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Justin Jones In Regional, Technology

How Finance Creates Better Partnerships With Business in Asia

Lessons from finance leaders at NeuGroup meetings in Singapore highlight success factors for business partner roles.

By Joseph Neu

How to navigate finance-business partner roles and related activities in Asia—where they really matter—emerged as an underlying theme at NeuGroup meetings in Singapore last week. Here are a few of my takeaways from lively discussions with finance leaders ranging from regional treasurers to CFOs.

Translator applications. “We are a translator for global corporate strategy and business conditions in each of the regional markets,” explained one member.

It is often HQ that needs to better understand how business plans play out in each of Asia’s markets—and the extent to which each one is different.
There’s a bias to take a regional approach akin to Europe, members said. For most MNCs, Asia is 12 to 14 distinct markets.

Of course, supporting business efforts in each local market also requires finance to translate corporate goals into terms that make sense to business operations there.

If local managers don’t understand how to implement the corporate plan in their market, it won’t succeed.

Technology is a huge enabler. Translator apps on your smartphone or PC make basic communications across languages easier in the region.

Technology to interpret is only getting better.
AI, including ChatGPT, is already writing English emails for team members. This is a time-saver.

Other ways of saving time with technology from auto-reconciliation to programmable money are pulling more transactional work out of human hands so finance teams can focus more on business partner needs.

While technology is pulling more of the low-value work out of the periphery, it is also making all the data available to support business decisions in real time.

A final way technology is enabling better finance-business partnerships is with modeling scenarios for improved planning and risk identification.

Twin models offer a virtual world view of the business (e.g., its supply chains) to scenario plan and identify risks, plus test responses to support business decisions as real-world conditions change.
Predictive modeling is also proving so accurate that forecasting is no longer a pain point, especially where data is unlocked in digital businesses.

Getting to yes. The finance organization needs to fight the problem of being seen by agile business leaders as always saying no.

Enterprise-grade governance and controls—applied to new account openings, new payments currencies and new business model creations, etc.—contribute to finance being seen as blockers vs facilitators.
Countering the negative perception and getting to “yes” in support of a business transformation means finance must be extremely proactive in searching for solutions and identifying opportunities to grow before business partners ask.

Finance is still finance. All the talk of embedding finance in the business suggests that a standalone finance function may become a thing of the past. Not so, say strategic finance professionals.

Ultimately, finance still needs to be able to talk as finance with finance (it’s a line of defense on business overoptimism, etc.).
So finance leaders need reporting lines and performance goals on the right side of the control line to keep balance in the partnership.

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Justin Jones In Capital Markets, ESG

How GM Treasury Drives the Company to a Sustainable Future

GM’s aims for carbon neutrality by 2040 will rely on treasury’s contributions—from acquisitions to green bonds.

Treasury at General Motors is playing an active role and working closely with the business as the automaker moves away from producing vehicles with internal combustion engines (ICE) and pushes deeper into manufacturing electric vehicles (EVs).

Speaking at the pilot session of NeuGroup for Auto and Transportation, GM assistant treasurer Gustavo Vello described how treasury is helping the automaker achieve its strategic goals.

GM’s aims for carbon neutrality by 2040 will rely on treasury’s contributions—from acquisitions to green bonds.

Speaking at the pilot session of NeuGroup for Auto and Transportation, GM assistant treasurer Gustavo Vello described how treasury is helping the automaker achieve its strategic goals.

Joint effort, joint venture. Treasury directed the financing of three new vehicle battery-cell plants by negotiating the terms of a joint venture (JV) with LG Energy Solution (LGES) and securing a $2.5 billion loan for the JV from the US Department of Energy (DoE) under its Advanced Technology Vehicles Manufacturing program—one of the first loans closed since a 2010 deal with Tesla.

Treasury first partnered with GM’s corporate development and legal teams to negotiate the terms of the JV, called Ultium Cells LLC, including transfer price mechanisms, volume commitments and capital structure.
The loan due diligence process was extensive as GM and LGES declined to guarantee the loan (mitigating impact on the parent entities’ balance sheets and credit rating metrics), requiring the DoE to underwrite the loan based on the JV’s standalone credit risk. The DoE paid special attention to the JV’s financial projections, which were hard to calculate due to uncertainty about how quickly the market will transition to electric vehicles.
Mr. Vello said the loan from the DoE allowed Ultium Cells to borrow at “very attractive” rates based on Treasury yields compared to rates the JV could have obtained in the financial markets.
- GM’s analysis of the loan, though, extended beyond interest rates. “We considered everything: financial covenants, approval rights, and all elements that may restrict the company’s ability to effectively manage its business.”
- The process proved far more difficult than a typical loan for GM because the JV was evaluated as a new company in a new industry, whereas GM benefits from being a large investment-grade issuer.

Ensuring access to key raw materials. Globally, demand for battery raw material (BRM) has increased significantly due to projected EV production, resulting in concerns that supply deficits and elevated commodity prices could persist through 2030. That is another challenge treasury is helping address.

“As you can imagine with all the industry transition to EVs, there’s not enough raw material for everybody,” Mr. Vello said. “What’s happening right now is a race to get that capacity, and prices are really skyrocketing.”
So GM’s treasury team joined a major internal effort, working with purchasing, corporate development and legal teams to structure deals to obtain required BRM volumes at lower prices. These strategies include purchasing commitments, loans and equity investments to create or expand mining capacity in stable locations—like GM’s $650 million investment in Lithium Americas, announced last month.
- In addition to benefiting suppliers through direct investments and revenue certainty, Mr. Vello said the deals lend credibility to the smaller miners and manufacturers, “so they can raise capital more easily from other investors.”
Mr. Vello added that, though there is a market to hedge cobalt and lithium hydroxide, it’s “very young,” with low liquidity and high costs. “We expect that to improve over time as demand grows.”

Putting the pieces together. GM’s aggressive plans to eliminate emissions from most vehicles in the US by 2035 also means significant investments in assembly plants are needed. Although the company’s cash generation has been robust, treasury took advantage of favorable pricing by launching the company’s inaugural green bond ($2.25 billion) in August 2022.

GM first had to launch a sustainable finance framework that allows it to borrow funds to finance projects associated with clean transportation solutions and social initiatives. Treasury led this process, working with two bank advisors and with support from the company’s legal, sustainability and investor relations teams.
A few days after launching the framework, GM issued the green bond. “It was an excellent opportunity to communicate the GM EV story to fixed income investors and better align our capital structure and funding to our journey to zero emissions,” Mr. Vello said.

Cruising ahead. Another initiative, and one with a longer time horizon, is to realize the company’s plans to move to autonomous vehicles. After helping acquire Cruise Automation—a start-up developing autonomous driving technology—in 2016, treasury supported several capital raises from financial and strategic investors such as Softbank, Honda, Microsoft and Walmart.

Treasury contributed to those transactions by performing valuations, evaluating comparable companies, conducting cash flow analysis and contributing to capital structure and governance rights negotiations.
Treasury also worked with GM Financial to offer a $5 billion credit line to Cruise to help fund its fleet of autonomous vehicles—which will be instrumental as Cruise looks to expand its commercial operations in San Francisco, Phoenix and Austin.

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Justin Jones In Capital Markets, Cash Investments, Diversity & Inclusion, The NeuGroup Insights Interview

Empowering Diversity in Finance: Views From Two Women Bank Execs

Loop Capital’s Sidney Dillard and Sobani Warner of Siebert Williams Shank discuss their careers, working at Black-owned firms, the role of D&I coordinators and more.

Many multinational corporations in recent years have increased their commitment to hiring banks, brokerage firms and asset managers that are owned by members of minority groups—so-called diverse-owned firms. NeuGroup is committed to learning and sharing more about these firms, the people who run them and the value they bring to corporates in capital markets transactions and other activities.

Loop Capital’s Sidney Dillard and Sobani Warner of Siebert Williams Shank discuss their careers, working at Black-owned firms, the role of D&I coordinators and more.

Many multinational corporations in recent years have increased their commitment to hiring banks, brokerage firms and asset managers that are owned by members of minority groups—so-called diverse-owned firms. NeuGroup is committed to learning and sharing more about these firms, the people who run them and the value they bring to corporates in capital markets transactions and other activities.

