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Spotlight Features

Reverse Repo: A Safe Haven for Cash Amid Financial Turbulence

What the FASB’s Supply Chain Finance Disclosure Rules Mean for Corporates

The Science of FX Exposure Management

Ted Howard
In COVID-19, ESG, Investment Management

Financing the Fight Against COVID-19: Sustainability Bond Deals

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Joseph Neu
In Banking, Cash & Working Capital, Insurance

C2FO Showcases Scope Expansion to AT Leaders

Working Capital Cycle

By Joseph Neu

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

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

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

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

By Joseph Neu

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

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

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

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

Insurance renewals won’t be fun. Several members noted working on insurance renewal projects and hearing from peers that it is a nightmare, with premiums going higher for less coverage, starting with D&O. 

  • In response members are working more closely with their brokers, even changing brokers to seek better advice, as well as focusing internal risk teams on coming up with solutions. 

Bond economics are key to positive bank relationships. In a session where members narrated their recent bond deals to shore up liquidity for the crisis, all mentioned more attention than ever being paid to using bond economics to reward banks:

  • in the RCF,
  • who indicated a willingness to step up with new lending, or
  • who had helped advise on pre-crisis capital structure and capital plans.

There was also attention paid to familiar faces who had been actives on a bond deal with them before, given that everyone had to do this remotely.

  • Passives who lost out due to this “familiar-faces” bias, might also have gotten some make up money.

Such is the importance of bond economics to bank relationships these days.

Stay safe and well.

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Ted Howard
In Capital Markets, Treasury Management

How Corporates Tapping Capital Markets Use Minority and Diversity Firms

NeuGroup members discuss benefits, challenges and process as treasury promotes diversity and inclusion.  

Many treasury teams at multinational corporations strive to include firms owned by women, people of color and disabled veterans when selling debt, buying back stock or issuing commercial paper. At a recent NeuGroup meeting focusing on capital markets, members shared their insights on the process of including minority and diversity firms in various transactions.

Formalize the process. The member who kicked off the discussion described her company’s path toward formalizing the process of using minority and diversity firms to underwrite bond deals. Using diversity firms as junior managers initially encountered resistance from some lead managers who declined to fill their orders, she said. But in 2013 the company mandated the inclusion of five to six of the firms in each debt issue, allocating 1% to 2% of the bonds to them.

NeuGroup members discuss benefits, challenges and process as treasury promotes diversity and inclusion.  

Many treasury teams at multinational corporations strive to include firms owned by women, people of color and disabled veterans when selling debt, buying back stock or issuing commercial paper. At a recent NeuGroup meeting focusing on capital markets, members shared their insights on the process of including minority and diversity firms in various transactions.

Formalize the process. The member who kicked off the discussion described her company’s path toward formalizing the process of using minority and diversity firms to underwrite bond deals. Using diversity firms as junior managers initially encountered resistance from some lead managers who declined to fill their orders, she said. But in 2013 the company mandated the inclusion of five to six of the firms in each debt issue, allocating 1% to 2% of the bonds to them.

  • “There are about 20 firms we use,” the member explained. “We sat down with each one of them three years ago and we rotate among 12-15 of them for bond deals.”
  • Every year, the company also sets up a relatively small, 364-day revolving credit facility employing local diversity firms from the metropolitan area where it’s based.

Adding value. Some members have found diversity and minority firms add particular value in stock buybacks. “We have found a select group that do well in share repurchase,” said one participant. Others said they had more success in using diversity and minority firms in their CP programs, including the session leader. “They have come through for us when bulge bracket firms have not come through,” she said.

  • At a separate NeuGroup meeting of assistant treasurers, one member said, “Philosophically we want to further diversity, but we also want to find ways to add value when we work with diversity and minority firms.” Transaction execution quality is the top criteria to measure value, he added.
  • On bond deals, “we find these firms bring real and incremental orders,” the AT said, noting the investors they serve tend to be price-insensitive. And while those orders don’t make or break a deal, they help on the margin, diversifying the company’s large debt stack.

Meetings matter. Participants in both NeuGroup discussions agreed that meeting with diversity and minority firms is worthwhile, in part to determine which business owners are truly “walking the talk.” For instance, one member said, it’s a red flag if a woman who owns a firm shows up with six men. Also, he wants to know what a firm owned by a disabled veteran is doing beyond hiring veterans. He was particularly impressed by one firm that is offering training classes to disabled vets. 

  • Another member said it’s important to find minority and diversity firms that truly align with the values of his company, adding that hiring these firms is an extension of the corporation’s commitment to environmental, social and governance (ESG) principles—an increasingly important topic for issuers. 

Challenges. The relatively small size of a diversity or minority firm and the capital it has may limit its ability to execute on a bond underwriting, members said. “How much they could take was a problem,” one said of her experience with minority firms on debt deals. 

  • The assistant treasurer’s company has a sizable investment portfolio, but trades requiring significant balance sheets can be problematic for small minority firms, he said. Their size can also inhibit them from providing asset-management services to large corporates seeking efficiency by doling out multi-billion-dollar mandates.

Backing by big banks. Members agreed that a few large investment banks step up to help manage the inclusion of a minority or diversity firm in a bond offering and, in some cases, provide a capital backstop for the smaller firm. Other banks, one member said, still ask, “Why do we have to do this?” In other words, as another member observed, “Some lead underwriters are better or more willing than others.”

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Joseph Neu
In Banking, Cash & Working Capital

Founder’s KTAs from the Global Cash and Banking Group 2020 H1 Meeting

Digital Forecasting

By Joseph Neu

NeuGroup facilitated our Global Cash and Banking Group’s 2020 H1 meeting last week, sponsored by ION Treasury.

Here are a few takeaways I wanted to share.

Focused on cash visibility and forecasting, still. Members in this group noted that their projects and priorities had not shifted as a result of Covid-19 and its impacts, given that cash visibility and forecasting were already a priority.

