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The Challenges for Corporates of Nonbank Payments

Treasurers in Asia discuss why regulation, technology and business models complicate nonbank payments in the B2C space.

The brave new world of nonbank payments presents both challenges and opportunities for finance teams at multinationals that have to collect cash from open platforms, a topic that garnered attention at a recent meeting of NeuGroup treasurers in Asia. 

Key issues. In the business-to-consumer (B2C) arena, the widespread use of tech intermediaries such as PayPal, WeChat and Alipay poses a problem for corporates because these open platforms are not meeting the typical segregation of duties and reconciliation protocols required by audits. The only options involve complex manual processes.

Treasurers in Asia discuss why regulation, technology and business models complicate nonbank payments in the B2C space.

The brave new world of nonbank payments presents both challenges and opportunities for finance teams at multinationals that have to collect cash from open platforms, a topic that garnered attention at a recent meeting of NeuGroup treasurers in Asia. 

Key issues. In the business-to-consumer (B2C) arena, the widespread use of tech intermediaries such as PayPal, WeChat and Alipay poses a problem for corporates because these open platforms are not meeting the typical segregation of duties and reconciliation protocols required by audits. The only options involve complex manual processes.

B2B dynamics. In the business-to-business space (B2B), payment service intermediaries such as TraxPay have emerged with offerings that present corporates with risks as well as opportunities, such as the ability to hold data in the cloud. Regulation, technology and business models also complicate the B2B payment landscape. The hope is that in the long run, platforms become more sophisticated. For now, there’s no immediate relief, a sore point for corporates.

Fintech and the trust Issue. Reliance on intermediaries in the B2B payments area raises a related issue facing finance teams at multinationals: How much do they trust fintechs? When it comes to payments, corporates trust banks far more than fintechs or ideas like crowdfunding. The issue is especially relevant when it comes to payment aggregators like PayPal, Stripe and Square. Corporates have to weigh the popularity of these systems and their ability to provide a neutral layer between them and a bank against the risks of giving data to businesses that don’t have to comply with bank regulations. The dependence of these systems on APIs also presents risks.

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Crisis Forces Consideration of Unwinding Cash-Flow Hedges

The COVID-19 crisis has reduced exposures to a point where for many companies those hedges may not be needed anymore. Time to unwind?

If you’re planning on unwinding a cash-flow hedge, there are many things to think about before you do. Determining when and why to unwind, as well as how to view the transaction’s cost benefits, and what counterparty to use, are just a few of the factors to consider. This was the topic of discussion among NeuGroup FX Managers’ Peer Group 1 and 2 members in a recent virtual “office hour” meeting, which led to some interesting takeaways.

  • The “No Choice” camp. With hedge accounting being a big driver for most members, keeping hedges on the books when exposures are materially reduced – as they unarguably have for many sectors in the COVID-19 crisis – is not an option as you’ll be over-hedged. For some companies, the lost sales in the crisis might be made up for in a later quarter, but for travel and service business, it is unlikely the rebound will make up for all of it.

 

The COVID-19 crisis has reduced exposures to a point where for many companies those hedges may not be needed anymore. Time to unwind?

If you’re planning on unwinding a cash-flow hedge, there are many things to think about before you do. Determining when and why to unwind, as well as how to view the transaction’s cost benefits, and what counterparty to use, are just a few of the factors to consider. This was the topic of discussion among NeuGroup FX Managers’ Peer Group 1 and 2 members in a recent virtual “office hour” meeting, which led to some interesting takeaways.

