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Antony Michels In Cash & Working Capital, COVID-19, Technology

How AI Can Hit the Cash Forecast Bull’s-eye When the Wind Is Wild

What happens to your AI-based model when historical data and cash flow patterns are disrupted?

Cutting-edge cash forecasting models that make use of artificial intelligence (AI) and machine learning will, inevitably, require manual adjustments by humans to account for seismic disruptions like the pandemic. The good news is that AI models will eventually catch up with the new normal, becoming more accurate with less intervention.

That was among the insights offered by Tracey Ferguson Knight, director of solution engineering (treasury) for HighRadius, who participated in a recent NeuGroup Virtual Interactive Session, “Cash Forecasting During a Crisis.”
“That’s the key to machine learning, it’s going to adapt,” Ms. Ferguson Knight said in a follow-up interview. “The better the models are, the faster they will catch up.”

That was among the insights offered by Tracey Ferguson Knight, director of solution engineering (treasury) for HighRadius, who participated in a recent NeuGroup Virtual Interactive Session, “Cash Forecasting During a Crisis.”
“That’s the key to machine learning, it’s going to adapt,” Ms. Ferguson Knight said in a follow-up interview. “The better the models are, the faster they will catch up.”

Miles to go. Unfortunately, most NeuGroup members still rely on Excel and the knowledge of a limited number of treasury analysts, who don’t typically have data science skills.

If those analysts leave, treasury may be unable to make an immediate change to a forecast that they didn’t build and don’t always understand, Ms. Ferguson Knight said.
To address this, several members said they want to improve data sourcing, build better data models, standardize and share data science skills and tools across treasury and FP&A, establish a center of excellence and explore professional service firms as a backstop.

Pandemic pace. The uncertainty created by COVID-19 has magnified the importance of cash forecasting—especially for companies that are not cash rich—a theme heard often during exchanges among NeuGroup members in the last five months. And many companies are now forecasting more frequently.

More than one member said their company is now doing daily cash forecasts that go out 12 months, which one member called excessive. “I can’t count how many different scenarios we’ve done,” he said.
“Forecasting cadence has increased dramatically,” Ms. Ferguson Knight said. “Companies that use to forecast quarterly, they might be doing it monthly now. Those that were doing it monthly are doing it weekly. Those that were doing it weekly are sometimes doing it multiple times a day.”
Companies that rely on manual processes will have difficulty increasing the speed and accuracy of forecasts, she added. “With AI and data science and a vendor that’s providing better models, you’re able to increase accuracy.”

AI playbook. The odds of success at using AI to improve the accuracy of cash forecasts rise if you:

Start with a baseline. This is where a master cash-flow model is helpful. And if you have used algorithms to produce cash forecasts with accuracy pre-crisis, you can use these as a baseline.
Compare forecast to actuals. Use AI tools and treasury team members to review comparisons of forecasts to actuals.
Consider manual changes. People may be aware of change or see things in the data that might prompt immediate manual changes in the forecast and the forecast model.
Allow the AI tool to learn. From there, keep feeding the data into the AI-tool so that it can learn from the changing data patterns and errors between the forecast and actual result.

AR and AP. HighRadius’ AI focuses heavily on accounts receivable (AR) and then accounts payable (AP). It will require:

A master list of data (customer or supplier variables).
Correlated data from related variables shown to influence predicted payment data by the customer with AR, for example.
Appling multiple algorithms to predict that payment date/receipt of the cash from AR for the cash or when your AP will pay for cash outflow.

Algorithmic accuracy. Your cash forecasting system should then switch to algorithms that show the most success in predicting the cash inflow and outflow. We learned in an earlier session on AI used in cash forecasting that certain algorithm types do better with unexpected changes in data patterns. How quickly the algorithms learn pattern changes to bring cash forecasts back up to the 90+ percentage accuracy levels will depend on:

The frequency and tenor of the forecasts. If you are doing monthly forecasts for the next month it will take longer than if you are doing a daily forecast for every day out a month.
The granularity of your forecast. For example, if you pull data to forecast cash from each legal entity and bank account, the AI may learn faster than if you forecast by pooling entity or some other aggregate.
Corporates should aim for the most granular level of detail they can get and the frequency they can achieve reliably and aggregate from there. The more cash poor you are, the more there will be an incentive to forecast with more detail and frequency.

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Antony Michels In Accounting & Disclosure, Banking

On Track: Banks Adopting CECL Not Derailed by COVID-19

Regulators have allowed banks to delay implementing CECL, but most are well on the way to adopting the standard.

Banks have been given extra time to implement the FASB’s CECL standard, but most are continuing their push to adopt the measure. The CARES act passed by the US Senate back in March offered banks the option to pause implementation until either the end of the year or the end of the COVID-19 national emergency, whichever came first.