  • Using treasury technology and process improvement to get better at both also has not changed.
  • It’s just now the tech and processes have to work from home.

By Joseph Neu

NeuGroup facilitated our Global Cash and Banking Group’s 2020 H1 meeting last week, sponsored by ION Treasury.

Here are a few takeaways I wanted to share.

Focused on cash visibility and forecasting, still. Members in this group noted that their projects and priorities had not shifted as a result of Covid-19 and its impacts, given that cash visibility and forecasting were already a priority.

  • Using treasury technology and process improvement to get better at both also has not changed.
  • It’s just now the tech and processes have to work from home.

AI is the future of cash forecasting. Among the cross-product solutions ION is focused on are machine learning applications, starting with a cash forecasting tool leveraging artificial intelligence, mostly in the form of machine learning and deep learning neural networks. ION’s research suggests that linear regression-based learning models perform well for businesses with stable, growing cash flows, but less well with cash flows subject to seasonal peaks. ARIMA, or AutoRegressive Integrated Moving Average and Neural Network models perform better, but require extra modeling:

  • for seasonality with ARIMA models and
  • with neural networks, careful attention to training data to learn from and supplemental intervention when non-repeating events occur, such as when global pandemics happen.

Still, you can get 90%-95% accuracy most of the time, in seconds vs a day or more.

Bank connectivity as a service progressing. Members sharing on bank connectivity experience suggests that it is a diminishing, albeit still a pain point as:

  • global banks offer to serve as a gateway for statements and payments
  • TMS and ERP vendors look to connect around traditional bank portals and
  • specialty providers fill the breach for those ill-served by these solutions.

Balancing access security (e.g., managing tokens) and segregation of duties with convenience and business continuity in a crisis (mailing new physical tokens vs. turning off virtual tokens on employees own smartphones fast enough) is still an issue, yet positive progress is the prevailing sentiment.

Stay safe and well.

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Joseph Neu
In Pension and Benefits

Founder’s KTAs from NeuGroup for Pension and Benefits 2020 H1 Meeting

Crisis Team

By Joseph Neu

The NeuGroup for Pension and Benefits 2020 H1 meeting took place last week, sponsored by BNY Mellon and their subject matter expert Insight Investment. 

Here are a few takeaways I wanted to share: 

Interregnum part 2. Insight Investment CEO Abdallah Nauphal put the Covid-19 crisis into the context of his thesis presented last October that the world is in an interregnum period between the financial-economic system that emerged from World War II and what comes next. Covid-19 is a likely trigger for pushing us further toward a new financial economic order.

To pass through it, his colleagues note, we will probably travel through three acts of crisis:

  1. Act 1, a liquidity crisis
  2. Act 2, a credit crisis and
  3. Act 3, an inflation crisis that will ultimately crescendo to the crisis that ushers in a new system.

  •  We are currently entering Act 2, the credit crisis, which means pension funds should continue to allocate investments to high-quality credits and select, lower-quality assets with visible cash flows offering better returns.
  • Pension plan sponsors need to use Act 2 to win authorization from plan committees to move quickly when it is time to target real cash flows and inflation protection, shifting allocations to inflation-linked assets and bonds, equities and other real assets.

By Joseph Neu

The NeuGroup for Pension and Benefits 2020 H1 meeting took place last week, sponsored by BNY Mellon and their subject matter expert Insight Investment. 

Here are a few takeaways I wanted to share: 

Interregnum part 2. Insight Investment CEO Abdallah Nauphal put the Covid-19 crisis into the context of his thesis presented last October that the world is in an interregnum period between the financial-economic system that emerged from World War II and what comes next. Covid-19 is a likely trigger for pushing us further toward a new financial economic order.

To pass through it, his colleagues note, we will probably travel through three acts of crisis:

  1. Act 1, a liquidity crisis
  2. Act 2, a credit crisis and
  3. Act 3, an inflation crisis that will ultimately crescendo to the crisis that ushers in a new system.
  •  We are currently entering Act 2, the credit crisis, which means pension funds should continue to allocate investments to high-quality credits and select, lower-quality assets with visible cash flows offering better returns.
  • Pension plan sponsors need to use Act 2 to win authorization from plan committees to move quickly when it is time to target real cash flows and inflation protection, shifting allocations to inflation-linked assets and bonds, equities and other real assets.

Pension best practice is very firm and situation dependent. For example, LDI and hedge strategies were validated by this crisis. The performance of fixed income assets boosted the confidence of plans that deployed LDI and also STRIPS and overlay strategies.

  • But it helped to be in a well-funded position to implement them in the first place.
  • And you also need to have committee approval to deploy overlays.

Underfunded plans, meanwhile, now face big decisions to make regarding the timing of moves to rebalance toward equities or otherwise re-risk.

Recreating a “pension” option for DC plans. Traditional annuities offered by insurance companies have earned a bad reputation, yet employees who retire fear running out of money more than they do dying.

  • Employers should, therefore, look to offer DC plan participants retirement income certainty options to keep retirees in their plans and
  • Work with the investment and insurance community to design better solutions. 
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Antony Michels
In Capital Markets, COVID-19

Good Timing: Blowout Bond Deals Before and After the Meltdown

Two debt issues show the benefits of both planning and flexibility when tapping capital markets.

Investors clamoring for highly rated corporate bonds before the financial-market meltdown began in late February and again in early May provided opportunities for issuers to do debt deals at very attractive terms under different circumstances. Two members of NeuGroup’s Assistant Treasurers’ Leadership Group discussed with peers the key factors and market dynamics driving their companies’ deals.
 
The similarities. Each company’s offering, one at the start of 2020 and the other in early May, was oversubscribed by several multiples.

  • Each deal saw spreads inked well below initial price talk.
  • Both companies are in the technology sector and their deals may have benefited from investor demand following a dearth of tech offers in 2019. 

Two debt issues show the benefits of both planning and flexibility when tapping capital markets.

