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What Should Treasury and Finance Functions Be Doing About the Coronavirus?

Something that warrants a rare FOMC inter-meeting rate cut calls for broader finance engagement. There is a lot of information, advice and checklists coming out on how businesses should respond to the coronavirus, or COVID-19. This one from McKinsey is a good example.

  • Health and safety first. A majority of companies, rightly, start with the most important steps to ensure the health and safety of employees, customers, suppliers and other stakeholders.
  • Tabletop crisis response and planning. The next most important item tends to be the crisis response and scenario planning. Tabletop exercises are emphasized, because you must both plan and practice to ensure that they can be executed.
  • Digital acceleration focused on customers/customer experience. One of the most interesting checklist items that more companies need to take to heart is how this crisis is pushing digital disruption of traditional business activities and accelerating transformation focused on customer needs and the customer experience.

Something that warrants a rare FOMC inter-meeting rate cut calls for broader finance engagement.
 
There is a lot of information, advice and checklists coming out on how businesses should respond to the coronavirus, or COVID-19. This one from McKinsey is a good example. 

  • Health and safety first. A majority of companies, rightly, start with the most important steps to ensure the health and safety of employees, customers, suppliers and other stakeholders. 
  • Tabletop crisis response and planning. The next most important item tends to be the crisis response and scenario planning. Tabletop exercises are emphasized, because you must both plan and practice to ensure that they can be executed. 
  • Digital acceleration focused on customers/customer experience. One of the most interesting checklist items that more companies need to take to heart is how this crisis is pushing digital disruption of traditional business activities and accelerating transformation focused on customer needs and the customer experience. 
    • If you are stuck at home, for example, how do you easily and safely procure food and water (online shopping with a screened delivery driver or an autonomous delivery method), plus continue to do your job and earn your pay (remote work, collaboration and meeting tools)?
    • If you are reliant on a supplier in China or Milan, how do you get production and delivery back online and mitigate future shutdowns (accelerate the Industrial Revolution 4.0 timeline with supply-chain financing and capital-raising assistance)? 

This is why I think treasury and finance teams need to think proactively and creatively to support their business response by staying close to their customers (in the business, especially). They should also think about the financial support in terms of structural, long-term transformations beyond the near-term crisis responses (which are also important).

McKinsey’s advice on this point is outstanding:

Stay close to your customers. Companies that navigate disruptions better often succeed because they invest in their core customer segments and anticipate their behaviors…. Customers’ changing preferences are not likely to go back to pre-outbreak norms(emphasis mine).

Accordingly, treasury and finance teams should push back on cost-cutting measures presented as a coronavirus response and balance the short-term crisis risks with the opportunities for transformative investments that will pay off in the long run. 

  • Move past the obvious. Crises always prompt a “cash is king” reminder and a recommendation to ensure that liquidity is sufficient to weather the storm
    • How well will ML and AI forecasting apps and analytics tools fare in with this sort of black swan event?
    • Does this change your final recommendations on how much excess cash to keep on the balance sheet in the wake of US tax reform?
    • Does this change how you invest that cash, especially now with the rate-cut response? 

Most firms are hyper-focused on cash and liquidity already, especially high-growth start-ups.

Moving on, other questions to ask: 

  • How has FX hedging been adjusting to shifting exposure profiles from demand and supply shocks? Commodity price risk management?
  • What’s the supply-chain financing support being arranged to expedite effective supply/production shifts and how are firms and their finance partners dealing with the credit risk? Thinking longer-term, might your superior capital-raising ability help make structural and digital manufacturing changes that are needing to come anyway?
  • Is a near or sub-1% USD funding round, or a potentially lower EUR round, right for dialing up a bond issue or other form of capital raise? Are the proceeds for buybacks? Or to make transformational investments like acquistions sooner rather than later? Does this present another liability management opportunity? 

And perhaps most importantly: 

  • Are your banks and others serving you best by staying close to you as their customers to better understand your challenges during this time? To be there with solutions, currently available, and those they are prepared to invest in to make available soon? 

Here is what NeuGroup is doing

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Fed Official to NeuGroup Members: The Time to Start Paying Attention to Libor’s End Is Now

ARRC liaison David Bowman explains the implications of SOFR and what corporates need to do now.

Corporate treasury teams that have paid little or no attention to the planned transition from Libor to SOFR, take note: That stance makes much less sense today than last year and “won’t make any sense” by the end of this year, in the view of David Bowman, the senior staff liaison from the Federal Reserve Board of Governors to the Alternative Reference Rates Committee (ARRC).

