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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  • “We encourage clients to come to us with any additional questions that they might have as they undergo this transition.”
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Walking the Talk on Diversity and Inclusion: One Company’s Steps

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

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

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

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

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

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

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

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

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

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

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

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

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

  • The goal, the presentation said, is to foster an environment where “everyone feels heard, supported and, most importantly, where these issues can be discussed openly.”
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Carbon Credits 101: Introduction to Voluntary Emissions Reduction

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  • The presentation noted that because market participants consider counterparty credit risk in pricing a derivative contract, a company’s valuation methodology should incorporate counterparty risk in its determination of fair value.
  • It noted that derivatives are unique “in the fact that they can potentially be in both an asset and liability position.”
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Unpleasant Surprise Post-Brexit: A New Bank Fee for SEPA Payments

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

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

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

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

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

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

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

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

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

  • Otherwise, it may be just as cost-effective to ignore the charges or reimburse the beneficiaries for it, as a company might do if the payments are for employee T&E expenses, for example.
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Documentation Overload: Internal Controls Over Financial Reporting

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  • “These types of trainings are mandatory and managed through the learning portal or an outsourced service for on-demand learning. The data and privacy and compliance teams in legal also play a role in the content and establishment of governance.”
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Pension Endgames: Insights for Managers Mulling Moves

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

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

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

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

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

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

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

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

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

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

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

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

  • Voluntary lump sum offers to retirees or terminated-vested participants can be more economical than insurance company risk transfer because participants don’t get additional premium for a required return on equity. 
  • A lump sum offer can also provide an alternative to participants who may not want to be transferred to an insurance company.  But companies need to be careful not to offer lump sums too frequently, or they may be deemed a component part of the plan requiring regular offers.
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Libor Transition Puzzle: FASB Provides Clarity, Relief to Corporates

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Other observations from the more recent meeting:

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

Member question: “Anyone have a net investment hedging program? If so, how often are you rolling hedges?

  • “What is your typical tenor? Are you hedging 100% or something less?”

Member question: “Anyone have a net investment hedging program? If so, how often are you rolling hedges?

  • “What is your typical tenor? Are you hedging 100% or something less?”

Peer answer: “We have done some opportunistic NIH hedging in JPY with FX forwards. We generally use our EUR capacity for debt issuances as well. Hedges have been in the two- to three-year range.

  • “We will go up to 100% of capacity (we do not seek to push to the 125% mark that is allowed).
  • “We also believe it should be thought of as synthetic debt—that the currency being hedged should have real underlying cash flows (e.g., would be able to pay off the debt if issued locally).”
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Learning New Strokes: A Treasurer Adds Tax to Her Skill Set

One NeuGroup member has “had to learn from doing” to tackle tax—and also tap internal and external experts.

When the head of tax at a midsized multinational company left to take another job a couple of years ago, the CFO tapped the treasurer to run tax, too. The treasurer shared some of the challenges she faced and how she addressed them at a recent meeting of the Treasurers’ Group of Thirty and in a follow-up interview.

A difficult beginning. Three of four junior tax staffers also ended up departing, leaving the treasurer with only one other tax person after being in the tax job for just a month. “That was obviously pretty difficult,” she said. “I literally had to do two jobs because we didn’t have many people at first.”

One NeuGroup member has “had to learn from doing” to tackle tax—and also tap internal and external experts.

When the head of tax at a midsized multinational company left to take another job a couple of years ago, the CFO tapped the treasurer to run tax, too. The treasurer shared some of the challenges she faced and how she addressed them at a recent meeting of the Treasurers’ Group of Thirty and in a follow-up interview.

A difficult beginning. Three of four junior tax staffers also ended up departing, leaving the treasurer with only one other tax person after being in the tax job for just a month. “That was obviously pretty difficult,” she said. “I literally had to do two jobs because we didn’t have many people at first.”

  • The exodus also changed the nature of the role senior management had initially intended the treasurer to play in tax. “At the time, they thought that it would be more of a management role for me; whereas with the departure of all those people and a new set of eyes, it became much more of a rebuilding cleanup exercise than a pure managerial exercise,” she said.

A key hire with an accounting background. Senior management combined the roles in part because “there was enough crossover between the two disciplines that it made sense to have a more unified approach,” the treasurer said. But when it comes to matters of tax compliance, GAAP tax provision, tax returns and audit defense, there is little crossover with treasury, she said.

  • “I ended up going out and hiring a really ‘heavyweight’ director of tax,” she said. “And one of my requirements was that they had to have a CPA. Because there’s two types of people out there in the tax world. There’s the CPAs and then the lawyers. We didn’t have enough structuring going on at our company to warrant a legal background. We really needed the accounting background.”
  • Her advice to peers building in-house tax teams: “If you are going to build internally, you need to get someone very heavy underneath you.”

Scaling the learning curve. To learn what she needed to know about tax, the treasurer posed lots of questions to her tax director and, when necessary, the company’s outside tax auditor. And, like a lot of learning, much is done on the job. “I had to learn from doing,” she said, including the analysis of the implications of a tax and legal structure proposed by the company’s outside auditor.

  • “I felt like I was really good at asking questions. And I felt like I could sort of think the way tax people think. But when you just don’t have the fundamental subject matter expertise, that’s where it gets difficult because you haven’t done the tax return yourself.”

The need to pick your spots. Making the transition to running tax and treasury requires deciding how much effort to devote to mastering tax concepts. “The tricky thing as a manager going from treasury to tax is how much time do you invest in that stuff,” the member said. “Because learning about these tax concepts is complicated and most things are not 10-minute discussions, it’s 20- or 30-minute discussions, at a minimum.

  • “I have to pick and choose how much I want to learn. I’m never going to be a tax professional and sit and do a tax return for a multinational company. I have no desire to do that and I won’t do that,” she added.

When wearing two hats pays off. The treasurer’s knowledge of repatriation of cash, global cash forecasting and cross-border investments has proven valuable in her management of this multinational’s tax team.

  • “Whenever there is cross-border, you have to involve tax,” she said. “So as we look at cross-border investments around the world and repatriating cash, now that I know more about the tax elements, I can really represent both areas at meetings and we don’t have to have yet another tax person on the call.
    • “So our tax director can focus on the stuff he needs to be working on and then I can go back to him for clarification or ask him to work on certain things.”

When outsourcing makes sense. The company does most of its domestic tax work in-house, but outsources transfer pricing studies to its outside auditor in addition to having the firm review other complicated, international tax matters. In response to a question from a peer at the meeting, she said, “Outsourcing is very expensive when you talk to the big four firms.”

  • The company outsources more in its operations abroad, including the preparation of tax returns and value-added tax (VAT) payments.

Dividing her time. When the treasurer took over tax, the company was in the midst of a global tax restructuring that required her to spend 80% to 90% of her time on tax. Her goal for 2021 is to spend 20% to 30% on tax and the rest on treasury.

  • “But I’d be happy if I could get down to 50% on average,” she said.
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Sign of the Times: Retailers Say Coin Shortage Worries Persist

Burned by a dearth of coins during the pandemic, many retailers are cautious despite some signs of stability.

“Cash-mageddon” is how one member at a recent meeting of NeuGroup for Retail Treasury described the havoc wreaked by the coin shortage that made life hellish for many retailers last year. And despite signs of normalization and increased production by the US Mint (see below), some members remain unconvinced that the coin supply disruption caused by the pandemic is truly over.

Burned by a dearth of coins during the pandemic, many retailers are cautious despite some signs of stability.

“Cash-mageddon” is how one member at a recent meeting of NeuGroup for Retail Treasury described the havoc wreaked by the coin shortage that made life hellish for many retailers last year. And despite signs of normalization and increased production by the US Mint (see below), some members remain unconvinced that the coin supply disruption caused by the pandemic is truly over.

Cautious about outlook. “The Fed hasn’t really given any new updates, so I would not take your sign down,” one member said, referring to the ubiquitous signs asking customers to use exact change or telling them to use credit or debit cards. One company resorted to giving out gift cards as change.

  • Another member whose company sometimes went weeks without a new coin delivery echoed the caution voiced by her peer.  “I’m uber-sensitive to coin; it was incredibly draining for our stores,” she said. “We’re at a point where it’s stable, but given all the uncertainty, keep your signs up, maybe to save you from having to reprint them.”
  • A third treasurer remarked that because the coin shortage stems from a circulation issue, if Covid protocols send consumers back online and away from physical stores, he “doesn’t see us being through it.”
    • The member said his company is completely reliant on courier services to deliver new coin to brick-and-mortal locations, and if for some reason there is an issue with the courier, the coin shortage would return. “It feels like they don’t have enough built-up inventory, they’re just using up what they have for that day,” he said.

Courier issues. Other members who use couriers for cash pickup and delivery said they share similar worries after years of inconsistent service, even before the pandemic.

  • When the coin shortage worsened last summer, couriers were hit hard as well, sometimes going up to 10 days without service for retailers. Though delivery has improved to a level that one member called “stable,” it still is not meeting some corporates’ needs.
  • “I’m being incredibly frustrated by the quality and level of service of these companies,” one member said. “I’m trying to be sensitive to their situation, I’m guessing their business is declining. They’re claiming there are driver shortages due to Covid, but sometimes we are going weeks without pickup.”

An unplanned stress test. One member said because the coin shortage became a large pain point, it served as something of a stress test, showing companies just how much they could take and providing a warning to prepare for all scenarios.

  • Another member said she is now preparing buffers and sensitivity analysis for her company, planning for the possibility of another lockdown.
  • “We’re thinking through a lot of the things we probably thought would never happen,” she said. “I don’t think anyone ever thought that we wouldn’t have coin, so when it stopped showing up, that was devastating to our stores. We had to be nimble and quick.”
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Calmer Seas: Revolvers Recover, Return to Pre-Covid Pricing, Tenor

Upfront fees are higher, but treasurers renewing facilities see reason for optimism; U.S. Bank is also positive.

Multiyear tenors for revolving credit facilities are now available to investment-grade (IG) corporate borrowers, according to several NeuGroup members who have been talking to their bankers recently. This week, one treasurer said, “Things have normalized a fair amount for solid credits,” citing a large bank.

Upfront fees are higher, but treasurers renewing facilities see reason for optimism; U.S. Bank is also positive.

Multiyear tenors for revolving credit facilities are now available to investment-grade (IG) corporate borrowers, according to several NeuGroup members who have been talking to their bankers recently. This week, one treasurer said, “Things have normalized a fair amount for solid credits,” citing a large bank.

  • This member, who was in the process of renewing his company’s revolver last year when Covid hit, is now deciding when to “pick it back up” and wanted to know what his peers have heard.
  • “Multiyear is back,” said one of them.

Longer tenors. “It sounds like five years is back on the table,” said another treasurer. She works for a company that postponed extending the tenor and raising the amount of its revolver last year.

  • This treasurer—whose company is a “new IG credit”—recently circled back with traditional lenders and said, “The reception’s been good,” noting that she got very little pushback to her plans to restructure the revolver.

Is the price right? The company did not get quotes, but “pricing appears to have settled down,” the member said. Another treasurer said upfront fees remain higher than before Covid, adding “how much you can push that” depends on your relationship with the banks and, of course, the size of your wallet.

  • This treasurer said some banks want funded facilities now that revolver drawdowns have been repaid. They are eager to increase assets and have a healthy risk appetite, he said, adding that they all want higher fees.

U.S. Bank’s analysis. NeuGroup Insights reached out to Jeff Stuart, head of capital markets at U.S. Bank, who keeps close tabs on the revolver market. Here are his observations:

  • The market for large-cap investment-grade revolving credit facilities has largely recovered to pre-Covid levels in terms of both pricing and tenor, with many borrowers executing five-year renewals at pre-Covid pricing levels.
  • U.S. Bank is seeing higher upfront fees pretty much across the board, one to three basis points for the higher-rated names.
  • The market is a bit sector- and ratings-specific, with higher impacted sectors still exacting a pricing premium, and more bank caution around lower investment-grade borrowers.
  • Some sectors, like utilities, have been slower to normalize despite their relative credit quality, with discussions going to five-year tenors only just recently.
  • On the bank side, there seems to be a higher post-Covid emphasis on returns, with a specific focus on available ancillary business, particularly by smaller regional banks.
  • U.S. Bank expects the trend toward a full return to pre-Covid terms on revolving credits to continue amid recovery overall during the first half of 2021. But it will continue to vary by situation and sector.

Sustainability-linked revolvers anyone? Back at the meeting, one treasurer raised the issue of revolving credit facilities whose terms are linked to the company achieving sustainability goals, unlike green bonds or loans whose proceeds must be used for sustainable purposes (see next story).

  • He has not seen the value in the idea, saying the savings for hitting the targets are minimal, a few basis points at most. “The net benefit is not good enough” given the incremental cost, he said. Another treasurer agreed that “treasury is not driving” the move by some companies to use sustainability-linked revolvers.
  • One treasurer drew laughs when he said his efforts to research “green revolvers” with a Google search turned up images of green handguns.

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Green Hedges: What You Need to Know About ESG Derivatives

Standard Chartered explains the potential value of “use of proceeds” and performance-linked ESG derivatives.

The flood of money pouring into ESG finance—everything from green bonds to sustainability-linked revolving credit facilities—has washed up on the shores of derivatives markets. At a recent NeuGroup meeting of European treasurers, sponsor Standard Chartered dove beneath the surface to reveal what value ESG derivatives may offer. The bank described two types:

  • “Use of proceeds” ESG derivatives that hedge FX or interest rate risks arising from ESG financing and are ring-fenced as hedges referencing a specific loan or bond.
  • ESG performance-linked derivatives that link a payoff with ESG metrics or key performance indicators (KPIs).
    • The sustainability metrics are determined by a third party’s score or index or by the corporate itself.

Standard Chartered explains the potential value of “use of proceeds” and performance-linked ESG derivatives.

The flood of money pouring into ESG finance—everything from green bonds to sustainability-linked revolving credit facilities—has washed up on the shores of derivatives markets. At a recent NeuGroup meeting of European treasurers, sponsor Standard Chartered dove beneath the surface to reveal what value ESG derivatives may offer. The bank described two types:

  • “Use of proceeds” ESG derivatives that hedge FX or interest rate risks arising from ESG financing and are ring-fenced as hedges referencing a specific loan or bond.
  • ESG performance-linked derivatives that link a payoff with ESG metrics or key performance indicators (KPIs).
    • The sustainability metrics are determined by a third party’s score or index or by the corporate itself.

Case studies. Standard Chartered’s presentation included several examples of how ESG derivatives can be used.

  • A company using an FX forward to hedge export pricing in Asia that will receive a discounted FX rate if it meets ESG targets which support the United Nations Sustainable Development Goals.
  • A company enters into an interest rate swap where the credit spread is linked to the corporate’s sustainability performance as measured annually by Sustainalytics.
  • A company enters into a cross-currency basis swap with a bank where either party’s interest rate payments can rise if they don’t meet their sustainability targets.

Any takers? While NeuGroup members expressed interest in the topic, it’s unclear if treasury teams are ready to embrace ESG derivatives since many companies are still figuring out where green bonds or sustainability-linked loans or revolvers fit in their sustainability plans.

A poll at the meeting revealed the low percentage of companies that have given treasury a specific sustainability mandate or have linked ESG to performance (see below).

One of the Standard Chartered bankers said the fact that almost half of those polled expect performance to be tied to ESG initiatives within one to three years was better than he expected and was “encouraging.”

  • An outside risk management consultant asked by NeuGroup Insights about the firm’s clients said, “It’s actually a new enough market development that we haven’t seen a lot of corporates exploring the use of ESG derivatives just yet.” Stay tuned.
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Fertile Ground: Capital Markets Look Good for Growing Tech Companies

Bank of the West/BNP Paribas sees inviting conditions for young companies raising capital in 2021.

Capital markets bounced back strongly in the second half of 2020, with soaring levels of convertible bond deals and a healthy climate for IPOs and high-yield bonds. Favorable conditions will continue to benefit emerging technology companies this year, according to Bank of the West/BNP Paribas, sponsor of the fall meeting of the Tech20 High-Growth Treasurers’ Peer Group.

Bank of the West/BNP Paribas sees inviting conditions for young companies raising capital in 2021.

Capital markets bounced back strongly in the second half of 2020, with soaring levels of convertible bond deals and a healthy climate for IPOs and high-yield bonds. Favorable conditions will continue to benefit emerging technology companies this year, according to Bank of the West/BNP Paribas, sponsor of the fall meeting of the Tech20 High-Growth Treasurers’ Peer Group. Highlights:

Low high-yields. Volatility due to political tensions and a second wave of Covid cases worldwide put a damper on the high-yield market at the start of the fourth quarter, but the market quickly strengthened following the November election.

  • High-yield deals had reached a record $453 billion through mid-December, nearly twice the levels of 2019.
  • Yields are in record low territory, around 4.3% vs. 2019-2020 average of 6.41%, Bank of the West/BNP Paribas said, a favorable environment for high-growth companies.

Cool convertibles. The US convertible bond market hit near-record issuance levels in 2020, reaching over $100 billion, with tech companies issuing nearly half of all convertible debt (see below).

  • Even with investor-friendly deals made at the onset of the pandemic, last year had the highest conversion premium and the lowest average coupon in the last decade, creating an ideal environment for issuers.
  • The bankers said market confidence has sparked the return of 24-hour marketing periods, as opposed to pre-market launches for same day pricings.

IPOs made easier. Constructive market conditions and a faster, easier process have made initial public offerings increasingly attractive for developing companies.

  • Many members shared their positive experiences with virtual roadshows, which can take under an hour and require no travel expenses. They also give growth companies access to a broad range of US and international investors.
  • “It’s hard to see a world post-Covid where investors fly to Europe to attend investor meetings,” one member said. “I think it’s here to stay.”
  • The lag between public filing and pricing an IPO rose to a month or more, a growing pipeline that the bankers described as “a sign that issuers have more confidence in the stability of markets.”

SPACs surge. Special-purpose acquisition companies (SPACs), an alternative to IPOs, surged last year, a trend that some analysts say is likely to continue in 2021.

  • Hedge funds looking for money market alternatives in a low-yield environment boosted demand for SPACs, a positive for growing tech companies.
  • Between the high-profile success story of Virgin Galactic and a willingness of target companies to go public via a “de-SPACing” acquisition rather than a traditional IPO, SPAC issuance in 2020 alone exceeded the previous decade combined.
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Bridging a Skills Gap Facing Finance Teams as Businesses Transform

Data from The Hackett Group show more companies plan to launch talent development initiatives this year. 

The good news is that more finance teams are placing a higher priority on aligning the skills and talents of their members with changing business needs amid digital transformation. The somewhat bad news is that many of those teams currently lack the abilities necessary to make that alignment a reality.

Data from The Hackett Group show more companies plan to launch talent development initiatives this year. 

The good news is that more finance teams are placing a higher priority on aligning the skills and talents of their members with changing business needs amid digital transformation. The somewhat bad news is that many of those teams currently lack the abilities necessary to make that alignment a reality.

  • Those are among the takeaways from survey data collected and analyzed by The Hackett Group and presented at several NeuGroup 2020 second-half meetings by Nilly Essaides, senior research director for Hackett’s finance advisory practice.

Progress report. Finance teams looking ahead ranked aligning skills and talent with changing business needs among their top 10 priorities in Hackett’s 2021 Key Issues Study. That’s a sign of progress, Ms. Essaides said, given that talent development did not crack the top 10 a year earlier.

  • That fact provides context in which to evaluate the significance of 42% of finance organizations reporting they plan to launch a talent development initiative in 2021—one of several findings presented in the graphic below.
  • “I see more and more finance teams that want to own staff development rather than hanging on the coattails of HR,” Ms. Essaides said. “There’s more interest by CFOs to develop these programs.”

Pushed by the pandemic. The prioritization of skills development is also significant as it comes amid the pandemic and plans by many finance teams to cut costs and enable remote work through process automation—the number one initiative on the function’s transformation agenda for this year. 

  • “Covid has really intensified the need to go digital,” Ms. Essaides said, adding that Hackett is seeing increased use of robotic process automation (RPA) and cloud-based applications, among other signs.
  • More than 20% of the organizations surveyed plan to hire more RPA specialists, data architects and scientists, and digital transformation managers.

Falling short. The graphic also shows that more than half of those surveyed (54%) see a big gap between current and desired analytic skills. More broadly, Hackett data show that finance organizations ranked their staffs’ lack or deficiency of critical skills second among the hurdles to making “transformation progress,” Ms. Essaides noted.

  • Those critical skills include analytics, emerging technologies, process redesign, design thinking and change management.
  • Technology and process complexity ranked first on the list of hurdles and organizational resistance to change came in third.

It’s not all about analytics. It’s critical to remember that in addition to technical and analytical skills, finance team members must possess the “ability to tell a story,” as one NeuGroup member put it.

  • Other NeuGroup members and Ms. Essaides agreed on the need for so-called soft skills that form the basis of communication, the ability to negotiate and influence and bring groups together.
  • Hackett calls these “core skills,” in part to counteract the perception that soft is somehow less important than the hard skills that often overshadow qualities that are essential for leaders in finance and every other function.
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Locking Up: Preventing Cyberfraud Attacks by Identifying Weaknesses

NeuGroup members share successes and failures keeping their companies secure amid the shift to an all-digital workforce.

The all-digital work from home environment has left treasury teams more connected to their devices than ever, but also left them—and their companies—more vulnerable to fraud. But by identifying weaknesses early, teams can resolve issues before fraudsters even have a chance to strike.

NeuGroup members share successes and failures keeping their companies secure amid the shift to an all-digital workforce.

The all-digital work from home environment has left treasury teams more connected to their devices than ever, but also left them—and their companies—more vulnerable to fraud. But by identifying weaknesses early, teams can resolve issues before fraudsters even have a chance to strike.

  • Members at a recent meeting of NeuGroup’s Treasurers’ Group of Thirty discussed their approaches to prevent the threat, one that continues to worsen.
  • Fatigue caused by working from home led to a communication breakdown for one member’s company, but others reported success through their preparation.

Success stories. Many NeuGroup members reported recent close calls with cyber breaches and have implemented processes to prevent future issues.

  • One member nearly fell prey to a fraud scheme when a phishing email included highly detailed information about the company, which could have fooled an employee into providing secure information.
    • This happened because one employee innocuously posted an update on LinkedIn about the company’s goings-on, and the scammers are growing more and more advanced.
    • The member suggests encouraging employees to only share what is necessary on social media to keep malicious third parties in the dark.
  • Another member had an issue with hackers accessing the company’s internal instant messaging system, allowing them to imitate employees with “no way to verify it was them.”
    • Some members use a series of steps to authenticate accounts before accessing sensitive information, including callbacks from verified phone numbers.

“A breakdown in communication.” One NeuGroup member had this type of system in place, but a series of internal mistakes led to a loss of nearly $10,000; thankfully, the member said they were able to recover the stolen cash.

  • When a new employee was hired at the member’s company, fraudsters hacked the digital account of an actual vendor that the company uses and corresponded with the new employee from a seemingly authentic  email address.
  • Though the member’s company does use a callback authentication process, he said there were application errors “on multiple levels” and plans more frequent audits and training to identify and prevent these weaknesses in the future.
    • “Fatigue is a real issue,” another member said, recommending smaller, “bite-size” trainings for employees to prevent burnout and ensure employees apply the knowledge they learn.
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Why Internal Audit Needs to Blow Its Own Horn

Like other functions, internal audit needs to publicize its value to senior executives and the broader corporation.

After the completion of a lengthy process audit at a multinational company, the chief audit executive (CAE) reported results to the owner of that process. After a cursory review, the process owner, also a senior executive, asked, “What else have you done?”

  • The CAE was somewhat taken aback. The audit took several months and ate up lots of FTE hours. But since it only resulted in a few findings, the audited executive thought there must be more that audit was working on.

Like other functions, internal audit needs to publicize its value to senior executives and the broader corporation.

After the completion of a lengthy process audit at a multinational company, the chief audit executive (CAE) reported results to the owner of that process. After a cursory review, the process owner, also a senior executive, asked, “What else have you done?”

  • The CAE was somewhat taken aback. The audit took several months and ate up lots of FTE hours. But since it only resulted in a few findings, the audited executive thought there must be more that audit was working on.

A need for self-promotion. This led the CAE to question how familiar management is with audit’s work. “We have not done a good job of selling audit” to management, he said, adding that his task now was to “reeducate the management team about the value of internal audit.”

  • To be sure, audit departments do not need to prove or explain themselves to management. Most, if not all, report directly to the audit committee of the company’s board. Their budgets in most cases are growing and not shrinking.
  • Still, administratively they typically report to the CFO, so there is some explaining to do when it comes to budget allocations. Nonetheless, this auditor felt that management needed to know more about what internal audit (IA) does and the benefits it can bring.

Stepping up. At another company, the auditor has seemingly cracked the code when it comes to showing IA’s benefits. This company, a serial acquirer with a tight fist when it comes to budgets across the company, wanted to cut its external auditor budget by 15%. When its external auditor balked at the request, IA stepped up to fill in any gaps. This saved the company millions of dollars.

