the $100 million ceiling in its policy. It turned out that only the CFO had to be alerted; no approval was needed from the board or senior management.
  • The company was entering longer-term exposures, including derivative transactions, in which relatively few banks were experts and offered reasonable fees. That resulted in a concentration of business that could hit exposure ceilings. 
    • “The more of this we do, we’re faced with the issue of which banks do we execute with and how much with each bank,” the treasurer said.  

Notional vs. marked to market. The session leader said that his team updates the marked-to-market derivatives exposures monthly but has relied on notional limits. The company’s exposures have traditionally been seven days or less, but the longer-term hedges may require a more dynamic approach.

  • A peer said his company relies on mark-to-market limits and stress tests them using a third-party service offered by Reval. Initial trades shouldn’t exceed the limits, and ratings downgrades and market-moving events such as Covid halt additional trades unless the CFO approves them. 
  • The company separates derivatives from deposits because the latter don’t have a stress scenario. The derivative limit is much smaller.
  • Another member said his company also includes commodity trades, adjusts all exposures according to their remaining lifespans, then aggregates and measures them daily. His team also tracks ratings and credit default swap (CDS) spreads to capture any real-time market moves, such as news about fraud at a bank. 

Scrutinizing the banks. The member added that a vendor performing his company’s customer-credit analysis also provides an annual analysis of the net worth of each relationship bank, and along with a bank’s credit rating his team will assign a limit to it. 

  • He added that rather than a $500 million or other arbitrary limit, “It’s actually based on the balance sheet of each bank.”
  • His team has sought to automate that process and eliminate much of the “check-the-box” analysis based on financial statements that often can be stale, adding, “We’ve found you can spend a lot of time on things that 99% of the time add little value.”

Common ground. Two other members said their firms set notional limits, separating deposits from derivatives. One noted entering into a long-term interest-rate swap. “This discussion is really timely,” she said, “As I’ve been talking to my derivatives team about how we can better manage those exposures.”

  • The other member uses notional thresholds “only because it’s easier” but acknowledged that marking positions to market provides the “real exposure.” His firm has increased its investment and derivative thresholds to accommodate more cash held at banks. 
  • In terms of investments, “We can go up to a certain amount, but it also has to be diversified within the portfolio,” the treasurer said. “So as the cash balance grows we have the capacity to go higher, but the mix of the portfolio is limited as well, both with the instrument and the counterparty.”
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Helping Treasury See Beneath the Payment Iceberg

TIS makes the case for treasury as gatekeeper of payment processes.

Nearly half the members at a recent meeting of NeuGroup’s Global Cash and Banking Group (GCBG) said treasury at their companies is responsible for treasury payments only—not for, say, accounts payable (AP) or payroll. Just 15% of those surveyed said treasury completely owns payment processes and tools.

  • Treasury Intelligence Solutions (TIS), sponsor of the meeting, made a case for making treasury the overall “gatekeeper” of all payment processes—with the help of its technology solution.
  • The crux of the case is that treasurers are responsible for the entire liquidity picture of an organization and can’t afford to see only the tip of the iceberg. “You can only manage what you see,” the TIS presentation said.

TIS makes the case for treasury as gatekeeper of payment processes.

Nearly half the members at a recent meeting of NeuGroup’s Global Cash and Banking Group (GCBG) said treasury at their companies is responsible for treasury payments only—not for, say, accounts payable (AP) or payroll. Just 15% of those surveyed said treasury completely owns payment processes and tools.

  • Treasury Intelligence Solutions (TIS), sponsor of the meeting, made a case for making treasury the overall “gatekeeper” of all payment processes—with the help of its technology solution.
  • The crux of the case is that treasurers are responsible for the entire liquidity picture of an organization and can’t afford to see only the tip of the iceberg. “You can only manage what you see,” the TIS presentation said. 

Map your payment processes. This first step will reveal the number of channels to make payments, expose risks and allow for a more holistic management approach. 