  • Mr. Bowman made the remarks in an exclusive presentation to NeuGroup members Monday afternoon, the first of two such sessions. The second is on Thursday.
  • Among the treasury professionals participating in the call, only 35% said their companies have formed cross-functional teams to manage the transition to SOFR, while 35% have not and 30% have plans to do so. In other words, a lot of companies have plenty to do to prepare.
  • Mr. Bowman said Ford Motor Co. will be joining ARRC, which already includes the National Association of Corporate Treasurers and the Association for Financial Professionals; less than a third of members are banks. He said that ARRC welcomes the input of nonfinancial corporates in its working groups.

ARRC liaison David Bowman explains the implications of SOFR and what corporates need to do now.

Corporate treasury teams that have paid little or no attention to the planned transition from Libor to SOFR, take note: That stance makes much less sense today than last year and “won’t make any sense” by the end of this year, in the view of David Bowman, the senior staff liaison from the Federal Reserve Board of Governors to the Alternative Reference Rates Committee (ARRC).

  • Mr. Bowman made the remarks in an exclusive presentation to NeuGroup members Monday afternoon, the first of two such sessions. The second is on Thursday.
  • Among the treasury professionals participating in the call, only 35% said their companies have formed cross-functional teams to manage the transition to SOFR, while 35% have not and 30% have plans to do so. In other words, a lot of companies have plenty to do to prepare.
  • Mr. Bowman said Ford Motor Co. will be joining ARRC, which already includes the National Association of Corporate Treasurers and the Association for Financial Professionals; less than a third of members are banks. He said that ARRC welcomes the input of nonfinancial corporates in its working groups.

What you should be doing now. In addition to forming cross-functional review teams, Mr. Bowman recommended that members start testing SOFR now through lines of credit, for example. His presentation noted that testing SOFR will help corporates shape how the market evolves and learn what works and what doesn’t. “Waiting means you forgo the chance to shape choices that will eventually impact you,” one slide stated.

Other advice and insights:

  • Corporates should participate in the ISDA protocol to amend fallback language in derivatives, and amend or renegotiate fallback provisions in other contracts when opportunities arise.
  • Operational changes will take time and planning. New loans, debt and securitizations based on SOFR will require operational updates, especially when using SOFR in arrears, and will have different pricing and margins.
  • Changes to internal valuations or other systems will need to be included in budgets, IT project planning, etc. Corporates will also want to make sure that external vendors are making necessary changes and that those changes will meet specific needs.
  • It’s a misconception that the repo market rates SOFR is based on will move down more than overnight unsecured rates. They actually move quite closely with the fed funds effective rate and the Fed’s monetary policy targets:
Source: FRBNY

Time check. Here are some timeline facts to keep in mind as corporates plan for the SOFR transition.

  • The UK’s Financial Conduct Authority in July 2019 said it expects some banks to leave the Libor panels soon after 2021. At that point Libor would either stop or FCA would have to judge wither it was reliably accurate. FCA has noted that with so few transactions already underlying Libor, any further bank departures would make Libor even less representative.
  • The Federal Reserve Bank of New York on Monday began publishing 30-, 90-, and 180-day SOFR averages as well as a SOFR index, in order to support a successful transition away from Libor.
  • ISDA’s protocol for converting legacy derivative contracts is expected in Q3.
  • GSEs like Fannie Mae will stop using Libor for ARMs and begin using SOFR in Q4.
  • The creation of a SOFR term reference rate will take place in 2021. Mr. Bowman said the original plan called for that to happen at the end of the year but the hope is to move that up to H1 2021.
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How to Convince Business Units That ERM Has Real Value

Integrating it with strategic planning shifts perceptions that ERM is a bureaucratic exercise.

Enterprise risk management (ERM) is often viewed by business leaders as a check-the-box exercise that interferes with the profit engines they’re seeking to run.

A treasurer at a recent NeuGroup meeting who also chairs his company’s risk committee sought advice on how to convince the leaders of business units and other corporate entities that the ERM process adds value. Ed Scott, senior executive advisor at NeuGroup and a retired Caterpillar Inc. treasurer, noted two approaches Caterpillar used to improve ERM.

Integrating it with strategic planning shifts perceptions that ERM is a bureaucratic exercise.

Enterprise risk management (ERM) is often viewed by business leaders as a check-the-box exercise that interferes with the profit engines they’re seeking to run.

A treasurer at a recent NeuGroup meeting who also chairs his company’s risk committee sought advice on how to convince the leaders of business units and other corporate entities that the ERM process adds value. Ed Scott, senior executive advisor at NeuGroup and a retired Caterpillar Inc. treasurer, noted two approaches Caterpillar used to improve ERM.

Strategic planning integration. ERM must be integrated with the company’s strategic planning efforts.

  • A lesson learned, Mr. Scott said, is to coordinate ERM with the planning that each business does annually. At Caterpillar, that’s done in the fall, but the ERM exercise was conducted from December through February, confusing business-unit managers and making integration with the strategic plan more difficult.
  • “Prior to integrating the ERM process with annual strategic planning, action plans for each risk weren’t part of the goals and objectives for each business unit’s strategic plan, so it looked like just a bureaucratic, regulatory exercise,” Mr. Scott said.
  • To improve the process, ERM was moved from internal audit (IA) to the strategic planning group. “So now it was no longer some bureaucratic exercise but viewed as part of the strategic planning process,” he said.