  • The “No Choice” camp. With hedge accounting being a big driver for most members, keeping hedges on the books when exposures are materially reduced – as they unarguably have for many sectors in the COVID-19 crisis – is not an option as you’ll be over-hedged. For some companies, the lost sales in the crisis might be made up for in a later quarter, but for travel and service business, it is unlikely the rebound will make up for all of it.
  • Monetizing in-the-money hedges. If hedge accounting is a driver to unwind hedges that are in the money, the extra liquidity is welcome, nevertheless. But ITM hedges are also an opportunity to access additional liquidity, even if the hedges are still “good.” By unwinding them – cashing in – you get the extra cash immediately and if needed, you can enter into a new set of hedges for the remaining exposure at prevailing market rates.
  • Do you need to take the P/L right away? Talk to your hedge accounting people to see whether the gains/losses on the hedges are material enough to require that they be recognized in the current quarter or if they can be released in the quarter they otherwise would have occurred.
  • Do you need to sell the hedge? And if so, to the same counterparty? Not necessarily. If you don’t feel the pricing offered is attractive enough from the original counterparty, you can bid it out competitively if your trading processes permit. Or, you can dedesignate the hedge and enter into an offsetting cash-flow hedge for the “over-hedged” part for a neutral outcome.
  • Can you offset it on the balance hedge side instead? None of the members on the call said they could. In one case it was because of systems that prevented a cash-flow hedge to be “transferred” to the balance-sheet program. So instead, the cash-flow hedge needs to be dedesignated and an offsetting hedge to be put in place the same day.
  • How much extra work is it? Unwinding cross-currency interest rate swaps and other complex or multi-tranche derivatives can mean a lot of extra trading and processing work for the treasury team. That is less likely for relatively simple FX derivatives, most of which can likely be pushed through the regular trading process but will probably incur some more “manual” (spreadsheet) valuation calculations. This should take care of most of the push back from the treasury operations and accounting side.
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Cyberattacks: Post-Pandemic May Be Worse Than the Lockdown

Best practices pre-pandemic have become even more important as the economy reopens.

A top treasury concern for years, cyberattacks ramped up following the sudden transition to the work-from-home regimen prompted by the pandemic. They’ll likely ramp up even further when the economy begins opening up.

That was among the takeaways from a session on cybersecurity at a recent virtual NeuGroup meeting headed by Jenny Menna, deputy chief information security officer at U.S. Bank, and Chris Moschovitis, CEO of technology consultancy tmg-emedia.

Best practices pre-pandemic have become even more important as the economy reopens. 

A top treasury concern for years, cyberattacks ramped up following the sudden transition to the work-from-home regimen prompted by the pandemic. They’ll likely ramp up even further when the economy begins opening up. 

  • That was among the takeaways from a session on cybersecurity at a recent virtual NeuGroup meeting headed by Jenny Menna, deputy chief information security officer at U.S. Bank, and Chris Moschovitis, CEO of technology consultancy tmg-emedia. Below are more insights.

Beware of stuffed animals. When fear struck that the COVID-19 was in the US and spreading, the bad guys—criminals and state actors—saw opportunity. 

  • Almost immediately there was a jump in phishing emails that seek to exploit fears about the virus to lure employees into revealing private information. 
  • Malicious apps professing to come from key resources of information, and even stuffed animals with accompanying thumb drives arriving by mail, are designed to infect home computers. 

Don’t forget to patch. These best practices and defensive measures have become even more important:

  • Install the latest software patches on phones, personal computers and work laptops to guard against evolving malware.
  • Assume that requests from higher-ups, especially from a personal email account, to send money are bogus.
  • Don’t use personal email accounts for business. Don’t email company documents to a personal email account.
  • Home printers may be compromised; avoid attaching work laptops to them.
  • Change up Zoom and other virtual meeting-room passwords to avoid unwanted guests. 
  • Alert employees to the latest phishing scams and cyberattacks. The Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency (CISA) and the FBI regularly update the latest developments. 

At the corporate level. Understand connections to vendors and other third parties, their cybersecurity policies, and your company’s dependency on them. 

  • Discuss in advance with outside counsel and the FBI how to respond to a ransomware attack, Ms. Menna said. Several large corporations have been hit recently.  

The internal threat. Mr. Moschovitis noted that 30% of cybercrimes are conducted by internal agents who understand how to bypass an institution’s controls.

  • Without any physical controls or eye-to-eye employee interactions that may provide hints of bad intent, any company-related queries by an employee outside his or her direct responsibilities or otherwise odd behavior should be escalated to HR.  

Prep now. A meeting participant mentioned fears that reopening the economy will accompany a flurry of activity fueling even more cyberattacks. 