  • Rolling out a payment system for various finance partners to use creates a business opportunity to collaborate across the organization, help colleagues reduce risk and increase transparency to key drivers of a fluctuating cash position. 
  • Accumulating data is the goal of inserting treasury in payment processes; it benefits treasury directly and, by yielding more accurate cash positions, can be of value for the C-Suite as well. 

Don’t get laughed out of the room. One member challenged the concept of treasury taking control of what are non-treasury payments, saying, “If I go to the treasurer and ask for those AP payments, I’ll get laughed out of the room.” 

  • TIS said the point is not that treasury should be doing the work, it’s that treasury should roll out and oversee a system that others work in for standardization of payment processes and reduction of bank portal access across the organization.
    • A presenter from TIS said, “Let them do the work, but ask them to run a standardized process” that funnels through one system.
  • Another member agreed with TIS’s logic because “if something goes wrong [with a payment/bank access], it’s treasury” that fixes the problem and needs to be in the know. 
    • If treasury is truly the gatekeeper to the banks, treasury should have authority to govern related processes. “The more you see the more you can control,” one TIS presenter said.

Payment fraud detection and the help of AI. Using machine learning and artificial intelligence to detect fraud is a hot topic in the treasury world now.

  • Whether treasury centralizes payments or divides control with accounts payable, tax departments, etc., it is important to find ways—including technology solutions—of leveraging data lakes to identify unusual behavior across networks to tighten security and reduce organizational weak points and risks. 
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Talking Shop: For a Bank KYC Refresh, Do You Complete a Beneficial Ownership Form With SSN?

Member question: “One of our banks does a biannual KYC [know your customer] refresh and asks us to complete the US Client Certification of Beneficiary Ownership (a FinCEN form).

  • “Is this something that your company also provides, and do you include Social Security number info?”

Member question: “One of our banks does a biannual KYC [know your customer] refresh and asks us to complete the US Client Certification of Beneficiary Ownership (a FinCEN form).

  • “Is this something that your company also provides, and do you include Social Security number info?”

Peer answer 1: “You do not need to provide SSN for a non-US person and you need to provide only one such person.”

Peer answer 2: “We always put the parent US company as the UBO [ultimate beneficial owner], and we would use the TIN [taxpayer identification number] number as SSN. If they don’t accept the parent company, we would use a foreign board member, which would avoid the need to provide SSN. We never ask for anyone’s SSN or provide them.”

Peer answer 3: “Our company worked out a process with our major relationship banks whereby we created our own ‘non-standard’ FinCEN CDD [customer due diligence] form identifying our beneficial owners. This form does include their SSN #.

  • “We provide the form to our US relationship contact and ask them to keep it secure and distribute internally within the bank on an as-needed basis any time FinCEN CDD requests need to be satisfied. It has worked very well for us and has eliminated providing this information multiple times.”

Peer answer 4: “We typically refuse to provide SSNs and work with the counterparty to find an alternative.”

Peer answer 5: “We do share a SSN. I believe our bank requests an update every three years; maybe you can encourage this bank to do the same.”

Peer answer 6: “I have a request right now from a bank. They won’t let us use the parent company as the BO [beneficial owner]; they insist on an individual. I pushed back, asking them to show me the regulation that calls for the SSN or work with me on an alternative.”

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Pandemic Shows Corporates Which Credit Analysts See Beyond the Crisis

Volatility and uncertainty boost the importance of analysts with experience and perspective.

The pandemic has been a first-of-its-kind challenge for corporates, their banks and investors, each trying to make sense of extreme circumstances and forecast what it all might mean. Credit rating agencies face their own challenges and are taking different approaches to the crisis that, according to participants in a recent NeuGroup meeting for large-cap companies, reflect relative strengths and weaknesses.

  • One member whose company had plenty of liquidity to weather the storm opined that Moody’s Investors Service had a “more mature attitude, looking through the crisis and not panicking,” while S&P Global was “crunching numbers and not treating this as a unique short-term situation.”
  • That corresponded with what one portfolio manager said at a different NeuGroup meeting. He called Moody’s approach more measured, the agency more willing to give companies a “Covid mulligan.”

Volatility and uncertainty boost the importance of analysts with experience and perspective.

