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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By Joseph Neu

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

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

By Joseph Neu

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  • The deal market is building, he added, “so much so that the election might not matter.”
  • Despite the M&A dialogue, many companies “haven’t pulled the trigger” yet, awaiting clarity around Covid, Mr. Stuart said.
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Talking Shop: Should You Bank Where Your Customers Bank?

Member question: “This question is about the cultural practice of banking where our customers bank. With today’s technological abilities this makes no sense to me. Do other companies have this practice? Has anyone had success in changing this behavior pattern of banking where your customer banks?

  • “The example I am currently dealing with is in Korea, where large customers use [a particular bank] and although they are not a preferred bank partner, we seem to be using them because these customers bank there and insist their vendors bank there (or at least that is what I am being told).
  • “Anyone else having this experience and/or had success with changing?”

Member question: “This question is about the cultural practice of banking where our customers bank. With today’s technological abilities this makes no sense to me. Do other companies have this practice? Has anyone had success in changing this behavior pattern of banking where your customer banks?

  • “The example I am currently dealing with is in Korea, where large customers use [a particular bank] and although they are not a preferred bank partner, we seem to be using them because these customers bank there and insist their vendors bank there (or at least that is what I am being told).
  • “Anyone else having this experience and/or had success with changing?”

Peer answer 1: “I would agree with you. The only place where we used to do this was in Mexico, to facilitate payments by our customers, given dual currency usage in the country and the absence of interbank payments in USD (in the past).

  • “With regulatory changes a few years back, this need has also vanished, so we moved away from this, albeit with some customer communication.”

Peer answer 2: “If you follow this practice you might end up changing banks often or end up with many accounts or banking partners which will translate into more BAM and further costs.”

Peer answer 3: “We do not follow that practice either.”

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The Benefits for Tech of Having More Than One Headquarters

Key takeaways from the Tech20 Treasurers’ Peer Group 20th Annual Meeting, sponsored by MUFG. 

By Joseph Neu

Treasury at multiple headquarters. Technology companies, whether megacaps or midsized, are experimenting with multiple headquarters which will resume as work from home phases out.

Key takeaways from the Tech20 Treasurers’ Peer Group 20th Annual Meeting, sponsored by MUFG. 

By Joseph Neu

Treasury at multiple headquarters. Technology companies, whether megacaps or midsized, are experimenting with multiple headquarters which will resume as work from home phases out.

  • Treasury will be represented across them, even within the US. Cost and competition for talent are drivers, but also diversity; it can be more challenging to get people of color to move to expensive and majority-white communities where US tech firms tend to be located.

ESG less of a credit rating driver in tech. Credit ratings from the three major agencies are likely less influenced by ESG factors in tech, according to analysts, than most sectors. This suggests a disconnect between the ESG initiatives in which many tech companies have invested significantly. And perhaps these efforts are not swaying their traditional credit ratings.

  • Since businesses with good ESG scores are touted by ESG proponents as better investment risks, the credit rating considerations are worth contemplating further.

More time to sort out decoupling. A significant capital and liquidity concern in key tech sub-sectors has been the cost and cash flow implications caused by shifting supply chains and distribution to customers in and out of China.

  • While a Biden presidency may not shift policy that’s driving US-China decoupling, it is anticipated to slow its pace, allowing for a smoother transition, which would be good news for tech capital budgets and cash flow forecasts exiting Covid.
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Data-Driven Decisions Aided by Dashboards and Scorecards

A NeuGroup member describes his money market fund dashboard and investment manager scorecards.

Dynamic dashboards that help corporates leverage data to make better decisions are becoming essential tools for finance teams committed to tapping technology to transform.

  • Some companies in the NeuGroup Network are generating envy by using in-house tech talent skilled in programs such as Python to create dashboards, while other members are turning to Power BI or Tableau to ramp up.
  • But a recent meeting of treasury investment managers underscored that it’s the data in a dashboard and the decisions it prompts that matter most, whether the dashboard showcases liquidity, cash flow, ESG ratings or—in this case—money market funds (MMFs).

A NeuGroup member describes his money market fund dashboard and investment manager scorecards.

Dynamic dashboards that help corporates leverage data to make better decisions are becoming essential tools for finance teams committed to tapping technology to transform.

  • Some companies in the NeuGroup Network are generating envy by using in-house tech talent skilled in programs such as Python to create dashboards, while other members are turning to Power BI or Tableau to ramp up.
  • But a recent meeting of treasury investment managers underscored that it’s the data in a dashboard and the decisions it prompts that matter most, whether the dashboard showcases liquidity, cash flow, ESG ratings or—in this case—money market funds (MMFs).

An MMF dashboard. One member’s MMF dashboard intrigued peers, who asked not about its whiz-bang technology (it’s compiled in Excel using mostly ICD data) but how it’s set up and how often the company refreshes the data in it.

  • The company’s treasury team designed the dashboard internally about five years ago and included metrics to help assess any vulnerability in funds given the then-pending impact of reforms involving gates and fees.
  • “It provided some early warning signals that in one case allowed us to exit a fund which ultimately folded,” the treasury investment manager said.
  • These days, the dashboard is updated every two weeks, except when there is market stress or other reasons to review funds more closely. It’s used by the member to monitor risk and positioning and by team members who make buy/sell fund decisions.
  • “It serves as an early warning system for any fund-related issues, which allows us to proactively position ourselves and optimize risk/reward,” he said.

Facts and figures. The member’s dashboard contains about 25 MMFs, mostly prime and some government, both US and offshore. In the future, he said, it may be automated using RPA to save time and perhaps “allow us to add more variables without manual work.” It currently shows:

  1. Balances
  2. Yields
  3. NAV volatility
  4. Fund AUM/trending
  5. Fund concentration
  6. Key stats, e.g., 7-day liquidity

Fund manager scorecards. The same member described to peers another way his team makes use of data generated on spreadsheets—fund manager scorecards that are turned into PDFs.

  • Among other criteria, managers are rated on trade settlement, compliance and the value they add through research, events and idea generation. And, of course, performance:
  • “We try to look at sources of performance and see how that might translate into our policy guidelines,” the member said. “For instance, a manager who relies heavily on derivatives might not perform as well when the tool is not available to them.”  Other key factors:
    • Annualized returns vs. a benchmark (net of fees)
    • Tracking error/difference vs. benchmark
    • Volatility
    • Qualitative; five P’s: people, philosophy, process, performance, price

Value added. “The real benefit I see from manager scorecards is that they ensure a consistent and structured two-way conversation with our managers,” the member said.

  • “It surfaces issues for discussion and everyone knows where they stand.  So when we are adding or, unfortunately, subtracting assets, it’s typically not a surprise because they’ve seen some consistency of feedback.”
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A Technology Tool to Help Corporate Bond Issuers

BondCliQ’s solution can give companies more insight into which dealers are supporting secondary trading. 

A lack of liquidity in the secondary market for investment-grade corporate bonds remains a source of frustration for many corporates that have issued record amounts of debt in the wake of the financial crisis and, more recently, during the pandemic.

  • A key reason for the liquidity problem is that broker dealers, including underwriters, have reduced their inventories of investment-grade corporate debt, in part because of regulations mandating higher bank capital ratios.
  • And despite improved transparency on corporate bond pricing and institutional investor portfolio holdings, information about which banks are making secondary markets for debt issues remains opaque.

BondCliQ’s solution can give companies more insight into which dealers are supporting secondary trading. 

A lack of liquidity in the secondary market for investment-grade corporate bonds remains a source of frustration for many corporates that have issued record amounts of debt in the wake of the financial crisis and, more recently, during the pandemic.

  • A key reason for the liquidity problem is that broker dealers, including underwriters, have reduced their inventories of investment-grade corporate debt, in part because of regulations mandating higher bank capital ratios.
  • And despite improved transparency on corporate bond pricing and institutional investor portfolio holdings, information about which banks are making secondary markets for debt issues remains opaque.

Enter BondCliQ. This fall, NeuGroup members had the opportunity to hear about one company’s technology solution that’s designed to provide more transparency and liquidity to this market by providing real-time data from over 35 dealers giving more than 40,000 price quotes daily.

  • BondCliQ founder and CEO Chris White described to members how his company’s analytics can help corporates reduce future funding costs.
  • The company says that by using performance metrics, treasury teams can review statistics on how corporate bond market makers support a company’s debt in the secondary market and improve their selection of underwriters, driving the best possible outcome on a new issue.
  • BondCliQ’s value proposition rests on the idea that if more investors perceive a company’s bonds to be fungible and liquid, demand for the bonds rises and the cost of debt capital falls.

Data combo. BondCliQ says that if leveraged properly, the information in its issuer performance reports can help lower an issuer’s cost of capital. The report combines traditional and proprietary data sets in the following categories:

  1. Pre-trade data. Bids and offers are directly derived from the company’s community of bond dealers, letting users know the market value of their debt.
  2. Post-trade data. Transaction information is sourced directly from FINRA’s Trade Reporting and Compliance Engine (TRACE), allowing issuers to monitor trading in their bonds.
  3. BondCliQ performance data. Comparative analytics for illustrating the performance of corporate bond dealers lets issuers evaluate potential underwriters.

Technology in the toolbox. “There are several factors which go into the selection of underwriters,” Mr. White said. “We view our product as a technology-driven solution that treasurers can add to their toolbox to make the best decisions possible for their companies.”

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Talking Shop: Taking the Pulse on Forward Points in Balance Sheet Hedging Programs

Member question: “How do those with balance sheet hedging programs account for forward points—are they included in earnings before interest and taxes (EBIT), below the line, etc.?

  • “We are considering implementing a balance sheet hedging program for net liabilities that are not part of our cash flow hedging program. ​Forward points are a concern since i) they work against us and ii) they may introduce volatility if the hedge is not valued at spot while the underlying exposure is. Any insight you can provide is much appreciated.”

Member question: “How do those with balance sheet hedging programs account for forward points—are they included in earnings before interest and taxes (EBIT), below the line, etc.?

  • “We are considering implementing a balance sheet hedging program for net liabilities that are not part of our cash flow hedging program. ​Forward points are a concern since i) they work against us and ii) they may introduce volatility if the hedge is not valued at spot while the underlying exposure is. Any insight you can provide is much appreciated.”

Peer answer 1: “For our balance sheet hedging program, we recently started including them in our budgeting process but only for the one currency (RUB) that’s had a big impact. After they settle, the points are just lumped in in the overall Gain/Loss hitting other income and expenses (OI&E).

  • “We’ll calculate them at the quarter-end to explain the G/L, but just for discussion. Our hedge timing is not perfect, so we suffer from a difference between spot of the hedge and spot of the underlying exposure regardless.”

Peer answer 2: “At my company, all forward points related to our balance sheet programs are recorded to FX OI&E and we do it on a monthly basis.”

Peer answer 3: “Our balance sheet hedge forward points are marked-to-market in OI&E. The underlying remeasurement of the monetary assets and liabilities we’re hedging is booked automatically to OI&E whether we hedge or not, so while the forward points do contribute some volatility, it is much smaller than the volatility of the spot-to-spot remeasurement we’re hedging. We are fortunate in that forward points are income for us, but it hasn’t always been that way and it won’t always be that way.”

Peer answer 4: “We’ll factor in average forward points cost for B/S hedges into our quarterly forecast of B/S remeasurement if material. Our B/S remeasurement and associated hedges used to book to OPEX, but changed geography this year to OI&E as we were making other changes to hedge geography associated with adoption of new hedge accounting guidelines. Volatility from remeasurement is a little better tolerated in OI&E than OPEX.”

Peer answer 5: “Our balance sheet hedging is mostly of liabilities. The hedging results, which includes mismatch and forward points, are recorded in other income. We track separately what the forward points are by currency so that we can back it out to calculate our true mismatch. Forward points have gotten expensive.”

Peer answer 6: “At my company all forward points to OI&E as well, with hedges that average about 3 months tenor. We break down our results monthly to understand them, isolating forward points (as if amortized) vs. the true mark-to-market volatility. We find the market-to-market component quite small.”

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Policies Resembling Guardrails That Withstand Trigger Events

Key takeaways from the Assistant Treasurers’ Leadership Group 2020 H2 meeting, sponsored by Chatham Financial.

By Joseph Neu

Policy and procedures off the back burner.  The pandemic put a wide range of policy and procedure review projects on the back burner and more members are starting to refocus on them now as immediate liquidity concerns recede.

Key takeaways from the Assistant Treasurers’ Leadership Group 2020 H2 meeting, sponsored by Chatham Financial.

By Joseph Neu

Policy and procedures off the back burner.  The pandemic put a wide range of policy and procedure review projects on the back burner and more members are starting to refocus on them now as immediate liquidity concerns recede.

  • A session on risk policy reviews, for instance, highlighted how valuable a review can be after an event trigger from a change in business, such as a major acquisition; a change in personnel, like a new treasurer or CFO; or a market change, including the impact of Covid on interest rates, FX, etc.
  • The more a policy resembles a set of guardrails that can be separated from tactics and procedures filled with prescriptive language, the easier it is to maintain a two-pager that remains valid through trigger events.
  • This allows the details, perhaps spanning 100 pages, to adapt to business change, process improvements, new technology and tools, people and other trigger events. It also allows strategies and tactics to be flexible enough to allow treasury to respond quickly, especially to changes in market conditions.

Covid crisis advancing cash forecasting.  Exponential improvements in cash forecasting are a huge silver lining in the Covid-19 crisis.

  • Member sharing during the projects and priorities discussion strongly suggests that two years from now, Excel will be replaced as the most important cash forecasting tool by business intelligence and other analytics applications alongside specialty forecasting modules that automatically pull data from the ERP and bank systems.
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No More Offices? Corporates Debate Making Work from Home Permanent

NeuGroup members face a future where some workers may never return to office buildings. 

NeuGroup members have learned to adapt to working from home (WFH) during the pandemic. Some like it, some don’t. But nine months into Covid, many remain uncertain about what role actual, old-school offices will play moving forward. Several discussed their thinking at a recent meeting of the Assistant Treasurers’ Leadership Group.

NeuGroup members face a future where some workers may never return to office buildings. 

NeuGroup members have learned to adapt to working from home (WFH) during the pandemic. Some like it, some don’t. But nine months into Covid, many remain uncertain about what role actual, old-school offices will play moving forward. Several discussed their thinking at a recent meeting of the Assistant Treasurers’ Leadership Group.

  • Two members work for companies that have announced plans to close all office buildings, although many details, including existing leases, need to be resolved.
  • Some corporates are following Google’s lead: The tech company plans to return to its offices in July 2021.
    • Microsoft last month announced plans for a “flexible workplace” that includes allowing some employees to work from home permanently.
  • Though some members are embracing the possibilities of an office-free future, others are skeptical, voicing concerns about the sustainability and side effects of this approach.

WFA: work from anywhere. The transition to permanently working from home is forcing some companies to take a hard look at themselves and make tough choices.

  • “We are going through a little bit of an identity crisis right now as a company,” one member said. “We’re experiencing a bit of a culture shift.”
  • As part of the shift, the member’s company is closing its headquarters in an area with a high cost of living, encouraging employees to find residence in lower-cost areas.
    • “We are incentivizing people to move out of high-cost locations and take a salary adjustment,” she said. “All future hires will be in low-cost areas.”
    • Because other corporates have offered employees a hybrid WFH/office arrangement, the member’s company had to be “very explicit that there is not going to be an option to go in.”

It’s about culture. A transition to working from home on a permanent basis also widely broadens the field of candidates to hire, which one member sees as a positive opportunity to advance inclusion.

  • The member whose company will only be hiring in low-cost areas said this provides it with the opportunity to be much more thoughtful when it comes to what she described as “equity.”
    • “I don’t think it’s any secret that women have really been struggling in this Covid economy,” she said. “We can now be really conscientious about how bias can creep into any corporate environment. It’s about culture.”
    • Though this is a positive for employees, the member said there can be drawbacks. “People are a lot less loyal to their company, and more willing to leave,” she said. “When they don’t have to be there every day, they will leave if they’re not compensated the way they want to be.”
  • Another member sees the benefits this can bring an employer who already seeks candidates from across the country: “If you’re working virtually, you don’t have to cover moving costs.”

Diverging opinions. Others at the meeting said they did not see a worthwhile tradeoff, placing a high premium on the bond built by in-person interaction.

  • “What about the learning that’s done by osmosis—mentorship, learning opportunities?” one member asked. “I just couldn’t imagine never being in an environment with my colleagues. I think it’s a very quick jump, based on very specific circumstances, that hopefully will not exist forever.”
  • Another member said not all employees are thrilled about no offices. “There’s a split between people who are older and have already established relationships outside of work versus those who are young and rely on work for socialization.”
  • One member acknowledged that there are no easy answers to whether completely virtual offices offer a real advantage for companies. “I think that’s a question that’s not going to be answered right away. There’s certainly a social aspect of being together in an office that was always big when you were young.”
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Walk Before You Run: Using Derivatives in Pension Funds

The value of educating stakeholders on why using derivatives can make sense.

During a recent NeuGroup for Pension and Benefits session sponsored by Insight Investment and BNY Mellon, a pair of members shared their knowledge and experience using derivatives in managing corporate pension plans. Two highlights:

  • Walk before you run” emerged as a key piece of advice to members, most of whom do not make extensive use of derivatives.
  • Educating stakeholders including finance committees, C-Suite executives and accountants on derivatives and their potential benefits is an essential step for companies walking toward using futures, swaps, options and other instruments.

The value of educating stakeholders on why using derivatives can make sense.

During a recent NeuGroup for Pension and Benefits session sponsored by Insight Investment and BNY Mellon, a pair of members shared their knowledge and experience using derivatives in managing corporate pension plans. Two highlights:

  • Walk before you run” emerged as a key piece of advice to members, most of whom do not make extensive use of derivatives.
  • Educating stakeholders including finance committees, C-Suite executives and accountants on derivatives and their potential benefits is an essential step for companies walking toward using futures, swaps, options and other instruments.

Four levels. After hearing each of the pension group participants say if and how they use derivatives, NeuGroup’s Roger Heine categorized them in four groups:

  1. No use of derivatives. One member in this category said the pension plan at her company is not allowed to use derivatives but that she is interested to hear how people have managed what she described as a “big undertaking,” adding that the human capital needed is one key issue. Another member said his company does not use them, preferring the “physical approach” of using cash securities to rebalance, if necessary.
  2. Outside manager use. Several members allow external asset managers to use derivative overlays, for example, to help achieve liability-driven investing (LDI) targets.
  3. Dipping in their toes. These companies limit direct use of derivatives to specific situations, maintaining simplicity, straightforward controls and transparency. Examples include going long equity index futures against a cash position, maintaining both cash liquidity and equity exposure.
  4. Extensive use.  These corporates use derivatives to expand their opportunities to enhance returns around myriad risk limit parameters with more complex controls. They have generally arrived at this level incrementally over a number of years.

Benefits: strategic and tactical. One of the two members who uses derivatives extensively said his company uses them for strategic purposes, such as eliminating the need to move money physically between investment managers.

  • He and the other member also described using derivatives for tactical asset allocation to get exposure to an asset class. One said derivatives offer “the most liquid way to express our views; we can quickly change risk targets and allocations and achieve the goal of avoiding drawdown risk.”

Helping hands. One of the members described using third-party firms to monitor collateral for the company when it uses over-the-counter derivatives. That’s especially useful, he said, during periods of extreme volatility.

  • Another recommended that members getting their feet wet with derivatives use so-called completion account managers, who in some cases coordinate the steps necessary to implement a pension de-risking process.
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Talking Shop: How to Respond to a New Rule on ESG Funds in 401(k) Plans?

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

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

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

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

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

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

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

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

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

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

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

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

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

By Joseph Neu

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

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

By Joseph Neu

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Why Parking Cash on the Balance Sheet May Trump Bigger Revolvers

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

By Joseph Neu

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

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

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

By Joseph Neu

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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COVID-19 Puts Buyback Programs on Hold—but Not for Everybody

Some companies are keeping share repurchases programs going while many others suspend them.

We are continuing to buy back stock,” said the treasurer of a cash-rich technology company in mid-March, speaking to peers during a virtual NeuGroup meeting of mega-cap businesses. “We haven’t pulled share repurchases either,” said the treasurer of a large health care company with a very healthy balance sheet and strong cash flow.

  • Later that day, a third treasurer—working from home—told the group that investor Bill Ackman was feeding market panic during an interview with CNBC. In it, he urged US companies to stop their buyback programs because “hell is coming.”

Some companies are keeping share repurchases programs going while many others suspend them.

We are continuing to buy back stock,” said the treasurer of a cash-rich technology company in mid-March, speaking to peers during a virtual NeuGroup meeting of mega-cap businesses. “We haven’t pulled share repurchases either,” said the treasurer of a large health care company with a very healthy balance sheet and strong cash flow.

  • Later that day, a third treasurer told the group that investor Bill Ackman was feeding market panic during an interview with CNBC. In it, he urged US companies to stop their buyback programs because “hell is coming.”

Suspending, scaling. In the month and a half since that day, as the coronavirus effectively shut down the US economy, many companies—including some NeuGroup members—have suspended share repurchase programs because of uncertainty about future cash flows, among other reasons.

  • One example: A consumer goods company that reported outstanding quarterly earnings in late April suspended its buyback program and withdrew guidance for 2020. The treasurer said the reasons include concerns about raw materials and—if infection rates spike—manufacturing sites. As a result, the company is “managing liquidity with a very different focus,” he said.
  • The capital markets manager of another large-cap company said, “We have a small buyback program in place and we’ve slowed it down over the last few weeks,” adding, “We’re waiting to get direction; the program is not cancelled but scaled back.”
  • A member who works at a company that began a repurchase program in late 2019 noted that buybacks in the current political and economic climate are “being frowned upon in some spaces.” He said his company may be scaling back on share repurchases and asked what peers are doing.
  • “We discontinued our share buyback program,” one treasurer said. “We think the world will understand.”

Not stopping now. The treasurer of the health care business said in the days leading up to a recent bond offering he was asked several times by investors if the company planned to stop buying back its stock. The answer—no—did not keep the deal from being a complete success, thanks to the company’s strong capital position, among other factors.

  • This company plans for its own “rainy day,” he said, adding it would undoubtedly pause the share repurchase program if it ever faced liquidity issues or needed government assistance—not its current situation.
  • The company, he said, will stick to its approach to repurchases, which includes buying when the stock trades below what leadership believes is the intrinsic value of the company.

A framework for buybacks. Back in 2018, as buybacks surged following US tax reform and the repatriation of assets, one NeuGroup member shared his three-point approach to designing a framework for repurchases. It involves:

  1. Achieving stated capital structure goals.
  2. Updating the valuation thesis regularly, validating repurchase decisions through retrospective analysis and adjusting for market conditions, changing business conditions or other factors.
  3. Execution: taking advantage of multiple buyback tools to manage through open markets and blackouts, while considering volatility, ADTV, VWAP and other factors to measure program success, bank execution and other factors.
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Time-Consuming and Intense: Due Diligence for Today’s Debt Deals

Corporates tapping the bond market should expect an in-depth, rigorous look at COVID-19 impacts.

Seller beware: Corporates selling bonds to bolster their liquidity this spring should expect a rigorous due diligence experience involving auditors, underwriters, internal counsel and external capital markets lawyers, among others.

  • The once seemingly perfunctory process for investment-grade issuers has become an intensive, multi-day, near round-the-clock affair, as banks and investors scrutinize issuer disclosures about COVID-19’s near- and long-term business impact.

Corporates tapping the bond market should expect an in-depth, rigorous look at COVID-19 impacts.
 
Seller beware: Corporates selling bonds to bolster their liquidity this spring should expect a rigorous due diligence experience involving auditors, underwriters, internal counsel and external capital markets lawyers, among others.

  • The once seemingly perfunctory process for investment-grade issuers has become an intensive, multi-day, near round-the-clock affair, as banks and investors scrutinize issuer disclosures about COVID-19’s near- and long-term business impact.

Be prepared. Once generic diligence questions are now very specific, even referencing unofficial public documents and news sources indicating business slowing that capital markets lawyers would never have used pre-pandemic.
“Things are happening so quickly, it almost gives us no choice,” Keith DeLeon, counsel at Sidley Austin LLP, told NeuGroup members at recent virtual meeting of treasurers at large-cap companies.

Extra time. In normal times, companies often issue debt immediately following Q1 financial filings, sometimes just before and sometimes on the same day. But now underwriters want more time to review.

  • “For first quarter and probably through the rest of 2020, underwriters are likely to recommend conducting the business and auditor calls a day or two following the filing of the 10-Q,” said Chris Cicoletti, a managing director of debt capital markets at US. Bank, which sponsored the meeting.
  • But don’t wait too long. Pre-coronavirus, offerings could take place weeks after the public filing, using a “bring-down call” with investors to fill in the gap. Few companies had filed 10-Qs so it’s hard to know, but that period may have shrunk to just a few days, Mr. DeLeon said, adding, “Diligence and disclosure, which clearly go hand-in-hand, go stale a lot faster.”

Groundhog Day. Mr. DeLeon observed that a current trend in the market involves diligence being refreshed overnight, because of new developments in between serial go/no-go calls.

  • “Deals are ready to go from a documentation perspective, there is a go/no-go call or market update that results in a decision to stand down, the diligence and disclosure are refreshed and the cycle repeats day after day until the deal gets done or stands down indefinitely,” he said.

Ready the big guns. Due diligence calls may once have been handled by treasury’s head of funding or investor relations. “It’s no longer delegated but handled by the C-suite officers,” Mr. DeLeon said.

  • Prepare for more underwriter questions. Full due diligence sessions are conducted with lead underwriters; now, co-managers and “passives” want the leads to ask more questions about coronavirus impact during a second call where the company updates underwriters on what may have changed since the first call.
  • “We don’t ask issuers to go through the entire diligence agenda again, but we do go through the biggest ticket items,” and that means the COVID-19 impact, Mr. DeLeon said.
  • Current practice suggests providing as much quantitative disclosure regarding the impacts of COVID-19 as possible, and other carefully worded qualitative disclosures regarding the actual and potential impacts of the pandemic in the risk factor and recent developments sections of offering and other disclosure documents.