The third dimension. ERM risk profiles typically factor in the probability of a risk occurring and the resulting severity in terms of cost. Several years ago, Caterpillar added time for the risk to occur as a third factor. For example:

  • In the case of a chemical company, there is a low to medium probability of a railcar chlorine spill, but if it occurred it would be severe and immediate. The severity and urgency would make it high risk.
  • Conversely, losing highly talented employees may be a medium risk and potentially severe, but since it could occur over a longer period of time, the total risk may be diminished.
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Hard to Let Go: Markets Slow to Move from Libor to New Benchmark

October 09, 2019

By Ted Howard

Banks are still using the London Interbank Offered Rate but SOFR is slowly gaining traction.

The members of NeuGroup’s Bank Treasurers’ Peer Group (BTPG) recently heard Chatham Financial discuss the switch from Libor to SOFR on their Q3 interim conference call. The big takeaway is that Libor remains firmly embedded in a lot of transactions, and even though banks understand that the tainted benchmark will disappear in the near future, the transition is inching along slowly. This could be because the shift is seen as a heavy lift given the low liquidity levels in the SOFR market.

“Here we are in September of 2019, and I would say that across our client base we really haven’t seen clients pulling away from Libor-based products in advance of the 2020-21 time frame with as much urgency as some have advocated for,” said Andrew Little, managing director at Chatham Financial. “As a matter of fact, given the shape of the curve, we’ve seen some clients actually extend the duration of their Libor exposure well out to seven years, 10 years and beyond.”

Nonetheless, Mr. Little said, “We have definitely seen a meaningful uptick in non-LIBOR-based balance sheet hedging.”

October 09, 2019

By Ted Howard

Banks are still using the London Interbank Offered Rate but SOFR is slowly gaining traction.

The members of NeuGroup’s Bank Treasurers’ Peer Group (BTPG) recently heard Chatham Financial discuss the switch from Libor to SOFR on their Q3 interim conference call. The big takeaway is that Libor remains firmly embedded in a lot of transactions, and even though banks understand that the tainted benchmark will disappear in the near future, the transition is inching along slowly. This could be because the shift is seen as a heavy lift given the low liquidity levels in the SOFR market.

“Here we are in September of 2019, and I would say that across our client base we really haven’t seen clients pulling away from Libor-based products in advance of the 2020-21 time frame with as much urgency as some have advocated for,” said Andrew Little, managing director at Chatham Financial. “As a matter of fact, given the shape of the curve, we’ve seen some clients actually extend the duration of their Libor exposure well out to seven years, 10 years and beyond.”

Nonetheless, Mr. Little said, “We have definitely seen a meaningful uptick in non-LIBOR-based balance sheet hedging.”

SOFR and the credit component. Todd Cuppia, managing director at Chatham Financial, agreed the elevated market volatility and the shape of the curve have increased the amount of hedging activity. He said around 75% of the macro trades that Chatham executes for its bank clients are still pointing to Libor, which he said was a “pretty meaningful departure” from what those statistics were a year ago, when close to 95% of balance sheet hedging referenced the LIBOR index. “Now there is an encouraging percentage of the activity we see going toward fed funds as an index, and eventually we expect SOFR once it becomes more viable from a liquidity standpoint,” Mr. Cuppia said. “I think ultimately from what we can tell, banks want a clear path forward on how to operate in the period before Libor goes away as well as clarity on fallback mechanics.”

Chatham pointed out, as have others, that the one thing that could engender better SOFR uptake would be some type of credit component that could be added to SOFR. Chatham reports that there is a strong interest from the market in developing one soon, although the path forward is still unclear.

“I think most of the [Libor-SOFR] conversation reduces in some way to the desire to replicate the time-varying credit spread that is inherent in Libor,” Mr. Cuppia noted. That reality has increased the relevancy of what he calls the “alternative alternative reference rates.” The two leading contenders are Ameribor and the ICE Bank Yield Index. Things to know here, he said, include:

