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Spotlight Features

Teaming Up with Tech Firms: Deutsche Bank’s Multifaceted Approach to Cash Management Solutions

Money Is Time: How TIS Simplified One Treasurer’s Bank Connectivity

Hot Topic: How and When Corporates Respond to Climate Change Risks

Willis Towers Watson offers insights on how companies should assess the financial and economic risks of rising temperatures.

At a recent NeuGroup virtual interactive session, Willis Towers Watson’s Climate and Resilience Hub experts, led by Irem Yerdelen, detailed the long-term risks of ignoring the causes of climate change and other environmental threats, and members discussed what steps, if any, treasurers can take to incorporate this risk into their ESG and risk management strategies.

  • “There is an extraordinary depth and breadth to this issue,” Ms. Yerdelen said. “It’s one of the few issues that permeates every element of every business—it hits every stakeholder in every element of every organization in every industry.”

Willis Towers Watson offers insights on how companies should assess the financial and economic risks of rising temperatures.

At a recent NeuGroup virtual interactive session, Willis Towers Watson’s Climate and Resilience Hub experts, led by Irem Yerdelen, detailed the long-term risks of ignoring the causes of climate change and other environmental threats, and members discussed what steps, if any, treasurers can take to incorporate this risk into their ESG and risk management strategies.

  • “There is an extraordinary depth and breadth to this issue,” Ms. Yerdelen said. “It’s one of the few issues that permeates every element of every business—it hits every stakeholder in every element of every organization in every industry.”

Understand the types of risk. Willis Towers Watson divides climate-related risks into three categories:

  • Physical risks, the acute risks arising from extreme weather-related events and chronic, slow onset climatic changes. While these risks may not impact all corporates in the near future, Ms. Yerdelen said, “without an established climate resilience, we expect the global economy to shrink by 2050.”
    • “The trends here are interesting,” one member responded. “But currently a lot of what our ESG function is identifying as a risk isn’t yet a material enterprise-level risk for the company.”
  • Transition risks arise from changes in policy, technology, societal pressure and consumer preference. Some sectors face significant shifts in asset values or higher costs.
  • Liability risks, or the risk of actions initiated by claimants who have suffered loss and damage arising from climate change.

Time to act? “Every risk is different,” one member said. “Identifying what is voluntary and what is mandatory is something that is taking a lot of our time and resource allocation. It is definitely a priority on our agenda, as well as all of the reporting with which we have to comply.”

  • She added that her company is still looking into how to evaluate the impact of climate change on cost of capital. “If the money we’re making demands an action that’s responding to climate change, what is going to happen with that impact?”
  • “Sustainability has never been a topic that is promoted and discussed in this way before,” she continued. “It is a top priority for us, and we want to figure out how to leverage the knowledge within our corporation, how we can organize to deal with this holistically.”
  • Willis Towers Watson recommends starting slow and assigning an end goal, like reducing your total carbon emissions to a set target by 2030 or later but understanding that the journey may fluctuate along the way.
    • “If you do nothing, governments and regulators and other corporates will do some of it for you,” one presenter said. “At the very least, ensure you’ve got the right leadership that think about these risks and appropriately weigh climate risks when they make decisions.”

Burden of proof. One member said that while climate change at the current pace could have a long-term impact, he could not get sign-off on any action to mitigate risks without supporting data. “It needs to be properly quantified, otherwise it’s just a headline,” he said.

  • Though there are a number of third parties that rate a company’s ESG performance, Willis Towers Watson has an in-house valuation tool it calls CVaR (climate value at risk), which evaluates long-term transition risk, as well as a physical climate risk modelling tool that reviews climate change impacts for selected scenarios and strategic time horizons.
  • As the charts below show, transition risk does not necessarily correlate with ESG scores or carbon intensity metrics.
  • “Evaluating climate risk is about looking at different assets, and that requires a whole set of analytics based upon commodities like the oil crisis and carbon prices changing in the future,” one presenter said.
  • “There is a bit of a debate about if ESG is an emerging risk or an existing risk,” he continued. “It’s not emerging, it is very prevalent now, but we still need to reconcile materiality when it comes to ERM. Ultimately, things need to be quantified in order to be impactful.”
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Reading the Tale of the Tape on Energy Transition

Economist Ed Hirs shared his perspective on the energy transition with NeuGroup Oil & Gas treasurers.

By Joseph Neu

“There is nothing you can do to fight the tape,” University of Houston Energy Fellow and  Zero Carbon Cycle LLC co-founder Ed Hirs said recently. Energy transition is here, with more than 75% of the public now wanting to reduce carbon emissions, he noted.

  • But “the tape,” or market trend, also points to the need for energy to support economic and population growth—in developing markets especially.
  • Total energy demand will continue to grow by 25% to 30% over the next 50 years.

Economist Ed Hirs shared his perspective on the energy transition with NeuGroup Oil & Gas treasurers.

By Joseph Neu

“There is nothing you can do to fight the tape,” University of Houston Energy Fellow and Zero Carbon Cycle LLC co-founder Ed Hirs said recently. Energy transition is here, with more than 75% of the public now wanting to reduce carbon emissions, he noted.

  • But the tape, or market trend, also points to the need for energy to support economic and population growth—in developing markets especially.
  • Total energy demand will continue to grow by 25% to 30% over the next 50 years.

Carbon calculus. There are really two ways to cut carbon emissions according to Mr. Hirs: reduce fossil fuel combustion that produces carbon; or find environmentally friendly uses of the carbon (like hand sanitizer or vodka; see Aircompany.com). (He also noted efforts to increase agriculture and plants to capture carbon.)

  • The latter is the story that members of NeuGroup for Oil & Gas Treasury will want to get behind. It is the best way to sustain growth and help the developing world escape from poverty (part of the S, social justice, in ESG).

This was the key takeaway from the opening session of the group’s second meeting, part of a pilot series focused on energy transition sponsored by Societe Generale. Key context:

  • Renewables are expensive and typically offer lower returns on investment offered by conventional oil and gas projects.
  • This is even more true in developing markets that need the investment proceeds the most. Villages in Ghana are helping lead the way thanks to recent projects, including sub-Saharan Africa’s first liquefied natural gas-to-power project. This lowers greenhouse gas emissions vs. coal by 50% or more.
  • If supply projects in the US and EU are cut back, they will migrate to places where emission standards and environmental and safety conditions are worse (Mr. Hirs calls this “hydrocarbon imperialism”).
  • If oil and gas companies exit high-return projects, other players including hedge funds will enter the picture and this will change the environment for traditional debt investors.
  • Meanwhile, if oil and gas companies continue to produce and invest in profitable fossil fuel projects, with good cash flow profiles, yield-seeking investors will welcome their lowered credit ratings and show high demand for their debt.

Climate club? For further context, Mr. Hirs provided statistics showing how global carbon emissions have risen in linear fashion from 1900 to 2018, citing a 2018 Nobel lecture by Yale Professor of Economics William Nordhaus. Fortunately, the ratio of carbon emissions to GDP is also falling in linear fashion. But because these trends have not been impacted by prior climate agreements in Kyoto or Paris, Mr. Hirs anticipates a draconian change in worldwide carbon policies to break these trends.

  • Professor  Nordhaus was awarded his Nobel prize for his concept of  a “climate club,” with participating nations setting a price for carbon emissions to limit them and then penalize with tariffs and other sanctions nations that do not join the club (see here). 

Take the initiative. Whether advocating for such a club or an EU-style carbon boarder tax, oil and gas companies should lead with their own initiative, leaning in favor of a carbon tax, as opposed to cap and trade. (Cap and trade is inefficient because the trading pricing and emission allowances tend to be arbitrary.)

  • Cap and trade imposed by the EPA is more likely than a carbon tax in Mr. Hirs’ view.

Coherent messaging. This gets to the other tale of the tape that member companies should grasp: They need to move out of the defensive posture of the last 50 years (ever since the Nixon administration tried to blame oil companies for the OPEC embargo and its own wage-and-price controls that caused the long gasoline lines).

  • They must come out with coherent and standard messaging on reducing carbon emissions while allowing oil and gas products to continue to play a significant role in the energy transition.
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Ripple Effects: Gauging Inflation’s Impact on US Rates and Economy

Despite increasing inflation, interest rates should remain low until late 2023, UMB bank tells assistant treasurers.
 