Investors clamoring for highly rated corporate bonds before the financial-market meltdown began in late February and again in early May provided opportunities for issuers to do debt deals at very attractive terms under different circumstances. Two members of NeuGroup’s Assistant Treasurers’ Leadership Group discussed with peers the key factors and market dynamics driving their companies’ deals.
 
The similarities. Each company’s offering, one at the start of 2020 and the other in early May, was oversubscribed by several multiples.

  • Each deal saw spreads inked well below initial price talk.
  • Both companies are in the technology sector and their deals may have benefited from investor demand following a dearth of tech offers in 2019. 

Thinking ahead pays. With existing bonds maturing over the summer and volatility likely as November elections neared, the first issuer decided that refinancing early was prudent. Had it waited a few months, the combination of blackout periods and the market impact of the coronavirus could have derailed its efforts.

So does flexibility. The second issuer had planned to refinance at year-end 2020 an existing deal maturing in summer 2021. Then it drew down its revolver in March, prompting a rethink. A lesson learned, the issuer’s AT said, was “be quick and flexible enough to react to market changes.”

  • Equities rallied and credit spreads tightened in April in response to the Federal Reserve’s aggressive efforts to stabilize markets and fiscal stimulus.The company filed its 10-Q at month’s end, a week after its earnings, to give investors time to read disclosures, especially regarding COVID-19.
  • The offering prospectus noted explicitly that proceeds were to pay down the revolver and refinance existing bonds, reassuring investors.

ESG talk helps. The first issuer’s bond wasn’t a sustainability bond, but slides in its NetRoadshow presentation discussed the company’s ESG footprint, and the CFO and treasurer explained its ESG initiatives during investor calls.

  • “That allowed us to draw a more diversified group of investors,” the AT said.  

Rewarding book runners. When assigning active book-runner positions, the first issuer prioritized help it had received on capital structure and allocation issues—beyond the banks’ normal treasury-operations services.

  • The second issuer chose active book runners from the first tier of its bank group and appeased a tier-one member that didn’t get that lucrative position by giving it the swap-manager role. “We typically would have unwound [the forward-starting swaps] ourselves, but we gave them that business,” the AT said.  

Saving money. The second issuer informed banks that it planned to pay down the revolver and asked them to waive the “breakage fee” for drawing on the bank facility. “Since we were dangling the bond economics, it gave them incentive to waive those fees,” the AT said.

  • The first issuer saved interest expense by stating the transaction size of its deal would not exceed what was initially announced, allowing the bookrunners to tighten pricing and get the best terms possible for the company.

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Antony Michels
In Capital Markets, COVID-19

Aligning Investment Strategy With the Shape of the Economic Recovery

Investment managers hear Neuberger Berman’s bull, bear and base case scenarios and the outlook for credit markets.

The best path for some fixed-income investors amid the uncertainty created by the pandemic may be to follow the lead of the Federal Reserve and buy assets that the US central bank is buying to keep credit markets liquid. That was among the key takeaways about asset allocation at a NeuGroup virtual meeting of treasury investment managers in late April sponsored by Neuberger Berman.

Bull, bear or base case. Neuberger Berman shared with members its investment playbook, which lays out three scenarios for economic recovery:

Investment managers hear Neuberger Berman’s bull, bear and base case scenarios and the outlook for credit markets.

The best path for some fixed-income investors amid the uncertainty created by the pandemic may be to follow the lead of the Federal Reserve and buy assets that the US central bank is buying to keep credit markets liquid. That was among the key takeaways about asset allocation at a NeuGroup virtual meeting of treasury investment managers in late April sponsored by Neuberger Berman.

Bull, bear or base case. Neuberger Berman shared with members its investment playbook, which lays out three scenarios for economic recovery:

  1. Base case: “U-shaped” recovery
  2. Bull case: “V-shaped” recovery
  3. Bear case: “L-shaped” recovery

Medical, not economic. One of the Neuberger Berman presenters called the bull case somewhat “implausible,” while another said that investors betting on the bear case should definitely “follow the Fed.” The scenario that ultimately plays out, he said, will be determined more by “medical” facts than traditional economic forces. He added that watching what happens in countries farther along the coronavirus curve than the US will indicate whether the recovery is W-shaped, following second waves of infections.

Update: differentiation. In mid-May, Neuberger Berman’s asset allocation committee (ACC) wrote in a report that “after ‘following the Fed’ in the wake of the central bank’s interventions in credit markets, investors appear to have moved quickly to differentiate the strong from the vulnerable, reminding us of the importance of robust fundamental research in the current environment.”

What to do now. Following the meeting, one of the presenters said the following when asked for advice for corporate treasurers looking to add yield:

  • Extending maturities modestly makes sense as we think the Fed will be on hold for a significant period.
  • Although they have tightened off the [widest spreads], things like AAA-rated ABS, CMBS, and mortgage product make sense.
  • Although riskier, we like AAA-rated CLOs and short duration investment grade corporate securities as well.

Retracement but value. At the meeting, the presenters said that although spreads had tightened significantly on high-quality corporate debt, valuations remained attractive, a point reiterated by Neuberger Berman’s fixed income strategy committee in a subsequent report. It stated that weak economic growth will create challenges for pockets of credit markets—amid strong central bank support.

  • “The combination of these two ideas leaves us focused on high-quality fixed income investments, which in our view have substantial upside even after the recent retracement in markets. A world of zero yields will ultimately drive investors toward quality investments that are supported by global central banks,” the committee wrote.

Pretty bullish. In a follow-up discussion, one of the presenters said Neuberger Berman thinks “this can be an environment where credit spreads and risk assets reach pretty bullish outcomes.”

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Antony Michels
In COVID-19, Risk Management

Risk and the Butterfly Effect on Supply Chains Amid COVID-19 

What small issue now can turn into a larger risk later? And how far away is later?
 
Can a small slipup in the supply chain—such as the inability to get a small part—create a bigger risk down the line? That example of the butterfly effect in action is what one member of NeuGroup’s Corporate Enterprise Risk Management group says he and management have been thinking about lately. The issue, like many things in business these days, is that COVID-19 adds a new and unpredictable layer to forecasting.