So to celebrate Black History Month, this episode of the Strategic Finance Lab podcast features two women in senior leadership positions at two of the top Black-owned financial firms in the US: Sidney Dillard, partner and head of the corporate investment banking division at Loop Capital Markets and Sobani Warner, co-head of corporate finance at Siebert Williams Shank.
Ms. Dillard and Ms. Warner speak with Andy Podolsky, head of NeuGroup for Diversity, Equity and Inclusion, a working group for NeuGroup members, to discuss their career paths, how corporates can prioritize diverse-owned firms by providing more meaningful, active roles in capital markets transactions and more.
Listen now by heading to Apple or Spotify.

One topic you’ll hear Ms. Dillard and Ms. Warner address are so-called diversity coordinators—large investment banks that are lead managers on bond deals that some corporates appoint to help support and facilitate active participation in the transactions by diversity firms.

These coordinators can play an important role in the allocation of bonds to diverse-owned firms in a deal led by big Wall Street banks. But it’s essential, the two women agree, that corporate issuers get to know and work directly with the smaller firms, to form relationships that allow companies to understand the full capabilities of Loop Capital, Siebert Williams Shank and other diversity firms.

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Justin Jones In Banking, Cash & Working Capital, Regional

A Year of War, Sadness and Confronting Challenges Together

Finance teams come together to overcome obstacles amid sanctions, countersanctions and the exodus of banks from Russia.

By Paul Dalle Molle, NeuGroup Senior Executive Advisor

This week’s one-year anniversary of Russia’s invasion of Ukraine is a sad moment, knowing as we do that the war is raging on with no signs of ending. It also reminds us that the conflict really began in 2014 with Russia’s annexation of Crimea and the war in Donbas. It has been almost a decade of sadness over lives lost and a country being destroyed.

Finance teams come together to overcome obstacles amid sanctions, countersanctions and the exodus of banks from Russia.

By Paul Dalle Molle, NeuGroup Senior Executive Advisor

This week’s one-year anniversary of Russia’s invasion of Ukraine is a sad moment, knowing as we do that the war is raging on with no signs of ending. It also reminds us that the conflict really began in 2014 with Russia’s annexation of Crimea and the war in Donbas. It has been almost a decade of sadness over lives lost and a country being destroyed.

At NeuGroup, the anniversary presents an occasion to recall how treasury and finance teams at multinational companies adapted to the crisis, including significant obstacles around banking. And it’s an opportunity to reflect on where things stand now for corporates coping with Western sanctions and Russian countersanctions.
While the war itself grinds on, we have witnessed a significant evolution in the needs of our members. To meet those needs, a year ago we created NeuGroup for Russia-Ukraine Crisis, a community where finance practitioners could pose hard questions and openly discuss challenges and solutions on a weekly basis.
As members got more control of the situation and clarity over sanctions and business restrictions, the group moved to meeting twice a month and then monthly. Today, after some two dozen meetings, we convene on an as needed basis. The next gathering is planned for March 13. Click here for more information.

Urgent questions. Early on in the crisis, members urgently sought answers to pressing questions, including how to get money to staff in Ukraine and Russia, in some cases to help them and their families relocate. Another major issue: making sense of a slew of sanctions, that changed frequently and grew to cover more people, banks, companies and even arcane subsidiaries and affiliates.

The next phase focused on resetting institutional relationships when partners ended up on those sanctions lists or ceased their activities. One example among many was payroll. How do you pay staff if your paying bank is now a sanctioned entity? An even bigger stress came when the giant payroll supplier ADP left the country.
Fortunately, the sanctions had lead-in times that allowed members to find alternatives, even if this meant a lot of scrambling. And to be clear, every member company in our group was determined to be a good corporate citizen. We never heard the slightest hint of someone trying to flout sanctions or other rules.

Struggles with banks. The single biggest topic for members of the working group in the past year has been an almost constant search for banking partners. Banks began to tighten conditions as soon as the war began, a process that continued until most foreign banks closed or announced impending closures.

Banks frequently delayed and sometimes rejected payments after detailed sanctions compliance analysis. Most payments eventually went through, some had to be resubmitted and others routed through different countries or banks because of different interpretations of a situation; a few payments were indeed rejected, with banks thankfully offering reasons for their decisions.
The four biggest international banks, Rosbank, Raiffeisen, UniCredit Russia and Citibank Russia, had the greatest impact on multinationals. Rosbank was sold by Societe Generale to its previous Russian owner; Citibank, the largest banker to MNCs, is closing its corporate business in two phases, creating a migration of accounts to the two big remaining EU banks, a few non-US/EU international banks and a few unsanctioned Russian banks.

Ruble wrinkles. The steady reduction in RUB liquidity of companies and international banks presented more challenges. This was primarily driven by the drastic reduction or elimination of local business, of course, but also a desire to reduce risk and keep liquidity to a bare minimum.

Some companies were forced to reduce liquidity below their desired minimum operating levels because of pressure from the few remaining international banks. These banks must reduce their Russian exposure and the reserves that need to be kept against their business, so they gradually forced their corporate MNC clients to reduce balances in bank accounts.
The good news is that the banks offer local RUB brokerage accounts, which do not attract reserves, alongside the bank accounts. So corporate liquidity can be invested in the brokerage accounts and then transferred into the banks when needed.

State of play today. The spectrum of treasury responsibilities in Russia today is very broad. At one end, some members have no activities at all because their companies chose to exit completely and did so.

At the other extreme are businesses (mostly in the special sectors of medical, pharmaceutical, agricultural, mineral and hydrocarbons) which maintain substantial operations in the country. That’s because these subsectors were not sanctioned, or lightly sanctioned, by US and EU authorities, a tacit and sometimes explicit indication that the authorities want these activities to continue.
In between these two extremes are corporates that still have some modest level of treasury activity, such as payables and receivables, funds transfers, RUB liquidity, etc. These find themselves maintaining a low level of operations in the country either because they cannot sell or transfer their assets or because they have decided to maintain some functions instead of undertaking a complete withdrawal.

Looking ahead. Several months after the start of the war our working group held a special session to review best treasury practices in crisis preparedness, including how this war and the complexity of sanctions revealed strengths or weaknesses in members’ plans and playbooks.

There were many approaches outlined and specific suggestions made, but by far the most important conclusion was the need, from the outset of a crisis, to have simple and clear lines of communication and decision-making for the entire company announced from the top. That’s one of the few positives to take away from this crisis—so companies can better weather the next one.
Corporates will continue to explore ways of reducing their activity and exiting that do not endanger local employees. And companies that remain will continue to cobble together payment and funding solutions for their core needs, establish new banking relationships with the ever-dwindling number of unsanctioned banks inside Russia, and generally run their businesses on a shoestring.

Finally, in thinking about the challenges and key issues that lie ahead, I cannot escape returning to the theme of sadness where we began. There is no sign that the war will end soon; the death and destruction look set to continue. My greatest hope is, of course, that the war ends soon.

Looking more tactically at our members and their businesses in Russia, I would hope for more clarity from US and EU institutions about the businesses that they want Western companies to continue to do in Russia (such as those special sectors mentioned above) and recognize the need for a few key Western banks to accompany them on this journey.

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Justin Jones In Capital Markets, Investment Management

Strengthening Bonds With Fixed-Income Investors Pays Dividends

A strong commitment to fixed-income investor relations in good times helps one company prepare for rough patches.

Say “investor relations” and most people immediately think of equity investors. But not the director of capital markets at a large manufacturer that has more than $100 billion outstanding in unsecured, asset-backed and convertible debt—and who has two team members dedicated solely to fixed-income investor relations (IR).

At a fall meeting of NeuGroup for Capital Markets sponsored by Deutsche Bank, the director described his company’s deliberate, proactive approach to fixed-income IR in good times and the benefits of the effort, which often show up most clearly when market or industry conditions become rough.

A strong commitment to fixed-income investor relations in good times helps one company prepare for rough patches.