According to meeting material presented at NeuGroup’s Bank Treasurers’ Peer Group, the Financial Accounting Standards Board’s current expected credit losses standard has already been adopted by 93% of banks with more than $10 billion in assets.
These banks are also prepared, according to the bank sponsor of the meeting. Loan loss reserves are up by an average of 60% from the beginning of the year.

According to meeting material presented at NeuGroup’s Bank Treasurers’ Peer Group, the Financial Accounting Standards Board’s current expected credit losses standard has already been adopted by 93% of banks with more than $10 billion in assets.
These banks are also prepared, according to the bank sponsor of the meeting. Loan loss reserves are up by an average of 60% from the beginning of the year.

Trouble. Unemployment and growth statistics point to trouble ahead, one banker presenting to the group said. The sponsor bank itself was “trying to figure out” what the next quarters will look like. Views are “very varied,” the banker said, adding that “everything is going to be impacted by COVID, no sector will be spared.” She said charge-offs “are low now but will increase.” One positive development is deposit growth, which she described as “good.”

Scenario planning. Other banks are also trying to determine the level of COVID-19-related uncertainty in their economic forecast. This in turn has driven the uncertainty in the predictive loan models that are key to the loan-loss reserve buildup for each bank. Most banks use multiple economic scenarios and may make qualitative changes to adjust for so much uncertainty. Many use economic scenarios provided by Moody’s with periodic updates. The methodology has been the focus of frequent questions in bank earnings calls.

As ready as ever? The bank sponsor also said banks were prepared for CECL impacts on their “Day 1” and “Day 2” reserves, the former being related to equity and latter related to quarterly income reports. The sponsor noted that Day 2 reserve build has been equal or greater than “Day 1 charge” for banks. But outcomes could vary depending on “portfolio mix and loss history.”

Reserves to loans range from 0.4% to 3.3%, with large US regionals at 1.7% and mid-caps at 1.3%, the sponsor bank’s analysis showed.
As such, “banks are acknowledging the likelihood of additional reserve build in 2Q, absent material changes in the current outlook.”
The pandemic-related delay applies to both the banks’ Day 1 and Day 2 reserve build, according to S&P Global.

Noted in most earnings reports. The sponsor bank also noted that most banks had at least one slide related to CECL in their earnings calls, which suggests that there are plenty of COVID-sensitive loan portfolio exposures.

The bank said that about 15%-20% of banks provided more detailed loan disclosure breakdowns by loan type in their Q1 calls. Most of that percentage was for larger banks while mid-cap banks “generally disclosed information on higher risk portfolios.” Key exposures include health care, energy, hotel, restaurant, retail, entertainment, travel and transportation, the bank presenters said.
On the calls, sponsors noted that most all management teams expressed uncertainty about future economic conditions and offered different takes on their baseline assumptions on the shape and timing of recovery.
Many banks assumed negative GDP in Q2 and FY 2020, and high unemployment rates persisting into 2021.

Forbearance response. The sponsor said banks were seeing a lot of forbearance requests and taking different approaches. For some, a client request was “the only prerequisite for many banks, while other banks are taking a more prudent approach and analyzing need.” Still, overall, there is a desire “to quickly process and assist customers.”

Most banks reporting forbearance actions “are reacting to customer inbound requests;” however, some banks are taking a proactive approach and “engaging in active dialogue with clients” about forbearance and client assistance initiatives that are available to them.

Slowdown in requests. Some banks disclosed an early spike in requests that have subsequently tapered off, suggesting that some clients may have foreseen economic difficulties ahead and/or fiscal initiatives are helping or are forecasted to help. This may change as COVID-19 resurges in many US states.

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Antony Michels In Cash & Working Capital, COVID-19

Helping Hands: How Corporates Are Aiding Customers and Suppliers

Supply chain finance and how the “we’re in this together” approach to the pandemic is playing out.

The COVID-19 crisis has put the meaning of business community—emphasis on community—into sharp relief as some businesses have survived well or even thrived (tech, consumer staples), while others have suffered devastating losses (retail, travel and hospitality).

At few points in recent memory has the mutual reliance on comrades in commerce been more important; and as in families, it’s often the stronger of the business brotherhood who pitches in the most to see the tribe through tough times.

At few points in recent memory has the mutual reliance on comrades in commerce been more important; and as in families, it’s often the stronger of the business brotherhood who pitches in the most to see the tribe through tough times.

At a recent Tech20 treasurers’ meeting, members shared what they were doing to keep business running—their own and that of all their value chain partners.

Who needs money? Can you collect later and pay earlier? Members across the NeuGroup universe—strong, global and investment grade, mostly—have shared throughout the crisis that they have been asked to extend collection terms to customers and pay suppliers earlier.