  • Take comfort. For longer-dated Libor contracts, banks and the market may take some comfort from the fact that the historical spread method has already started to be priced into the forward curves. By that measure, “some may say that the transition is becoming priced in to the extent you believe that current basis markets and historical averages are going to be in range of what the different working groups have suggested, which was a multiyear average or median of those rates,” Mr. Cuppia said.
  • “If you look at fed funds as a reasonable proxy for SOFR and you look at the basis between fed funds and Libor, you can see a pretty meaningful decline in those basis rates to what could be a fair representation of their historical average,” he said. “I believe that’s what could be guiding the thinking of those who are using those much longer-term Libor contracts relative to what their alternatives may be.”
  • Standards that simplify. Mr. Cuppia said another issue that merits deeper attention is a recent change in the hedge accounting standard that has made it significantly easier for institutions to hedge fixed-rate exposures. “This relief is just in time for the Libor transition and so to the extent that there is concern around hedges using Libor, which have these fallback risks, it’s very simple to use a non-Libor index. We’ve seen a meaningful increase in the use of non-Libor derivatives on our macro hedging desk.”
  • Product development. To that end, one of the things that Chatham is working on is how to think about replicating some of the option products that exist for Libor in a SOFR world. Mr. Cuppia said there isn’t a lot of clarity yet, but markets received some good news recently when the CME Group announced it will begin to trade options on SOFR futures beginning in January. “This could be the beginning of the development of the volatility complex, which is important for balance sheet hedging and broader risk management processes,” Mr. Cuppia said.
  • Go fixed rate. One theme that Chatham is seeing is an increased interest in hedging fixed-rate loans. “Users were in a sense sidestepping the development of these alternative reference rates and how to calculate the appropriate spread through the different economic cycles, and using a more plain-vanilla balance sheet hedging strategy allowing portfolio managers to take the risks they want on the asset side without getting their asset-liability picture off-kilter, so to speak,” Mr. Cuppia said.

All this has led to many questions, according to Chatham. For instance:

  • How will Ameribor develop now that there is both a cash and futures market? How will the ICE US Bank Index develop?
  • How will both connect with what the International Swaps and Derivatives Association (ISDA) will say should be the credit component on interest-rate swaps?

There remains a lot to keep track of as we transition from Libor to an alternative reference rate. We know that SOFR is certainly an alternative with strong support from the Fed, and it seems as if it will be up to the market to collectively determine the outcome of the credit component. This transition will not only be keenly watched by bank treasurers, but also by corporate treasurers who have assets and liabilities currently referenced to Libor. Stay tuned!

Libor Exposure Breakdown

The value of all financial products tied to US dollar Libor is about $200 trillion, according to the New York Federal Reserve. This amount, which the Fed estimates is roughly 10 times US GDP, includes $3.4 trillion of business loans, $1.8 trillion of floating-rate notes and bonds, another $1.8 trillion of securitizations and $1.3 trillion of consumer loans, most of which are residential mortgage loans. The remaining 95% of exposures are derivative contracts.

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A Look Back at Our Enterprise Reconciliation Insight

Founder’s Edition, by Joseph Neu

A 20-year-old best practice guide says a lot about the state of working capital management today.

There seems to be a lot of renewed interest in working capital management lately, with a focus on automating processes, capturing data and deploying technology. The goal: to improve analysis and predictability of the quote-to-cash, order-to-delivery and purchase-to-pay cycles. This stands to vastly improve working capital management, but especially cash and liquidity management.

  • I kept thinking, all of this seems oddly familiar, and now I know why. I dug up one of our old best practice guides, published 20 years ago: Enterprise Reconciliation: The New Foundation for Cash Management in the Era of E-Commerce. Substitute AI-powered data matching for reconciliation and digital transformation for e-commerce and we could easily republish the guide today.

Founder’s Edition, by Joseph Neu

A 20-year-old best practice guide says a lot about the state of working capital management today.

There seems to be a lot of renewed interest in working capital management lately, with a focus on automating processes, capturing data and deploying technology. The goal: to improve analysis and predictability of the quote-to-cash, order-to-delivery and purchase-to-pay cycles. This stands to vastly improve working capital management, but especially cash and liquidity management.

  • I kept thinking, all of this seems oddly familiar, and now I know why. I dug up one of our old best practice guides, published 20 years ago: Enterprise Reconciliation: The New Foundation for Cash Management in the Era of E-Commerce. Substitute AI-powered data matching for reconciliation and digital transformation for e-commerce and we could easily republish the guide today.

Produced with Chase Bank, the guide drew from a series of exchanges with companies (including Colgate-Palmolive, Dell, Eli Lilly, Merck, Microsoft, Nike and P&G) and a roundtable we facilitated in April 2000. The latter offered practical guidelines for how treasury, leveraging the internet, could take a leading role in promoting “enterprise reconciliation.” Here are some takeaways that remain highly relevant today:

  • Enterprise reconciliation requires businesses to reconcile information on transactions conducted through the banking system via intra-enterprise networks and extra-enterprise networks connecting business value chains.  Generally, these reconciliations come in three types:
    • Matching cash positions with those reported by banks via primary collection and disbursement accounts, and secondary custodial accounts receiving funds from investments and dispersing them to investors.
    • Matching cash with payments and receipts from invoicing and bill presentment that come from suppliers and customers (which also may be performed by a bank).
    • Matching cash positions with physical goods and services ordered, sourced, manufactured and delivered prior to the payments being made or received.
  • Total working capital management requires that data from each type be regularly reported, captured and analyzed relative to current, future and historical information.