At a fall meeting of NeuGroup for Capital Markets sponsored by Deutsche Bank, the director described his company’s deliberate, proactive approach to fixed-income IR in good times and the benefits of the effort, which often show up most clearly when market or industry conditions become rough.
His presentation generated considerable interest from peers who came away with fresh ideas for managing an area that may not always receive the attention it deserves, where work pays off in ways that at times are hard to quantify but are evident and significant.
Deutsche Bank bankers offered insights on how corporates—including those that are infrequent issuers—can foster relationships with debt investors as financial conditions grow more difficult and feedback from asset managers on topics like ESG and sustainable financing becomes more important.

Funding when times are tough. Fixed-income investor outreach “is critical given the need to fund” the member’s company and its financing arm throughout all economic cycles, including downturns, he said. Top bondholders are “anchor orders on our new deals and provide secondary market liquidity in support of our outstanding bonds”—leading to more favorable pricing of new deals, according to his presentation.

“We spend a lot of time in the good times engaging with investors, which, we think—it’s hard to quantify this—pays off in the times that aren’t so good,” the member said in elaborating on the value of fixed-income IR. “For us, it’s deal execution in a poor market, or deal execution when there are maybe some not-so-positive forces that are industry-specific.”
Matt Siracuse, a managing director on Deutsche Bank’s investment grade syndicate desk, added that reaching out to investors well before any deal is launched can pay off when debt market conditions move against issuers. “As we enter into a market that’s a bit more challenging, fostering those relationships ahead of any kind of issuance could go a long way to minimize deal risk,” he said.
NeuGroup’s Scott Flieger, a former banker who leads the capital markets group, said another benefit of engagement with bondholders is an issuer’s ability to complete transactions in the size they want during choppy markets, in part because investors believe a deal will be properly priced with room for some upside potential. Also, “You can get the maturities done that you want to—and you can get both fixed- and floating-rate paper done,” he added.

Unpacking fixed-income IR. The member’s company signals the importance of the company’s relationship with its top bondholders by proactive outreach and offering them private calls and meetings with senior leadership, including the CEO and CFO.

“We prioritize one-on-one investor relations,” the member said. “That takes more time, it takes more energy, it takes more work, but we get more candid feedback that way than group discussions.” He added, “We pride ourselves in being best in class, trying to really engage with investors in a way that they see as a partnership.”
One-on-one or small meetings are where investors feel more comfortable offering direct, frank feedback to issuers, Mr. Siracuse said. That may include offering critical opinions on KPIs a company may be considering for a sustainable bond.
The presentation listed these other key workstreams for fixed-income IR:
- Supporting rating agency relationships; the fixed-income IR team owns the relationship with agencies.
- Communicating key investor information to senior management, bringing back what IR hears from investors after earnings calls.
- Leading quarterly earnings process for the company’s financing arm.
- Supporting unsecured debt transactions.
- Preparing quarterly fixed-income presentations for investor outreach.
At the end of a recent year, the member’s fixed-income IR had completed more than 250 meetings, including presentations at conferences, non-deal roadshows, virtual events and gatherings at the company’s offices. Many meetings included the company’s equity IR team, but not all.

Other ways to engage. Infrequent debt issuers and companies that don’t have dedicated fixed-income IR teams have options for efforts that will not be as extensive as the presenting member but are still worthwhile. They include:

Tacking on fixed-income meetings at your company’s equity conferences; consider joining your company’s IR team when they are going to an equity conference. If you can’t attend, add something to the deck the equity team is presenting.
Making sure that if your company’s large equity holders have big bond operations, the fixed-income side of the asset manager takes a serious look at starting or increasing debt holdings.
Asking banks to let you know when they are having credit conference so someone from your company can attend. If you prepare a deck for the conference, post it on the company’s website.
When visiting a large city, consider asking a bank to organize a lunch or afternoon session with a small group of fixed-income investors.

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Justin Jones In Diversity & Inclusion, The NeuGroup Insights Interview

Treasury’s DEI Opportunity: Partnering with Diverse-Owned Firms

Insights from Loop Capital’s Sidney Dillard and Siebert Williams Shank’s Sobani Warner.

NeuGroup’s Strategic Finance Lab Podcast—available on Apple and Spotify—will bring you an interview next week about the progress made by diverse-owned banks, brokers and asset managers. It features Sidney Dillard, partner and head of corporate investment banking at Loop Capital, and Sobani Warner, co-head of corporate finance at Siebert Williams Shank (SWS). The two firms are among the top Black-owned financial institutions in America.

Hit the play button below to watch a video clip from the interview in which Ms. Dillard discusses the opportunity corporate treasurers have to partner with diverse-owned firms and make significant contributions to how their companies promote diversity, equity and inclusion.
Ms. Warner notes that the podcast interview with NeuGroup’s Andy Podolsky comes during Black History Month and that the efforts of finance teams need to be seen in the larger context of strengthening all segments of American society. She looks forward, she says, to passing on what’s been achieved at diverse-owned firms like SWS and Loop to the next generation, adding, “it’s going to be fantastic.”

Insights from Loop Capital’s Sidney Dillard and Siebert Williams Shank’s Sobani Warner.

Hit the play button below to watch a video clip from the interview in which Ms. Dillard discusses the opportunity corporate treasurers have to partner with diverse-owned firms and make significant contributions to how their companies promote diversity, equity and inclusion.
Ms. Warner notes that the podcast interview with NeuGroup’s Andy Podolsky comes during Black History Month and that the efforts of finance teams need to be seen in the larger context of strengthening all segments of American society. She looks forward, she says, to passing on what’s been achieved at diverse-owned firms like SWS and Loop to the next generation, adding, “it’s going to be fantastic.”

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Justin Jones In Technology

Touched Less, Not Touchless: Bringing Automation to Life

Finding key parts of processes to automate can make automation more achievable than end-to-end automation.

AI chatbots like ChatGPT and Google’s Bard may conjure up a limitless future of so-called touchless, automated processes that require no human intervention. But for corporates limited by the budgets and sizes of IT teams, end-to-end process automation is often an unrealistic goal. So some NeuGroup members are embracing “touched less” solutions—adopting a mindset that can go a long way toward making automation more achievable.

At a recent session of NeuGroup for Technology Advancement, an IT project manager at a private company who works with finance teams discussed how he conceptualizes and implements automation through this lens.
“If you look at a business process holistically, end-to-end, we can start picking out parts down to the individual process that can be touched less—that’s how we’re deploying, and that’s how automation comes to life,” he said.

Finding key parts of processes to automate can make automation more achievable than end-to-end automation.

At a recent session of NeuGroup for Technology Advancement, an IT project manager at a private company who works with finance teams discussed how he conceptualizes and implements automation through this lens.
“If you look at a business process holistically, end-to-end, we can start picking out parts down to the individual process that can be touched less—that’s how we’re deploying, and that’s how automation comes to life,” he said.

Success story. The project manager walked through a recent automation the company implemented to improve purchases by the procurement team, saving hours of research time and improving decision-making.

For example, the solution, which he calls an “AI-lite” engine, can accept a purchase request for a specific type of pencil. The engine analyzes the entire history of purchases of that kind of pencil that the company’s ever made and recommends the optimal retailer or supplier.
While a “dream-state” automation tool might see the need for this type of pencil and make the purchase on its own, the additional steps would far prolong the design and development stages.
Instead, the process is now touched less, as the procurement team member simply inputs the specific need and receives a recommendation they can use to save time and money.

Holistic design. One member advised that when implementing automation solutions, it’s important to think holistically about current processes that may span multiple departments. Doing so allows practitioners and technologists to zero in on designing the best practical application; though it may prolong the design process, it will ensure a more useful final product.

Indeed, the IT project manager said internal clients often come to him imagining a new touchless process, but after considering the entire business workflow and how to address its pain points, a “touched less” solution is often what emerges.
To arrive at that solution, the project manager first must understand the entire business process and where automation and technology can result in meaningful change, an approach he calls “design thinking.” From there, his team develops solutions that can be implemented and built upon.

Making your case. Finance teams hoping to adopt either “touched less” or touchless automation can’t lose sight of the need to prove that the effort will pay off. “For tech resources, which are very expensive, to work on big projects we need to understand the P&L impact—it could be related to things like revenue or FTE hours saved,” another member said. “If it’s a small impact, we say they should layer that into another request.”