The pandemic has been a first-of-its-kind challenge for corporates, their banks and investors, each trying to make sense of extreme circumstances and forecast what it all might mean. Credit rating agencies face their own challenges and are taking different approaches to the crisis that, according to participants in a recent NeuGroup meeting for large-cap companies, reflect relative strengths and weaknesses.  

  • One member whose company had plenty of liquidity to weather the storm opined that Moody’s Investors Service had a “more mature attitude, looking through the crisis and not panicking,” while S&P Global was “crunching numbers and not treating this as a unique short-term situation.”
  • That corresponded with what one portfolio manager said at a different NeuGroup meeting. He called Moody’s approach more measured, the agency more willing to give companies a “Covid mulligan.”
  • Several peer group members said S&P tends to rotate lead analysts regularly, whereas senior analysts at Moody’s often had followed their companies for years, even decades.

People vs. methodologies. Much about credit analysis depends on the person behind it. A member’s company whose business includes two sectors struggled with an S&P analyst who only focused on one sector and maintained the same rating for a decade. When the analyst retired early, “It was a game changer for us,” the treasurer said.

  • The Moody’s rating, however, was still a couple of notches lower, so the treasury team engaged with the rating agency, which ultimately replaced its analyst with someone who brought new perspective. The treasurer made a concerted effort over the next 18 months to educate the analyst, and the rating climbed to investment grade.
  • The company was already investment grade with Fitch Ratings and S&P, so “by the time we got our second-notch movement, spreads tightened by a good 10 basis points, and with the last move we probably saw another 10,” he said.
  • “It’s the analyst that matters; not the agency,” a peer added. “You need to get someone you click with and has a good understanding of your industry.” 

Methodologies at crossroads.  Indeed, the analyst’s understanding has become ever more important, according to a former ratings analyst now at a major bank. He told members that the rating agencies have struggled since the onset of the pandemic because debt is now dirt cheap, shareholder buybacks have grown in importance and business profiles are being disrupted.

  • “A lot of the standard ratings methodologies simply don’t work that well anymore,” he said, adding that treasurers have likely seen ratings that differ significantly from what the methodology inputs would dictate.
  • “It’s very perception-based at the moment, and a lot of it relies on how experienced the analyst is. So there are wide variations because the methodologies don’t work,” he said.

Time to negotiate. Change can provide leverage to negotiate. One member cited success negotiating fees with Moody’s but not S&P, although the latter agency indicated it may be open to negotiating the ratings fee on large offerings—probably in the range of $5 billion—if not the annual fee.

  • “Moody’s was the other way around,” he added. “They’ve been willing to work with us on the annual fee.”
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Taking A Second Look: Corporates Reconsider Cryptocurrencies

Members share their curiosity about embracing cryptocurrency amid more regulation.

Efforts by central banks and finance ministers to block the widespread use of digital currencies until strong regulation is in place—along with the emergence of new types of currencies—are leading some corporates to reconsider earlier decisions to avoid accepting cryptocurrencies as payment.

  • That is among the takeaways from a discussion at a recent meeting of NeuGroup for Retail Treasury, sponsored by U.S. Bank, during which one member said her company, encouraged by the outlook for regulation, is actively considering options to accept digital currency in the future.

Members share their curiosity about embracing cryptocurrency amid more regulation.

Efforts by central banks and finance ministers to block the widespread use of digital currencies until strong regulation is in place—along with the emergence of new types of currencies—are leading some corporates to reconsider earlier decisions to avoid accepting cryptocurrencies as payment.

  • That is among the takeaways from a discussion at a recent meeting of NeuGroup for Retail Treasury, sponsored by U.S. Bank, during which one member said her company, encouraged by the outlook for regulation, is actively considering options to accept digital currency in the future.

In the news. On Tuesday, the Financial Stability Board issued recommendations for the regulation, supervision and oversight of global stablecoins—such as Libra, a stablecoin proposed by Facebook—which aim to counter the high volatility of crypto assets like Bitcoin by tying the stablecoin’s value to other assets, including sovereign currencies.