  • Mr. Moschovitis agreed. The flood of overdue invoices and other documents may be overwhelming to process, creating opportunity for cyberattacks. “Our advice remains consistent: The minute something becomes abnormal, pick up the phone” to double-check, he said.
  • Many employees will continue working from home, so policies such as how the division of labor will occur must be developed. “Now is the time to have these conversations,” he said. “And it will involve having a lot of stakeholders around the table—the COO, CFO, IT, cybersecurity. All these folks need to be in the room to have this conversation.”
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Pandemic Reveals the Haves and the Have Nots: Asia Report

Examples of the varying effects lockdowns had on businesses, and how they’ve responded.

The coronavirus pandemic has provided more proof that crises affect some companies far differently than others. The reasons include what industry a company is in, its business model and how much cash it has on hand—the haves and the have-nots.

Perhaps less expected is that business units within the same company may weather a storm better than others. All this and more emerged in discussions among finance practitioners in Asia participating in a NeuGroup virtual meeting in mid-April.

Examples of the varying effects lockdowns had on businesses, and how they’ve responded.

The coronavirus pandemic has provided more proof that crises affect some companies far differently than others. The reasons include what industry a company is in, its business model and how much cash it has on hand—the haves and the have-nots.

Perhaps less expected is that business units within the same company may weather a storm better than others. All this and more emerged in discussions among finance practitioners in Asia participating in a NeuGroup virtual meeting in mid-April. Here are some takeaways:

  • Members who work for cash-rich companies expressed interest in making strategic acquisitions as asset prices declined in response to the pandemic. Potential deals in this environment must be evaluated not only based on price but the degree to which an acquisition will deplete the buyer’s cash pile.
  • Asia business units planning to provide funds to parent companies had different experiences. For at least one company, the process was relatively easy, thanks to its strong relationships with local partners. Others faced difficulties getting approvals from external auditors and clearance from tax authorities.
  • Companies without significant cash surpluses have made significant cuts in capital expenditures and discretionary expenses. They have also drawn down or increased bank lines of credit.
  • A member from a consumer goods company described declining sales of its products that are distributed to restaurants but solid sales of products consumed at home and purchased in convenience stores.
  • Those drugs requiring face-to-face-meetings between pharmaceutical salespeople and health care providers are not selling as well as other drugs companies produce.
  • Lockdowns—no surprise—put a huge dent in sales of companies that rely on foot traffic.
  • Companies with business models that have easily transitioned to remote work such as consulting are doing well and, in some cases, have seen an uptick in business.
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Seeking Incremental Credit? Refinancing Loans? Expect Hurdles

Insights from U.S. Bank on current market dynamics as corporates shore up their access to credit.

Defensive drawdowns of revolving credit lines have subsided and banks are selectively entertaining requests for new, incremental loans as well as refinancings of existing credit lines. But borrowers can expect some hoops, hurdles and different market dynamics. That was among the takeaways from a presentation by U.S. Bank, sponsor of a recent virtual NeuGroup meeting for treasurers of large-cap companies. Here are highlights:

  • Members heard that in the wake of the pandemic, U.S. Bank had received more than 150 client requests for incremental liquidity lines—both new revolving and term—and to date had closed over 70 facilities with many more in the works as of April 23.

Insights from U.S. Bank on current market dynamics as corporates shore up their access to credit.

Defensive drawdowns of revolving credit lines have subsided and banks are selectively entertaining requests for new, incremental loans as well as refinancings of existing credit lines. But borrowers can expect some hoops, hurdles and different market dynamics. That was among the takeaways from a presentation by U.S. Bank, sponsor of a recent virtual NeuGroup meeting for treasurers of large-cap companies. Here are highlights:

  • Members heard that in the wake of the pandemic, U.S. Bank had received more than 150 client requests for incremental liquidity lines—both new revolving and term—and to date had closed over 70 facilities with many more in the works as of April 23.

Refinancing season begins. U.S. Bank is working with two large borrowers rated single-A or higher that are rolling over their 364-day tranches but leaving five-year portions alone, rather than pushing them out a year as they once would have.