NeuGroup’s Kelly McClelland, who ran the session, encouraged members to step up and ask for what they need to make transformation a reality. “Technical resources might not always be where we need them to be,” she said. “Have an argument ready that an automation, however small, is going to save the organization a lot of money—you just have to build the business case.”

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Justin Jones In Cyber risk, Insurance, Risk Management

Ray of Hope: Cyber Catastrophe Bonds May Boost Insurer Capacity

The first cyber cat bond could spell some relief for corporates navigating a hard market for cyber insurance.

Corporate treasurers and risk managers whose companies face ever-increasing cyber risk may soon have a new tool to discuss with brokers and insurers as they build insurance towers and navigate the hard, capacity-strained market for cyber coverage: catastrophe bonds.

Last month, U.K. insurer Beazley sold $45 million in cyber cat bonds, the first deal of its kind—following more than a decade of discussion about the product in the insurance-linked securities (ILS) market. The Beazley cat bond will pay out if the insurer exceeds $300 million in losses from cyberattack claims.

The first cyber cat bond could spell some relief for corporates navigating a hard market for cyber insurance.

Last month, U.K. insurer Beazley sold $45 million in cyber cat bonds, the first deal of its kind—following more than a decade of discussion about the product in the insurance-linked securities (ILS) market. The Beazley cat bond will pay out if the insurer exceeds $300 million in losses from cyberattack claims.
Cat bond issuers pay interest to institutional investors who purchase the bonds; the investors end up paying out the principal set aside in a trust to the issuer only if indemnity or other loss triggers are set off by a specified type of storm, cyberattack or other catastrophic event.

More to come? The Beazley deal should fuel consideration of similar transactions to mitigate growing cyber risks that insurers worry pose a systemic threat, resulting in greater capacity to meet the needs of corporates, according to Peter Foster, chairman of WTW’s Global FINEX Cyber business.

He said cyber insurers will most likely be the biggest issuers of cyber cat bonds, but corporates could also issue the securities to reduce loss reserving and free up capital.
“Corporates could consider their own cat bond to provide greater capacity of cyber insurance projection,” Mr. Foster said.
Another industry observer told NeuGroup Insights, “The bond solution will only be there for the very largest clients in the market—or maybe client groups.”

Corporates no strangers to cats. Cat bonds are well established in the property and casualty market, where they have mostly been issued by insurers and reinsurers seeking to transfer risk to investors who are looking for returns uncorrelated with financial investments, including pension funds.

Some corporates looking for protection from natural disasters have also taken advantage of the market for cat bonds in recent years.
A corporate “maxes out coverage from the traditional insurance market, then goes to the cat bond market,” said John Seo, co-founder and managing director of Fermat Capital Management, an investor in the Beazley deal. He cited corporates that have increased coverage of earthquake risk:
- Google and its parent Alphabet purchased $275.5 million of California earthquake risk protection in 2021 following two similar deals the year before.
- Also in 2021, Kaiser Permanente renewed and increased the size of its cat bond providing earthquake protection.
“Even if the amount of cat bond coverage procured is modest, the impact on the traditional program can be significant,” Mr. Seo said.

Risk model concerns. Cyber cat bonds have long been discussed by ILS-market participants but concerns about the ability to accurately model cyber risk stalled potential transactions. The Beazley deal was privately placed by Gallagher Securities, the ILS arm of reinsurer Gallagher Re, and is tradeable under Rule 144A among institutional investors.

It uses the cyber risk model developed by CyberCube, which Mr. Seo said is becoming the “industry standard for cyber risk transfer” and a model Fermat used.
Another broker specializing in ILS, Aon Securities, also anticipates completing a cyber cat bond this year, according to CEO Paul Schultz, who has publicly credited maturing investor education and risk models for cyber cat deals finally coming to market.
More traditional risk model providers such as RMS, acquired by Moody’s Investors Service in September 2021, have ramped up their cyber offerings. Jin Shah, managing director, capital markets and resilience, said RMS’s cyber model is already widely used by the insurance industry, and his firm has spent significant time educating investors how it works.

Reality check. Fred Barnachawy, managing director and CIO at DeshCap, which negotiates contracts and insurance payouts on behalf of insured clients, said that property risk is easier to model and contacts are fairly standard compared to those covering cyber risk. Plus, he said, property does not carry the liability risk that often emerges in the wake of cyberattacks.

Mr. Barnachawy cautioned that the terms and conditions of early cyber cat deals are likely to be “constrained” and payouts limited, even after significant cyber events.
“Cyber cat bonds may help with the capacity issue, but will it help with core protection?” he asked.
What is clear, though, is the need for more coverage, capacity and innovation in cyber coverage. The National Association of Insurance Commissioners reported that 2021 data breaches increased 68% over the prior year. But despite trillions in estimated cyber losses, commercial premiums written totaled a relatively paltry $6.5 billion.

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Justin Jones In D&I, Investment Management

Investing in Diversity: D&I Performance Metrics in Action

A NeuGroup survey shows treasury prioritizes risk management and performance against a benchmark when evaluating diverse-owned firms.

Eighty-six percent of respondents to NeuGroup’s D&I Financing and Asset Management Survey do not have a formal D&I policy, but 54% work within informal guidelines. Regardless of approach, the overall investment policy requires that treasury apply performance metrics when it selects external managers for investment of cash and evaluates their success over time.

The survey reveals treasury applies the same performance measures to diverse-owned investment managers as it does to their peers.
“We hold them to the same metrics, all the way from performance to timely reporting and quarterly market updates,” said one cash investment manager.

The chart above shows the relative importance of metrics treasury uses to assess return on cash invested by minority-owned managers. It reveals treasury is consistent in its approach. Given the conservative nature of cash investments, risk management and compliance with guidelines, and performance against the benchmark, are tied for the number-one spot, followed by performance against managers with a similar mandate.

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Justin Jones In Technology, The NeuGroup Insights Interview

Funding Growth-Tech During a Downturn: A Tech Banker’s Insights

Bank of the West’s Andreas Bubenzer-Paim on markets, ChatGPT and bankers helping tech firms weather recessions.

The collapse of the IPO market in 2022 is just one factor weighing on growth-tech firms that need financing as they prepare for a possible economic downturn while watching many mega-cap tech companies eliminate jobs. That’s the backdrop for this timely Strategic Finance Lab podcast conversation with Andreas Bubenzer-Paim, managing director and head of technology banking at Bank of the West. You can listen to it now by heading to Apple or Spotify.

Mr. Bubenzer-Paim shares his insights with NeuGroup’s Antony Michels on the outlook for growth-tech firms, cryptocurrency, space technology and how tech companies can forge stronger ties with banks—and what they should expect from those banks during good times and, more importantly perhaps, when the going gets tough.

Bank of the West’s Andreas Bubenzer-Paim on markets, ChatGPT and bankers helping tech firms weather recessions.

Mr. Bubenzer-Paim shares his insights with NeuGroup’s Antony Michels on the outlook for growth-tech firms, cryptocurrency, space technology and how tech companies can forge stronger ties with banks—and what they should expect from those banks during good times and, more importantly perhaps, when the going gets tough.

Mr. Bubenzer-Paim, seen above with NeuGroup CEO and founder Joseph Neu at the fall meeting of NeuGroup for Growth-Tech Treasurers sponsored by Bank of the West, also gives his take on ChatGTP and artificial intelligence.

The interview took place before Microsoft announced it would integrate ChatGPT technology into its Bing search engine and Google’s event on Wednesday to promote its new AI chatbot called Bard.
Those developments dovetail nicely with what Mr. Bubenzer-Paim says about ChatGPT: “It’s certainly a milestone development. It’s still a very specialized tool, it’s built to fulfill a very specific purpose. I think those kind of AI [tools] are bound to be successful.”

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Justin Jones In Banking, Talking Shop

Talking Shop: Do You Pay All Joint Lead Arrangers of Revolvers?

Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: [email protected].

Member question: “We have three joint leader arrangers (JLAs) for our revolving credit facility and the JLA that drives the revolver renewal gets paid more than the others.

“There are some companies with a lot more than three JLAs. If we were to grow the top tier/JLA group, would the market standard be that they all get paid an arranger fee and, if yes, how would it compare to the lead JLA?
“Or do some corporates name banks as a JLA but don’t necessarily pay all of them a separate fee?”

