Insights

Antony Michels In Cash & Working Capital, COVID-19

US Coin Shortage: Retail Treasury Teams Call for Action, Urgency

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

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

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

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

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

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

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

**A June 27 Twitter post by @Inevitable_ET says the photo is from a 7-Eleven.**

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

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

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

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

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

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

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

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

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

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

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Antony Michels In Pension and Benefits

European Pensions Ride the ESG Bandwagon. Will US Plans Catch Up?

In Europe, ESG is gaining traction in pension funds while it still lags a bit in US; raters also need to standardize.

While many observers thought environmental, social and governance (ESG) issues would take a back seat amid the pandemic, the opposite has happened, with treasury practitioners—at least in NeuGroup’s universe— seeking more information.

Still, as members of the NeuGroup for Pensions and Benefits (NGPG) were told in a virtual meeting in May, it depends on where you are.

Still, as members of the NeuGroup for Pensions and Benefits (NGPG) were told in a virtual meeting in May, it depends on where you are.

How important? “ESG means different things to different people,” a sponsor presenter told members. “In Europe it’s the first thing pensions want to talk about, but not in the US.” The presenter added that this interest has been driven by both stakeholders and government. “So, depends on where plans are located.”

One member said ESG is considered in managing the company’s pension but it is just one of several other considerations. ESG “is adopted as one of the factors in evaluating portfolio choice,” he said. “But it’s not a controlling factor.” The member added that he “thought it would have more of an impact but as of now we have had less interest.”
Since interest in Europe has been keener – particularly in Sweden, one member noted – multinationals were much more focused on ESG within their European funds.

Held to a different standard. There is also a difference in standards, with one ESG rater often seeing things differently vs. another ESG rater. Essentially there are no industry standards, members were told.

The lack of measurement standards results in vastly different scoring depending upon which of the many vendors are used. But there are efforts afoot to unify standards.
There’s also mixed evidence of the value-add of ESG-oriented investments: a Hamburg review of studies found a “non-negative” correlation between ESG and corporate financial performance, meaning there were mostly studies showing a positive relationship; but there were also a number of negative results. In the meantime, several sovereign wealth funds have targeted ESG believing ESG assets will outperform.
This lack of rock-solid evidence in addition to fiduciary responsibility of pension managers has been cited as reason for the lack of interest in the US. Some participants said that they haven’t changed asset allocation in the US to reflect ESG.
There is an effort underway in the EU to create uniform pension regulations, although Brexit means that UK will not be part of this work. However, UK interest in ESG is strong.

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Ted Howard In Risk Management, Treasury Management

What the Experiment With Modern Monetary Theory Means for Risk Managers

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

By Joseph Neu

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

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

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

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

By Joseph Neu

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

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

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

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

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

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Ted Howard In Libor SOFR, Treasury Management

Transition to SOFR Pushing Ahead Despite Pandemic

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

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

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

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

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

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

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

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

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

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Ted Howard In Cash & Working Capital, Risk Management, Treasury Management

March Madness: Searching for Answers on Cash Flow and Credit

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

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

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

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

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

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

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

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

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

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Antony Michels In Senior Executive, Treasury Management

Juneteenth and Beyond: NeuGroup Member Companies Take Action on Racial Justice

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

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

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

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

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

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

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

A good start. Another participant noted the pride he felt in seeing how both his current and former employers have tackled the issue of race head-on, including the CEO of the company where he works now urging conversation and learning. “I couldn’t be prouder of how people have responded,” he said.

Accelerated change. In the last few weeks, the national conversation shifted from COVID-19 to racial justice crisis, focused on diversity and inclusion and black lives.

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

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Antony Michels In FX, Technology

Can You Save A Month a Year Automating FX Trades?

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

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

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

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

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

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Antony Michels In Pension and Benefits, Risk Management

Pandemic Creates Too Many Unknowns to Change Pension Strategies

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

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

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

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

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

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

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

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

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

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

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

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Ted Howard In Pension and Benefits, Risk Management

Pensions Look for Re-Entry, Re-Risk Opportunities

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

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

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

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

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

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

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

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

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

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Ted Howard In Capital Markets

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“But if you asked me three years ago to bet on what German 10-year bond yields would be, I never would have bet they would be negative.”

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Ted Howard In FX, Regional

Pandemic Hits Argentina Hard – With Tighter FX Controls in Its Wake

The pandemic has inflicted serious pain on world economies and it could be extra painful for Argentina.