Speed is of the essence. Quickly drafting disclosures as well as efficient mechanics, such as printing the offering documents, are vital to take advantage of optimal windows to issue bonds. The difference in pricing over just a few hours can be as much as half a percentage point given current intraday volatility. “Things like printer turnaround time have become critical in the current market given the often tight windows for optimal deal execution,” Mr. DeLeon noted.

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Keeping the Company Strong after the Initial Hit

Companies have survived the early impact of COVID-19; now the focus is keeping the concern going.

There is a lot of talk in treasury and risk circles lately about business continuity plans or BCPs. The talk is mainly around whether the plans worked and what lessons have been learned in the latest crisis. But there has not been as much talk about business resiliency, that is, whether the company, now in the throes of major health crisis, can hang in there and navigate ups and down. 

A recent Deloitte article on resiliency stressed that business leaders must be “vigilantly focused on protecting financial performance during and through the crisis … and making hard, fact-based decisions.” But what is also important, particularly in this crisis where lockdowns and employee isolation are the norm, is communications with those employees, keeping them engaged to help keep the company moving forward.

Companies have survived the early impact of COVID-19; now the focus is keeping the concern going.

There is a lot of talk in treasury and risk circles lately about business continuity plans or BCPs. The talk is mainly around whether the plans worked and what lessons have been learned in the latest crisis. But there has not been as much talk about business resiliency, that is, whether the company, now in the throes of major health crisis, can hang in there and navigate ups and down. 

A recent Deloitte article on resiliency stressed that business leaders must be “vigilantly focused on protecting financial performance during and through the crisis … and making hard, fact-based decisions.” But what is also important, particularly in this crisis where lockdowns and employee isolation are the norm, is communications with those employees, keeping them engaged to help keep the company moving forward.

Isolation stress. In a recent call with members of NeuGroup’s Internal Auditors’ Peer Group, several auditors said they were addressing the stresses that go with working remotely and the disconnect many employees feel as they isolate in their homes. 

  • In previous calls, members themselves have said that while working from home they often don’t know whether an action they take is just a shot in the dark with no result. “Is anything happening out there?” wondered one auditor.

Layoff fear. During the recent call, one member detailed how his company started doing a weekly check-in with employees, which included doctors and members of the human resources team. Doctors are there to answer health questions and HR can help with fears of layoffs. “Everyone feels like they’re out of touch and everyone is worried about layoffs at this point,” the member said. 

Another member said management at his company conducts similar calls, but in a more hierarchical way. They have calls with worldwide site leaders who in turn have calls with their employees. They also do calls with individual region leadership, like those in EMEA and Latin America. 

  • “They have very candid discussions,” the member said. Globally, employees can submit questions to managers that may or may not be addressed (due to volume) in any one of these calls. He said most of the questions regard layoffs.

Still another member said that his company’s HR is now providing support services for people isolated at home, which includes health services. 

Mapping the return. NeuGroup members continue to talk about returning to work and how that will all play out. One member said management meets with the CEO once a week to discuss locations and where stay-at-home orders are easing so they can start their back-to-work programs. 

  • Discussions also increasingly include reducing the company’s footprint by having some people work from home part time or on a rotational basis. “We’re looking at each location globally and doing the analysis,” said one member.
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Pandemic Lessons Learned by Treasurers in Asia

How finance teams respond to the need for cash depends in part on their ability to tap global cash pools.

As the pandemic brought  the world to a standstill, the primary concern of many multinational corporations centered on sustaining their operations, assuming no cash inflows for at least 30 days. For almost every company, that requires a lot of cash! That was among the takeaways from member comments at a recent NeuGroup virtual meeting of treasurers in Asia in early April.

Cash pools. Multinational companies best positioned to source emergency funds have access to global cash pools domiciled in jurisdictions where capital markets are liquid and central banks supportive, such as  London and  New York. To fund business activities elsewhere, companies rely on domestic banks or subsidiaries of foreign banks. 

How finance teams respond to the need for cash depends in part on their ability to tap global cash pools.

As the pandemic brought  the world to a standstill, the primary concern of many multinational corporations centered on sustaining their operations, assuming no cash inflows for at least 30 days. For almost every company, that requires a lot of cash! That was among the takeaways from member comments at a recent NeuGroup virtual meeting of treasurers in Asia in early April.

Cash pools. Multinational companies best positioned to source emergency funds have access to global cash pools domiciled in jurisdictions where capital markets are liquid and central banks supportive, such as  London and  New York. To fund business activities elsewhere, companies rely on domestic banks or subsidiaries of foreign banks. 

Other tools. Challenges arise when domestic credit is not sufficient to fund the company and its supply chain. To support loyal business partners, finance directors resort to traditional programs such as distributor and supplier financing. However, complex and paper intensive onboarding often holds them back. 

  • Likewise, declaring dividends from cash-rich subsidiaries to sustain cash-poor sister companies is challenging when both audit and tax clearance staff are themselves subject to lockdowns. Finance teams with long-standing relationships are more likely to break through. 

Government help. As a last resort, companies apply for direct government support. Members report that the application process is resource intensive and time consuming. To be effective, the country’s senior executive must lead a multi-functional team including tax, legal, government affairs, HR, and finance. The treasury team executes loan transactions and reporting, ensuring that new covenants do not breach existing agreements. 

Although it is too early to draw definitive lessons from the pandemic, it’s clear that the even the best business contingency plans never fully test the complexity of an unfolding crisis. Leveraging a global cash pool by concentrating a company’s firepower brings benefits well beyond a cost advantage. They give finance directors the space to look for practical local workarounds where needed.

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Funding Is Top Priority for Treasurers amid Pandemic: Poll

Treasurers have funding on their minds as they deal with COVID-19. BCP and supply chains also a concern.

Securing funding is a top priority for corporate treasurers thrust into the role of organizing companies’ financial response amid the COVID-19 pandemic, according to a recent poll by Bloomberg and Greenwich Associates. Following funding, treasurers say their attention is also on business continuity plans and suppliers.

Many treasurers have been tasked with making sure key suppliers have the resources to stay in business and providing the needed parts and material.

Treasurers have funding on their minds as they deal with COVID-19. BCP and supply chains also a concern.

Securing funding is a top priority for corporate treasurers thrust into the role of organizing companies’ financial response amid the COVID-19 pandemic, according to a recent poll by Bloomberg and Greenwich Associates. Following funding, treasurers say their attention is also on business continuity plans and suppliers.

Many treasurers have been tasked with making sure key suppliers have the resources to stay in business and providing the needed parts and material. 

  • The Bloomberg-Greenwich survey revealed that treasurers (49% of respondents) are taking a closer look at customer and supplier credit, receivables and financing. 

“One of the most intriguing results of our poll was that it revealed the most important risk focus for treasurers is the credit position of their supply chain and customers,” said Ken Monahan, senior analyst at Greenwich Associates. 

  • “This even rated above improving relationships with their own creditors,” he added. “This is interesting because the most observable phenomenon has been the rush to funding. The scrutiny of the supply chain and the customers goes on behind the scenes but is a top priority nonetheless.”
  • NeuGroup has heard similar responses in weekly interactions with its members. Several companies mentioned making sure their suppliers remained viable. And early on they said they were looking to underpin balance sheets by tapping revolvers or looking for loans. 

However, at the same time, they noted that some bankers were viewing drawdowns and requests much more favorably than others. Realizing this, treasurers are communicating with banks. According to the Bloomberg-Greenwich poll, 39% of respondents said they “increased conversations with our banks.”

The poll was conducted during a Bloomberg webinar on Greenwich Associates’ recent report, “Changing KPIs force treasurers to improve their risk technology.”

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Looking for Yield: Investment Managers Mull Prime Funds, Short-Duration SMAs

After fleeing prime funds, corporates are asking if now is the time to return.

Treasury investment managers interested in picking up additional yield for short-duration cash are not yet returning to prime money market funds (MMFs) that they exited as the coronavirus pandemic emerged. That was one of the key takeaways at a NeuGroup virtual meeting this week where several managers expressed interest in what one of their peers is doing: Using separately managed accounts (SMAs) for liquidity investing.

  • None of the participants is currently invested in prime funds. “We got out and went into more government funds and stayed there,” one member said. Several others used almost the exact same phrase.

  • The speed of the fixed-income market’s reaction to COVID-19 reflected that, in the wake of the 2008 global financial crisis, “Everyone had a playbook for duration, counterparty risk and prime funds,” one investment manager said. “Once they realized it was for real, they acted on it quickly.

After fleeing prime funds, corporates are asking if now is the time to return.

Treasury investment managers interested in picking up additional yield for short-duration cash are not yet returning to prime money market funds (MMFs) that they exited as the coronavirus pandemic emerged. That was one of the key takeaways at a NeuGroup virtual meeting this week where several managers expressed interest in what one of their peers is doing: Using separately managed accounts (SMAs) for liquidity investing.

  • None of the participants is currently invested in prime funds. “We got out and went into more government funds and stayed there,” one member said. Several others used almost the exact same phrase.
  • The speed of the fixed-income market’s reaction to COVID-19 reflected that, in the wake of the 2008 global financial crisis, “Everyone had a playbook for duration, counterparty risk and prime funds,” one investment manager said. “Once they realized it was for real, they acted on it quickly.

Now what? Now that credit markets have stabilized, “We are curious about prime,” one member said. No wonder: The Federal Reserve’s moves to support markets with backstops for MMFs and commercial paper have some corporates wondering if the risk of prime funds is nearly comparable to that of government funds, making it worthwhile to take the extra yield offered by prime.

Prime problem. One reason to avoid prime funds, members said, is the gates that temporarily impose restrictions on redemptions if the funds breach weekly or daily liquidity requirements. Despite the Fed’s support, there are “still concerns,” one member said, adding that in the current situation you may unfortunately find out that you “have cash but don’t have the cash.”

  • He noted that Goldman Sachs and Bank of New York Mellon pumped money into their prime funds in March as redemptions surged.
  • An asset manager addressing the peer group told the managers, “If I had your jobs, I would not have a dollar outside the government funds” that is earmarked for a short-term, liquidity bucket. He said the floating or variable NAV of prime funds “can cause panic” in volatile markets.
    • As for the Fed’s backstop facilities, he said that when investing in commercial paper or other debt, “I want to buy a credit because it’s a credit that I think is solid and a fair valuation—not because the Fed is providing a backstop.” In short, he added, “There is no substitute to credit work.”

The SMA option. Several participants were happy to hear from one member that using SMAs for cash invested for as little as two-months can be worth the cost of hiring an external manager. That’s thanks to a “strong relationship with a manager” who charges a “very low fee,” the member said.

  • “I had always viewed the SMA route only for a weighted average life of a year or so,” one member commented. “But even for shorter duration it seems compelling now.”

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COVID-19 Puts Another Lens on ESG—and an Opportunity for Treasury to Lead

Mega-cap treasurers discuss treasury’s role in promoting ESG and the fragmented ratings landscape.

COVID-19 has moved the subject of ESG ratings and financing to the back burner for many businesses. One banker speaking at a NeuGroup meeting called ESG “a luxury” that many companies can’t afford now. But the issue is not going away, and the pandemic offers another lens to view how corporations affect the world and society, and how businesses respond to crises and the needs of employees, customers and other stakeholders.

  • The issue of where ESG fits in the current climate surfaced at a recent NeuGroup meeting of mega-cap treasurers that included presentations by MSCI, a provider of ESG ratings, and BNP Paribas. Highlights:

Mega-cap treasurers discuss treasury’s role in promoting ESG and the fragmented ratings landscape.

COVID-19 has moved the subject of ESG ratings and financing to the back burner for many businesses. One banker speaking at a NeuGroup meeting called ESG “a luxury” that many companies can’t afford now. But the issue is not going away, and the pandemic offers another lens to view how corporations affect the world and society, and how businesses respond to crises and the needs of employees, customers and other stakeholders.

  • The issue of where ESG fits in the current climate surfaced at a recent NeuGroup meeting of mega-cap treasurers that included presentations by MSCI, a provider of ESG ratings, and BNP Paribas. Highlights:

Prepare for acceleration. A banker from BNP Paribas discussing sustainability-linked finance acknowledged that the pandemic meant that ESG would not be “top of mind” for several months. Before the crisis, the bank forecasted that 100% of finance would become sustainable finance within five years.

  • Once the world is “back in rhythm,” he asserted, “what we have gone through will accelerate this move.” Expect to see more sustainability-linked loans, ESG-linked derivatives and continued interest in green bonds.

Treasury’s role. The treasurer of a large tech company told peers, “All of us in treasury can do some simple things to move the needle” on ESG. He mentioned:

  • “Changing the way we invest,” such as eliminating coal, tobacco and firearms.
  • Including minority-owned firms in all US bond offerings and more use of the firms in all activity.
  • Issuing green bonds.
  • Committing funds to affordable housing programs.

Another treasurer said his company used the issuance of a green bond to focus on the “e” in ESG both “internally and externally.” He said treasury drove the data accumulation to support the use of proceeds assertions for the bond.

  • The first treasurer told the group that corporate sustainability teams can’t tackle the ESG issue by themselves and that he would love to see other treasurers help rally their companies, promote a “sense of urgency” and get buy-in from their boards.

A lack of standards. The ESG ratings landscape is difficult to navigate for corporates seeking relative certainty and standards akin to what exists in the credit rating industry.

  • MSCI and Sustainalytics, two prominent ESG ratings firms, have “very different approaches,” said one ESG leader at the meeting who described MSCI’s ratings methodology as “in depth;” she said Sustainalytics uses a “huge number of metrics” and collects a “vast amount of information without prioritization.”
  • Another ESG specialist said his team put together a spread sheet with 700 different metrics tracked by 20 different agencies, underscoring the lack of uniformity among raters and the resulting confusion for companies.
  • That company and others are developing their own internal standards by, among other things, reaching out to their largest shareholders and bondholders as well as ESG investors to ask what they find most important from an sustainability perspective.

Be proactive. In the same vein, corporates should consider the path taken by one ESG leader who said her company is “really branching out” as it shifts from a “very reactive” stance to ratings to one that emphasizes “developing a strong point of view of what matters,” as her team does its own so-called gap analysis and digs “into where we might be able to improve disclosure.”

Connect with raters. Part of becoming proactive means taking the initiative with MSCI, Sustainalytics and other influencers in the ESG space. MSCI offers an issuer portal and Sustainalytics plans to roll one out in May. Treasury needs to be in the loop on who at the company connects with these firms as the importance of ESG for both investors and issuers increases.

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A Closer Look: ESG Ratings, KPIs and Second-Party Opinions

Sustainalytics discusses ESG trends, ratings and aligning internal KPIs with established principles.

Treasurers exploring the rapidly expanding land of environmental, social and governance (ESG) criteria quickly encounter Sustainalytics, a well-established provider of ESG ratings to institutional investors and so-called second-party opinions used by issuers of green bonds to give confidence to investors that bond proceeds will finance environmental or social projects.

  • At a recent NeuGroup virtual meeting, representatives from Sustainalytics described the company’s ratings and methodology, answered questions from members and discussed current trends in the sustainable finance space, which includes sustainability-linked loans, where the proceeds are used for general corporate purposes but the interest rate decreases as sustainability targets are met.

Sustainalytics discusses ESG trends, ratings and aligning internal KPIs with established principles.

Treasurers exploring the rapidly expanding land of environmental, social and governance (ESG) criteria quickly encounter Sustainalytics, a well-established provider of ESG ratings to institutional investors and so-called second-party opinions used by issuers of green bonds to give confidence to investors that bond proceeds will finance environmental or social projects.

  • At a recent NeuGroup virtual meeting, representatives from Sustainalytics described the company’s ratings and methodology, answered questions from members and discussed current trends in the sustainable finance space, which includes sustainability-linked loans, where the proceeds are used for general corporate purposes but the interest rate decreases as sustainability targets are met.

Market practice. Second-party opinions are not a requirement but are “increasingly becoming market practice when issuing ESG bonds,” Heather Lang, executive director of sustainable finance solutions at Sustainalytics, told members.

  • “As new industries enter the market, there is a high degree of scrutiny regarding which uses of proceeds qualify as green or socially impactful,” she said. “An external reviewer is well positioned to attest to the alignment of projects and activities to market standards and investor expectations, not to mention the credibility of the issuer.”
  • “Some clients will even license their ESG rating from us around the time of a bond issuance because they know that investors, especially responsible investors, will want to look at a company’s overall ESG performance alongside reviewing the use of proceeds,” Ms. Lang said.
  • Green bonds continue to drive the ESG market, accounting for about $260 billion in issuance in 2019. At the end of 2018, investors managed more than $30 trillion in ESG assets.

KPI considerations. One NeuGroup member considering a sustainability-linked, undrawn revolver said his company may license an ESG rating. The company’s sustainability report contains both audited and unaudited key performance indicators (KPIs), and the member asked Sustainalytics which KPIs banks and investors value the most.

  • Ms. Lang said companies’ internally tracked KPIs receive more scrutiny, especially if they’re not audited.
  • She highlighted the importance of aligning with the Sustainability Linked Loan Principles published in March 2019 by three global syndicated loan associations. They provide guidelines for capturing the fundamental characteristics of sustainability-linked loans, enabling a borrower to develop KPIs closely aligned with the company’s sustainability profile.

Levels of review. Sustainalytics and other ESG analysis firms can review selected KPIs to determine their materiality given a company’s subindustry and operating regions.

  • “That’s a way to combine involving a credible external party while also being able to focus on internally tracked KPIs,” Ms. Lang said, adding that some companies have combined internal KPIs with a holistic external ESG rating.
  • “Revolving credit facilities are very common for sustainability-linked loans,” she noted.

Corporate ratings use. ESG ratings are more prevalent in Europe but increasingly so in the US, Ms. Lang said, and are now being used by corporates in a variety of ways.

  • For one, they’re essential for companies seeking to be included in ESG investment indices, to diversify their investor base and include more international and “responsibility-tilted” sources of capital.
  • Ms. Lang said companies are increasingly publishing their ESG ratings externally, beyond just institutional investors to the more general public and employees.
  • Some companies are using ratings to identify ESG risks in the supply chain, and others are linking executive compensation to them.

What’s your company’s score? Two-thirds of NeuGroup members polled at the recent meeting did not know their Sustainalytics ratings.

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Seizing Opportunities, Waiting for More and Getting Back to Work

Quick Takes, COVID-19 edition: A roundup of news, notes and notions from the NeuGroup Network.

Strategic Acquistions: Waiting for Small Biotechs to Adjust to Lower Values
Here’s some post-meeting follow-up from a treasurer in the biotech industry on his expectations for a “resetting of asset prices” and opportunities for strategic acquisitions as markets gyrate.

“I would characterize it as an emerging opportunity. So far, you have had price adjustments (lower stock prices) for smaller biotechs. But you need two parties to make a deal. What needs to happen in the future is that those same smaller biotechs need to become acclimated to their new prices.

Quick Takes, COVID-19 edition: A roundup of news, notes and notions from the NeuGroup Network.

Strategic Acquistions: Waiting for Small Biotechs to Adjust to Lower Values
Here’s some post-meeting follow-up from a treasurer in the biotech industry on his expectations for a “resetting of asset prices” and opportunities for strategic acquisitions as markets gyrate.

“I would characterize it as an emerging opportunity. So far, you have had price adjustments (lower stock prices) for smaller biotechs. But you need two parties to make a deal. What needs to happen in the future is that those same smaller biotechs need to become acclimated to their new prices.

  • Right now, many [executives at small biotechs] believe the price will recover as this is a temporary phenomenon; but if the recovery is not a sharp, V-shaped recovery it will begin to impact management’s views on price. Additionally, those without a large cash cushion will not be able to fund using equity issuance. They will begin to feel the pain sooner.

Until the market makes progress on the last two steps, I don’t see immediate deal opportunities. Let’s see how the market moves in the 30-60 days.”

A Treasury Investment Manager Seizes Opportunities, Adjusts for Uncertainty in the Business
The head of global investments at a NeuGroup member company described how his team has navigated volatile financial markets and shared his insights on the phases of financial crises like the one we’re in now. Here’s what he said:

“I think of financial crises in three stages:

  1. Dash for cash/forced liquidation. Market participants want to own the shortest term, highest quality securities possible. However, it takes two parties to make a trade, if no one is buying, no one can sell – in trader speak “No bid.” No primary transactions occur.
  2. Illiquidity. Capital markets are frozen or sticky. Issuers can get deals done at a premium.
  3. Balance sheet rebuilding. Most issuers can access the market to repair balance sheets that were wrecked during the previous two stages.

We were fortunate:

  • The balance sheet investments had the lowest duration and highest quality in nine years.
  • The internally managed liquidity portfolio (investment-grade corporate credit) had the most assets ever.
  • We had significant maturities every week.
  • Once we understood there wasn’t an immediate cash need by the company, we were able to take advantage of “dash for cash” and purchase high quality commercial paper at crazy yields; as I recall Boeing was offering two-week CP north of 4%. Those opportunities are fleeting.

We also shifted our money market funds to government-only to avoid the risk of gates.

Over the past two weeks, we’ve seen more normalcy in the markets. We can pick up extra yield by investing in non-marquis issuers. The rating agencies started the downgrade cycle which always provides opportunities.

  • For us, the biggest challenge is the uncertainty in the business. Every [similar] company that has announced earnings has given no forward guidance. Due to the uncertainty, we have to stay short and forego opportunities even three months out.”

Back to Work: Not So Fast
Most members on a recent COVID-19 check-in call for NeuGroup’s Internal Auditors’ Peer Group are beginning the process of getting employees back to work. It’s anything but straightforward. Here’s some of what we heard:

  • Manage the return. The idea is to “control the process” using a phased or staggered approach, one member said. Another said his company was looking at the process and doing “re-entry modeling.” The current plan at this business is to allow back the most critically needed people—such as engineers—and then go down the chain from there. The main workforce would return in shifts to better manage spacing and social distancing rules.
  • No uniformity. This phased-in approach takes on added complexity since companies have to account for different rules in different US states as well as in other countries. India—where many companies have call centers or shared service centers—is almost in full lockdown mode, members noted. So even getting “essential employees” back to work could be a challenge.
  • The kid factor. Another member mentioned that in many areas, school will be cancelled for the rest of the year. And since summer camps and other programs haven’t started yet, it might not be feasible for parents to just jump back into work.
  • Permanent remote for some? There are also real estate considerations, said one member. The thinking at this company was that in certain places, perhaps remote work made more sense and renting office space was not economically practical. Management is asking, “Can we reduce our footprint?”

The process of companies getting people back to work could raise unforeseen problems. A member of a NeuGroup teasurers’ group recently wondered if the company would be liable financially if a worker went back to his job and then became ill with COVID-19.

Distressed Customers and Other Priorities for a Tech Treasurer
Here’s what one NeuGroup member tells us he and his team are working on in the current, COVID-19 climate:

  • Liquidity needs for the rest of the year
  • Stress test around liquidity from revenues, expenses, margin compression, etc
  • Staying on top of capital markets
  • Working with teams on A/R programs for distressed customers
  • Forecasting cash needs around the globe
  • Analyzing investment portfolios to understand unrealized losses and making adjustment where needed
  • And, of course, day-to-day operations
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Rating Agencies—Along With Everyone Else—Find Themselves in Uncharted Territory

Societe Generale provides perspective on how Moody’s and S&P are approaching COVID-19 effects.

Credit analysts are generally taking a “staged approach” to the new coronavirus’ impact on ratings, largely because current circumstances are unprecedented and have created uncharted analytical territory.

  • That was among the key takeaways from a session led by Societe Generale’s Karl Pettersen, head of rating advisory, at a recent meeting of NeuGroup’s AT30 peer group.
  • Each agency, he added, has adopted a slightly different mindset so far in approaching the crisis. As a result, rating agencies will also rely heavily on issuers to understand the mechanics of companies’ credit response to the virus.

Societe Generale provides perspective on how Moody’s and S&P are approaching COVID-19 effects.

Credit analysts are generally taking a “staged approach” to the new coronavirus’ impact on ratings, largely because current circumstances are unprecedented and have created uncharted analytical territory.

  • That was among the key takeaways from a session led by Societe Generale’s Karl Pettersen, head of rating advisory, at a recent meeting of NeuGroup’s AT30 peer group.
  • Each agency, he added, has adopted a slightly different mindset so far in approaching the crisis. As a result, rating agencies will also rely heavily on issuers to understand the mechanics of companies’ credit response to the virus.

Fishing expedition. One member said the analyst who covers his company at Moody’s Investors Service had reached out, fishing for information, but only vaguely responded to questions about how the agency might integrate that information into its analysis.

  • The Moody’s outreach was unsurprising, Mr. Pettersen said. In part, Moody’s got “burned” when it massively downgraded the oil and gas sector in the previous down cycle and has now opted for a more gradual and case-by-case approach. As a result, the agency has given individual analysts more latitude in building their cases with the agencies. 
  • S&P Global analysts have often been tight-lipped individually, but the agency is instead making “a lot of noise” at the policy level, announcing COVID-19 and oil price-related ratings actions affecting more than 1,000 issuers across the globe, including wholesale sector-wide credit watch or outlook changes. “That approach buys them time—60 days to figure everything out,” said Mr. Pettersen, adding S&P’s approach tends to be more formal and top down.