Member question: “We have three joint leader arrangers (JLAs) for our revolving credit facility and the JLA that drives the revolver renewal gets paid more than the others.

“There are some companies with a lot more than three JLAs. If we were to grow the top tier/JLA group, would the market standard be that they all get paid an arranger fee and, if yes, how would it compare to the lead JLA?
“Or do some corporates name banks as a JLA but don’t necessarily pay all of them a separate fee?”

Peer answer 1: “For our syndicated credit facilities, the only banks getting paid any extra fees are the five JLAs, one left lead and four passive lead arrangers.

“The four passive JLAs each get the same fee, which is one-third of the fee for the left lead arranger. All JLAs commit at the lead level, which is sized such that it provides 50% of total commitments.“

Peer answer 2: “I recently asked myself the same thing. We were doing an institutional deal back then, not bank debt. I paid fees to our two JLAs equally (despite only one really doing the work), plus an incentive kicker to the top left JLA for achieving a certain spread reduction and/or OID tightening vs. original pricing talks. Then co-managers had a title only, they did not get any fees.

“This went down ok with the syndicate, but we had prior context on this transaction. In an upcoming large deal, I will likely go back to giving out small fees to another tier below JLA.”

Peer answer 3: “We pay arranger fees to each JLA. All of them are in the top tier of our facility. The lead left and lead right JLAs get paid more than the others.”

Peer answer 4: “We’ve typically had two active leads (right and left) who get an arrangement fee. We also have a group of JLAs who get a smaller arrangement fee.”

Big picture: For more context and perspective on the question, NeuGroup Insights reached out to the head of a syndicated loan business at a major domestic bank. Here’s his response:

“In the past, there were a few instances where a bank would commit largely to get the JLA title. They would receive little or no separate JLA compensation but get credit on the league tables as a bookrunner.
“Recently, however, largely due to capital constraints facing banks across the industry, there has been much more focus on the returns of banks’ loan commitments. As such, JLA compensation is now present in nearly all transactions.
“When there are multiple JLAs, it is the norm that each of the banks will receive JLA compensation. Though if there are two tiers—which is common in large, syndicated loans for Fortune 100 companies—the second tier receives a slightly lower amount.”

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Justin Jones In Capital Markets, D&I, Investment Management

Reaching Out: Treasury Leads Engagement With Diverse-owned Firms

NeuGroup research reveals treasury is the primary driver of greater engagement with minority-owned banks, brokers and asset managers.

As chief procurer of financial services, treasury is at the epicenter of a complex ecosystem of financial partners, from banks to brokers to pension and cash investment managers. According to NeuGroup’s D&I Financing and Asset Management Survey, treasury is not only seeking greater engagement with minority-owned firms but is the driving force behind companies’ efforts to build more expansive financial relationships with these firms.

NeuGroup research reveals treasury is the primary driver of greater engagement with minority-owned banks, brokers and asset managers.

A bigger share of wallet. Treasurers hold the purse strings and are increasingly sharing their wallets with diverse-owned firms. According to the survey, conducted in partnership with the National Association of Securities Professionals (NASP), Sustainable Fitch and Fitch Ratings:

25% of respondents expect to invest as much as 50% to 75% of short-term cash with diverse firms, vs. the current ceiling of under 40%.
50% of respondents plan to invest 21% to 30% of strategic cash via minority-owned firms, up from 25% currently.
50% of respondents intend to allocate between 5% and 10% of pension assets to minority-owned firms, up from 33% currently.
13% of respondents expect to increase underwriting commitments to diverse-owned firms to between 11% and 20%. Currently, the top allocation level is 5% to 10%.
50% of respondents expect to spend 5% to 10% of fees with diverse-owned firms, up from 33% currently.

A grassroots effort. The drive to increase engagement with diversity firms is coming from within. Ninety-two percent of survey respondents reported they are not experiencing any pressure from the board. Survey data shows that only 50% of CFOs are highly engaged.

“While many CFOs are supportive, treasurers are more connected to the financial market ecosystem,” said Mike Simonton, who is on the Global DEI Advisory Committee at Sustainable Fitch. “Because they have external lens, they can see the importance of this issue and are moving forward.”
“The CFO is not knocking at our door to include diverse firms in our debt underwriting and investment activities,” explained one survey respondent. While treasury maintains a direct communication line to the CFO, “it’s not like he’s actively asking us how things are going.”
“The treasury group is pushing up versus responding to a top-down mandate,” added an investment manager at another member company. According to her, treasury is ahead of other corporate functions, such as procurement, in diversifying its vendor base. “We are proactively communicating what we are doing in this space in order to motivate others to take similar steps,” she said.
“It’s more of an organically driven process,” agreed a member from a tech company that issued debt recently and included minority-owned brokers. “We have a whole impact team that’s committed to social goals and green initiatives.”
The same goes for working with external investment advisors. “It’s us pushing them,” said a respondent, in a follow-up focus group. “Consultants and advisors are not adamant about adding diverse-owned firms to our portfolio.” He added, “We require our advisors to include at least one diverse firm in their RFPs.”

Getting the CFO on board. While treasurers have been pushing forward with remarkable success, a highly involved CFO is a feature in the profile of a successful treasury effort to expand engagement with diversity firms. When the CFO is a strong partner, treasury is more likely to have:

A formal D&I policy that governs its work with minority-owned firms.
A policy that has been in place for over two years.
Investment advisors who are required to include diverse-owned firms in their proposals.

Key takeaway. For treasurers, this is a call for action: To move up the maturity curve, they should advocate for their programs by demonstrating success through financial KPIs that show the business benefits of expanding the diversity of financial partners.

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Justin Jones In Capital Markets, Technology, The NeuGroup Insights Interview

Tech in the Spotlight: The Outlook for Financing Growth in 2023

Capital markets insights from Bank of the West Head of Technology Banking Andreas Bubenzer-Paim.

If you only read the headlines, you might think that every technology company in the world is cutting jobs. But Andreas Bubenzer-Paim, Managing Director and Head of Technology Banking at Bank of the West, knows that layoffs by giants like Alphabet, Microsoft, IBM and other mega-caps are only part of a tech sector landscape which includes thousands of smaller, high-growth tech firms—many still private—that are actively hiring, not firing, workers.

“There is definitely a difference between the headline news and what I’m seeing in our daily lives when we talk to these tech companies and the management teams,” Mr. Bubenzer-Paim said in a recent interview. “And the message that you hear is they’re still hiring; they’re still growing.”
He’s quick to point out that hiring and growth at these companies will be at slower rates as recessionary conditions take hold. But whatever the pace of expansion, it’s critical for growth-tech firms to secure funding to stay on an upward trajectory. And volatility in financial markets that started in 2022 has made that harder.
In the video clip below—taken from a longer, Strategic Finance Lab Podcast to be released soon—Mr. Bubenzer-Paim shares his perspective and informed insights on the financing outlook in various capital markets for growth tech companies this year.

Capital markets insights from Bank of the West Head of Technology Banking Andreas Bubenzer-Paim.

“There is definitely a difference between the headline news and what I’m seeing in our daily lives when we talk to these tech companies and the management teams,” Mr. Bubenzer-Paim said in a recent interview. “And the message that you hear is they’re still hiring; they’re still growing.”
He’s quick to point out that hiring and growth at these companies will be at slower rates as recessionary conditions take hold. But whatever the pace of expansion, it’s critical for growth-tech firms to secure funding to stay on an upward trajectory. And volatility in financial markets that started in 2022 has made that harder.
In the video clip below—taken from a longer, Strategic Finance Lab Podcast to be released soon—Mr. Bubenzer-Paim shares his perspective and informed insights on the financing outlook in various capital markets for growth tech companies this year.

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Justin Jones In Cash & Working Capital

Cash Leadership Councils: Leading the Charge to a Cash Culture

Finance leaders and business heads collaborate on improving working capital management.

“Working capital is going to be a major challenge in 2023,” a member of NeuGroup for Global Cash and Banking said recently to kick off a session taking place as rising recession fears intensify the pressure on treasury to free up cash. The member is not alone: working capital optimization ranked as a top-five priority for treasurers in NeuGroup’s 2023 Finance & Treasury Agenda Survey.