  • These borrowers are offering upfront fees. “They’re trying to keep the integrity of the existing deal but recognizing that banks are under strain and pricing is likely to go up, so they’re offering the fees to bridge that gap,” said Jeff Duncan, managing director of loan capital markets at U.S. Bank.
  • Covenant waivers and amendments are likely to increase, he said, as companies digest their first quarter earnings and look ahead.

Loan split stays. The structure splitting loans into 364-day and five-year portions will likely continue, despite today’s challenges in rolling them over, because big companies can raise sufficient liquidity while keeping the bank group at a manageable number, Mr. Duncan said. Also:

  • A bank refusing to refinance the shorter piece while holding onto the five-year is effectively shutting off ancillary business. This gives borrowers leverage.
  • One member asked if seeking an incremental 364-day now would jeopardize refinancing an existing one in August. Ask the lead banks about syndicate capacity well in advance, said Jeff Stuart, U.S. Bank’s head of capital markets.
  • Coupling incremental loans with a bond deal incentivizes lenders with fees and reassures banks that the facility is temporary.

Big bank hiatus. A member looking for an unfunded revolver said the largest US banks were the least likely to step up, while European lenders, large US regionals, and Japanese banks even increased their allocations.

Prepare for the sprint. Given pricing volatility, U.S. Bank has led syndications that, from initial discussions to closing, have wrapped up in two weeks instead of the typical five or six, thereby meeting corporate clients’ accelerated funding needs.

Floors required, please. Libor floors on bank loans, guaranteeing a minimum yield, are becoming increasingly popular, most at 75 basis points and some at 100 basis points, Mr. Duncan said, and some banks are requiring floors in order to commit to incremental facilities.

  • “We’re seeing them more frequently at launch to take that issue off the table and maximize the number of participants getting into deals,” he said.

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Aligning on the Meaning of Risk Helps Companies Focus on It

The word risk means different things to different people; how can you agree on the definition across an organization?

“What exactly does risk mean to you?” one member asked during a recent virtual meeting of NeuGroup’s Corporate Enterprise Risk Management Group. The question was a bit rhetorical—the member answered it himself by saying risk means different things to different people. There is good risk, bad risk, strategic risk, operational risk and catastrophic risk.

  • This was true, said one member of an ERM team presenting to the group on risk alignment at her company. She said, “Initial definitions are easier to get consensus” on; but she observed that as you move away from those definitions and go out to the businesses, “That’s where we see more variation of risk.”

The word risk means different things to different people; how can you agree on the definition across an organization?

“What exactly does risk mean to you?” one member asked during a recent virtual meeting of NeuGroup’s Corporate Enterprise Risk Management Group. The question was a bit rhetorical—the member answered it himself by saying risk means different things to different people. There is good risk, bad risk, strategic risk, operational risk and catastrophic risk.

  • This was true, said one member of an ERM team presenting to the group on risk alignment at her company. She said, “Initial definitions are easier to get consensus” on; but she observed that as you move away from those definitions and go out to the businesses, “That’s where we see more variation of risk.”

Risk council. Another ERM member leading that alignment effort said that risk definitions need to be made uniform and that those definitions should be decided upon company-wide. To do it, ERM created a risk council by recruiting leaders from the regulatory side of the business, HR, accounting, R&D and the business units to help the broader company focus on ERM.

  • He added that since ERM reports into finance, he made sure not to “overload finance on the council.” The group sought to determine “where we were different and where were we the same,” when it came to nailing down the meaning of risk in different areas of the business.

No appetite for “appetite.” This member said the process was not straightforward because of the number of different personalities and agendas. “I expected we would stumble on some definitions,” he said, adding that, for instance, ERM’s “view of the world may be influenced by board personality.” Others might be influenced by other necessities; that means “there are words some people want to use and others they don’t want to use.”

  • For example, the company’s legal counsel didn’t like the term “risk appetite” and said the company had zero appetite for risk. He wanted to call it something else. Others saw it differently, which made it “challenging in some naming conventions.”