What small issue now can turn into a larger risk later? And how far away is later?
 
Can a small slipup in the supply chain—such as the inability to get a small part—create a bigger risk down the line? That example of the butterfly effect in action is what one member of NeuGroup’s Corporate Enterprise Risk Management group says he and management have been thinking about lately. The issue, like many things in business these days, is that COVID-19 adds a new and unpredictable layer to forecasting.
 
Scope and speed. “We’re really struggling with something happening in the supply chain” and then how big it will become and how soon it would affect the business, he said. He added that the velocity of risk, that is, how soon whatever happens in the supply chain hurts the company, is also difficult to predict in the current environment. “There are different views of this,” he said. 

  • “One group might say that if so and so happened, it would take nine months” to affect the company. “Another group may say three months.”
  • This member is also refocusing on another significant risk that has been mostly forgotten amid the pandemic: trade war. This is something that was a big supply chain concern in all of 2019, the member said, and to him, “is more serious than COVID-19.”

Risk influencer. Another topic discussed by ERM members is the idea that COVID-19 shouldn’t be considered a risk at this point, but more of a risk influencer. There are other risks that predate the pandemic and will exist going forward. The challenge now is determining how will COVID-19 impact those existing risks. 

  • One ERM member said he was trying to get management to think beyond the short term and COVID-19. As the company “gets back into the swing of things, we want management to start thinking of the long-term risks associated with COVID-19.”
  • Echoing this point, another member added that he’s also been trying to get his management to think of COVID-19 not as a “separate risk, but something that is influencing other risks.”
  • “COVID-19, yes, but let’s not forget about existing risks,” added another member.
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Ted Howard
In Capital Markets, Investment Management, Risk Management

Investment Managers Balance Need for Liquidity and Desire for Yield 

More cash and falling interest rates have some corporates weighing a return to prime funds.

Many treasury teams have plenty of cash to invest but not many places to park it that offer attractive yields. That has some of them debating whether, when and how to add risk to their portfolios while preserving capital and liquidity. The challenge is figuring out “how to optimize cash in a very short portfolio,” as one member put it. Read on to see what others said this spring at two NeuGroup virtual meetings for investment managers.

More cash and falling interest rates have some corporates weighing a return to prime funds.

Many treasury teams have plenty of cash to invest but not many places to park it that offer attractive yields. That has some of them debating whether, when and how to add risk to their portfolios while preserving capital and liquidity. The challenge is figuring out “how to optimize cash in a very short portfolio,” as one member put it. Here’s some of what others said this spring at two NeuGroup virtual meetings for investment managers:

  • “We’re evaluating different alternatives to pick up yield without commensurate risk—there’s not a lot of low-hanging fruit,” one assistant treasurer said. “We don’t want to get too far out over our ski tips. It’s a struggle—there’s no playbook in terms of where we’re headed here.”
  • Another member asked what others are doing “to capture extra yield” given that rates at the front end of the yield curve are near zero. “I struggle with that,” responded one of his peers. “I can go out six months and get 30 basis points; is it worth it?”
  • Another investment manager said his team is “balancing liquidity for the firm with taking advantage of dislocations.”

Raising capital. The economic uncertainty created by the pandemic sent many corporations racing to the capital markets to boost liquidity by issuing debt in record amounts in March and April. One member’s company raised more than $10 billion in two bond offerings. “Now we have to manage the cash,” he said, a reality mentioned by several members whose companies had done debt deals.  

Time for prime? After huge outflows sparked by the pandemic, prime funds more recently have seen inflows and increased interest by NeuGroup members who dumped them to put cash in government and treasury money market funds (MMFs). The Federal Reserve’s backstop, the Money Market Mutual Fund facility (MMLF), gave some investors more peace of mind about credit risk.

  • One member with cash to invest after raising capital asked if any of his peers had done “anything to find yield” and whether there was an “easy yield pickup” between prime and government MMFs.
  • “We are in prime funds,” another member said later. “We find the yield benefit attractive currently and do not have operational issues supporting the NAV movements. We ‘diligence’ prime fund managers thoroughly before investing in any particular fund to ensure we are OK with their credit process.”  
  • Another member, who is not back in prime funds or LVNAV funds in Europe, is considering them now, in part because he likes their yields relative to bank deposits, saying he views the risk of deposits “the same or worse” as prime funds. He’s evaluating:
    • Performance of the fund before, during, and after “what has so far been the peak of the market dislocation.”
    • The fund’s NAV, size, any gates or fees imposed and any recapitalizations.
    • “We will also look at things like the Fed’s MMLF to see how that may help in case there is a market ‘flare-up’,” he said.

Enhanced money market fund.  One participant who is not invested in prime MMFs raised the interest of peers by describing an enhanced MMF she manages internally that allows her to “go out three years floating, 18 months fixed” and invest in BBB credits. Over a six-year period, she has outperformed prime funds by about 40 basis points. And the icing on the cake: “I don’t charge 15 basis points.”

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Ted Howard
In Risk Management, Technology

Aligning Risks to Inculcate Risk Awareness

How one company’s ERM team is raising risk awareness and its own profile by organizing the firm’s sprawling risks.

Sometimes the best way to add importance to your function is to look to the top. To management, that is. This was what one company’s enterprise risk management team did to accomplish two things: help organize the company’s risks and add a level of seriousness to the function itself.

The head of this ERM team recently described, at NeuGroup’s Corporate ERM Group’s annual meeting, how he and his colleagues went about this task of organizing and legitimizing.

How one company’s ERM team is raising risk awareness and its own profile by organizing the firm’s sprawling risks.

Sometimes the best way to add importance to your function is to look to the top. To management, that is. This was what one company’s enterprise risk management team did to accomplish two things: help organize the company’s risks and add a level of seriousness to the function itself.