Finance leaders and business heads collaborate on improving working capital management.

To improve working capital management, members at this session and others held by NeuGroups for Growth-Tech Treasurers and European Treasury said their companies have created cash leadership councils—led by treasury—to identify opportunities to create a culture of cash in which free cash flow is prioritized over profit margins.
The councils bring together members of a company’s finance leadership, including the treasurer, CFO, the head of FP&A and business representatives from outside of finance. Most meet quarterly.
The councils implement projects that improve a company’s working capital management, such as supply chain financing programs, and are seen as universally successful by the members who have had them in place for years.

Getting buy-in. One assistant treasurer at a healthcare company that started a cash council last year said it sprang from a working capital team within treasury.

“In order to implement supply chain finance or an AR factory, you need business buy-in,” he said. “The purpose of the [working capital] team was to identify project-related opportunities.” One problem: the time it takes to get buy-in from executive leadership to implement projects that may require a reallocation or reprioritization of resources.
Now, the working capital team can have this conversation immediately, as the company’s controller, CFO and head of FP&A join the quarterly cash council meetings.
In just the last 12 months, the meetings have driven investments in forecasting, improving payment terms with suppliers using supply chain finance programs and accounts receivable factoring.
Another member said he is very interested in replicating this member’s approach. “It’s so important to get the operational finance guys in the room too,” he added. “They’re the ones living the customer relationships, and they know how to manage inventory.”
One member added that meeting with operational functions outside finance could help eliminate one of his primary working capital challenges: treasury employees that lack true understanding of how the business operates. “It can be super hard for a treasury person to discuss working capital if they don’t understand how the business works,” he said.

An additional treasury deliverable. Other members at the session had similar stories of cash excellence councils growing from internal treasury initiatives. One treasury director at an advertising firm had a mandate to not only encourage a cash culture, but directly incentivize free cash flow—backed up by the CEO.

“We wanted to tie free cash flow to compensation—but how do you do that at the enterprise level where you’ve got very large divisions, each one having very different working capital needs, with decisions that affect cash flow differently?” he asked.
The treasury team looked at the company’s overall cash flow and figured out how to adjust each business unit’s working capital so it could directly tie successes to individual business units.
- “And we stripped out the things they can’t control, taxes and treasury-related stuff,” the director said. “So, it became an incentive for each business unit, aligned with results that directly explained the performance of the business unit to the entire team, focusing only on what’s controllable.”
The member said that both the CFO and CEO took interest in the program, and their buy-in resulted in smooth sailing. “It got lots of traction very quickly, and now it’s a regular component of the deliverables treasury puts together every quarter.”
- “Buy-in from CEOs is often explicit because the trend is to have compensation metrics tied to working capital or cash flow and that only happens if business heads and the CEO agree with the CFO,” said NeuGroup senior executive advisor Paul Dalle Molle, who co-led the session. “These KPIs emanate from the work of the cash councils, usually after several years of development.”

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Justin Jones In Technology, Treasury Management

Turbocharging Treasury Automation

Treasurers predict a sixfold surge in the adoption of AI-enabled analytics tools.

Cash forecasts are notoriously unreliable, primarily because of limited visibility into current and forward-looking data. However, in a year when liquidity is going to come at a premium, treasury must develop a clearer understanding of where cash is today, and how much more is coming down the pipeline. Cognizant of this need, treasurers responding to NeuGroup’s 2023 Finance & Treasury Agenda Survey ranked improving analytics and modeling capabilities as one of their top five priorities for this year.

NeuGroup’s 2022 Cash Forecasting Survey found that one-month cash forecast accuracy was +/- 10% in 75% of the cases.
That is a very wide range when it comes to assessing a company’s ability to pay the bills and invest in growth.
Rising economic pressures and financial market volatility require that forecasts not only be more accurate but, in many cases, also more frequent.

Treasurers predict a sixfold surge in the adoption of AI-enabled analytics tools.

NeuGroup’s 2022 Cash Forecasting Survey found that one-month cash forecast accuracy was +/- 10% in 75% of the cases.
That is a very wide range when it comes to assessing a company’s ability to pay the bills and invest in growth.
Rising economic pressures and financial market volatility require that forecasts not only be more accurate but, in many cases, also more frequent.

Smart automation. Yet collecting and analyzing data about current and future cash remains a largely manual process at many companies; this perennial pain point accounts for the more than sixfold forecasted increase in the adoption of advanced analytics tools over the next 12-24 months (see chart below).

AI-enabled analytics can improve forecast accuracy and increase forecasting cadence by automating data curation and applying sophisticated algorithms.
High-quality, consistent data is essential to the effectiveness of advanced analytics; NeuGroup’s findings reveal a projected 2.8x jump in the use of data management tools over the next two years.
Treasurers are beginning to move to next-generation smart automation: 24% of them expected to implement machine learning tools in the 12-24 months, compared to zero right now.

The benefit of bundling. The pivot to new tools reflects that many TMS vendors have struggled to provide effective forecasting solutions. While TMS adoption is still expected to grow by 43% over the next two years, all-inclusive systems are being supplemented and supplanted by emerging technologies.

Vendors that are incorporating AI and ML into their products are likely to see healthier growth rates and higher market share.
In one recent case, a member of NeuGroup for European Treasury said he selected a TMS that has incorporated AI into its core engine versus one with less sophisticated analytics capabilities.

Connectivity everywhere. The survey also shows a meaningful increase in the deployment of connectivity technologies, like robots and APIs. Both connect disparate internal and external source systems by automating the flow of data among them, and centralizing the storage of that data. Going forward, a combination of connectivity and data and analytics tools can potentially upend the need for an all-in-one system.

Bank APIs got off to a slow start, in large part because banks chose to develop proprietary protocols, making the technology less scalable. But API adoption is set to jump 4.1x over the next 12-24 months, as the technology matures and new, API aggregators and other middleware come on the scene.
RPA adoption is set to rise by 1.4x in the next two years.

A case to make. Granted, this may be a tough year for getting technology budgets, and some large-scale projects may be placed on hold. However, projects with a shorter and clearer ROI will continue to draw investment, and treasury has a strong business case for to make:

Many of its routine activities can and should be automated to reduce cost.
By employing tools like AI, treasury can make significant progress toward more efficient liquidity management and contribute greater value to senior management.

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Justin Jones In FP&A, Technology, The NeuGroup Insights Interview

ChatGPT, AI and the Future of Finance: An FP&A Leader’s Vision

Baxter International FP&A head Aaron Bloomer shares insights on how FP&A can lead finance into the digital future.

The buzz surrounding the OpenAI tool ChatGPT has highlighted the power of artificial intelligence and the potential for AI to bring the future of finance forward—in ways that will further disrupt and transform finance organizations.

That’s the jumping-off point for a lively Strategic Finance Lab podcast conversation between NeuGroup’s Justin Jones and Baxter International FP&P leader Aaron Bloomer about AI, advanced analytics and the leading role finance should play as corporations turn insights derived from data into strategic action.
Watch a video clip from the podcast by hitting the play button below. Then listen to the full interview by heading to Apple or Spotify.

Baxter International FP&A head Aaron Bloomer shares insights on how FP&A can lead finance into the digital future.

That’s the jumping-off point for a lively Strategic Finance Lab podcast conversation between NeuGroup’s Justin Jones and Baxter International vice president of FP&A Aaron Bloomer about AI, advanced analytics and the leading role finance should play as corporations turn insights derived from data into strategic action.
Watch a video clip from the podcast by hitting the play button below. Then listen to the full interview by heading to Apple or Spotify.

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Justin Jones In Capital Markets, Libor SOFR

Time Crunch Facing High-yield Loans Without Fallback Language

As Libor cession approaches, borrowers that have yet to seek refis or amendments may face higher execution costs.

Libor will cease to exist on June 30, yet many borrowers in the high-yield loan market have yet to amend or refinance their loans to address the need to switch to a different reference rate.