  • On the same day, financial leaders of the world’s seven biggest economies reiterated their opposition to unregulated digital payment services, stating that “no global stablecoin project should begin operation until it adequately addresses relevant legal, regulatory, and oversight requirements.”
  • “You’re going to see a lot more government-related actions, and a lot more focus on that area,” the NeuGroup member whose company is now interested cryptocurrency said late last month.
    • “I think governments are taking a more detailed look at what this really needs and how that could complement their financial systems.”
  • Another member agreed that recent developments—including news about Libra—have piqued their interest, saying, “It’s something we’re keeping our eye on, but haven’t pulled the trigger yet. It’s worth watching closely.”

Mixed reactions and experiences. To be sure, not all the treasurers at the meeting had the same level of interest, with some expressing a cautious curiosity and one saying the issue “isn’t even on our radar.”

  • One member said their company attempted to accept cryptocurrency payments nearly ten years ago. “Merchants did not necessarily want to adopt because it was so volatile,” she said. “One day it could be worth $10, another day it could be a thousand. You didn’t know what you were getting on any specific day. So we shut that down as an option.”
  • Another treasurer said an online-only competitor needed to implement a workaround to accept bitcoin. “They were accepting it through a wallet that would access intermediaries that the customer wanted to use, and they would flip it to US dollars that would actually transact on site,” he said. “They were also keeping a portion of it, which created some accounting issues on their balance sheet.”
  • The member whose company stopped accepting cryptocurrency agreed that there are complications having digital currency on a balance sheet. “Accounting regulations-wise, how you deal with a crypto asset or liability isn’t that straightforward,” she said. “Depending on who you are, where you are, you have to take your own rules and decide how you deal with it.”

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A Virgin Bond Deal, Community Investment and Frustration With Banks

Takeaways from the Tech20 High-Growth Treasurers’ Peer Group 2020 H2 meeting, sponsored by Bank of the West / BNP Paribas. 

By Joseph Neu

Wanted: A better bank user experience. The user interface (UI) and user experience (UX) is a key success driver for high-growth technology companies. So when their banks fail to deliver a quality UI/UX, growth tech treasurers get frustrated. Work from home, of course, has made what used to be digital nice-to-haves into must-haves.

Takeaways from the Tech20 High-Growth Treasurers’ Peer Group 2020 H2 meeting, sponsored by Bank of the West / BNP Paribas. 

By Joseph Neu

Wanted: A better bank user experience. The user interface (UI) and user experience (UX) is a key success driver for high-growth technology companies. So when their banks fail to deliver a quality UI/UX, growth tech treasurers get frustrated. Work from home, of course, has made what used to be digital nice-to-haves into must-haves.

  • Electronic bank account management (eBAM) promises are seen by members as mostly a lie—banks seem to roll out products in line with their own agenda rather than that of their clients. So a bank that asks, “What can I do for you?” and listens and delivers on what they learn can go far with treasurers in growth tech.

Community impact appeals to a growth-tech mindset. In a session on ESG, sustainability and impact investment solutions, members said that having a positive community impact is part of their growth-company DNA and what makes employees feel good about working for an employer.

  • That means treasury needs to make room for impact investment best practices in policy early on. And that includes guiding cash toward minority and community development financial institutions (CDFIs) active in geographies where these companies have a significant presence.

A pandemic is a good time for a virgin bond. It turns out, based on a member case study, that the Covid-19 crisis is an ideal time for a virgin bond deal. Zoom sessions make it efficient to get a credit rating and work with banks as well as outside counsel.

  • It still proved time-consuming and challenging for one small treasury team, but with the help of a project manager, they were able to bring it all together and capitalize on great debt capital market conditions.
  • Add a huge appetite for tech company debt and getting lucky with the issue window, and the bond transaction ended up being a very satisfying experience. You never forget your first debt deal.
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The Cup Runneth Over: Corporates Awash in Cash Mull Options

Treasurers discuss concerns about companies rushing to deploy cash too quickly.

When uncertainty abounded at the start of the pandemic, companies drew down revolvers, issued debt, cut capital expenditures (capex), halted share repurchases—whatever it took to conserve cash for the troubling times ahead.