  • This same auditor took a close look at the company’s licensing relationships and found many of the deals out of date or companies out of compliance with the terms of their contracts. Thus, the IA team was able to claw back several million dollars in fees. The same was done with supplier performance agreements.
  • All of these efforts were well received by senior management and, best of all, the chief executive.

Best foot forward. While some IAs have struggled with promoting their skills and value to the rest of the company, in some cases, Covid has allowed them to shine. Many IAs, forced to change audit plans at the outset of the pandemic (not stopping or canceling audits, but slowing timelines), have been able to do extra work outside of their purview.

  • This includes assisting with Covid response, data analytics, accounting or lending out FTEs to help in other functions where there is a need. This showed other parts of the organization all the good IA can do.
  • Consulting is on the docket in 2021 for the first auditor. He said IA is going to work on and highlight “what the value is we can bring beyond the X amount of audits and findings,” which he hopes to accomplish by doing more consultative projects. 
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Talking Shop: Derivative Regulatory Compliance in Hedging Programs

Member question: “Our hedging programs have trading entities in multiple jurisdictions requiring continual monitoring of derivative regulatory compliance regulation. This is mostly handled internally, leveraging external counsel to advise on specific topics and questions.

  • “How do others manage derivative regulatory compliance such as EMIR (European Market Infrastructure Regulation), FMIA (Financial Market Infrastructure Act) and others? Do you outsource, handle internally, hybrid solution or is it not applicable? Are there advisors that you would recommend?”

Member question: “Our hedging programs have trading entities in multiple jurisdictions requiring continual monitoring of derivative regulatory compliance regulation. This is mostly handled internally, leveraging external counsel to advise on specific topics and questions.

  • “How do others manage derivative regulatory compliance such as EMIR (European Market Infrastructure Regulation), FMIA (Financial Market Infrastructure Act) and others? Do you outsource, handle internally, hybrid solution or is it not applicable? Are there advisors that you would recommend?”

Peer answer 1: “My company is similar; predominantly navigated internally with legal’s assistance as needed.”

Peer answer 2: “Response from our derivatives manager:

  • “We monitor internally in treasury and at our regulated financial units (typically through either internal legal or accounting/compliance groups, and this in the past has sometimes been a reactive position rather than proactive).
  • “Sometimes the banks may notify us of a change; I’ve seen this in the onshore highly regulated markets due to the local complexities/language/access to regulation, etc.—Brazil, India, China, Thailand.
  • “For the US and European market regulations, there are a few representatives that have actively participated in the Coalition for Derivatives End-Users run by Gibson Dunn.”
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Learning a New Language: Tax Experts Who Become Treasurers

Insights and advice from a tax professional who left her comfort zone to become treasurer. 

A “steep learning curve” is how one member of NeuGroup’s Treasurers’ Group of Thirty (T30) who has extensive experience in tax described what she encountered in taking on the added responsibility of treasury at her company at a recent meeting sponsored by Standard Chartered.

Insights and advice from a tax professional who left her comfort zone to become treasurer. 

A “steep learning curve” is how one member of NeuGroup’s Treasurers’ Group of Thirty (T30) who has extensive experience in tax described what she encountered in taking on the added responsibility of treasury at her company at a recent meeting sponsored by Standard Chartered.

  • She is one of several members in the group who previously led tax teams and are relatively new to leading treasury. Below is a Q&A the treasurer had with NeuGroup Insights following the meeting, edited for space and clarity.

Q: What has made taking over treasury a tall order for someone with a deep background in tax?

A: While both are financial disciplines, a different language can be spoken and there can be different norms for various interactions, aside from the difference in general education for the roles.

  • I remind myself that I didn’t earn the treasurer role based on my finance background, but rather my ability to build and motivate teams, learn quickly and distill complex topics into understandable language for stakeholders—along with strong communication and leadership qualities.

Q: What are the biggest challenges you’ve faced moving to treasury from tax?

A: Being entirely out of my comfort zone. When presenting to our board on tax matters, I know I’m the expert in the room, which allows a certain confidence.

  • With treasury topics, I’m not the expert and have realized I second-guess myself, which can impact confidence in leading the discussion.
  • And given that I took on treasury in January 2020, Covid was a huge challenge in March/April/May and continues to require ongoing focus.  

Q: How have you scaled the learning curve to get a grip on treasury—peers, colleagues, other sources of information?

A: I was extremely clear with my CFO when agreeing to take on treasury that it was not my wheelhouse and his support and expertise would be critical.

  • He and I work closely together and I also have a very bright and steady assistant treasurer with a finance background. Our styles mesh well and his background is complementary to mine.
  • T30 has been helpful to meet others in similar roles; I’ve sought advice from others which has been very helpful. Our banking group has provided valuable insight and support, too.

Q: How has your tax background aided your transition to running treasury? How do the two areas complement each other?

A: In tax, I learned to be comfortable making decisions with partial (but best available!) information; avoiding analysis paralysis. This arises extremely often in treasury as well, be it cash management, insurance renewals, debt.

  • I work to keep things simple in both areas; if I can’t explain it to the CFO and others clearly and concisely, we need to simplify.

Q: Is there an example of something you’re working on now that allows you to leverage your knowledge of both tax and treasury?

A: Consolidated cash planning/forecasting and cash repatriation. I have a new appreciation of bank account complexity and KYC queries that can arise and have been able to share additional insight from a tax perspective with the treasury team regarding specific structures and nuances.

Q: What advice do you have for other treasurers who have a tax background; and what advice for treasury folks who find themselves running tax? Which is the harder transition in your view?

A:I don’t think one is harder than the other, both have a steep learning curve! A lot of treasurers may have had exposure to tax concepts through cash repatriation work, intercompany loan documentation or structuring external debt.

  • My advice for both sides of the coin: Ask questions—there is no such thing as a stupid question. Your team and advisors are paid to answer your questions, so leverage their expertise!
    • I’ve found a lot of the questions I have are similar to what others want to ask as well.
  • My other piece of advice is around each team—build and maintain a strong team that meshes and communicates well. I rebuilt the tax team and it was critical to eliminate some bad apples; the treasury team I joined works very well together and we recently added an analyst, too.
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What Dollar Weakness and ‘Japanification’ Mean for FX Hedging Strategies

Corporate financial risk managers should be reassessing long-held assumptions as they look to redo their hedging.

Add a weakening US dollar to the growing list of reasons risk managers at multinational corporations need to take a long, hard look at their hedging programs and strategies.

  • That takeaway emerged at a NeuGroup Virtual Interactive Session last week featuring Societe Generale global strategist Albert Edwards, known for his provocative mid-1990s “Ice Age” thesis of bonds outperforming stocks.
  • Christophe Downey, a director in the bank’s market risk advisory practice, explored possible changes to FX risk policies for NeuGroup members looking to protect themselves or benefit from a weakening dollar and a strengthening euro.

Corporate financial risk managers should be reassessing long-held assumptions as they look to redo their hedging.

Add a weakening US dollar to the growing list of reasons risk managers at multinational corporations need to take a long, hard look at their hedging programs and strategies.

  • That takeaway emerged at a NeuGroup Virtual Interactive Session last week featuring Societe Generale global strategist Albert Edwards, known for his provocative mid-1990s “Ice Age” thesis of bonds outperforming stocks.
  • Christophe Downey, a director in the bank’s market risk advisory practice, explored possible changes to FX risk policies for NeuGroup members looking to protect themselves or benefit from a weakening dollar and a strengthening euro.

Japanification? Mr. Edwards’ thesis of a weaker USD (and deflation in the near term) is set against this backdrop:

  • The unprecedented intervention by the Fed directly into the real economy and not just the finance sector is backed by massive levels of fiscal stimulus that, like in Japan, will end up on the central bank balance sheet.
  • “We have crossed the Rubicon” Mr. Edwards said, from quantitative easing to something more like Modern Monetary Theory (MMT), and there is “no way we can go back.”
    • It has been increasingly apparent that risk managers and other NeuGroup members should be brushing up on the implications of this unprecedented monetary policy and the tenets of MMT.
  • The developed world has coasted on having weaker currencies than USD to help support their economies; but now, one by one, the reasons for dollar strength are vanishing.

Dollar doldrums. One of those reasons—along with the expansion of the Fed’s balance sheet—involves the collapse of the interest rate differential between the US and Europe that has underpinned the carry trade and has long played a key role in the FX rate outlook of many risk managers.

  • COVID-19, of course, is a key reason for the collapse of that rate differential as the US economy’s relative strength versus the rest of the world declines.
  • The eurozone has recently taken away the need for a weaker euro support with the decision to issue community debt to support fiscal stimulus. This will allow the euro to strengthen, and Mr. Edwards thinks the dollar might weaken about 10% against it.
  • Along with the outlook for the dollar, the economic fallout from the pandemic and the havoc it is wreaking on supply and demand means corporates must reevaluate their FX exposures.

Action levers. Assuming the risk management policy allows a view on currency direction to influence hedge decisions, the three levers for change FX risk managers have are hedge ratio, tenor and instrument choice. How they use them depends on if they need to buy or sell dollars (see table).

  • Hedge ratios have already been challenged because of the pandemic’s impact on business and exposures; but even if business has not been severely affected, dollar weakness may still prompt a look at hedge ratios, specifically lowering them for short USD exposures.
  • Shorter tenors are another response to forecast uncertainty, or an unfavorable carry on the currency.
  • Both of these approaches are risky in case of FX headwinds, as most corporates are looking to protect downside risk, Mr. Downey noted.

An optimal instrument mix. Assuming short USD exposures, SocGen back tested a two-year program with 24 hedges layered in monthly (for an overall P/L smoothing effect, all else equal).

  • In the tradeoff between smooth earnings with neutralized FX impact where forwards work best but realize large FX losses at times, and an all-put option strategy with premium costs but unlimited upside once recouped, those with policy flexibility should consider analyzing their exposures and currencies to determine where on the spectrum they will feel the risk is acceptable for their desired risk management outcome. 

More optionality. Societe Generale is recommending that corporates with short dollar positions incorporate more options into their product mix to capture upside from cash flows converted back to a weaker dollar with limited incremental volatility.

  • A vanilla put strategy (option to sell foreign currency/buy dollars) would provide the best trade-off between volatility and incremental cost (the payment of a premium is part of the cost of the strategy, like the carry cost of the forward strategy).
  • A collar (combination of a purchased option and a sold option to reduce the overall cost of the hedge) with sufficiently low delta would likely deliver the best P&L and hedge level in a multi-year USD weakening trend; but would come with some increased volatility.
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Scoring With Single Sign-On and Bank Portal Rationalization

One member’s winning use of single sign-on to access bank portals through Wallstreet Suite impresses peers.
 
A NeuGroup member’s success at implementing single sign-on (SSO) to provide access to bank portals through the company’s treasury management system (TMS) made a splash at the spring virtual meeting of the Global Cash and Banking Group.

  • Of equal interest was the member’s goal of taking away “as much bank portal access as possible” from employees, some of whom only need to see bank statements and don’t conduct cash transactions.
    • The result, the presenter said, was a “mass migration from bank portals into the TMS for visualizations.”

One member’s winning use of single sign-on to access bank portals through Wallstreet Suite impresses peers.
 
A NeuGroup member’s success at implementing single sign-on (SSO) to provide access to bank portals through the company’s treasury management system (TMS) made a splash at the spring virtual meeting of the Global Cash and Banking Group.

  • Of equal interest was the member’s goal of taking away “as much bank portal access as possible” from employees, some of whom only need to see bank statements and don’t conduct cash transactions.
    • The result, the presenter said, was a “mass migration from bank portals into the TMS for visualizations.”

Single sign-on safety. One of the main benefits of migrating users to TMSs from bank portals, the presenter said, is the added safety, security and control provided by single sign-ons—an authentication service where employees use one set of login credentials to access multiple applications.

  • The company’s TMS is ION’s Wallstreet Suite, which links to the company’s identity management system through single sign-on. Various bank portals connect to the TMS.
  • That means users who leave the company and lose access to its network immediately lose access to the TMS.
  • The single sign-on gives the company more control than bank portals in terms of segregation of duties and role restriction, helping the company “restrict to the exact level of detail,” the member said.

Bank portal rationalization. About three years ago, a substantial number of the company’s bank accounts were accessed through online bank portals. “Bank portals have no standards on security and user controls,” one of the presenter’s slides stated.

  • Centralize. To mitigate risk through rationalization, the company centralized portal management, moving read-only users to the TMS and moving payments to SAP where possible.
  • Challenges. Hurdles included resistance to change, insufficient staff from small business units for appropriate segregations of duties and slower speeds for same-bank payments using the TMS vs. a bank portal.
  • Success. The results of the company’s efforts include:
    • The elimination of more than 50% of its bank portals globally.
    • The reduction of bank portal user counts by more than 50%.
    • No single person having the ability to initiate and approve a payment.
    • A substantial reduction in the number of wires going through portals.

Customization question. One member listening to the presentation said her company has been struggling with bank portal rationalization.

  • One issue is how to customize access to the TMS and balance what users want with security concerns. “What if we don’t want to share all that info with an entity?” she asked.
  • The presenter said his company’s TMS can restrict users by bank account, entity or time period. “We had to create a complex set of profiles” to account for segregation of duties and the need to restrict access to initiate payments. “It is a lot of work,” he said.
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Pandemic Stokes Fire of Rising D&O Insurance Premiums

Corporates see no relief as insurers take a hard line on renewals amid rising fears of COVID litigation.
 
Premiums for directors and officers (D&O) insurance are surging, a pain point discussed at several NeuGroup meetings this spring, including the Tech20 Treasurers’ Peer Group and the Life Sciences Treasurers’ Peer Group.

  • Premiums were already on the rise at the beginning of the year and now, amid the pandemic, they continue to rise. That’s in part because COVID-19-related D&O claims are already being filed in US courts.

Corporates see no relief as insurers take a hard line on renewals amid rising fears of COVID litigation.
 
Premiums for directors and officers (D&O) insurance are surging, a pain point discussed at several NeuGroup meetings this spring, including the Tech20 Treasurers’ Peer Group and the Life Sciences Treasurers’ Peer Group.

  • Premiums were already on the rise at the beginning of the year and now, amid the pandemic, they continue to rise. That’s in part because COVID-19-related D&O claims are already being filed in US courts. 

Big percentage increases. During Tech20’s recent virtual meeting, members said they were seeing premiums rise by between 25% and 70%. According to insurance broker Marsh, rates on D&O policies in the US rose 44% on average in the first quarter from the same period a year ago. Marsh reported that 95% of its clients experienced an increase.

  • “The last few weeks have been bad,” said one member, adding that in some cases insurers themselves “have just walked away.” Another member was quoted an increase in the 30% range and considered himself lucky. “If someone gives you something good, take it.”
  • This advice was too late for one member. “We were told of a 30-35% [increase] in February, but now we’re told between 50%-70%,” she said.
  • At the NeuGroup for treasurers of retailers, one member’s D&O renewal experience involved “premium pressure on the lead portion, but more on the excess layers, where the premium pressure was outrageous.”

Reckoning and retention. After a “historic underpricing” of D&O premiums in London, the market is now witnessing a serious course correction, according to an account executive from Aon Risk Solutions who spoke at the life sciences meeting.

  • This reckoning, along with the pandemic, means the London market is not offering capacity and premiums are surging, he said.
  • Another takeaway from that meeting: higher retentions by corporates are not leading to significant premium relief.
  • Some members of the life sciences group reported having difficulty getting competing quotes for D&O coverage.

Litigation nation. At the LSTPG meeting, one insurance expert presenting noted that he was starting to see an increase in “litigation over the pandemic,” including lawsuits in the tourism sector. No one is immune,” he said, and treasurers should “anticipate seeing more and more [litigation].”

  • With this in mind, some treasures noted that underwriters were adding a pandemic or virus exclusion to policies going forward; current policies either don’t have the exclusion or are vague. 

Better beyond D&O. The good news, according to Tech20 members, is that outside of some coverage areas like D&O and property, there haven’t been huge increases. “Coverage has remained stable,” said one Tech20 member, who added that there was “no constriction in terms and conditions.”

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A Green Light for Tax Equity Investments in Renewable Energy

There’s still time for corporates to benefit from federal tax credits and reap attractive returns.

The final session of NeuGroup’s final H1 meeting featured a presentation on green and sustainability-linked finance by U.S. Bank, sponsor of the NeuGroup for Retail Treasury. Below are some key takeaways from the session as distilled by Joseph Neu, founder of NeuGroup and leader of the retail group.

  • Update your view on the ROI of tax equity structures. Commenting on the cash flows from a transaction presented by U.S. Bank, one member noted that they looked more sizable than he remembered when looking into tax equity structures several years ago. This shows how the economics have improved significantly with the greater investment tax credit available, so it pays to do the math again if you have not looked at these in a while. Members confirmed that the immediate (end of year one) tax credit payback and subsequent operational cash flows make it relatively easy to meet your hurdle and do something good with renewable energy (mainly solar) tax equity investments.

There’s still time for corporates to benefit from federal tax credits and reap attractive returns.

The final session of NeuGroup’s final H1 meeting featured a presentation on green and sustainability-linked finance by U.S. Bank, sponsor of the NeuGroup for Retail Treasury. Below are some key takeaways from the session as distilled by Joseph Neu, founder of NeuGroup and leader of the retail group.

  • Update your view on the ROI of tax equity structures. Commenting on the cash flows from a transaction presented by U.S. Bank, one member noted that they looked more sizable than he remembered when looking into tax equity structures several years ago. This shows how the economics have improved significantly with the greater investment tax credit available, so it pays to do the math again if you have not looked at these in a while. Members confirmed that the immediate (end of year one) tax credit payback and subsequent operational cash flows make it relatively easy to meet your hurdle and do something good with renewable energy (mainly solar) tax equity investments.
  • It helps to work with a bank/broker with balance sheet. If you have your own source of funding it is easier to control the transaction while lining up investors and keeping the contractor and project moving. One member noted having a transaction fail with a broker that did not have its own funding and lost control of the project.
  • Investors needed. U.S. Bank says that there are multiples more projects needing financing than current investors in tax equity structures, so it’s a bit of an investor’s market. Also, even if the tax credits on offer though 2023 are not renewed, there is still ample time to get on board—and there is good likelihood that they will be.
Source: U.S. Bank
  • PPAs and VPPAs. Power purchase agreements (PPAs) and virtual PPAs are also a way to support renewable energy, but come with a bit more risk due to potential price fluctuations and the need to actually use the energy procured or the counterparty risk with the VPPA.  Tax equity structures tend to have a first loss guarantee by the bank to cushion performance risk.  
  • Do you have enough use of proceeds to issue in benchmark size?  When the discussion turned to green bonds, the first question was to look at your use of proceeds, including with three or more-year look backs, to see if you can justify a benchmark size issuance of $500 million or more.
  • If yes, then consider the fees/real asset economics. The second question asked was to what extent a green issuance can be justified based on the cost of issuance and pricing. All things point to the answer being yes— you can see a three to four basis point advantage to green bonds, as appetite by ESG investors and normal fixed income investors for ESG-friendly bonds is strong and growing stronger.
    • The only way to prove it without extrapolation of different tranches (green and non-green) issued at once by an issuer or by backing out the new issue premium differential from how green bonds trade in the secondary markets is for someone to issue a 10-year green bond and 10-year non-green bond of the same amount simultaneously.
    • One member said he would do that if bank underwriting fees were discounted to help him do it. These fees can be a bit higher because there is a bit more work on the part of the bank underwriter. There are also specialty accounting/audit fees to consider and those of a specialty ESG rater.
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Keeping That Resilient Posture Post-Pandemic

Having the resilience to survive the pandemic needs to extend into staying that way it as the pandemic abates (whenever that is).

One imperative that has informed the operations of most corporates during the pandemic is business resiliency. Through the stress of potential liquidity crunches, supply-chain disruptions and work from home pressures, companies have bobbed and weaved their way with great resiliency. But what about once the pandemic is over? What will BAU, “business as usual,” be like after the COVID-19 pandemic loosens its grip?

At NeuGroup’s recent European Treasury Peer Group (EuroTPG) virtual meeting, sponsor HSBC noted that in the early stages, COVID-19 was a supply crisis, hitting the large production city Wuhan, prompting a manufacturing shift to other Asian countries; it was only later that it became a demand crisis when countries mandated that wide swaths of their populations stay home.

Having the resilience to survive the pandemic needs to extend into staying that way as the pandemic abates (whenever that is).

One imperative that has informed the operations of most corporates during the pandemic is business resiliency. Through the stress of potential liquidity crunches, supply-chain disruptions and work from home pressures, companies have bobbed and weaved their way with great resiliency. But what about once the pandemic is over? What will BAU, “business as usual,” be like after the COVID-19 pandemic loosens its grip?

At NeuGroup’s recent European Treasury Peer Group (EuroTPG) virtual meeting, sponsor HSBC noted that in the early stages, COVID-19 was a supply crisis, hitting the large production city Wuhan, prompting a manufacturing shift to other Asian countries; it was only later that it became a demand crisis when countries mandated that wide swaths of their populations stay home. 

  • Treasurers can learn valuable operations, risk and treasury-structure lessons for the post-COVID world from how the crisis developed and how it affected their businesses. 
  • A risk scorecard to evaluate the exposure to risk factors like 2020 revenue impact, operational inelasticity, reliance on key suppliers, input prices, cash and available credit, impacts on costs and debt metrics, and of course time to return to BAU, can be particularly illustrative. 

Build a robust, centralized treasury with strong regional execution abilities. Large, global MNCs that have navigated the crisis well have shown the importance of having the right treasury structure, which emphasizes control and flexibility; the ideal set-up enables: 

  • Systems to deliver real-time, global exposure information.
  • A centralized liquidity and risk management framework.
  • Centralized policies and control structure and regional/local execution, where needed, via treasury hubs.   

Go for operational flexibility and endurance to stay the course. With a widespread and long-lasting crisis, what is the company’s ability to: 

  • Access sufficient cash levels and credit lines, and ability to “flex” capital expenditures? 
  • Serve customers (and for customers to purchase goods and services) while the pandemic rages?
  • Change its sales model, potentially increasing e-commerce and direct sales? 
  • Substitute and localize parts of the supply chains in a swift manner?
  • Not rely unduly on offshore sources of materials and components?
  • Recover lost revenues when the outbreak ebbs?

Supply chain finance was the original risk mitigation. Trade finance was “born as a risk management solution,” said HSBC in its session, and COVID-19 has put the spotlight on the importance of getting the supply chain in top form to withstand potential border closings and financing droughts. 

  • This has been borne out in reports from across the NeuGroup universe. Some members have had supply chain finance (SCF) vendors tell them that banks temporarily asked for wider spreads to compensate for their own higher funding costs. 
  • Other members worry more about how one unavailable link or part in the supply chain could metastasize into a larger material or component unavailability, thereby threatening a key product line.

Make someone happy. For its part, HSBC said it was also focusing on supporting the corporate supply chains of its current clientele while also extending its services to new customers. A presenter said the bank wants to support suppliers to avoid shortages by offering HSBC’s balance sheet for: 

  • Classical trade instruments to match liquidity generation and supplier risk mitigation: Here, supply chain programs should consider documentary payment terms to mitigate long receivables risk and enable financing; documentary payment terms are also cheaper than letters of credit.
  • SCF to support suppliers’ liquidity position and mitigate concentration risk via receivables finance and forfaiting.

Open-account financing to established, single-flow key suppliers. 

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Managing Bank Balance Sheets in a Low Yield Environment

NeuGroup BankTPG members hear ways to manage their balance sheets amid low interest rates (that may remain low a long time).

The Federal Reserve announced in early June that it would keep its benchmark interest rate near zero through 2022. While this might be good for borrowers, what does it mean for lenders? And are negative rates possible?

The first question has many answers, as members of NeuGroup’s Bank Treasurers’ Peer Group (BankTPG) heard at the 16th annual meeting. There were several strategies suggested by the meeting sponsor on what bank treasurers can do to manage the balance sheet amid this uncertainty. The answer to whether rates go negative: it is unlikely

NeuGroup BankTPG members hear ways to manage their balance sheets amid low interest rates (that may remain low a long time).

The Federal Reserve announced in early June that it would keep its benchmark interest rate near zero through 2022. While this might be good for borrowers, what does it mean for lenders? And are negative rates possible?

The first question has many answers, as members of NeuGroup’s Bank Treasurers’ Peer Group (BankTPG) heard at the 16th annual meeting. There were several strategies suggested by the meeting sponsor on what bank treasurers can do to manage the balance sheet amid this uncertainty. The answer to whether rates go negative: it is unlikely (see below). 

Like the Gershwin tune. “Low rates are here to stay,” one member of the BankTPG meeting sponsor team said, and thus would remain a challenge for banks. “Not a lot of yield to be had here,” he added. The bankers suggested that as with their own balance sheet, members should think about pass-throughs. 