The head of this ERM team recently described, at NeuGroup’s Corporate ERM Group’s annual meeting, how he and his colleagues went about this task of organizing and legitimizing.

  • The member said that when he took over the role of head of risk management at the company, “ERM was a board reporting exercise; it was muted.” But then the board, in its desire to improve at oversight, decided it wanted to get a better handle on the company’s risks.

Simplifying. The member said his team started with the twin goals of simplifying and optimizing. “Simplification,”  he said, was “near and dear” to his company’s heart. This involved getting a better and more holistic view of enterprise risks and applying a strategy that assigned risks to business lines or individuals and allowed a better way to share results, standardize risk scoring, clarify risk definitions and roles, and leverage technology.

Whose risk is it? One of the first issues was identifying who owned what risk. “We don’t have a lot of roles that are ‘risk managers’ or ‘risk champions.'” ERM developed a risk council, which was comprised of people from different parts of the business. The council was given heft by drafting “a leader that was high up in the organization to help navigate and get people more engaged.” There is now active engagement across the company as well as a program that is a good balance of time, commitment and resources for all involved. 

Aligning on tech. There is also good alignment on methodology and what technology to use. The member said that the technology search has been getting momentum from other functions that have an interest in ultimately sharing it. “More groups are pricking up their ears as we get closer to a tool selection,” he said. This is beneficial because it will allow ERM to share the cost with whichever function decides to partner with it.

Sharing the news on risk. The final step will be how to share any findings on risk and spread the word across the business. This includes creating a forum for problem-solving and sharing information on risk, where to focus mitigation efforts and aligning the messaging to leadership. 

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Antony Michels
In Banking, Technology

Pandemic Raises the Stakes for Banks to Double Down on Digital

Digital banking is speeding up, and banks not getting ahead of the trend will be left behind.

Now is the time for all good bankers to embrace digital banking—or risk being left behind as the pandemic accelerates a trend that was gaining momentum well before the arrival of COVID-19. Engaging with digital now is also smart because the barrier to entry is relatively small and the returns can be significant. Those were among the insights from a presentation at a recent virtual meeting of NeuGroup’s Bank Treasurers’ Peer Group.

  • “This was a shift that was going to take years, but now that timeline has sped up,” a digital banking analyst at the meeting said. “It is now compressed into a matter of months.” He also said that “social distancing will reformat bank branches,” so there will be fewer visits to brick and mortar banks, which means banks, like many companies during the pandemic, should consider shrinking their footprints.
  • “There won’t be people walking through the door,” the bank analyst said. And contactless payments will continue to grow. “Cash is one of the dirtiest things you can touch these days,” he added.

Digital banking is speeding up, and banks not getting ahead of the trend will be left behind.

Now is the time for all good bankers to embrace digital banking—or risk being left behind as the pandemic accelerates a trend that was gaining momentum well before the arrival of COVID-19. Engaging with digital now is also smart because the barrier to entry is relatively small and the returns can be significant. Those were among the insights from a presentation at a recent virtual meeting of NeuGroup’s Bank Treasurers’ Peer Group.

  • “This was a shift that was going to take years, but now that timeline has sped up,” a digital banking analyst at the meeting said. “It is now compressed into a matter of months.” He also said that “social distancing will reformat bank branches,” so there will be fewer visits to brick and mortar banks, which means banks, like many companies during the pandemic, should consider shrinking their footprints.
  • “There won’t be people walking through the door,” the bank analyst said. And contactless payments will continue to grow. “Cash is one of the dirtiest things you can touch these days,” he added.

Growing pool. Another presenter, a bank treasurer, pointed out that the pool of potential clients for digital is growing, particularly in the health care space. Doctors and dentists are increasingly processing payments digitally and want to borrow online to expand their businesses. Another reason to act now: nonbank competitors.

  • “Amazon is becoming more bank-like,” the presenter said. The online retailer is “able to use vendor information to offer loans and financing. How can we tap that?”

Bottom line. Bankers at the meeting also heard that current technology solutions help level the playing field for regional banks. “We’re not a G-SIB,” the bank treasurer said, referring to the behemoth global systemically important banks. “So, this was an opportunity to buy and get in,” he said of his own bank’s entry. There are good verticals, he added, and the volume of business could mean a big increase in bank revenue.

  • He also said that nearly 90% of all banking is now done digitally, so there’s almost no choice. “Investing in digital infrastructure is paying benefits,” so “if you’re not focusing on digital, you’re missing out.”

More takeaways:

  • Shift in customer service. The digital bank analyst said that in addition to investing in tech, banks will need to hire more customer service staff. Digital banks are seeing a “huge influx of calls into call centers during the crisis,” he said.
  • Saying no. Customers are resisting paying for certain bank services. “They don’t want to pay fees; checking fees and for other services,” the analyst said. Also, digital banks have been waiving fees for early withdrawal on CDs.” The good news is that lower overhead with digital means banks would be able to waive some fees.
  • Reality check. It’s easier said than done for regional banks to digitize their entire product set. Online deposit gathering is very rate driven, and not a reliable source of funds. Loan origination online takes work, particularly if you want to digitize the whole customer journey through the interfaces with back-end systems.
  • Keep trying. Nonetheless, some members report success, competing with the likes of Chase, which has much bigger systems overhead than almost anyone else. This also eats up a significant portion of their tech spend advantage. Being smaller and agile helps. Members also report success with targeted acquisitions.
  • No more wet signature? The digital wave also may be the end of e-signatures, the bank treasurer said. “Will the Federal Reserve keep accepting e-signatures? Banks have temporarily allowed it; will they go back? I don’t think so.”
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Antony Michels
In Technology, Treasury Management

Lessons Learned From a Major Treasury Integration and Enhancement

Consultants and lots of testing may pay off for corporates picking a single TMS following an acquistion. 

The merger of two large technology companies resulted in a highly ambitious integration and upgrade of numerous treasury functions and systems, and provided lessons for one NeuGroup member about setting realistic goals and the value of rigorous testing.
 