  • A few months later, after massive government stimulus and a recovering economy, many are awash in cash and trying to figure out what to do with it—or not do with it.
  • At a recent NeuGroup meeting for large-cap companies, several treasurers said their companies’ cash balances are several times higher than normal, echoing a refrain being heard across the NeuGroup Network this fall.

Treasurers discuss concerns about companies rushing to deploy cash too quickly.

When uncertainty abounded at the start of the pandemic, companies drew down revolvers, issued debt, cut capital expenditures (capex), halted share repurchases—whatever it took to conserve cash for the troubling times ahead. 

  • A few months later, after massive government stimulus and a recovering economy, many are awash in cash and trying to figure out what to do with it—or not do with it.
  • At a recent NeuGroup meeting for large-cap companies, several treasurers said their companies’ cash balances are several times higher than normal, echoing a refrain being heard across the NeuGroup Network this fall.

Temptation and perspective. Among the fresh insights about excess cash voiced at the large-cap meeting: Treasury’s role in keeping corporates from making potentially rash short-term decisions designed to keep activists and Wall Street analysts happy. 

  •  “I worry about the temptation for senior management and the board to deploy cash as quickly as possible,” one treasurer said. 
  • As a result, treasury may need to add perspective when C-Suite leaders who previously considered an M&A deal out of reach reconsider as cash balances rise.
  • One member said his team seeks to keep management focused more on the company’s net debt level and less on reducing cash. “That’s what we actually talk about in earnings calls—the change in net debt year to date, and when we think about deleveraging,” he said.

Better safe than sorry. The size and timing of more federal aid to address the pandemic and anticipated rise in infections remains uncertain, prompting treasurers to recommend caution.

  • “Enough uncertainty remains that we can tell the story: We’ll continue to monitor cash and slowly drift [the level] back down,” a treasurer at a large manufacturer said.
    • “That’s absorbing a lot of time and thought around just what is that strategy, and how does it look over the next year or so.”

Step out on the yield curve? Terming out cash to pick up extra basis points is the approach one member’s team is contemplating. Other treasury teams are considering alternative asset classes (see this story). 

  • Some corporates, though, may want to reduce at least some cash, especially those with higher revenues expected during the holiday season.
  • That’s not so easy when capex has already been slashed, and the social justice movement poses political risks for companies rewarding investors before employees and their communities during a pandemic. 
  • “We’ve seen some companies turn on share repurchases with the caveat that they’re increasing wages,” one member said, adding his company is thinking through when to resume repurchases given that Covid looks far from over. 

Street pressure. Some Wall Street firms are pushing liability management to take advantage of historically low rates. 

  • But one treasurer said that after paying up to issue precautionary liquidity, some companies must now pay a premium to buy back the debt, making it better to hold on to the cash in case the pandemic worsens and the extra funds are needed. “We’re in wait and see mode,” the treasurer said.
  • Another member described a recent exercise in which his team reviewed peers’ capital structures and had to explain to the board why a competitor has lower weighted average coupons and maturities. 
  • “We had to remind the board that the company had to pay up for that, put cash upfront in order to refinance into a longer term,” he said.
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Hunting Yield: Investment Managers Weigh TIPS, Munis, Credit Risk

Treasury investment managers weigh options for finding returns in a low-rate environment.

Treasury investment managers looking to boost returns in the current low interest-rate environment discussed a range of options at a recent NeuGroup meeting sponsored by Morgan Stanley, including Treasury inflation-protected securities (TIPS) and municipal bonds.

  • “We’re looking for alternative investment ideas to get attractive yield,” one member said. Her company is looking to return to investing overseas cash in low volatility net asset value (LVNAV) money market funds, an asset class it exited in March.
  • Another investment manager said, “We are flooded with short-term cash, which is not great,” adding that her company is trying “to figure out how to deal with low rates.”

Treasury investment managers weigh options for finding returns in a low-rate environment.

Treasury investment managers looking to boost returns in the current low interest-rate environment discussed a range of options at a recent NeuGroup meeting sponsored by Morgan Stanley, including Treasury inflation-protected securities (TIPS) and municipal bonds. 