Argentina has faced recurring fiscal crises, and now the global pandemic-induced economic recession has once again pushed the country to the brink of defaulting on its dollar-denominated sovereign debt. For corporates doing business there, including members of NeuGroup’s Latin America Treasury Peer Group (LatAmTPG), the most visible manifestation of the crisis is in the defensive measures the government is taking to preserve FX reserves, i.e., getting local cash and earnings out is getting harder and harder.

In the “good” column, the government has confiscated USD held privately, which was the so-called “pesofication” policy implemented during the last fiscal crisis. Second, the Argentine government does allow a parallel FX market (aka, the blue-chip swap market) to coexist with the official rate available from the Argentine Central Bank (BCRA).

The blue-chip transaction involves buying local bonds or shares using pesos, transferring them out and selling them for dollars, at a significant “haircut.” The rate at which you can buy dollars officially is about 73 pesos, obviously preferred to the blue-chip rate at about 124 (June 17).

Eat your veggies first… In the most recent iteration of FX controls, companies are now required to use their offshore dollars first to cover their dollar needs, and only then will they be given access to USD from the BCRA at the official rate. In addition, companies are careful not to “flout” the FX controls too boldly, as it carries reputation risk and so most keep their parallel transactions to inconspicuous amounts.

Having said that, large MNCs are reluctant to use the blue-chip market at all because if they do, they must wait 90 days before being allowed to transact at the official rate with the BCRA again.

No confidence vote. As difficult and uncertain as the financial environment is in Argentina, members also noted that much of the difficulties stem from a lack of confidence in the government to take the necessary steps for a successful resolution to the current crisis. Looking at the facts on the ground, the fiscal and debt measures do not appear to be nearly as bad as in the past, they said.

On the working capital management side, members also noted that some banks are willing to factor receivables (without recourse) “at a reasonable rate.”

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Antony Michels In Cash & Working Capital, Technology

A Win-Win Solution to Save Suppliers and Manage Corporate Cash

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Antony Michels In COVID-19, Investment Management, Risk Management

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

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

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

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

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

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

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

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

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

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

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

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Antony Michels In Banking, COVID-19

So far, So Good: US Banking Sector Shows Strength During Pandemic

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

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

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

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

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

Weakness in Europe. The strategist said that while US banks are in top form, European banks are not. That’s because of the zero interest rate environment in the European Union. The European bank sector is weak because zero rates makes banks inefficient, the strategist noted. “European banks are as weak as they were in during the ’08-’09 financial crisis,” he said. US banks have taken a hit and are a great shape, and “nowhere near ’09 levels.”

Negative rates in the US? While there are negative rates globally, the strategist didn’t think the US would go that route. “There are now unprecedented levels of negative rates” globally, he said. “Will US go there? No, because we have a huge money market fund market and if we break the buck again, then it will be a huge mess.” And it certainly would be “negative for bank profitability.”

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Antony Michels In Banking, Capital Markets

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Antony Michels In Capital Markets, Investment Management

Dusting Off the Cobwebs and Retooling the Investment Policy

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

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

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

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

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

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

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

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

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

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Antony Michels In Cash & Working Capital, Regional

Latin America Treasury Peer Group Members Discuss Challenges of Managing Cash Amid Crisis

By Joseph Neu

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

Here are few key takeaways I wanted to share.

By Joseph Neu

Here are few key takeaways I wanted to share.

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

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

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

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

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

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

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Jacob Bromsey In Capital Markets, Technology

A New Money Market Platform Leverages JPMorgan’s Depth in Technology and Innovation

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

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

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

In March alone, institutional investors plowed $821 billion¹into government MMFs. That massive flight to quality sent monthly trading volume on Morgan Money surging about 40% to $120 billion², fueled in part by inflows into the JPMorgan US Government Fund, whose assets reached $228 billion.

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

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

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

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

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

Investing in tech, talking to clients

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

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

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

Trading carts, analytics and APIs

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

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

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

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

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

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

Looking ahead

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

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

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

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Joseph Neu In Capital Markets, Cyber risk, Insurance

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

By Joseph Neu

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

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

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

By Joseph Neu

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

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

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

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

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

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

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

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

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

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

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

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Ted Howard In Accounting & Disclosure, Compliance, COVID-19, Treasury Management

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

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

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

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

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

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

Baseline
Adverse
Severely adverse

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

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

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

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