  • “Given current mortgage rates, prepayments may increase and remain elevated, suggesting that bank portfolios should purchase lower dollar price assets in pass-throughs,” the sponsor said in a presentation.

Real estate could help. BankTPG members were told that GSEs Fannie Mae and Freddie Mac could be facing reform soon, although COVID-19 may delay things. Despite this, the housing market should stay strong, according to the meeting sponsors. Commercial real estate could be problematic but low rates could mitigate the impact. 

  • “There could be some challenges to commercial, but looking at it overall, it’s not bad because of low rates,” said one member of the sponsor team. “There are plenty of people with dry powder to buy in distress and otherwise.” 

Protect against volatility. Another strategy for the remainder of 2020 suggested by sponsors was to protect downside risk with hedges. “Shifting from linear derivatives into hedges with positive convexity like interest rate swaps may be risk accretive at current rate levels. Also, “as implied volatility hits multi-year lows, 0% strike interest rate floors and interest rate collars have become powerful hedging tools.” 

Certificates of deposit. The sponsor said some of its clients are investing in bank CDs with customized coupons. “There’s some risk there so don’t do in large size,” the sponsor suggested. 

Floating-rate SOFR. With the Fed’s Secured Overnight Financing Rate (SOFR) gaining traction, there have been many entities, including GSEs Fannie and Freddie, banks like Goldman Sachs, Credit Suisse and Bank of America issuing SOFR-referenced floating rate notes. The BankTPG sponsor said that despite this, SOFR FRNs are not that popular. 

  • On the other hand, the bank is “supportive of the move to SOFR; the transmission mechanism is good,” the sponsor said. Nonetheless, “it raises a lot of questions on how you want to be positioned right now.” And in terms of FRNs, “anything out there that is a lottery ticket if rates go negative.” 

Negative rates? The sponsor said negative rates in the US are unlikely, and members agreed. Across the NeuGroup network, the consensus is that US rates, while remaining near zero, will not go negative. 

  • “Our bank is trying to be disciplined and mechanical,” said one member who was reviewing whether to “unwind and reposition things” in case rates go below zero. The sponsors added that their bank was “trying to be disciplined and mechanical” about the market.” 
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NeuGroup for Retail Treasury Pilot Series Wrap-Up

Customer paying using mobile phone

In a series of Zoom sessions, the NeuGroup for Retail Treasury was launched in partnership with Starbucks treasury and sponsored by U.S. Bank. NeuGroup Founder and CEO Joseph Neu shares his key takeaways from the sessions as follows:

  1. Retail is a sector of haves and have-nots based on being deemed an essential business, the ability to offer and scale on-line offerings and/or deliver out-of-store, including via curbside pickup or drive through.
  2. Business norms are changing fast. In June, the focus for retailers shifted from Covid-19 to racial injustice and equity in a matter of two weeks.
  3. Point-of-sale payments are problematic. In the US, in particular, payment systems serving the point of sale have not kept up with digital payments, creating substantial problems for retailers, and Covid-19 has laid that bare.

By Joseph Neu

As part of our ongoing experimentation with new virtual formats, the NeuGroup for Retail Treasury pilot “meeting” was made into a series of Zoom sessions over the course of about six weeks, concluding this week. This group was launched in partnership with Starbucks Treasury on the member side and sponsored by U.S. Bank.

Here are my key takeaways as a wrap up to the series:

Covid-19 divides into haves and have-nots. Retail and other consumer-facing businesses, such as quick-serve restaurants, represent a sector of haves and have nots.

The haves:

  • Those deemed essential businesses that could remain open during the Covid-19 lockdown
  • Those that were prepared to offer/ramp online offerings as well as
  • Those that provided out-of-store delivery, including curbside pick-up or drive through are the more likely haves in this sector.

The have-nots:

  • Pretty much everyone else.

Protests prompt fast-changing norms.  In a session that happened to fall on Juneteenth, weeks after a session where a member in the Twin Cities shared his perspectives on the situation there, we took a good portion of our exchange on regulation and business norms to discuss an entirely unexpected crisis. We discussed how the retail sector, being consumer-facing and with storefronts made part of the protests, was confronting a crisis brought about by racial trauma and a lack of respect being shown for Black lives.

  • Underscoring the pace of change in business norms, the focus shifted from Covid-19 to racial justice and equity in a period of two weeks.

It was a fitting way to celebrate Juneteenth, however.

  • Several members attending also joined on what was a company holiday for them (a new holiday can be decided upon in days).
  • All spoke to what their companies have and will continue to do to show their commitment to, as one company noted: “to standing with Black families, communities and team members and creating lasting change around racial justice and equity.”
  • All also will be building on their foundations of diversity and inclusion to make what one member of color noted she hopes will be sincere actions to create lasting change.

Payments at the point of sale are problematic.  In the US, in particular, the payment situation at the point of sale is a huge problem and Covid-19 has laid that bare.

  • The problems start with interchange fees in this country that have not kept pace with digital forms of payment
  • They actually dissuade merchants from accepting contactless forms of payment, including the safest form using smartphones with biometric identify verification.

As a result, the US has seen growth in contactless forms of payment rise to 4%, from 0.4% in the last 18 months, while the rest of the developed world is growing it to over 50% of face-to-face transactions.

  • While members report that electronic payments are growing, including contactless, as a result of Covid-19, the cost involved in processing such payments is also a growing concern.

Cash transactions, meanwhile, have been hampered, at a time when customers are returning to in-store purchases, by the disruptions of coins in circulation. This is due to so many stores being closed in lockdown, coin recycling machines being turned off, and consumer reluctance to return to stores and use unhygenic cash and coin as payment. 

  • Without the ability to make change–given the cost of electronic payments on small-ticket sales and the number of customers who prefer or can only pay in cash– stores processing face-to-face payment at the point of the sale have had to scramble to cope with yet another issue detrimental to their business.
  • The state of play in the US with point-of-sale payments is an embarrassment and we should all do more to ensure that we don’t let it stand as it does.
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COVID Boosts Contactless Payments, Revealing Retailer Frustrations

Low adoption rates in the US and issues such as routing rights and interchange fees may present challenges for some retailers as contactless payment grows.

It’s no big surprise that the pandemic has pushed more US shoppers to use contactless credit and debit cards as well as mobile wallets. Tapping or waving a card or phone is a cleaner, safer way to pay than swiping or inserting a card.

  • But what stood out at a recent NeuGroup for Retail Treasury meeting was the frustration voiced by members about aspects of the shift to contactless payments—each aspect related in some way to costs.

Low adoption rates in the US and issues such as routing rights and interchange fees may present challenges for some retailers as contactless payment grows.

It’s no big surprise that the pandemic has pushed more US shoppers to use contactless credit and debit cards as well as mobile wallets. Tapping or waving a card or phone is a cleaner, safer way to pay than swiping or inserting a card.

  • But what stood out at a recent NeuGroup for Retail Treasury meeting was the frustration voiced by members about aspects of the shift to contactless payments—each aspect related in some way to costs.

One-sided investment? “This frustrates me,” said one member, adding that companies like hers were “forced to step up and invest” in technology enabling chips and contactless payments or risk being liable for fraudulent charges. The problem? Card issuers, she said, did not include contactless technology when they introduced chip cards—meaning retailers had to make “a one-sided investment” with respect to contactless payments.

The US as laggard. One reason that investment hasn’t paid off for many retailers is that very few US consumers are making contactless payments, even though about 75% of merchant locations can accept them and card issuers are now providing them. As the chart shows, only 4% of face-to-face transactions in the US are contactless, far below the global average of 50%.  

  • This discrepancy meant merchants have not benefitted significantly from faster transaction processing times or throughputs available with contactless payments, the member said. And employees of quick service restaurants with drive-through service had to keep passing cards back and forth with customers.
  • But the times are changing fast: More than half (51%) of Americans are now using some form of contactless payment, which includes tap-to-go credit cards and mobile wallets like Apple Pay, according to Mastercard. 

Pinless debit in peril? Another member pointed out that companies like his that process pinless debit transactions—which by law allow merchants to route transactions away from the big global card networks and pay lower interchange fees—may lose that ability if they opt for contactless payments.

  • “This is the networks’ way of eliminating pinless debit because of lost revenue,” he said.

Upside down. The last area of frustration discussed concerns the interchange fees merchants pay for contactless transactions over the internet using biometric technology in digital wallets, making them among the most secure transactions, one treasuer said.

  • He argued that this superior level of security should mean interchange fees for mobile transactions online are the lowest paid by retailers. They’re not.
  • They’re among the highest, he said, because they are treated in most cases as any internet transaction, which is less secure than when a customer is presenting a card in a physical store or restaurant.
  • That there is no correlation between the fees charged and the relative level of security doesn’t make sense to this treasurer.
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Pandemic Pushes Companies to Digitize Processes, Prioritize People

Treasurers at tech firms push to abandon legacy processes while focusing on keeping teams connected.
 
Many tech companies during the pandemic have been able to announce that they will not lay anyone off during the crisis—and have been able to keep their promise.
 
Unfortunately, that’s not universally true—some businesses have been particularly hard hit and have had to furlough or cut staff, and consequently do more with less. This prompted a hard look at projects and their prioritization for many members of NeuGroup’s Tech20 Treasurers’ Peer Group, who met virtually in May.

Treasurers at tech firms push to abandon legacy processes while focusing on keeping teams connected.
 
Many tech companies during the pandemic have been able to announce that they will not lay anyone off during the crisis—and have been able to keep their promise.
 
Unfortunately, that’s not universally true—some businesses have been particularly hard hit and have had to furlough or cut staff, and consequently do more with less. This prompted a hard look at projects and their prioritization for many members of NeuGroup’s Tech20 Treasurers’ Peer Group, who met virtually in May.
 
Mixed emphasis. Even for those members who didn’t have to downsize their teams, there was an effort to deprioritize certain projects to avoid the fatigue that creeps into teams as the work from home (WFH) regime drags on. But there may also be projects that should be accelerated.

  • A lack of automation and digitalization manifests itself sharply in uncertain times and calls for a mindset of taking advantage of the crisis to boost these efforts.
  • One simple example is the push for wider bank and regulatory acceptance of digital signatures (Adobe Sign, DocuSign) instead of the standard “wet” signature, not just on a temporary basis but permanently and globally.
  • And if you haven’t automated enough of your cash positioning, for instance, now is the time to do so to free up time for critical forecasting and analysis. 

Back in the office, or not so much? What will the future workplace look like, even if you have an office to go to? Even with smaller meeting sizes, half team in, half team out, masks on and temps checked—all of which will put a damper on the office enthusiasm—some employees might not have an office. One treasurer’s company had announced in May that it would reduce its real estate footprint by 50%; this has been something heard across NeuGroups.

  • “Hoteling,” with coworking and shared work spaces, is back again. Will this lead to a reversal of the California exodus trend, i.e., going to lower-cost states? If one of the key reasons for distributing teams out of the state is the cost of Bay Area real estate, will that go on to the same degree if the team can just work from home instead, saving cost on office space? At the very least, the calculus will look a bit different going forward. 

But really, what’s next? As one member noted, the new WFH paradigm is not likely to change any time soon and may become a permanent arrangement for some, or at least some of the time. What will that mean for recruitment processes, performance reviews, retention, team alignment and getting everyone to row in the same direction?

  • Focus on the folks. A member noted the emphasis on empathy and keeping the team feeling connected: “At other meetings, we used to talk to about systems, systems, systems, and now it’s people, people, people. And I can’t imagine losing any of my people now.”
  • When everyone’s remote, “it’s hard to recreate the ordinary dialogue you have” noted one of the RBC Capital Markets sponsors, referring to summer interns and new hires. That said, it seems that younger employees are thriving in the WFH environment and have grown more assertive; they were quieter in the office. As one member said, “On Zoom, everyone’s square is the same size.”
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Under the Hood of the Global Payments System: Complexity

How TIS helped The Adecco Group harmonize payment, reporting and bank account management processes.

So, you need to make payments? Sounds simple, but once you look under the hood of the global payments apparatus—which has developed differently in different places for different currencies—you will discover separate layers of complexity. That’s according to Joerg Wiemer, co-founder and CEO of Treasury Intelligence Solutions, or TIS.Put simply, there are three different sources of complexity.

  1. The connection and integration of the ERP and the bank system is incomplete, resulting in the use of multiple e-banking tools and a cumbersome cash visibility process.
  2. Payment formats, despite efforts to harmonize them, are not fully standardized, resulting in more time-consuming setup processes and/or costly payment fixes.
  3. Communication options like APIs are more like green bananas than the ripe fruit they are currently made out to be. Add to these the increased frequency of fraud attempts targeting the payments function.

How TIS helped The Adecco Group harmonize payment, reporting and bank account management processes.

So, you need to make payments? Sounds simple, but once you look under the hood of the global payments apparatus—which has developed differently in different places for different currencies—you will discover separate layers of complexity. That’s according to Joerg Wiemer, co-founder and CEO of Treasury Intelligence Solutions, or TIS.

Put simply, there are three different sources of complexity.

  1. The connection and integration of the ERP and the bank system is incomplete, resulting in the use of multiple e-banking tools and a cumbersome cash visibility process.
  2. Payment formats, despite efforts to harmonize them, are not fully standardized, resulting in more time-consuming setup processes and/or costly payment fixes.
  3. Communication options like APIs are more like green bananas than the ripe fruit they are currently made out to be. Add to these the increased frequency of fraud attempts targeting the payments function. 

High jump. The combination of these factors makes it hard for a treasury management system (TMS) to truly meet payment needs. And that’s before you consider that you will always need to make payments. A TMS, TIS suggests, can be a great “all-arounder” but is still like an Olympic decathlete in terms of required functionalities compared to the superior, focused expertise of a sprinter, long-distance runner, high jumper or javelin thrower.

A simplification case. At a recent meeting of the Tech20 High Growth Edition, NeuGroup for treasurers of high-growth tech companies, TIS co-presented a payments simplification case with a client, The Adecco Group. 

  • Adecco is a Fortune Global 500 recruitment and staffing agency based in Zurich, Switzerland, which operates 5,100 branches in eight regions and 60 countries. Over 60% of its EUR 23.4 billion FY2019 revenues came from Western Europe, and 19% from North America.
  • While the business is relatively stable and has some offsetting/countercyclical elements, 75% of revenues come from temporary staffing solutions with “retail-like” margins, i.e., not that generous. With processes involving up to 700,000 individuals at any given time, the emphasis is naturally on operating efficiency.
  • This entails digitization and automation in timesheets, recruitment (e.g., candidate portals), documentation, administration and, of course, payments. 

The handover. The payments function, often managed by treasury, is a handover point from many stakeholders, including treasury itself, accounting, shared services, IT or value-added process owners, and a variety of legal entities. It is similar at Adecco. The objectives of Adecco’s transformation journey are focused on:

  • Global cash visibility in the TMS, Kyriba.
  • Connection to all banks globally using TIS as the service bureau, ensuring communication efficiency (SWIFT, host-to-host, EBICS, BACS) depending on volume and complexity of local business needs.
  • Improved and harmonized payment, reporting and bank account management processes via a single, bank-independent e-banking system, provided by TIS (over 10,000 banks are connected via TIS’s cloud platform)—while also achieving compliance, bank-signature governance, risk reduction and cash centralization via pooling arrangements.  

A complicating factor is payroll payments: Salary and wage payments come from human resource systems where local rules and regulations for employee protections and taxes drive local differences, making this type of payment hard to harmonize.

The business case? Depending on your starting point, a “very high” ROI can be achieved primarily by:

  • Building in the ability to choose the most efficient communication option (bullet 2 above) for each payment. Over 90% of the traffic can go directly via non-SWIFT channels, meaning it’s cheaper: SWIFT has transaction-based pricing and TIS has “value-based” pricing where higher complexity means higher pricing (the number of bank accounts or ERPs is a proxy for complexity). But part of the TIS value proposition is reducing complexity with their project implementation.
  • Overcoming format-error driven payment delays (and costly fixes) with the use of TIS’s continuously updated and maintained payments “format library.” 

Success factors. Like many project stories, success lies in the effective coordination and collaboration of people.

  • Senior management sets the tone by driving change and expectations; also required is committed involvement from internal controls, compliance and IT/security, and strong governance from business, finance and treasury leadership.  

Test, test and test some more. For an end-to-end (E2E) process approach to be successful, test, test and retest all the formats and pathways thoroughly. And include deliberate errors to make testing as robust as possible.

Next up: From batch to instant payments. TIS does not consider APIs quite ready for prime time yet, and cites country-by-country differences (apps, clearing systems, amount thresholds and the varying API libraries banks have) as the primary reasons. They are nevertheless a big development and will bring many benefits in time.

  • People use Adecco’s app to find jobs; when their work is done and approved, nothing really stands in the way of settling the payment for that work.
  • “So we envision moving from batch to instant payments,” André van der Toorn, senior vp of treasury at the Adecco Group, said. Adecco’s associates (employees for whom Adecco is the employer of record) may be keen to accept that, even if it means they will get paid slightly less. Instant payments may come very soon, based on the success of a live test with a digital client in a remote part of the world.

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Obstacle Course: Cash Forecasting Challenges in Latin America 

Treasurers in Latin America are coping with the pandemic, M&A activity and working capital needs.
 
Many of the cash management challenges currently facing treasurers in Latin America are being complicated by a variety of factors, including the omnipresent COVID-19 crisis. But also in the mix is recent M&A activity in the region (think integration and its opposite, divestiture), along with difficult financing conditions affecting working capital management.
 
COVID chaos. Latin America is no exception in regions contending with the difficulties brought on by the pandemic. As in other parts of the world, work from home (WFH) processes have had to be invented on the fly and then executed.

Treasurers in Latin America are coping with the pandemic, M&A activity and working capital needs.
 
Many of the cash management challenges currently facing treasurers in Latin America are being complicated by a variety of factors, including the omnipresent COVID-19 crisis. But also in the mix is recent M&A activity in the region (think integration and its opposite, divestiture), along with difficult financing conditions affecting working capital management.
 
COVID chaos. Latin America is no exception in regions contending with the difficulties brought on by the pandemic. As in other parts of the world, work from home (WFH) processes have had to be invented on the fly and then executed.

  • This has led to some turnover, part of which stems from the paradoxical situation where WFH often means more work and burnout; this then leads to companies onboarding new people either virtually or in person while maintaining social distancing protocols.
  • Members pointed out that this highlighted the importance of written, up-to-date policies and procedures. 

M&A chaos. Acquisitions, and in one case a divestiture, bring their own challenges to accurate cash forecasting. Integration of the entities involved must take place country by country. The message here is that there is a lot to do, in multiple tax and regulatory environments that generally do not allow cross-border solutions. Of course, the whole forecast philosophy can vary—forecast as needed vs. regular forecasts. Also, the need to repatriate regularly or leave the cash where it is requires major adjustment and training.

  • Where treasury management systems are involved (and the accounting systems that feed them), there is the need to reconcile different approaches to the requirements of the new combined (or separated) entity. 

Working cap scrutiny. Communicating the expected cash needs of the new company is an important issue to management ahead of earnings calls. Going along with this is the focus on working capital, and in particular short-term assets like accounts receivable (DSO’s) and inventory (months of sales).

  • Often overlooked is the opportunity presented on the liability side. Companies with historically strong cash flow may have slipped into a practice of just paying the bills as presented.
  • By paying according to terms, or negotiating payment terms to industry benchmarks, companies can add to cash on hand the same way collecting sales faster adds to cash. 

Cash rules. Treasury needs to work closely with in-country managers to identify where there are opportunities to increase cash on hand and then determine how to get that cash to where it is needed, whether to pay down debt or pay equity investors.

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Why Swapping Fixed-Rate Debt to Floating Is Still Worth Considering

Wells Fargo shared insights on liability management at the pilot meeting of NeuGroup for Capital Markets.

At a spring meeting of NeuGroup for Capital Markets, sponsored by Wells Fargo, several members said they had used interest-rate swaps to shift more of their debt to floating rates, a move that paid off as rates fell in the second quarter amid the pandemic.

  • A few participants had regrets about having swapped from floating to fixed rates.
  • One member said his team is “spending a lot of time trying to get the right mix” of fixed and floating rates as it asks if “it makes sense to do swaps.”

Wells Fargo shared insights on liability management at the pilot meeting of NeuGroup for Capital Markets.

At a spring meeting of NeuGroup for Capital Markets, sponsored by Wells Fargo, several members said they had used interest-rate swaps to shift more of their debt to floating rates, a move that paid off as rates fell in the second quarter amid the pandemic.

  • A few participants had regrets about having swapped from floating to fixed rates.
  • One member said his team is “spending a lot of time trying to get the right mix” of fixed and floating rates as it asks if “it makes sense to do swaps.”

Conversations and convincing. One of the members who swapped from fixed to floating said it had required “convincing management this was right” from an asset liability management (ALM) perspective, adding that treasury had lots of conversations with the CFO “to make him comfortable.” She said much of the focus was on timing which, fortunately, “worked out.”

  • As a result, some of this company’s hedges are in the money, raising the question of whether it makes sense to unwind or enter into offsetting swaps to monetize the hedge gains. The member asked for input on accounting and other considerations.
  • This company had also done some pre-issuance hedging and was doing more of it at the time of the meeting.

Magic formula? One of the presenters from Wells Fargo asked, rhetorically, how many people at the meeting had been told there is a “magic formula” for the ideal debt mix, such as 75% fixed to 25% floating.

  • Formulas aside, the key question investment-grade (IG) companies must answer before using interest-rate swaps, he said, is how much volatility in corporate earnings (before interest and taxes) will result from changes in rates. The answer, he suggested, depends on the cyclicality of the business and its “absorption capacity.”
  • It’s important to ask why you put on the swap, especially in this environment when fixed to floating-rate swaps went into the money, the Wells Fargo presenter said. What’s important is determining how much potential eps volatility it creates and whether “you can add it and not create heartburn,” he said.

What now? Another presenter from Wells Fargo said that, as a result of lower savings now available from swapping fixed to floating rates, “I think people have written off swaps to floating.” But he said the savings are still decent, meaning it makes sense to keep swaps on the radar screen and that corporates should “keep thinking” about them.

  • In a follow-up call in early July, he said his views still hold in the current market and pointed to data Wells Fargo presented during the meeting to illustrate that swaps to floating make sense even when rates are flat.
  • It shows that over the last 23 years, the savings on a 5-year swap, even in an adjusted market environment where interest rates remain flat and trendless, still amount to nearly 100 basis points.
  • This may be especially relevant today given that so many companies boosted liquidity as the pandemic shut down the economy by issuing fixed-rate debt.
  • As a result, Wells Fargo’s presentation says, the liability portfolios of many IG issuers are overweight fixed-rate debt.
  • The bank also noted an “asset liability mismatch (debt versus cash/short-term investments) creating ‘negative carry drag’.”
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Brain Game: Using Artificial Intelligence to Improve Cash Forecasting

ION’s plans to tap machine learning, deep learning and neural networks to help treasurers.  
 
Making better use of technology to improve cash flow forecasting (and cash visibility) has taken on greater importance during the pandemic for many companies where it was already a high priority. That was among the key takeaways at the spring virtual meeting of the Global Cash and Banking Group, sponsored by ION Treasury.

  • ION sells seven different treasury management systems (TMSs), including Reval and Wallstreet Suite.
  • Among the cross-product solutions ION is focused on is a cash forecasting tool leveraging artificial intelligence (AI), mostly in the form of machine learning (ML) and deep learning neural networks.
  • One of the ION presenters said advances in AI and ML have produced an “opportunity to reimagine how cash forecasting can be done,” noting something treasurers know too well—that no one yet has truly “solved in a great way” one of the top challenges facing finance teams.

ION’s plans to tap machine learning, deep learning and neural networks to help treasurers.  
 
Making better use of technology to improve cash flow forecasting (and cash visibility) has taken on greater importance during the pandemic for many companies where it was already a high priority. That was among the key takeaways at the spring virtual meeting of the Global Cash and Banking Group, sponsored by ION Treasury.

  • ION sells seven different treasury management systems (TMSs), including Reval and Wallstreet Suite.
  • Among the cross-product solutions ION is focused on is a cash forecasting tool leveraging artificial intelligence (AI), mostly in the form of machine learning (ML) and deep learning neural networks.
  • One of the ION presenters said advances in AI and ML have produced an “opportunity to reimagine how cash forecasting can be done,” noting something treasurers know too well—that no one yet has truly “solved in a great way” one of the top challenges facing finance teams.

Define your terms. Another ION presenter explained that AI is any intelligence demonstrated by a machine.

  • ML—a subset of AI—involves the ability to learn without being explicitly programmed.
  • Deep learning (DL) is a subset of ML and includes so-called neural networks inspired by the human brain. The algorithms powering neural networks need “training data” to learn, enabling them to recognize patterns.
    • The ION presenter gave the example of a neural network within a self-driving vehicle that processes images “seen” by the car. 