Economic growth turned negative at the start of the pandemic but is rebounding strongly as the United States advances through what some call the Great Rotation—major changes that Eric Kelley, executive VP and director of research and fixed income for UMB Bank, said should result in a strong reopening over the next 12 to 24 months.

  • UMB Bank is a large regional bank serving mainly the Southeastern US and Mr. Kelley addressed members of NeuGroup for Large-Cap Assistant Treasurers.
  • Interest rates are likely to remain on hold until at least late 2022, when the Fed may have to address inflation that UMB forecasts increasing to about 2.5% in the second half of next year.
  • After rapid growth this year and next, the economy is likely to return to around 2% growth for the long haul.

Despite increasing inflation, interest rates should remain low until late 2023, UMB bank tells assistant treasurers.
 
Economic growth turned negative at the start of the pandemic but is rebounding strongly as the United States advances through what some call the Great Rotation—major changes that Eric Kelley, executive VP and director of research and fixed income for UMB Bank, said should result in a strong reopening over the next 12 to 24 months.

  • UMB Bank is a large regional bank serving mainly the Southeastern US and Mr. Kelley addressed members of NeuGroup for Large-Cap Assistant Treasurers.
  • Interest rates are likely to remain on hold until at least late 2022, when the Fed may have to address inflation that UMB forecasts increasing to about 2.5% in the second half of next year.
  • After rapid growth this year and next, the economy is likely to return to around 2% growth for the long haul. 

The rotations. The most obvious rotation is from Covid cases to vaccinations, followed by the subsequent reopening of the economy. The new regime in Washington, D.C. is another big one, given the massive $4.9 trillion stimulus packages it already passed and trillions of dollars in additional federal spending it is seeking for infrastructure and other initiatives over the next decade. 

  • That spending, along with a $5 trillion increase in institutional and household savings accumulated during the pandemic, will more than adequately fund increased demand and consumption as the economy picks up speed.
  • It will also fuel two less welcomed rotations: inflation and rising interest rates. 

Inflation outlook. Inflation rose significantly in April, May and June compared to a year earlier. UMB largely agrees with the Fed that the spikes have been driven by prices rebounding in sectors that were hardest hit by pandemic shutdowns, such as airfares and hotels, and by recovery bottlenecks such as the shortage in computer chips.

  • Five-year inflation expectations, a key Fed indicator, have climbed steadily since federal stimulus packages began in April 2020 and this year have hovered between 2.25% and 2.75%, a level that will prompt the Fed to raise rates if sustained. 
  • Price increases are likely to cool in coming months and “inflation will come back to around 2%, then grind steadily higher until it gets to the point where the Fed may raise rates,” Mr. Kelley said.

Rate increase not imminent. Mr. Kelley said the US economy is likely to grow at a rapid 6% this year but then settle closer to 2% as stimulus wanes and macroeconomic factors regain traction.

  • Even if inflation starts steadily rising, the Fed is unlikely to raise rates until full-employment is reached, a hazy target that Mr. Kelley said rests around 4% unemployment.
  • He noted that an improving economy will draw many of the five million people who stopped looking for work during the pandemic back into the labor force. “That will help keep unemployment from falling down to levels where the Fed has to react and raise rates” to stem overheating. 
  • Watch first for the Fed to begin tapering its purchase of Treasury bonds in about year, and then to start raising rates toward early 2023, Mr. Kelley said.

Leverage impact? An assistant treasurer asked about highly levered institutions and individuals that had taken advantage of record low rates, and if they would be adversely impacted by rate increases.

  • Mr. Kelley said that corporates and individuals have “very wisely termed out their debt,” adding that rates would have to remain high for seven or eight years—the average duration of corporate debt—before their borrower and operating costs increased significantly. 
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Talking Shop: Interviewing Management to Uncover Risks

Member question: “Has anyone, recently or in the past, conducted broad wide-scale open-ended (i.e., not scripted Q&A) risk interviews of top management and leaders as the primary means to collect risk-identification inputs?

  • “I am looking to share thoughts and experiences regarding the effectiveness, as well as methods to summarize, quantify and present the key findings.
  • “I have interviewed board members, executive staff, management VPs+, totaling in the range of 75-100 one-on-one discussions. I am seeking recommendations on the process.”

Member question: “Has anyone, recently or in the past, conducted broad wide-scale open-ended (i.e., not scripted Q&A) risk interviews of top management and leaders as the primary means to collect risk-identification inputs?

  • “I am looking to share thoughts and experiences regarding the effectiveness, as well as methods to summarize, quantify and present the key findings.
  • “I have interviewed board members, executive staff, management VPs+, totaling in the range of 75-100 one-on-one discussions. I am seeking recommendations on the process.”

Peer answer 1: “Yes, I use this process. Two years ago, we implemented an ‘integrated’ risk discussion process where the chief audit executive (CAE), chief compliance officer (CCO) and chief information security officer (CISO) jointly meet with leaders across the org. 

  • “We aggregate our key takeaways in a PowerPoint deck and organize them by main themes (for example Covid-19 was a main risk theme last year).
  • “Prior to me joining audit, they used a survey for a period of time and had difficulty getting responses and/or the quality of information was not as good as that obtained through face-to -face meetings.”

Peer answer 2: “We do an annual assessment in which we ask leaders to select from a 22-risk framework and have the leaders provide narrative responses. Not individual interviews, however.”

Peer answer 3: “We are in the midst of this process right now, so we’re very much in learning mode. Our interviews will be complete in mid-July, and we’ll be summarizing the inputs and presenting in September. Happy to share our experiences and ideas.”

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A Bigger Slice: Bank Boosts Roles of Diverse-Led Firms in Bond Deals

Morgan Stanley shares insights on its approach to partnering with diverse-led firms, including increased fees and mentorship.

Morgan Stanley recently shared how it is expanding the role of banks and broker-dealers owned and run by minorities, women and veterans—so-called diversity or diverse-led firms—in self-led bond deals. The insights came during a NeuGroup meeting of bank treasurers sponsored by Morgan Stanley.

Morgan Stanley shares insights on its approach to partnering with diverse-led firms, including increased fees and mentorship.

Morgan Stanley recently shared how it is expanding the role of banks and broker-dealers owned and run by minorities, women and veterans—so-called diversity or diverse-led firms—in self-led bond deals. The insights came during a NeuGroup meeting of bank treasurers sponsored by Morgan Stanley.

  • Many corporates in the NeuGroup network are encouraging banks that underwrite their debt offerings to allocate bonds to diverse-led firms and are working to figure out which of these financial institutions add the most value to transactions.

A bigger share of fees. Morgan Stanley’s $4.5 billion note offering in November increased the share of self-led bond underwriting fees it pays to diverse-led firms from 2% to 12%. It described other elements of its approach going forward:

  • The bank’s presentation discussed the creation of a three-tier syndicate structure amongst the firms, creating three additional opportunities to participate.
  • In addition to two D&I co-managers, the bank will include three D&I joint lead managers, with one given an “active” role and an increased percentage of the underwriting fees (4%; the two passive leads receive 3%).
    • That firm will participate in all syndicate strategy calls, bring orders into the order book and be able to demonstrate its unique distribution capabilities with more modest-sized institutional investors, some of which are diversity asset managers.  
  • Beyond fees, the presentation included Morgan Stanley’s commitment to focus on mentoring diverse-led firms to help them continue to build and grow.

Initial steps. A bank treasurer asked about Morgan Stanley’s approach to engaging diverse-led firms in deals.

  • A Morgan Stanley banker said that last summer, the Wall Street firm interviewed firms extensively to understand their priorities in terms of getting involved in the underwriting process and maximizing their roles in transactions.
  • The calls served to also learn more about the firm’s business performance and distribution capabilities as well as each firm’s unique mission and approach to giving back, which along with connectivity of Morgan Stanley’s treasury and syndicate team, are all important attributes to grow the partnership.
  • Morgan Stanley identified roughly 20 firms to engage and consider on future transactions, reviewing the group that has been regularly involved with investment-grade debt offerings over the last year.