TMS timing. The member, who worked through many long days during the process, walked peers through the decision-making and implementation steps. The acquired company went live on Reval just as the merger closed; the other company had put on hold upgrading its FIS systems, Quantum and Trax, in light of the anticipated acquisition.
 
Time-intensive. The first step was to decide which treasury management system (TMS) would best suit both companies. This involved:

Consultants and lots of testing may pay off for corporates picking a single TMS following an acquistion. 

The merger of two large technology companies resulted in a highly ambitious integration and upgrade of numerous treasury functions and systems, and provided lessons for one NeuGroup member about setting realistic goals and the value of rigorous testing.
 
TMS timing. The member, who worked through many long days during the process, walked peers through the decision-making and implementation steps. The acquired company went live on Reval just as the merger closed; the other company had put on hold upgrading its FIS systems, Quantum and Trax, in light of the anticipated acquisition.
 
Time-intensive. The first step was to decide which treasury management system (TMS) would best suit both companies. This involved:

  • Members from the two treasury teams traveling back and forth between offices (yes, pre-coronavirus).
  • The completion of multiple vendor demos.
  • The involvement of 30 business workstreams.
  • 70 senior management executives engaging in more than 80 meetings.
  • The IT team logging more than 600 hours on the assessment project alone. 

And the winner is… “At the end of the day, we consulted with our top management, took a very deep dive in terms of strategic attributes and requirements, and FIS bubbled to the top,” the member said. But he emphasized that this was the best choice for them based on the specifics of the company and not necessarily the best choice for others. The real takeaway was the thoroughness of the selection process.
 
More moves. In addition to consolidating the two treasury functions under a single TMS, the companies migrated service bureaus to FIS and adopted the most recent versions of Trax and Quantum. The first year was taken up with planning, including scoping the FIS project, prepping for upgrades and user-acceptance testing (UAT), testing scripts and bank engagements. The meat of the project went live in 2019, with planned enhancements to hedging accounting, eBAM and bank fee tools.
 
The company learned important lessons: 

  • Consultants add value. In addition to devoting significant in-house resources, the companies tapped consultancies. Treasury Strategies helped conduct the RFP of TMS vendors, and Deloitte and TSI Consulting were retained to help determine which technologies best suited the two treasury groups, each with different functions and approaches to employing technology.
    • The consultancies already have the test scripts and can point to the strengths and weaknesses of different vendors. “So even though you have to pay them, it saves time in the end,” the member said, adding that the extra layer of resources comes in handy when the business side doesn’t have time to do the necessary testing. 

Testing, testing, testing. The company tested its work six times over six weekends in the first half of 2019. “All the testing, all the time, did pay off,” the member said. “We found multiple problems in our practice go-lives, and those were rung out of the system. So when we went live it was almost flawless.”

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Antony Michels
In Accounting & Disclosure, Capital Markets

Treasury’s CECL Conundrum: How to Estimate (and Define) a Credit Loss

Treasury investment managers trying to get a better handle on FASB’s new methodology for estimating credit losses got some help this month at two NeuGroup virtual meetings. No surprise, the issue of how exactly to estimate those losses generated plenty of interest. 

  • One of the meetings featured a presentation from EY that included the slide below. It lays out three criteria used to adjust historical loss information to develop a loss estimate. EY’s presenter said that coming up with a “reasonable and supportable forecast” is the tricky part, especially given the uncertainty created by the pandemic.
  • One member commented that while the slide is simple, “the definition of a credit loss is where I have an issue.” Like other members, he underscored the difficulty of determining what portion of an unrealized loss is related to credit as opposed to other factors, including liquidity. “I have a problem actually calculating that,” he said.
  • EY’s presentation made the point that CECL requires “the use of more judgment and is expected to increase earnings volatility.”

Treasury investment managers trying to get a better handle on FASB’s new methodology for estimating credit losses got some help this month at two NeuGroup virtual meetings. No surprise, the issue of how exactly to estimate those losses generated plenty of interest. 

  • One of the meetings featured a presentation from EY that included the slide below. It lays out three criteria used to adjust historical loss information to develop a loss estimate. EY’s presenter said that coming up with a “reasonable and supportable forecast” is the tricky part, especially given the uncertainty created by the pandemic.
  • One member commented that while the slide is simple, “the definition of a credit loss is where I have an issue.” Like other members, he underscored the difficulty of determining what portion of an unrealized loss is related to credit as opposed to other factors, including liquidity. “I have a problem actually calculating that,” he said.
  • EY’s presentation made the point that CECL requires “the use of more judgment and is expected to increase earnings volatility.”

Models. One EY presenter said the length of time the CECL process takes depends in part on what model corporates use to estimate losses. At another meeting, presenters from Aladdin—which offers risk management software tools and is owned by BlackRock—described three sources for coming up with “CECL numbers.” They are:

  1. Asset Managers. Aladdin advises asking if money managers are able to provide CECL- compliant numbers and to consider whether differences in loss modeling approaches between managers are acceptable. One member got silence after asking peers at the meeting if they had had any luck getting CECL information from external asset managers. Another member reported no luck after asking Clearwater.
  2. Internal Processes. Determine whether you have internal models that you can use as-is or if you need to make adjustments. And do you have in-house expertise for all asset classes? Are all the right teams involved?
  3. Vendor Solutions. Aladdin, which offers CECL modelling services to corporates, recommends assessing the quality of a firm’s asset coverage, asking whether it supports end-to-end workflow, including integration with accounting platforms, and asking whether the corporate can selectively override the vendor’s model settings if treasury has a different view.
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Antony Michels
In Technology, Treasury Management

Treasurers Are Making the Most of Zoom and Microsoft Teams

The buzz: Zoom’s security improves, Teams may help IT governance, and more access to Bloomberg.
 
Virtual meetings have been a godsend to corporate treasury executives sheltering in place, despite occasional glitches. In a recent Zoom meeting, NeuGroup members exchanged valuable tips about making their virtual interactions more efficient and effective.
 
