Insights

Peer-Validated Insight Distilled by NeuGroup

Sign up to get NeuGroup Insights by email—and share what you learn.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  • A vanilla put strategy (option to sell foreign currency/buy dollars) would provide the best trade-off between volatility and incremental cost (the payment of a premium is part of the cost of the strategy, like the carry cost of the forward strategy).
  • A collar (combination of a purchased option and a sold option to reduce the overall cost of the hedge) with sufficiently low delta would likely deliver the best P&L and hedge level in a multi-year USD weakening trend; but would come with some increased volatility.
1
0
Read More Read Less
Contact Us
1
0

Scoring With Single Sign-On and Bank Portal Rationalization

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

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

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

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

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

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

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

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

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

  • One issue is how to customize access to the TMS and balance what users want with security concerns. “What if we don’t want to share all that info with an entity?” she asked.
  • The presenter said his company’s TMS can restrict users by bank account, entity or time period. “We had to create a complex set of profiles” to account for segregation of duties and the need to restrict access to initiate payments. “It is a lot of work,” he said.
0
0
Read More Read Less
Contact Us
0
0

Pandemic Stokes Fire of Rising D&O Insurance Premiums

Corporates see no relief as insurers take a hard line on renewals amid rising fears of COVID litigation.
 
Premiums for directors and officers (D&O) insurance are surging, a pain point discussed at several NeuGroup meetings this spring, including the Tech20 Treasurers’ Peer Group and the Life Sciences Treasurers’ Peer Group.

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

Corporates see no relief as insurers take a hard line on renewals amid rising fears of COVID litigation.
 
Premiums for directors and officers (D&O) insurance are surging, a pain point discussed at several NeuGroup meetings this spring, including the Tech20 Treasurers’ Peer Group and the Life Sciences Treasurers’ Peer Group.

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

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

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

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

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

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

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

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

0
0
Read More Read Less
Contact Us
0
0

A Green Light for Tax Equity Investments in Renewable Energy

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

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

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

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

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

  • Update your view on the ROI of tax equity structures. Commenting on the cash flows from a transaction presented by U.S. Bank, one member noted that they looked more sizable than he remembered when looking into tax equity structures several years ago. This shows how the economics have improved significantly with the greater investment tax credit available, so it pays to do the math again if you have not looked at these in a while. Members confirmed that the immediate (end of year one) tax credit payback and subsequent operational cash flows make it relatively easy to meet your hurdle and do something good with renewable energy (mainly solar) tax equity investments.
  • It helps to work with a bank/broker with balance sheet. If you have your own source of funding it is easier to control the transaction while lining up investors and keeping the contractor and project moving. One member noted having a transaction fail with a broker that did not have its own funding and lost control of the project.
  • Investors needed. U.S. Bank says that there are multiples more projects needing financing than current investors in tax equity structures, so it’s a bit of an investor’s market. Also, even if the tax credits on offer though 2023 are not renewed, there is still ample time to get on board—and there is good likelihood that they will be.
Source: U.S. Bank
  • PPAs and VPPAs. Power purchase agreements (PPAs) and virtual PPAs are also a way to support renewable energy, but come with a bit more risk due to potential price fluctuations and the need to actually use the energy procured or the counterparty risk with the VPPA.  Tax equity structures tend to have a first loss guarantee by the bank to cushion performance risk.  
  • Do you have enough use of proceeds to issue in benchmark size?  When the discussion turned to green bonds, the first question was to look at your use of proceeds, including with three or more-year look backs, to see if you can justify a benchmark size issuance of $500 million or more.
  • If yes, then consider the fees/real asset economics. The second question asked was to what extent a green issuance can be justified based on the cost of issuance and pricing. All things point to the answer being yes— you can see a three to four basis point advantage to green bonds, as appetite by ESG investors and normal fixed income investors for ESG-friendly bonds is strong and growing stronger.
    • The only way to prove it without extrapolation of different tranches (green and non-green) issued at once by an issuer or by backing out the new issue premium differential from how green bonds trade in the secondary markets is for someone to issue a 10-year green bond and 10-year non-green bond of the same amount simultaneously.
    • One member said he would do that if bank underwriting fees were discounted to help him do it. These fees can be a bit higher because there is a bit more work on the part of the bank underwriter. There are also specialty accounting/audit fees to consider and those of a specialty ESG rater.
0
0
Read More Read Less
Contact Us
0
0

Keeping That Resilient Posture Post-Pandemic

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

0
0
Read More Read Less
Contact Us
0
0

Managing Bank Balance Sheets in a Low Yield Environment

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  • “Our bank is trying to be disciplined and mechanical,” said one member who was reviewing whether to “unwind and reposition things” in case rates go below zero. The sponsors added that their bank was “trying to be disciplined and mechanical” about the market.” 
0
0
Read More Read Less
Contact Us
0
0

NeuGroup for Retail Treasury Pilot Series Wrap-Up

Customer paying using mobile phone

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

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

By Joseph Neu

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

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

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

The haves:

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

The have-nots:

  • Pretty much everyone else.