Credit vs. ESG. The advent of COVID-19 has also highlighted the question of how credit ratings and ESG ratings should intersect, Mr. Pettersen said. In addition:

  • The credit agencies’ traditional metrics are not designed to capture factors, often ESG related, that may permanently impair even highly rated companies’ credit trajectory. Thus, a reset in how ratings are defined may ultimately be necessary. 
  • The current situation highlights areas of complementarity or even contradiction between ESG and credit ratings. More bluntly, and more broadly, this tension is also embodied in the potentially competing priorities of economic and public health priorities today. In extreme cases, ESG and credit ratings can even be at opposite ends from each other.
  • The emerging issue’s poster child until recently has been Tesla, with its high ESG scores but deep-junk credit ratings. The current environment could accelerate questions around certain sectors such as oil and gas, and their fundamental ability to sustain credit quality over the long term.
  • One early consideration today is the extent to which market support (i.e. equity, debt, and bank capital markets, plus legislation/regulation) should be more formally incorporated and differentiated in credit ratings. For large investment-grade issuers, market access/support is an essential but mostly unspoken part of analysis, but which will come more to the forefront of analysis today, including through possible stimulus packages.

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Preparing for a (Grand?) Reopening

Founder’s Edition, by Joseph Neu

How should finance and treasury professionals prepare for an economic reopening following the COVID-19 lockdown?

Since March 10, I have attended most of the 40-plus Zoom meetings NeuGroup has held with members. These include virtual peer group meetings, COVID-19 discussions, weekly office hours and interactive sessions devoted to other subjects. Below are some of my takeaways and insights.

Forecasting is paramount. The emphasis every company is placing on forecasting began with determining how long they could last with the liquidity on hand, without new cash flow. Then it incorporated expectations on new revenue expected in two weeks, one month, next quarter, in two quarters and so on, all under various scenarios, including a realistic worst case.

Founder’s Edition, by Joseph Neu

How should finance and treasury professionals prepare for an economic reopening following the COVID-19 lockdown?

Since March 10, I have attended most of the 40-plus Zoom meetings NeuGroup has held with members. These include virtual peer group meetings, COVID-19 discussions, weekly office hours and interactive sessions devoted to other subjects. Below are some of my takeaways and insights.

Forecasting is paramount. The emphasis every company is placing on forecasting began with determining how long they could last with the liquidity on hand, without new cash flow. Then it incorporated expectations on new revenue expected in two weeks, one month, next quarter, in two quarters and so on, all under various scenarios, including a realistic worst case.

  • Members continue to monitor collections closely and have switched on cash preservation protocols with varying severity, depending on the expected impact from COVID-19, how much liquidity they had, and how much access they had to new sources.
  • Forecasting, business planning and replanning now turn to the reopening and figuring out how soon lines of business may recover, how fast new cash flow arrives (and for how long) and what the recovery will look like—V-shaped, U-shaped, a flat-line or something else?

Stratification is key. The insight from China, courtesy of this week’s Zoom with our AsiaCFO peer group, is that financial planning must be stratified. For example, the recovery in China is V-shaped, helped by pent-up demand and stimulus. Yet there is great uncertainty and an expectation the recovery will be upset by demand and supply shocks caused by the global nature of the pandemic and the economic recession it has triggered. That means economic forecasts and corporate cash flow forecasts must factor in:

  • The impact in each country, region, sector and market. For example, food service and hospitality will be hit much harder than professional services in most markets, and areas with higher population densities will be affected more severely.
  • Timing differences. Companies must account for the different stages and severity of COVID-19 in different countries, from the initial curve of infections in their markets, in others they sell into or source from, and then the curve of subsequent infections until a vaccine emerges or the virus dies out. China is a few weeks to a month out of lockdown, Australia is midway, Thailand is just starting, and Singapore, Japan and South Korea are going through various second waves of lockdown.
    • In late Q1, MNC affiliates in China helped fund their parents by sending cash home to the US and Europe, as they were getting hit with the first wave.
    • Make hay while you can: April, May and June will be big months for a lot of business in China due to the reopening, before the next wave hits. Where can MNCs turn to next to make hay during another market’s reopening phase?
  • The opportunity to reacquire customers and competitors’ customers when the economy reopens. In many business lines, from food service to health care, homebound customers will be open to new products, new stores, new treatments. How aggressively will your company compete to reacquire and acquire them?

It can get complex quickly, and with each new forecast or plan, businesses need to balance the upside opportunity against the danger risk. Therefore:

  • Agility and smart decisions. “What sets the most successful firms apart in this environment is agility and decision making,” one Asia CFO from a consultancy said. “Agility is really critical, but also the speed of how you make decisions.” People need clarity on what decisions need to be made and when, and who needs to make them. And with so many decisions, there must be a good delegation process so employees can make them quickly and then take action.

Do we have enough capital? Given this complexity, uncertainty and opportunity, there is already a lot of second-guessing by those with access to capital: Do we have enough? Should we have issued more bonds? Should we go back into the market again? The second-guessing isn’t helped by the fact that bond offerings continue to be oversubscribed, spreads keep narrowing in secondary markets for those who have already issued, and bankers keep calling and emailing to ask issuers if they want to go back for more. So the internal conversations for reopening might shift from liquidity to growth capital for some.

  • This gets to the final stratification of haves and have nots in this new world: Those with liquidity and access to capital to survive and then thrive and those who do not. The former might possibly look forward to a grand reopening, whereas others are just hoping to reopen.
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As Day Follows Night: China Exposures Grow and So Do the Hedges Against Them

Members whose companies have material exposure to the Chinese market exchange experiences with how to manage the currency risk.

What’s the best course of action when corporates need to blunt their growing cash-flow exposures in China? The answer, hedge. But what’s the best approach? Depends on the company of course. At a recent FX summit of NeuGroup’s two FX Managers’ Peer Groups – which due to COVID-19 was NeuGroup’s first-ever virtual peer group meeting – one session dealt with managing RMB risk. Two members shared their situations and planned or current approach, followed by virtual breakout discussions for peers to compare and contrast.

  • Company 1: As a company with many retail locations in China, Company 1’s cash-flow exposure is driven by the renminbi (RMB) royalties owed by RMB-functional entities to a USD-functional entity. The royalties are payable in USD and currently the onshore team processes RMB spot conversion to USD via a local payment bank. However, treasury is in the process of moving future royalty payments hedging, conversion and hedge settlement to treasury operations.
  • Company 2: This globally USD-functional company has expenses (capex and opex) in RMB related to the Chinese manufacturing of products (sold worldwide, priced in USD), as well as R&D and sales and marketing expenses. The company has a seven-person treasury front- and back office in Shanghai.

Members whose companies have material exposure to the Chinese market exchange experiences with how to manage the currency risk.

What’s the best course of action when corporates need to blunt their growing cash-flow exposures in China? The answer, hedge. But what’s the best approach? Depends on the company of course. At a recent FX summit of NeuGroup’s two FX Managers’ Peer Groups – which due to COVID-19 was NeuGroup’s first-ever virtual peer group meeting – one session dealt with managing RMB risk. Two members shared their situations and planned or current approach, followed by virtual breakout discussions for peers to compare and contrast.

  • Company 1: As a company with many retail locations in China, Company 1’s cash-flow exposure is driven by the renminbi (RMB) royalties owed by RMB-functional entities to a USD-functional entity. The royalties are payable in USD and currently the onshore team processes RMB spot conversion to USD via a local payment bank. However, treasury is in the process of moving future royalty payments hedging, conversion and hedge settlement to treasury operations.
  • Company 2: This globally USD-functional company has expenses (capex and opex) in RMB related to the Chinese manufacturing of products (sold worldwide, priced in USD), as well as R&D and sales and marketing expenses. The company has a seven-person treasury front- and back office in Shanghai.

Which market? The RMB is traded in two markets (onshore China, offshore China) with three curves: CNY (onshore), NDF (non-deliverable forwards) and CNH (offshore). Since mid-2018, offshore entities can access onshore FX rates in China and dividend payments and “forecasted” RMB exposure are eligible transactions. The CNY is traded on CFETS (China Foreign Exchange Trade System), run by the central bank, PBoC. Among the global banks, Citi, HSBC and Standard Chartered, for example, are CFETS members.

  • Company 1: As a buyer of USD, the CNH curve is more advantageous since the CNY curve includes a 150 basis point reserve charge.
  • Company 2: The CNY curve is better for a buyer of RMB like this company.

External and internal challenges: The implementation and ongoing running of a cash-flow hedge program faces some challenges of both external and internal nature, such as:

  • Documentation requirements from counterparties and regulators. Limitations as to what CFETS offers in products and tenors.
  • Since the CNY market is controlled, the USDCNY reference rate that is announced daily is open to manipulation.
  • The liquidity of the CNY NDF market falls off beyond the 1-year tenor mark.
  • Use and pricing of options/collars if and when the CNY market moves beyond PBoC’s +/- 2% guidance.
  • The counterparty credit risk is harder to quantify when dealing with locally regulated affiliates of multinational partner banks.
  • For company 2, if market conditions drive a shift from revenues in USD to CNY, what are the hedge program implications?
  • What do you lose when you centralize the hedge program to US? Local knowledge and contacts on the ground is particularly valuable in high-context cultural environments like China. How much of that will be lost in a drive to centralize hedging to HQ, many timezones away? It will be harder to communicate with the remaining team on the ground, as well as with trusted, regular bank contacts for FX and other local needs.

Accounting rate. Try to push for the use of the same accounting rate as the market you use the most; if you trade and hedge in the CNH market, push to use CNH as the accounting rate as well.

Hedge accounting. Does the choice of market have hedge accounting and effectiveness testing implications? For example, if CNY is the intercompany billing currency, would hedging in the NDF market require regression vs. only critical-terms match if you used the CNY market?

Internal collaboration:

  • Between FX, BU and AP teams for accuracy in forecasting and payment timing.
  • IT and TMS considerations: Can systems facilitate both CNY, CNH and NDFs?Will the system require the creation of a new “country” and assign the second RMB curve to that.
  • Legal and compliance: what amendments of key intercompany agreements are necessary?
  • Treasury: additional ISDA, KYC and other banking requirements.
  • Treasury Ops & Treasury Middle office: aligning settlement details, CNH (or CNY) accounts setup, Reval transaction flow.
  • Educating general internal stakeholders on the RMB market.

Note: Renminbi (RMB) is the name of the currency; a yuan is a unit of the currency; CNY is the onshore-traded yuan, CNH is the offshore-traded yuan; NDF is a non-deliverable forward denominated in CNY.

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“Too Soon” Is Now “Let’s Do It”: Risk Managers Start Planning for Life Beyond COVID

Up until about a week ago, companies were so busy handling the immediate issues related to COVID-19, they were putting off thinking of future risks.

Enterprise risk management professionals are paid to look into the future and help companies prepare for it. But COVID-19 changed all that. “Too soon,” was the answer from most members of NeuGroup’s ERM peer group two weeks ago when we asked them about post-pandemic planning and their thoughts about the future.

  • One member back then said he was eager to get into longer-term thinking and “scenarios for one or two or three weeks or more.” However, the reaction he got from management was, “Now’s not the time.”

Today, though, that attitude is changing as senior executives adjust to the new normal. For example, one member in late March was delaying his annual risk outlook program, where heads of business units and direct reports suggest the biggest risks they see in the next few months to a year or more. This member was also hesitant to ask people to name their biggest risk “because they’ll just say pandemic.”

Up until about a week ago, companies were so busy handling the immediate issues related to COVID-19, they were putting off thinking of future risks.

Enterprise risk management professionals are paid to look into the future and help companies prepare for it. But COVID-19 changed all that. “Too soon,” was the answer from most members of NeuGroup’s ERM peer group two weeks ago when we asked them about post-pandemic planning and their thoughts about the future.

  • One member back then said he was eager to get into longer-term thinking and “scenarios for one or two or three weeks or more.” However, the reaction he got from management was, “Now’s not the time.”

Today, though, that attitude is changing as senior executives adjust to the new normal. For example, one member in late March was delaying his annual risk outlook program, where heads of business units and direct reports suggest the biggest risks they see in the next few months to a year or more. This member was also hesitant to ask people to name their biggest risk “because they’ll just say pandemic.”

  • But in mid-April, he said the program is starting up again, with C-Suite interviews and the creation of a heat map to present to the board in September.
  • Another member said he was now assigning teams to look at what happens after the crisis abates. Likewise, a member of NeuGroup’s Internal Auditors’ Peer Group, who also oversees ERM, said identifying post-crisis risks was getting a “better reception” among senior leadership.
    • “We’re starting to ID things that will need to be addressed,” she said. “What will it take for a recovery?”

Along with thinking about future risks, ERM at some companies has been assigned the project of updating the business continuity plan with takeaways from the pandemic. At another IAPG member’s company, the lack of a good BCP plan “is very top of mind” and managers are asking themselves, “How did we miss this?” He added that the company’s response has been “on the fly” and has been effective so far, but they don’t want to be as unprepared next time.

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Revolvers to Recovery: Credit Markets and the Five R’s of COVID-19

US Bank on where credit markets have been, are now, and what (we hope) lies ahead: recovery and relaxation.

NeuGroup held a virtual meeting last week where members who work in treasury at major retailers heard a presentation on bond and loan markets from US Bank and discussed other topics of interest during this period of uncertainty, volatility and disruption. Here are some key takeaways as distilled by Joseph Neu, beginning with insights from US Bank.

The five R’s of COVID-19. US Bank described five stages of the debt and loan market’s progression in the wake of the coronavirus pandemic (see graphic). The funding market has moved through stage 1—revolver drawdowns—and stage 2—raise incremental liquidity—and is now in stage 3, repair, with covenant amendments and credit restructuring (to secured and asset-backed lending) with repricing along with that. Stage 4 brings recovery with the economy reopening, repayment of drawn lines and the bank market reopening for “regular-way” issuance extending beyond 364-days. Stage 5 is when we can all relax again.

US Bank on where credit markets have been, are now, and what (we hope) lies ahead: recovery and relaxation.

NeuGroup held a virtual meeting last week where members who work in treasury at major retailers heard a presentation on bond and loan markets from US Bank and discussed other topics of interest during this period of uncertainty, volatility and disruption. Here are some key takeaways as distilled by Joseph Neu, beginning with insights from US Bank.

  • The five R’s of COVID-19. US Bank described five stages of the debt and loan market’s progression in the wake of the coronavirus pandemic (see graphic). The funding market has moved through stage 1—revolver drawdowns—and stage 2—raise incremental liquidity—and is now in stage 3, repair, with covenant amendments and credit restructuring (to secured and asset-backed lending) with repricing along with that. Stage 4 brings recovery with the economy reopening, repayment of drawn lines and the bank market reopening for “regular-way” issuance extending beyond 364-days. Stage 5 is when we can all relax again.
  • Confirmation that accordions and incremental borrowing past a year are out. There was also confirmation that until the economy reopens (stage 4), banks will not offer anything but incremental short-term facilities priced above current revolver pricing (e.g., Libor + 225 basis points). The economics are best when done in conjunction with a bond deal and where revolvers remain undrawn. Lesser credits and smaller corporates may see Libor floors between .5% and 1%.
  • Debt issuance continues down the credit spectrum. Ongoing Federal Reserve efforts to bolster the credit markets—namely the primary and secondary corporate credit facilities—are helping to narrow credit spreads in the bond market. The expansion to include high-yield debt is helping the lower end of the investment grade market, too. The issuance trend will likely continue into fallen angels and convertibles as a result.
  • Essentials vs. non-essentials. Credit risk perception in both the bond and bank loan market is bifurcated by ratings as well as essential vs. non-essential businesses, with companies in the latter group also seeing their ratings downgraded on higher perceived credit risk. This expectation also helps explains why most of the draws were in the BBB space.
  • Some banks not participating in new lending. While the appetite for incremental lending varies based on the bank’s position in a company’s bank group, and there is more client selection going on than usual (with downsizing), some banks are not offering any more balance sheet at all. And foreign banks that cannot take US deposits are also reluctant to lend.
Source: US Bank

Member Insight

  • Prime funds same risk as government funds? One member asked where to put cash drawn from the revolving credit facility (or raised in the CP market). Peers said they are doing the regular counterparty risk checks on banks (CDS prices are rising, but still below 2008 levels). One member said he would share analysis his team is doing to test the hypothesis that, with all the Fed backstops, government-MMF risk and prime-fund risk may actually be pretty close, so why not take the extra yield offered by prime funds?
  • Credit card processor best practice. One member in a different group had been hit by a significant reserve request by BAMS; no one in the retail group has experienced that. This prompted an insight on processor best practice: Use multiple processors (three to five of the top ones) so you can shift volume when one does something to upset you; plus you can allocate based on stores (subsets of stores) and e-commerce.
  • China store update. One member shared that they are reopening stores in China by following the SARS 2003 playbook, which then saw getting back to normal taking five to six months. On a positive note, the current experience is tracking slightly ahead of that.
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How to Protect FX From Newbies on Rotation

A NeuGroup member asks peers how to train people passing through the FX function without raising the risk of costly mistakes.

More often than not, specific corporate functions love a rotation plan where people from other areas come through to learn how the work in that function gets done, usually as part of a training and development program for high-potential talent. But for FX, more specifically trading, this can sometimes be a little tricky.

  • For instance, how, asked one FX manager during a recent NeuGroup virtual peer group meeting, do other members protect against FX newbies on a rotation making expensive trading errors? In other words, this manager said, “How do you make sure the rotation people aren’t doing what they’re not supposed to be doing?”

A NeuGroup member asks peers how to train people passing through the FX function without raising the risk of costly mistakes.

More often than not, specific corporate functions love a rotation plan where people from other areas come through to learn how the work in that function gets done, usually as part of a training and development program for high-potential talent. But for FX, more specifically trading, this can sometimes be a little tricky.

  • For instance, how, asked one FX manager during a recent NeuGroup virtual peer group meeting, do other members protect against FX newbies on a rotation making expensive trading errors? In other words, this manager said, “How do you make sure the rotation people aren’t doing what they’re not supposed to be doing?”

Limitations. Another member responded that his company sets parameters on amounts and types of trades, for example, so that rotating staff can be “allowed to do some things but there is a limit to how much damage they can do.” Shadowing or overlap also helps, whether it’s a rotation or someone taking another’s place for a different reason; one member said she trained the person taking her place for maternity leave for a month before she left.

Different strokes for different folks. Rotation programs come in several flavors and target different level staff. For instance, one member described a program he was familiar with that was two-tiered. This means there was a junior financial development program and a program for more senior financial people.

  • In the junior program, the young rotators would serve in more of a support role, doing things like analysis of counterparties, reporting and other functions that support the trader— but they weren’t actually allowed to trade. The more senior people rotating through could execute trades, but they were also held accountable for mistakes commensurate with their more senior status.
  • Even without rotations, training needs to be adequate for all the teams interacting with the FX team as well. One member said his treasury doesn’t do a rotation per se, but his company’s model is to “use the cash operations staff to be the FX back office.” But FX can be complicated and hard to learn even for a person from inside the organization who already knows the company well.

Trading’s the easy part. Whatever the philosophy on who can and cannot be let loose at the trading desk, one member thought that for training people in the FX world, trading was actually the easy part. “I think I can train anybody in one week” to do a trade, he said. “But the hard part is the strategy side. Strategic thinking, the accounting, the consequences, collaborating with all the business partners. That’s the hard part of the trade. For that, you need at least six months or a year or more.”

For big firms only? Finally, whether rotations are feasible depends very much on the size of the company and the treasury department, or finance function writ large. Ultimately, as a member pithily put it, “Rotations are the luxury of the large company.”

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Treasurers Rise to the Challenge of Managing Teams Remotely

One treasurer shares how he keeps staff united and upbeat—and offers his take on leadership during a crisis. The COVID-19 pandemic has forced many treasurers to confront the challenges of managing finance teams remotely.

  • At a recent NeuGroup virtual meeting of mega-cap companies, one treasurer shared his approach to keeping his team cohesive, as well as an observation about how people perform during a crisis.

Together apart. To build a sense of togetherness and maintain unity when everyone is in a different place, the treasurer created a virtual “war room” where every morning each of his direct reports speaks up and updates the group on critical information including domestic and foreign cash levels.

One treasurer shares how he keeps staff united and upbeat—and offers his take on leadership during a crisis.

The COVID-19 pandemic has forced many treasurers to confront the challenges of managing finance teams remotely.

  • At a recent NeuGroup virtual meeting of mega-cap companies, one treasurer shared his approach to keeping his team cohesive, as well as an observation about how people perform during a crisis.

Together apart. To build a sense of togetherness and maintain unity when everyone is in a different place, the treasurer created a virtual “war room” where every morning each of his direct reports speaks up and updates the group on critical information including domestic and foreign cash levels.

  • He holds another war room call at the end of the day to learn, for example, about any cash shortfalls and ask his direct reports about the calls they’re holding with their teams and how the broader treasury group is functioning.
  • He also sends an email update to the entire treasury staff at the end of the day to reinforce the feeling that they are members of a team. He includes a fun fact about himself (first concert, favorite food, etc.). And he has received positive responses by sharing how he spends his workday.
    • “They are very interested in what your day looks like,” he said, adding that he would likely share some of what he got from the NeuGroup meeting that day.

Fun stuff. To keep things light and spirits high during an extremely tough time, the treasurer had people wear something fun for St. Patrick’s Day. (Another member jokingly suggested having an “ugly sweater day.”)

  • Every Friday, as part of the end-of-day call, the team has a virtual happy hour. The overall goal, he said, is to create a “good environment” in the virtual workplace.  

Crisis response. In mid-March, two weeks or so into working from home, the treasurer had observed that some members of his team had not yet stepped up as leaders or started thinking outside the box as they navigated “unchartered waters” created by the pandemic.

  • “Most people tend to do what they are comfortable with during a crisis, rather than hit it head on,” he said. “Top leaders tend to shine during a crisis.”
  • To help maintain focus and motivation, the treasurer does a weekly review, listing the major accomplishments from the treasury/risk team.
  • He also pays tribute to individuals who hit milestones, like a work anniversary, or who go “above the call of duty.”
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Treasurers in Asia Alter Stress Tests, Grapple with Pandemic Challenges

Headaches include dividend repatriation, obstacles to execution of business contingency plans.

Repatriating dividends from China, India, Thailand and other countries is proving difficult for some treasury teams in Asia that are seeking to bolster their companies’ global liquidity in response to the coronavirus pandemic.

  • That takeaway and others emerged during a virtual meeting of treasurers in Asia facilitated by NeuGroup on Monday. Members at companies that had business continuity plans in place and had done stress testing before the crisis discussed some of the unforeseen consequences of this catastrophic outbreak.

Headaches include dividend repatriation, obstacles to execution of business contingency plans.

Repatriating dividends from China, India, Thailand and other countries is proving difficult for some treasury teams in Asia that are seeking to bolster their companies’ global liquidity in response to the coronavirus pandemic.

  • That takeaway and others emerged during a virtual meeting of treasurers in Asia facilitated by NeuGroup on Monday. Members at companies that had business continuity plans in place and had done stress testing before the crisis discussed some of the unforeseen consequences of this catastrophic outbreak.

Tax and audit issues. Few if any members assumed that the need for tax clearance and a full audit would thwart efforts to repatriate dividends. But the inability to access auditors and the closure of government tax offices has indeed made life difficult for some companies.

  • Treasury at one company solved the repatriation problem by doing back-to-back lending—leaving cash in China as a pledge to secure a loan to a subsidiary elsewhere.

New assumptions for stress tests. The repatriation issue underscores how the scope and effects of this pandemic exceeded the assumptions of many stress tests. As a result, companies are taking a hard look at those assumptions and making changes to reflect the new reality.

  • One company, for example, is now looking at how to build a cash buffer that will sustain it for two months without cash collection, up from one month under the old liquidity stress test assumption.

BCP steps: Not so simple. One member offered up an example of something in a business continuity plan that seems simple but is not working as advertised: The company had planned to shift some processes to India during the crisis but could not because logistical problems prevented the shipment of bank tokens there—meaning no access to the banking network.

Banks and documents. While some banks are accepting electronic signatures and the use of DocuSign, many are not, creating delays for corporates that then must get physical signatures and mail them to the bank. That raises the question of how far your banks will bend during this enormous disruption to business norms.

Business health. Companies in some industries have been devastated by the economic effects of the crisis. But among NeuGroup members, some at this meeting described doing quite well, particularly those in the technology and health care sectors. And only a small minority are considering the benefits of accepting government assistance.

Balancing act. On a personal level, members of treasury teams in Asia are confronting the same challenges of working at home described at all recent NeuGroup virtual meetings, especially by those with children who must be supervised because schools are closed. It’s another example of how the length and severity of the COVID-19 outbreak is forcing finance teams to adapt creatively to circumstances that everyone hopes will be much different by the second half of 2020 if not sooner.

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SOFR Passes COVID-19 Stress Test, Bolstered by Stability of Repo Market

The volume of repo transactions underlying the calculation of SOFR has remained strong as the coronavirus disrupted other markets.

US regulators’ recommended Libor replacement has performed strongly through the volatility roller coaster powered by the coronavirus. In fact, the overnight repurchase agreement (repo) market used to calculate SOFR has increased in daily volume to more than $1.3 trillion.

  • “With SOFR, you have good reason to be confident that it can always be calculated, and the rate you’re paying reflects actual transactions,” David Bowman, senior associate director at the Federal Reserve’s Board of Governors, told NeuGroup members at a recent virtual meeting. “Every market is challenged now, but the only one that really seems to be operating near standard capacity is the overnight treasury repo market.”

The volume of repo transactions underlying the calculation of SOFR has remained strong as the coronavirus disrupted other markets.

US regulators’ recommended Libor replacement has performed strongly through the volatility roller coaster powered by the coronavirus. In fact, the overnight repurchase agreement (repo) market used to calculate SOFR has increased in daily volume to more than $1.3 trillion.

  • “With SOFR, you have good reason to be confident that it can always be calculated, and the rate you’re paying reflects actual transactions,” David Bowman, senior associate director at the Federal Reserve’s Board of Governors, told NeuGroup members at a recent virtual meeting. “Every market is challenged now, but the only one that really seems to be operating near standard capacity is the overnight treasury repo market.”