Kudos for Teams. A few participants using Microsoft Teams while working from home heaped praise on the solution. Responding to requests to elaborate, one member called it “absolutely superb for team working,” because it allows audio and video calls but also enables colleagues to work simultaneously on Excel spreadsheets and other Microsoft 365 applications.

The buzz: Zoom’s security improves, Teams may help IT governance, and more access to Bloomberg.
 
Virtual meetings have been a godsend to corporate treasury executives sheltering in place, despite occasional glitches. In a recent Zoom meeting, NeuGroup members exchanged valuable tips about making their virtual interactions more efficient and effective.
 
Kudos for Teams. A few participants using Microsoft Teams while working from home heaped praise on the solution. Responding to requests to elaborate, one member called it “absolutely superb for team working,” because it allows audio and video calls but also enables colleagues to work simultaneously on Excel spreadsheets and other Microsoft 365 applications.

  • “And there’s a very efficient follow-up mechanism—give someone a task, and they automatically get emails until they’ve completed it,” he said. 

Curbing shadow IT. Free technologies such as Microsoft Teams can fall outside a company’s IT toolkit and governance framework—so-called “shadow IT.” A cybersecurity expert at the meeting said Teams runs on a Microsoft SharePoint backbone, so the corporate IT people supporting SharePoint can control access.

  • “They can impose some degree of governance on the Teams environment,” he said. 

Zoom news. Zoom remains the go-to virtual meeting service but raises security concerns, such as “Zoom bombings” when hackers disrupt confidential meetings.

  • The April 27 release of Zoom 5.0, the expert said, provides significant security enhancements.
  • “Don’t be surprised in the next weeks or months when you see a very aggressive advertising campaign by Microsoft to ditch Zoom and get on to Teams,” the security expert said. 

Bloomberg: additional access. There is no need for one person to take on all Bloomberg terminal responsibilities for the group. A member noted that Bloomberg’s Disaster Recovery Services (DRS) allows multiple users to access a terminal subscription from different computers—one at a time, similar to an actual terminal.  

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Antony Michels
In Capital Markets, ESG, Investment Management

ESG: A Leading Indicator of Quality for Federated Hermes

The asset manager believes an active ownership approach to responsible investing is how to navigate this market.

“ESG Investing Shines in Market Turmoil, With Help From Big Tech,” shouted a headline in the Wall Street Journal this week. The story reports that investors put a record $12 billion into ESG funds in the first four months of 2020, according to Morningstar Direct, more than double the same period last year. And more than 70% of ESG funds across all asset classes performed better than their counterparts during the first four months of the year.

The outperformance of many ESG funds during the pandemic is helping change the minds of investors who thought they had to sacrifice returns to invest responsibly, said Martin Jarzebowski, director of responsible investing at Federated Hermes, speaking at a roundtable this week. He expects the interest in sustainable investing to grow as more investors see the value in screening for ESG factors. 

The asset manager believes an active ownership approach to responsible investing is how to navigate this market.

“ESG Investing Shines in Market Turmoil, With Help From Big Tech,” shouted a headline in the Wall Street Journal this week. The story reports that investors put a record $12 billion into ESG funds in the first four months of 2020, according to Morningstar Direct, more than double the same period last year. And more than 70% of ESG funds across all asset classes performed better than their counterparts during the first four months of the year.

The outperformance of many ESG funds during the pandemic is helping change the minds of investors who thought they had to sacrifice returns to invest responsibly, said Martin Jarzebowski, director of responsible investing at Federated Hermes, speaking at a roundtable this week. He expects the interest in sustainable investing to grow as more investors see the value in screening for ESG factors. 

  • “There is a correlation between ESG leaders and lower volatility and more consistent profits,” he said. “ESG is a new quality factor—ESG leaders are additive to performance.”

Federated Hermes is doing its part to spread the word and get more businesses to engage in sustainability-focused risk management during the crisis and beyond. The company, a pioneer in active engagement, has pushed “stewardship” for investment managers for well over a decade and has a dedicated team, called EOS, that actively engages directly with company boards and executives. 

  • “EOS’s mission is to engage in a collaborative dialogue with corporate issuers to better understand material ESG risks and advocate for positive change,” Mr. Jarzebowski wrote in a recent blog post. “These dedicated engagers are ESG subject-matter experts who complement the fundamental research of Federated Hermes investment teams across all asset classes.”

The firm’s deep understanding of financially relevant ESG factors helps Federated Hermes’ global portfolio managers to assess the underlying quality of the companies in which they invest. And that, Mr. Jarzebowski argues, gives the company an edge against passive investing, which does not take the same approach.   

  • “By incorporating forward-looking ESG insights into our active investment process, we think we can better assess where the puck is headed relative to passive indexes, which are mostly judging quality through a rearview mirror,” Mr. Jarzebowski wrote.

Federated Hermes will share its insights on sustainable investing and how ESG can fit your company’s strategy in a webinar hosted by NeuGroup on June 9, 2020. Register for it here. 

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Antony Michels
In Banking, Technology

Pandemic Pushes Some Companies Away From Checks, Toward Real-Time Payments

U.S. Bank sees more clients opting for RTP in a bid to gain control and improve forecasting.

The COVID-19 pandemic appears to be persuading more companies to consider abandoning paper checks and start using electronic payment rails to pay bills — even though many corporate treasurers do not view speed as a major incentive to switch. That insight emerged during a presentation by U.S. Bank at a recent NeuGroup meeting it sponsored. 
 
Old, suboptimal habits in the US. Here’s some context for where US business stands now: Companies with $1 billion or more in revenue still make 39 percent of payments with checks, and the figure is higher for smaller companies, according to the Association of Financial Professionals’ 2020 Payments Fraud and Control Survey.

  • Among payment methods, checks are the most susceptible to fraud.
  • Forty-four other countries already have instant, electronic payment methods. 

U.S. Bank sees more clients opting for RTP in a bid to gain control and improve forecasting.