Building on data and business knowledge. For cash forecasting, the learning process starts with entering historical data into the model that is “cleaned” by tagging the inflows and outflows appropriately and removing outliers that would significantly skew trends. Models are trained via algorithms that apply rules and matching inputs with expected outputs.

Validation required. Like many learning curves, it takes time for the model to reach a high level of performance and requires treasury professionals to validate that the algo knows what it is doing by comparing the forecast to actual variances.

  • Similarly, people—not machines—will have insider knowledge of significant changes within the organization and must make tweaks to the model where appropriate. 

Measuring the models. Various statistical approaches feed neural networks’ underlying algorithms. When building their AI cash forecasting solution, ION tested everything from simple linear regression to multivariable linear regression to the Autoregressive Integrated Moving Average (ARIMA) model, which adds layers to the neural network and process non-linear activities.

  • ION’s research suggests that linear regression-based learning models perform well for businesses with stable, growing cash flows, but less well with cash flows subject to seasonal peaks.
    • ARIMA models perform better, but need extra modeling for seasonality while neural networks require careful attention to training data to learn from, as well as supplemental intervention when non-repeating events occur—such as global pandemics.
  • Still, you can get 90%-95% accuracy most of the time, in seconds vs a day or more using manual methods. ML for cash forecasting has the potential to be 3,000 times faster than common manual processes companies employ, according to ION.
    • Other benefits include improving accuracy, overcoming human biases, picking up anomalies that could mean fraudulent activity, and realizing monetary gains from more predictable cash positions.
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Managing the Team Through WFH Takes Effort

Powering an effective team through tough times – snacks and all.

For all the talk about how well NeuGroup peer group members and their teams have navigated the pandemic – quarter closes, bond issuances, insurance renewals, revolver negotiations, even hostile takeover attempts – there is a nagging feeling that “this can’t go on forever” without more problems manifesting themselves in some way. 

After almost four months of a near complete “work from home” or WFH regime, it will still be a while before the full strength of the treasury team is back together in the office. Some companies have announced recently phased-in returns as early as mid-June while others have been told to stay home through the end of the year. What can be learned from the experience so far as the situation stays fluid? Here are some thoughts from NeuGroup’s recent Tech20 Treasurers’ Peer Group meeting.

Powering an effective team through tough times – snacks and all.

For all the talk about how well NeuGroup peer group members and their teams have navigated the pandemic – quarter closes, bond issuances, insurance renewals, revolver negotiations, even hostile takeover attempts – there is a nagging feeling that “this can’t go on forever” without more problems manifesting themselves in some way. 

After almost four months of a near complete “work from home” or WFH regime, it will still be a while before the full strength of the treasury team is back together in the office. Some companies have announced recently phased-in returns as early as mid-June while others have been told to stay home through the end of the year. What can be learned from the experience so far as the situation stays fluid? Here are some thoughts from NeuGroup’s recent Tech20 Treasurers’ Peer Group meeting. 

First, all the BCP work pays off. Treasury’s essential focus of keeping the lights on no matter the catastrophe has long required detailed business continuity plans to ensure access to liquidity, collections capabilities and the ability to make payments away from a compromised office site. 

  • So, arguably, no team was better prepared than treasury going into the pandemic-driven mandate for staff to take up their posts at home. Some treasurers noted with relief that they had recently tested the BCP and that things had worked out as planned when the order came. 

Not much change for some. Global corporations of a certain size already have regional treasury centers in other places of the world, and – especially if based in the high-cost San Francisco Bay Area – varying levels of distributed teams in lower-cost regions of the US, e.g., Florida and Texas. The ability to lead those teams may have taken on a different nuance in the WFH environment, but managers were already used to leading remote team members. 

  • “We were already very remote so we had that down, and the [quarterly] close wasn’t a problem,” said a Tech20 member who leads both the treasury and tax teams. Nevertheless – and despite a significant redistribution of ergonomic chairs from offices to homes across the Bay Area – several companies gave a stipend of up to several hundred dollars to set up a home office. 

Reassure the team with leadership, transparency. With the airwaves filled with COVID-19 news and the increased focus on cash and forecasting facing a very uncertain future, it is natural that people start worrying about losing their jobs. Some companies, including one Tech20 member who shared her company’s approach to leading in times of COVID-19, announced that there would be no layoffs in 2020. 

  • This company also makes a lot of effort to show empathy with employees and demonstrates its own focus on well-being to reassure others that it is OK to nor just power on as usual. The cadence of communication is important.

Set boundaries, examples. Particularly in situations where the whole family is at home, it’s important to demarcate work time and home time. Our presenting member said her husband oversees schooling the kids and she does “after school” activities. This means she is not available for meetings for a set number of hours in the afternoon and encourages her staff to set similar limits. 

  • Another member, who also emphasized mental well-being after the intensity of weeks upon weeks of blurred work/home lines – especially for single parents with young kids, and since taking vacation seems pointless if you can’t go anywhere – said he would take a Friday off on a regular basis, signaling that similar actions by staff are acceptable. 

A lot of mileage out of small morale boosters. Coffee breaks and happy hours by Zoom, a dedicated Slack channel for office chitchat and family pictures, checking in on the singles on the team, and online trivia game time are examples of team building and maintaining a sense of team and inclusion. The tax and treasury chief from above organized a “remote offsite” meeting to connect with the team and from time to time sends much-welcomed healthy snack packages (from Oh My Green) to her staff. 

  • All this combined with the moratorium on layoffs have rewarded the presenting company’s management with their highest employee satisfaction numbers, despite the challenging period. 
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Do Pensions Need to Bolster Post-Retirement Resources?

Pension managers could be doing a better job of guiding retirees with their post-work pension planning.

For decades, defined contribution (DC) retirement plans have helped address the needs of individuals leading up to retirement. However, plan sponsors have made little progress in addressing individuals’ needs during retirement itself, according to Insight Investment, a sponsor of the NeuGroup for Pension and Benefits’ recent meeting. 

Retirement anxiety. There is a lot of unease for employees on the verge of retiring, as they worry about funding their non-working lives. It also remains a major concern among the population still working, given the disappearance of defined benefit pension plans, near-zero interest rates and highly volatile equity markets.

Pension managers could be doing a better job of guiding retirees with their post-work pension planning.

For decades, defined contribution (DC) retirement plans have helped address the needs of individuals leading up to retirement. However, plan sponsors have made little progress in addressing individuals’ needs during retirement itself, according to Insight Investment, a sponsor of the NeuGroup for Pension and Benefits’ recent meeting. 

Retirement anxiety. There is a lot of unease for employees on the verge of retiring, as they worry about funding their non-working lives. It also remains a major concern among the population still working, given the disappearance of defined benefit pension plans, near-zero interest rates and highly volatile equity markets.  

“Surveys are showing that this is a concern for individuals,” said Bruce Wolfe, head of individual retirement strategy at Insight Investment. “The first step is to understand how the decumulation phase differs from the accumulation phase and create a framework to deliver the steady, predictable lifetime income that retirees generally desire.” 

  • Mr. Wolfe believes many of the “hurdles for plan sponsors to do more are only a matter of perception.” This means steps do exist for those managing the plan to not only educate soon-to-be retirees but also offer solutions to help manage their assets at separation “giving them firmer footing for the next phase of their lives.”
  • Meeting attendees basically agreed that while it was generally good to offer their employees a range of investment products – including environmental, social and governance options – within their retirement plans, there was little interest in what exiting employees did with their savings after they leave the company. While companies may offer some simple retirement planning tools, they do not want to risk appearing to be fiduciaries. 

Decumulation in the spotlight. The lack of tools has put decumulation in the spotlight for many plan sponsors, a recognition that most retirees are lost when it comes to what is, in practical terms, fairly sophisticated financial analysis. For example, only 5.5% wait until age 70 to start taking social security benefits when most retirees should wait as long as possible given longevity protection and inflation hedge that social security uniquely provides. For 401(k) participants seeking help there are some positive developments including:

  • 41% of plans have at least some form of “retirement income” solutions available, although plan sponsors acknowledge more innovation is needed.
  • The Setting Every Community Up for Retirement Enhancement (SECURE) Act cleared away some legal impediments to offering more retirement income products, particularly annuity-related ones.
  • QLAC products (Qualified Longevity Annuity Contracts) can be offered with limits within DC plans providing participants access to lifetime annuity contracts starting when individuals reach their 80s.   

This means plan sponsors need to “think harder about the escalating challenges they will face through the ‘decumulation’ phase of their investment lifecycle,” the Insight Investment team told meeting attendees. 

Unsteady footing. “Uncertainty is building as we find ourselves in an ‘interregnum’ between the post-war economic order and a brand-new economic era,” said Abdallah Nauphal, CEO at Insight Investment. “COVID-19 has provided an idea of how liquidity challenges, rebalancing and tail risk concerns can be elevated in stressed market conditions.” 

  • This means investors should prepare for future crises accordingly.
  • “Plans may need to consider adding additional tools to the toolkit, such as completion, overlay, asymmetric payoff and cost-effective downside equity risk management strategies to help ensure full funding and manage pension risks,” said Shivin Kwatra, Insight Investment’s head of LDI portfolio management in the US.
  • “We also believe investors need to focus on high quality investments to help ensure they meet their return and cash flow requirements with the highest level of certainty,” Mr. Kwatra said.
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Preparation Pays Off for Microsoft in Debt Exchange Offer

Liability management success: Microsoft received exchange interest of $12.5B, 56% of the targeted notional amount.
 
Treasury teams managing their debt portfolios have a menu of liability management transactions to choose from, including bond tenders, open-market repurchases, consent solicitations and debt exchanges. To use most of these tools, corporates need to offer investors a reasonable amount of time to decide, ranging from five to 20 business days.

  • So a successful liability transaction such as a debt exchange depends, in part, on a generally stable underlying market. COVID-19, of course, wreaked havoc on markets and sent volatility levels spiking. But monetary actions by the Fed and fiscal stimulus help calm markets, resulting in a sharp drop in volatility. And that opened the door for companies including Microsoft to take action.

Liability management success: Microsoft received exchange interest of $12.5B, 56% of the targeted notional amount.
 
Treasury teams managing their debt portfolios have a menu of liability management transactions to choose from, including bond tenders, open-market repurchases, consent solicitations and debt exchanges. To use most of these tools, corporates need to offer investors a reasonable amount of time to decide, ranging from five to 20 business days.

  • So a successful liability transaction such as a debt exchange depends, in part, on a generally stable underlying market. COVID-19, of course, wreaked havoc on markets and sent volatility levels spiking. But monetary actions by the Fed and fiscal stimulus help calm markets, resulting in a sharp drop in volatility. And that opened the door for companies including Microsoft to take action.

Laying the foundation. At a recent NeuGroup for Capital Markets office hours session, Microsoft’s treasury team discussed their recent debt exchange, announced on April 30, 2020 and settled on June 1, 2020.

  • Like any successful capital markets transaction, the preparation done in the months before by the treasury team laid the foundation for a debt exchange which accomplished the company’s financial and strategic objectives.
  • These objectives were driven by the primary principle to maximize economic value, including reducing the annual interest rate paid and being P&L accretive. 

Debt exchange details. On April 30, the company announced a registered waterfall exchange offer targeting 14 series of notes across two separate pools with maturities between 2035-2057, all with coupon rates above 3.75% (the existing notes) in exchange for cash into $6.25 billion of new notes due 2050 and $3 billion of new notes due 2060.

  • Microsoft set a waterfall prioritization based on economic value and registered the exchange via an S-4 filing requiring a 20-day offering period. It included an early exchange time on May 13, 2020 which offered investors better economics by exchanging their notes earlier than the official expiration date on May 28, 2020.
    • The strong interest by investors in the exchange allowed Microsoft to increase the amount of the new 2060 note to $3.75 billion. The final coupons on the new 2050 notes and the new 2060 notes were 2.525% and 2.675%, respectively. 

Banks with strong LM credentials. Working with joint dealer managers, Microsoft was able to tap into the knowledge and insights of two banks with strong credentials in liability management.

  • These banks were able to form a consensus on important details including what spreads over US Treasuries to use for both the existing notes and the new notes, modeling analysis, supporting logistics, the identification of holders of the existing notes and their likelihood of participating in the exchange, and potential ways to hedge interest rate movements.
  • At the end of the day, the transaction generated significant interest savings, and extended Microsoft’s debt maturity profile. The exchange also established new, liquid, par securities by allowing investors to move out of high dollar-priced bond issues.

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Cash and COVID-19: A Tale of Two Companies

One company asks, “Where is the cash?” while another reevaluates operational processes.
 
The economic upheaval unleashed by the pandemic divided the universe of companies at a recent virtual meeting of the Global Cash and Banking Group into two camps: Those with ample liquidity that were able to manage cash and conduct business as usual; and those forced to play defense and go “back to basics,” as one member in the latter camp put it.

  • Two member companies sharing very different perspectives on the pandemic’s impact on their businesses embodied this dichotomy: One, a tech giant, presented opportunities it found for process improvements; the other, a travel and leisure company, described an all-hands-on-deck liquidity crunch involving stress tests and turning over every stone for cash.

One company asks, “Where is the cash?” while another reevaluates operational processes.
 
The economic upheaval unleashed by the pandemic divided the universe of companies at a recent virtual meeting of the Global Cash and Banking Group into two camps: Those with ample liquidity that were able to manage cash and conduct business as usual; and those forced to play defense and go “back to basics,” as one member in the latter camp put it.

  • Two member companies sharing very different perspectives on the pandemic’s impact on their businesses embodied this dichotomy: One, a tech giant, presented opportunities it found for process improvements; the other, a travel and leisure company, described an all-hands-on-deck liquidity crunch involving stress tests and turning over every stone for cash. 

Tech tools. Liquidity was not an issue for the tech company and “we probably weathered the crisis better than other industries because of all the tech tools we have,” the member said, adding that the “crisis has raised opportunities” to improve processes.

  • The company was completely prepared to shift gears to work remotely so the challenge became how to overcome various geographical shutdowns and stay-at-home orders across the globe that affected access to stores, lockboxes and, in some cases, payroll.
  • Another technology company found opportunities on the check issuance side, saying that some vendors wanted to switch to ACH payments to improve their liquidity; but ACHs also made sense because it was pointless to send checks to locations (stores, lockboxes, etc.) that were closed. 

Tokens vs. mobile apps. During the pandemic, the first tech company lifted some restrictions on the use of mobile banking apps; when a token doesn’t work and treasury isn’t “in the building” the ease of a mobile app can save the day, especially since the company’s internal process requires three people to move money across the board.

  • However, future thought must be given to the continued use of mobile banking because in the case of termination or employee’s departure, it is easier to collect a token than disable a feature on their phone.

Are wet signatures a thing of the past? The pandemic also presented an opportunity to see how far banks would go in accepting DocuSign.

  • Members said the answer depends on the bank, with the member from the tech company saying, “We adjust to whatever the banks can support.” That said, many banks have made allowances that members hope will continue when things return to “normal.”

Where is the cash? On the flip side to these operational improvement opportunities, many treasury departments across industries scrambled to get a handle on all cash everywhere as the pandemic squeezed liquidity.

  • Hard hit. The travel and leisure industry in particular has been hard hit by mandated travel restrictions and months of consumer cancellations, resulting in a big blow to liquidity. For one member in that industry, prudent cash management and operations have been imperative to keeping the company’s balance sheet strong.
  • No treasury outside treasury. A centralized treasury department has helped with tackling the liquidity pinch for this member, allowing for global transparency and examination of onshore and offshore cash.
    • Because onshore does not equate to accessibility, her treasury department has re-bucketed cash by availability to determine true cash positions across horizons and established an internal task force with legal and accounting to establish minimum balances required for operations.
  • Scenario analyses and stress tests. Good cash forecasting has never been so important— treasury has been called to turn over models, run various scenario analyses and stress test base cases to safeguard the business. 
    • This treasury team tested base, prolonged recovery and severe impact analyses to consider various economic scenarios and protect minimum operating requirements.

Teamwork. The company formed a global finance task force to explore what more can be done to generate cost savings, defer tax and bolster receivables. The member said she was pleased to have employees volunteering from various departments and teams, coming together to help keep the company strong.

  • Similarly, with working capital management, different approaches are being taken with treasury in mind. Previously, departments would seek approval from the CFO based on anticipated ROI; now these teams are talking to treasury first to see if the use of cash makes sense before seeking sign-off. 

I will remember that. Members in similar boats agreed that some banks have gone out of their way to help them while others have been more strict, pushing back on requests and acting as though treasury was asking too much.

  • That prompted one member to say, “The banks who gave us the hard time—we won’t give them business.”
  • On the subject of accessing money invested in term deposits, she advised peers to always look at force majeure clauses in bank agreements to make sure they are not one-sided—allowing the bank to terminate but not allowing the investor to get money back early.
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US Coin Shortage: Retail Treasury Teams Call for Action, Urgency

Call it a disruption or call it a shortage—not enough coins means pain for retailers and banks.

Treasurers of major retailers and restaurant chains sounded loud notes of alarm at a NeuGroup virtual meeting Friday about what many observers are calling a coin shortage. U.S. Bank, the meeting sponsor, described it a “severe disruption” in the nation’s coin circulation sparked by COVID-19. (People have spent less cash during the pandemic and have exchanged far fewer coins for bills or credit at banks or grocery stores.)

Whatever you call this state of affairs, it’s a problem almost everyone said will turn painful this week and may last several months.

Call it a disruption or call it a shortage—not enough coins means pain for retailers and banks.

Treasurers of major retailers and restaurant chains sounded loud notes of alarm at a NeuGroup virtual meeting Friday about what many observers are calling a coin shortage. U.S. Bank, the meeting sponsor, described it as a “severe disruption” in the nation’s coin circulation sparked by COVID-19. (People have spent less cash during the pandemic and have exchanged far fewer coins for bills or credit at banks or grocery stores.)

Whatever you call this state of affairs, it’s a problem almost everyone said will turn painful this week and may last several months.

  • “What is the sense of urgency?” of addressing the problem, one assistant treasurer asked a U.S. Bank representative who serves on the Federal Reserve’s cash advisory council.
  • The U.S. Bank official said banks are keeping pressure on the US Mint, which ramped up production of all coins in mid-June, and are urging the Fed to make the public aware of the issue, including through social media.
  • While there is no easy, short-term solution, U.S. Bank is exhausting all channels to help clients, given the Fed’s decision to effectively ration the amount of coins banks can access to supply businesses.
  • The AT said his company’s coin orders are being filled at lower and lower percentages—as low as 20% or 0% in some areas. Roughly 20% of the company’s retail transactions are in cash.
A June 27 Twitter post by @Inevitable_ET says the photo is from a 7-Eleven.

Educating the public. “Why is the marketing campaign taking so long?” asked another member about expected efforts by the Fed to educate the public about the coin problem and encourage people to bring as many coins as possible back into the banking system.

  • “We as retailers are going to have to deal with consumers who don’t understand,” she said.
  • The treasurer of another retailer, where 40% of transactions are in cash, said there is some resistance from field teams to “having to explain the coin shortage in the country.”

Banks are showing a general lack of urgency/transparency. Members described their banks as providing varying degrees of help, from doing what they can, to “it’s not our problem” or “it’s not that bad of an issue.”

  • Comparing the issue to toilet paper hoarding earlier in the crisis, members noted that there is CEO-to-CEO engagement between retailers and suppliers. But that level of engagement is not happening between retailers and their banks, who are their suppliers of coin. 

Calls for more bank engagement. To address this, members suggested that banks come out with public letters from their CEOs calling attention to the coin shortage. This would help treasury get better traction and awareness in C-suites that this is a major issue that needs to be addressed.

Fixes are awkward, costly. Members noted that the fixes they are contemplating either are awkward or costly, and usually both.

  • On the awkward side is training associates to always ask for exact change, posting signs encouraging this and even saying that customers who do not have exact change (or an electronic form of payment) may not be able to check out or have their order filled.
  • On the cost side, moving low-dollar transactions to electronic payment has a significant economic cost (fees); rounding typically costs store as consumers don’t want to round up (and there are multi-jurisdiction tax issues to consider); and reprogramming point of sale systems can be expensive.
    •  Gift card issuance for change is also cumbersome. Some members are looking to donate change (or rounded-up amounts) to charity, usually the sponsored charity of the store.
    • Meanwhile, operators are being told to stop depositing coins, bringing in their own coins from home, ask local banks for supply and not to turn away coin orders that are “short.” 

Will coin disruption spread to notes? While banks have been assured by the Fed that the issue is not going to spread to notes, e.g., dollar bills or fives, retailers face an environment where the unexpected can happen, so members should extend their contingency plans to work out how to address disruption in smaller denomination notes as well.

Better/cheaper payment rails. Despite COVID-19 being a global issue, the coin disruption is principally a US problem, at least for the developed economies. Asked about the situation in the UK, for example, a member noted the country has an electronic payment system with much lower fees that allows for acceptance of electronic payment to become cost-effective at much lower ticket sizes. Multinational retailers are monitoring the situation in other cash-intensive markets closely, however.

Thus, the coin disruption provides yet another talking point alongside others with COVID-19, for those promoting an end to cash, a more inclusive electronic payment method, and digital currency. The Bank for International Settlements calls out the role of central banks with payments in this digital era, including establishing digital currencies in its recent economic annual report, for example.

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What the Experiment With Modern Monetary Theory Means for Risk Managers

Treasury and finance teams need to adapt to the reality of different thinking about debt and deficits.

By Joseph Neu

“We’re not even thinking about thinking about raising rates,” Fed Chairman Jerome Powell said after the Federal Open Market Committee’s June meeting.

  • This was good timing for me: On the same day, I suggested to clients of Chatham Financial attending a virtual summit that among the accelerating trends treasury and financial risk managers need to prepare for is the current flirtation with Modern Monetary Theory.

Study up on MMT. For those with a limited understanding of MMT, including me, it’s time to bone up, because without really saying they are doing so, governments and central banks of developed nations seem to be pushing us very close to something that will end up looking like an MMT experiment.

Treasury and finance teams need to adapt to the reality of different thinking about debt and deficits. 

By Joseph Neu

“We’re not even thinking about thinking about raising rates,” Fed Chairman Jerome Powell said after the Federal Open Market Committee’s June meeting.

  • This was good timing for me: On the same day, I suggested to clients of Chatham Financial attending a virtual summit that among the accelerating trends treasury and financial risk managers need to prepare for is the current flirtation with Modern Monetary Theory. 

Study up on MMT. For those with a limited understanding of MMT, including me, it’s time to bone up, because without really saying they are doing so, governments and central banks of developed nations seem to be pushing us very close to something that will end up looking like an MMT experiment. 

  • The zero-rates-for-the-foreseeable-future policy coming out of the Fed is telling, because one of the tenets of MMT is to set rates at zero to borrow more efficiently to cover needed government spending and print money to repay it. Apparently, though, some MMT proponents suggest that it’s even more efficient just to print money to cover government deficits and not issue any debt at all.
  • It’s probably safer to keep the government debt issuance going for now as it underpins private sector debt financing, credit and interest rate management. Many of us have to unlearn what we’ve been taught about printing money and inflation, too, before we stop worrying about how we will pay off government debt. 
  • Taxes, in the MMT view, are not to increase cash flow to pay the debt but to take out excess printed money from the system so that we don’t get to hyperinflation.

After studying MMT, those of you who are treasury and financial risk managers should consider: 

  • Changing your thinking about financial risk. The developed world seems to be on a mission to test MMT. Time to adjust thinking to that reality.
  • Rethinking your fixed-rate bias. For current policy to work, we need low rates (even zero, if not negative) to be the norm, so the economics of swaps or interest-rate risk management isn’t necessarily going to be the same.
  • Accepting central banks as financial market primaries. The massive central bank intervention crisis playbook has sped up. How much more can the Fed do before it becomes the primary financing mechanism for everything? 
  • Is your company a have or a have not? The divide between those that have unlimited access to capital and those that do not will widen—and it is not limited to sovereigns. If sovereigns have unlimited ability to finance deficits and issue debt, they also have unlimited ability to support the financing of entities they deem unworthy of failure. Meanwhile, the financially strongest private entities will look for an equivalent power to print money. 
  • Becoming “antifragile.” MMT (or whatever governs our financial economic situation now) is not likely sustainable; or if it is, the transition to everyone believing it is unlikely to be smooth. So risk managers must promote resilience in preparation for the unknown of what comes next.
    • If you subscribe to Nassim Taleb’s view, then the most resilient risk management approach is to become “antifragile.” That is, strive to manage risk through the transition to MMT (or whatever we end up with) so that you can benefit from shocks while thriving and growing when exposed to volatility, randomness, disorder and stressors. And don’t forget learning to love adventure, risk and uncertainty.
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Transition to SOFR Pushing Ahead Despite Pandemic

The pandemic and its aftermath forced bank treasurers to move the Libor-to-SOFR transition to the back burner; but make no mistake, it is still very much still on the stove.