Libor extension unlikely. The futures exchanges’ move to SOFR discounting in October, anticipated to ramp up SOFR hedging, and other significant developments this year may be delayed—but only briefly.

  • US regulators have little choice but to move forward with transitioning away from Libor, Mr. Bowman said, given banks’ unwillingness to submit their costs for wholesale, unsecured funding past 2021, when their agreement to continue submitting to Libor ends.
  • New York State legislation designed to facilitate the transition from Libor has recently stalled as coronavirus took priority; but earlier “discussions were positive” and efforts should resume when the crisis calms, Mr. Bowman said. The bill would impact a wide range of corporate transactions, such as purchase agreements where the late payment fee is based on Libor, that typically lack language enabling the fallback to an alternative rate.

Corporate concerns linger. Mr. Bowman described efforts by the International Swaps and Derivatives Association and the Alternative Rates Reference Committee (ARRC) to develop SOFR contractual language and best practices, respectively, for derivative and cash transactions, to facilitate the transition. Corporates, however, are concerned that a forward-looking term SOFR has yet to emerge, and payments must be calculated in arrears.

  • “We would want to see a full term structure, so we can base transactions off one-month and three-month SOFR,” said the assistant treasurer of a major pharmaceutical company, noting few corporates have issued SOFR-priced debt so far.
  • Mr. Bowman said the ARRC is “committed to doing everything it can” to ensure the production of a forward-looking SOFR term rate, and it anticipates borrowers having a choice of solutions.
  • He encouraged corporates to experiment with using SOFR calculated in arrears, noting that calculation needn’t occur shortly after the period ends but could be done five or 10 days before, giving more time to plan. “Don’t wait for a term rate—find out where you can use SOFR now,” Mr. Bowman added.

Calling all corporates. Mr. Bowman invited corporate finance executives to participate in his Friday afternoon office hours to discuss SOFR issues and to join ARRC committees and respond to its consultations. “Having you all help to shape the way this goes forward is vitally important,” he said.

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Using Bloomberg for “Nuisance” Trades

Avoiding the time-intensive process of requesting trades in a centralized structure, local cash managers speed the process with online access to Bloomberg.

During a recent NeuGroup virtual meeting of FX managers, one member said he has started to use Bloomberg for local affiliates’ “nuisance trades.” These are foreign currency-denominated accounts payable under a certain USD-equivalent threshold.

Avoiding the time-intensive process of requesting trades in a centralized structure, local cash managers speed the process with online access to Bloomberg.

During a recent NeuGroup virtual meeting of FX managers, one member said he has started to use Bloomberg for local affiliates’ “nuisance trades.” These are foreign currency-denominated accounts payable under a certain USD-equivalent threshold.

  • Local freedom. The member noted his company’s corporate treasury manages FX worldwide, so they were happy to find that local cash managers are able to load their trades by accessing Bloomberg online (which doesn’t require Bloomberg terminal access) for the centralized team in the US to execute.
  • Straight through. This process has eliminated an inefficient trade-request process using email across various time zones. The team’s normal e-platform for FX trading is not the best solution for this because many local banks don’t have the technology to connect to it. But they are all connected to Bloomberg. Affiliates only need a login and an internet connection to submit trade requests.
  • Multicurrency. Bloomberg also can execute onshore trades and NDFs in currencies the other platform might not support, so the FX team is able to trade INR, CNY, MYR, THB, KRW, and BRL, all onshore.
  • A small catch. There is a fee for access and authority to upload trades to Bloomberg. But for this company, it is well worth the cost to efficiently reduce the time required for this workflow.
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Supply Chain Finance Not Immune from Pandemic Pain Felt by Banks

Higher funding costs for banks amid COVID-19 mean wider spreads in SCF market. An assistant treasurer at a major consumer goods company learned from supply-chain-finance (SCF) vendors that banks financing SCF assets have asked for wider spreads to compensate for their own higher funding costs, at least temporarily. The banks had agreed to a fixed spread that was still attractive in early March but, in the midst of the coronavirus economic meltdown, is much less so today. “It isn’t as attractive an asset at this moment, but long term it’s a terrific asset for the banks,” the member said at a recent NeuGroup virtual meeting. Because the banks see it as a long-term asset, they’re unlikely to “pull the rug out,” he said.

  • Another member noted that banks are struggling to syndicate risk from factoring programs as investors hoard cash, and they’re scrambling to find room on their balance sheets to keep their commitments.

Higher funding costs for banks amid COVID-19 mean wider spreads in SCF market.
 
An assistant treasurer at a major consumer goods company learned from supply-chain-finance (SCF) vendors that banks financing SCF assets have asked for wider spreads to compensate for their own higher funding costs, at least temporarily. The banks had agreed to a fixed spread that was still attractive in early March but, in the midst of the coronavirus economic meltdown, is much less so today.

  • “It isn’t as attractive an asset at this moment, but long term it’s a terrific asset for the banks,” the member said at a recent NeuGroup virtual meeting. Because the banks see it as a long-term asset, they’re unlikely to “pull the rug out,” he said.
  • Another member noted that banks are struggling to syndicate risk from factoring programs as investors hoard cash, and they’re scrambling to find room on their balance sheets to keep their commitments.

Beyond COVID. The consumer goods company is a big proponent of SCF and uses three solution providers. It turned to fintech Orbian rather than a major bank more than a decade ago, partly because it offered the ability to engage a wide group of relationship banks without having to set up multiple SCF programs.

  • The company was able to reward the third- and fourth-tier banks in its revolving credit facility by tapping them to be liquidity providers in the program.
  • Not only does that diversify liquidity providers, but it gives “ancillary business to these banks that, quite frankly, we have a hard time providing business to,” the AT said.
  • The other AT noted factoring programs can be used similarly. 

Beyond Orbian. A few years ago, the consumer-goods company’s CFO tasked the finance function with increasing days payable outstanding (DPO) and working capital. The first step, extending terms, required reworking contracts with thousands of vendors, before seeking to persuade them to use SCF.

  • To roll out an SCF program to a wider population of suppliers, the company signed on fintech Taulia, the AT said, partly because its innovative SCF onboarding procedure more closely resembles downloading an iPhone app than competitors’ documentation-heavy approach.
  • Taulia also offers dynamic discounting, typically aimed at smaller vendors with more urgent cash needs.
  • In addition, Taulia offers an e-invoicing portal to facilitate vendors’ invoice submissions that can be used by vendors that do not take part in SCF or dynamic discounting. 

Big strides. With the US, Canada and Western Europe covered in terms of SCF, the company sought a global bank last year to provide an SCF option to suppliers in Asia and Latin America. At this point, the company has made “noticeable strides in DPO,” jumping from the fourth quartile to the second quartile among corporate peers, the AT said.

  • Segmenting suppliers by size, sophistication, geography and other relevant factors is key. Larger and more sophisticated vendors typically opt for SCF, in which discounts resemble the investment-grade company’s revolving-credit rate, but smaller companies may accept dynamic discounts as high as 14%, “and I’ll do that all day long,” the AT said.
  • Speeding up invoice approval is also necessary for a successful SCF program, since slow approvals reduce benefits for all the parties. The company standardized invoices, and its policy is to no longer accept invoices by mail or even PDF.

Suppliers unable to submit electronic-data-interchange (EDI) invoices must send PDFs to Taulia, which converts them to EDI and processes them straight through to the company ERP. Both Taulia and Orbian plug and play into SAP.

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Closing a Quarter for SOX Can be Difficult in New, Remote World

An internal auditor describes what his company has done to successfully close a quarter when some physical tasks can’t be done.

Part of Sarbanes-Oxley, the internal controls act released in 2002, requires a corporate’s chief executive and financial officers to certify financial and other information contained in the issuer’s quarterly and annual reports. But what happens in a crisis? What if some of that info requires someone in place to record inventory or in-person meetings when employee movement is heavily restricted during the current pandemic?

An internal auditor describes what his company has done to successfully close a quarter when some physical tasks can’t be done.

Part of Sarbanes-Oxley, the internal controls act released in 2002, requires a corporate’s chief executive and financial officers to certify financial and other information contained in the issuer’s quarterly and annual reports. But what happens in a crisis? What if some of that info requires someone in place to record inventory or in-person meetings when employee movement is heavily restricted during the current pandemic?

Practice. One answer is the punchline to the joke, “How do you get to Carnegie Hall?” Practice, practice, practice. That’s essentially what one member of NeuGroup’s Internal Audit Peer Group has done over the past few years. The company developed a robust business continuity plan where SOX was a particular focus and has used it a few times over the years for natural disasters and has audited the plan several times. So with COVID-19, “We’re in pretty good shape,” the member said.

Take a photo. Despite the company being comfortable with remote working, there still are challenges to closing the quarter amid the global pandemic. This includes practices like obtaining “wet ink” signatures, getting people in place for inventory observation or cut-off testing for shipping.

  • In this case, the auditor said, the company “did what it could when it came to inventory.” Local managers took photos of inventory before they were told to leave the premises. And managers were able to obtain wet signatures while keeping in mind social distancing rules. Where this couldn’t be done, e-signatures like those provided by DocuSign were allowed.
    • In one of NeuGroup’s treasury peer group zoom meetings recently, one practitioner in Europe said his relationship banks were permitting DocuSign functionality for 90 days.
  • Preparation. The member’s company listed all the controls it thought it wouldn’t be able to use when people couldn’t access company buildings or managers had little access to each other.
    • “We identified the controls and have been able to postpone some reporting,” he said. “It’s going to be an interesting quarter, but I think we’ll be able to close with no problems.”
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Lock It Up: What You Need to Know About Pre-Issuance Hedging

The pros and cons of treasury locks and forward-starting swaps as bond issuance jumps.

 The crush of investment-grade issuers rushing to sell bonds as COVID-19 wreaks economic havoc has made pre-issuance hedging a relatively hot topic for many treasury teams.

  • Chatham Financial, sponsor of NeuGroup’s Virtual FX Summit, helped members get a firmer grip on the various ways to manage interest rate risk—and the associated accounting implications—during the summit and a subsequent Zoom meeting.

Here are some of the key takeaways:

The pros and cons of treasury locks and forward-starting swaps as bond issuance jumps.

The crush of investment-grade issuers rushing to sell bonds as COVID-19 wreaks economic havoc has made pre-issuance hedging a relatively hot topic for many treasury teams.

  • Chatham Financial, sponsor of NeuGroup’s Virtual FX Summit, helped members get a firmer grip on the various ways to manage interest rate risk—and the associated accounting implications—during the summit and a subsequent Zoom meeting.

Here are some of the key takeaways:

  • Treasury locks are quite efficient as a short-term hedge (even intra-day), but can be less efficient when debt issuance is further out than three months, so it can be difficult to apply hedge accounting.
    • They may be easier to explain to senior management than a forward-starting swap, but the market is also not as liquid nor as transparent. 
    • Another con: You’ll pay a “roll” premium if the tenor goes beyond the next treasury auction.
  • Forward-starting swaps can be efficient as both a short-term and long-term hedge, but are predominantly used for longer-term refinance risk.
    • While more liquid, forward-starting swaps also add an element of “basis risk” in the event that swap spreads compress over US treasuries, which in turn can add a layer of complexity when seeking senior management approval.
  • Have a plan. Chatham Financial stressed that regardless of which option a company chooses, it’s important to have a plan in place including internal approvals that would permit the treasury team to execute hedges quickly if markets moved in a favorable direction. This sort of “readiness book” also helps prepare teams to strike while the capital markets are in their favor.
  • Check out Chatham’s table below for more comparisons between treasury locks, forward-starting swaps and swaptions. And to dive deeper into the economic and accounting considerations, contact the experts.
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Go with the Flow: How Treasury Is Adapting to Churning Markets

Flexibility and resourcefulness are critical as treasury teams cope with fallout from COVID-19. Assistant treasurers at a virtual NeuGroup meeting last week exchanged numerous examples of resourcefulness and flexibility in coping with the effects of the pandemic on FX trading, capital markets and other areas of responsibility. Here are some top takeaways: Time for algos. One AT said spot trading in the FX market became “ridiculous” as liquidity vanished and spreads widened, making it difficult to close out small spot trades. That means the FX team is “one of the most impacted right now,” she said.

  • As a result, she said the team has opened its toolbox and is using algos “ridiculously more” than usual.
  • Algos search out and aggregate snippets of liquidity across the market over time, and sometimes are used to mask the market participant’s intentions.

Flexibility and resourcefulness are critical as treasury teams cope with fallout from COVID-19.

Assistant treasurers at a virtual NeuGroup meeting last week exchanged numerous examples of resourcefulness and flexibility in coping with the effects of the pandemic on FX trading, capital markets and other areas of responsibility. Here are some top takeaways:

Time for algos. One AT saidspot trading in the FXmarket became “ridiculous” as liquidity vanished and spreads widened, making it difficult to close out small spot trades. That means the FX team is “one of the most impacted right now,” she said.

  • As a result, she said the team has opened its toolbox and is using algos “ridiculously more” than usual.
  • Algos search out and aggregate snippets of liquidity across the market over time, and sometimes are used to mask the market participant’s intentions.

Meeting the market. A rebound in the credit markets and healthy liquidity in investment grade bonds allowed many corporates to sell debt last week—but not under typical circumstances and therefore requiring flexibility.

  • One member described deciding tenor and size for a large, multi-tranche deal by paying more attention than usual to meeting market demand, noting, “You can’t wait for the perfect day in this marketplace.”
  • “We had good demand and were oversubscribed across all maturities, but we let the market dictate our maturities when normally we would driven that ourselves,” he said.
  • The AT of a major consumer-goods company, which had issued late the week before, said there was plenty of liquidity but very few of the usual large investors showed up. “We actually had to ask our banking partners who some of them were,” he said, adding that it looked then like investors “were getting ready to park their cash and go home for awhile.”
  • The investors that did step up made a good bet. Another member said he had heard that the bonds issued by the first AT had tightened 66 basis points since issuance.

Documents still must be signed. Even when almost everyone is working remotely, bank documents and checks still need signatures. Two members said their teams have set up schedules to limit staff entering the building to perform that function. Another offered that a scanned phone version of the document can speed up the process, leaving signatures on the actual documents for later on.

New approach to earnings calls? One AT member asked peers about handling the Q1 earnings process, given most employees now work from home and her company’s earnings are scheduled for release in late April.

  • “We’ve had some internal discussions about whether to do the process like we normally do it, with a regular call, or do something different,” she said.

Another member whose company’s earnings are scheduled for early May said his team had tentatively mapped out a virtual call as part of its business continuity plan. Recent discussions have focused on setting a schedule to prepare for the event and planning mock calls.

  • “We’ve kicked off the effort, but it’s probably 50/50 that will actually do it [in early May] at this point,” he said, adding, “We’re testing feasibility over the next two to three weeks.”
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Listen Up: A Banker’s Reality Check for Corporates Tapping Credit Lines

Societe Generale offers insights on bank pricing and priorities as companies seek cash safety. Companies determined to bolster their balance sheets by tapping revolvers or looking for loans, take heed: Bankers will view some drawdowns and requests much more favorably than others, and it pays to understand the bank’s perspective.

  • That insight and others emerged during comments by Guido van Hauwermeiren, Societe Generale’s head of coverage and investment banking in the Americas. He spoke this week during NeuGroup’s Assistant Treasurers’ Group of Thirty virtual meeting, sponsored by SocGen.
  • The meeting took place against the backdrop of some 130 companies drawing down $124 billion in credit lines since March 1, according to the Financial Times.

Societe Generale offers insights on bank pricing and priorities as companies seek cash safety.

Companies determined to bolster their balance sheets by tapping revolvers or looking for loans, take heed: Bankers will view some drawdowns and requests much more favorably than others, and it pays to understand the bank’s perspective.

  • That insight and others emerged during comments by Guido van Hauwermeiren, Societe Generale’s head of coverage and investment banking in the Americas. He spoke this week during NeuGroup’s Assistant Treasurers’ Group of Thirty virtual meeting, sponsored by SocGen.
  • The meeting took place against the backdrop of some 130 companies drawing down $124 billion in credit lines since March 1, according to the Financial Times.

Credit committee stress. Pent-up demand for new loans is stressing out bank credit committees, and that’s forcing bankers to pick who goes to the front of the line. As a result, Mr. van Hauwermeiren said, blue-chip companies that have funded long-term projects with short-term commercial paper (CP) may find banks unwilling to replace that inexpensive funding with a similarly priced loan.

  • “I’m not going to put requests from companies that have been financing project finance with CP on the top of the pile, or even in the pile,” he said.

Cash flow vs. buybacks. Client history will play a role in determining bank priorities. Companies with strong bank relationships that face disrupted cash flows or other types of financial duress can rely on the bank to do whatever possible. Those looking to fund share buybacks, less so.

  • “We’re saying there’s not enough money to go around, so you can’t do that,” Mr. van Hauwermeiren said.

Repairing and repricing. Revolving credit facilities (RCFs) have been the “lifeblood” for many companies, “but that system needs to be repaired, and I’m sure it will get repriced,” the SocGen banker said.

  •  Facilities priced between 30 and 45 basis points over LIBOR will likely see spreads widen to the 125 bps over Libor range, Mr. van Hauwermeiren said.

When to draw? An AT30 member asked if it was better to draw down a facility now, even if the company doesn’t need the liquidity, since it will face higher pricing anyway. Noting the new rules have yet to be written, Mr. van Hauwermeiren said he doesn’t foresee a stigma on corporates drawing down facilities, if it’s done the right way.

  • For example, he said, a highly rated company could request a new facility at the higher rate on top of its existing, inexpensively priced backstop, and promise to draw down only the new one if need arises. “That’s a sensible, relationship-type of play, and those borrowers will be viewed fondly,” he said.
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DIY: Forming Mentoring Circles That Lead to Sponsorship

More takeaways from the Women in NeuGroup meeting featuring three senior executives at one company.

The Women in NeuGroup (WiNG) virtual meeting held last week highlighted the use of mentoring circles as a building block for sponsorship—where someone senior to you in the company advocates for your advancement. Our first story described how the process works at one major American multinational, as described by three senior executives. Below are more takeaways from the meeting as distilled by Anne Friberg, senior director of peer groups at NeuGroup.

  • Yes, you can build your own. It doesn’t really require corporate sponsorship to build mentoring circles like the one featured at the WiNG event. You can start your own with women (and men) whom you know and just go for it. The one stumbling block may be to get budget approval for things like traveling along with mentors to other company facilities, for example, but most of the suggested actions don’t incur much cost. (Of course, almost no one is traveling now, but that will change some day.)
  • Don’t be afraid to ask someone to be a mentor (or even sponsor). The worst that can happen is they say no. The key is not to let that dent your confidence, and the silver lining is that it also opens up for a conversation of what it would take for them to consider mentoring or sponsoring you.

More takeaways from the Women in NeuGroup meeting featuring three senior executives at one company.

The Women in NeuGroup (WiNG) virtual meeting held last week highlighted the use of mentoring circles as a building block for sponsorship—where someone senior to you in the company advocates for your advancement. Our first story described how the process works at one major American multinational, as described by three senior executives. Below are more takeaways from the meeting as distilled by Anne Friberg, senior director of peer groups at NeuGroup.

  • Yes, you can build your own. It doesn’t really require corporate sponsorship to build mentoring circles like the one featured at the WiNG event. You can start your own with women (and men) whom you know and just go for it. The one stumbling block may be to get budget approval for things like traveling along with mentors to other company facilities, for example, but most of the suggested actions don’t incur much cost. (Of course, almost no one is traveling now, but that will change some day.)
  • Don’t be afraid to ask someone to be a mentor (or even sponsor). The worst that can happen is they say no. The key is not to let that dent your confidence, and the silver lining is that it also opens up for a conversation of what it would take for them to consider mentoring or sponsoring you.
  • It can get awkward with close associates. What if you started out at the same level with a long-time colleague, but now you’re in a more senior role and you’re mentoring that person? And what if you really feel you cannot in good conscience sponsor this person for a promotion or joining your team? Remember the key tenets of productive mentor and sponsor relationships: They require trust, honesty, communication and commitment. When you’ve known someone for a long time and may be friends outside work, this is hard.  But—gulp—take a deep breath and be honest about why you cannot sponsor someone, and be generous about sharing what you believe the areas of improvement required for your sponsor support are.
  • Prepare yourself for being sponsored. Not everyone is as aware as they would like about their own skill set or what’s required for being “discovered” and sponsored. If that sounds like you, it may pay to take an assessment from StrengthsFinder or similar services. That way, you can be more confident in putting yourself forward for something that suits your strengths, or seek out opportunities where you may need to dig deeper and develop an area that’s less of a strong suit for you to balance out your skill set. And mind you, a sponsor who’s gotten to know you may well see strengths and capabilities more clearly than you do.
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Beyond Revolvers: What NeuGroup Members are Talking About Now

More of Joseph Neu’s takeaways from virtual meetings dominated by talk of cash and liquidity. The waterfall of insights cascading from NeuGroup’s virtual meetings this month requires expert judgment on wringing out and distilling what matters most. One expert is NeuGroup founder Joseph Neu, who on Tuesday offered his take on tapping credit lines. Here are some of his other takeaways: Converts as an option. Industrial companies said they are looking at the convertible debt market as a financing option. Typically, these are the domain of tech and life sciences firms, so investors are said to be looking for diversification. Reviewing cash flow models. It pays to have a good cash flow model and members report reviewing those and watching key metrics. For example, recurring revenue companies: An increase in churn and pricing declines. Scenario plans are also being layered on top of these. “We are fine for a few months, but eight months is another matter,” one member said.

More of Joseph Neu’s takeaways from virtual meetings dominated by talk of cash and liquidity.

The waterfall of insights cascading from NeuGroup’s virtual meetings this month requires expert judgment on wringing out and distilling what matters most. One expert is NeuGroup founder and CEO Joseph Neu, who on Tuesday offered his take on tapping credit lines. Here are some of his other takeaways:

Converts as an option. Industrial companies said they are looking at the convertible debt market as a financing option. Typically, these are the domain of tech and life sciences firms, so investors are said to be looking for diversification.

Reviewing cash flow models. It pays to have a good cash flow model and members report reviewing those and watching key metrics. For example, recurring revenue companies: An increase in churn and pricing declines. Scenario plans are also being layered on top of these. “We are fine for a few months, but eight months is another matter,” one member said.

Cash forecasts not good enough. Even the best forecasters are challenged with the demand and supply shocks set off by this crisis. If you are hedging forecasted exposures, it really pays to be a hedge accounting whiz with hedged item designations and your effectiveness testing methodology. Even then auditors may want to put you into the penalty box, so be prepared to push back.  

Can you still concentrate global cash? Evaluate cash positions across the globe and the ability to centralize it under various contingencies, including currency controls being reimposed or tightened. This will become a bigger risk if FX rates continue to weaken.

Supply chain finance. Treasury should be working with banks and supply chain finance solution providers to take efficiency to the max level in onboarding and matching invoices for early payment to support key suppliers so they can focus their own balance sheet efforts on the most vulnerable suppliers that don’t have invoices to factor. One member noted the irony that a bank can hold their paper backed by supply chain finance obligations, but not its CP, which is a regulatory anomaly versus a credit risk economic issue. The member also noted that bank and investor demand for commercial-trade/invoice-backed financing for suppliers is said to be holding up well. This is huge given this context.

Signing documents. Tell banks and others allowing DocuSign (and other digital signature tools) that are allowing them as a temporary crisis fix that they should be good enough for the future, too. People to do company chops or process documents needed for cross-border transfers might not be available, which could delay cross-border transfers (see above).

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Bonds in the Time of COVID-19: Timing Is Everything

Treasury teams need to be prepared to pounce as investor sentiment shifts wildly in capital markets.

Be prepared so you can be nimble. That’s the advice from a treasurer whose company pounced when investor sentiment in the investment grade corporate bond market allowed nine corporates to issue $25 billion in debt on one day this month before the window slammed shut again amid COVID-19 fear.

  • “You have to take what the market gives you and respond to the environment around you, which has seen a bear market in equities and severe liquidity stress in credit markets,” he said during a recent NeuGroup meeting of mega-cap multinationals.
  • Several peers congratulated the treasurer on his team’s ability to act fast, with one saying, “Thanks for going out there and being our golden child. Thank God you did it yesterday.”
  • Another treasurer said his company is working on a bond offering but wasn’t prepared to tap the capital markets as quickly.

Treasury teams need to be prepared to pounce as investor sentiment shifts wildly in capital markets.

Be prepared so you can be nimble. That’s the advice from a treasurer whose company pounced when investor sentiment in the investment grade corporate bond market allowed nine corporates to issue $25 billion in debt on one day this month before the window slammed shut again amid COVID-19 fear.

  • “You have to take what the market gives you and respond to the environment around you, which has seen a bear market in equities and severe liquidity stress in credit markets,” he said during a recent NeuGroup meeting of mega-cap multinationals.
  • Several peers congratulated the treasurer on his team’s ability to act fast, with one saying, “Thanks for going out there and being our golden child. Thank God you did it yesterday.”
  • Another treasurer said his company is working on a bond offering but wasn’t prepared to tap the capital markets as quickly.

Be prepared to call an audible. The treasurer said his company has had a liquidity planning playbook since the 2008 financial crisis and had been looking to tap the capital markets for the last month. The market’s violent swings forced him to change the company’s original plans several times.

  • “We pivoted from a debt exchange which exposes you to 10 days of market risk until closing to an unsecured bond offering which gets you in and out of the market in one day,” he explained.
  • “We decided to warehouse liquidity on our balance sheet as a sign of strength, and once the coast is clear we can consider liability management and debt repayment.”

Laying the groundwork. To prepare to act fast, treasury told the board to consider the debt offering as “relatively cheap insurance” even though “it was really scary to dip your toe into this market,” the treasurer said.