In the broadest sense, then, enterprise reconciliation was understood as capturing data from all transactions, analyzing it and connecting the dots to gain instant insight and develop foresight on what the transactions say about the business today and what they can predict.

  • Two-decade-old challenges. Extending the bank reconciliation concept to the enterprise level posed three major challenges that should also ring familiar:
    • Moving to real-time reporting and processing that captures all relevant data.
    • Integrating data on physical and anticipated transactions with actual cash payments.
    • Creating a mandate to act on the data across the relevant functional finance and business silos.   

Finally, the old guide’s checklist items, meant to prompt specific actions, are totally relevant today. These include:

  • Expand scope—or die. As treasury’s time gets freed up by automation, teams need to expand their scope to other areas for financial operations to be in the game for total working capital management.
  • Assemble a cross-functional team. If a “takeover” isn’t possible, then assemble a team to work across the relevant finance silos and—above all—partner with the business units. Make sure you receive a clear mandate to both obtain the needed data and act on it.
  • Form partnerships with business operations based on common goals. Identify partners in specific business operations and determine how you can help them meet specific performance goals.
  • Go on-site to find data. Jointly looking under the hood to find relevant data is one of the main reasons to form these partnerships, so do it.

As happy as I am about the value of this 20-year-old insight, I’d rather see it have very little relevance beyond nostalgia when I look back in 20 years.

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A Treasurer Grows Frustrated with a Top US Lender and Takes It down a Notch

Seeking a bigger return on its capital as rules tighten, the bank wanted a larger share of wallet.

One of the largest US commercial lenders is aggressively seeking more return—share of wallet—for the credit it provides corporates, prompting at least one borrower to say “enough” and downgrade the bank’s rank in its loan syndicate.

  • That takeaway emerged at a recent NeuGroup meeting where members exchanged insights about syndicated loan market trends and discussed which banks are eager to extend credit and which are less inclined.

Fed up. The treasurer who grew sick of the bank’s demands was in the process of renewing a term loan A and revolver last year. The lender’s insistence on a higher return on capital went too far. “We actually tiered that one down, because we were frustrated with them,” he said.

Seeking a bigger return on its capital as rules tighten, the bank wanted a larger share of wallet.

One of the largest US commercial lenders is aggressively seeking more return—share of wallet—for the credit it provides corporates, prompting at least one borrower to say “enough” and downgrade the bank’s rank in its loan syndicate.

  • That takeaway emerged at a recent NeuGroup meeting where members exchanged insights about syndicated loan market trends and discussed which banks are eager to extend credit and which are less inclined.

Fed up. The treasurer who grew sick of the bank’s demands was in the process of renewing a term loan A and revolver last year. The lender’s insistence on a higher return on capital went too far. “We actually tiered that one down, because we were frustrated with them,” he said.

Capital concerns. As the Basel III capital accords continue to take hold, banks are increasing their focus on their risk-weighted assets (RWA). That’s especially true of their capital-intensive revolving and term loan facilities, and whether a bank’s overall relationship with a borrower warrants providing it the amount of credit it currently does.  

Different perspective. Given that context, another member at a Fortune 100 company that deals with the bank in question had a different take, saying the lender appears to be ahead of the curve in adapting to the new rules, ensuring adequate return for putting its balance sheet to work, and communicating clearly with clients. “We see enhanced dialogue and focus from [the bank]. We use them as a sounding board,” he said.    

Credit seekers. Members agreed that US regionals, including PNC, US Bank, Fifth Third and SunTrust, are eager to participate in revolvers and, in particular, term loan A’s, where they can earn reasonable net interest margins relative to their borrowing costs and develop deeper relationships with the borrowing companies.

  • Japanese banks, such as Mitsubishi UFJ Financial Group, Mizuho Bank and Sumitomo Mitsui Banking have also been active on that front.
  • For blue-chip names, Chinese banks have stepped up for commitments of $50 million or $75 million, “but they don’t ever want them drawn, because they’re working off swap lines from China,” one member said, adding, “It’s branding more than anything else.”

Less enthused. European banks have retreated from the syndicated loan market for years—HSBC just announced significantly scaling back operations in the US and Europe.

  • Canadian banks received a mixed reaction from members regarding their willingness to participate in revolving credit facilities. Some have expressed a willingness to expand their lending into the US because of its sizeable fee pool across commercial and investment banking. However, their main focus remains the strong franchises they have built in Canada.
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No Slam Dunk for Pension Fund Managers: Selling Leverage-Averse Boards on Overlays

The popularity of overlays is increasing in the US despite concerns of executive committees.

Leverage is something of a dirty word in the world of pension funds and that, perhaps, presents the biggest challenge that pension fund managers face when seeking to persuade their companies’ executive committees to use overlays that use derivatives as a fund-management tool.