With apologies to the real estate industry, there were three critical issues that mattered to bank treasurers before the pandemic: 1) Libor to SOFR transition, 2) Libor to SOFR transition and 3) Libor to SOFR transition. But now, given COVID-19’s damaging impact on world economies, banks have been presented with new priorities, like securing adequate liquidity and the Paycheck Protection Program (PPP). 

This mindset has led many banks to thinking that they should back-burner the transition until the coast is clear. Another driver of this thinking is that many treasurers haven’t been so keen on moving away from Libor in the first place.

The pandemic and its aftermath forced bank treasurers to move the Libor-to-SOFR transition to the back burner; but make no mistake, it is still very much still on the stove.

With apologies to the real estate industry, there were three critical issues that mattered to bank treasurers before the pandemic: 1) Libor to SOFR transition, 2) Libor to SOFR transition and 3) Libor to SOFR transition. But now, given COVID-19’s damaging impact on world economies, banks have been presented with new priorities, like securing adequate liquidity and the Paycheck Protection Program (PPP). 

This mindset has led many banks to thinking that they should back-burner the transition until the coast is clear. Another driver of this thinking is that many treasurers haven’t been so keen on moving away from Libor in the first place.

Lingering skepticism. Several members of NeuGroup’s Bank Treasurers’ Peer Group (BankTPG), meeting virtually recently, revealed wariness of jumping on the SOFR train too soon. “People want someone else to be first mover,” said one member in a breakout session at the meeting, which was held virtually. There was not a lot of interest at his bank, he said, adding that SOFR-based lending “would be sticking out like a sore thumb” among peers. Another member said his bank was “not operationally ready” to move off Libor. “We could find an alternative rate,” he added. 

  • There is “a lot of discovery that hasn’t been done yet,” noted another member in the breakout. “The lending business has to evolve.” Another member added there are “a lot of things we can’t do operationally,” however, what he said the bank should be doing “is educating our customers: whatever replacement they’re going to.” 

Unfortunately, bank treasurers are going to have to overcome their hesitancy. 

The show must go on. According to a presentation at the meeting by Tom Wipf, Vice Chairman of Institutional Securities at Morgan Stanley and Chair of the Federal Reserve’s Alternative Reference Rates Committee (ARRC), the committee is “taking the timelines provided by the official sector as given and continuing its work, recognizing that although some near-term goals may be delayed, other efforts can continue.” 

In other words, do not assume Libor will continue to be published at the end of 2021, Mr. Wipf told meeting attendees. One of the official authorities the ARRC cites is the UK Financial Conduct Authority. The FCA in late March said the end-Libor date “has not changed and should remain the target date for all firms to meet.” 

  • “The transition from Libor remains an essential task that will strengthen the global financial system. Many preparations for transition will be able to continue. There has, however, been an impact on the timing of some aspects of the transition programmes of many firms,” the FCA said in a statement.
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March Madness: Searching for Answers on Cash Flow and Credit

Data from Clearwater underscores the concerns of treasury investment managers reducing risk during the pandemic.

If you needed any more proof that the pandemic has made treasury investment managers even more attuned to the risks in their portfolios, check out the table below from Clearwater Analytics, which sponsored a NeuGroup meeting this week on market trends and improving balance sheet management.

Cash flow and credit. It may not be surprising, but relative to other searches, the sheer number of views in March of data on cash flow projections for securities and portfolios—more than 13,000—captures exactly what was the top concern of nearly every portfolio manager.

Data from Clearwater underscores the concerns of treasury investment managers reducing risk during the pandemic.

If you needed any more proof that the pandemic has made treasury investment managers even more attuned to the risks in their portfolios, check out the table below from Clearwater Analytics, which sponsored a NeuGroup meeting this week on market trends and improving balance sheet management. 

Cash flow and credit. It may not be surprising, but relative to other searches, the sheer number of views in March of data on cash flow projections for securities and portfolios—more than 13,000—captures exactly what was the top concern of nearly every portfolio manager.

  • Also noteworthy is the 84% jump from the prior month in credit events inquiries. The investment manager for a large technology company who described his experience and thinking in the last several months said that keeping track of the volume of downgrades and other credit actions was “breathtaking.”
  • The same manager told his peers about having eliminated stakes in “industries we didn’t like” and reducing investments in energy, retail and health care credits. He said his team spent “an ungodly amount of time on credit.” 
  • And while not every treasury team does its own credit analysis, a widespread focus by managers on vulnerable sectors underlies the more than doubling (111%) in Clearwater views during March of portfolio exposure by industry. 

Governance and communication. The importance of strong governance emerged as a key takeaway from the meeting. It’s critical, as several NeuGroup members noted, that a company’s management team not only understands the risks taken by the investment team but are also comfortable with them before a significant market disruption like that experienced this year.

  • One member asked others if they were receiving any pressure from management to boost investment returns now that interest rates are closer to zero. And while managers whose companies issued debt at wide spreads in March said senior management is interested in reducing interest expense, that is not translating into pressure to take on greater risk with the cash.

Look around the corners. That said, investment managers who survived the first quarter and are now looking toward closing the books on the second are asking plenty of questions about how to position themselves for what lies ahead—much of which is uncertain. Many said they are still asking, as one of them put it, “What is the right amount of credit risk, liquidity, market risk, etc.” 

  • Whatever they do with cash in the months ahead, members are well advised to heed the warning of one peer who is constantly asking “what if we’re wrong?” in assessing what’s next. He noted that many observers doubted COVID-19 would move beyond Asia. That points up the critical need, he said, to keep doing stress tests. Without them, he said, “It’s hard to react if you’re on the wrong side of it.”
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Juneteenth and Beyond: NeuGroup Member Companies Take Action on Racial Justice

Treasurers at major retailers discuss what’s been done so far and what lies ahead.

Calls for major societal change in the wake of the killing of George Floyd have sparked many corporations, including NeuGroup member companies, to take a range of actions in support of change and racial justice. For some, those actions included the observation of Juneteenth, which commemorates the end of slavery in the US.

Treasurers at major retailers discuss what’s been done so far and what lies ahead.
 

Calls for major societal change in the wake of the killing of George Floyd have sparked many corporations, including NeuGroup member companies, to take a range of actions in support of change and racial justice. For some, those actions included the observation of Juneteenth, which commemorates the end of slavery in the US.

  • At a NeuGroup virtual meeting for retailers last Friday on changing regulation and business norms post-crisis, a member from a major American retailer described his company’s quick decision to make Juneteenth (June 19) a company holiday.
  • Noting that the company doesn’t typically move as quickly, he credited its fast action to its cross functional crisis leadership team which is approaching the company’s reaction to recent events as it would a crisis such as a hurricane or COVID-19.
  • The company kept stores open but paid time and half to hourly workers on Juneteenth; other, eligible workers had the option to take the day off with full pay; and the company’s headquarters offices were closed.
  • “As we pivoted to this issue, we had to decide if we wanted to follow or lead,” the member said. “We wanted to lead.” 

Education and sincerity. One participant, who is African American, encouraged others on the call to better educate themselves on matters of slavery and black history, noting that few on the call knew the meaning of Juneteenth until recently.

  • This treasury professional said that what matters is sincerity and action, not talk, taken to address underlying problems. She said there is a difference between “what you know is expedient and what is taken to heart, what is sincere and what is a press release.”

 A good start. Another participant noted the pride he felt in seeing how both his current and former employers have tackled the issue of race head-on, including the CEO of the company where he works now urging conversation and learning. “I couldn’t be prouder of how people have responded,” he said.
 
Accelerated change.  In the last few weeks, the national conversation shifted from COVID-19 to racial justice crisis, focused on diversity and inclusion and black lives.

  • That, observed NeuGroup founder Joseph Neu, highlights the extent to which COVID-19 has forced business thinking to be open to accelerated change and the urgency for companies and finance teams to embrace a faster pace of change for good.

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Can You Save A Month a Year Automating FX Trades?

360T says corporates can use the roughly four weeks saved by automating FX “nuisance trades” to spend time on more valuable analytical work.

The graphic below demonstrates some of the benefits of automating FX trades described by technology provider 360T at a recent interactive session for NeuGroup members called “Demystifying Automated Trading Across the Trade Lifecycle.”


360T says corporates can use the roughly four weeks saved by automating FX “nuisance trades” to spend time on more valuable analytical work.
 

The graphic above demonstrates some of the benefits of automating FX trades described by technology provider 360T at a recent interactive session for NeuGroup members called “Demystifying Automated Trading Across the Trade Lifecycle.”

  • The time savings accrue by eliminating the need to manually enter orders onto trading platforms, examine the pricing offered, choose among competing banks (and sometimes talking to them on the phone) and then deal with all the required back-office chores involved.
  • 360T’s presenters said that by automating the workflow trading process using rules-based trading execution technology that connects directly to a company’s treasury management system, users save time, achieve the best possible price—improving their spreads—and reduce operational risk caused by human errors.

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Pandemic Creates Too Many Unknowns to Change Pension Strategies

Pension managers struggle with strategy amid a pandemic pace unlike the drawn-out financial crisis.

Rapidly changing conditions during the pandemic have made it extremely difficult for many NeuGroup members and other treasury practitioners to create forecasts and devise strategies. Pension fund managers are in the same pickle, finding it nearly impossible to change their overall pension strategies given how fast the landscape is shifting.

Pension managers struggle with strategy amid a pandemic pace unlike the drawn-out financial crisis.
 
Rapidly changing conditions during the pandemic have made it extremely difficult for many NeuGroup members and other treasury practitioners to create forecasts and devise strategies. Pension fund managers are in the same pickle, finding it nearly impossible to change their overall pension strategies given how fast the landscape is shifting.

  • This is a far different predicament than during the 2008-09 financial crisis, which was a slow-moving disaster.
  • “The financial crisis evolved over time, so you had a lot of time,” said one member at a recent NeuGroup Pension and Benefits virtual meeting. “In COVID, you don’t have much time – you don’t know what things will be like a week from now.”
  • At the peak of the COVID crisis, pension managers focused on liquidity concerns—sometimes exacerbated by margin calls—and immediate benefit payment requirements.

Back seat. With market, credit and liquidity risk front and center, longevity risk management, which has minimal linkage to market conditions, has taken a back seat. Similarly, buy-outs and buy-ins—where plans buy annuities—are not currently priority projects. 

  • Buy-outs are on the back burner because many companies have already transferred low-balance participants because the economics are pretty powerful; that’s especially true of younger participants (whereas it becomes almost impossible to transfer longtime employees).

No enthusiasm for handouts. There was mixed enthusiasm for legislative initiatives like the American Benefits Council (ABC) proposal for new funding relief in light of the havoc COVID-19 has inflicted on defined benefit pension plans. This is because many investment-grade companies don’t face mandatory contributions in the next few years despite the market downturn, thanks to outstanding pension relief and previous proactive pre-funding. 

  • Nonetheless, funding relief remains a very important issue for some meeting participants; also, the Health and Economic Recovery Omnibus Emergency Solutions Act (HEROES) passed by the US House apparently already includes many of the ABC provisions that would result in substantial funding relief. HEROES was previously estimated to equate to roughly five years of funding holiday.

Fixed income. In drilling down on fixed-income strategy, one sponsor presenter said that, broadly, there are three phases of a crisis: a liquidity crisis, a credit crisis and, finally, an inflation crisis. He believed that we are at the start of the credit crisis stage. He noted that central banks are supporting some categories of assets but not others, with clear trading implications. 

  • It is hard to evaluate some asset categories based on cash flows that are currently being deferred by many borrowers (such as rents) because it’s not known how much and how fast the deferred amounts will get repaid.
  • Also, it was explained how increases in operating costs can erode margins and also increase leverage—particularly in the high-yield space. Ultimately, members should worry about inflation because how else will all the government and private sector debt get repaid?
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Pensions Look for Re-Entry, Re-Risk Opportunities

Pension managers were de-risking at the end of 2019, much to their relief months later; now it’s time to add some risk.

Although pension managers have been de-risking over the course of the last several months – and continue to do so in different areas – many are now on the hunt to re-enter the market to re-risk. “Can we be nimble enough to pounce given the opportunities that are out there?” wondered one member of NeuGroup’s Pension and Benefits (NGPB) peer group at a recent virtual meeting.

Pension managers were de-risking at the end of 2019, much to their relief months later; now it’s time to add some risk.

Although pension managers have been de-risking over the course of the last several months – and continue to do so in different areas – many are now on the hunt to re-enter the market to re-risk. “Can we be nimble enough to pounce given the opportunities that are out there?” wondered one member of NeuGroup’s Pension and Benefits (NGPB) peer group at a recent virtual meeting.

LDI. Liability driven investment and de-risking clearly was the winning strategy at the end of 2019, which caused collective sighs of relief when the pandemic hit. 

  • Overall, the sentiment was that the equity market now seems to have gotten ahead of itself, so some participants are keeping some liquidity available for market downturns. 

Different paths. One theme emerging from a projects and priorities discussion at the meeting was that there was no uniformity in pension strategy among member companies. There is no gold standard “answer.” Why? Because of variations in underlying situations, such as companies with active vs. frozen plans, varying demographics of plan participants, and well-funded plans vs. those with a large deficit. 

  • The current roller-coaster environment makes it challenging to shift pension strategy, particularly given corporate governance issues and board oversight.

An example of this is different approaches to glide paths: some companies only have de-risking triggers as funded status improves, others have re-risking as well when equity investment value declines, and others have no defined glide path at all. 

  • In one sponsor presentation on pension risk management, a more sophisticated evolution was presented using outright option positions, collars and option replication using delta hedging.  

Options an option? Still, these strategies are challenged by the currently high volatility behind option pricing and, in particular, the volatility skew which makes out-of-the-money put options particularly expensive. 

  • It sounded like a few meeting participants had investigated these strategies but again are challenged by governance issues in authorization for them. Some participants are not even using derivative overlays at this point. Derivative overlays facilitate rapid shifts in risk position without the costs of buying and selling underlying cash investments, and also allow for better management of overall risk.

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Economic Forecast: Outlook for Recovery Improving, but Numerous Risks Remain

Evercore ISI economist Dick Rippe lays out the case for second-half growth after a first-half plunge.

The increased difficulty of cash forecasting and other financial planning since the COVID-19 outbreak means that many treasury and finance teams are eager to hear informed economic analysis and forecasts while we all wait for a vaccine.

  • At a NeuGroup meeting in late May, Dick Rippe, managing director and economist at Evercore ISI, provided his firm’s US and global economic outlook and responded to member questions. Mr. Rippe this week provided updates to his firm’s forecast and analysis.

Evercore ISI economist Dick Rippe lays out the case for second-half growth after a first-half plunge.

The increased difficulty of cash forecasting and other financial planning since the COVID-19 outbreak means that many treasury and finance teams are eager to hear informed economic analysis and forecasts while we all wait for a vaccine.

  • At a NeuGroup meeting in late May, Dick Rippe, managing director and economist at Evercore ISI, provided his firm’s US and global economic outlook and responded to member questions. Mr. Rippe this week provided updates to his firm’s forecast and analysis.

Two quarters of pain. Evercore ISI forecasts the economy will contract by a 40% annual rate in Q2, following a drop of 5.0% in Q1. Mr. Rippe noted that the combined decline in the first two quarters is the largest in the post-World War II period. 

  • The firm has counted over 1,300 instances of layoffs, pay cuts, and business or institution closures; many of these may be temporary, but as they occur, they reverberate throughout the economy, Mr. Rippe said. 

Encouraging signs. Evidence of an upturn has been accumulating rapidly in Evercore ISI’s view:

  • Employment picked up in May (after an enormous fall in April); filings for unemployment insurance – while still high – have diminished substantially in recent weeks; and retail sales rebounded sharply in May, as have auto sales. Similar gains are being seen in China and Germany.
  • Massive economic stimulus is being provided by both the Federal Reserve and the fiscal authorities in Congress and the Trump Administration.
  • A major GDP driver is consumer net worth—the value of houses, securities, and bank accounts. It is close to an all-time high, Mr. Rippe said, adding that it fell much further during the 2008-2009 financial crisis than it did when the coronavirus pandemic started.


Growth likely to resume in H2. Based upon those signs and fundamentals, Evercore ISI updated its economic forecast to show a faster recovery in the second half of 2020.

  • The forecast now shows growth in both Q3 and Q4 at a 20% annual rate; even so, measured from Q4 2019 to Q4 2020, real GDP is expected to decline by 4.8%.
  • Evercore ISI forecasts an increase of 5.0% in 2021. 
  • The improvements depend upon maintaining simulative economic policies which will help keep companies open and consumers solvent, Mr. Rippe said.
  • The emergence of a country-wide second wave of infections would be very damaging, he added. On the positive side, the rapid development of a vaccine would allow a much more secure economic advance.

Dollar doldrums? Responding to a member’s query about the outlook for the US dollar, Mr. Rippe noted that low interest rates brought about by highly accommodative monetary policy would usually be expected to lower the dollar. But in the current global environment, almost all central banks are moving in the same direction. So while the dollar might decline a little, no big move was likely, he said.

Negative Rates? Addressing another member’s concerns about short-term rates possibly going negative, Mr. Rippe said that given the US’s productive economy, when growth resumes negative rates won’t be necessary. And the Fed would go negative only in an absolute emergency, he said, because of the havoc it would reap on money-markets.

  • “But if you asked me three years ago to bet on what German 10-year bond yields would be, I never would have bet they would be negative.”
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A Win-Win Solution to Save Suppliers and Manage Corporate Cash

C2FO gives on and off-balance sheet options for early payments to suppliers in need.

As suppliers struggle in the COVID-19 economic environment, getting cash to them quickly can be a lifesaver, and even better is letting them choose the rate that’s most suitable for their circumstances.

  • At a recent NeuGroup virtual meeting, a major retailer described how C2FO’s unique platform gives even small suppliers ready access to a flexible, in-house, early funding program or supply chain finance (SCF) solution.

Cash management tool. By using the C2FO platform, companies can employ their own cash to fund early payments to their suppliers in return for a discount; or suppliers can choose a dynamic SCF option funded via a banking partner Both ways guarantee early payments.

 

C2FO gives on and off-balance sheet options for early payments to suppliers in need.
 
As suppliers struggle in the COVID-19 economic environment, getting cash to them quickly can be a lifesaver, and even better is letting them choose the rate that’s most suitable for their circumstances.

  • At a recent NeuGroup virtual meeting, a major retailer described how C2FO’s unique platform gives even small suppliers ready access to a flexible, in-house, early funding program or supply chain finance (SCF) solution.

Cash management tool. By using the C2FO platform, companies can employ their own cash to fund early payments to their suppliers in return for a discount; or suppliers can choose a dynamic SCF option funded via a banking partner Both ways guarantee early payments.

  • “It’s a nice mixture of having off and on-balance sheet programs, and being able to adjust and navigate the different needs—both supplier needs and corporate needs—in the event we want to reallocate that cash somewhere else,” the senior director of global treasury said.

Uptick in demand. The pandemic has increased demand for C2FO’s platform, especially for the company-cash option, according to Jordan Novak, SVP of market innovation at the Kansas City-headquartered fintech.

  • The SCF rate is attractive for suppliers, but there are significant onboarding hurdles, whereas onboarding to a company’s internal offering is fast and easy.  

Slice and dice. The company provides the yield it seeks, i.e. the discount suppliers give for early payment, and the available cash. C2FO’s platform uploads approved invoices and suppliers log in to set offers for early payment. The fintech’s proprietary algorithms match suppliers’ offers to the company’s desired rate of return. For example, if the target rate is 2%, one supplier may offer 1.5% and another 2.2%, and the technology aggregates all offers to the desired rate, resulting in a higher volume program.

  • C2FO provides the company’s ERP with the discount and new pay date.
  • The company still pays its suppliers directly, only faster.
  • The platform eliminates the need to segment suppliers, as this happens automatically when suppliers name their rates through C2FO.
  • C2FO is able to create programs for small and medium-sized companies, women-owned, minority-owned and veteran-owned businesses. The major retailer was able to craft these programs for its suppliers overnight.
  •  “We can slice and dice different groups of suppliers and have different targets or minimal rates,” the member said.  

Win-win. C2FO facilitates the company’s early payments to suppliers, and it’s a boon to those in critical need of cash.

  • Suppliers can pursue early payment across multiple geographies on the same platform while staying compliant with tax regulations globally.
  • For companies, the cloud-based platform automates what previously could have been hundreds or even thousands of negotiations with suppliers, providing seamless collaboration among companies and their trading partners.
  • “It improves our cash position and return on cash on the margins, and where it’s being used, it is definitely a benefit to P&L,” the retail treasury member said.

Here’s a slide summarizing the reasons the retailer chose to use C2FO’s platform:

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A “Perfect Storm” in Emerging Markets Shatters Hope for Some Investors 

Treasury investment managers hear sober forecasts and calls for greater action by the IMF.

Hardly any of the treasury investment managers who met in early May at a NeuGroup virtual meeting said they owned emerging market (EM) debt—not very surprising given that most companies have been parking cash in high-quality, short-duration investments since the pandemic rattled credit markets.

  • But one manager who does invest in USD-denominated EM debt said he was “bitterly disappointed” in the International Monetary Fund and G7 nations that had not “come to grips” with the depth of the problem facing the poorest countries in the developing world in the wake of the coronavirus, adding that they “haven’t thought big enough about” the issue—a contrast to fiscal and monetary efforts by developed nations.
  • He noted that emerging markets had been forecast to supply two-thirds of the world’s economic growth.
  • On the plus side, his company had avoided investments in Argentina and sold stakes in Turkish and Ukrainian debt.

Treasury investment managers hear sober forecasts and calls for greater action by the IMF.

Hardly any of the treasury investment managers who met in early May at a NeuGroup virtual meeting said they owned emerging market (EM) debt—not very surprising given that most companies have been parking cash in high-quality, short-duration investments since the pandemic rattled credit markets.

  • But one manager who does invest in USD-denominated EM debt said he was “bitterly disappointed” in the International Monetary Fund and G7 nations that had not “come to grips” with the depth of the problem facing the poorest countries in the developing world in the wake of the coronavirus, adding that they “haven’t thought big enough about” the issue—a contrast to fiscal and monetary efforts by developed nations.
  • He noted that emerging markets had been forecast to supply two-thirds of the world’s economic growth.
  • On the plus side, his company had avoided investments in Argentina and sold stakes in Turkish and Ukrainian debt.  

BlackRock’s take. Several representatives from BlackRock, sponsor of the meeting, described a grim situation in emerging markets, with one saying many nations face a “perfect storm,” given inadequate health care infrastructure to deal with COVID-19 cases, the trend toward onshoring in global supply chains, capital outflows and serious debt issues. One presenter said the IMF’s efforts at debt relief were “not enough.”

  • One senior executive said he was “very bearish” on the outlook for countries including Brazil, Indonesia and Argentina, saying all hope has been “shattered.”
  • The executive also noted that the greatest impact of climate change will be on the equatorial world, including Brazil, Africa and Bangladesh. “If you believe in climate change, the long-term impact is incredibly ugly,” he said. The developing world, he added, will “use more coal than ever” during a severe economic downturn.

Updates. In mid-June, the BlackRock Investment Institute explained its views on EM debt:

  •  “We stay neutral on hard-currency EM debt due to the heavy exposure to energy exporters and limited policy space among some markets. Default risks may be underpriced.
  • “We are neutral on local-currency EM debt because we see a risk of further currency declines in key markets amid monetary and fiscal easing. This could wipe out the asset class’s attractive coupon income.” 
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So far, So Good: US Banking Sector Shows Strength During Pandemic

Banks are as healthy as ever, and  robust investment-grade debt issuance has bolstered the industry’s profitability.

The global pandemic has cratered economies and affected businesses the world over. But the US banking system remains healthy because banks are well capitalized, having adhered to rules put in place after the 2008 financial crisis. Equally important: Investment-grade debt issuance by corporates is generating bank profits.

Banks are as healthy as ever, and  robust investment-grade debt issuance has bolstered the industry’s profitability.

The global pandemic has cratered economies and affected businesses the world over. But the US banking system remains healthy because banks are well capitalized, having adhered to rules put in place after the 2008 financial crisis. Equally important: Investment-grade debt issuance by corporates is generating bank profits.

  • That’s some of what members of NeuGroup’s Tech20 Treasurers’ Peer Group heard at a recent meeting from a bank equity strategist.
  • “The investment-grade markets are stronger than ever,” the strategist said. “Funding markets are very robust, with corporates taking advantage of low rates.”
  • Data from US securities industry organization SIFMA and financial tech and data company Refinitiv show that investment grade companies have issued more $1 trillion in debt this year. As a result, the strategist said, bank industry profits “are going gangbusters,” noting that this is a continuation of a long-term trend.

Texas ratios. This all means that despite the current economic straits, “We can handle a greater level of the problems we’re facing,” the strategist said. He also referred to the “Texas ratio,” which, by dividing nonperforming assets by tangible common equity and loan-loss reserves, helps investors determine how risky a bank is. (The higher the Texas ratio the more financial trouble a bank might be in.) By this measure, the sector is, “very healthy.”