The COVID-19 pandemic appears to be persuading more companies to consider abandoning paper checks and start using electronic payment rails to pay bills — even though many corporate treasurers do not view speed as a major incentive to switch. That insight emerged during a presentation by U.S. Bank at a recent NeuGroup meeting it sponsored. 
 
Old, suboptimal habits in the US. Here’s some context for where US business stands now: Companies with $1 billion or more in revenue still make 39 percent of payments with checks, and the figure is higher for smaller companies, according to the Association of Financial Professionals’ 2020 Payments Fraud and Control Survey.

  • Among payment methods, checks are the most susceptible to fraud.
  • Forty-four other countries already have instant, electronic payment methods. 

The new normal. With most corporate mailrooms functioning minimally, businesses are trying alternatives to checks, including a system from The Clearing House called Real Time Payment (RTP), which U.S. Bank trailblazed as one of the earliest adopters.

  • “Over the last month we’ve seen the greatest number of clients opting for RTP,” said Anuradha Somani, a payment solutions executive in global treasury management at U.S. Bank. 
  • The timing is ripe, she said, since electronic payment rails have emerged that enable transactions to carry much more data, improving working capital, security, and analytics such as cash-flow forecasting.  

“Just in time” payments. Meeting participants agreed that payment speed was not the only priority, and Ms. Somani said that RTP’s key improvement is flexibility and control – meaning, no longer initiating a payment today and having to wait one or two days for settlement.

  • “It’s the ability to control payments at the precise time you want,” she said, noting that such control and the irrevocability of incoming RTPs, available 24/7/365, can dramatically improve cash forecasting. 
  • The treasurer of a major industrial company said, “What intrigues me is if I can have better information, and there’s something truly analytical about this to help enhance forecasting abilities.”

Data continuity: John Melvin, working capital consultant at U.S. Bank, called RTP “the biggest payments infrastructure change in the last 40 years.”  That change is the extensive data that transactions carry through the RTP network of connected banks.

Data-light ACH payments often receive remittance information through outside methods such as email or fax, which often requires searching for a payer’s identity in order to post the transaction. RTP’s request for payment (RFP) function instead allows billers to alert customers that payments are due by sending a message containing all the relevant biller information, facilitating reconciliation.

  • Because RFP-prompted payments require payers’ approval, they dramatically reduce fraud, and “models can be created to reconcile payments, eliminating the need for shared service centers purposed for reconciliation,” Melvin said.

While the pandemic is likely to be one of the most challenging crises businesses will ever face, proactively taking stock of payments strategy can help plan for the future, according to U.S. Bank. And it says that no matter what the initial driver is – the pandemic, speed, data, superior control or the ability to forecast better, faster payments are here to stay. 

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Antony Michels
In Compliance, Risk Management

ERM’s Profile Rises as Boards Focus on Risk Oversight Role

Corporate boards are taking their oversight mandate more seriously; that’s why they need ERM.

Today’s corporate boards need to fully understand the risks a company faces as well as their relevance to its strategy and risk appetite. That’s been the case since 2009 when the SEC started requiring disclosure of a board’s role in risk oversight, including the qualifications of its members and a description of how the board administers its oversight function.

  • The risks revealed by COVID-19 make this a good time to probe how enterprise risk managers fit into this picture.

Corporate boards are taking their oversight mandate more seriously; that’s why they need ERM.

Today’s corporate boards need to fully understand the risks a company faces as well as their relevance to its strategy and risk appetite. That’s been the case since 2009 when the SEC started requiring disclosure of a board’s role in risk oversight, including the qualifications of its members and a description of how the board administers its oversight function.

  • The risks revealed by COVID-19 make this a good time to probe how enterprise risk managers fit into this picture.

ERM’s role. ERM can help the board fulfill its mandate and gain satisfaction that the right risks are being addressed. That was among the takeaways from a discussion led by Dr. Paul Walker, executive director of the Center for Excellence in ERM at St. John’s University. It is the ERM function that can collate all the risks of the company and drill down to the most important ones. 

  • Dr. Walker added that practitioners can provide the satisfaction the board is looking for by benchmarking with peers and uncovering possible risks through conversations and other interactions with company managers. This risk discovery process helps ERM to map the connected risks of the company. Dr. Walker said ERMs should take those connected risks and “boil them down to a story.” It’s more art than science, he admitted, but it can be done. 

Ultimately, Dr. Walker said, these efforts will further arm ERM with the right answer when the board eventually asks: “How do we know we’re looking at the right set of risks?”
 
Here are some of Dr. Walker’s recommendations for engaging with the board:

  • Know the laws. Corporations have a growing list of requirements on risk and governance best practices. This is a chance to show your risk expertise.
  • Don’t go overboard. Some ERMs can give too much information or create big presentations; boards and presenters can end up in the weeds. The truth of the matter is, ERM will probably get 15 minutes in front of the board or even a subcommittee (i.e., risk committee), so make it concise.
  • Whisper campaign. With that brief amount of face time, try sharing any other risks concerns with colleagues. If those colleagues are going to report to the board, whether they be audit or other compliance functions, “whispering” the issues to them can help. “Maybe they’ll mention it to the board in their report,” Dr. Walker said.
  • Know your audience. Dr. Walker said getting to know the board, what they read, what they want or expect, can be especially useful. Who likes data? Who likes reports? Who likes visuals? This will require a bit of sleuthing on the part of ERM.
  • Ahead of the curve. More gumshoeing here: Stay ahead of the board’s expectations and questions.

In the end, Dr. Walker said, “Don’t give vanilla if they want chocolate chip cookie dough.”

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Antony Michels
In Banking, Technology

The Challenges for Corporates of Nonbank Payments

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

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

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

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

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

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

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

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

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Ted Howard
In Accounting & Disclosure, Capital Markets, FX, Risk Management

Crisis Forces Consideration of Unwinding Cash-Flow Hedges

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

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

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

 

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

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

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