At a roundtable of pension fund managers arranged by the NeuGroup, one participant said his team had begun to explore how to “de-risk” the plan more than three years ago, using a derivative overlay to hedge liabilities as one tool.

  • But the executive committee said no to derivatives and the leverage they often include. “So we had to go through an education process on their timeline. Since then, rates fell 50 basis points, and committee members asked, ‘Have you put on the overlay yet?’”

Laugh line. That produced chuckles in the room and prompted other roundtable participants to chime in about the difficulty of convincing executive committees about the benefits of overlay strategies. Such strategies use derivatives like swaps and treasury futures to gain, offset or substitute specific portfolio exposures beyond the portfolios’ physical assets.

The popularity of overlays is increasing in the US despite concerns of executive committees.

Leverage is something of a dirty word in the world of pension funds and that, perhaps, presents the biggest challenge that pension fund managers face when seeking to persuade their companies’ executive committees to use overlays that use derivatives as a fund-management tool.

At a roundtable of pension fund managers arranged by the NeuGroup, one participant said his team had begun to explore how to “de-risk” the plan more than three years ago, using a derivative overlay to hedge liabilities as one tool.

  • But the executive committee said no to derivatives and the leverage they often include. “So we had to go through an education process on their timeline. Since then, rates fell 50 basis points, and committee members asked, ‘Have you put on the overlay yet?’”

Laugh line. That produced chuckles in the room and prompted other roundtable participants to chime in about the difficulty of convincing executive committees about the benefits of overlay strategies. Such strategies use derivatives like swaps and treasury futures to gain, offset or substitute specific portfolio exposures beyond the portfolios’ physical assets.

Overlay rising. A banker attending the meeting noted that 10 years ago, few if any plans in the UK used overlay as a part of liability driven investment (LDI) strategies, but today nearly all do. He added that the approach has crossed the Atlantic, with a recent survey showing 75% of US plans using overlay compared to less than half five or so years ago.

An overlay argument. LDI strategies aim to accrue sufficient assets to cover all current and future liabilities, often requiring derivative overlays when physical assets are insufficient or inappropriate. Another member said that rolling out an LDI program generated “quite a discussion” with the executive committee.

  • Her team framed its argument by noting that the company’s greatest risk in terms of expense management and cash flow is its funded status volatility, emphasizing that implementing an LDI program reduces such volatility, even when derivatives introduce leverage.

Counterparty concerns. Aside from leverage, another issue stemming from overlays is the counterparty risk of over-the-counter swaps, a big concern during the financial crisis. But new regulations require daily margin calls on all the derivatives used, and “that risk has essentially gone away,” noted a roundtable member.

Leveraging up only assets is problematic. In an asset/liability context, however, using derivatives to increase the duration of the pension fund’s asset pool to offset the fund’s short liability position is actually delevering and decreasing risk. “The powerful thing about overlay,” he said, “is that it is leverage from a narrow, asset-only perspective, but from an asset/liability bent it is risk reducing.”

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Treasury Teams Taking to Heart the Force of the ESG Wave Barreling Across Atlantic

Discussing insurance, investing and BlackRock’s Larry Fink, NeuGroup members weighed in on ESG.

The potentially dramatic and varied impact on multinationals from the environmental, social and governance (ESG) wave barreling across the Atlantic from Europe is hitting home for a growing number of US finance teams. That was among the key takeaways from comments by treasurers gathered in Dallas for NeuGroup’s first meeting of 2020.

Thanks for the warning. One the most interesting revelations involved the effect of ESG on insurance.

  • One treasurer said a French insurer sought to “squeeze language” on a recent casualty policy renewal in light of the potential social concerns arising from the company’s defense industry products. Another member planning to implement an auto policy for his company’s European fleet appreciated the heads-up.
    • “We’re taking out all local policies, so it’s good to hear about your experience. We’ll probably run into that,” he said.
  • US insurers increasingly use ESG to help measure risk in the policies they’re underwriting so “if your company has a bad ESG score, then you’re probably going to pay a higher premium,” NeuGroup’s Scott Flieger said.

Discussing insurance, investing and BlackRock’s Larry Fink, NeuGroup members weigh in on ESG.

The potentially dramatic and varied impact on multinationals from the environmental, social and governance (ESG) wave barreling across the Atlantic from Europe is hitting home for a growing number of US finance teams. That was among the key takeaways from comments by treasurers gathered in Dallas for NeuGroup’s first meeting of 2020.

Thanks for the warning. One the most interesting revelations involved the effect of ESG on insurance.

  • One treasurer said a French insurer sought to “squeeze language” on a recent casualty policy renewal in light of the potential social concerns arising from the company’s defense industry products. Another member planning to implement an auto policy for his company’s European fleet appreciated the heads-up.
    • “We’re taking out all local policies, so it’s good to hear about your experience. We’ll probably run into that,” he said.
  • US insurers increasingly use ESG to help measure risk in the policies they’re underwriting so “if your company has a bad ESG score, then you’re probably going to pay a higher premium,” NeuGroup’s Scott Flieger said.