Best practices. The presentation included an overview of best practices around process and execution on investment-grade transactions, with the objective of establishing “a process that is both inclusive and equitable, providing a foundation to ensure success for the diverse-led firms.” Highlights:

  • Including a D&I coordinator to be the central point of contact for diverse-led firms “sets the tone to provide enhanced communication, transparency and overall support for firms.”
  • Involving the firms early in the process and programmatically enables them to engage with their investors promptly.
    • Notifying firms “immediately after the ‘go’ decision will allow for maximum time to clear logistics and gather orders.”
    • Incorporating the firms in the allocation process by including their feedback provides an opportunity for them to advocate for their investors, prior to any allocation decisions that are made to the order books.
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Taking Smaller ESG Steps, Bypassing the Green Bond Road (for Now)

Options in the ESG financing field range from CP to credit facilities, money-market funds and time deposits.
 
Not quite ready to issue ESG bonds? Nearly half the assistant treasurers (ATs) in the projects and priorities session of a recent meeting of NeuGroup for Large-Cap Assistant Treasurers cited ESG as a top priority. However, most said their companies were not quite ready to issue an ESG-based bond and expressed interest in various ESG alternatives.

  • Issuing an ESG bond requires significant legwork and sufficient ESG-qualifying initiatives to warrant the funding.
  • Banks are providing a variety of alternatives that may pack less punch than a sizable bond offering but nevertheless enable companies to dip their toes in the water.

Options in the ESG financing field range from CP to credit facilities, money-market funds and time deposits.
 
Not quite ready to issue ESG bonds? Nearly half the assistant treasurers (ATs) in the projects and priorities session of a recent meeting of NeuGroup for Large-Cap Assistant Treasurers cited ESG as a top priority. However, most said their companies were not quite ready to issue an ESG-based bond and expressed interest in various ESG alternatives.

  • Issuing an ESG bond requires significant legwork and sufficient ESG-qualifying initiatives to warrant the funding.
  • Banks are providing a variety of alternatives that may pack less punch than a sizable bond offering but nevertheless enable companies to dip their toes in the water.

Green CP. The AT of a major agriculture-related company said Bank of America pitched “green” commercial paper the week before. “We want to do a sizable bond that’s sustainability linked, but we want to let it marinate a bit,” he said. “The CP side was really interesting to me.”

  • A peer from a healthcare company expressed her interest in the notion, noting that Bank of America, as a relationship bank, would likely pitch her as well on the ESG option.
  • A different bank offered a member at a tech company green deposit accounts, which the bank would use to fund borrowers’ ESG projects. “Not very yield friendly, and more to check the box,” the member said, adding his company would prefer to pursue a more holistic ESG strategy.

Only upside. A consumer-goods company AT asked if his peer at the healthcare business had looked into sustainability-linked credit facilities. Rather than having to tie the funding specifically to sustainable initiatives, the credit facility and drawn fees are linked to meeting the borrower’s ESG goals.

  • He added that his firm is in a similar situation, since it does not actually need to raise significant capital, but it does have projects that will require financing.
  • “The credits are typically structured so that there’s upside when you meet your targets but no downside if you don’t,” he said.
  • Another member noted that her team is getting up to speed on ESG-linked credits, in preparation for the company’s credit facility that comes up for renewal next year.

Parking cash sustainably. A technology firm AT noted his company’s focus on ESG, actively choosing minority-owned banking partners for stock buybacks and other services. About a year ago, his team began investing cash in ESG money markets.

  • “We’re not getting much yield anyway, and those funds are quite competitive with non-ESG funds, so we’re not losing anything there,” he said.

SMAs are trickier. The tech-firm AT said his company invests longer term in separately managed accounts (SMAs) and occasionally analyzes the investments through an “ESG lens” to determine whether the holdings are ESG supportive or not.

  • “One thing we find challenging is there’s no consistent rating or ranking for ESG—whether supportive or non-supportive—so we’re trying to work through that and figure out what we need to think about going forward.”

Bark worse than bite. The AT of a global media company said his company hadn’t seen itself as ready yet for an ESG bond, but when his team dug into the market’s current dynamics that view changed.

  • “Now we’re going back to a couple of our banks who may lead an ESG offering to ask if they can help us build a good story,” he said.
  • On the pension side, he said, his team is exploring ESG in the pension scheme along with an asset advisor to determine whether to change some investment policies and views about asset managers.
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Offering Retirement Income Solutions in DC Plans: Yes, but Not Yet

Using annuities to make 401(k) plans resemble pensions is compelling—but so far, most corporates aren’t doing it.

The vast majority of members of NeuGroup for Pensions and Benefits who also oversee defined benefit (DC) plans say their companies should consider solutions that help employees receive lifetime income after they retire. But few corporates are actually implementing so-called retirement income solutions. At least not yet.

  • That key takeaway emerged at a recent meeting sponsored by Insight Investment and BNY Mellon that featured a presentation by Raytheon Technologies on its “Lifetime Income Strategy.”

Using annuities to make 401(k) plans resemble pensions is compelling—but so far, most corporates aren’t doing it.
 
The vast majority of members of NeuGroup for Pensions and Benefits who also oversee defined benefit (DC) plans say their companies should consider solutions that help employees receive lifetime income after they retire. But few corporates are actually implementing so-called retirement income solutions. At least not yet.

  • That key takeaway emerged at a recent meeting sponsored by Insight Investment and BNY Mellon that featured a presentation by Raytheon Technologies on its “Lifetime Income Strategy.”

Beyond target date funds. Many corporates have embraced target date funds as the default option for DC plans. These funds automatically and gradually shift the participant’s allocation from equity investments to fixed-income as participants approach retirement age.

  • Retirement income solutions go a step further by gradually layering in annuity contracts provided by insurance companies with life and beneficiary features.
  • The end result: As participants approach retirement age, their DC plan looks more like a defined benefit (DB) pension plan, but with liquidity benefits not generally available under DB plans.
  • As NeuGroup Insights has reported, The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 cleared some legal impediments to offering more retirement income products, particularly annuities.

Slow to act.  But while 85% of respondents at the meeting said in a poll that it made sense for them to consider offering retirement income solutions, responses to another question (see chart above) indicated that “lack of expressed participant interest” and “lack of compelling solutions” are reasons why most companies have not actually pursued this solution.

  • One member of the group said that while the safe harbor provisions of the SECURE Act have made offering more choices feasible, the company’s legal counsel remains reluctant to give the green light.
  • Bruce Wolfe, head of individual retirement strategy at Insight Investment, noted that United Technologies (now Raytheon) remains the only major DC plan “with a systematic retirement income solution embedded in the process.” A future NeuGroup Insights post will explain the details of the company’s Lifetime Income Strategy.
  • He suggested that some companies see their role as limited to helping employees accumulate wealth while they work, and that going beyond that is not considered part of the corporate’s responsibility.

Benefits of better benefits. Among the reasons that more companies may adopt investment-annuity combinations in their DC plans going forward are financial benefits.

  • The Raytheon presenter said, “What we’re doing for employees is going to raise the bottom line, noting the savings to the company for “everyone who retires on time.”
  • He cited research by Prudential and the University of Connecticut in a 2019 study showing a one-year increase in average retirement age results in over $50,000 in additional costs for employers.
    • This represents the cost differential between the retiring employee and a newly hired employee, largely because of higher healthcare costs for older employees.
  • And NeuGroup’s Roger Heine, who helped moderate the meeting, said that “it’s clear that providing better DC plans will promote the hiring and retaining of talented employees.”
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Talking Shop: Investing in Collateralized Loan Obligations

Member question: “Have any members considered/evaluated adding [collateralized loan obligations] to their investment portfolio in the current environment?

  • “While we’ve had CLOs in the portfolio in the past, it’s something that hasn’t been actively pursued in recent years and we are dusting it off for evaluation.”

Member question: “Have any members considered/evaluated adding [collateralized loan obligations] to their investment portfolio in the current environment?

  • “While we’ve had CLOs in the portfolio in the past, it’s something that hasn’t been actively pursued in recent years and we are dusting it off for evaluation.”

Peer answer 1: “We have been investing in CLOs since Q2, almost exclusively in the AAA space, but we have authorization to do AA. Spreads are tight, but they are a good option to park cash and pick up some yield without taking any more duration or mortgage risk.”

Peer answer 2: “We started investing in CLOs at the end of 2020 for similar reasons to those [Peer 1] mentioned: taking on less duration and mortgage risk. We have authorization to invest down to the single-A level but typically try to reduce risk weighed assets so we only go that low if the spreads/credit look good and risk weights aren’t too high.