But that means being judicious and determining “how much capacity we have and how much credit to give,” said one member. “Some of our programs are more efficient and we can’t afford to be too generous.”
Nevertheless, typically the strongest credit in the chain, large corporates are the best positioned to partner with C2FO, Taulia or another supply chain finance specialist or with their banks for a proprietary offering.

Win-win: Change of business models may present opportunity. When the world as you know it grinds to a halt, what other avenues to reach customers are there? For brick-and-mortar retailers, going online, if they haven’t already, seems the natural step if customers cannot come to them. Some build their own; others join one of the branded platforms.

By expanding a retail revival program already in place for underrepresented communities, one was able to onboard new sellers—mainstream small and medium-sized businesses that had never sold online—to its platform rapidly while also supporting them with a curriculum of educational tools on how to use it and thrive on it, plus a free trial period and free listings.

Speed and scale require ownership. Operationalizing a new program is one thing; scaling it is another. To deliver on promises made to new sellers at a faster pace than normal takes internal coordination. One idea is to have a special task force own it, with either treasury driving it or with significant involvement.

Treasury can help creating educational tools addressing what to do when goods are sold and how the money comes into the seller’s bank account.
On the corporate side, this connects to the treasury and balance sheet implications of extending credit to customers (such as payment grace periods) as well as partnering with global billing to streamline while managing fraud risk.
It helps for treasury to also be the owner of collections.

Negotiating new terms to spread the pain. In situations where the company is a platform between a seller and buyer—new economy service companies come to mind—the fine print of agreements really comes into focus.

In cases where refund policies are subject to seller discretion and/or are too one-sided, the platform or broker may need to step in to ensure the pain of lost business is shared equitably between buyers, sellers and itself via an amended extenuating circumstances policy.
This requires careful thought on what will feel equitable to all involved to maintain brand goodwill, and how the broker itself can finance its part, including loans and dipping into reserves.
In addition, if refunds during the pandemic suddenly go from a relative exception to an avalanche of requests, it may also require a reengineering of the payments-reversal process to manage significant transaction volume.

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Antony Michels In COVID-19, FX, Risk Management

What Dollar Weakness and ‘Japanification’ Mean for FX Hedging Strategies

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Antony Michels In Banking, Cash & Working Capital, Technology

Scoring With Single Sign-On and Bank Portal Rationalization

One member’s winning use of single sign-on to access bank portals through Wallstreet Suite impresses peers.

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

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

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

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

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

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

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

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

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

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Antony Michels In COVID-19, Insurance

Pandemic Stokes Fire of Rising D&O Insurance Premiums

Corporates see no relief as insurers take a hard line on renewals amid rising fears of COVID litigation.

Premiums for directors and officers (D&O) insurance are surging, a pain point discussed at several NeuGroup meetings this spring, including the Tech20 Treasurers’ Peer Group and the Life Sciences Treasurers’ Peer Group.

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

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

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

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

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

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

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

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

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

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Antony Michels In Capital Markets, ESG, Tax

A Green Light for Tax Equity Investments in Renewable Energy

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

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

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

Update your view on the ROI of tax equity structures. Commenting on the cash flows from a transaction presented by U.S. Bank, one member noted that they looked more sizable than he remembered when looking into tax equity structures several years ago. This shows how the economics have improved significantly with the greater investment tax credit available, so it pays to do the math again if you have not looked at these in a while. Members confirmed that the immediate (end of year one) tax credit payback and subsequent operational cash flows make it relatively easy to meet your hurdle and do something good with renewable energy (mainly solar) tax equity investments.
It helps to work with a bank/broker with balance sheet. If you have your own source of funding it is easier to control the transaction while lining up investors and keeping the contractor and project moving. One member noted having a transaction fail with a broker that did not have its own funding and lost control of the project.
Investors needed. U.S. Bank says that there are multiples more projects needing financing than current investors in tax equity structures, so it’s a bit of an investor’s market. Also, even if the tax credits on offer though 2023 are not renewed, there is still ample time to get on board—and there is good likelihood that they will be.

PPAs and VPPAs. Power purchase agreements (PPAs) and virtual PPAs are also a way to support renewable energy, but come with a bit more risk due to potential price fluctuations and the need to actually use the energy procured or the counterparty risk with the VPPA. Tax equity structures tend to have a first loss guarantee by the bank to cushion performance risk.
Do you have enough use of proceeds to issue in benchmark size? When the discussion turned to green bonds, the first question was to look at your use of proceeds, including with three or more-year look backs, to see if you can justify a benchmark size issuance of $500 million or more.
If yes, then consider the fees/real asset economics. The second question asked was to what extent a green issuance can be justified based on the cost of issuance and pricing. All things point to the answer being yes— you can see a three to four basis point advantage to green bonds, as appetite by ESG investors and normal fixed income investors for ESG-friendly bonds is strong and growing stronger.
- The only way to prove it without extrapolation of different tranches (green and non-green) issued at once by an issuer or by backing out the new issue premium differential from how green bonds trade in the secondary markets is for someone to issue a 10-year green bond and 10-year non-green bond of the same amount simultaneously.
- One member said he would do that if bank underwriting fees were discounted to help him do it. These fees can be a bit higher because there is a bit more work on the part of the bank underwriter. There are also specialty accounting/audit fees to consider and those of a specialty ESG rater.