  • “We’re looking for alternative investment ideas to get attractive yield,” one member said. Her company is looking to return to investing overseas cash in low volatility net asset value (LVNAV) money market funds, an asset class it exited in March.
  • Another investment manager said, “We are flooded with short-term cash, which is not great,” adding that her company is trying “to figure out how to deal with low rates.”

Why not reach for yield? In a discussion about credit risk, one member asked why investors who believe in the idea of a “Fed put” would not reach for yield during “a carry trade environment” where it “feels like fundamental research matters less and less.”

  • Earlier, a Morgan Stanley portfolio manager said that it is “hard to think credit is wildly attractive here” given the contraction in spreads since March and that recovery “will mean tighter spreads than today.”
  • In response to the member’s question, he agreed with the idea of a Fed backstop and said he has a hard time seeing a scenario where “spreads blow back out.”
  • He said that if spreads widened from about 130 now to 145 to 150, “we would buy.” But he said that things may not go as the market expects and recommends investors be selective. 

Tri-party repos, anyone? One manager is using tri-party repos, where a clearing bank acts as an intermediary and alleviates the administrative burden between two parties engaging in a repo. She said her company “disregards collateral” and proceeds if her team is “comfortable with the bank risk.” 

  • The company is also investing in three-to-five year financial and nonfinancial corporate bonds.
  • It holds short-term government paper, including some Swiss and Japanese issues swapped back into dollars and yielding about 40 basis points.
  • The manager is considering buying muni bonds, in part because she believes the timing is likely better now for investors than issuers.

Mulling munis. Other members asked about munis and one who invests in them offered to discuss offline the approach the company takes. 

  • The member who owns munis believes that another round of fiscal stimulus could benefit the asset class.  
  • A Morgan Stanley portfolio manager said munis may make sense for some corporates, depending on their tax situation and what happens to corporate tax rates after the election. 
  • A municipal strategist at Morgan Stanley estimates states will lose $180 billion and local governments $90 billion in revenue through mid-2021 because of the pandemic and recession.
  • He said while there may be downgrades and different states will make different choices affecting credit ratings, “I don’t think default is the way to frame the discussion.”

TIPS debate. In response to one member who expressed interest in TIPS but has not figured out how they fit it to the company’s overall strategy, another member offered to put the first in touch with a “TIPS expert” who has done internal modelling with machine learning.

  • A Morgan Stanley manager, who said TIPS had performed poorly in March and April, warned that “TIPS aren’t Treasuries” and that they have a “huge liquidity premium.” He said TIPS have a high correlation to high-quality corporates and “the extra yield doesn’t look that attractive.”
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Talking Shop: How Well Does Quantum Manage Interest Rate Swap Accounting?

Member question: “For those who use Quantum as their TMS, do you also leverage Quantum for hedge accounting, and if you do, does Quantum (in your opinion) manage interest rate swap accounting well?

  • “We have been using Reval for a while, but just wanted to know if people have been able to leverage Quantum V6+ for hedge accounting, including interest rate swaps.”

Member question: “For those who use Quantum as their TMS, do you also leverage Quantum for hedge accounting, and if you do, does Quantum (in your opinion) manage interest rate swap accounting well?

  • “We have been using Reval for a while, but just wanted to know if people have been able to leverage Quantum V6+ for hedge accounting, including interest rate swaps.”

Peer answer 1: “When we put our interest rate forward starting swaps in place a few years back, Quantum did not have the accounting capabilities to handle what we needed so it was kept offline in Excel. That could be different now in 6.9, but we have not explored what is possible in the new version.”

Peer answer 2: “When we deployed Quantum, we were ‘sold’ the IRS functionality, but it never materialized. We had previously used Reval for IRS and FIS’s Sungard for our TMS. We hoped Quantum would bring it under one roof, but we had to stick with Reval for the IRS piece.

  • “We ultimately moved away from Reval and to Chatham. We are very pleased with Chatham and use them for FSSs, IRSs, and XCSs.”

NeuGroup Insights offered FIS Quantum the opportunity to comment. A spokeswoman for FIS declined.

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