  • “Much if not all of the AA bonds we purchased are 20% risk-weighted. CLOs make up about 12% of our portfolio now.”

Peer answer 3: “We like CLOs for all of the reasons mentioned above. I leveraged this asset in a prior life and it performed very well in a similar rate environment. With that said, [there are] definitely some hurdles to get folks comfortable with this asset class, but it’s on our radar.”

Peer answer 4: “We are looking at CLOs now and will take it to the investment committee for evaluation.”

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Rolling Forecasts by FP&A Gain Ground in Pandemic Despite Obstacles

The pandemic and rapid recovery underscore the benefits of more frequent forecasts by FP&A, but transitions can be messy.
 
At a recent NeuGroup meeting for heads of FP&A teams co-sponsored by fintech OneStream Software, more than half of members surveyed said they are updating their forecasts more frequently—some using rolling forecasts—a practice prompted by the pandemic and continuing because of the rapid economic rebound.

  • Instead of updating the standard 12-month forecast yearly, more teams now continuously update throughout the year. Most members said they update monthly, with some doing it every other month.

The pandemic and rapid recovery underscore the benefits of more frequent forecasts by FP&A, but transitions can be messy.
 
At a recent NeuGroup meeting for heads of FP&A teams co-sponsored by fintech OneStream Software, more than half of members surveyed said they are updating their forecasts more frequently—some using rolling forecasts—a practice prompted by the pandemic and continuing because of the rapid economic rebound.

  • Instead of updating the standard 12-month forecast yearly, more teams now continuously update throughout the year. Most members said they update monthly, with some doing it every other month.

Velocity, agility and accuracy. “Increased frequency of forecasting helps with accuracy and also agility,” said John O’Rourke, VP of product marketing and communications at OneStream, whose performance management platform can streamline forecasting of cash flow, sales and earnings.

  • “There’s positive results in the ability to make changes to the budget. You can respond quickly to new market opportunities or potential risks to your business,” he added.
  • One member shared about the impact on forecasting of a supply chain issue related to shipping products on international flights, many of which were cancelled due to the pandemic. As a result, the company has made its forecasting more agile to be ready for future potential disruptions.
  • Another member shared that post-pandemic business is far exceeding the company’s initial forecast, and they appreciate the added agility that comes with frequently updated rolling forecasts.

Baby steps. Although many members see advantages in more frequent forecasts, the switch isn’t always immediate, easy or clearly worth the extra resources. OneStream research shows that 66% of finance functions have the capability to update their forecasts within one week, but only 19% use rolling forecasts on a consistent basis.

  • One member, whose experience many others said mirrors their own, said her company had to start by taking baby steps. “Previously, we only forecasted anything twice a year,” she said. “And this year, we do an assessment each month, but only through the end of the fiscal year.
  • “Next year, I’m expanding that so that we’re doing a rolling 12 months. People’s heads are exploding when I say that, but I think we’ll be able to get there.”
  • Another member raised the issue of potentially excessive workloads. “There are a few ways that a rolling forecast could help us,” he said. “But we are not going to transition to something like that if it creates excess work.”
  • Other reasons companies stick with traditional forecast and budgeting processes include the cost of automation, additional training and work for accountants and Wall Street’s focus on quarterly earnings.

OneStream’s solution. OneStream’s platform unifies multiple finance processes, like forecasting, budgeting and reporting, and includes direct integration to ERP systems and other platforms. The system includes a number of built-in capabilities to assist in analyzing, reporting and forecasting.

  • One member said the platform’s ability to streamline the forecasting process enabled her company to quickly implement rolling forecasts, calling it “a tremendous time-saver.”
  • “Our planning system is two models, one is budgeting, one is a 12-month rolling forecast, which the company never used to do,” the member said.
  • On the budgeting side, the member uses OneStream to simplify collaboration between multiple departments. Each team “can go and model their revenues and plan at the same time.”
  • “The rolling forecast is then done at a high level of detail, using the same model we use for the budget but simplified,” she said. “[The model] is then overlaid on top of the information we have from the budget.”
    • “It’s greatly simplified. It only takes about two weeks and is a very, very agile system.”
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The Option to Use Options: Hedging FX Risk in Emerging Markets

FX risk managers rely on flexibility at a multinational that wants to participate in beneficial currency moves.
 
The ability to use options is essential for an FX risk manager at one NeuGroup member whose company wants to participate in favorable currency moves when hedging exposures in emerging markets. He described the company’s approach at a spring meeting sponsored by HSBC.

  • The bank cited research showing that “the incentive to hedge EM risk has increased over the past 10 years” and “bouts of EM currency weakness have become more frequent and recoveries less marked.”
  • “It has been worth spending the carry on [Latin American] and [Central and Eastern Europe, the Middle East and Africa] currencies,” the HSBC presentation said.
  • However, “passive blanket covering is too onerous over the long run,” according to the bank. “A tactical approach” creates a better balance of “risk reduction vs. the cost of hedging.”

FX risk managers rely on flexibility at a multinational that wants to participate in beneficial currency moves.
 
The ability to use options is essential for an FX risk manager at one NeuGroup member whose company wants to participate in favorable currency moves when hedging exposures in emerging markets. He described the company’s approach at a spring meeting sponsored by HSBC.

  • The bank cited research showing that “the incentive to hedge EM risk has increased over the past 10 years” and “bouts of EM currency weakness have become more frequent and recoveries less marked.”
  • “It has been worth spending the carry on [Latin American] and [Central and Eastern Europe, the Middle East and Africa] currencies,” the HSBC presentation said.
  • However, “passive blanket covering is too onerous over the long run,” according to the bank. “A tactical approach” creates a better balance of “risk reduction vs. the cost of hedging.”

The optionality option. The NeuGroup member’s tactical, opportunistic approach includes options, which can allow the company to benefit from market volatility. “We really do value the ability to participate, so we really like to use option structures to help us in emerging markets,” he said.

  • Because the company reports earnings in US dollars, “I protect against strong USD and try to benefit when the dollar weakens,” he added. The company does not want to “miss weak dollar cycles.”
    • “By using options, if the [EM] currency appreciates, I’m only out the premium spent and I can continue to gain on the underlying exposure,” he explained.
    • “It is really a risk management strategy whereby the company is comfortable with spending some amount of money to protect earnings while still being able to gain in the event the currency moves in our favor.”
  • The member favors using options to hedge high-carry currencies, usually over a three-month time frame. He first considers, separately, each currency where the company has major exposures. The countries include Brazil, South Africa, China, Mexico and Chile.
  • It then creates a portfolio of the entire bucket of EM currencies it hedges and examines “how we’re doing relative to year-over-year,” the member said.
  • “We’ve done a lot of back testing with HSBC and other partners to look at our portfolio of emerging market currencies, trying to establish an efficient frontier,” he said.

Balancing act. In response to a question from a peer about indicators, the member said the FX team has regular meetings and conversations with the treasurer and the CFO so their views and opinions can be overlayed into the analysis of the relative value of currencies.

  • The team spends considerable time analyzing local mobility data to uncover trends as well as talking extensively to counterparties to learn their views.
  • The group looks at worst case scenarios and whether “we can live with it, knowing we want to be able to participate,” he said.
  • The company’s outlook has shifted from being extremely bearish on USD to a view that incorporates the US outperforming other economies (dollar bullish) in the short-term as well as a longer-term view that is more bearish.
  • “We’re balancing the different views and that’s where the option strategy helps us please everyone,” he said. “With all the uncertainty coming out of Covid, we really want to be able to participate.”

More systematic. The member said the company is moving from a very flexible, dynamic and opportunistic stance heavily based on market views to something more structured but still relatively loose.

  • “We’re still pretty risk tolerant, but maybe not as much as we were,” he said. The goal now, he said, is to be a bit more systematic but still flexible.
  • That means having the ability to lock in forwards or extend duration, he explained. But also having guardrails around the budget to spend on option premiums.
  • The member said this new framework should provide his team “more certainty about what we can produce” and reduce Monday morning quarterbacking that may arise when hedging decisions are questioned after currency moves.
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In Creeps Crypto

While most companies aren’t directly involved in crypto yet, members expect questions and are looking for answers.
 