Syndicated loans with the Alternative Reference Rates Committee’s recommended replacement (or “hardwired fallback”) language will be automatically converted to the Secured Overnight Financing Rate (SOFR) on June 30.
All other legacy loans must be either refinanced into a Libor-replacement reference rate or have their contractual language amended.
Treasury teams at companies with legacy loans must move expeditiously to refinance or amend their language.

As Libor cession approaches, borrowers that have yet to seek refis or amendments may face higher execution costs.

Libor will cease to exist on June 30, yet many borrowers in the high-yield loan market have yet to amend or refinance their loans to address the need to switch to a different reference rate.

Syndicated loans with the Alternative Reference Rates Committee’s recommended replacement (or “hardwired fallback”) language will be automatically converted to the Secured Overnight Financing Rate (SOFR) on June 30.
All other legacy loans must be either refinanced into a Libor-replacement reference rate or have their contractual language amended.
Treasury teams at companies with legacy loans must move expeditiously to refinance or amend their language.

Running out of options. A fall 2022 ARRC survey revealed that 51% of lenders prefer that borrowers refinance their loans, and 31% expect to amend the language.

Refinancing, the most efficient option, has been open to investment-grade companies; but the market had been mostly closed to riskier borrowers since last March amid financial market volatility.
“Loan market volatility has eased recently but we have not yet seen a significant uptick in refinancings,” said Meredith Coffey of the Loan Syndications & Trading Association. “That said, we are anecdotally hearing of more fallback amendments.”
Bond and loan analysis firm Covenant Review found that 84% of the 1,416 loans in the Credit Suisse Leveraged Loan Index are still priced over Libor. The index is comprised of the largest and most liquid speculative-grade loans.
- “This time last year, I would have guessed 30% or less would still be on Libor,” said Ian Walker, head of middle-market research at Covenant Review.

The most challenging deals. Some leveraged loan borrowers may have to pursue costlier amendments if the high-yield market remains closed to them.

Nearly 10% of loans in the Credit Suisse index do not have any fallback language, according to Covenant Review. Unless these borrowers transition away from Libor before its cessation, the loans will automatically move to the higher prime rate, the fallback stated in most legacy syndicated loans.
The prime rate typically rests at least a couple of percentage points above Libor or SOFR, Mr. Walker said. “That’s the incentive for borrowers to transition.”

Better sooner than later. While 10% may seem small, it means approximately $140 billion of the $1.4 trillion leveraged loan market needs to move to SOFR by June 30—a transition fraught with challenges.

For one, refinancing or amending loans to include a lower rate requires unanimous consent of the lenders.
Loans can also be repriced, a route that allows borrowers to simply replace lenders that do not consent to the repricing. However, repricings are generally sought by borrowers to improve their economics, and lenders are likely to resist.
Whichever method, the path will become more challenging as the deadline approaches and lenders, legal counsel and other involved parties become more swamped with transactions.

Proposed relief. Recognizing the challenge ahead, the Financial Conduct Authority in the UK issued a consultation in November seeking feedback on publishing one-, three- and six-month US Libor on a “synthetic basis” through September 24, 2024.

The consultation period ended earlier this month and the FCA has yet to issue a decision.
An extension would give borrowers breathing room, Mr. Walker said, but if they wait and the proposal fails, then lenders’ position to negotiate terms will be even stronger as the June deadline approaches.
“Borrowers are probably more likely to get the best terms now rather than waiting until there’s a crush and trying to get their deal through,” he said.

Be aware. The Federal Reserve Board adopted a final rule December 16 that implements the Adjustable Interest Rate (Libor) Act passed last spring, replacing certain Libor rates automatically with benchmark rates based on SOFR. However, the Fed rule only applies to Libor transactions with no fallback language, and syndicated loans are typically written to fall back to the prime rate.

“If you’re a NeuGroup borrower, then you may have a mix of loans as well as floating-rate notes or other Libor contracts that have no fallback language,” Mr. Walker said. “So you need to be aware of the Fed rule, since there may be different ways the various instruments transition.”

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Justin Jones In Regional, Treasury Management

Girding for Trouble Ahead: A 2023 Crisis Management Playbook

Treasury and finance teams can better prepare for potential disruption and crises by codifying past lessons.

Over the last few years, treasuries have faced significant market and geopolitical shocks, including the onset of Covid, the war in Ukraine and extreme global financial market volatility. This year promises to be equally if not more challenging.

Respondents to NeuGroup’s 2023 Treasurers’ Agenda Survey listed an economic downturn as their No. 1 risk this year. Financial market volatility was tied with political uncertainty for second place.
On treasurers’ risk radar screens this year are an escalation in tensions between Taiwan and China, and political strife and currency devaluation in Nigeria, Peru, Chile, Brazil, India, South Africa and Turkey.

Treasury and finance teams can better prepare for potential disruption and crises by codifying past lessons.

Respondents to NeuGroup’s 2023 Treasurers’ Agenda Survey listed an economic downturn as their No. 1 risk this year. Financial market volatility was tied with political uncertainty for second place.
On treasurers’ risk radar screens this year are an escalation in tensions between Taiwan and China, and political strife and currency devaluation in Nigeria, Peru, Chile, Brazil, India, South Africa, Venezuela and Turkey.

The value of preplanning. To prepare for trouble ahead, treasurers must leverage lessons learned in past crises and develop an action plan, so they can respond immediately and proactively to unfolding events. Over these past couple of years, NeuGroup has provided members with multiple forums to address their pressing challenges and benchmark and identify crisis management best practices.

Examples include our popular Russia-Ukraine Crisis community (we often had over 100 members on these initially weekly, Monday-morning sessions); our Argentina Crisis community, as well as ongoing and targeted coverage of events as they unfolded through our flagship publication, NeuGroup Insights.

Crisis management learnings. The primary outcome from the various forms of peer exchange was the identification of key best practices in scenario planning and the development of early warning systems. Companies with significant investments in high-risk markets should review their exposures on a regular basis.

According to one member, “It’s important to have a solid playbook that outlines scenario planning as well as an effective early warning system, which need to be updated by regions two-to-three times a year.”
An effective early warning system should track indicators such as country credit ratings, credit default swap spreads, GDP, employment data, budget deficits, inflation rates and foreign currency reserves. The war in Ukraine introduced an added layer of risk, requiring careful monitoring of US and European sanctions.
By monitoring these indicators and establishing lines of communication with decision-makers, treasurers can be alerted to potential trouble ahead and take necessary precautions.

What to look out for. An early warning system should take into consideration the following key questions:

Country credit ratings: Has the sovereign been downgraded by the ratings agencies?
Credit default swap spreads: Is the sovereign at risk of default?
GDP: Are there extreme movements in either direction?
Employment data: Are there volatile shifts in labor market data?
Budget deficits: Does the sovereign have a fiscal policy with outlays that are not met by tax revenues?
Inflation rates: Is inflation at the sovereign increasing at low rate on a monthly basis, or at a rate higher than earned income percentage for long and protracted periods?
Interest rates: Are the rates steadily increasing, decreasing or are they highly volatile?
Foreign currency reserves: Does the sovereign have the necessary foreign currency reserves for trade settlement?

In case of a crisis. Our extensive conversations with members revealed the following important steps treasury should take to protect the company’s assets and operations. For example:

Establish and maintain clear lines of communication and decision-making processes with local operations and global decision-makers. Often, changes occur daily, and require an immediate action. The decision-making process should be announced by the CEO and should include a cross-functional crisis management team to ensure central coordination, communication and decisions.
Develop information channels for fact-checking and quick updates; leverage relationships with banks and risk advisors as well as local experts to make sure you keep track of new developments.
Connect with peers on a regular basis to source critical information and common approaches to solving emerging problems.
Consolidate local cash and establish local banking relationships for short-term working capital. Existing banking partners may no longer be able to support or protect corporate funds.
Maintain supply chain sustainability by ensuring continued supplier payments.
Consider long-term funding options and cash repatriation options, e.g., dividends, intercompany loans or royalties.
In extreme cases, assess the cost ramifications of exiting the market and consider different timing options.
Incorporate operational changes into financial reporting systems (TMS, ERP) as well as the enterprise risk management framework.
Build in monitoring mechanisms and automate alerts based on factors such as:
- Failed invoices
- Delayed banking payments
- Failed FX settlements

By following these steps, corporate treasurers can minimize the financial impact of a crisis and ensure business continuity.