Higher profile. Nonetheless, this effort helped ERM “level set” what risk meant, the member said. The group then presented refined risk definitions to the board to get agreement. “The result has been active engagement.”

  • Overall, this and other efforts have raised the profile of ERM within the company. When he first took the position, ERM “was a board-reporting exercise; ERM was muted.” But now with the alignment project, the function is “now more of a presence.”

This has meant building more risk accountability and finding the right risk owners across the company. “The more we can get involved with individual regions or business, the more we can inculcate risk into the organization,” he said.

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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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Pandemic Economy: The Ugly, the Bad, and the Good

From a US standpoint, no matter how experts look at it, the pandemic has created an economic nightmare scenario. But in Asia there may be glimmers of hope.

The pandemic has ravaged the global economy and as it lingers, offers little hope of a V-shaped recovery when it eases. It is therefore understandable that the economic prognosis, viewed from that trough of despair, looks pretty ugly. However, the perspectives of several CFOs in Asia participating in a NeuGroup virtual meeting, revealed some improvement in business sentiment in the region.

To be sure, no one is under any illusions that the global economy has not fallen off a cliff and will struggle mightily to get back to something resembling growth and normalcy. In the virtual meeting, a capital markets strategist put into context what the US will face in the aftermath.

From a US standpoint, no matter how experts look at it, the pandemic has created an economic nightmare scenario. But in Asia there may be glimmers of hope.

The pandemic has ravaged the global economy and as it lingers, offers little hope of a V-shaped recovery when it eases. It is therefore understandable that the economic prognosis, viewed from that trough of despair, looks pretty ugly. However, the perspectives of several CFOs in Asia participating in a NeuGroup virtual meeting, revealed some improvement in business sentiment in the region.

To be sure, no one is under any illusions that the global economy has not fallen off a cliff and will struggle mightily to get back to something resembling growth and normalcy. In the virtual meeting, a capital markets strategist from a bank put into context what the US will face in the aftermath.

  • In his presentation, this banker said he was more bearish than most observers. He said the “economics of stoppage is not well understood” and therefore the outlook to plan for may need to be more bearish than the baseline consensus. For example, he pointed out that S&P had forecasted earnings at plus-10% just two months ago; the consensus is now 25%-33% declines for 2020. This shows how the virus has begun to hollow out demand. 

Here are some other of his observations:

  • This is a “bottom up” crisis, particularly in the US where 30 million small businesses employ 85% of the labor force. What’s more, many of these jobs are not coming back. This will hobble an economic recovery. It will be gradual and slow, resembling a Nike swoosh recovery vs. a V-shaped one. 
  • Discretionary spending will be down 60%-90%. That’s due to the high transmission rate of the virus, which leads to more isolation which in turn “ruins” discretionary spending. Transmission is more important than the focus on mortality, he says. Ultimately the economic impact will align with the virus’s impact on public health. The transmission factor makes the virus more efficient, more lethal and more of a risk.
  • The Southern hemisphere will continue this transmission risk through the winter and increase the likelihood of a second wave in the fall for the northern hemisphere.
  • Overlaid on this is the oil price capitulation. The banker said this by itself would be a massive global event were it not for the crisis.
  • The depth of the global recession will be a second economic headwind for China.  

Some light. Despite the doom and gloom, treasurers in Asia see some normalcy returning, albeit amid plenty of concerns. This was revealed in the virtual meeting’s breakouts, which highlighted those bright spots and anxieties:

  • At the micro level, member companies have seen a V-shape recovery for many business lines, all driven by the reopening of China.
  • The appetite to invest in China remains.
  • People have to feel safe to participate in economic activity; and they feel safe returning to work now. Note: in a  NeuGroup COVID-19 call for  heads of internal audit, several members confirmed that workers and shoppers in Asia were feeling safe enough to return to work and shops.
  • One concern was supply chain financing; members reported rising prices as bank appetite falls and the cost of funds for these programs increases.
  • More concern about the impact of the crisis on banks. Members report seeing a diverse reaction with some banks restricting credit while others are increasing offerings, depending on who the company is and where. 
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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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