In a twist providing insight into an increasingly important issue, assistant treasurers at a recent NeuGroup meeting pointed to a discussion about cryptocurrencies as one of their takeaways while saying digital currencies have not yet had an impact on their treasury departments.

  • Members of NeuGroup for Large-Cap Assistant Treasurers agreed that corporate higher-ups would almost certainly inquire soon about digital currencies and assets—one reason many finance teams are having discussions about this hot topic.

While most companies aren’t directly involved in crypto yet, members expect questions and are looking for answers.
 
In a twist providing insight into an increasingly important issue, assistant treasurers at a recent NeuGroup meeting pointed to a discussion about cryptocurrencies as one of their takeaways while saying digital currencies have not yet had an impact on their treasury departments.  

  • Members of NeuGroup for Large-Cap Assistant Treasurers agreed that corporate higher-ups would almost certainly inquire soon about digital currencies and assets—one reason many finance teams are having discussions about this hot topic.

Fear prompts early considerations. One member noted insurance companies announcing purchases of cryptocurrencies, and a peer responded that many are purchasing bitcoin and other digital currencies in case clients face ransomware attacks requiring cryptocurrency payments.

  • “We started investigating that as well,” said another AT. “We don’t want to own bitcoin, but we wanted to know what would happen in a ransomware situation, and where we could get” the cryptocurrency.
  • Fear of hyperinflation prompted discussion of another potential use case, in countries with highly volatile currencies. Farmers and other exporters in Venezuela and Argentina, for example, may prefer cryptocurrencies over the local currency that may rapidly lose value.
    • In a previous meeting, one member said her company was toying with that idea.
  • A member noted that his firm exited Venezuela years ago, and back then gold—an asset cryptocurrencies are at times compared to as a store of value—was similarly under consideration.

Other blockchain stuff. The extreme volatility of cryptocurrencies has dominated headlines, but blockchain technology is emerging in other forms that may impact treasury.

  • A few NeuGroup members have suddenly found themselves able to monetize their companies’ iconic images as non-fungible tokens (NFTs), in which a digital imprint is taken of the image and traded on a blockchain. NeuGroup’s Scott Flieger said the companies immediately converted to US dollars the cryptocurrencies used to pay for the NFTs, since “they had no interest in being long cryptocurrency.”
  • The bigger impact for corporate treasury, Mr. Flieger said, may be central bank digital currencies (CBDCs).
  • “This topic isn’t going away and it may move from cryptocurrencies to CBDCs,” he said. “The Chinese are pretty far ahead relative to the rest of the world, which could negatively impact the US economy.”

Need to know. A clear takeaway from the meeting was that ATs still have much to learn about cryptocurrencies, which have rocketed in less than a year from an obscure asset to one in which the largest financial institutions want exposure.

  • “It’s not something I’m getting pinged about a lot,” one member said. “But the more information and understanding I have about what others are doing is very helpful if that question does come up.”
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China and Beyond: Understanding Central Bank Digital Currencies

Insights from HSBC on CBDCs, as China’s tests of a government-backed digital currency, dubbed e-CNY, grow larger.

Most multinationals in the NeuGroup Network do business in China, just one reason finance teams need to stay on top of the country’s expanding tests of a digital version of the yuan known as the e-CNY, a so-called central bank digital currency or CBDC.

  • HSBC’s global head of FX research, Paul Mackel, spoke at a NeuGroup virtual interactive session sponsored by the bank this spring to help treasurers get up to speed on CBDCs and China’s e-CNY trials, as interest in these topics grows.
  • “I first started talking about this with my team a year ago, and now we’re getting requests from clients daily, from many different types of clients on our spectrum, to have discussions about what’s happening,” Mr. Mackel said.

Insights from HSBC on CBDCs, as China’s tests of a government-backed digital currency, dubbed e-CNY, grow larger.

Most multinationals in the NeuGroup Network do business in China, just one reason finance teams need to stay on top of the country’s expanding tests of a digital version of the yuan known as the e-CNY, a so-called central bank digital currency or CBDC.

  • HSBC’s global head of FX research, Paul Mackel, spoke at a NeuGroup virtual interactive session sponsored by the bank this spring to help treasurers get up to speed on CBDCs and China’s e-CNY trials, as interest in these topics grows.
  • “I first started talking about this with my team a year ago, and now we’re getting requests from clients daily, from many different types of clients on our spectrum, to have discussions about what’s happening,” Mr. Mackel said.

An e-CNY for an e-China. China’s crackdown on cryptocurrencies like Bitcoin, as well as its embrace of non-bank payment methods, increases the potential impact and implications of a CBDC in the country.

  • Due to the proliferation of app-based payments like WeChat and AliPay, Chinese citizens currently far outpace any other nation’s use of digital or mobile wallets (see chart below), with over 800 million payments by mobile phones.
  • China has publicly addressed the inherent risk of a population that heavily relies on these types of non-bank payments. If one of these apps ran into an obstacle, “that could be a source of concern,” Mr. Mackel said.
  • He said “the line of thinking from the PBOC is that the e-CNY is going to complement what Alipay and WeChat pay already do” for consumers, while also offering an alternative and a way to hedge internal risk from the PBOC’s side.
  • On the other hand, amid China’s increasingly strict regulation on cryptocurrency, Mr. Mackel believes the e-CNY could be an attempt to alleviate the curiosity around digital or crypto currencies.

A broader impact? In terms of the impact in other markets, it may be limited—for now. In the US, the Fed recently started to research the topic with MIT and the European Central Bank has published a number of whitepapers on what an e-Euro may look like, but for now it’s all theoretical.

  • “What China has done, given their apparent success, is they’re making other central banks look far behind the curve,” Mr. Mackel said
  • “Over next two to three quarters, I think that the information transfer between central banks and [other companies] will only steepen the learning curve.”

CBDC pros and cons. Central banks cite many reasons for exploring CBDCs, including improving the safety, robustness and efficiency of the payments system as well as its use as a monetary policy tool to spur financial inclusion.

  • In the meeting, HSBC said the primary benefits of central bank digital currencies are:
    • Lower transaction costs.
    • Easier transaction processing for less developed banking systems (if CBDCs are enabled for cross-border transactions).
    • Real-time indications of consumption.
    • Useful for policy setting or combating inflation.
  • Among the drawbacks:
    • Russia’s central bank identified a CBDC as a potential tool to combat sanctions.
    • A digital currency would make it far easier for a central government to track users based on ID.
    • In a time of crisis, a run on a central bank digital currency could have a widespread impact on bank funding.
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Hot Desks, Hybrids and Introverts: Managing Post-Pandemic Work 

Takeaways on talent management as 100% remote work gives way to hybrid models and new hiring challenges.

The transition from completely remote work to whatever comes next—back to the office, work at home, a bit of both—is in full swing across companies in the NeuGroup Network. The topic is generating lots of interest at meetings as finance teams plot a course for post-pandemic work that will in many cases be unlike what work life resembled pre-pandemic.

NeuGroup founder and CEO Joseph Neu recently moderated a pair of meetings that covered details of the transition and the larger issue of talent management. Here are some of his takeaways.

Takeaways on talent management as 100% remote work gives way to hybrid models and new hiring challenges.

The transition from completely remote work to whatever comes next—back to the office, work at home, a bit of both—is in full swing across companies in the NeuGroup Network. The topic is generating lots of interest at meetings as finance teams plot a course for post-pandemic work that will in many cases be unlike what work life resembled pre-pandemic.

NeuGroup founder and CEO Joseph Neu recently moderated a pair of meetings that covered details of the transition and the larger issue of talent management. Here are some of his takeaways.