  • That health stems in part from banks “setting aside a lot of money for loan losses” in the first quarter, the strategist said. He acknowledged that deferments “are happening” and loan forbearances “are way up;” additionally, bank lending standards are tightening and “demand is going down.” He added that he expects bank earnings to be weak “but this is not a balance sheet event or credit event.” Bottom line: “The banking system is as healthy as its been in our lifetimes.”

Weakness in Europe. The strategist said that while US banks are in top form, European banks are not. That’s because of the zero interest rate environment in the European Union. The European bank sector is weak because zero rates makes banks inefficient, the strategist noted. “European banks are as weak as they were in during the ’08-’09 financial crisis,” he said. US banks have taken a hit and are a great shape, and “nowhere near ’09 levels.”
 
Negative rates in the US? While there are negative rates globally, the strategist didn’t think the US would go that route. “There are now unprecedented levels of negative rates” globally, he said. “Will US go there? No, because we have a huge money market fund market and if we break the buck again, then it will be a huge mess.” And it certainly would be “negative for bank profitability.”

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The Loan Road Ahead: Steep Prices May Linger Longer Than Short Tenors

Post-pandemic advice from U.S. Bank for treasury teams: keep close to your banks.

Unlike the booming bond market, corporates still face restrictions on loans, and it may be awhile before pricing returns to pre-pandemic levels. U.S. Bank, sponsor of a recent NeuGroup meeting for assistant treasurers, provided participants with insights into revolver drawdowns and what to anticipate when refinancing or seeking new debt.

Revolver pricing leaps. The volume of revolving-credit drawdowns—once taboo—has hovered at over $250 billion since leaping to that level in mid-April.

  • A plurality of drawdowns by volume (42%) has been by companies rated ‘BBB’, followed by ‘BB’ (24.9%), ‘B’ (10.6%) and ‘A’ (8.5%), according to U.S. Bank.
  • Highly-rated borrowers issuing incremental short-tenor, drawn facilities saw pricing jump more than 40%, and well over 100% for undrawn ones, except ‘AA’ which increased 86%.

Post-pandemic advice from U.S. Bank for treasury teams: keep close to your banks.

Unlike the booming bond market, corporates still face restrictions on loans, and it may be awhile before pricing returns to pre-pandemic levels. At a recent NeuGroup meeting for assistant treasurers, U.S. Bank provided participants with insights into revolver drawdowns and what to anticipate when refinancing or seeking new debt.

Revolver pricing leaps. The volume of revolving-credit drawdowns—once taboo—has hovered at over $250 billion since leaping to that level in mid-April.

  • A plurality of drawdowns by volume (42%) has been by companies rated ‘BBB’, followed by ‘BB’ (24.9%), ‘B’ (10.6%) and ‘A’ (8.5%), according to U.S. Bank.
  • Highly-rated borrowers issuing incremental short-tenor, drawn facilities saw pricing jump more than 40%, and well over 100% for undrawn ones, except ‘AA’ which increased 86%.

Restrictions will persist. Libor floors became prevalent early on, said Jeff Stuart, U.S. Bank’s head of capital markets, and several structural features have since emerged, such as restricted payment tests on dividends and share buybacks, and anti-hoarding provisions requiring that a portion of drawdowns be used to pay down debt.

  • “I think they’ll be here for a while,” said Mr. Stuart, responding to a question whether such changes will apply to new issuances or executing an “accordion” option to increase loan size.
  • Pricing will stay elevated as well. “That’s what we’re going to see for some time,” Mr. Stuart said.

Some good news. Of 156 deals since March 23 tracked by U.S. Bank, only five new-money deals achieved tenors longer than a year; four were unrated and two secured. Eight “amends and extends” were longer than a year, and all 13 of those deals were in May.

  • “The world fell out of the five-year and dramatically increased the 364-day,” Mr. Stuart said, adding longer tenors will likely return to pre-pandemic levels sooner than pricing.

Some advice. Given banks’ “shock” at the rush to draw down revolvers, Mr. Stuart said, for the foreseeable future it will be harder to do multiyear facilities as well as accordion and incremental financings without impacting pricing on entire deals.

  • Banks are squirrely now, saying no to easy deals but agreeing to difficult ones. “It’s very difficult to predict what they’ll do, so this is a time when you need to be as close to your banks as ever,” Mr. Stuart said.
  • He anticipates greater confidence to lend next year and potentially improvements come fall, but “If you don’t have to do a deal now, don’t do it.”

No more stigma. Asked how drawing down a revolver influences banks’ view of the borrower, Mr. Stuart said initially he was perturbed at the lack of trust that the funding request implied, but soon realized how boards applied pressure to bolster liquidity.

  • “It used to be the worst thing a corporate could do, drawing down its back-up revolver, but I don’t think anybody is looking at it like that now,” he said.
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Dusting Off the Cobwebs and Retooling the Investment Policy

An inside look at portfolio governance and changes to investment strategies.

When the global pandemic hit, investment managers needed to act fast to manage liquidity and move company cash to short-dated safe havens. So having flexibility in their investment management strategy was essential for reallocation of portfolios and easy access to cash. At two NeuGroup virtual meetings for investment managers, members discussed investment policies and what governance their companies have in place.

An inside look at portfolio governance and changes to investment strategies.

When the global pandemic hit, investment managers needed to act fast to manage liquidity and move company cash to short-dated safe havens. So having flexibility in their investment management strategy was essential for reallocation of portfolios and easy access to cash. At two NeuGroup virtual meetings for investment managers, members discussed investment policies and what governance their companies have in place.

What is best-in-class portfolio governance? Most member companies have an investment policy that includes a high-level statement that can only be modified by the board, with underlying investment policies and procedures that may be changed by the treasurer or assistant treasurer; some require CFO approval.

  • The most convenient practice is to have a policy that allows the treasurer or assistant treasurer approval of investment mandates with monthly or quarterly reporting to the CFO and yearly reporting to the board. But is most convenient also best in class? Yes, if responsiveness during the liquidity crisis could have been inhibited by waiting for board approval.

Reinventing an investment program.  One member recently went through the process—thankfully before the global pandemic—of dusting off the cobwebs on her company’s investment policy and shared with peers the following advice for successful realignment.

  • Consider your cash buckets (i.e.: operational cash versus cash reserves), establish a minimum cash framework and back test your operating buffers.
    • Determine and maintain minimum operating cash balances.
    • Ensure sufficient liquidity to meet ongoing operational & strategic business needs.
  • Establish a new “cash culture” mindful of the cash impact from operational decisions.
    • Secure buy-in from management.
    • Align more frequently with FP&A.
    • Host biweekly meeting with treasurer & finance heads.
    • Improve treasury Cash Forecast by making departments accountable for forecast variances.
  • Conduct an investment policy review annually (or more frequently as needed)
    • Oversee risks, controls, managers and performance within treasury and accounting teams.
    • Address manager violations. One member uses Clearwater to monitor managers’ decisions and performance, making the managers reimburse the company if they violate a policy and have to sell an asset at a loss; if the manager was out of compliance at time of purchase, the CFO is alerted.

Benchmark for success:  This starts with monitoring the investment portfolio) daily and report at least monthly and quarterly. Also:

  • Pay attention daily to market moves, fair market value changes, unrealized gains/losses.
  • Compliance guidelines should be established via dashboards and baseline reporting. 
  • One member advocated that reporting is a way to confirm alignment with internal stakeholders.
    • Although his 10-page policy is approved annually, every quarter his team reports portfolio performance to the board.
    • Each month, his team sends the treasurer and CFO reports on permissible investments, holdings, performance, variances to prior years. 
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Latin America Treasury Peer Group Members Discuss Challenges of Managing Cash Amid Crisis

NeuGroup and Latin America

By Joseph Neu

Latin America is being hard hit by the COVID-19 virus and the economic aftershocks, both of which formed the backdrop for NeuGroup’s Latin America Treasury Peer Group 2020 H1 virtual meeting. Members discussed the challenges of intercompany lending, the lack of treasury center capabilities and looming Argentina chaos.

Here are few key takeaways I wanted to share.

By Joseph Neu

Latin America is being hard hit by the COVID-19 virus and the economic aftershocks, both of which formed the backdrop for NeuGroup’s Latin America Treasury Peer Group 2020 H1 virtual meeting. Members discussed the challenges of intercompany lending, the lack of treasury center capabilities and looming Argentina chaos.

Here are few key takeaways I wanted to share.

Rethinking intercompany funding. One member noted that in most Latin American countries where her company is located, entities are funded on a standalone basis. This is challenging when banks locally don’t step up with reasonable credit.

  • MNCs funding intercompany need to fit the region carefully into their strategic financing plans, for example, to tailor funds transfer pricing or their capital allocation models for intercompany loans; also at issue is capital invested into the region and cash pulled out vs. left in country.
  • COVID-19 has vastly disrupted forecasts of local cash and capital needs, so going forward, members will look to both improve forecasting capabilities in the region and integrate them more smoothly into the company’s broader strategic cash and capital planning.

Exasperation with the lack of treasury center capabilities. Members expressed their growing impatience with the lack of progress in the region, by governments and banks, to allow them to implement world-class cash management and other treasury operations solutions.

  • Latin America is simply not keeping pace with what is happening in the rest of the world. The impediments to world-class treasury center capabilities, e.g., linking up affiliates to the in-house bank, makes it more challenging amid the crisis to meet the needs of members’ businesses, customers, suppliers, and other stakeholders.

Factoring in another Argentina crisis. As one member observed, this is not a new occurrence for Argentina; the country has defaulted on its debt nine times. Still, the most recent default has led to some new and innovative restrictions to accessing USD, members note.

  • For example, there has been a call on companies with offshore dollars to use them to pay external vendors before being able to sell more pesos. The only alternative is to invest pesos in assets that yield something that helps mitigate the inflationary loss.
  • So-called blue-chip swaps and their bond equivalents still carry fears of reputation risk.
  • Meanwhile, find a bank to help with factoring receivables so that you get those pesos to invest or spend as soon as possible.
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A New Money Market Platform Leverages JPMorgan’s Depth in Technology and Innovation

The abrupt stampede to safety in financial markets unleashed by COVID-19 in March 2020 created chaos and concern for investors, financial institutions and regulators. And it put extra scrutiny on the ability of digital solutions, systems and tools that underpin global trading, execution and settlement to serve and satisfy millions of financial professionals trying to do their jobs from home.

Among the digital solutions facing its first real-world crisis was Morgan Money, a web-based, open architecture money market trading platform with state-of-art technology designed by J.P. Morgan Asset Management that launched at the Association for Financial Professionals’ annual conference in Boston in October 2019. Four months after AFP, the liquidity crisis sparked by the pandemic sent many institutional investors rushing to sell risk assets—including prime money market funds (MMFs)—and park cash in lower-risk government and treasury funds. Money fund assets swelled and now exceed $5 trillion, according to Crane Data.

The abrupt stampede to safety in financial markets unleashed by COVID-19 in March 2020 created chaos and concern for investors, financial institutions and regulators. And it put extra scrutiny on the ability of digital solutions, systems and tools that underpin global trading, execution and settlement to serve and satisfy millions of financial professionals trying to do their jobs from home.

Among the digital solutions facing its first real-world crisis was Morgan Money, a web-based, open architecture money market trading platform with state-of-art technology designed by J.P. Morgan Asset Management that launched at the Association for Financial Professionals’ annual conference in Boston in October 2019. Four months after AFP, the liquidity crisis sparked by the pandemic sent many institutional investors rushing to sell risk assets— including prime money market funds (MMFs)—and park cash in lower-risk government and treasury funds. Money fund assets swelled and now exceed $5 trillion, according to Crane Data.

In March alone, institutional investors plowed $821 billion1 into government MMFs. That massive flight to quality sent monthly trading volume on Morgan Money surging about 40% to $120 billion2 , fueled in part by inflows into the JPMorgan US Government Fund, whose assets reached $228 billion.

1 Source: Crane Data
2 Source: J.P.Morgan Asset Management

Through it all, Morgan Money never missed a beat—exactly as its creators expected. One reason: The surge in activity in March didn’t approach what the technology team had thrown at the system in periodic stress tests in which the platform is subjected to trading and connection requests significantly higher than what would ever happen in reality.

“We had zero downtime during the COVID pandemic, not a single minute of downtime intraday,” said Paul Przybylski, Head of Product Development and Strategy for JPMorgan’s global liquidity business. “When clients asked for money, they got the money. When they invested with us, the money was invested.”

And in the weeks that followed, Morgan Money clients had no issues using the platform from home. “The fact this platform is web-based allowed us to really be resilient throughout this,” Mr. Przybylski added. “It allowed our clients to use their own personal computers and log on to the platform. Working from home had no impact at all. Things worked as intended.”

A treasury analyst at a US aviation company is among Morgan Money’s proponents in the wake of the outbreak. “Morgan Money has been essential in enabling me to fully execute my role, especially since we started working from home,” she said. “Having access to all my accounts in one place and being able to trade with the peace of mind that JPMorgan cybersecurity brings has been indispensable.”

Investing in tech, talking to clients

Today, Morgan Money has about $124 billion in assets under management, more than 1,000 unique clients, 4,000 active users and 20,000 registered users. In addition to JPMorgan MMFs, short-duration and ultra-duration funds, the platform offers MMFs from third-party fund families in the US and EMEA. JPMorgan is leveraging the bank’s investments in technology (nearly $11 billion annually) and cybersecurity—combined with its deep reservoir of products, services and relationships—to get an edge in a competitive market where banks and nonbanks provide treasury teams and other investors with portals and platforms that allow them to select and trade money funds from multiple asset managers.

“Throughout our history, JPMorgan has helped clients navigate changing environments and challenging markets,” said John Donohue, CEO of Asset Management Americas and Head of Global Liquidity. “Our significant investments in innovation and technology will enable Morgan Money to continue to meet clients’ needs, both immediately and as they evolve and transform over time.”

To better serve those investors, JPMorgan drilled deep into what they really want. The Morgan Money team initially conducted client interviews where they asked portal users, “What is your ideal state? What’s broken? How can we make things better?” The mission became clear, Mr. Przybylski said. “We had to build a platform that offered the easiest way to execute a trade so someone in treasury can purchase a product in fewer clicks. It’s all about trade flow and settlement, and how easily you make those work.”

Trading carts, analytics and APIs

Eighteen months and some 200-plus additional client meetings later, Morgan Money offers treasury investment managers a look and feel that’s familiar to anyone who has purchased something online: a trading cart (patent pending) that allows users to easily create trades and save them for future execution. They can make multiple trades with one click as opposed to processing each one separately. Also familiar are tools that let investors hover their cursor over a fund name and have information like the minimum investment pop up on the screen.

Morgan Money’s risk analytics tools have all been designed in-house to give users a powerful, intuitive and visual way to analyze their holdings and compare them to other funds on many levels. Investors can examine their investment exposures by instrument type, issuer, maturity, country and rating, down to the individual holding level.

They can drill down and filter to show the CFO their exposures to, say, China and Canada. A what-if analysis function allows them to model the potential impact of a trade—either buying or selling—and see how it might affect exposures at an account, company or full relationship level. And they can export everything to Excel in a raw, pivot ready format.

Morgan Money’s creators say their system stands apart from some competitors’ because it allows users to do real-time transactions and reporting, thanks to application programming interfaces (APIs). That functionality can pay off when an investor needs to make a trade close to cutoff. “Morgan Money has the ability to connect to our clients and their systems via APIs, which are instant connections, sending information back and forth in real time,” Mr. Przybylski said. “Most connections out there are done through secure file transfer protocol (SFTP), where you send a file every few minutes. We have the ability to send a trade instantly rather than waiting for the next batch.”

APIs also open the door to integrating Morgan Money with a client’s treasury management (TMS) or enterprise resource planning (ERP) system, a trend JPMorgan expects to accelerate in the post-pandemic world as seamless connectivity becomes more essential for trade execution. “I think everything is going to be on a shorter timetable,” Mr. Przybylski said. “We all saw working remotely as the future before the crisis. Now I think things are going to be accelerated. Everyone wants the flexibility and automation. So having the digital integration capabilities is going to be a big point going forward.”

Morgan Money will also provide, when necessary, so-called tech credits that help platform users defray TMS and other expenses, including payments to Bloomberg and Clearwater Analytics. That’s critical for some investors, including one NeuGroup member who said, “That’s the model we’re used to, having tech credits that offset other expenses within treasury.”

Looking ahead

In the wake of the pandemic, tools like Morgan Money that have given clients a greater sense of control when doing their jobs outside of the office and outside of their comfort zones—a situation that could last for months—may enable treasury teams to transform how and where they operate.

“When you’re trading large amounts, a lot of people are cautious in terms of doing this anywhere but from the office,” Mr. Przybylski said. “I think this current experience is going to open people’s eyes to their ability to do these things at home, especially considering the security levels are so high and that we have the same cybersecurity throughout the JPMorgan system, wherever you use it.”

This new mode of operation will require Morgan Money and other digital solutions to keep innovating to offer finance teams more options to do more kinds of work remotely, efficiently and safely. And that fits perfectly with JPMorgan’s vision of the future.

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Life Sciences Treasurers Speak to Capital Market Strategies, Insurance and Payment Fraud Mitigation

By Joseph Neu

The NeuGroup Life Sciences Treasurers’ Peer Group completed its H1 meeting series last week, sponsored by Societe Generale. Here are a few takeaways I wanted to share:

Three types of companies with three capital markets crisis strategies. Life sciences businesses, like those in most sectors, fall into three general capital market strategy buckets:

  1. Those needing rescue capital in order to survive through this crisis.
  2. Those looking to fortify their balance sheets.
  3. Those looking to be opportunistic to monetize high stock volatility and build acquisition capital to diversify their growth portfolio.

By Joseph Neu

The NeuGroup Life Sciences Treasurers’ Peer Group completed its H1 meeting series last week, sponsored by Societe Generale. Here are a few takeaways I wanted to share:

Three types of companies with three capital markets crisis strategies. Life sciences businesses, like those in most sectors, fall into three general capital market strategy buckets:

  1. Those needing rescue capital in order to survive through this crisis.
  2. Those looking to fortify their balance sheets.
  3. Those looking to be opportunistic to monetize high stock volatility and build acquisition capital to diversify their growth portfolio.

Most members saw the crisis as a reason to build liquidity to give themselves the option to fund R&D, have dry powder for an acquisition and fund share buybacks or dividend payments.

  • That means the majority of companies in this group have one foot in the balance sheet fortification strategy and the other in the opportunistic and strategic bucket.

Pandemic pushing traditional insurance out. A session on the insurance market impact of COVID-19 revealed that the market is driving retention increases, with as much as 60 percent increases on renewal quotes.

  • But higher retention is not leading to the expected premium relief, especially on D&O and property coverage.
  • Some corporates are not even able to get competing quotes on D&O.

The feeling that the insurance market is broken is compounded by the lack of direct and indirect pandemic coverage found in current policies. Some of this is still to be determined by legislation and litigation. Plus, members are told that outright pandemic exclusions should be expected going forward and pandemic coverage, if offered at all, will come at a very high price.

  • These circumstances have more members weighing creative coverage and alternatives to traditional insurance, such as captives and group captives, perhaps even for D&O.
  • They are also allocating more lead time to the renewal process to consider all options. 

Payment fraud prevention in focus. Cyber risk of all kinds has risen during the work from home phase of the virus and remains high as more workers return to the office. But payment fraud is top of mind. One member presented to the group a layered approach to preventing payment fraud.

  • A key insight was the focus on contractual language now embedded in their supplier portal to put the onus on all vendors to comply with their cybersecurity requirements, including immediate notice of a business email compromise.
  • Plus, the supplier portal allows the firm to use credentialed logins to identify the right person to confirm remittance discrepancies.
  • Another popular best practice is to implement after-action reviews to go over any issues or events to make them into a teachable moment.
  • These reviews complement well a reward system where anyone who takes the extra step to confirm a potentially fraudulent payment or prevent a real one is acknowledged.

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Smooth Sailing: One Investment Manager’s Painless Adoption of CECL

Taking a qualitative approach and doing no discounted cash flow calculations produced a calm CECL debut for at least one investment manager.

At a recent NeuGroup meeting, the only investment manager whose company adopted the new accounting standard for estimating credit losses in the first quarter described a relatively painless process, giving comfort to some of his peers. The meeting, sponsored by BlackRock, included a presentation by Aladdin on FASB’s current expected credit losses (CECL) methodology. Aladdin offers risk management software tools and is part of BlackRock.

Qualitative vs quantitative. Among the CECL decisions facing corporates is whether to assess their credit investment portfolio on a qualitative basis or to use a quantitative approach that requires the use of models and, often, discounted cash flow (DCF) analysis. One of the Aladdin presenters said clients with larger portfolios often do a quantitative analysis or combine it with a qualitative approach.

Taking a qualitative approach and doing no discounted cash flow calculations produced a calm CECL debut for at least one investment manager.

At a recent NeuGroup meeting, the only investment manager whose company adopted the new accounting standard for estimating credit losses in the first quarter described a relatively painless process, giving comfort to some of his peers. The meeting, sponsored by BlackRock, included a presentation by Aladdin on FASB’s current expected credit losses (CECL) methodology. Aladdin offers risk management software tools and is part of BlackRock.

Qualitative vs quantitative. Among the CECL decisions facing corporates is whether to assess their credit investment portfolio on a qualitative basis or to use a quantitative approach that requires the use of models and, often, discounted cash flow (DCF) analysis. One of the Aladdin presenters said clients with larger portfolios often do a quantitative analysis or combine it with a qualitative approach.

  • The NeuGroup member whose company adopted CECL uses a qualitative method as an initial screen; if the qualitative assessment indicates that a security is “not money good,” then a quantitative assessment will be performed. The company’s accountants are comfortable with this approach, he added. 
    • In response to a question, the member said that in the event of needing to do a DCF analysis he will have Clearwater run the analysis. In practice, this is unlikely because any security with a credit loss will likely have been out of compliance and sold, he said.
  • The investment manager said his portfolio assessment includes making sure that every security is investment grade and then looking closely at any “outliers” that have dropped below a certain price level. He receives feedback and guidance from external managers when an issuer is downgraded. “Is it still money-good” is what he wants to know.
  • One investment manager said the perspective offered by the member who doesn’t expect to have to do any DCF analyses provided some relief. “The additional work may not be as bad as I thought it would be,” he said.
  • Another member of the group would like to see a survey showing if peers are taking a quantitative or a qualitative approach. He said the qualitative process described earlier “doesn’t sound vastly different from an “OTTI regime,” referring to the other-than-temporary impairment approach used to account for credit losses before the adoption of CECL. 

Adverse or severe? Companies using models as they adopt CECL face other decisions, including which economic scenario to use—particularly challenging given the uncertainty created by the COVID-19 pandemic. An Aladdin presenter said the relevant scenarios today include:

  1. Baseline
  2. Adverse
  3. Severely adverse

The presenter said most, but not all, of the companies he’s seen are using the adverse scenario assumptions. That surprised at least one member who has run scenarios in preparation to adopt CECL. He said, “We asked ourselves, if this isn’t severe, what is?”

  • That same member, in response to a question about what his scenario testing had revealed, said it was “super interesting to watch.” He said the company initially had no credit losses on its books; “now, suddenly it’s everywhere.” An Aladdin presenter later said CECL could have an impact on earnings for some companies that have adopted the standard. 

Final thoughts. That said, the member whose company has adopted CECL said that “our general stance is that CECL is not targeted to us,” a sentiment that echoed statements heard in at least one of the meeting’s earlier breakout sessions on projects and priorities, where CECL was deemed “sort of a non-event for everyone,” as the NeuGroup leader in the group described it. We’ll see if that sentiment holds up through the next few quarters. 

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Differing Opinions About Audit Opinions

Internal auditors use a variety ratings or opinions for their reporting, despite a trend of not using them.

There is a growing trend of internal audit departments moving away from using audit opinions, or ratings, to rate the progress of a mitigation effort. The idea is to focus on the audit issue itself and mitigate it. Despite this trend, many auditees and audit committee members are happy with the current system and push back against suggestions to get rid of ratings.

Following an audit of a process, the auditee gets a rating or opinion on the progress they’ve made on fixing the process – the audit issue. Ratings methods differ; some employ colors.  Green generally means good while colors like yellow or orange mean “needs work” or “needs improvement;” red means things are bad and not being addressed at all. “I’ve never seen a red since I’ve been an auditor,” one member said at a recent virtual meeting of NeuGroup’s Internal Auditors’ Peer Group (IAPG).

Internal auditors use a variety ratings or opinions for their reporting, despite a trend of not using them.

There is a growing trend of internal audit departments moving away from using audit opinions, or ratings, to rate the progress of a mitigation effort. The idea is to focus on the audit issue itself and mitigate it. Despite this trend, many auditees and audit committee members are happy with the current system and push back against suggestions to get rid of ratings.