  • The company’s ability to take advantage of the open window also involved having disclosure decisions in place. The company filed an 8-K that said, “Due to the speed with which the situation is developing, we are not able at this time to estimate the impact of COVID-19 on our financial or operational results, but the impact could be material.”
  • The treasurer received many more calls than normal from investors and relied on the 8-K, which stated, “COVID-19 may affect the ability of our suppliers and vendors to provide products and services to us. Some of these factors could increase the demand for our products and services, while others could decrease demand or make it more difficult for us to serve our customers.”

Hedging advice. Given the volatile nature of markets, the treasurer had this advice for peers looking to reduce interest-rate risk: “I highly encourage folks to do intraday hedging if you’re hedging the market.”

  • As distilled by NeuGroup founder Joseph Neu, “Pre-issuance hedging using the full knowledge base on treasury locks, swap locks, including intra-day rate hedging, and the hedge accounting implications are a must in this market.”
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Little or No Pushback Has Corporates Drawing on Credit Lines—At What Cost?

Founder’s Edition by Joseph Neu Insights on the reasons to tap revolvers and what the trend may mean for banks and treasury. One clear insight emerging during our first several NeuGroup virtual meetings as the COVID-19 crisis escalates is that corporates are taking a slew of steps to bolster their liquidity positions. Among the most notable: All but the most stellar credits are drawing on revolving credit facilities (RCFs), a move that has potentially profound implications for banks.

  • As Reuters noted recently, “After the 2008 financial crisis, several blue-chip companies drew down on revolving credit facilities, shocking banks that had charged minimal interest margins on the assumption the loans would remain unused (my emphasis).”

Founder’s Edition by Joseph Neu

Insights on the reasons to tap revolvers and what the trend may mean for banks and treasury.

One clear insight emerging during our first several NeuGroup virtual meetings as the COVID-19 crisis escalates is that corporates are taking a slew of steps to bolster their liquidity positions. Among the most notable: All but the most stellar credits are drawing on revolving credit facilities (RCFs), a move that has potentially profound implications for banks.

  • As Reuters noted recently, “After the 2008 financial crisis, several blue-chip companies drew down on revolving credit facilities, shocking banks that had charged minimal interest margins on the assumption the loans would remain unused (my emphasis).”

This time is different—kind of. The good news is that 12 years after the financial crisis began, banks are solid, have buffers and are in a good position to weather this storm; plus, central banks are backing them in a bigger way. Yet the pricing of RCFs, in the US especially, still largely assumes they will remain undrawn and often does not reflect the true cost of the credit.

  • If the stigma of drawing on an RCF for a company that normally relies on the capital markets goes away, then bank pricing of them will need to reflect that.
  • Indeed, it is happening already as banks have been adjusting the pricing of liquidity on RCFs, bilats, term loans et al. If you were used to 35 to 45 basis points over on an RCF, you should not expect any new lending at that price—it has gone up, said one banker to our members. If everyone one draws, and rating agencies start to rethink downgrading, banks are going to start to feel more pain and reprice their risk further. For some, their liquidity and capital ratios may come under duress. Banks will remember who drew when it comes time to renew.
  • So, if the drawing on RCFs continues, accordingly, treasurers should be prepared to kiss the RCF market they are used to goodbye. This will obviously have knock-on effects on the entire business model for bank pricing, fees and wallet analysis and bank relationship management.

Here are more of my takeaways on this topic from what we’re hearing from members and bankers so far:

Hoarding toilet paper. A banker invited to the opening of a Zoom meeting last week characterized the liquidity and capital markets situation as being like hoarding toilet paper: Those wealthy enough to buy and store it in bulk are creating shortages. They don’t need as much as they are buying, preventing those who really need toilet paper from finding any.

  • Similarly, high-grade corporates are taking as much liquidity as they can, hoarding cash and crowding out other market participants. Some are drawing on RCFs and term loans when they don’t have liquidity needs. Those with big needs are drawing down big facilities.
  • It feels like the stigma of this move signaling duress is gone.

No pushback. One member walked thought the thinking to draw a significant portion of his facility. “We spoke to the banks and our rating agencies and got no pushback.” One bank said “this is unusual, as we have not seen other companies in your sector do it,” but that was it. Rating agencies did not seem concerned “as our plan was to sit on the cash.”

CP market becoming hard work. A big reason to consider a draw is that the CP market is getting more difficult. One A2/P2 member has still been able to place paper even at one-month tenors (due to the quality of its name and business position in this crisis), but it’s been choppy. A1/P1 issuers are have only a bit better luck, but some quality names are reporting it’s taking more of an effort to place CP.

MAC clause concerns. A significant consideration in drawing before you need to is the MAC clause. If you think COVID-19 might trigger a material adverse change in the business, then it’s a reason to draw sooner.  

Deposit cash in banks you draw on. To mitigate some of the renewal repricing from drawing on your RCF, banks will advise you to deposit the drawn funds back with them. Unfortunately, the risk evaluation is not often the same for the banks you allow to provide you credit and those you will extend credit to in the form of a deposit. You also need to see if there is a set-off clause in the revolver.

Bank deposits or T-Bills? Part of the decision to draw on a facility is the bank risk, so one member said his plan is to put the cash into T-bills vs. bank deposits. Money market funds are also being watched closely. Prime funds (post reform) are facing their first crisis test, with some floating NAVs below $1, testing gates etc.

No to 8-K. While law firms have advised some members on the need to file an 8-K with a draw, other members got comfort that they could avoid the headline risk by foregoing an 8-K. They will have to note the draw in the 10-Q, but they have some time until the end of the quarter to determine if they want to pay it back before or not.

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Communication Is Key When Drawing on a Revolver

Get buy-in from internal and external stakeholders as you guard against a COVID-19 liquidity crunch. Every day seems to bring news of another multinational corporation drawing down some or all of a revolving credit facility to weather potential liquidity disruptions created by market reaction to the coronavirus outbreak. News reports say private equity firms like Blackstone are encouraging portfolio companies to tap credit lines.

  • The companies recently tapping revolvers include Kraft Heinz, L Brands and Carnival.

Get buy-in from internal and external stakeholders as you guard against a COVID-19 liquidity crunch.

Every day seems to bring news of another multinational corporation drawing down some or all of a revolving credit facility to weather potential liquidity disruptions created by market reaction to the coronavirus outbreak. News reports say private equity firms like Blackstone are encouraging portfolio companies to tap credit lines.

  • The companies recently tapping revolvers include Kraft Heinz, L Brands and Carnival.

NeuGroup Insights reached out to the treasurer of a company whose SEC filing announcing the drawdown of its revolver described the move as a precautionary measure to increase its cash position and “preserve financial flexibility” in light of current uncertainty in the global markets resulting from the COVID-19 outbreak.

  • The form 8-K also said the proceeds are now on the company’s balance sheet and may be used for general corporate purposes.

Buy-in across the board. The treasurer said the decision to draw down on the revolver was agreed upon at the highest levels of the company. In addition to the reasons for acting now that are spelled out in the 8-K, the company wanted to avoid a situation where it could not access the full amount of the revolver, he said.

Proactive outreach. The treasurer said the company considered the perceptions of investors and the three credit rating agencies, in part because it wants to maintain its current ratings. The treasurer said the company is committed to transparency with the agencies and its banking partners and was proactive with each group. Its strong liquidity position and conservative financial policy—along with the reasons in the 8K—supported taking this prudent, precautionary move, he added.

Bottom line. In the end, a lot depends on what you do before announcing the decision to draw down a revolver. “It’s the matter of communicating with internal and external stakeholders to the extent you can,” the treasurer said. “You want to make sure they understand the intent and are not caught off guard.” And the common denominator in all these conversations and relationships, he said, are trust and transparency.

Legal stuff. Law firmsare offering recommendations and observations to corporates considering the drawdown of revolvers. The firm Fried Frank says borrowers should review their credit agreements for “force majeure” or similar provisions that might excuse a revolving lender’s obligation to lend in bad economic environments. But it adds that, typically, “committed facilities do not include such provisions.”

Here are some other takeaways, from White & Case:

  • SEC 8-K filings typically disclose the amount of the borrowing, the interest rate, and the total cash available to the company after giving effect to the borrowing.
  • Companies also include a short reason for the borrowing that may include, depending on the circumstances, that it is a precautionary measure to increase cash and preserve flexibility in light of uncertainties surrounding COVID-19 and the global economy.
  • Companies provide a short summary of the terms of the relevant credit facility and a reference to the initial filing in which it was disclosed and attached as an exhibit.
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Using Mentoring Circles to Cultivate Organic Sponsorship for Women

Mentoring circles can help women find sponsors who can advocate for their career advancement.

Three women who are senior finance executives at a major multinational corporation described how their company organically builds sponsorship using so-called mentoring circles to support the development needs of high-potential talent. The three spoke this week at a Women in NeuGroup virtual meeting.

  • One of the women described mentoring circles as groups of 10 to 20 people led by more senior employees to discuss topics of common interest and engage in activities to support career development.

Mentoring circles can help women find sponsors who can advocate for their career advancement.

Three women who are senior finance executives at a major multinational corporation described how their company organically builds sponsorship using so-called mentoring circles to support the development needs of high-potential talent. The three spoke this week at a Women in NeuGroup virtual meeting.

  • One of the women described mentoring circles as groups of 10 to 20 people led by more senior employees to discuss topics of common interest and engage in activities to support career development.

Sponsor vs. mentor. “A mentor talks with you, and a sponsor talks about you.” That concise phrase captures a key difference between the two roles, as described in the panelists’ presentation. In addition:

  • A mentor helps you navigate your career, provides guidance, acts as an advisor or sounding board.
  • A sponsor uses strong influence to help you obtain high-visibility assignments, promotions; advocates for your advancement and champions your work and potential to senior leaders.

Why sponsorship matters. The presentation cited research showing:

  • 70% of individuals with sponsors felt more satisfied with their career advancement.
  • Women with sponsors are 22% more likely to ask for “stretch” assignments.
  • Women are 54% less likely than men to have a sponsor.

A Catalyst report also notes that among the benefits of sponsorship are increased loyalty and tenure and a willingness to give back by mentoring and sponsoring others.

Personal stories. One of the women cited her promotion from the senior director level to an officer role as the best example of how she benefited from sponsorship. She said a colleague took a calculated risk in recommending she take his job because he believed in her based on the work she did. Her advice: “You have to work for mentorship and sponsorship; it doesn’t just come to you.”

  • She and the other panelists agreed that doing a great job in the position you’re in is critical in building the trust necessary for a mentor to become a sponsor.

Sponsors cannot be assigned. No matter how structured and well-thought-out a program to advance the careers of women and other under-represented groups, you can’t force sponsorship. So the presenting company uses mentor circles “to create an environment” where a sponsor relationship can develop organically.

  • The structure of the mentor circles at the company promote various opportunities to talk, travel and work together, allowing mentors to learn enough about their mentees to make a decision to sponsor some but not all of them. That means the sponsor uses her own reputational capital to influence decisions about promotions for the mentee.

Agree on expectations. Panelists and participants agreed that the best mentorship relationships begin with a clear intentions and goals. “Be very deliberate about it,” one panelist said. “It’s important to have a shared set of expectations.” She recommends seeking mentors in other areas of the company to whom you would not normally have access. Another panelist said that it pays to be flexible and find both women and men to serve as mentors and sponsors.

Know when to end the relationship. One panelist praised a former mentoring circle leader who was clear in saying, “Your name has been given to me, I want to invest in you; but when this is not valuable, let’s admit that and move on and give someone else the spot.”

Transparency matters. Some participants described being surprised at learning—after the fact—that someone had played the role of sponsor for them in supporting their advancement.

  • One woman only found out after she left her previous company that she had people in her corner who were very supportive of her work and capabilities. That could have made all the difference for her motivation to leave or stay.
  • In general, she said, knowing she has a sponsor will motivate her and make her feel nurtured. Absent that knowledge, it’s possible to “misinterpret how the organization feels about you,” she said.
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A Coronavirus Crisis Treasury Playbook

Treasurers probably haven’t seen crises like this before. Here’s what they can learn from past events. The COVID-19 pandemic has presented the modern world with an almost unprecedented crisis. And the daily onslaught of worrying headlines—cancelled sports seasons and parades, Tom Hanks and wife infected, travel bans—seems to be triggering mystifying actions by panicked consumers, like the run on toilet paper. But despite COVID-19’s unprecedented nature, for treasurers there actually is precedent, so there should be no mystery about what needs to be done (and certainly, Microsoft is not going to run out of Excel spreadsheets).

Treasurers probably haven’t seen crises like this before. Here’s what they can learn from past events.
 
The COVID-19 pandemic has presented the modern world with an almost unprecedented crisis. And the daily onslaught of worrying headlines—cancelled sports seasons and parades, Tom Hanks and wife infected, travel bans—seems to be triggering, mystifying actions by panicked consumers, like the run on toilet paper. But despite COVID-19’s unprecedented nature, for treasurers there actually is precedent, so there should be no mystery about what needs to be done (and certainly, Microsoft is not going to run out of Excel spreadsheets).
 
During the eurozone crisis that began in 2009 and stretched into 2013, treasurers were guided by time-tested cash management principles honed in the US financial crisis of 2008 (and perhaps other crises like Argentina in the early 2000s). But they were also forced to create more comprehensive contingency playbooks addressing all aspects of business risk.
 
And although treasurers were caught off guard like everyone else by the speed of the current COVID-19 crisis, they can still check to make sure playbooks are up to date for whatever lies ahead. Generally speaking, these playbooks should include a range of risks and mitigation steps to ensure minimal disruption for clients and employees and are typically incorporated into a larger corporate-wide strategy that addresses all aspects of the business.  
 
The list below is culled from a late 2012 article, in which NeuGroup Insights’ predecessor, iTreasurer, asked members to list the important aspects that should be considered in the creation of their playbooks. We think it has aged well enough to be included in what now can be called the Coronavirus Crisis Playbook. Take a look:

Show me the money. Liquidity fears are one of the most prominent issues faced by members and are the subject of a variety of stress-testing scenarios and contingency planning strategies. It is important to understand how our organization will manage through extreme levels of volatility making sure that your cash is safe and accessible as needed. Extreme contingency plans have gone as far as holding levels of cash on hand in vaults and other secure locations in the event that banks are closed, and funds are unavailable for an extended period of time.

  • Making sure that the business can function after a significant event or during ongoing ones like now is of a primary focus for treasurers and their teams. It is possible that banks would close for a period of time and would impose capital controls or other reporting requirements or lifting fees, so it is critical that treasurers identify ways to keep the local office running as smoothly as possible. These important step-by-step details should be included in the overall contingency strategy.

2020 refresh: Ed Scott, retired treasurer of Caterpillar, recommends treasurers “pressure test their business plan” and suggests they “revise projections” to assume a one, two or three-month decline in revenue.
 

People management. All members agreed that it is important to ensure you have accurate updated employee contact information as well as a documented communication plan (call tree) so that you can quickly contact all appropriate stakeholders in the event it becomes necessary. Each member of the crisis team should understand their individual roles and responsibilities, and the business dependencies, in the event of market disruption.

  • This plan should be tested with sporadic “surprise drills” so that everyone can be sure the pieces are in place and are working as expected. It is always best to test contingency plans well before they are executed in real-time.

2020 refresh: Does your company have the technology in place for employees to work and meet remotely?
 

Payment and collections. Contingency planning for a disruption in your payment or collections activity should include a full understanding of your key customers, including their ownership and business location. You should know where your largest customers source their revenue so that you can determine potential downstream effects and plan accordingly. It is also important to understand the business details of your key suppliers; where they are headquartered and where they source their raw materials, so that you can plan for potential disruptions in the delivery of your raw materials to ensure production is not disrupted. 

  • It is important to identify a communication plan for large key clients and vendors so that you are ready to address payment terms if necessary. Some members have implemented supply chain finance programs in the event their key clients are unable to access bank funding. 

2020 refresh: Many companies now use suppliers from different regions as a redundancy measure. Are these other suppliers up to date on your business plans?

Trigger events. Each organization will need to address relevant trigger events that are specific to their individual organization. It is important to understand what trigger events you will monitor to ensure an early warning of potential disruption. Try not to predict what might happen, but instead use it as a contingency-planning tool. Understand where your cash is and how you can access it. Identify what key stressors exist in your supply chain and how can you contain risk to prevent significant business disruption.

  • Crisis management teams should meet periodically to address any changes to the status of the crisis and make necessary changes based on specific trigger events that may have occurred.

2020 refresh: “Each company should then determine what they can do to manage their variable expenses and cashflow,” Mr. Scott says.
 

Operations and technology. Have you stress-tested existing systems and procedures to manage changes in volume? Are you confident in the readiness plans of any third party providers? How soon will software providers be ready to accept new payment instructions or new currency codes? These questions should be carefully considered as part of the overall contingency strategy. The smallest detail can trip up a treasury team if it was not considered ahead of time. Some members have gone as far as to create new accounts with banks outside the “danger zone” to be opened upon the announcement of a country exit or bank closures.

2020 refresh: All TMS functions should be in the cloud.

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Not All Bank Fees Are Created Equal

In good times and bad, treasury teams benefit from knowing how their banks look at the world. That’s one reason this chart, created by NeuGroup’s Scott Flieger, is compelling. It shows which products are especially important to banks by measuring both their relative profitability and how much balance sheet impact they have. A third dimension shows which products result in predictable revenue and which are more episodic in nature. Most members found the slide “directionally accurate” and helpful in explaining why…

In good times and bad, treasury teams benefit from knowing how their banks look at the world. That’s one reason this chart, created by NeuGroup’s Scott Flieger, is compelling. It shows which products are especially important to banks by measuring both their relative profitability and how much balance sheet impact they have. A third dimension shows which products result in predictable revenue and which are more episodic in nature. Most members found the slide “directionally accurate” and helpful in explaining why banks have been more aggressive on some products versus others. 

  • Mr. Fleiger explained that FX revenue is important to banks because of its high level of predictability. And while “flow” FX business such as spot FX transactions may not be terribly profitable, it allows banks to demonstrate their competitive strengths and commitment to corporates. It may also increase their chances of being selected when more lucrative opportunities presents themselves, including FX transactions associated with cross-border strategic M&A.
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It’s Time for Nonfinancial Corporates to Gear Up Libor-SOFR Transition Plans

Founder’s Edition, by Joseph Neu

NeuGroup member calls with corporate treasury leaders reveal preparation gaps.

Some NeuGroup corporate members—nonfinancial institutions—are well on track with planning to transition off Libor before the end of 2021. One company, Ford Motor, has even joined the Alternative Reference Rates Committee (ARRC), a group of private-sector participants convened by the Federal Reserve Board and the New York Fed to help identify alternatives to Libor and develop strategies to promote their use.

However, the majority of members have work to do, as revealed by polling on two conference calls last week with David Bowman, the Fed’s senior staff liaison to the ARRC. Altogether, we had 184 member participants from 91 companies on these calls.

Founder’s Edition, by Joseph Neu

NeuGroup member calls with corporate treasury leaders reveal preparation gaps.

Some NeuGroup corporate members—nonfinancial institutions—are well on track with planning to transition off Libor before the end of 2021. One company, Ford Motor, has even joined the Alternative Reference Rates Committee (ARRC), a group of private-sector participants convened by the Federal Reserve Board and the New York Fed to help identify alternatives to Libor and develop strategies to promote their use. 

However, the majority of members have work to do, as revealed by polling on two conference calls last week with David Bowman, the Fed’s senior staff liaison to the ARRC. Altogether, we had 184 member participants from 91 companies on these calls.

  • Teamwork. 41% of members have not yet established a cross-functional team to manage the transition from Libor to SOFR, the Secured Overnight Financing Rate the ARRC and the Fed are promoting to replace Libor. A cross-functional team to include participants from treasury, accounting, tax, legal and procurement, credit and collections and other business finance leads is seen as the first big step in taking the transition seriously. An additional 27% have realized this and are planning to put a team together.
  • Information. By far the easiest preparation step is to sign up for the ARRC’s email updates. Just 18% of our members had signed up (before last week’s calls).  Every week, the ARRC publishes a free email update with important information on the Libor transition. You can sign up on the ARRC home page: https://www.newyorkfed.org/arrc.
    • A recent edition highlights an ARRC proposal for New York State legislation, as New York law governs most USD financial transactions, to deal with the permanent cessation of Libor that many contracts did not envision, which may also be difficult or impossible to amend.  
  • Timing. Although the phaseout of Libor is mandated for the end of 2021, liquidity is likely to shift away from Libor-referenced contracts sooner than that with a tipping point possible for many by the end of this year. As an example, Fannie Mae and Freddie Mac have said they will stop accepting adjustable-rate mortgages tied to Libor by the end of 2020. As soon as ISDA finalizes its fallback language protocol, expected for implementation in H2, liquidity in the markets for swaps and other rate derivatives markets will likely also tip away from Libor.

 Time to get busy.

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FX Hedging Opportunities Amid Virus Volatility

Opportunistic FX managers are locking in favorable exchange rates to hedge exposures as markets gyrate. NeuGroup members have locked in favorable foreign exchange rates in the wake of volatility sparked by the coronavirus outbreak, plunging oil prices and speculation about more US interest rate cuts by the Federal Reserve.

  • “We’re taking advantage; this is something of an opportunity to layer in hedges,” said one risk manager during a NeuGroup’s Virtual FX Summit sponsored by Chatham Financial.
  • Amol Dhargalkar, a managing director at Chatham, said, “We are definitely seeing some opportunistic hedging of FX as it has moved to more favorable rates—depending upon the direction of the exposure, of course.”

Opportunistic FX managers are locking in favorable exchange rates to hedge exposures as markets gyrate.

NeuGroup members have locked in favorable foreign exchange rates in the wake of volatility sparked by the coronavirus outbreak, plunging oil prices and speculation about more US interest rate cuts by the Federal Reserve.

  • “We’re taking advantage; this is something of an opportunity to layer in hedges,” said one risk manager during a NeuGroup’s Virtual FX Summit sponsored by Chatham Financial.
  • Amol Dhargalkar, a managing director at Chatham, said, “We are definitely seeing some opportunistic hedging of FX as it has moved to more favorable rates—depending upon the direction of the exposure, of course.”
Source: Reuters

Yen strengthens. The summit began one day after the Japanese yen soared to a more than three-year high of 101.19 per US dollar on Monday as investors sought safe-haven currencies. It jumped 9.4% in 12 trading days.

  • One NeuGroup member whose company has restarted a yen cash-flow hedge program said the FX team locked in rates in the range of 102 to 104. Another member whose company is long the currency said locking in yen was “the main opportunity” for her team amid the volatility.

Winning from weakness. A third participant said the market turmoil allowed his team to layer in hedges for currencies where the company is short, including the Brazilian real, the Canadian dollar and the Mexican peso. The peso fell to a three-year low against the dollar on Monday and the real has plunged about 15% this year.

Not everyone. At least one person at the virtual meeting said her team has not been trading “because spreads are so wide.” For now, traders at this company are “just monitoring” market moves.

Beyond FX: One of the participants said that beyond FX, her company has debt maturing in a little over a year and is exploring options for the best time to refinance in light of the recent plunge in interest rates.

  • Mr. Dhargalkar said many companies have already taken advantage of extremely low fixed rates and are not in a position to do more now. “Companies that did nothing are coming back and saying maybe we should do something now,” he said.
  • Chatham continues to see more companies adding fixed-rate debt to their capital structures; recently, more of them are doing so synthetically rather than through new issuance.
  • Chatham is seeing more companies do pre-issuance hedging of future anticipated financings. “Many investment grade companies are rushing to hedge now for issuances as far out as two years,” Mr. Dhargalkar said.

Strategic opportunities Below are three suggestions listed in Chatham’s presentation on hedging opportunities. Insights will dive into these and other highlights from the Virtual FX Summit in future posts.

  • Extend hedges on floating rate debt to take advantage of pricing and lock in a low rate.
  • Consider a combination approach of caps and swaps to hedge floating rate debt.
  • For hedges maturing in the near future, consider executing forward starting hedges while rates are low.
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Org Charts and Beyond: How Leaders Help Prepare Teams for Change

Many treasurers want to give team members the skills to move to other areas or companies.

NeuGroup members at a recent Treasurers’ Group of Thirty meeting delved into the nuances of treasury department organizational structures and how they meet specific company needs. Participants enjoyed seeing on a screen exactly how other treasury teams have been put together and why. And they had a laugh when one person didn’t recognize his own org chart.

  • But many members clearly feel the weight of managing relatively small teams with highly specialized skills where advancement is difficult, turnover is high among analysts, and competition for skilled talent is fierce, resulting in shallow benches at some companies.
  • Given that set of circumstances and other factors, some treasurers feel duty bound to prepare their staffs for the future and change by ensuring they have the training and experience to move ahead.

PE realities. The treasurer of a private-equity owned company noted the inevitable: “We’re going to get sold someday, so how do I make sure that [team members] have all the skills necessary to look good for their next job?” he said.

Many treasurers want to give team members the skills to move to other areas or companies.

NeuGroup members at a recent Treasurers’ Group of Thirty meeting delved into the nuances of treasury department organizational structures and how they meet specific company needs. Participants enjoyed seeing on a screen exactly how other treasury teams have been put together and why. And they had a laugh when one person didn’t recognize his own org chart.

  • But many members clearly feel the weight of managing relatively small teams with highly specialized skills where advancement is difficult, turnover is high among analysts, and competition for skilled talent is fierce, resulting in shallow benches at some companies.
  • Given that set of circumstances and other factors, some treasurers feel duty bound to prepare their staffs for the future and change by ensuring they have the training and experience to move ahead.

PE realities. The treasurer of a private-equity owned company noted the inevitable: “We’re going to get sold someday, so how do I make sure that [team members] have all the skills necessary to look good for their next job?” he said.