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Justin Jones In Capital Markets, Talking Shop

Talking Shop: Determining the Interest Rate on Intercompany Loans

Member Question: “I am exploring whether doing a ‘mini-credit assessment’ (similar to Moody’s model) is a meaningful exercise and a value-add change to our current policy, which is to treat all subsidiaries as created equal for the purposes of determining our credit rating for intercompany loan borrowing rates (i.e., a few notches below [the parent’s] credit rating).

“I am interested in what other member companies are doing in this space to determine the interest rates for intercompany borrowings in the absence of an external credit rating.”

“I am interested in what other member companies are doing in this space to determine the interest rates for intercompany borrowings in the absence of an external credit rating.”

Peer answer: “Our credit spread is based on the ‘risk profile’ tier we assign an entity to. The tier is based on the nature of entity activity and the country they operate in. We use, for example, the [Allianz Trade] country risk rating to define country risk.

“[Allianz Trade] risk rating methodology combines three variables:
- ‘The Macroeconomic Rating (ME), based on the analysis of the structure of the economy, budgetary and monetary policy, indebtedness, the external balance, the stability of the banking system and the capacity to respond effectively to (emerging) weaknesses.
- Structural Business Environment Rating (SBE) measures the perceptions of the regulatory and legal framework, control of corruption and relative ease of doing business.
- The Political Risk Rating (P), which is based on the analysis of mechanisms for transferring and concentration of power, the effectiveness of policy-making, the independence of institutions, social cohesion, and international relations.’

“The operational risk of the entity is generally contemplated in the country risk rating, using logic similar to Moody’s.

“Scale

Revenue: Sales in lower risk markets are less sensitive to surprise changes in country regulation.

“Business Profile (Pharma)

Product and Therapeutic Diversity: Lower risk markets tend to have better patient reimbursement and improved price predictability.
Geographic Diversity: Lower risk markets tend to have broader market segmentation (e.g., private market vs. government reimbursement only), plus better market intelligence.

“Patents and Pipeline

Patent Exposures: Lower risk markets tend to have better patent protection in place with better legal systems to ensure protection.
Pipeline Quality.

NeuGroup Insights: Paul Dalle Molle, a NeuGroup senior executive advisor, added: “When I was a banker, we helped a few multinational companies answer this question. That effort was driven out of our credit ratings advisory team and focused on providing a framework for a company to systematically categorize all its global entities. The big initial question is how granular you want your analysis to be, and what you are trying to solve for.

“One of the biggest motivations we found was the need for the CFO and treasurer to show business unit leaders that they had a systematic approach that was fair and that was part of an overall capital allocation policy. Accounting and tax also liked this approach because it helped insulate the company from future accusations of transfer pricing manipulation.
“The companies that were most interested in this had already established the basic principle that their subsidiaries around the world did not have the same degree of risk and that therefore they needed some ways to differentiate them for internal cost-of-capital calculations and intracompany borrowing rates in order to achieve something approaching ‘arms-length’ pricing.

“Five vectors stood out:

Country risk: For this, companies adopted risk categories from rating agencies or specialized risk consulting companies.
Ownership: 100% vs. joint ventures.
Type of funding: the debt/equity mix, taking into account how local laws treat parent loans (in some countries they are automatically considered as equity).
Source of funding (internal or third-party): On the question of granularity, our clients got very granular whenever joint venture partners and/or third-party funding was involved, but otherwise kept the analysis relatively light and easy to manage.
Type of affiliate company: e.g., manufacturing, distribution, R&D, intellectual property, sales, etc.”

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Justin Jones In FX, Technology

Seeing Is Believing: Micron Collaborates With Procurement To Cut Costs

Treasury at Micron is partnering with the procurement team to mitigate financial risk from supplier contracts.

The US dollar and commodity price strength have provided treasury an opportunity to demonstrate its capability to accurately mitigate a company’s financial risk exposure. It has also increased awareness about the consequences of commodity and FX fluctuations at the business-unit level.

Micron Technology, a semiconductor company with global operations and heavy manufacturing in APAC, is US-dollar functional across its enterprise. Therefore, procuring tools and local operations introduce material FX exposure for the company.

Treasury at Micron is partnering with the procurement team to mitigate financial risk from supplier contracts.

The US dollar and commodity price strength have provided treasury an opportunity to demonstrate its capability to accurately mitigate a company’s financial risk exposure. They have also increased awareness about the consequences of commodity and FX fluctuations at the business-unit level.

Micron Technology, a semiconductor company with global operations and heavy manufacturing in APAC, is US-dollar functional across its enterprise. Therefore, procuring tools and local operations introduce material FX exposure for the company.

To address the risk, treasury is evolving its strategic value by working directly with procurement to identify commodity and FX risk embedded in supplier contracts and make cost-conscious decisions about which party should own the financial risk.

“It takes a lot of training and many small wins to obtain the confidence of the procurement team to convince them you are there not to add another level of red tape, but to support them to create value for the company,” said assistant treasurer Robert Lambert.
“Even with senior management involvement, you have to engage with local procurement teams to isolate and quantify exposure within contracts,” Mr. Lambert shared.

Getting in front of the risk. Before treasury forged the partnership with the procurement team, the company primarily insulated non-US dollar costs from FX fluctuations by isolating and hedging the exposure through FX derivatives. The success of this process was challenged by limited enterprise reporting capabilities.

With billions in supplier contracts, “The key is managing financial risk at the source,” Mr. Lambert said. “There are many ways we can go about minimizing the exposure. And even if we are not successful in converting the contract to US dollars, by bringing treasury in, as a company, we become more knowledgeable, so any hedging action we take can become more accurate and effective.”
While pricing contracts in US dollars may offer 100% protection against FX fluctuations, it can be costly when suppliers are local-currency functional, smaller and/or less creditworthy relative to Micron. In all cases, they pay a credit premium on top of the hedge cost, which they “charge back” through the price of the goods.
Treasury works with procurement to decide whether to price in US dollars (sometimes the counterparty is also dollar functional to create value for all parties) or in the local currency and then pull the exposure into the balance sheet (for payables) or cash flow hedging program (for anticipated expenses).
By partnering with procurement, treasury has changed the commodity index of contracts to one with more liquidity that is less expensive to hedge.
The preference is still to hedge the commodity exposure with the supplier to minimize the administrative burden. However, treasury can quantify the cost differential by working with Micron’s banking relationships to recommend the optimal hedge strategy.
Treasury focuses on supplier contracts of over $20 million to balance administrative burden with incremental value. And the effort has paid off. In some cases, treasury reduced the cost of specific contracts by up to 5% by assuming ownership of the currency exposure.

Optimizing working capital. The next step in working with procurement is managing working capital. “Treasury can quantify the difference between payment terms to negotiate better contracts,” Mr. Lambert said.

In many organizations, procurement does not have payment KPIs, so payment terms are not a priority. Treasury can quantify the impact on DPO, DSO and the cash conversion cycle to recommend which levers to pull to provide the best overall contract for the company.
While getting started may be challenging, the collaboration can improve these metrics once procurement sees the value. “We are responsive and easy to collaborate with,” explained Mr. Lambert, “and have access to more resources, from Bloomberg to our banking partners, to help them achieve the best overall outcome for the company.”

Building a process. The success of this collaborative effort depends on ensuring treasury is at the table before contracts are signed. In contrast, in many companies, procurement negotiates and signs the contract without consultation and with a specific goal: To meet its functional targets of reducing notional cost year-over-year, which are embedded in their performance assessment.

However, this mindset does not necessarily align with the company’s financial performance. “They just don’t have the visibility to always see the big picture,” Mr. Lambert explained. “In some cases, we were dramatically overexposed. We are looking to provide the businesses with context.”

Micron is creating a financial risk committee to oversee enterprise-wide financial exposures. The committee will include leaders from the finance and procurement teams to leverage skillsets to provide timely and optimized solutions to complex problems.

Building a relationship. In addition to the successful treasury-procurement partnership at Micron, the key takeaway from the engagement is the blueprint it lays for future intercompany partnerships that create substantial value.

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