The Fink Effect. The meeting took place just three weeks after BlackRock CEO Larry Fink, in his annual letter to CEOs, announced initiatives placing sustainability at the center of the giant asset manager’s investment approach, including exiting incompatible investments and launching new products that screen fossil fuels.

  • One treasurer, underscoring the significance of the letter, said, “If your company is publicly rated, BlackRock is probably one of your top five shareholders, and if it wants to see what you’re doing in that space, then ESG is coming.”
    • The possible implications of what’s coming include something already seen in Europe: ESG pricing grids that borrowers may encounter alongside credit grids on their credit facilities.

Risk alarm bell. Mr. Flieger made the point that screening for ESG can pay off for investors beyond doing what’s beneficial for society. “Investors are using these ESG scores not only for socially responsible sustainable investments, but to identify which might be susceptible to a significant tail-risk event,” he said.

Avoid controversy. Strong ESG scores can be undermined by “controversy” scores, generated by the frequency of a company’s negative press. Funds likely won’t share the ESG reports they pay the scoring firms for, but treasury executives should ask them for details. “Because if I’m going to be invested in ESG, my company better be in those funds,” one member said.

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Mike Likes It, but Would Your Team Vote for an Open-Office Plan?

Open-office plans like the one Mike Bloomberg adopted at City Hall have fans and skeptics. Where do you stand (sit)?

Presidential hopeful Mike Bloomberg in December tweeted the picture above of the “bullpen” office he had as New York City mayor and wrote, “I’ll turn the East Room into an open-office plan, where I’ll sit with our team.”

No one can say if that will ever happen, of course. But the subject of open-office plans definitely sparked interest at a NeuGroup meeting this month when one member asked how others organize their office space.

Breaking down walls. One member surprised peers by saying that within a few months his company will move completely to open space, with no walls between people, and that arrangement will apply also to top executives, including the CEO, CFO and legal counsel.

Open-office plans like the one Mike Bloomberg adopted at City Hall have fans and skeptics. Where do you stand (sit)?

Presidential hopeful Mike Bloomberg in December tweeted the picture above of the “bullpen” office he had as New York City mayor and wrote, “I’ll turn the East Room into an open-office plan, where I’ll sit with our team.”

No one can say if that will ever happen, of course. But the subject of open-office plans definitely sparked interest at a NeuGroup meeting this month when one member asked how others organize their office space.

Breaking down walls. One member surprised peers by saying that within a few months his company will move completely to open space, with no walls between people, and that arrangement will apply also to top executives, including the CEO, CFO and legal counsel.

  • “If you want to exchange confidential information, there will be a room, but you won’t be allowed to sit there all day,” he said.
  • Another member called his firm’s environment open, “but we do have individually assigned desks, so we’re not completely free.”

Backlash. The concept of open-space seating has been around for decades, especially among technology companies that have viewed open-space environments as conducive to exchanging ideas.

  • More recently, however, there has been something of a backlash, with studies like one in 2018 by Harvard researchers showing that open-space workplaces can significantly reduce employee productivity.

Alternatives. Another meeting participant’s company had expressed interest in open space, but for now employees remain in cubicles with low walls, and managers have offices.

  • Its finance arm’s building is being renovated, however, and the result will be low-wall cubicles and every manager’s office will be the same size, no matter their rank.

Still, meeting members suggested most treasury departments remain conservative on the seating front, with team members sitting in cubicles with high walls—a “legacy thing,” as one person put it.

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Margin Bells Will Soon Toll for More Pension Funds

Pension funds need to prepare for margin rules covering the OTC derivatives they use.

Corporate pension-fund managers may soon have initial-margin responsibilities for the over-the-counter (OTC) derivatives they use to manage those funds, even if their parent companies are exempt.

Background. Following the financial crisis, global regulators established variation and initial margin rules for OTC derivatives to provide greater transparency into counterparty risk.

  • Those requirements first became effective in 2016 for financial firms with more than $3 trillion in notional derivatives exposure and were extended in stages to firms with smaller notionals, reaching those with $750 billion in exposure in 2019.
  • While most corporate end-users of OTC derivatives were exempted from margin requirements, their employee-benefits plans, under the Employee Retirement Income and Security Act (ERISA), were not. Consequently, most corporate pension plans will soon be subject to margin rules, and several fund managers raised issues at a recent NeuGroup meeting:

Pension funds need to prepare for margin rules covering the OTC derivatives they use.

Corporate pension fund managers may soon have initial-margin responsibilities for the over-the-counter (OTC) derivatives they use to manage those funds, even if their parent companies are exempt.