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

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

It was a fitting way to celebrate Juneteenth, however.

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

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

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

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

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

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

  • Without the ability to make change–given the cost of electronic payments on small-ticket sales and the number of customers who prefer or can only pay in cash– stores processing face-to-face payment at the point of the sale have had to scramble to cope with yet another issue detrimental to their business.
  • The state of play in the US with point-of-sale payments is an embarrassment and we should all do more to ensure that we don’t let it stand as it does.
0
0
Read More Read Less
Contact Us
0
0

COVID Boosts Contactless Payments, Revealing Retailer Frustrations

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

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

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

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

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

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

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

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

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

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

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

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

  • He argued that this superior level of security should mean interchange fees for mobile transactions online are the lowest paid by retailers. They’re not.
  • They’re among the highest, he said, because they are treated in most cases as any internet transaction, which is less secure than when a customer is presenting a card in a physical store or restaurant.
  • That there is no correlation between the fees charged and the relative level of security doesn’t make sense to this treasurer.
0
0
Read More Read Less
Contact Us
0
0

Pandemic Pushes Companies to Digitize Processes, Prioritize People

Treasurers at tech firms push to abandon legacy processes while focusing on keeping teams connected.
 
Many tech companies during the pandemic have been able to announce that they will not lay anyone off during the crisis—and have been able to keep their promise.
 
Unfortunately, that’s not universally true—some businesses have been particularly hard hit and have had to furlough or cut staff, and consequently do more with less. This prompted a hard look at projects and their prioritization for many members of NeuGroup’s Tech20 Treasurers’ Peer Group, who met virtually in May.

Treasurers at tech firms push to abandon legacy processes while focusing on keeping teams connected.
 
Many tech companies during the pandemic have been able to announce that they will not lay anyone off during the crisis—and have been able to keep their promise.
 
Unfortunately, that’s not universally true—some businesses have been particularly hard hit and have had to furlough or cut staff, and consequently do more with less. This prompted a hard look at projects and their prioritization for many members of NeuGroup’s Tech20 Treasurers’ Peer Group, who met virtually in May.
 
Mixed emphasis. Even for those members who didn’t have to downsize their teams, there was an effort to deprioritize certain projects to avoid the fatigue that creeps into teams as the work from home (WFH) regime drags on. But there may also be projects that should be accelerated.

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

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

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

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

  • Focus on the folks. A member noted the emphasis on empathy and keeping the team feeling connected: “At other meetings, we used to talk to about systems, systems, systems, and now it’s people, people, people. And I can’t imagine losing any of my people now.”
  • When everyone’s remote, “it’s hard to recreate the ordinary dialogue you have” noted one of the RBC Capital Markets sponsors, referring to summer interns and new hires. That said, it seems that younger employees are thriving in the WFH environment and have grown more assertive; they were quieter in the office. As one member said, “On Zoom, everyone’s square is the same size.”
0
0
Read More Read Less
Contact Us
0
0

Under the Hood of the Global Payments System: Complexity

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

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

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

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

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

Put simply, there are three different sources of complexity.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

0
0
Read More Read Less
Contact Us
0
0

Obstacle Course: Cash Forecasting Challenges in Latin America 

Treasurers in Latin America are coping with the pandemic, M&A activity and working capital needs.
 
Many of the cash management challenges currently facing treasurers in Latin America are being complicated by a variety of factors, including the omnipresent COVID-19 crisis. But also in the mix is recent M&A activity in the region (think integration and its opposite, divestiture), along with difficult financing conditions affecting working capital management.
 
COVID chaos. Latin America is no exception in regions contending with the difficulties brought on by the pandemic. As in other parts of the world, work from home (WFH) processes have had to be invented on the fly and then executed.

Treasurers in Latin America are coping with the pandemic, M&A activity and working capital needs.
 
Many of the cash management challenges currently facing treasurers in Latin America are being complicated by a variety of factors, including the omnipresent COVID-19 crisis. But also in the mix is recent M&A activity in the region (think integration and its opposite, divestiture), along with difficult financing conditions affecting working capital management.
 
COVID chaos. Latin America is no exception in regions contending with the difficulties brought on by the pandemic. As in other parts of the world, work from home (WFH) processes have had to be invented on the fly and then executed.