  • He seeks to provide staff engaged in otherwise segregated duties with exposure to different areas within treasury, so they’re “marketable” outside their current functions. “We talk to the private-equity [staff], and about the goals we’re setting as team; we share everything,” he said.
  • NeuGroup meetings play a role in educating team members, he said, noting that his company recently hosted the cash management peer group.
  • He recently switched the roles of two employees, the directors of treasury operations and of liquidity and capital markets.
  • The treasurer looks for cross-functional opportunities, such as the capital markets director working on a project with the tax team.

Transformation opens opportunities. Mergers mean change, and a peer group member who started as treasurer at a company digesting a transatlantic merger has required staff to have a “sense of urgency and the ability to knock down barriers, find solutions and execute,” or depart.

  • Some professionals had been in treasury functions for a decade or more, leaving a shallow bench that in part will be rebuilt with recruits hired fresh out of college. They will be trained across treasury “infrastructure,” including bank account statements and management, TMS and bank portal, with the goal of moving them up.
  • The treasurer also communicates openly to staff about his own departure: Whenever that arrives, it will provide opportunity for advancement to others. “Until that happens, my job is to provide training and career development, so they have the right sorts of skills to go somewhere internally or externally and be successful.”
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Internal Auditors Snapping into Action to Help Companies Cope with Coronavirus Crisis

The outbreak points up the need to create or improve pandemic policies and formalize rules. The coronavirus outbreak is revealing how prepared multinational corporations are for threats posed by crises that can affect almost every area of a business. And that’s made the virus a top concern and focus of many members of NeuGroup’s Internal Auditors’ Peer Group (IAPG) who are playing a key role in the response.

  • Proactive approach. “I am now devoting more than 50% of my time to pandemic team duties,” wrote one senior internal auditor who said companies are now trying to “get proactive” after being reactive. The pandemic team he is a member of meets daily and is issuing communications and policies “on a real-time basis,” he said.
  • Working remotely. Another member writes, “We have cancelled all travel for March and April audits, expanding our existing use of technology solutions to do the work remotely; [we] have postponed a few audits. At the company level, our general Emergency Crisis Management Team has been activated, and we are working closely with health organizations around the world to update our guidance to employees every day.”
  • Bans and communication. A third member has banned travel to all Asia locations, Italy and Seattle for her team. The corporation, she added, is “in constant communication with our Operations Control Center and the CDC and assessing the situation continually.”

The outbreak points up the need to create or improve pandemic policies and formalize rules.

The coronavirus outbreak is revealing how prepared multinational corporations are for threats posed by crises that can affect almost every area of a business. And that’s made the virus a top concern and focus of many members of NeuGroup’s Internal Auditors’ Peer Group (IAPG) who are playing a key role in the response.

  • Proactive approach. “I am now devoting more than 50% of my time to pandemic team duties,” wrote one senior internal auditor who said companies are now trying to “get proactive” after being reactive. The pandemic team he is a member of meets daily and is issuing communications and policies “on a real-time basis,” he said.
  • Working remotely. Another member writes, “We have cancelled all travel for March and April audits, expanding our existing use of technology solutions to do the work remotely; [we] have postponed a few audits. At the company level, our general Emergency Crisis Management Team has been activated, and we are working closely with health organizations around the world to update our guidance to employees every day.”
  • Bans and communication. A third member has banned travel to all Asia locations, Italy and Seattle for her team. The corporation, she added, is “in constant communication with our Operations Control Center and the CDC and assessing the situation continually.”

Pandemic policy? One IAPG member said his company had a pandemic policy in place that had never been tested until now; he said it’s a bit “deficient” in some respects.

  • “One particular area that seems to lacking from most policies is the existence of a response level framework which defines the triggers changing the classification of severity from level one to level two,” he said. The policies should also define when a company closes an office and offers work-from-home options, he added.
  • His company is now implementing formal policies on travel, facility closure, working from home, visitor access, and attendance at events involving more than 1,000 people, among other measures.

Creating a policy. The law firm Baker McKenzie says that companies in need of developing a pandemic policy might draw on their experiences with other business disruptions like natural disasters or strikes. Thus, policies will likely:

  • Include an emergency communication protocol.
  • Procedures for closing and opening offices.
  • Address working with limited staff.
  • Offer additional technical support to allow employees to work remotely.
  • Offer HR and communication support to ensure that employees are being treated fairly.

Offering help. Internal audit expert and blogger Norman Marks recently wrote that in response to coronavirus, risk practitioners should be asking management, “How can we help?” He says the goal is to ensure that the organization is prepared and capable of responding promptly and appropriately to:

  • A breakdown in the supply of materials
  • An inability to deliver products or services to customers
  • The forced closure of a part of the business, such as a factory or a call center
  • The loss of key personnel who come down with symptoms
  • The inability of a competitor to deliver products or services (an opportunity!)
  • A surge or drop in demand
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Actuarial Agony: Falling Interest Rates and the Plight of Pension Fund Managers

Private equity helps matters, but track records of outperformance don’t sway actuaries.

Falling interest rates are pushing down the expected return on assets (EROA) at pension funds, an unwanted development for all managers and especially aggravating, perhaps, for those who have historically been able to outperform expectations. That was among the takeaways from a recent NeuGroup pension roundtable.

Blame it on the actuaries. The pension fund manager at a major media company maintained an EROA of 7.5% over the last few years. Despite the fund outperforming relevant benchmarks, the EROA will soon move to 7.25% based on advice from actuaries concerned about long-term forecasts. “They just don’t care,” he said of his track record.

Private equity helps matters, but track records of outperformance don’t sway actuaries.

Falling interest rates are pushing down the expected return on assets (EROA) at pension funds, an unwanted development for all managers and especially aggravating, perhaps, for those who have historically been able to outperform expectations. That was among the takeaways from a recent NeuGroup pension roundtable.

Blame it on the actuaries. The pension fund manager at a major media company maintained an EROA of 7.5% over the last few years. Despite the fund outperforming relevant benchmarks, the EROA will soon move to 7.25% based on advice from actuaries concerned about long-term forecasts. “They just don’t care,” he said of his track record.

Several other participants acknowledged that their funds’ EROAs, too, had either dropped recently or likely will soon.

Private equity provides respite. The executive from a major pharmaceutical company agreed that actuaries appear set on lower EROAs, regardless of track records. She noted that her pension’s EROA currently rests at 8% but will likely fall to the high 7s in the next year or two. “Private equity is the only way we’ve been able to maintain it that high, and it’s why we have such a meaningful allocation to it,” she said.

Another participant said the sizable portion of his fund’s portfolio devoted to private assets, around 20%, enables it to support a higher EROA. Still another noted that “our private equity and venture capital [managers] are using a 11.25% long-term return, which helps, versus 8.25% for equities.”

The pharma exec noted a similar allocation, pointing out, however, that private assets are difficult to manage from an operational standpoint, given the cash flow and year-end accounting. “It’s a big commitment,” she said.

Priorities blur. A roundtable member noted that the question for the group is whether EROA is based just on capital market assumptions and employee allocations, or does income statement impact play a greater role. “Is the pressure to keep EROAs up from management?” he asked.

“Yes,” the group responded in unison.

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What Should Treasury and Finance Functions Be Doing About the Coronavirus?

Something that warrants a rare FOMC inter-meeting rate cut calls for broader finance engagement. There is a lot of information, advice and checklists coming out on how businesses should respond to the coronavirus, or COVID-19. This one from McKinsey is a good example.

  • Health and safety first. A majority of companies, rightly, start with the most important steps to ensure the health and safety of employees, customers, suppliers and other stakeholders.
  • Tabletop crisis response and planning. The next most important item tends to be the crisis response and scenario planning. Tabletop exercises are emphasized, because you must both plan and practice to ensure that they can be executed.
  • Digital acceleration focused on customers/customer experience. One of the most interesting checklist items that more companies need to take to heart is how this crisis is pushing digital disruption of traditional business activities and accelerating transformation focused on customer needs and the customer experience.

Something that warrants a rare FOMC inter-meeting rate cut calls for broader finance engagement.
 
There is a lot of information, advice and checklists coming out on how businesses should respond to the coronavirus, or COVID-19. This one from McKinsey is a good example. 

  • Health and safety first. A majority of companies, rightly, start with the most important steps to ensure the health and safety of employees, customers, suppliers and other stakeholders. 
  • Tabletop crisis response and planning. The next most important item tends to be the crisis response and scenario planning. Tabletop exercises are emphasized, because you must both plan and practice to ensure that they can be executed. 
  • Digital acceleration focused on customers/customer experience. One of the most interesting checklist items that more companies need to take to heart is how this crisis is pushing digital disruption of traditional business activities and accelerating transformation focused on customer needs and the customer experience. 
    • If you are stuck at home, for example, how do you easily and safely procure food and water (online shopping with a screened delivery driver or an autonomous delivery method), plus continue to do your job and earn your pay (remote work, collaboration and meeting tools)?
    • If you are reliant on a supplier in China or Milan, how do you get production and delivery back online and mitigate future shutdowns (accelerate the Industrial Revolution 4.0 timeline with supply-chain financing and capital-raising assistance)? 

This is why I think treasury and finance teams need to think proactively and creatively to support their business response by staying close to their customers (in the business, especially). They should also think about the financial support in terms of structural, long-term transformations beyond the near-term crisis responses (which are also important).

McKinsey’s advice on this point is outstanding:

Stay close to your customers. Companies that navigate disruptions better often succeed because they invest in their core customer segments and anticipate their behaviors…. Customers’ changing preferences are not likely to go back to pre-outbreak norms(emphasis mine).

Accordingly, treasury and finance teams should push back on cost-cutting measures presented as a coronavirus response and balance the short-term crisis risks with the opportunities for transformative investments that will pay off in the long run. 

  • Move past the obvious. Crises always prompt a “cash is king” reminder and a recommendation to ensure that liquidity is sufficient to weather the storm
    • How well will ML and AI forecasting apps and analytics tools fare in with this sort of black swan event?
    • Does this change your final recommendations on how much excess cash to keep on the balance sheet in the wake of US tax reform?
    • Does this change how you invest that cash, especially now with the rate-cut response? 

Most firms are hyper-focused on cash and liquidity already, especially high-growth start-ups.

Moving on, other questions to ask: 

  • How has FX hedging been adjusting to shifting exposure profiles from demand and supply shocks? Commodity price risk management?
  • What’s the supply-chain financing support being arranged to expedite effective supply/production shifts and how are firms and their finance partners dealing with the credit risk? Thinking longer-term, might your superior capital-raising ability help make structural and digital manufacturing changes that are needing to come anyway?
  • Is a near or sub-1% USD funding round, or a potentially lower EUR round, right for dialing up a bond issue or other form of capital raise? Are the proceeds for buybacks? Or to make transformational investments like acquistions sooner rather than later? Does this present another liability management opportunity? 

And perhaps most importantly: 

  • Are your banks and others serving you best by staying close to you as their customers to better understand your challenges during this time? To be there with solutions, currently available, and those they are prepared to invest in to make available soon? 

Here is what NeuGroup is doing

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Fed Official to NeuGroup Members: The Time to Start Paying Attention to Libor’s End Is Now

ARRC liaison David Bowman explains the implications of SOFR and what corporates need to do now.

Corporate treasury teams that have paid little or no attention to the planned transition from Libor to SOFR, take note: That stance makes much less sense today than last year and “won’t make any sense” by the end of this year, in the view of David Bowman, the senior staff liaison from the Federal Reserve Board of Governors to the Alternative Reference Rates Committee (ARRC).

  • Mr. Bowman made the remarks in an exclusive presentation to NeuGroup members Monday afternoon, the first of two such sessions. The second is on Thursday.
  • Among the treasury professionals participating in the call, only 35% said their companies have formed cross-functional teams to manage the transition to SOFR, while 35% have not and 30% have plans to do so. In other words, a lot of companies have plenty to do to prepare.
  • Mr. Bowman said Ford Motor Co. will be joining ARRC, which already includes the National Association of Corporate Treasurers and the Association for Financial Professionals; less than a third of members are banks. He said that ARRC welcomes the input of nonfinancial corporates in its working groups.

ARRC liaison David Bowman explains the implications of SOFR and what corporates need to do now.

Corporate treasury teams that have paid little or no attention to the planned transition from Libor to SOFR, take note: That stance makes much less sense today than last year and “won’t make any sense” by the end of this year, in the view of David Bowman, the senior staff liaison from the Federal Reserve Board of Governors to the Alternative Reference Rates Committee (ARRC).

  • Mr. Bowman made the remarks in an exclusive presentation to NeuGroup members Monday afternoon, the first of two such sessions. The second is on Thursday.
  • Among the treasury professionals participating in the call, only 35% said their companies have formed cross-functional teams to manage the transition to SOFR, while 35% have not and 30% have plans to do so. In other words, a lot of companies have plenty to do to prepare.
  • Mr. Bowman said Ford Motor Co. will be joining ARRC, which already includes the National Association of Corporate Treasurers and the Association for Financial Professionals; less than a third of members are banks. He said that ARRC welcomes the input of nonfinancial corporates in its working groups.

What you should be doing now. In addition to forming cross-functional review teams, Mr. Bowman recommended that members start testing SOFR now through lines of credit, for example. His presentation noted that testing SOFR will help corporates shape how the market evolves and learn what works and what doesn’t. “Waiting means you forgo the chance to shape choices that will eventually impact you,” one slide stated.

Other advice and insights:

  • Corporates should participate in the ISDA protocol to amend fallback language in derivatives, and amend or renegotiate fallback provisions in other contracts when opportunities arise.
  • Operational changes will take time and planning. New loans, debt and securitizations based on SOFR will require operational updates, especially when using SOFR in arrears, and will have different pricing and margins.
  • Changes to internal valuations or other systems will need to be included in budgets, IT project planning, etc. Corporates will also want to make sure that external vendors are making necessary changes and that those changes will meet specific needs.
  • It’s a misconception that the repo market rates SOFR is based on will move down more than overnight unsecured rates. They actually move quite closely with the fed funds effective rate and the Fed’s monetary policy targets:
Source: FRBNY

Time check. Here are some timeline facts to keep in mind as corporates plan for the SOFR transition.

  • The UK’s Financial Conduct Authority in July 2019 said it expects some banks to leave the Libor panels soon after 2021. At that point Libor would either stop or FCA would have to judge wither it was reliably accurate. FCA has noted that with so few transactions already underlying Libor, any further bank departures would make Libor even less representative.
  • The Federal Reserve Bank of New York on Monday began publishing 30-, 90-, and 180-day SOFR averages as well as a SOFR index, in order to support a successful transition away from Libor.
  • ISDA’s protocol for converting legacy derivative contracts is expected in Q3.
  • GSEs like Fannie Mae will stop using Libor for ARMs and begin using SOFR in Q4.
  • The creation of a SOFR term reference rate will take place in 2021. Mr. Bowman said the original plan called for that to happen at the end of the year but the hope is to move that up to H1 2021.
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How to Convince Business Units That ERM Has Real Value

Integrating it with strategic planning shifts perceptions that ERM is a bureaucratic exercise.

Enterprise risk management (ERM) is often viewed by business leaders as a check-the-box exercise that interferes with the profit engines they’re seeking to run.

A treasurer at a recent NeuGroup meeting who also chairs his company’s risk committee sought advice on how to convince the leaders of business units and other corporate entities that the ERM process adds value. Ed Scott, senior executive advisor at NeuGroup and a retired Caterpillar Inc. treasurer, noted two approaches Caterpillar used to improve ERM.

Integrating it with strategic planning shifts perceptions that ERM is a bureaucratic exercise.

Enterprise risk management (ERM) is often viewed by business leaders as a check-the-box exercise that interferes with the profit engines they’re seeking to run.

A treasurer at a recent NeuGroup meeting who also chairs his company’s risk committee sought advice on how to convince the leaders of business units and other corporate entities that the ERM process adds value. Ed Scott, senior executive advisor at NeuGroup and a retired Caterpillar Inc. treasurer, noted two approaches Caterpillar used to improve ERM.

Strategic planning integration. ERM must be integrated with the company’s strategic planning efforts.

  • A lesson learned, Mr. Scott said, is to coordinate ERM with the planning that each business does annually. At Caterpillar, that’s done in the fall, but the ERM exercise was conducted from December through February, confusing business-unit managers and making integration with the strategic plan more difficult.
  • “Prior to integrating the ERM process with annual strategic planning, action plans for each risk weren’t part of the goals and objectives for each business unit’s strategic plan, so it looked like just a bureaucratic, regulatory exercise,” Mr. Scott said.
  • To improve the process, ERM was moved from internal audit (IA) to the strategic planning group. “So now it was no longer some bureaucratic exercise but viewed as part of the strategic planning process,” he said.

The third dimension. ERM risk profiles typically factor in the probability of a risk occurring and the resulting severity in terms of cost. Several years ago, Caterpillar added time for the risk to occur as a third factor. For example:

  • In the case of a chemical company, there is a low to medium probability of a railcar chlorine spill, but if it occurred it would be severe and immediate. The severity and urgency would make it high risk.
  • Conversely, losing highly talented employees may be a medium risk and potentially severe, but since it could occur over a longer period of time, the total risk may be diminished.
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Hard to Let Go: Markets Slow to Move from Libor to New Benchmark

October 09, 2019

By Ted Howard

Banks are still using the London Interbank Offered Rate but SOFR is slowly gaining traction.

The members of NeuGroup’s Bank Treasurers’ Peer Group (BTPG) recently heard Chatham Financial discuss the switch from Libor to SOFR on their Q3 interim conference call. The big takeaway is that Libor remains firmly embedded in a lot of transactions, and even though banks understand that the tainted benchmark will disappear in the near future, the transition is inching along slowly. This could be because the shift is seen as a heavy lift given the low liquidity levels in the SOFR market.

“Here we are in September of 2019, and I would say that across our client base we really haven’t seen clients pulling away from Libor-based products in advance of the 2020-21 time frame with as much urgency as some have advocated for,” said Andrew Little, managing director at Chatham Financial. “As a matter of fact, given the shape of the curve, we’ve seen some clients actually extend the duration of their Libor exposure well out to seven years, 10 years and beyond.”

Nonetheless, Mr. Little said, “We have definitely seen a meaningful uptick in non-LIBOR-based balance sheet hedging.”

October 09, 2019

By Ted Howard

Banks are still using the London Interbank Offered Rate but SOFR is slowly gaining traction.

The members of NeuGroup’s Bank Treasurers’ Peer Group (BTPG) recently heard Chatham Financial discuss the switch from Libor to SOFR on their Q3 interim conference call. The big takeaway is that Libor remains firmly embedded in a lot of transactions, and even though banks understand that the tainted benchmark will disappear in the near future, the transition is inching along slowly. This could be because the shift is seen as a heavy lift given the low liquidity levels in the SOFR market.

“Here we are in September of 2019, and I would say that across our client base we really haven’t seen clients pulling away from Libor-based products in advance of the 2020-21 time frame with as much urgency as some have advocated for,” said Andrew Little, managing director at Chatham Financial. “As a matter of fact, given the shape of the curve, we’ve seen some clients actually extend the duration of their Libor exposure well out to seven years, 10 years and beyond.”

Nonetheless, Mr. Little said, “We have definitely seen a meaningful uptick in non-LIBOR-based balance sheet hedging.”

SOFR and the credit component. Todd Cuppia, managing director at Chatham Financial, agreed the elevated market volatility and the shape of the curve have increased the amount of hedging activity. He said around 75% of the macro trades that Chatham executes for its bank clients are still pointing to Libor, which he said was a “pretty meaningful departure” from what those statistics were a year ago, when close to 95% of balance sheet hedging referenced the LIBOR index. “Now there is an encouraging percentage of the activity we see going toward fed funds as an index, and eventually we expect SOFR once it becomes more viable from a liquidity standpoint,” Mr. Cuppia said. “I think ultimately from what we can tell, banks want a clear path forward on how to operate in the period before Libor goes away as well as clarity on fallback mechanics.”

Chatham pointed out, as have others, that the one thing that could engender better SOFR uptake would be some type of credit component that could be added to SOFR. Chatham reports that there is a strong interest from the market in developing one soon, although the path forward is still unclear.

“I think most of the [Libor-SOFR] conversation reduces in some way to the desire to replicate the time-varying credit spread that is inherent in Libor,” Mr. Cuppia noted. That reality has increased the relevancy of what he calls the “alternative alternative reference rates.” The two leading contenders are Ameribor and the ICE Bank Yield Index. Things to know here, he said, include:

  • Take comfort. For longer-dated Libor contracts, banks and the market may take some comfort from the fact that the historical spread method has already started to be priced into the forward curves. By that measure, “some may say that the transition is becoming priced in to the extent you believe that current basis markets and historical averages are going to be in range of what the different working groups have suggested, which was a multiyear average or median of those rates,” Mr. Cuppia said.
  • “If you look at fed funds as a reasonable proxy for SOFR and you look at the basis between fed funds and Libor, you can see a pretty meaningful decline in those basis rates to what could be a fair representation of their historical average,” he said. “I believe that’s what could be guiding the thinking of those who are using those much longer-term Libor contracts relative to what their alternatives may be.”
  • Standards that simplify. Mr. Cuppia said another issue that merits deeper attention is a recent change in the hedge accounting standard that has made it significantly easier for institutions to hedge fixed-rate exposures. “This relief is just in time for the Libor transition and so to the extent that there is concern around hedges using Libor, which have these fallback risks, it’s very simple to use a non-Libor index. We’ve seen a meaningful increase in the use of non-Libor derivatives on our macro hedging desk.”
  • Product development. To that end, one of the things that Chatham is working on is how to think about replicating some of the option products that exist for Libor in a SOFR world. Mr. Cuppia said there isn’t a lot of clarity yet, but markets received some good news recently when the CME Group announced it will begin to trade options on SOFR futures beginning in January. “This could be the beginning of the development of the volatility complex, which is important for balance sheet hedging and broader risk management processes,” Mr. Cuppia said.
  • Go fixed rate. One theme that Chatham is seeing is an increased interest in hedging fixed-rate loans. “Users were in a sense sidestepping the development of these alternative reference rates and how to calculate the appropriate spread through the different economic cycles, and using a more plain-vanilla balance sheet hedging strategy allowing portfolio managers to take the risks they want on the asset side without getting their asset-liability picture off-kilter, so to speak,” Mr. Cuppia said.

All this has led to many questions, according to Chatham. For instance:

  • How will Ameribor develop now that there is both a cash and futures market? How will the ICE US Bank Index develop?
  • How will both connect with what the International Swaps and Derivatives Association (ISDA) will say should be the credit component on interest-rate swaps?

There remains a lot to keep track of as we transition from Libor to an alternative reference rate. We know that SOFR is certainly an alternative with strong support from the Fed, and it seems as if it will be up to the market to collectively determine the outcome of the credit component. This transition will not only be keenly watched by bank treasurers, but also by corporate treasurers who have assets and liabilities currently referenced to Libor. Stay tuned!

Libor Exposure Breakdown

The value of all financial products tied to US dollar Libor is about $200 trillion, according to the New York Federal Reserve. This amount, which the Fed estimates is roughly 10 times US GDP, includes $3.4 trillion of business loans, $1.8 trillion of floating-rate notes and bonds, another $1.8 trillion of securitizations and $1.3 trillion of consumer loans, most of which are residential mortgage loans. The remaining 95% of exposures are derivative contracts.

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A Look Back at Our Enterprise Reconciliation Insight

Founder’s Edition, by Joseph Neu

A 20-year-old best practice guide says a lot about the state of working capital management today.

There seems to be a lot of renewed interest in working capital management lately, with a focus on automating processes, capturing data and deploying technology. The goal: to improve analysis and predictability of the quote-to-cash, order-to-delivery and purchase-to-pay cycles. This stands to vastly improve working capital management, but especially cash and liquidity management.

  • I kept thinking, all of this seems oddly familiar, and now I know why. I dug up one of our old best practice guides, published 20 years ago: Enterprise Reconciliation: The New Foundation for Cash Management in the Era of E-Commerce. Substitute AI-powered data matching for reconciliation and digital transformation for e-commerce and we could easily republish the guide today.

Founder’s Edition, by Joseph Neu

A 20-year-old best practice guide says a lot about the state of working capital management today.

There seems to be a lot of renewed interest in working capital management lately, with a focus on automating processes, capturing data and deploying technology. The goal: to improve analysis and predictability of the quote-to-cash, order-to-delivery and purchase-to-pay cycles. This stands to vastly improve working capital management, but especially cash and liquidity management.

  • I kept thinking, all of this seems oddly familiar, and now I know why. I dug up one of our old best practice guides, published 20 years ago: Enterprise Reconciliation: The New Foundation for Cash Management in the Era of E-Commerce. Substitute AI-powered data matching for reconciliation and digital transformation for e-commerce and we could easily republish the guide today.

Produced with Chase Bank, the guide drew from a series of exchanges with companies (including Colgate-Palmolive, Dell, Eli Lilly, Merck, Microsoft, Nike and P&G) and a roundtable we facilitated in April 2000. The latter offered practical guidelines for how treasury, leveraging the internet, could take a leading role in promoting “enterprise reconciliation.” Here are some takeaways that remain highly relevant today:

  • Enterprise reconciliation requires businesses to reconcile information on transactions conducted through the banking system via intra-enterprise networks and extra-enterprise networks connecting business value chains.  Generally, these reconciliations come in three types:
    • Matching cash positions with those reported by banks via primary collection and disbursement accounts, and secondary custodial accounts receiving funds from investments and dispersing them to investors.
    • Matching cash with payments and receipts from invoicing and bill presentment that come from suppliers and customers (which also may be performed by a bank).
    • Matching cash positions with physical goods and services ordered, sourced, manufactured and delivered prior to the payments being made or received.
  • Total working capital management requires that data from each type be regularly reported, captured and analyzed relative to current, future and historical information.