Following an audit of a process, the auditee gets a rating or opinion on the progress they’ve made on fixing the process – the audit issue. Ratings methods differ; some employ colors.  Green generally means good while colors like yellow or orange mean “needs work” or “needs improvement;” red means things are bad and not being addressed at all. “I’ve never seen a red since I’ve been an auditor,” one member said at a recent virtual meeting of NeuGroup’s Internal Auditors’ Peer Group (IAPG). 

In the meeting, members described their various rating scales – no two the same – and said in some cases they were asked to move away from them. One reason for this was that many of the functions being audited focused too much on the rating and not on the underlying issue. “The (audit) finding gets lost,” said one auditor. 

  • But auditors say they get pushback when they discuss moving away from ratings. “Execs like the overall rating because they don’t have to read the whole audit report,” said one IAPG member. Added another member, “Audit reports sometimes have too many pages. [AC members and executives] will read through them and then ask, ‘what’s important here?’ So the ratings and colors are needed.” 

And despite the industry effort to drop ratings, some IAPG members have actually added more rating categories to their scales. Several members who have three ratings for findings, typically along the lines of “satisfactory,” “needs improvement” and “ineffective” or “unsatisfactory,” have added more nuance. In a few cases they have split the middle rating, “needs improvement,” into “moderate improvement opportunity” and “needs significant improvement.” 

Language matters. Members also mentioned that there’s sometimes pushback over the language of ratings. 

  • For one member, the legal department made IA change the red rating “ineffective” to “major improvement needed.” This was because, in the case of a lawsuit, ineffective could be misconstrued and create a problem.
  • Another member mentioned that sometimes auditees, particularly millennials, take issue even if their mitigation efforts are good or get the top rating. In this member’s case, that rating is “satisfactory,” which to some ears sounds mediocre or worse. But the auditor said it’s not his job to say it’s anything more than that. 
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Goldman Sachs’ Bold Vision for Virtual Accounts and the Future of Cash Management

Goldman Sachs is entering the cutthroat and increasingly crowded world of corporate cash management determined to play the role of innovative disruptor—no easy task. A cornerstone of Goldman’s strategy is a product whose name is familiar to many corporate treasury professionals but that is not fully understood by all of them: virtual accounts.

That state of affairs has put Mark Smith, Goldman’s Transaction Banking head of global liquidity, on a mission to answer every question treasury teams have about virtual accounts, particularly as the bank has just launched its own Virtual Integrated Account (VIA) offering in the US, with plans to roll it out internationally later in 2020. “Virtual accounts are a foundational product for us and we’re conscious that awareness and understanding of them is inconsistent,” Mr. Smith says. “We’re here to change that.”

Goldman Sachs is entering the cutthroat and increasingly crowded world of corporate cash management determined to play the role of innovative disruptor—no easy task. A cornerstone of Goldman’s strategy is a product whose name is familiar to many corporate treasury professionals but that is not fully understood by all of them: virtual accounts.

That state of affairs has put Mark Smith, Goldman’s Transaction Banking head of global liquidity, on a mission to answer every question treasury teams have about virtual accounts, particularly as the bank has just launched its own Virtual Integrated Account (VIA) offering in the US, with plans to roll it out internationally later in 2020. “Virtual accounts are a foundational product for us and we’re conscious that awareness and understanding of them is inconsistent,” Mr. Smith says. “We’re here to change that.”

The Basics

Virtual accounts began in the Asia-Pacific region in the early 2000s and started being used extensively in Europe in the last 10 years. In the last five years, they’ve become more mature in Europe, where there is less dependency on cash. They’re a relatively new concept in the US, presenting Goldman with an opportunity to help corporate treasurers who are seeking more efficient liquidity solutions.

“At their most basic,” Mr. Smith says, “virtual accounts are simply a way of organizing and reporting data within a real bank account.” Traditionally, he explains, companies have organized cash flow information by having separate physical bank accounts. He cites an example of a corporate with 10 divisions, with each division having its own bank account; in this instance, the cash balance, incoming receipts and outgoing payments can be tracked for each. “But that means maintaining 10 bank accounts,” Mr. Smith says. One alternative is to have one bank account and tracking information on an Excel spreadsheet with 10 tabs. The trouble with the Excel model is that “correctly allocating the incoming receipts and outgoing payments can be time-consuming and error-prone.”

Unique Identifiers

Virtual accounts organize data within a bank account so that it looks as if it’s divided into mini-accounts or sub-ledgers (i.e., virtual accounts). Just like a real bank account, each virtual account has an opening balance, a closing balance, incoming receipts and outgoing payments. The key to achieving this is assigning a unique identifier to each incoming receipt and outgoing payment so that the bank’s VIA solution can attribute it to the correct virtual account, and in turn the bank account with which it is associated. These identifiers can be reference numbers, in which case each payment instruction needs to contain the real bank account number and the reference number.

Alternatively, the virtual account identifiers can be configured as a clearing-recognized account number, such as an International Bank Account Number or IBAN. This method means that the payment instruction only needs to contain the clearing-recognized account number; no additional reference number is required. When the bank receives the incoming payment, the VIA system automatically posts it to the relevant real bank account and (simultaneously) reflects it in the correct virtual account. Virtual accounts and the real account are always kept in sync.

Mr. Smith says the benefits of the reporting capability of virtual accounts have helped fuel their growth among corporates. This is particularly true in Europe, where many cite the typical treasury need for better control and visibility over cash and liquidity. But the potential of virtual accounts goes far beyond reporting and visibility.

Rationalization

Virtual accounts are a great tool for tackling the challenge of bank account and bank rationalization. Treasuries worldwide have witnessed a proliferation of bank accounts over the past several decades as customers and supply chains have expanded globally. This has brought with it the time and cost required to open and maintain all those accounts.

With virtual accounts, once the master physical account has been established, any number of virtual accounts can be opened—all with minimal additional documentation, if any. This will be one of the main features of Goldman‘s VIA offering. “The Goldman Sachs offering is self-service, putting the full power and flexibility of virtual accounts in the hands of the treasurer,” Mr. Smith says. This means treasurers “can effectively open and close virtual accounts instantly, and update hierarchies in real time. It’s a totally different experience to managing traditional bank accounts.

At their most basic virtual accounts are simply a way of organizing and reporting data within a real bank account.

In certain situations, virtual accounts can eliminate and replace real bank accounts, but with no loss of reporting detail. What’s more, Mr. Smith asserts that a virtual account could end up costing at most a tenth of what a traditional account would cost—and in many cases, virtual accounts may be free altogether. Consequently, rationalizing traditional accounts into virtual accounts should save both time and money.

Goldman Sachs’ offering can also function across ERP systems. This means users will have the ability to send information using all industry formats; it’s also API-enabled and integrated across all the firm’s product offerings, real time if required. This is unlike incumbent payment mechanisms, which many banks use, and which use a host-to-host connection or node. Moreover, once the SWIFT structure is implemented, it’s hard to change.

More than Just Accounts Receivable (AR)

Arguably the most documented use case for virtual accounts is in receivables management, which is how virtual accounts got started in Asia over a decade ago. Virtual accounts address an inherent problem with traditional receivables structures in which many receipts are received into one bank account, requiring significant manual intervention to reconcile.

Breaking up a traditional bank account into virtual accounts can, Mr. Smith says, drive much higher rates of straight-through reconciliation if, for example, one virtual account is assigned per client. Reconciling receipts vs. open accounts receivable in the one-to-one relationships in virtual accounts is, Goldman says, more straightforward than in the “many-to-one” relationships typical in traditional account structures.

Nikil Nanjundayya, Goldman’s Transaction Banking head of emerging products, says that using virtual accounts this way eliminates the need to dedicate personnel to manual reconciliation, resulting in potentially significant cost savings. Furthermore, faster reconciliation can mean faster cash application and better working capital availability. Faster reconciliation can even lead to a better client experience.

Payments/Receipts On Behalf Of (POBO/ROBO)

Virtual accounts also drive significant efficiencies within a given legal entity, but they can be a powerful on-behalf-of tool when applied to corporate structures, Mr. Smith says. Subsidiaries no longer need to maintain their own bank accounts. Instead, they can maintain virtual accounts with a parent entity or treasury center. In this case, the virtual account becomes an intercompany ledger, recording the parent entity’s or treasury center’s position with the subsidiary, as well as all the underlying transactions.

If a treasury center makes a payment on behalf of a subsidiary, that outgoing payment will bear the subsidiary’s virtual account number and will reflect simultaneously in that virtual account and post to the physical account. Incoming receipts similarly can be reflected on behalf of a subsidiary to the relevant virtual account.

Goldman Sachs’ offering can also function across ERP systems. This means users will have the ability to send information using all industry formats; it’s also API-enabled and integrated across all the firm’s product offerings, real time if required.

While virtual accounts can drive POBO/ROBO structures, clients will still need to organize their payment and receipt operations centrally. This may require a time investment up-front, but the time and cost savings of POBO/ROBO structures will be well worth it and are well documented.

Virtual accounts can therefore sit at the heart of an in-house bank. Here, Mr. Smith is keen to reiterate the advantage of the Goldman Sachs virtual account offering. “Goldman virtual accounts can be configured to be clearing-recognizable, which some other in-house bank solutions cannot,” he says. He adds that other “engines” for virtual accounts rely on reference numbers, but those numbers can be mistakenly omitted or transposed, resulting in the inefficiency of manual intervention.

Some European banks, and even European corporates, believe virtual account structures may be a convenient way to address regulatory pressure on notional pooling. In Europe, Basel III requires capital to be held against the gross assets in a notional pool, not the net position. This has made notional pooling more expensive for capital-intensive European banks, which are subject to the supplementary leverage ratio; it has even called into question the future of notional pooling altogether.

“Single currency notional pools can absolutely be replicated virtually,” Mr. Smith explains. This is done by assigning virtual accounts to subsidiaries within the same physical accounts, he says. Mr. Smith adds that individual virtual accounts can be overdrawn, but if the physical account maintains a positive balance, no overdraft charges are incurred. The virtual pool is also self-funding and self-collateralizing. Crucially, only the net balance on the physical deposit is reflected for general ledger and regulatory reporting—including capital reporting. “There’s no risk of gross-up as you have with a notional pool,” Mr. Smith says. Finally, pooling in this way doesn’t require cross guarantees as the bank faces only the one physical bank account.

Pooling Not Out Completely

Virtual multicurrency notional pools should also be possible through multicurrency virtual accounts, in which the parent physical account is denominated in one currency while the virtual accounts represent wallets in different currencies. The currency balance on the virtual accounts is translated into the nominal currency of the parent account but isn’t converted via any FX trade—they remain in source currency. The economics should be like a traditional multicurrency notional pool, where net negative balances are charged a cost-effective collateralized overdraft rate. But again, cross guarantees aren’t required as the bank faces the net position on the parent physical account.

Because cross guarantees aren’t required, virtual notional pooling should be significantly more straightforward to establish than traditional notional pooling. Theoretically, more clients should be able to benefit from the cheaper funding costs and lower FX fees as a result, Goldman argues.

There is one important difference between traditional notional pooling and virtual notional pooling. In a traditional notional pool, there are no intercompany balances between entities. In a virtual notional pool, all participating virtual accounts represent an intercompany relationship with the entity that owns the physical account. For some corporates, avoiding intercompany balances is an important objective in pooling. Such corporates will need to weigh the potential advantage of avoiding cross guarantees against any potential disadvantages of intercompany balances.

KYC Questions

Both banks and their corporate clients have wondered whether virtual accounts can ease the burden of know your customer (KYC) and anti-money laundering (AML) rules when physical accounts are replaced with virtual accounts. The use of virtual accounts may streamline customer onboarding obligations, with a focus on the customer—the physical accountholder. Still, it is reported that in South America, local regulations are requiring KYC by legal entity. “A certain level of due diligence will always be required on any participant in the US financial system, whether they participate physically or virtually,” Mr. Nanjundayya says.

Mr. Smith and Mr. Nanjundayya maintain that Goldman’s VIA is cutting-edge, and will continue to evolve, offering a best-in-class user experience, including full self-service capability as well as the ability to scale. As Mr. Nanjundayya explains, “Clients can open a million or more virtual accounts effective instantly themselves, should they need to—and to close them.” Further, he says, Goldman Sachs clients will be able to structure accounts into hierarchies and adjust those hierarchies using the same self-service capability. This ability to scale isn’t possible with traditional bank accounts, Mr. Nanjundayya says. Additionally, traditional cash structuring, including account opening, typically involves more engagement with the bank than is necessary with virtual structuring.

But Goldman doesn’t just want to be at the leading edge when it comes to virtual accounts; it wants to define that leading edge and drive it forward. “We are also future-proofing our product,” Mr. Nanjundayya asserts. While the bank is not willing to divulge specifics, Goldman’s offering will include capabilities expanding into FX, analytics, cross-border activity and even M&A management.

Virtual accounts drive significant efficiencies within a given legal entity, but they can also be a powerful on-behalf-of tool when applied to corporate structures.

It’s All About the User

Goldman Sachs believes that the benefits of virtual accounts can benefit all clients and that its offering is not a segment-specific solution. That means it is flexible and can be adapted to corporates that have a variety of use cases, i.e., different corporates will use the accounts in different ways. For example, a property manager may use them to track the cash flows for each building, while a software company may use them to manage developer payments.

Migrating to virtual accounts need only be as complex as changing bank accounts, although structuring them into more sophisticated solutions will need careful planning in partnership with the bank. However, the benefits of moving to virtual accounts should outweigh the costs many times over, Goldman says. In short, the bank says that virtual accounts should be at the heart of treasury transformation.

Transaction Banking is business of Goldman Sachs Bank USA (“GS Bank”) and its affiliates. GS Bank is a New York State chartered bank and a member of the Federal Reserve System and FDIC, as well as a swap dealer registered with the CFTC, and is a wholly-owned subsidiary of The Goldman Sachs Group, Inc. (“Goldman Sachs”). Transaction Banking services leverages the resources of multiple Goldman Sachs subsidiaries, subject to legal, internal and regulatory restrictions. Transaction Banking has compensated NeuGroup for their participation in the drafting of this white paper.   

© 2020 Goldman Sachs. All rights reserved.

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Financing the Fight Against COVID-19: Sustainability Bond Deals

Corporates and banks fuel gains in social and sustainability bond issuance amid the battle against the coronavirus.
 
The coronavirus pandemic may have dampened green bond issuance in the first quarter of 2020, but it has also pushed some corporates to use proceeds from sustainability bond offerings to help fight the virus. Case in point: Pfizer.

  • Heather Lang, executive director of sustainable finance solutions at ESG ratings firm Sustainalytics—which is being acquired by Morningstar—named Pfizer as one of the institutions using proceeds from recent sustainable debt deals to address the effects of COVID-19. She spoke at a recent NeuGroup meeting for assistant treasurers. Sustainalytics provided Pfizer with a so-called second-party opinion supporting the deal.
  • Pfizer—already in the process of preparing to issue a sustainability bond when the virus began—said some of the $1.25 billion in proceeds from its 10-year March offering will be used to “address the global COVID-19 pandemic and the threat of antimicrobial resistance.”

Corporates and banks fuel gains in social and sustainability bond issuance amid the battle against the coronavirus.
 
The coronavirus pandemic may have dampened green bond issuance in the first quarter of 2020, but it has also pushed some corporates to use proceeds from sustainability bond offerings to help fight the virus. Case in point: Pfizer.

  • Heather Lang, executive director of sustainable finance solutions at ESG ratings firm Sustainalytics—which is being acquired by Morningstar—named Pfizer as one of the institutions using proceeds from recent sustainable debt deals to address the effects of COVID-19. She spoke at a recent NeuGroup meeting for assistant treasurers. Sustainalytics provided Pfizer with a so-called second-party opinion supporting the deal.
  • Pfizer—already in the process of preparing to issue a sustainability bond when the virus began—said some of the $1.25 billion in proceeds from its 10-year March offering will be used to “address the global COVID-19 pandemic and the threat of antimicrobial resistance.”

Big Picture. Sustainalytics, according to its slide presentation, has expanded its “internal taxonomy to explicitly identify potential use of proceeds related to the virus, targeting two main areas – healthcare and socio-economic impact mitigation.”

  • Sustainalytics said, “Social bonds are ideal instruments for allocating capital to specific groups impacted by the pandemic and/or the wider population impacted by the economic crisis,” one reason that “there has been an uptick in social and sustainability bond issuance since the COVID-19 outbreak.”
  • In mid-May, Bank of America issued a $1 billion bond aimed at financing not-for-profit hospitals, skilled nursing facilities, and manufacturers of health care equipment and supplies.
  • At the time of that deal, Bloomberg reported that borrowers globally had raised a record $102.6 billion of debt this year to combat the coronavirus including development banks, sovereigns and corporates. It reported that Chinese companies have issued the most so-called pandemic bonds.

Multiple uses of proceeds. During the meeting, one NeuGroup member said that public bond offerings are inherently sizable, “so unless you have major sustainability projects, it’s kind of hard” to use all the proceeds for environmental, social or governance activities.

  • But Ms. Lang pointed out that proceeds from one offering can be allocated to multiple uses.
  • For example, she said, a company could use the money for a pair of renewable energy projects, a Leadership in Energy and Environmental Design (LEED)-certified headquarters office, and several social initiatives. “It doesn’t all have to go into one bucket.” 

Loans are the rage. Volume in the fastest-growing segment of the sustainability market, ESG-linked loans, leapt 168% over the last two years, exceeding $122 billion last year. One big draw: They offer the flexibility to use the proceeds for general corporate purposes.

  • They’re designed to promote the pursuit of sustainability goals by linking the interest rate on the loan to the achievement of those goals.
  • They’re available to investment grade and non-investment grade companies, including “browner” companies not previously eligible for an ESG bond, Ms. Lang said. They can be structured as revolvers, term loans, bilateral or syndicated.

She said Sustainalytics has recently worked on transactions for shipping companies, which struggled to enter the green market but have “a lot of potential for reducing carbon emissions for their fleets.”

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Founder’s KTAs from NeuGroup for European Treasury Peer Group 2020 H1 Meeting

By Joseph Neu
 
The European Treasury Peer Group 2020 H1 meeting took place last week, sponsored by HSBC. Here are some takeaways that I wanted to share:
 
COVID-19 validates regional treasury centers. HSBC said the case for regional treasury centers has been further validated by the pandemic. In comments on how clients have shown resilience and are preparing for markets to reopen, the bank noted the importance of real-time global exposure information, including a centralized liquidity and risk management framework; but also critical is the existence of treasury hubs to execute in regional markets.

By Joseph Neu
 
The European Treasury Peer Group 2020 H1 meeting took place last week, sponsored by HSBC. Here are some takeaways that I wanted to share:
 
COVID-19 validates regional treasury centers. HSBC said the case for regional treasury centers has been further validated by the pandemic. In comments on how clients have shown resilience and are preparing for markets to reopen, the bank noted the importance of real-time global exposure information, including a centralized liquidity and risk management framework; but also critical is the existence of treasury hubs to execute in regional markets. 

  • The value of regional centers stems from the need for MNCs to be agile and respond quickly in the new normal. That’s because the predictability of cash flows, FX markets and thus exposures are substantially diminished. So are the diversification of risk portfolios, natural hedges and the capacity to take risk more generally.
  • One result is that the comfort zone in which treasurers can wait for local context to get relayed to headquarters and for risk managers there to respond is likely to be gone for a while. 

Work from home works. All members reported that working from home (WFH) has worked well and better than expected. But some participants admitted to missing the office. Two reasons:

  • The ability to communicate on small things without scheduling a phone call or web conference is a disadvantage of WFH. 
  • Onboarding and training new hires remotely remains a big challenge. 

At the next meeting, members will share how their plans to return to the office have evolved. Most expect the additional flexibility of working remotely to persist post-pandemic. How this plays out for regional centers located in tax advantaged locations with substance requirements will be something to watch.
 
The virtues of virtual accounts. Two members shared rollouts of virtual account (VA) projects in EMEA. All members noted that their banks have been selling them hard.

  • The tangible advantage described so far is for companies with multiple ERPs, since virtual accounts allow them to identify payments and separate account statements, helping to automate posting and reconciliation across various systems.
  • VAs can bring more efficiency to liquidity sweeping arrangements with fewer accounts to manage and audit. 

Tax departments at several member companies are leery of assigning virtual accounts to multiple entities, which would help transform pay-on-behalf-of and receive-on-behalf-on structures, and allow in-house banks to fully leverage them. But the bottom line is that virtual account penetration in EMEA continues. 

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C2FO Showcases Scope Expansion to AT Leaders

Working Capital Cycle

By Joseph Neu

C2FO sponsored our recent Assistant Treasurers’ Leadership Group Meeting on Zoom. Their scope expansion, which is indicative of ways working capital platforms can support business ecosystems in this crisis, is my first of three takeaways from that meeting.

Working capital platforms expand their scope. Platforms such as C2FO’s focusing on intermediating between buyers with access to capital and a wide range of suppliers with working capital needs have a vital role to play in this pandemic.

  • C2FO is focusing on bringing more small and medium-sized businesses to their platform to better access working capital.
  • They can use their platform to connect suppliers with buyers in a position to offer early payment directly in reaction to the Covid-19 triggered economic downturn or to connect suppliers with their buyers’ banks and other financial providers to fund their working capital using the buyer’s superior credit.
  • C2FO is also advocating for government stimulus aimed at small businesses to get channeled through its platform.
  • Finally, to get access to working capital sooner, platforms are looking to offer pre-invoice, or purchase order financing in response to this crisis.

Either way, C2FO says, firms helping suppliers with earlier payment are generating stickiness and loyalty.

By Joseph Neu

C2FO sponsored our recent Assistant Treasurers’ Leadership Group Meeting on Zoom. Their scope expansion, which is indicative of ways working capital platforms can support business ecosystems in this crisis, is my first of three takeaways from that meeting.

Working capital platforms expand their scope. Platforms such as C2FO’s focusing on intermediating between buyers with access to capital and a wide range of suppliers with working capital needs have a vital role to play in this pandemic.

  • C2FO is focusing on bringing more small and medium-sized businesses to their platform to better access working capital.
  • They can use their platform to connect suppliers with buyers in a position to offer early payment directly in reaction to the Covid-19 triggered economic downturn or to connect suppliers with their buyers’ banks and other financial providers to fund their working capital using the buyer’s superior credit.
  • C2FO is also advocating for government stimulus aimed at small businesses to get channeled through its platform.
  • Finally, to get access to working capital sooner, platforms are looking to offer pre-invoice, or purchase order financing in response to this crisis.

Either way, C2FO says, firms helping suppliers with earlier payment are generating stickiness and loyalty.

Insurance renewals won’t be fun. Several members noted working on insurance renewal projects and hearing from peers that it is a nightmare, with premiums going higher for less coverage, starting with D&O. 

  • In response members are working more closely with their brokers, even changing brokers to seek better advice, as well as focusing internal risk teams on coming up with solutions. 

Bond economics are key to positive bank relationships. In a session where members narrated their recent bond deals to shore up liquidity for the crisis, all mentioned more attention than ever being paid to using bond economics to reward banks:

  • in the RCF,
  • who indicated a willingness to step up with new lending, or
  • who had helped advise on pre-crisis capital structure and capital plans.

There was also attention paid to familiar faces who had been actives on a bond deal with them before, given that everyone had to do this remotely.

  • Passives who lost out due to this “familiar-faces” bias, might also have gotten some make up money.

Such is the importance of bond economics to bank relationships these days.

Stay safe and well.

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How Corporates Tapping Capital Markets Use Minority and Diversity Firms

NeuGroup members discuss benefits, challenges and process as treasury promotes diversity and inclusion.  

Many treasury teams at multinational corporations strive to include firms owned by women, people of color and disabled veterans when selling debt, buying back stock or issuing commercial paper. At a recent NeuGroup meeting focusing on capital markets, members shared their insights on the process of including minority and diversity firms in various transactions.

Formalize the process. The member who kicked off the discussion described her company’s path toward formalizing the process of using minority and diversity firms to underwrite bond deals. Using diversity firms as junior managers initially encountered resistance from some lead managers who declined to fill their orders, she said. But in 2013 the company mandated the inclusion of five to six of the firms in each debt issue, allocating 1% to 2% of the bonds to them.

NeuGroup members discuss benefits, challenges and process as treasury promotes diversity and inclusion.  

Many treasury teams at multinational corporations strive to include firms owned by women, people of color and disabled veterans when selling debt, buying back stock or issuing commercial paper. At a recent NeuGroup meeting focusing on capital markets, members shared their insights on the process of including minority and diversity firms in various transactions.

Formalize the process. The member who kicked off the discussion described her company’s path toward formalizing the process of using minority and diversity firms to underwrite bond deals. Using diversity firms as junior managers initially encountered resistance from some lead managers who declined to fill their orders, she said. But in 2013 the company mandated the inclusion of five to six of the firms in each debt issue, allocating 1% to 2% of the bonds to them.

  • “There are about 20 firms we use,” the member explained. “We sat down with each one of them three years ago and we rotate among 12-15 of them for bond deals.”
  • Every year, the company also sets up a relatively small, 364-day revolving credit facility employing local diversity firms from the metropolitan area where it’s based.