  • Introverts vs. extroverts. The former will want to keep working from home and the extroverts may be enticed back in to the office because they miss the social interaction. Consider how this plays out in your current team and roles, and factor it in as you onboard new hires.
  • Hoteling and hot desking. This approach to creating a more flexible workplace—one involves reserving desk space in advance, the other doesn’t—is in vogue now. That means many employees will be returning to an office landscape that’s unfamiliar. Be ready for that. Not all members are sold on this solution working or lasting.
  • Meet outside the office. Since hoteling and hot desking may change the dynamics of the office and present booking and scheduling complications, don’t be afraid to continue meeting with people outside of the office.
  • Over-engage. A few members who switched companies recently noted that their remote or hybrid onboarding was heavily facilitated—far more than for the typical new finance hire. This prompted the thought to over-engage with new hires for the treasury team in a similar way.
    • The same may be said for existing team members. One member indicated employee surveys suggest that people appreciate check-ins; so weigh that carefully against the fear that you, the boss, are intruding.
  • Virtual still works. Most members agree that banker meetings work well virtually and should continue to be remote more often than not. Take an inventory of other meeting types that continue to work well virtually post-pandemic.
  • Skill gaps and how to fill them. Soft skills especially, like how to present to senior management and appear before the board, are harder to acquire remotely. So members are concerned about gaps in development that may take more time to fill. Proactive steps should be taken to mitigate them accordingly.
  • Policy uncertainty. You simply don’t know where people are until you tell them they have to come back. Members noted that once companies make a definitive return-to-office announcement, they will not know how many of their employees have moved away from the ring-fencing zone for work from the office mandates, no matter how many days a week that is. Therefore, policies, as announced, may change if key talent says no.

Talent management: Insights from a NeuGroup partner:

  • The fight for talent means supporting employees to reach their full potential whether they are hybrid primarily at home, primarily in the office or fully remote.
  • To stay agile, establish guardrails, but allow team leaders both in business development and operations to create the plan that works best for their teams.
  • Integrate key corporate attributes and the “company way” with employee engagement, training and development.
    • It starts with a well-thought-out onboarding process with tangible waypoints and extends into learning management with a company “academy.”
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Early Innings in the Fintech Disruption Game

A partner at VC firm Canapi Ventures says regional banks can play by helping developing the digital infrastructure.
 
Blockchain-technology firms may be among the best-known disruptors of traditional banking services, thanks in part to the extreme volatility of the cryptocurrencies the technology supports, like Bitcoin. But fintechs take many forms, and the real disruption is still to come.

  • That takeaway surfaced at a recent NeuGroup meeting of bank treasurers that included insights from Jeffrey Reitman, a partner at Canapi Ventures, which invests in early- to growth-stage fintechs along with more than 40 regional-bank limited partners.
  • Mr. Reitman said disruption may adversely impact banks but also bolster them, especially first-movers. Payment services may face the most disruption, followed by lending and financial-services infrastructure, he added.

A partner at VC firm Canapi Ventures says regional banks can play by helping developing the digital infrastructure.
 
Blockchain-technology firms may be among the best-known disruptors of traditional banking services, thanks in part to the extreme volatility of the cryptocurrencies the technology supports, like Bitcoin. But fintechs take many forms, and the real disruption is still to come.

  • That takeaway surfaced at a recent NeuGroup meeting of bank treasurers that included insights from Jeffrey Reitman, a partner at Canapi Ventures, which invests in early- to growth-stage fintechs along with more than 40 regional-bank limited partners.
  • Mr. Reitman said disruption may adversely impact banks but also bolster them, especially first-movers. Payment services may face the most disruption, followed by lending and financial-services infrastructure, he added.

Early days. The explosion of fintechs over the last decade and the pandemic have accelerated the use of digital financial services.

  • However, many so-called digital natives—including Gen Zers and some millennials—are just entering the consumer market.
  • “We see another 10-, 20-, 30-year tailwind that will ebb and flow,” Mr. Reitman said. “So it’s still early days in financial services disruption.”

Buy now pay later. Payments have seen the most disruption so far, in the B-to-B space but also at the consumer level. Examples cited by Mr. Reitman include Affirm Holdings, which enables online shoppers to pay for purchases over time.

  • Big Tech has entered the game, too, with Apple partnering with Goldman Sachs to offer its credit card.
  • Lending has also seen disruption, with fintechs entering the mortgage and auto-loan markets, Mr. Reitman said, adding, “Their marketing and transparency has helped drive down the cost of credit.”

Infrastructure and banks. Coinbase enables users to link from the cryptocurrency exchange to bank accounts, prompting ACH transfers automatically to pay for crypto purchases. Fintechs such as Plaid and Stripe are similarly building pieces of the digital economy as well as bridges to traditional financial institutions, Mr. Reitman said.

  • The cost of starting fintech companies has dropped and building robust products and experiences is much easier, he added, saying that fintech software is becoming “embedded” across banks’ traditional lending, payments and trading businesses.
  • “The banks that move the quickest to partner on these initiatives will be the underpinning of that infrastructure.”

Canapi’s LPs. The venture capital firm chose to raise money from regional and community banks instead of the very largest financial institutions, which have the resources to build proprietary solutions.

  • Other banks must prioritize key initiatives and how they drive value, which often leads to “renting” the software that underpins solutions, Mr. Reitman said, adding that makes a lot of sense “when you don’t necessarily have the ability to build customized solutions in-house.”

Crypto’s place? Mr. Reitman noted that banks are inherently built on trust and therefore are not well positioned to take advantage of public blockchains’ “trustless” features. This suggests there may be better solutions to increase the speed of money movement between trusted counterparties.

  • Signature Bank’s private blockchain, available only to approved members and controlled centrally, enables payments and settlements in real-time and may offer blockchain benefits, he noted.
  • Custody and surveillance may be opportunities for banks in the crypto space. Canapi has yet to invest there, Mr. Reitman said, but banks’ customers will likely look to their banks to hold cryptocurrencies in the future.
  • “Custodying assets through partnerships will be important,” he said, as well monitoring transactions. “Crypto is actually more public than most financial transactions, and with the right tooling you can actually have near-perfect information about the connections of different wallets and money movements.”
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Talking Shop: Allocating Transaction FX Impacts

Member question: “As it relates to the reporting of transaction FX impacts (revaluation of non-functional currency monetary assets and liabilities—cash, AR, AP, etc.), does your company allocate these impacts to the business or is that impact kept at corporate?”

Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: [email protected].


Member question: “As it relates to the reporting of transaction FX impacts (revaluation of non-functional currency monetary assets and liabilities—cash, AR, AP, etc.), does your company allocate these impacts to the business or is that impact kept at corporate?”

Peer answer: “We’ve discussed this a lot recently. Historically, the FX gain/loss is kept at the business level (with the thought that the business needs skin in the game for any requests treasury might have).

  • “As we streamline the process a bit more (implementing FiREapps, etc.), we might move the gain/loss to corporate. But at least for now, it’s staying at the business level.”

Member response: “Thanks. Can you share why you are evaluating shifting the FX impacts to corporate from the business?”

Peer response: “We’re in the final stages of our FiREapps implementation project—so one viewpoint is that now that we’re less dependent on local teams for exposure data, we at corporate treasury can take on the FX results.

  • “Not exactly a done deal yet—keeping the local business teams involved can be helpful in case we run into issues with accounting entries being booked late, etc. Always good to have allies on our team!”
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All Aboard? The Crypto Train Has Left the Station

Finance teams need to look beyond Bitcoin to broader opportunities offered by blockchain technology and digital assets.
 
Don’t let all noise blaring from bitcoin drown out the broader implications of blockchain technology and the need for finance teams to understand the potential opportunities offered by cryptocurrency and other digital assets including tokenized securities.

  • That bottom-line takeaway emerged at a recent meeting of NeuGroup for Cash Investment 2 sponsored by State Street, where representatives from Deloitte as well as cryptocurrency fintechs Lukka and Arca Labs walked members through the innovative possibilities of digital assets.
  • “From a treasurer’s standpoint, I’ve seen a progression of acceptance of digital assets through the years,” said Carina Ruiz, a Deloitte Risk & Financial Advisory partner. “From our first conversations with clients saying ‘heck no’ to understanding that this is the way of the future and something they need to accept, whether or not we receive or pay through it. The ship has sailed.”

Finance teams need to look beyond Bitcoin to broader opportunities offered by blockchain technology and digital assets.
 
Don’t let all noise blaring from bitcoin drown out the broader implications of blockchain technology and the need for finance teams to understand the potential opportunities offered by cryptocurrency and other digital assets including tokenized securities.

  • That bottom-line takeaway emerged at a recent meeting of NeuGroup for Cash Investment 2 sponsored by State Street, where representatives from Deloitte as well as cryptocurrency fintechs Lukka and Arca Labs walked members through the innovative possibilities of digital assets.
  • “From a treasurer’s standpoint, I’ve seen a progression of acceptance of digital assets through the years,” said Carina Ruiz, a Deloitte Risk & Financial Advisory partner. “From our first conversations with clients saying ‘heck no’ to understanding that this is the way of the future and something they need to accept, whether or not we receive or pay through it. The ship has sailed.”