In the broadest sense, then, enterprise reconciliation was understood as capturing data from all transactions, analyzing it and connecting the dots to gain instant insight and develop foresight on what the transactions say about the business today and what they can predict.

  • Two-decade-old challenges. Extending the bank reconciliation concept to the enterprise level posed three major challenges that should also ring familiar:
    • Moving to real-time reporting and processing that captures all relevant data.
    • Integrating data on physical and anticipated transactions with actual cash payments.
    • Creating a mandate to act on the data across the relevant functional finance and business silos.   

Finally, the old guide’s checklist items, meant to prompt specific actions, are totally relevant today. These include:

  • Expand scope—or die. As treasury’s time gets freed up by automation, teams need to expand their scope to other areas for financial operations to be in the game for total working capital management.
  • Assemble a cross-functional team. If a “takeover” isn’t possible, then assemble a team to work across the relevant finance silos and—above all—partner with the business units. Make sure you receive a clear mandate to both obtain the needed data and act on it.
  • Form partnerships with business operations based on common goals. Identify partners in specific business operations and determine how you can help them meet specific performance goals.
  • Go on-site to find data. Jointly looking under the hood to find relevant data is one of the main reasons to form these partnerships, so do it.

As happy as I am about the value of this 20-year-old insight, I’d rather see it have very little relevance beyond nostalgia when I look back in 20 years.

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A Treasurer Grows Frustrated with a Top US Lender and Takes It down a Notch

Seeking a bigger return on its capital as rules tighten, the bank wanted a larger share of wallet.

One of the largest US commercial lenders is aggressively seeking more return—share of wallet—for the credit it provides corporates, prompting at least one borrower to say “enough” and downgrade the bank’s rank in its loan syndicate.

  • That takeaway emerged at a recent NeuGroup meeting where members exchanged insights about syndicated loan market trends and discussed which banks are eager to extend credit and which are less inclined.

Fed up. The treasurer who grew sick of the bank’s demands was in the process of renewing a term loan A and revolver last year. The lender’s insistence on a higher return on capital went too far. “We actually tiered that one down, because we were frustrated with them,” he said.

Seeking a bigger return on its capital as rules tighten, the bank wanted a larger share of wallet.

One of the largest US commercial lenders is aggressively seeking more return—share of wallet—for the credit it provides corporates, prompting at least one borrower to say “enough” and downgrade the bank’s rank in its loan syndicate.

  • That takeaway emerged at a recent NeuGroup meeting where members exchanged insights about syndicated loan market trends and discussed which banks are eager to extend credit and which are less inclined.

Fed up. The treasurer who grew sick of the bank’s demands was in the process of renewing a term loan A and revolver last year. The lender’s insistence on a higher return on capital went too far. “We actually tiered that one down, because we were frustrated with them,” he said.

Capital concerns. As the Basel III capital accords continue to take hold, banks are increasing their focus on their risk-weighted assets (RWA). That’s especially true of their capital-intensive revolving and term loan facilities, and whether a bank’s overall relationship with a borrower warrants providing it the amount of credit it currently does.  

Different perspective. Given that context, another member at a Fortune 100 company that deals with the bank in question had a different take, saying the lender appears to be ahead of the curve in adapting to the new rules, ensuring adequate return for putting its balance sheet to work, and communicating clearly with clients. “We see enhanced dialogue and focus from [the bank]. We use them as a sounding board,” he said.    

Credit seekers. Members agreed that US regionals, including PNC, US Bank, Fifth Third and SunTrust, are eager to participate in revolvers and, in particular, term loan A’s, where they can earn reasonable net interest margins relative to their borrowing costs and develop deeper relationships with the borrowing companies.

  • Japanese banks, such as Mitsubishi UFJ Financial Group, Mizuho Bank and Sumitomo Mitsui Banking have also been active on that front.
  • For blue-chip names, Chinese banks have stepped up for commitments of $50 million or $75 million, “but they don’t ever want them drawn, because they’re working off swap lines from China,” one member said, adding, “It’s branding more than anything else.”

Less enthused. European banks have retreated from the syndicated loan market for years—HSBC just announced significantly scaling back operations in the US and Europe.

  • Canadian banks received a mixed reaction from members regarding their willingness to participate in revolving credit facilities. Some have expressed a willingness to expand their lending into the US because of its sizeable fee pool across commercial and investment banking. However, their main focus remains the strong franchises they have built in Canada.
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No Slam Dunk for Pension Fund Managers: Selling Leverage-Averse Boards on Overlays

The popularity of overlays is increasing in the US despite concerns of executive committees.

Leverage is something of a dirty word in the world of pension funds and that, perhaps, presents the biggest challenge that pension fund managers face when seeking to persuade their companies’ executive committees to use overlays that use derivatives as a fund-management tool.

At a roundtable of pension fund managers arranged by the NeuGroup, one participant said his team had begun to explore how to “de-risk” the plan more than three years ago, using a derivative overlay to hedge liabilities as one tool.

  • But the executive committee said no to derivatives and the leverage they often include. “So we had to go through an education process on their timeline. Since then, rates fell 50 basis points, and committee members asked, ‘Have you put on the overlay yet?’”

Laugh line. That produced chuckles in the room and prompted other roundtable participants to chime in about the difficulty of convincing executive committees about the benefits of overlay strategies. Such strategies use derivatives like swaps and treasury futures to gain, offset or substitute specific portfolio exposures beyond the portfolios’ physical assets.

The popularity of overlays is increasing in the US despite concerns of executive committees.

Leverage is something of a dirty word in the world of pension funds and that, perhaps, presents the biggest challenge that pension fund managers face when seeking to persuade their companies’ executive committees to use overlays that use derivatives as a fund-management tool.

At a roundtable of pension fund managers arranged by the NeuGroup, one participant said his team had begun to explore how to “de-risk” the plan more than three years ago, using a derivative overlay to hedge liabilities as one tool.

  • But the executive committee said no to derivatives and the leverage they often include. “So we had to go through an education process on their timeline. Since then, rates fell 50 basis points, and committee members asked, ‘Have you put on the overlay yet?’”

Laugh line. That produced chuckles in the room and prompted other roundtable participants to chime in about the difficulty of convincing executive committees about the benefits of overlay strategies. Such strategies use derivatives like swaps and treasury futures to gain, offset or substitute specific portfolio exposures beyond the portfolios’ physical assets.

Overlay rising. A banker attending the meeting noted that 10 years ago, few if any plans in the UK used overlay as a part of liability driven investment (LDI) strategies, but today nearly all do. He added that the approach has crossed the Atlantic, with a recent survey showing 75% of US plans using overlay compared to less than half five or so years ago.

An overlay argument. LDI strategies aim to accrue sufficient assets to cover all current and future liabilities, often requiring derivative overlays when physical assets are insufficient or inappropriate. Another member said that rolling out an LDI program generated “quite a discussion” with the executive committee.

  • Her team framed its argument by noting that the company’s greatest risk in terms of expense management and cash flow is its funded status volatility, emphasizing that implementing an LDI program reduces such volatility, even when derivatives introduce leverage.

Counterparty concerns. Aside from leverage, another issue stemming from overlays is the counterparty risk of over-the-counter swaps, a big concern during the financial crisis. But new regulations require daily margin calls on all the derivatives used, and “that risk has essentially gone away,” noted a roundtable member.

Leveraging up only assets is problematic. In an asset/liability context, however, using derivatives to increase the duration of the pension fund’s asset pool to offset the fund’s short liability position is actually delevering and decreasing risk. “The powerful thing about overlay,” he said, “is that it is leverage from a narrow, asset-only perspective, but from an asset/liability bent it is risk reducing.”

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Treasury Teams Taking to Heart the Force of the ESG Wave Barreling Across Atlantic

Discussing insurance, investing and BlackRock’s Larry Fink, NeuGroup members weighed in on ESG.

The potentially dramatic and varied impact on multinationals from the environmental, social and governance (ESG) wave barreling across the Atlantic from Europe is hitting home for a growing number of US finance teams. That was among the key takeaways from comments by treasurers gathered in Dallas for NeuGroup’s first meeting of 2020.

Thanks for the warning. One the most interesting revelations involved the effect of ESG on insurance.

  • One treasurer said a French insurer sought to “squeeze language” on a recent casualty policy renewal in light of the potential social concerns arising from the company’s defense industry products. Another member planning to implement an auto policy for his company’s European fleet appreciated the heads-up.
    • “We’re taking out all local policies, so it’s good to hear about your experience. We’ll probably run into that,” he said.
  • US insurers increasingly use ESG to help measure risk in the policies they’re underwriting so “if your company has a bad ESG score, then you’re probably going to pay a higher premium,” NeuGroup’s Scott Flieger said.

Discussing insurance, investing and BlackRock’s Larry Fink, NeuGroup members weigh in on ESG.

The potentially dramatic and varied impact on multinationals from the environmental, social and governance (ESG) wave barreling across the Atlantic from Europe is hitting home for a growing number of US finance teams. That was among the key takeaways from comments by treasurers gathered in Dallas for NeuGroup’s first meeting of 2020.

Thanks for the warning. One the most interesting revelations involved the effect of ESG on insurance.

  • One treasurer said a French insurer sought to “squeeze language” on a recent casualty policy renewal in light of the potential social concerns arising from the company’s defense industry products. Another member planning to implement an auto policy for his company’s European fleet appreciated the heads-up.
    • “We’re taking out all local policies, so it’s good to hear about your experience. We’ll probably run into that,” he said.
  • US insurers increasingly use ESG to help measure risk in the policies they’re underwriting so “if your company has a bad ESG score, then you’re probably going to pay a higher premium,” NeuGroup’s Scott Flieger said.

The Fink Effect. The meeting took place just three weeks after BlackRock CEO Larry Fink, in his annual letter to CEOs, announced initiatives placing sustainability at the center of the giant asset manager’s investment approach, including exiting incompatible investments and launching new products that screen fossil fuels.

  • One treasurer, underscoring the significance of the letter, said, “If your company is publicly rated, BlackRock is probably one of your top five shareholders, and if it wants to see what you’re doing in that space, then ESG is coming.”
    • The possible implications of what’s coming include something already seen in Europe: ESG pricing grids that borrowers may encounter alongside credit grids on their credit facilities.

Risk alarm bell. Mr. Flieger made the point that screening for ESG can pay off for investors beyond doing what’s beneficial for society. “Investors are using these ESG scores not only for socially responsible sustainable investments, but to identify which might be susceptible to a significant tail-risk event,” he said.

Avoid controversy. Strong ESG scores can be undermined by “controversy” scores, generated by the frequency of a company’s negative press. Funds likely won’t share the ESG reports they pay the scoring firms for, but treasury executives should ask them for details. “Because if I’m going to be invested in ESG, my company better be in those funds,” one member said.

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Mike Likes It, but Would Your Team Vote for an Open-Office Plan?

Open-office plans like the one Mike Bloomberg adopted at City Hall have fans and skeptics. Where do you stand (sit)?

Presidential hopeful Mike Bloomberg in December tweeted the picture above of the “bullpen” office he had as New York City mayor and wrote, “I’ll turn the East Room into an open-office plan, where I’ll sit with our team.”

No one can say if that will ever happen, of course. But the subject of open-office plans definitely sparked interest at a NeuGroup meeting this month when one member asked how others organize their office space.

Breaking down walls. One member surprised peers by saying that within a few months his company will move completely to open space, with no walls between people, and that arrangement will apply also to top executives, including the CEO, CFO and legal counsel.

Open-office plans like the one Mike Bloomberg adopted at City Hall have fans and skeptics. Where do you stand (sit)?

Presidential hopeful Mike Bloomberg in December tweeted the picture above of the “bullpen” office he had as New York City mayor and wrote, “I’ll turn the East Room into an open-office plan, where I’ll sit with our team.”

No one can say if that will ever happen, of course. But the subject of open-office plans definitely sparked interest at a NeuGroup meeting this month when one member asked how others organize their office space.

Breaking down walls. One member surprised peers by saying that within a few months his company will move completely to open space, with no walls between people, and that arrangement will apply also to top executives, including the CEO, CFO and legal counsel.

  • “If you want to exchange confidential information, there will be a room, but you won’t be allowed to sit there all day,” he said.
  • Another member called his firm’s environment open, “but we do have individually assigned desks, so we’re not completely free.”

Backlash. The concept of open-space seating has been around for decades, especially among technology companies that have viewed open-space environments as conducive to exchanging ideas.

  • More recently, however, there has been something of a backlash, with studies like one in 2018 by Harvard researchers showing that open-space workplaces can significantly reduce employee productivity.

Alternatives. Another meeting participant’s company had expressed interest in open space, but for now employees remain in cubicles with low walls, and managers have offices.

  • Its finance arm’s building is being renovated, however, and the result will be low-wall cubicles and every manager’s office will be the same size, no matter their rank.

Still, meeting members suggested most treasury departments remain conservative on the seating front, with team members sitting in cubicles with high walls—a “legacy thing,” as one person put it.

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Margin Bells Will Soon Toll for More Pension Funds

Pension funds need to prepare for margin rules covering the OTC derivatives they use.

Corporate pension-fund managers may soon have initial-margin responsibilities for the over-the-counter (OTC) derivatives they use to manage those funds, even if their parent companies are exempt.

Background. Following the financial crisis, global regulators established variation and initial margin rules for OTC derivatives to provide greater transparency into counterparty risk.

  • Those requirements first became effective in 2016 for financial firms with more than $3 trillion in notional derivatives exposure and were extended in stages to firms with smaller notionals, reaching those with $750 billion in exposure in 2019.
  • While most corporate end-users of OTC derivatives were exempted from margin requirements, their employee-benefits plans, under the Employee Retirement Income and Security Act (ERISA), were not. Consequently, most corporate pension plans will soon be subject to margin rules, and several fund managers raised issues at a recent NeuGroup meeting:

Pension funds need to prepare for margin rules covering the OTC derivatives they use.

Corporate pension fund managers may soon have initial-margin responsibilities for the over-the-counter (OTC) derivatives they use to manage those funds, even if their parent companies are exempt.

Background. Following the financial crisis, global regulators established variation and initial margin rules for OTC derivatives to provide greater transparency into counterparty risk.

  • Those requirements first became effective in 2016 for financial firms with more than $3 trillion in notional derivatives exposure and were extended in stages to firms with smaller notionals, reaching those with $750 billion in exposure in 2019.

While most corporate end-users of OTC derivatives were exempted from margin requirements, their employee-benefits plans, under the Employee Retirement Income and Security Act (ERISA), were not. Consequently, most corporate pension plans will soon be subject to margin rules, and several fund managers raised issues at a recent NeuGroup meeting:

  • When? The threshold for posting margin drops this year to financial end users with more than $50 billion in notional exposure, and in 2021 will include market participants with more than $8 billion in OTC notional.
  • Covering margin calls. A member of the roundtable noted the need for a policy for raising cash to cover margin calls. Another participant recounted addressing that issue when her company began its overlay program, so it decided to perform a VAR analysis to size its collateral at 99% for a one-month stress test.
    • “It wouldn’t have covered where we landed in the global financial crisis for equity, but for every other scenario there was sufficient cash,” she said.
  • Cash or Treasuries? The participant added that her company is holding the collateral as cash, which it then “equitizes,” or places in short-term investments such as ETFs. Depending on the instrument, she said, the cash can generally also be held in Treasuries, providing a bit of income.
  • Administration? No way. Tracking daily margin and posting margin is an administrative hassle, which the roundtable member said she leaves to her ERISA manager.
    • “There’s no way I would ever want to do that. I just make sure there’s enough cash in the account with the manager to cover the amount of collateral we feel is sufficient,” she said.

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Mining Merchant Services for Today’s Gold: Data

Founder’s Edition by Joseph Neu

The drive to access and leverage data from credit card and other transactions is transforming merchant services.

Merchant services are fast becoming a key value driver for transaction banks, fintechs and other financial services institutions. The key reason is the importance of capturing data at the point of sale, along with facilitating frictionless transactions. What takes place under the heading of merchant services is worth your attention because:

  1. It’s the beginning of the data-rich order-to-cash cycle for most companies, which is vital to understanding their cash flow models, their businesses, and their credit risks.
  2. It’s a vital source of data to understand what consumers buy, how much they spend, how they pay, and where and when they pay—which, in turn, can be used to verify identity and mitigate fraud.
  3. It offers a critical opportunity to influence—by using what is learned from the data—how customers pay, which enables effective loyalty programs and promotional incentives and, potentially, the reduction of merchant transaction fees (see below).

Founder’s Edition by Joseph Neu

The drive to access and leverage data from credit card and other transactions is transforming merchant services.

Merchant services are fast becoming a key value driver for transaction banks, fintechs and other financial services institutions. The key reason is the importance of capturing data at the point of sale, along with facilitating frictionless transactions. What takes place under the heading of merchant services is worth your attention because:

  1. It’s the beginning of the data-rich order-to-cash cycle for most companies, which is vital to understanding their cash flow models, their businesses, and their credit risks.
  2. It’s a vital source of data to understand what consumers buy, how much they spend, how they pay, and where and when they pay—which, in turn, can be used to verify identity and mitigate fraud.
  3. It offers a critical opportunity to influence—by using what is learned from the data—how customers pay, which enables effective loyalty programs and promotional incentives and, potentially, the reduction of merchant transaction fees (see below).

The value of data is why e-commerce giants like Alibaba in China have moved quickly to dominate in a wide variety of merchant services, including digital payments. It may have started with helping customers pay with less friction, but now the data is more important.

  • China + data. The experience in China, where Alibaba’s Alipay and Tencent’s WeChat Pay have totally disrupted banks on consumer payments and other merchant services, is one reason transaction banks outside China are trying hard to disrupt merchant services themselves. But like the e-commerce giants, they’re also eying the value of data.

A major problem with merchant services has been its fragmentation—too many players serving different segments of the market; there was also a general lack of integration end-to-end. This creates inefficiencies and higher fees, but it also means that a lot of data gets lost.

  • Creating end-to-end platforms. Hence, the desire for players in merchant services to create end-to-end platforms, either through acquisition rollups or greenfield investment.

Banks, particularly those with a strong retail presence already, are looking at creating end-to-end global payment and merchant services platforms as potential cores to their broader transaction services businesses. “Payments are now nonlinear,” said one banker who heads global merchant services sales for such a bank, “so you need to own the payment system end to end. You also want to be able to serve all clients from smallest to largest, across segments.”

In theory, this push toward single platforms also will help merchants and consumers get something in return for the data they end up sharing at the point of sale.

  • Consumers, for example, could be offered more choices for rewards depending on the form of payment—e.g., use this card and you will get a $50 credit on your next purchase at that store, bypassing the typical 1%, 2% or 3% cash back.
  • Merchants, meanwhile, may be able to drive more sales with loyalty programs and targeted incentives, but also tap into a broader pool of data to manage inventory and product selection. This will also allow them to share more of the value in interchange fees and lower them via the data capture (e.g., so-called level 3 data such as invoice and order numbers).

Watch this space!

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Negative-Rate Concerns Spreading to Pension Funds

US MNCs with European pension funds are being forced to contend with negative rates in Europe.

Although the likelihood of negative interest rates in the US still seems remote, in Europe they’ve been a reality for several years, and pension funds are now grappling with what that means. 

In a recent NeuGroup meeting, the head of pension investments at a multinational corporation (MNC) with several European funds noted that for the first time the company will have to use negative interest rates to value liabilities, specifically in a Swiss fund.

This treasurer noted that he reviewed IFRS accounting rules that apply to European companies, and concluded a negative number must be used in those calculations, “even though it doesn’t sound right. You promised a $100 pension to someone, and you knew it wouldn’t be more than that, but today you have to say that my liability is $105.”

US MNCs with European pension funds are being forced to contend with negative rates in Europe.

Although the likelihood of negative interest rates in the US still seems remote, in Europe they’ve been a reality for several years, and pension funds are now grappling with what that means. 

In a recent NeuGroup meeting, the head of pension investments at a multinational corporation (MNC) with several European funds noted that for the first time the company will have to use negative interest rates to value liabilities, specifically in a Swiss fund.

This treasurer noted that he reviewed IFRS accounting rules that apply to European companies, and concluded a negative number must be used in those calculations, “even though it doesn’t sound right. You promised a $100 pension to someone, and you knew it wouldn’t be more than that, but today you have to say that my liability is $105.”
 
Falling rates are no fun either. Other participants noted that falling rates, even if not yet negative, are also problematic given the growing pressure they put on banks, and ultimately their services. One member noted the impact of falling rates on her company’s P&L and said her team is now concentrating on investment manager searches and debating the value of passive versus active managers. “Do we think active management would provide us with a bit more of a defensive posture, in our equity line up?” she said. 

Cutting costs. The topic of centralizing pension plans across European countries also arose during the meeting. This was in regard to enabling pensions facing the challenge of negative rates to cut costs while potentially smoothing out imbalances when some of an MNC’s funds across different countries are well funded while others are in the red. A participant noted that Belgian law permits pooling pension fund assets, and his team has considered the move with respect to funds in smaller European countries—Belgium and Austria, for example—but the complexity has hindered progress. “We don’t see blending Germany and the UK, Switzerland and the UK, or those in other large countries,” he said. 

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For Property & Casualty: Look Past the First Tier

If you’re not getting the premium reductions your’e looking for, shop around and check out low-cost brokers.

When thinking about top-tier insurance brokers for corporates the usual suspects come to mind: Hub International, Marsh & McLennan Cos., Willis Towers Watson, Aon PLC and the like. But after a quick look beyond that upper slot, one comes across unfamiliar names. Take for instance a broker called Oswald Companies.

  • Not a well-recognized insurance broker among treasurers attending a recent NeuGroup meeting, the Cleveland-based Oswald actually has a long track record, since 1893, that stems from its high quality, low cost services.

At least that’s what one treasurer told peers, noting his company’s existing market-leading broker had declined to reduce premiums by the requested 20%. Even with revenues of nearly $4.5 billion in 2019, “We felt we were not a big enough client, either inside or outside the US” to get the proper respect and that 20% reduction, the treasurer said.

If you’re not getting the premium reductions your’e looking for, shop around and check out low-cost brokers.

When thinking about top-tier insurance brokers for corporates the usual suspects come to mind: Hub International, Marsh & McLennan Cos., Willis Towers Watson, Aon PLC and the like. But after a quick look beyond that upper slot, one comes across unfamiliar names. Take for instance a broker called Oswald Companies.

  • Not a well-recognized insurance broker among treasurers attending a recent NeuGroup meeting, the Cleveland-based Oswald actually has a long track record, since 1893, that stems from its high quality, low cost services.

Request denied. At least that’s what one treasurer told peers, noting his company’s existing market-leading broker had declined to reduce premiums by the requested 20%. Even with revenues of nearly $4.5 billion in 2019, “We felt we were not a big enough client, either inside or outside the US” to get the proper respect and that 20% reduction, the treasurer said.

That prompted a search beyond the biggest names. “We went with Oswald, a tier 2 broker that has alliances overseas that its customers can access and is hungry for business. They cut our premiums by almost $2 million,” the member said, to the audible gasps of fellow treasurers. “Almost 40% in one year.”

In return, Oswald received a base fee and a percentage of premium savings.

Coverage quality still good. Asked if coverage quality suffered, the member said the level of coverage remained largely the same, as did the carrier group—Chubb Limited, Aegon N.V., etc. “And they were able to come to us and say, ‘Here’s the data you’ll need, here’s how to put it together, and this is what the insurance companies are looking for,” he said, adding, “They did a lot of heavy lifting.”

Related risk management. The member also noted Oswald’s ancillary risk management services, such as implementing driver monitor and safety programs for auto-insurance policies related to the company’s transportation needs.

Fast. The member said his treasury group moved quickly to replace its current policies, and Oswald kept pace, replacing policies “within a quarter.”

Go long. One member asked if peers recently renewing their property and casualty policies had done so annually or for multiple years, and the consensus was a combination, although today’s rising premium environment favors longer rather than shorter. A couple of members said their brokers had locked them into two-year contracts that had worked out well. “Insurers have been hit very hard recently,” noted one. “The industry is saying we need to make money on these products.”

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Making Bank on Receivables

Founder’s Edition by Joseph Neu

Investor demand for receivables-backed securities presents opportunities for banks that harness data, technology.

Last week, I noted how supply chain finance (reverse factoring et al) was raising concerns with accountants, rating agencies and regulators because it allows unscrupulous firms to potentially extend payables to fund their working capital without considering it to be debt.

This week I focus on the positive sides of trade finance and, especially, supply chain finance: Thinking about receivables plus data opens exponential possibilities to secure financing, usually at lower rates than many imagine. Here’s the story as it applies to reverse factoring:

Investors want trade receivables. Attending a bank session last month, I learned that every asset manager and insurance company (and probably a sizable segment of other smart investors) wants receivables-backed investment opportunities from credible supply chain programs. They are coming to banks asking to put $10 billion or more to work and the banks are asking themselves how to satisfy this investor demand. The banker leading the trade finance session said there is an estimated $1.5 trillion gap between supply and demand for trade finance paper. The gap will soon climb another trillion as SMEs become more integrated into supply chains.

Why trade receivables? What investors really want are securities backed by diverse pools of trade receivables that have mitigated credit risk due to commercial relationships. Critical suppliers to strong- credit buyers are a good risk, because the buyer is not going to let a good supplier go under by not paying an invoice; the payment ensures the cash flow that supports the security the investor purchases.

Has the invoice been approved? Clearly, if the invoice has been approved, then the credit risk is further diminished. Thus, a whole ecosystem of machine learning and AI has emerged to help predict which invoices are expected to receive approval. Some solutions are said to be accurate enough to win a government guarantee based on their predictions of whether and when the invoices will be approved.

Data as a risk mitigant. Of course, the predictive power of technology is very reliant on the data accessible to it. Indeed, the data is quickly becoming as or more valuable than the receivable itself. The more data a supply chain finance vendor/arranger has that indicates when buyers approve and pay which suppliers, not to mention the commercial importance of the transaction, the more confidence investors will have in the certainty and timing of the underlying cash flows.