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Ted Howard In Treasury Management

Keeping That Resilient Posture Post-Pandemic

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Ted Howard In Banking, Investment Management

Managing Bank Balance Sheets in a Low Yield Environment

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

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

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

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

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

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

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

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

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

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

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

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

“Our bank is trying to be disciplined and mechanical,” said one member who was reviewing whether to “unwind and reposition things” in case rates go below zero. The sponsors added that their bank was “trying to be disciplined and mechanical” about the market.”

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Joseph Neu In Cash & Working Capital, COVID-19, Technology

NeuGroup for Retail Treasury Pilot Series Wrap-Up

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

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

By Joseph Neu

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

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

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

The haves:

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

The have-nots:

Pretty much everyone else.

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

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

It was a fitting way to celebrate Juneteenth, however.

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

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

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

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

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

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

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

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Antony Michels In Banking, Cash & Working Capital, Technology

COVID Boosts Contactless Payments, Revealing Retailer Frustrations

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

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

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

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

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

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

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

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

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

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

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

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Antony Michels In COVID-19, Technology, Treasury Management

Pandemic Pushes Companies to Digitize Processes, Prioritize People

Treasurers at tech firms push to abandon legacy processes while focusing on keeping teams connected.

Many tech companies during the pandemic have been able to announce that they will not lay anyone off during the crisis—and have been able to keep their promise.

Unfortunately, that’s not universally true—some businesses have been particularly hard hit and have had to furlough or cut staff, and consequently do more with less. This prompted a hard look at projects and their prioritization for many members of NeuGroup’s Tech20 Treasurers’ Peer Group, who met virtually in May.

Mixed emphasis. Even for those members who didn’t have to downsize their teams, there was an effort to deprioritize certain projects to avoid the fatigue that creeps into teams as the work from home (WFH) regime drags on. But there may also be projects that should be accelerated.

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

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

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

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

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

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Antony Michels In Banking, Cash & Working Capital, Technology

Under the Hood of the Global Payments System: Complexity

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

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

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

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

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

Put simply, there are three different sources of complexity.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Antony Michels In Cash & Working Capital, Regional

Obstacle Course: Cash Forecasting Challenges in Latin America

Treasurers in Latin America are coping with the pandemic, M&A activity and working capital needs.

Many of the cash management challenges currently facing treasurers in Latin America are being complicated by a variety of factors, including the omnipresent COVID-19 crisis. But also in the mix is recent M&A activity in the region (think integration and its opposite, divestiture), along with difficult financing conditions affecting working capital management.

COVID chaos. Latin America is no exception in regions contending with the difficulties brought on by the pandemic. As in other parts of the world, work from home (WFH) processes have had to be invented on the fly and then executed.

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

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

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

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

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

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

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Antony Michels In Capital Markets, Risk Management

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

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

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

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

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

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

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

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

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

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

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

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Antony Michels In Cash & Working Capital, Technology

Brain Game: Using Artificial Intelligence to Improve Cash Forecasting

ION’s plans to tap machine learning, deep learning and neural networks to help treasurers.

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

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

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

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

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

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

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

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

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

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

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Ted Howard In Treasury Management

Managing the Team Through WFH Takes Effort

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

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

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

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

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

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

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

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

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

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

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

All this combined with the moratorium on layoffs have rewarded the presenting company’s management with their highest employee satisfaction numbers, despite the challenging period.

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Ted Howard In Investment Management, Pension and Benefits

Do Pensions Need to Bolster Post-Retirement Resources?

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

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

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

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

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

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

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

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

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

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

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Antony Michels In Capital Markets, Risk Management

Preparation Pays Off for Microsoft in Debt Exchange Offer

Liability management success: Microsoft received exchange interest of $12.5B, 56% of the targeted notional amount.

Treasury teams managing their debt portfolios have a menu of liability management transactions to choose from, including bond tenders, open-market repurchases, consent solicitations and debt exchanges. To use most of these tools, corporates need to offer investors a reasonable amount of time to decide, ranging from five to 20 business days.

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

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

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

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

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

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

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

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

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Antony Michels In Cash & Working Capital, COVID-19

Cash and COVID-19: A Tale of Two Companies

One company asks, “Where is the cash?” while another reevaluates operational processes.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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