Beneath the headlines. Tim Davis, a Deloitte Risk & Financial Advisory principal and Deloitte’s Global Center of Excellence for Blockchain Assurance leader, said frequent headlines about bitcoin’s ups and downs can cause people to miss the point. “The point is not bitcoin’s volatility, the point is the innovation,” he said. “It’s a Cambrian explosion of innovation in the financial markets.”

  • Blockchain innovations have led to trustless computing and decentralized finance (DeFi) tools that he said can disintermediate traditional ecosystem platforms and allow for more efficient, transparent transactions.
    • Trustless computing eliminates a middle man, allowing for direct account-to-account transactions and DeFi that relies on a blockchain and can eliminate the need to trust a bank or other counterparty.
  • Mr. Davis referred to two pieces Deloitte published about corporate investing and the use of cryptocurrency in business, which emphasize that cryptocurrency technology is an area ripe with opportunity.
  • Lukka CEO Robert Materazzi said crypto is not simply a new asset class, but a technology that can be applied to any asset class.
    • “It has resulted in some new asset classes, like cryptocurrencies such as bitcoin; we’ll see if these assets are around in 10 years,” he said. “I don’t know if bitcoin specifically will be, but I do believe assets will be using blockchain, and I think it will change the way that assets are managed around the world—across all businesses.”

An opportunity to educate. Many members are asking what steps can treasury take in the near future to prepare for the changes coming with crypto and other digital assets.

  • Rob Massey, a partner and global tax leader for Deloitte’s blockchain and cryptocurrency team, said a good start is enabling the organization to use digital assets, “in an investment category, payment or in your business. It is a good way to test drive and stress test [your company’s] systems.”
  • He said this can also help treasury understand how another team within the company will potentially treat cryptocurrency. “What they used to do with some other asset is different from what they’re going to do with crypto, so you have to learn their sensitivities real-time. You’re in it together.”

Other takeaways. Mainstream financial institutions, including custody banks, are adopting the tech and data management infrastructure of cryptocurrency native exchanges. Fintechs can offer some assistance on the data management side; one example is Lukka, which transforms blockchain data into business information that’s easier to parse.

  • As cryptocurrency becomes more regulated, KYC is also becoming more critical—and more digitized, a digital onboarding process that may be more intensive.
  • Tokens or new digital securities backed by Treasury securities—like that of Arca—highlight how traditional investment products could be wrapped in the ecosystem, and be more likely to pass muster with corporate investment policies as well.
  • Popular cryptocurrencies like bitcoin and ether go up to eight and 18 decimal places, something members say corporate and bank systems are not currently set up to handle.
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How to Float the Interest Rate Boat When Fixed Rates Are So Low

Treasury teams making the case for floating-rate debt see commercial paper as a flexible tool to gain exposure.
 
One of corporate treasury’s perennial challenges is determining the best ratio of fixed- to floating-rate debt, and that conundrum has been heightened by factors including record low interest rates and the significant debt companies took on last year.

  • An assistant treasurer in a recent NeuGroup Assistant Treasurers’ Leadership Group (ATLG) meeting noted that efficient-frontier analysis suggests companies should hold a minimum 30% to 40% of floating-rate debt, while CFOs and corporate boards often call that amount the very maximum.
  • Floating rates change gradually with cycles, but rolling over fixed-rate debt can result in much “chunkier” moves, raising the question: Which is truly more volatile?

Treasury teams making the case for floating-rate debt see commercial paper as a flexible tool to gain exposure.
 
One of corporate treasury’s perennial challenges is determining the best ratio of fixed- to floating-rate debt, and that conundrum has been heightened by factors including record low interest rates and the significant debt companies took on last year.

  • An assistant treasurer in a recent NeuGroup Assistant Treasurers’ Leadership Group (ATLG) meeting noted that efficient-frontier analysis suggests companies should hold a minimum 30% to 40% of floating-rate debt, while CFOs and corporate boards often call that amount the very maximum.
  • Floating rates change gradually with cycles, but rolling over fixed-rate debt can result in much “chunkier” moves, raising the question: Which is truly more volatile?

Inching toward floating. The AT recalled analyzing the fixed/floating relationship seven years ago and finding savings from floating-rate debt of approximately 1.5%.

  • He theorized that with steadily declining fixed interest rates, the benefit should have diminished. But it hasn’t. In fact, he found the economic benefit remained even during very different periods of economic cycles, such as before and after the 2008 financial crisis.
  • Given management and board reticence about relinquishing historically low fixed rates, the AT said he planned to pitch to his CFO lifting floating-rate exposure from zero today to 25% to 30%.
  • He’s recommending some permanent commercial paper (CP), floating-rate notes when financings needs arise, and fixed-to-floating swaps to match up against the first eight or 10 years of longer fixed-rate bonds.

CP convenience. The AT at a major healthcare company said it, too, has all fixed exposure and is starting to leg into the floating-rate market, recently restarting its CP program to get some exposure.

  • Her team is also considering refinancing upcoming fixed-rate maturities either with floating-rate notes or CP, depending on the need for cash long term.
  • Noted the first AT, “Part of what I like about CP is that it’s a bit cheaper than floating-rate notes, and it’s an additional liquidity tool, just like cash,” he said, adding that if cash becomes excessive, less CP can be issued. “So, I like a mix of them.”

CFO concerns.  The healthcare AT noted the difficulty in persuading the CFO to agree to take on the volatility of a floating-rate debt now, when fixed rates are still so low.  

  • Another peer said that his company’s CFO prefers the currently 100% fixed portfolio because there are no surprises, of which there have been plenty in the last 18 months. So, gaining exposures synthetically through swaps, he said, “would be a very difficult sell.”

Messaging tips. He said that entering “organically” into the CP market, in which the company was a regular participant prior to the pandemic, is on the horizon. One message, he added, is that it’s good to show the rating agencies that the company has a vehicle to delever, if it needs to.

  • Another member at a global consumer-products company said looking at the interest expense on net debt rather than gross debt illustrates that the adverse impact on cash from rapidly falling rates during the pandemic would have been offset by a larger floating-rate exposure.
  • “I’ll have to remember to use that line,” said a peer.
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Treasury Help Wanted: Junior Members With Skills Beyond Finance

Members of NeuGroup for High Potentials also discuss the value of the Certified Treasury Professional Designation.
 
At a meeting this spring, NeuGroup’s High Potentials group discussed critical skills and career management that included observations on the value of the Certified Treasury Professional (CTP) designation and current hiring challenges facing treasury teams. Following are takeaways from NeuGroup’s Andy Podolsky, who moderated the session.

Members of NeuGroup for High Potentials also discuss the value of the Certified Treasury Professional Designation.
 
At a meeting this spring, NeuGroup’s High Potentials group discussed critical skills and career management that included observations on the value of the Certified Treasury Professional (CTP) designation and current hiring challenges facing treasury teams. Following are takeaways from NeuGroup’s Andy Podolsky, who moderated the session.
 
A skills checklist. The meeting included a survey about what skills members believe every treasury professional should possess. Highlights:

  • FX got the most votes, with 70% of respondents listing it, followed by capital markets with 60%.
  • About one-third of respondents listed these skills: project management, cash forecasting, entity structure, accounting and capital planning.
  • Bank management and TMS received votes from 20% of respondents, while insurance and taxation got 10%.

Challenges. Members shared on common challenges including trouble filling open positions for more junior roles. Other topics that surfaced:

  • New hires who are often not familiar with what treasury does.
  • A sense that the CTP designation is perhaps not as valuable as it once was.
  • The importance of hiring candidates with deeper business intelligence (BI) and data management skills.

CTP critique. The group divided almost evenly into three groups: those having their CTP, those considering it, and those thinking the CTP may not be worth the trouble.  

  • Only a tiny minority (10%) felt the CTP was “extremely important” (see chart). Fewer than half (40%) said it’s “somewhat important” to have the designation.
  • Many of these young leaders believe the general skills of curiosity, acting as team players and displaying an ability to learn are more critical than treasury technical skills that can be learned over time.
  • Other skills in demand include good working habits, an ability to think outside the box, real-world experience, and internships that expose candidates to finance and allow them to hit the ground running.