Founder’s Edition by Joseph Neu

Investor demand for receivables-backed securities presents opportunities for banks that harness data, technology.

Last week, I noted how supply chain finance (reverse factoring et al) was raising concerns with accountants, rating agencies and regulators because it allows unscrupulous firms to potentially extend payables to fund their working capital without considering it to be debt.

This week I focus on the positive sides of trade finance and, especially, supply chain finance: Thinking about receivables plus data opens exponential possibilities to secure financing, usually at lower rates than many imagine. Here’s the story as it applies to reverse factoring:

  • Investors want trade receivables. Attending a bank session last month, I learned that every asset manager and insurance company (and probably a sizable segment of other smart investors) wants receivables-backed investment opportunities from credible supply chain programs. They are coming to banks asking to put $10 billion or more to work and the banks are asking themselves how to satisfy this investor demand. The banker leading the trade finance session said there is an estimated $1.5 trillion gap between supply and demand for trade finance paper. The gap will soon climb another trillion as SMEs become more integrated into supply chains.
  • Why trade receivables? What investors really want are securities backed by diverse pools of trade receivables that have mitigated credit risk due to commercial relationships. Critical suppliers to strong- credit buyers are a good risk, because the buyer is not going to let a good supplier go under by not paying an invoice; the payment ensures the cash flow that supports the security the investor purchases.
  • Has the invoice been approved? Clearly, if the invoice has been approved, then the credit risk is further diminished. Thus, a whole ecosystem of machine learning and AI has emerged to help predict which invoices are expected to receive approval. Some solutions are said to be accurate enough to win a government guarantee based on their predictions of whether and when the invoices will be approved.
  • Data as a risk mitigant. Of course, the predictive power of technology is very reliant on the data accessible to it. Indeed, the data is quickly becoming as or more valuable than the receivable itself. The more data a supply chain finance vendor/arranger has that indicates when buyers approve and pay which suppliers, not to mention the commercial importance of the transaction, the more confidence investors will have in the certainty and timing of the underlying cash flows.
  • New value in data sources. This data, unfortunately for banks, resides mostly in ERP systems and not in the banking system. This explains the opportunity for ERP vendors and fintechs to partner to source this data to reduce trade friction and mitigate credit risk. If every invoice that gains approval were updated in the ERP and that information was made available instantly to a bank or securitization pool, the world would be a different place.
  • Trusted intermediary for the data. With concern growing about who has access to what data, especially when it involves historical relationships between trusted counterparties, who plays the role of intermediary for receivables data matter.
    • Banks would be one option, but they are limited in how many counterparties they can onboard to their systems (and how quickly) due to KYC regulations. Unregulated fintechs have more scope to onboard, but do they have the trust factor?
    • Another option might be platforms like Marco Polo or Voltran (now Contour), that could use their distributed ledger/blockchain to provide secure intermediation of the transactions and the data.
  • Who provides balance sheet? Corporates in the Fortune 50 that look at supply chain finance programs also want to have someone else’s balance sheet behind them. “If the whole thing goes upside down, they want to know that there is a backer able to write a half-billion-dollar check,” said one banker. Yet no bank wants to support a platform that is not exclusively theirs and no corporate wants their supply chain dependent on one bank. Bolero and Swift efforts have shown the challenges of pleasing all constituencies.

Meanwhile, the opportunity to package trade receivables and the underlying data to create optimal pools of receivables at scale to meet investor demand remains.

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Treasurers Educate HighRadius on Cash Forecasting Needs

NeuGroup members give to get by providing feedback on AI-based cash forecasting solutions.

Treasurers at a NeuGroup meeting in Texas sponsored by HighRadius provided feedback to the Houston-based technology company on what they’d like to see from cash forecasting solutions that use artificial intelligence (AI) and machine learning (ML) to improve accuracy, reduce treasury’s need to input data and allow a wider variety of pertinent data.

  • HighRadius has long provided forecasting services for accounts receivable (AR), the biggest component of cash forecasting, that make use of ML. It now is applying the methodology to accounts payable and other cash forecasting components.

Input wanted. HighRadius executives eagerly sought input on the company’s cash forecasting solution now being developed, and here’s some of what they heard from NeuGroup members:

NeuGroup members give to get by providing feedback on AI-based cash forecasting solutions.

Treasurers at a NeuGroup meeting in Texas sponsored by HighRadius provided feedback to the Houston-based technology company on what they’d like to see from cash forecasting solutions that use artificial intelligence (AI) and machine learning (ML) to improve accuracy, reduce treasury’s need to input data and allow a wider variety of pertinent data.

  • HighRadius has long provided forecasting services for accounts receivable (AR), the biggest component of cash forecasting, that make use of ML. It now is applying the methodology to accounts payable and other cash forecasting components.

Input wanted. HighRadius executives eagerly sought input on the company’s cash forecasting solution now being developed, and here’s some of what they heard from NeuGroup members:

  • Drill down to the invoice level. The HighRadius app enables companies to explore which of dozens of variables—business line, currency, country—generate most of the variance between forecasted and actual cash. A NeuGroup member suggested going deeper still, to reveal which customers generate the variance.
    • A HighRadius representative said the firm’s technology already predicts payments by individual customers on the collection side, and “we’ve been debating how far to take it” with cash forecasting.
  • A longer tail. Orders for goods and services would be another helpful variable, one member said, because they look out further than invoices.
  • Size matters. Another member suggested that HighRadius include the ability to drill down to customers responsible for 80% to 90% of a company’s AR and provide details on those accounts.
  • Override. The app allows for manual overrides when, for example, a major customer wants to pay early, prompting one meeting participant to say it should identify the customer and explain the reason for early payment.
    • “We’ve heard similar requests, so it’s on the roadmap,” a HighRadius rep responded.
  • Cross-company learnings. A corporate customer may historically pay its annual invoice on time but face challenges this year that aren’t captured by historical data. A member asked whether HighRadius’ app incorporates that company’s more recent payment history with other clients, indicating potential troubles ahead.
    • That will come as High Radius’ customer base grows, a rep said, since “learnings from one company could apply to others.”
  • Sales forecasts? Yes, said a HighRadius rep, sales forecasts provided by a company’s FP&A group could be included in the model to generate long-term forecasts.
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Steps on a Technology Journey to Data-Driven Decisions, Actions

A detailed look at the progression of one tech company’s digital transformation.

Building and using a data lake that is a centralized source of data is a key part of the modernization and technology journey for treasury at one leading tech company; a progression from being data aware to data proficient to data savvy to achieving data-driven decisions and actions.

  • A treasury cash operations manager presenting details of this journey at a NeuGroup meeting said a top priority was “wading into the data lake despite the complexity” because treasury is “tired of pulling data from multiple systems.” Among the goals are data transparency, standardization and control.

Data analytics. This company’s treasury adopted Power BI (everyone is trained to use it) for creating standardized dashboards with drill-down capabilities so it could address questions immediately but also create a more self-serve environment. Using the tool’s capabilities to do data analytics, the member said, reveals both data-driven answers and, initially, data shortcomings.

  • Hence the benefit of the data lake. And as other NeuGroup members have noted, treasury’s ability to use AI and machine learning for cash flow forecasting and other purposes depends on having data that has depth and detail.

A detailed look at the progression of one tech company’s digital transformation.

Building and using a data lake that is a centralized source of data is a key part of the modernization and technology journey for treasury at one leading tech company; a progression from being data aware to data proficient to data savvy to achieving data-driven decisions and actions.

  • A treasury cash operations manager presenting details of this journey at a NeuGroup meeting said a top priority was “wading into the data lake despite the complexity” because treasury is “tired of pulling data from multiple systems.” Among the goals are data transparency, standardization and control.

Data analytics. This company’s treasury adopted Power BI (everyone is trained to use it) for creating standardized dashboards with drill-down capabilities so it could address questions immediately but also create a more self-serve environment. Using the tool’s capabilities to do data analytics, the member said, reveals both data-driven answers and, initially, data shortcomings.

  • Hence the benefit of the data lake. And as other NeuGroup members have noted, treasury’s ability to use AI and machine learning for cash flow forecasting and other purposes depends on having data that has depth and detail.  

The role of the cloud. The presenter said that moving treasury applications to the cloud to co-locate data reduced IT’s footprint by 60%. Treasury has about 40 applications; 24 of them are first-party apps (meaning the company builds and maintains them in-house), and the rest are third-party apps. The first-party apps address:

  • Cash forecasting
  • Cash visibility
  • Bank account management
  • Intercompany loan management
  • Wire requests and tracking

SWIFT gpi and transparency. The company was an early adopter of SWIFT gpi, which allows treasury to track wires once they leave treasury’s banking partner. One member said this is good news for her treasury. “This will be very beneficial to us as we have limited visibility to transactions once they leave our banks,” she said. “SWIFT gpi will provide more transparency on payment statuses.”

SWIFT and the cloud. The company and SWIFT have worked together on a cloud-native project that allows SWIFT wire transfers to be done over the cloud. The teams have enabled SWIFT wire transfers on this setup. The company is the first cloud provider working with SWIFT to build public cloud connectivity and will work toward making this solution available to the industry. 

How it works. Treasury sends a wire instruction through a web app on the cloud, which is validated by using machine-learning algorithms.

  • Once validated for authenticity, these wires are sent to SWIFT via the company’s SWIFT installation on the cloud. SWIFT validates the wire instructions and sends it off to the appropriate bank. Once the bank carries out the wire instruction, it sends confirmation through to treasury.

Machine learning. Treasury built a machine-learning forecasting solution that is addressing a key FX exposure for the company while improving forecast accuracy of AR and operational efficiency for the team.

  • Historical data in the cloud was cleaned and used to create the solution using the R programming language and other tools.
  • Cumulative forecasting of notional exposure improved by 6%.
  • Volatility of FX impact on other income and expense was reduced by ~25%.

The people part. Like many treasury teams, this one is trying to strike the right balance between people in possession of core treasury knowledge and skills and those who are more adept at data analytics and have advanced quantitative abilities. In addition to everyone learning Power BI, treasury recently hired its own data analysts.

The problem remains, though, that some staff lack the skills, ability or interest to learn new tools and technology at a point when data science is increasingly critical. The treasury team highly encourages employees to take courses to increase their skills in the data analytics space and provides sponsorship to help them achieve these goals.

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Tales from the Cyber Crypt

Assistant treasurers exchange recent scary cyber tales of success and failure.

In a breakout session at NeuGroup’s Assistant Treasurers’ Leadership Group focusing on securing companies from cyberattacks, members recounted recent experiences and the conundrums they face combating them.

Digital protection, à la carte. NeuGroup’s own Scott Flieger, director of peer groups, said a fellow member of a college board who runs a cybersecurity advisory firm recommends companies make a menu of their digital assets, from bank accounts onward, and seek to value them. Then ask how much the company is willing to pay to protect that asset. He added that few understand a company’s digital assets better than assistant treasurers. “Being the person in treasury who has an inventory of the digital assets and can value their importance—that’s an important position,” Mr. Flieger said.

Assistant treasurers exchange recent scary cyber tales of success and failure.

In a breakout session at NeuGroup’s Assistant Treasurers’ Leadership Group focusing on securing companies from cyberattacks, members recounted recent experiences and the conundrums they face combating them.

Digital protection, à la carte. NeuGroup’s own Scott Flieger, director of peer groups, said a fellow member of a college board who runs a cybersecurity advisory firm recommends companies make a menu of their digital assets, from bank accounts onward, and seek to value them. Then ask how much the company is willing to pay to protect that asset. He added that few understand a company’s digital assets better than assistant treasurers. “Being the person in treasury who has an inventory of the digital assets and can value their importance—that’s an important position,” Mr. Flieger said.

Bad timing. The email system of a NeuGroup member firm’s collections team was compromised, revealing all its customer contacts. The fraudsters then sent realistically scripted emails to customers requesting payments be sent to a different bank and providing the necessary details.

The member’s security team wanted to alert customers, but it was two weeks from quarter end, “and you don’t want to spook customers so they don’t pay you—a real treasury issue,” the member said.

Cyber reticence. Companies develop their cybersecurity plans internally, but then what? “One of our biggest challenges was that people don’t want to talk about cybersecurity,” one participant said, noting wariness about discussing the plan with third parties.

  • “We had a hard time finding peers to benchmark against, and we were paranoid as well, creating a special NDA that we made all of our banking partners sign before talking about our cybersecurity,” he said. Even his team’s discussion about how to store the plan was challenging, “because we effectively created a playbook for how to hack us.”

Cryptocurrency conundrum. A ransomware attacker may demand the transfer of $50,000 in Bitcoin to a cryptocurrency account to unfreeze a company’s system. If news breaks on CNBC about the attack, pressure will mount to meet that demand, but opening cryptocurrency accounts takes time. Companies may open cryptocurrency accounts in preparation for an attack, but would this information becoming public in an earnings call invite such attacks? And should any payment be made at all, given that the attacker could be a terrorist organization?

  • One solution: “We back up all our data, even on the desktops, so if we get locked out of our primary system, we can just reload everything,” one member said.
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Crisis Management Brings Executives Together

Having a crisis response plan can help make the company more resilient now and later.

Following a framework for crisis response planning that engages management as well as the board can create significant political capital for internal audit, not to mention better prepare the company for crises that may arise.

Having a crisis response plan can help make the company more resilient now and later.

Following a framework for crisis response planning that engages management as well as the board can create significant political capital for internal audit, not to mention better prepare the company for crises that may arise.

Multipurpose framework. The head of internal audit at a major government contractor said in a recent NeuGroup meeting that his company uses the National Fire Protection Association 1600 Standard on Continuity, Emergency and Crisis Management. He described it as a “fairly transferable” framework that can be used across a variety of scenarios, from fire drills to much more complex and resource-intensive corporate initiatives. Most members participating in the meeting were unfamiliar with the NFPA document and listened raptly as the IA chief describe the benefits.

The member noted that the company’s risk committee chairman had required adopting the framework and given the nature of the company’s business, most of its provisions were already in place.

What not to do. The member said a fascinating outcome of crisis response planning is understanding better what executives are not supposed to do or say, “particularly for the C-suite, where it’s not uncommon to have lots of type A personalities.” The exercise clarifies what each executive’s role is and emphasizes letting the crisis manager inform them about developments so they can better determine their next steps.

By promoting understanding of the various scenarios and analyzing what to report versus what to disclose, the requirements and the cadence of reporting, “We really challenged management to think about that, and it was very helpful,” he said.

Muscle memory. “Every time we went through the exercise, whether [for a major initiative], or for cyber, or an inside threat, we’d learn something new, or ask questions we hadn’t thought to ask before,” the member said. The future will always bring situations that can’t be anticipated, and he recounted a few humorous ones. “There’s always something you don’t think about, but the more you do it, it builds muscle memory,” he said.

Political capital. The member noted that facilitating these conversations in his capacity as IA was highly rewarding. “It engaged management at different levels and created political capital that has paid dividends in so many different areas for IA,” he said.

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Appealing to Millennials and Gen Zers: The Academic Perspective

Insights from the Foster School of Business on what today’s MBAs want—and what treasurers have to say.

Corporates who want to hire MBA finance graduates face a highly competitive market and are well served by knowing what the current crop of millennials and Gen Zers value most when weighing job offers. That was among the key takeaways from a presentation by faculty and administrators at the University of Washington’s Foster School of Business to the members of a group of treasurers at mega-cap companies. Here’s what matters most:

Insights from the Foster School of Business on what today’s MBAs want—and what treasurers have to say.

Corporates who want to hire MBA finance graduates face a highly competitive market and are well served by knowing what the current crop of millennials and Gen Zers value most when weighing job offers. That was among the key takeaways from a presentation by faculty and administrators at the University of Washington’s Foster School of Business to the members of a group of treasurers at mega-cap companies. Here’s what matters most:

  • Strategic thinking
  • Business decision-making
    • A Foster School assistant dean later elaborated: “New graduates are seeking jobs in strategic positions that impact a company’s present and future direction. They are savvy in technology, use of communication networks, and see both the present and the future in how they think, so where they can exercise these attributes and skills makes a difference to them.  They think with innovation in mind and have a global sense of their potential impact.”
  • Cross-functional teams
  • Salary
    • The average salary for Foster’s 2018 MBA finance graduates was about $115,000, plus a signing bonus of $25,000.
  • Flexibility/work balance.
  • Promotions.
    • In an earlier session, one treasurer asked his peers if they found that new hires expected a promotion every year. He said that’s unrealistic and his approach is to tell people the company is “going to get you where you ultimately want to go,” but don’t expect a promotion every year. Another treasurer said finance has a 70% retention rate and warned, “You’ll lose them if they’re not advancing.”
  • Frequent feedback. The Foster School professors added that MBAs want contact with senior leadership.

How to engage potential recruits. The Foster School presentation recommended members take these actions to appeal to MBA students:

  • Give a guest lecture or serve on a panel at the school.
  • Host a group of students for a tour or talk.
  • Sponsor a spring analytics project.
  • Mentor a student.
  • The obvious: Hold on-campus recruiting events.

The corporate perspective. Not all the treasurers present said they favored MBA graduates. In fact, one member said MBA grads who are on rotations in the company’s leadership program usually don’t return to finance roles because they “want to do exciting business stuff, sexy biz dev stuff.” It’s easier, he said, to retain undergraduates who start in finance. “I love the leadership program when we get undergrads,” he said.

  • Another treasurer asked, “How do we make finance sexier?” He noted that corporates are often competing against investment banks for top talent.
  • The first treasurer said that when he does hire MBAs, he takes graduates from “second tier” schools who did well and are intent on proving themselves, as opposed to trying to recruit Ivy League MBAs. “Let them go to McKinsey or Goldman Sachs,” he said.
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Supply Chain Finance Faces Rising Regulatory Scrutiny

Founder’s Edition, by Joseph Neu

Making sense of calls to increase debt classification and disclosure requirements for reverse factoring.

I received an email recently from a consultant giving me a heads-up about a potential financial reporting change that could adversely impact the multibillion-dollar market for supply chain finance.

Founder’s Edition, by Joseph Neu

Making sense of calls to increase debt classification and disclosure requirements for reverse factoring.

I received an email recently from a consultant giving me a heads-up about a potential financial reporting change that could adversely impact the multibillion-dollar market for supply chain finance.

  • Extended payables vs. debt. At issue is the ability of companies to use a financial intermediary to pay suppliers at a discount while extending their payments terms to the suppliers (sometimes in conjunction with raising financing against their own receivables, too), or simply extend payables beyond the norm to preserve cash (aka reverse factoring, payables financing or supply chain finance). Many such transactions are not recorded as debt but rather as trade payables.

The collapse of the UK construction firm Carillion in early 2018, linked by critics to its misuse of supply chain finance, is seen as one tipping point. But the broader use of reverse financing to help firms fund themselves at lower cost that is being promoted by a growing number of financial intermediaries is also driving regulatory scrutiny. Here are some recent examples:

  • Big Four ask for guidance. The Big Four accounting firms in October took the rare step of sending the FASB a joint letter, asking it to weigh in on how companies should classify various supply chain financing transactions and what details they should disclose.
  • Rating agencies. Fitch has a formula it uses to adjust company debt ratios to reflect their use of supply-chain finance. Moody’s has issued a warning.
  • SEC calls for MD&A disclosures. At the American Institute of CPAs conference in December, SEC Corporation Finance Deputy Chief Accountant Lindsay McCord said businesses needed to use the Management Discussion and Analysis section of their financial statements to give investors insight on their use of supplier finance programs that might change their financial condition.

To get the views of our members, I reached out to a few who manage significant supply chain finance programs.

  • Transparency and standardization needed. “The significant variations among accounting professionals in how they treat SCF reporting, even within the same accounting firm, does create external reporting challenges,” one member said. He would support standardization of interpretation and transparency of reporting.
  • The ESG component. Standardization would support good governance “to remove financial engineering and creativity merely for the sake of metrics reporting (for MNCs and large corporates) that are not necessarily beneficial to the overall business environment,” the member said. SMEs can be especially victimized by extraordinary extended terms (240-360 days), he added, with settlement delays of another 30-60 days in some countries.
  • Are new rules really needed? In another member’s opinion, “Any hack analyst can tell what is going on. Yes, it is a bit of a trick with the ratings agency’s metrics, but they too know exactly what is happening.”

I think it is fair to say that audit firms should be able to come up with a more consistent application of the current principles-based approach—i.e., the extent to which an intermediary’s involvement changes the nature, amount, and timing of payables, plus the direct economic benefit the entity receives—even without the intervention of those who set accounting standards.

  • We should all support disclosures that are sufficient to determine adherence to this principal and make clear how financing techniques affect the statement of cash flows. Reputation risk and ESG ratings related to the treatment of suppliers will also help prevent abuse if capital providers are paying attention.

To see what such disclosures might look like, take a look at examples from Masco and Keurig Dr Pepper in their responses to SEC staff comment letters.

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Managing FX in Currency Tiers to Control Cost, Workload

Why one company’s treasury spreads currency management among teams for large exposures, currency clusters and “tier two” currencies.

At a recent NeuGroup meeting of treasurers in Europe, one member shared how his company manages FX risk management-related costs and workload by considering currencies in tiers.

Why one company’s treasury spreads currency management among teams for large exposures, currency clusters and “tier two” currencies.

At a recent NeuGroup meeting of treasurers in Europe, one member shared how his company manages FX risk management-related costs and workload by considering currencies in tiers.

Global policy, local execution. Generally speaking, at this company, corporate treasury at HQ is responsible for the framework and policies and the global hedging approach, but local (in-country) treasury staff implement the hedging strategy with advice and approval from HQ.

Big countries have their own treasury organization. Some countries in the global group are so large relative to the size of the company and have their own currencies that they will have their own treasury. Other countries together form a “cluster” that also can be managed on its own.

But “tier two” countries don’t. Various tier two countries can be served directly by corporate treasury. Here, local treasury and in-country project controllers forecast and monitor FX risks resulting from purchase orders, sales orders and tender offers, but the exposure is hedged at the group level by corporate treasury.

Other tier two countries are served by local treasury, such as India, China, South America and Africa; here, risk identification is done as above but the exposure is hedged with local banks by local treasury. (However, the valuation of the local third-party hedges is performed by corporate treasury.)

Group guidance promotes the use of global currencies like USD or EUR for project tenders in emerging markets but when that is not possible, negotiators need to ensure that currency fluctuation clauses are in the contracts. Failing contracts in global currencies, local treasury consults closely with corporate treasury to monitor risk and manage the cost of hedging.

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Smoother Sailing: The Benefits of Dynamic Discounting

How C2FO’s solution helps one company’s treasury team smooth its cash flows.

Successfully adopting dynamic discounting (DD) to execute early payments requires internal alignment across multiple functions in a corporate’s organization—as well as finding the right vendor and solution. However, the technology’s many benefits, including smoothing out cash flow for both the company and its suppliers, provide a persuasive argument.

How C2FO’s solution helps one company’s treasury team smooth its cash flows.

Successfully adopting dynamic discounting (DD) to execute early payments requires internal alignment across multiple functions in a corporate’s organization—as well as finding the right vendor and solution. However, the technology’s many benefits, including smoothing out cash flow for both the company and its suppliers, provide a persuasive argument.

A treasury executive from a major technology company explained her firm’s challenges and the benefits of implementing C2FO’s DD platform at a recent NeuGroup meeting sponsored by the Kansas City-based fintech.

The biggest challenge. The member said that aligning top executives internally was probably the most time-consuming aspect of the adoption, noting that there were multiple areas and teams impacted whose cooperation was critical. Besides the initial IT investment, the implementation required changing the company’s procurement and accounts payable processes.

  • The assessment and ultimately the recommendation to adopt C2FO were made by an executive committee comprising representatives from finance, treasury, IT, supply chain, procurement, and credit and collection. Ultimately the company’s CFO signed off on the project.

Three choices. The company considered employing the traditional discounting model, in which vendors receiving early payment within a certain number of days would accept a specified discount. Also contemplated: a sliding-scale model that tied the discount percentage to how many days early the vendors were paid.

  • Those approaches typically require extensive negotiations with suppliers and allow limited flexibility. The company chose the dynamic-discounting model, which lets it define the amount and timing of cash it deploys into the program and enables vendors to bid on the discount percentage they are willing to provide.

Smoothing out cash flows. The flexibility of the C2FO platform allows the company to better manage its cash flows, making the model especially attractive given the transactional, potentially volatile nature of the company’s business.

Benefits across the company. Treasury’s DD benefits include a risk-free investment opportunity, optimizing working capital and payment-term extensions. In addition to being a tool highly leveraged by treasury, there were benefits in other areas too:

  • Procurement: Stronger supplier relationships; standardized processes and payments; no more negotiating one-off discount terms.
  • IT: Minimal support required; a secure SaaS platform; easy user experience with minimal training; operations on multiple ERP systems.
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Share Repurchases: Don’t Wait for the Sell-off

The case for spending all (or almost all) the cash allocated to buybacks right away.

Monday’s stock market sell-off provides an opportunity to revist an insight on stock buybacks from a NeuGroup meeting last spring: A risk management expert at Deutsche Bank argued that waiting for dips is not the most effective way to repurchase shares. That’s worth considering given that many companies only buy back their stock when the price dips below what they consider its intrinsic value.

The case for spending all (or almost all) the cash allocated to buybacks right away.

Monday’s stock market sell-off provides an opportunity to revist an insight on stock buybacks from a NeuGroup meeting last spring: A risk management expert at Deutsche Bank argued that waiting for dips is not the most effective way to repurchase shares. That’s worth considering given that many companies only buy back their stock when the price dips below what they consider its intrinsic value.

Danger in waiting. Research by Deutsche Bank suggests that for almost all sectors, more shares are repurchased (at a lower price per share) if companies buy as soon as cash becomes available