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

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

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

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

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

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

0
0
Read More Read Less
Contact Us
0
0

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

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

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

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

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

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

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

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

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

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

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

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

  • In a follow-up call in early July, he said his views still hold in the current market and pointed to data Wells Fargo presented during the meeting to illustrate that swaps to floating make sense even when rates are flat.
  • It shows that over the last 23 years, the savings on a 5-year swap, even in an adjusted market environment where interest rates remain flat and trendless, still amount to nearly 100 basis points.
  • This may be especially relevant today given that so many companies boosted liquidity as the pandemic shut down the economy by issuing fixed-rate debt.
  • As a result, Wells Fargo’s presentation says, the liability portfolios of many IG issuers are overweight fixed-rate debt.
  • The bank also noted an “asset liability mismatch (debt versus cash/short-term investments) creating ‘negative carry drag’.”
0
0
Read More Read Less
Contact Us
0
0

Brain Game: Using Artificial Intelligence to Improve Cash Forecasting

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

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

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

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

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

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

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

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

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

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

  • ION’s research suggests that linear regression-based learning models perform well for businesses with stable, growing cash flows, but less well with cash flows subject to seasonal peaks.
    • ARIMA models perform better, but need extra modeling for seasonality while neural networks require careful attention to training data to learn from, as well as supplemental intervention when non-repeating events occur—such as global pandemics.
  • Still, you can get 90%-95% accuracy most of the time, in seconds vs a day or more using manual methods. ML for cash forecasting has the potential to be 3,000 times faster than common manual processes companies employ, according to ION.
    • Other benefits include improving accuracy, overcoming human biases, picking up anomalies that could mean fraudulent activity, and realizing monetary gains from more predictable cash positions.
0
0
Read More Read Less
Contact Us
0
0

Managing the Team Through WFH Takes Effort

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

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

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

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

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

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

First, all the BCP work pays off. Treasury’s essential focus of keeping the lights on no matter the catastrophe has long required detailed business continuity plans to ensure access to liquidity, collections capabilities and the ability to make payments away from a compromised office site. 

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

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

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

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

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

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

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

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

  • All this combined with the moratorium on layoffs have rewarded the presenting company’s management with their highest employee satisfaction numbers, despite the challenging period. 
0
0
Read More Read Less
Contact Us
0
0

Do Pensions Need to Bolster Post-Retirement Resources?

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

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

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

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

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

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

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

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

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

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

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

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

  • This means investors should prepare for future crises accordingly.
  • “Plans may need to consider adding additional tools to the toolkit, such as completion, overlay, asymmetric payoff and cost-effective downside equity risk management strategies to help ensure full funding and manage pension risks,” said Shivin Kwatra, Insight Investment’s head of LDI portfolio management in the US.
  • “We also believe investors need to focus on high quality investments to help ensure they meet their return and cash flow requirements with the highest level of certainty,” Mr. Kwatra said.
0
0
Read More Read Less
Contact Us
0
0

Preparation Pays Off for Microsoft in Debt Exchange Offer

Liability management success: Microsoft received exchange interest of $12.5B, 56% of the targeted notional amount.
 
Treasury teams managing their debt portfolios have a menu of liability management transactions to choose from, including bond tenders, open-market repurchases, consent solicitations and debt exchanges. To use most of these tools, corporates need to offer investors a reasonable amount of time to decide, ranging from five to 20 business days.

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

Liability management success: Microsoft received exchange interest of $12.5B, 56% of the targeted notional amount.
 
Treasury teams managing their debt portfolios have a menu of liability management transactions to choose from, including bond tenders, open-market repurchases, consent solicitations and debt exchanges. To use most of these tools, corporates need to offer investors a reasonable amount of time to decide, ranging from five to 20 business days.

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

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

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

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

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

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

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

1
0
Read More Read Less
Contact Us
1
0

Cash and COVID-19: A Tale of Two Companies

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  • That prompted one member to say, “The banks who gave us the hard time—we won’t give them business.”
  • On the subject of accessing money invested in term deposits, she advised peers to always look at force majeure clauses in bank agreements to make sure they are not one-sided—allowing the bank to terminate but not allowing the investor to get money back early.
0
0
Read More Read Less
Contact Us
0
0

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.

0
0
Read More Read Less
Contact Us
0
0

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.

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. 

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.
0
0
Read More Read Less
Contact Us
0
0

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. 

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. 

  • 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.
0
0
Read More Read Less
Contact Us
0
0

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.

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.
0
0
Read More Read Less
Contact Us
0
0

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.

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.

  • 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.”
1
0
Read More Read Less
Contact Us
1
0

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.

0
0
Read More Read Less
Contact Us
0
0

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.

0
1
Read More Read Less
Contact Us
0
1

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?
0
0
Read More Read Less
Contact Us
0
0
Recent Stories
Recent Stories
Recent Stories
Recent Stories
Recent Stories
Recent Stories
Recent Stories
Recent Stories