Adding value. Some members have found diversity and minority firms add particular value in stock buybacks. “We have found a select group that do well in share repurchase,” said one participant. Others said they had more success in using diversity and minority firms in their CP programs, including the session leader. “They have come through for us when bulge bracket firms have not come through,” she said.

  • At a separate NeuGroup meeting of assistant treasurers, one member said, “Philosophically we want to further diversity, but we also want to find ways to add value when we work with diversity and minority firms.” Transaction execution quality is the top criteria to measure value, he added.
  • On bond deals, “we find these firms bring real and incremental orders,” the AT said, noting the investors they serve tend to be price-insensitive. And while those orders don’t make or break a deal, they help on the margin, diversifying the company’s large debt stack.

Meetings matter. Participants in both NeuGroup discussions agreed that meeting with diversity and minority firms is worthwhile, in part to determine which business owners are truly “walking the talk.” For instance, one member said, it’s a red flag if a woman who owns a firm shows up with six men. Also, he wants to know what a firm owned by a disabled veteran is doing beyond hiring veterans. He was particularly impressed by one firm that is offering training classes to disabled vets. 

  • Another member said it’s important to find minority and diversity firms that truly align with the values of his company, adding that hiring these firms is an extension of the corporation’s commitment to environmental, social and governance (ESG) principles—an increasingly important topic for issuers. 

Challenges. The relatively small size of a diversity or minority firm and the capital it has may limit its ability to execute on a bond underwriting, members said. “How much they could take was a problem,” one said of her experience with minority firms on debt deals. 

  • The assistant treasurer’s company has a sizable investment portfolio, but trades requiring significant balance sheets can be problematic for small minority firms, he said. Their size can also inhibit them from providing asset-management services to large corporates seeking efficiency by doling out multi-billion-dollar mandates.

Backing by big banks. Members agreed that a few large investment banks step up to help manage the inclusion of a minority or diversity firm in a bond offering and, in some cases, provide a capital backstop for the smaller firm. Other banks, one member said, still ask, “Why do we have to do this?” In other words, as another member observed, “Some lead underwriters are better or more willing than others.”

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Founder’s KTAs from the Global Cash and Banking Group 2020 H1 Meeting

Digital Forecasting

By Joseph Neu

NeuGroup facilitated our Global Cash and Banking Group’s 2020 H1 meeting last week, sponsored by ION Treasury.

Here are a few takeaways I wanted to share.

Focused on cash visibility and forecasting, still. Members in this group noted that their projects and priorities had not shifted as a result of Covid-19 and its impacts, given that cash visibility and forecasting were already a priority.

  • Using treasury technology and process improvement to get better at both also has not changed.
  • It’s just now the tech and processes have to work from home.

By Joseph Neu

NeuGroup facilitated our Global Cash and Banking Group’s 2020 H1 meeting last week, sponsored by ION Treasury.

Here are a few takeaways I wanted to share.

Focused on cash visibility and forecasting, still. Members in this group noted that their projects and priorities had not shifted as a result of Covid-19 and its impacts, given that cash visibility and forecasting were already a priority.

  • Using treasury technology and process improvement to get better at both also has not changed.
  • It’s just now the tech and processes have to work from home.

AI is the future of cash forecasting. Among the cross-product solutions ION is focused on are machine learning applications, starting with a cash forecasting tool leveraging artificial intelligence, mostly in the form of machine learning and deep learning neural networks. ION’s research suggests that linear regression-based learning models perform well for businesses with stable, growing cash flows, but less well with cash flows subject to seasonal peaks. ARIMA, or AutoRegressive Integrated Moving Average and Neural Network models perform better, but require extra modeling:

  • for seasonality with ARIMA models and
  • with neural networks, careful attention to training data to learn from and supplemental intervention when non-repeating events occur, such as when global pandemics happen.

Still, you can get 90%-95% accuracy most of the time, in seconds vs a day or more.

Bank connectivity as a service progressing. Members sharing on bank connectivity experience suggests that it is a diminishing, albeit still a pain point as:

  • global banks offer to serve as a gateway for statements and payments
  • TMS and ERP vendors look to connect around traditional bank portals and
  • specialty providers fill the breach for those ill-served by these solutions.

Balancing access security (e.g., managing tokens) and segregation of duties with convenience and business continuity in a crisis (mailing new physical tokens vs. turning off virtual tokens on employees own smartphones fast enough) is still an issue, yet positive progress is the prevailing sentiment.

Stay safe and well.

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Good Timing: Blowout Bond Deals Before and After the Meltdown

Two debt issues show the benefits of both planning and flexibility when tapping capital markets.

Investors clamoring for highly rated corporate bonds before the financial-market meltdown began in late February and again in early May provided opportunities for issuers to do debt deals at very attractive terms under different circumstances. Two members of NeuGroup’s Assistant Treasurers’ Leadership Group discussed with peers the key factors and market dynamics driving their companies’ deals.
 
The similarities. Each company’s offering, one at the start of 2020 and the other in early May, was oversubscribed by several multiples.

  • Each deal saw spreads inked well below initial price talk.
  • Both companies are in the technology sector and their deals may have benefited from investor demand following a dearth of tech offers in 2019. 

Two debt issues show the benefits of both planning and flexibility when tapping capital markets.

Investors clamoring for highly rated corporate bonds before the financial-market meltdown began in late February and again in early May provided opportunities for issuers to do debt deals at very attractive terms under different circumstances. Two members of NeuGroup’s Assistant Treasurers’ Leadership Group discussed with peers the key factors and market dynamics driving their companies’ deals.
 
The similarities. Each company’s offering, one at the start of 2020 and the other in early May, was oversubscribed by several multiples.

  • Each deal saw spreads inked well below initial price talk.
  • Both companies are in the technology sector and their deals may have benefited from investor demand following a dearth of tech offers in 2019. 

Thinking ahead pays. With existing bonds maturing over the summer and volatility likely as November elections neared, the first issuer decided that refinancing early was prudent. Had it waited a few months, the combination of blackout periods and the market impact of the coronavirus could have derailed its efforts.

So does flexibility. The second issuer had planned to refinance at year-end 2020 an existing deal maturing in summer 2021. Then it drew down its revolver in March, prompting a rethink. A lesson learned, the issuer’s AT said, was “be quick and flexible enough to react to market changes.”

  • Equities rallied and credit spreads tightened in April in response to the Federal Reserve’s aggressive efforts to stabilize markets and fiscal stimulus.The company filed its 10-Q at month’s end, a week after its earnings, to give investors time to read disclosures, especially regarding COVID-19.
  • The offering prospectus noted explicitly that proceeds were to pay down the revolver and refinance existing bonds, reassuring investors.

ESG talk helps. The first issuer’s bond wasn’t a sustainability bond, but slides in its NetRoadshow presentation discussed the company’s ESG footprint, and the CFO and treasurer explained its ESG initiatives during investor calls.

  • “That allowed us to draw a more diversified group of investors,” the AT said.  

Rewarding book runners. When assigning active book-runner positions, the first issuer prioritized help it had received on capital structure and allocation issues—beyond the banks’ normal treasury-operations services.

  • The second issuer chose active book runners from the first tier of its bank group and appeased a tier-one member that didn’t get that lucrative position by giving it the swap-manager role. “We typically would have unwound [the forward-starting swaps] ourselves, but we gave them that business,” the AT said.  

Saving money. The second issuer informed banks that it planned to pay down the revolver and asked them to waive the “breakage fee” for drawing on the bank facility. “Since we were dangling the bond economics, it gave them incentive to waive those fees,” the AT said.

  • The first issuer saved interest expense by stating the transaction size of its deal would not exceed what was initially announced, allowing the bookrunners to tighten pricing and get the best terms possible for the company.

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Aligning Investment Strategy With the Shape of the Economic Recovery

Investment managers hear Neuberger Berman’s bull, bear and base case scenarios and the outlook for credit markets.

The best path for some fixed-income investors amid the uncertainty created by the pandemic may be to follow the lead of the Federal Reserve and buy assets that the US central bank is buying to keep credit markets liquid. That was among the key takeaways about asset allocation at a NeuGroup virtual meeting of treasury investment managers in late April sponsored by Neuberger Berman.

Bull, bear or base case. Neuberger Berman shared with members its investment playbook, which lays out three scenarios for economic recovery:

Investment managers hear Neuberger Berman’s bull, bear and base case scenarios and the outlook for credit markets.

The best path for some fixed-income investors amid the uncertainty created by the pandemic may be to follow the lead of the Federal Reserve and buy assets that the US central bank is buying to keep credit markets liquid. That was among the key takeaways about asset allocation at a NeuGroup virtual meeting of treasury investment managers in late April sponsored by Neuberger Berman.

Bull, bear or base case. Neuberger Berman shared with members its investment playbook, which lays out three scenarios for economic recovery:

  1. Base case: “U-shaped” recovery
  2. Bull case: “V-shaped” recovery
  3. Bear case: “L-shaped” recovery

Medical, not economic. One of the Neuberger Berman presenters called the bull case somewhat “implausible,” while another said that investors betting on the bear case should definitely “follow the Fed.” The scenario that ultimately plays out, he said, will be determined more by “medical” facts than traditional economic forces. He added that watching what happens in countries farther along the coronavirus curve than the US will indicate whether the recovery is W-shaped, following second waves of infections.

Update: differentiation. In mid-May, Neuberger Berman’s asset allocation committee (ACC) wrote in a report that “after ‘following the Fed’ in the wake of the central bank’s interventions in credit markets, investors appear to have moved quickly to differentiate the strong from the vulnerable, reminding us of the importance of robust fundamental research in the current environment.”

What to do now. Following the meeting, one of the presenters said the following when asked for advice for corporate treasurers looking to add yield:

  • Extending maturities modestly makes sense as we think the Fed will be on hold for a significant period.
  • Although they have tightened off the [widest spreads], things like AAA-rated ABS, CMBS, and mortgage product make sense.
  • Although riskier, we like AAA-rated CLOs and short duration investment grade corporate securities as well.

Retracement but value. At the meeting, the presenters said that although spreads had tightened significantly on high-quality corporate debt, valuations remained attractive, a point reiterated by Neuberger Berman’s fixed income strategy committee in a subsequent report. It stated that weak economic growth will create challenges for pockets of credit markets—amid strong central bank support.

  • “The combination of these two ideas leaves us focused on high-quality fixed income investments, which in our view have substantial upside even after the recent retracement in markets. A world of zero yields will ultimately drive investors toward quality investments that are supported by global central banks,” the committee wrote.

Pretty bullish. In a follow-up discussion, one of the presenters said Neuberger Berman thinks “this can be an environment where credit spreads and risk assets reach pretty bullish outcomes.”

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Risk and the Butterfly Effect on Supply Chains Amid COVID-19 

What small issue now can turn into a larger risk later? And how far away is later?
 
Can a small slipup in the supply chain—such as the inability to get a small part—create a bigger risk down the line? That example of the butterfly effect in action is what one member of NeuGroup’s Corporate Enterprise Risk Management group says he and management have been thinking about lately. The issue, like many things in business these days, is that COVID-19 adds a new and unpredictable layer to forecasting.

What small issue now can turn into a larger risk later? And how far away is later?
 
Can a small slipup in the supply chain—such as the inability to get a small part—create a bigger risk down the line? That example of the butterfly effect in action is what one member of NeuGroup’s Corporate Enterprise Risk Management group says he and management have been thinking about lately. The issue, like many things in business these days, is that COVID-19 adds a new and unpredictable layer to forecasting.
 
Scope and speed. “We’re really struggling with something happening in the supply chain” and then how big it will become and how soon it would affect the business, he said. He added that the velocity of risk, that is, how soon whatever happens in the supply chain hurts the company, is also difficult to predict in the current environment. “There are different views of this,” he said. 

  • “One group might say that if so and so happened, it would take nine months” to affect the company. “Another group may say three months.”
  • This member is also refocusing on another significant risk that has been mostly forgotten amid the pandemic: trade war. This is something that was a big supply chain concern in all of 2019, the member said, and to him, “is more serious than COVID-19.”

Risk influencer. Another topic discussed by ERM members is the idea that COVID-19 shouldn’t be considered a risk at this point, but more of a risk influencer. There are other risks that predate the pandemic and will exist going forward. The challenge now is determining how will COVID-19 impact those existing risks. 

  • One ERM member said he was trying to get management to think beyond the short term and COVID-19. As the company “gets back into the swing of things, we want management to start thinking of the long-term risks associated with COVID-19.”
  • Echoing this point, another member added that he’s also been trying to get his management to think of COVID-19 not as a “separate risk, but something that is influencing other risks.”
  • “COVID-19, yes, but let’s not forget about existing risks,” added another member.
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Investment Managers Balance Need for Liquidity and Desire for Yield 

More cash and falling interest rates have some corporates weighing a return to prime funds.

Many treasury teams have plenty of cash to invest but not many places to park it that offer attractive yields. That has some of them debating whether, when and how to add risk to their portfolios while preserving capital and liquidity. The challenge is figuring out “how to optimize cash in a very short portfolio,” as one member put it. Read on to see what others said this spring at two NeuGroup virtual meetings for investment managers.

More cash and falling interest rates have some corporates weighing a return to prime funds.

Many treasury teams have plenty of cash to invest but not many places to park it that offer attractive yields. That has some of them debating whether, when and how to add risk to their portfolios while preserving capital and liquidity. The challenge is figuring out “how to optimize cash in a very short portfolio,” as one member put it. Here’s some of what others said this spring at two NeuGroup virtual meetings for investment managers:

  • “We’re evaluating different alternatives to pick up yield without commensurate risk—there’s not a lot of low-hanging fruit,” one assistant treasurer said. “We don’t want to get too far out over our ski tips. It’s a struggle—there’s no playbook in terms of where we’re headed here.”
  • Another member asked what others are doing “to capture extra yield” given that rates at the front end of the yield curve are near zero. “I struggle with that,” responded one of his peers. “I can go out six months and get 30 basis points; is it worth it?”
  • Another investment manager said his team is “balancing liquidity for the firm with taking advantage of dislocations.”

Raising capital. The economic uncertainty created by the pandemic sent many corporations racing to the capital markets to boost liquidity by issuing debt in record amounts in March and April. One member’s company raised more than $10 billion in two bond offerings. “Now we have to manage the cash,” he said, a reality mentioned by several members whose companies had done debt deals.  

Time for prime? After huge outflows sparked by the pandemic, prime funds more recently have seen inflows and increased interest by NeuGroup members who dumped them to put cash in government and treasury money market funds (MMFs). The Federal Reserve’s backstop, the Money Market Mutual Fund facility (MMLF), gave some investors more peace of mind about credit risk.

  • One member with cash to invest after raising capital asked if any of his peers had done “anything to find yield” and whether there was an “easy yield pickup” between prime and government MMFs.
  • “We are in prime funds,” another member said later. “We find the yield benefit attractive currently and do not have operational issues supporting the NAV movements. We ‘diligence’ prime fund managers thoroughly before investing in any particular fund to ensure we are OK with their credit process.”  
  • Another member, who is not back in prime funds or LVNAV funds in Europe, is considering them now, in part because he likes their yields relative to bank deposits, saying he views the risk of deposits “the same or worse” as prime funds. He’s evaluating:
    • Performance of the fund before, during, and after “what has so far been the peak of the market dislocation.”
    • The fund’s NAV, size, any gates or fees imposed and any recapitalizations.
    • “We will also look at things like the Fed’s MMLF to see how that may help in case there is a market ‘flare-up’,” he said.

Enhanced money market fund.  One participant who is not invested in prime MMFs raised the interest of peers by describing an enhanced MMF she manages internally that allows her to “go out three years floating, 18 months fixed” and invest in BBB credits. Over a six-year period, she has outperformed prime funds by about 40 basis points. And the icing on the cake: “I don’t charge 15 basis points.”

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Aligning Risks to Inculcate Risk Awareness

How one company’s ERM team is raising risk awareness and its own profile by organizing the firm’s sprawling risks.

Sometimes the best way to add importance to your function is to look to the top. To management, that is. This was what one company’s enterprise risk management team did to accomplish two things: help organize the company’s risks and add a level of seriousness to the function itself.

The head of this ERM team recently described, at NeuGroup’s Corporate ERM Group’s annual meeting, how he and his colleagues went about this task of organizing and legitimizing.

How one company’s ERM team is raising risk awareness and its own profile by organizing the firm’s sprawling risks.

Sometimes the best way to add importance to your function is to look to the top. To management, that is. This was what one company’s enterprise risk management team did to accomplish two things: help organize the company’s risks and add a level of seriousness to the function itself.

The head of this ERM team recently described, at NeuGroup’s Corporate ERM Group’s annual meeting, how he and his colleagues went about this task of organizing and legitimizing.

  • The member said that when he took over the role of head of risk management at the company, “ERM was a board reporting exercise; it was muted.” But then the board, in its desire to improve at oversight, decided it wanted to get a better handle on the company’s risks.

Simplifying. The member said his team started with the twin goals of simplifying and optimizing. “Simplification,”  he said, was “near and dear” to his company’s heart. This involved getting a better and more holistic view of enterprise risks and applying a strategy that assigned risks to business lines or individuals and allowed a better way to share results, standardize risk scoring, clarify risk definitions and roles, and leverage technology.

Whose risk is it? One of the first issues was identifying who owned what risk. “We don’t have a lot of roles that are ‘risk managers’ or ‘risk champions.'” ERM developed a risk council, which was comprised of people from different parts of the business. The council was given heft by drafting “a leader that was high up in the organization to help navigate and get people more engaged.” There is now active engagement across the company as well as a program that is a good balance of time, commitment and resources for all involved. 

Aligning on tech. There is also good alignment on methodology and what technology to use. The member said that the technology search has been getting momentum from other functions that have an interest in ultimately sharing it. “More groups are pricking up their ears as we get closer to a tool selection,” he said. This is beneficial because it will allow ERM to share the cost with whichever function decides to partner with it.

Sharing the news on risk. The final step will be how to share any findings on risk and spread the word across the business. This includes creating a forum for problem-solving and sharing information on risk, where to focus mitigation efforts and aligning the messaging to leadership. 

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Pandemic Raises the Stakes for Banks to Double Down on Digital

Digital banking is speeding up, and banks not getting ahead of the trend will be left behind.

Now is the time for all good bankers to embrace digital banking—or risk being left behind as the pandemic accelerates a trend that was gaining momentum well before the arrival of COVID-19. Engaging with digital now is also smart because the barrier to entry is relatively small and the returns can be significant. Those were among the insights from a presentation at a recent virtual meeting of NeuGroup’s Bank Treasurers’ Peer Group.

  • “This was a shift that was going to take years, but now that timeline has sped up,” a digital banking analyst at the meeting said. “It is now compressed into a matter of months.” He also said that “social distancing will reformat bank branches,” so there will be fewer visits to brick and mortar banks, which means banks, like many companies during the pandemic, should consider shrinking their footprints.
  • “There won’t be people walking through the door,” the bank analyst said. And contactless payments will continue to grow. “Cash is one of the dirtiest things you can touch these days,” he added.

Digital banking is speeding up, and banks not getting ahead of the trend will be left behind.

Now is the time for all good bankers to embrace digital banking—or risk being left behind as the pandemic accelerates a trend that was gaining momentum well before the arrival of COVID-19. Engaging with digital now is also smart because the barrier to entry is relatively small and the returns can be significant. Those were among the insights from a presentation at a recent virtual meeting of NeuGroup’s Bank Treasurers’ Peer Group.

  • “This was a shift that was going to take years, but now that timeline has sped up,” a digital banking analyst at the meeting said. “It is now compressed into a matter of months.” He also said that “social distancing will reformat bank branches,” so there will be fewer visits to brick and mortar banks, which means banks, like many companies during the pandemic, should consider shrinking their footprints.
  • “There won’t be people walking through the door,” the bank analyst said. And contactless payments will continue to grow. “Cash is one of the dirtiest things you can touch these days,” he added.

Growing pool. Another presenter, a bank treasurer, pointed out that the pool of potential clients for digital is growing, particularly in the health care space. Doctors and dentists are increasingly processing payments digitally and want to borrow online to expand their businesses. Another reason to act now: nonbank competitors.

  • “Amazon is becoming more bank-like,” the presenter said. The online retailer is “able to use vendor information to offer loans and financing. How can we tap that?”

Bottom line. Bankers at the meeting also heard that current technology solutions help level the playing field for regional banks. “We’re not a G-SIB,” the bank treasurer said, referring to the behemoth global systemically important banks. “So, this was an opportunity to buy and get in,” he said of his own bank’s entry. There are good verticals, he added, and the volume of business could mean a big increase in bank revenue.

  • He also said that nearly 90% of all banking is now done digitally, so there’s almost no choice. “Investing in digital infrastructure is paying benefits,” so “if you’re not focusing on digital, you’re missing out.”

More takeaways:

  • Shift in customer service. The digital bank analyst said that in addition to investing in tech, banks will need to hire more customer service staff. Digital banks are seeing a “huge influx of calls into call centers during the crisis,” he said.
  • Saying no. Customers are resisting paying for certain bank services. “They don’t want to pay fees; checking fees and for other services,” the analyst said. Also, digital banks have been waiving fees for early withdrawal on CDs.” The good news is that lower overhead with digital means banks would be able to waive some fees.
  • Reality check. It’s easier said than done for regional banks to digitize their entire product set. Online deposit gathering is very rate driven, and not a reliable source of funds. Loan origination online takes work, particularly if you want to digitize the whole customer journey through the interfaces with back-end systems.
  • Keep trying. Nonetheless, some members report success, competing with the likes of Chase, which has much bigger systems overhead than almost anyone else. This also eats up a significant portion of their tech spend advantage. Being smaller and agile helps. Members also report success with targeted acquisitions.
  • No more wet signature? The digital wave also may be the end of e-signatures, the bank treasurer said. “Will the Federal Reserve keep accepting e-signatures? Banks have temporarily allowed it; will they go back? I don’t think so.”
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Lessons Learned From a Major Treasury Integration and Enhancement

Consultants and lots of testing may pay off for corporates picking a single TMS following an acquistion. 

The merger of two large technology companies resulted in a highly ambitious integration and upgrade of numerous treasury functions and systems, and provided lessons for one NeuGroup member about setting realistic goals and the value of rigorous testing.
 
TMS timing. The member, who worked through many long days during the process, walked peers through the decision-making and implementation steps. The acquired company went live on Reval just as the merger closed; the other company had put on hold upgrading its FIS systems, Quantum and Trax, in light of the anticipated acquisition.
 
Time-intensive. The first step was to decide which treasury management system (TMS) would best suit both companies. This involved:

Consultants and lots of testing may pay off for corporates picking a single TMS following an acquistion. 

The merger of two large technology companies resulted in a highly ambitious integration and upgrade of numerous treasury functions and systems, and provided lessons for one NeuGroup member about setting realistic goals and the value of rigorous testing.
 
TMS timing. The member, who worked through many long days during the process, walked peers through the decision-making and implementation steps. The acquired company went live on Reval just as the merger closed; the other company had put on hold upgrading its FIS systems, Quantum and Trax, in light of the anticipated acquisition.
 
Time-intensive. The first step was to decide which treasury management system (TMS) would best suit both companies. This involved:

  • Members from the two treasury teams traveling back and forth between offices (yes, pre-coronavirus).
  • The completion of multiple vendor demos.
  • The involvement of 30 business workstreams.
  • 70 senior management executives engaging in more than 80 meetings.
  • The IT team logging more than 600 hours on the assessment project alone. 

And the winner is… “At the end of the day, we consulted with our top management, took a very deep dive in terms of strategic attributes and requirements, and FIS bubbled to the top,” the member said. But he emphasized that this was the best choice for them based on the specifics of the company and not necessarily the best choice for others. The real takeaway was the thoroughness of the selection process.
 
More moves. In addition to consolidating the two treasury functions under a single TMS, the companies migrated service bureaus to FIS and adopted the most recent versions of Trax and Quantum. The first year was taken up with planning, including scoping the FIS project, prepping for upgrades and user-acceptance testing (UAT), testing scripts and bank engagements. The meat of the project went live in 2019, with planned enhancements to hedging accounting, eBAM and bank fee tools.
 
The company learned important lessons: 

  • Consultants add value. In addition to devoting significant in-house resources, the companies tapped consultancies. Treasury Strategies helped conduct the RFP of TMS vendors, and Deloitte and TSI Consulting were retained to help determine which technologies best suited the two treasury groups, each with different functions and approaches to employing technology.
    • The consultancies already have the test scripts and can point to the strengths and weaknesses of different vendors. “So even though you have to pay them, it saves time in the end,” the member said, adding that the extra layer of resources comes in handy when the business side doesn’t have time to do the necessary testing. 

Testing, testing, testing. The company tested its work six times over six weekends in the first half of 2019. “All the testing, all the time, did pay off,” the member said. “We found multiple problems in our practice go-lives, and those were rung out of the system. So when we went live it was almost flawless.”

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