Hiring woes. The group agreed that hiring people for treasury roles is particularly challenging these days. These managers found that candidates are not trained well by universities on what treasury teams do, and are disinclined to take, or even apply for, jobs that will be 100% in the office.

  • Training those people who do accept jobs is problematic in a virtual world where training is often limited to “throwing new hires into the deep end and seeing who can swim and learn on the job,” as one member put it. “I wish there were better preparation by colleges.”  
  • As a result, hiring managers seem to be shifting their focus to raw talent they can mold into treasury specialists. 
  • This gap is something business schools will hopefully add to their curriculum—functional awareness and an overview of corporate finance functions.
  • In the meantime, one member’s advice to colleagues new to treasury: “Take advantage of your bankers to ask the ‘dumb’ questions you don’t want to internally. They’re a great source and always happy to help.”         
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Convertibles, Speed and Capital Structure: A Tech Banker’s Take

MUFG helps a high-growth tech company shift from convertibles to a financing mix more in line with an IG credit.

The optimal capital structure for a high-growth technology company may change significantly as its business develops and its financing options increase—one reason corporates that issue convertible bonds early in their trajectory often replace them with alternatives more suited to mature businesses with investment-grade (IG) credit metrics or ratings.

  • That takeaway sprang from a session at a recent meeting of NeuGroup for Growth-Tech Treasurers featuring a case study of how one tech company in the SAAS sector is transforming its capital structure with the help of MUFG, sponsor of the meeting. The study included analysis of peers’ capital structures and issuance.
  • “When we see a company displaying specific capital structure choices we make conclusions about their growth stage and maturity,” Lucia Greenblatt, a director of technology banking at MUFG, said.

An interview with Lucia Greenblatt, managing director of technology banking at MUFG, on a SAAS company’s financing journey.

The optimal capital structure for a high-growth technology company may change significantly as its business develops and its financing options increase—one reason corporates that issue convertible bonds early in their trajectory often replace them with alternatives more suited to mature businesses with investment-grade (IG) credit metrics or ratings

  • That takeaway sprang from a session at a recent meeting of NeuGroup for Growth-Tech Treasurers featuring a case study of how one tech company in the SAAS sector is transforming its capital structure with the help of MUFG, sponsor of the meeting. The study included analysis of peers’ capital structures and issuance.
  • “When we see a company displaying specific capital structure choices we make conclusions about their growth stage and maturity,” Lucia Greenblatt, a director of technology banking at MUFG, said.

EBITDA reality check. Earnings before interest, taxes and depreciation (EBITDA)—or the lack thereof—plays an important role in determining the financing mix available to companies. “As a proxy for operating cash flow, EBITDA is the foundation of any credit structure,” Ms. Greenblatt said.

  • “A growth company, with limited EBITDA, will have to rely on instruments where EBITDA does not underpin the structure of the credit facility and availability of funds,” she added. “Converts suit this requirement.”
  • The head of treasury at the member company said, “At the start, EBITDA was a limiting factor for going to different financing types like bank debt.”

Convert considerations. A few years ago, the member company, like many peers, issued convertible notes at what the head of treasury said were “attractive terms for the time.”

  • As the MUFG table below shows, converts offer a financing alternative that does not require credit ratings or come with financial covenants, among other advantages.
  • “Converts can enable a company to successfully accelerate growth via acquisitions by deferring the issuance of equity outright,” Ms. Greenblatt explained.

Peer pressure. Another reason many companies in this space go the route of convertibles: peer pressure. “Peers at similar growth and maturity stages in their life cycle exhibit similar financing choices and behavior,” Ms. Greenblatt said.

  • “It’s pressure to make the same financing choice, like accessing the convertible market because it’s hot and other peers have successfully done so.”
  • She added, “Conversations in the boardroom create momentum towards supporting the same financing choice that worked for the peer group.”

The dilution dilemma. Many mature IG companies avoid converts because of the dilution of the corporate’s common stock if the debt is converted to equity. That risk may not be of primary importance to younger, high-growth SAAS companies, but can take a toll later in their lives.

  • “While we noted that the great majority of high-growth companies in the peer group had outstanding convertible notes in the cap structure, there was a general sentiment that management may overlook potential impact from dilution in the future,” Ms. Greenblatt said.

Looking ahead. That said, the member company stands out for its deliberate planning. “As part of our development strategy, we talked a lot about IG—which we consider ourselves close to being,” the head of treasury said.

  • The company is gradually converting from converts to an IG-like financing mix comprised of a revolving credit facility to backstop liquidity, and a delayed draw term loan A to enable the company to opportunistically time repurchase or redemption windows.
  • Last fall, MUFG and two other bookrunners arranged the revolver and the term loan. “The successful syndication displayed the IG market continues to have pockets of liquidity in a post-Covid-19 environment for 5-year tenors at relatively attractive pricing for well-structured facilities that are supported by sufficient ancillary business,” MUFG’s presentation stated.  
  • Since the transactions, “We have repurchased about half of the convertible debt,” the member said. “We’re a very different company, with more financing options available to us today.”
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Hard Work: Creating a Flexible Workplace Combining Office and Remote

Finance teams balancing worker desires and corporate needs favor hybrid models, but the details are a work in progress.

Companies’ timelines for returning to the office vary widely, according to assistant treasurers at recent meeting of NeuGroup’s Assistant Treasurers’ Leadership Group. Some are scheduling returns imminently while others only tentatively plan to return next fall. There was consensus, however, that requiring everybody to come back all at once is probably no longer feasible.

Finance teams balancing worker desires and corporate needs favor hybrid models, but the details are a work in progress.

Companies’ timelines for returning to the office vary widely, according to assistant treasurers at recent meeting of NeuGroup’s Assistant Treasurers’ Leadership Group. Some are scheduling returns imminently while others only tentatively plan to return next fall. There was consensus, however, that requiring everybody to come back all at once is probably no longer feasible.

  • Still, remote work’s advantages are likely outweighed by the disadvantages for most companies.
  • Now the issue appears to be how to provide the work-from-home flexibility employees have come to appreciate while retaining the clear benefits of interacting in the office.

Tipping point. Members agreed that enough major companies have decided to provide employees with work-location flexibility that mandating that everyone return to the office is unrealistic.

  • “Otherwise, they’ll stick out like a sore thumb,” one member said.
  • Another said her company’s CEO and HR chief were adamant about everybody returning to the office until a few months ago, when an employee survey strongly suggested that taking a hard line would harm recruiting.
  • “Now, if you work in the corporate office, hybrid will be supported and we’re open to fully remote possibilities as well,” the AT said.

Ownership blues. Companies that own their office properties face harder choices.

  • “We own a very large corporate campus,” said one member. “It’s hard for people to agree to more of a remote situation when you see this huge facility sitting empty.”
  • Another member whose company owns its office in pricey San Francisco said the technology company had started to reconfigure a few of its floors to accommodate a “hoteling” model, in which employees dynamically schedule their use of workspaces.
  • “We may do that with the rest of the building to accommodate a hybrid approach—two or three days in the office each week-type scenario,” he said.

Remote concerns. A common concern about remote work is onboarding new employees, especially recent college graduates.

  • “There’s really something to be said, especially for people early in their careers, for being in a room where you can see people’s reactions and body language,” one member said, adding, “I would like my team to be in the office a couple days a week to foster that development.”
  • Commoditization of jobs may also emerge for purely remote hires, since they never make a physical connection, another member said. “When the next opportunity comes up, are they more likely to take a peek at it and dip their toes in the water?”
  • One way to foster that connection may be to schedule meetings without an organized agenda, said a peer at a company that’s going 100% remote, to discuss career advancement and other employee-related topics.

Honing the hybrid. A hybrid approach can provide benefits of home and office work, but the concept is still very new and will likely require some trial and error.

  • One member said two or three days in the office each week would be ideal, as long as her entire team could coordinate to meet up in person at least one day, probably in the middle of the week when flexibility is less important.  

The fully remote argument. A member said that finding talent in the Bay Area can be very difficult, and by offering a fully remote position she was able to hire a senior analyst.

  • “The talent pool just expands,” she said, “And we couldn’t be happier with the hire.”
  • Another peer noted that hiring based on remote interviews may be no more risky than hiring people you meet face-to-face, given that good in-person impressions don’t always translate into success. “I’ve had enough people where you think they’re superstars until they show up” at the job.
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