Background. Following the financial crisis, global regulators established variation and initial margin rules for OTC derivatives to provide greater transparency into counterparty risk.

  • Those requirements first became effective in 2016 for financial firms with more than $3 trillion in notional derivatives exposure and were extended in stages to firms with smaller notionals, reaching those with $750 billion in exposure in 2019.

While most corporate end-users of OTC derivatives were exempted from margin requirements, their employee-benefits plans, under the Employee Retirement Income and Security Act (ERISA), were not. Consequently, most corporate pension plans will soon be subject to margin rules, and several fund managers raised issues at a recent NeuGroup meeting:

  • When? The threshold for posting margin drops this year to financial end users with more than $50 billion in notional exposure, and in 2021 will include market participants with more than $8 billion in OTC notional.
  • Covering margin calls. A member of the roundtable noted the need for a policy for raising cash to cover margin calls. Another participant recounted addressing that issue when her company began its overlay program, so it decided to perform a VAR analysis to size its collateral at 99% for a one-month stress test.
    • “It wouldn’t have covered where we landed in the global financial crisis for equity, but for every other scenario there was sufficient cash,” she said.
  • Cash or Treasuries? The participant added that her company is holding the collateral as cash, which it then “equitizes,” or places in short-term investments such as ETFs. Depending on the instrument, she said, the cash can generally also be held in Treasuries, providing a bit of income.
  • Administration? No way. Tracking daily margin and posting margin is an administrative hassle, which the roundtable member said she leaves to her ERISA manager.
    • “There’s no way I would ever want to do that. I just make sure there’s enough cash in the account with the manager to cover the amount of collateral we feel is sufficient,” she said.

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Mining Merchant Services for Today’s Gold: Data

Founder’s Edition by Joseph Neu

The drive to access and leverage data from credit card and other transactions is transforming merchant services.

Merchant services are fast becoming a key value driver for transaction banks, fintechs and other financial services institutions. The key reason is the importance of capturing data at the point of sale, along with facilitating frictionless transactions. What takes place under the heading of merchant services is worth your attention because:

  1. It’s the beginning of the data-rich order-to-cash cycle for most companies, which is vital to understanding their cash flow models, their businesses, and their credit risks.
  2. It’s a vital source of data to understand what consumers buy, how much they spend, how they pay, and where and when they pay—which, in turn, can be used to verify identity and mitigate fraud.
  3. It offers a critical opportunity to influence—by using what is learned from the data—how customers pay, which enables effective loyalty programs and promotional incentives and, potentially, the reduction of merchant transaction fees (see below).

Founder’s Edition by Joseph Neu

The drive to access and leverage data from credit card and other transactions is transforming merchant services.

Merchant services are fast becoming a key value driver for transaction banks, fintechs and other financial services institutions. The key reason is the importance of capturing data at the point of sale, along with facilitating frictionless transactions. What takes place under the heading of merchant services is worth your attention because:

  1. It’s the beginning of the data-rich order-to-cash cycle for most companies, which is vital to understanding their cash flow models, their businesses, and their credit risks.
  2. It’s a vital source of data to understand what consumers buy, how much they spend, how they pay, and where and when they pay—which, in turn, can be used to verify identity and mitigate fraud.
  3. It offers a critical opportunity to influence—by using what is learned from the data—how customers pay, which enables effective loyalty programs and promotional incentives and, potentially, the reduction of merchant transaction fees (see below).

The value of data is why e-commerce giants like Alibaba in China have moved quickly to dominate in a wide variety of merchant services, including digital payments. It may have started with helping customers pay with less friction, but now the data is more important.

  • China + data. The experience in China, where Alibaba’s Alipay and Tencent’s WeChat Pay have totally disrupted banks on consumer payments and other merchant services, is one reason transaction banks outside China are trying hard to disrupt merchant services themselves. But like the e-commerce giants, they’re also eying the value of data.

A major problem with merchant services has been its fragmentation—too many players serving different segments of the market; there was also a general lack of integration end-to-end. This creates inefficiencies and higher fees, but it also means that a lot of data gets lost.

  • Creating end-to-end platforms. Hence, the desire for players in merchant services to create end-to-end platforms, either through acquisition rollups or greenfield investment.

Banks, particularly those with a strong retail presence already, are looking at creating end-to-end global payment and merchant services platforms as potential cores to their broader transaction services businesses. “Payments are now nonlinear,” said one banker who heads global merchant services sales for such a bank, “so you need to own the payment system end to end. You also want to be able to serve all clients from smallest to largest, across segments.”

In theory, this push toward single platforms also will help merchants and consumers get something in return for the data they end up sharing at the point of sale.

  • Consumers, for example, could be offered more choices for rewards depending on the form of payment—e.g., use this card and you will get a $50 credit on your next purchase at that store, bypassing the typical 1%, 2% or 3% cash back.
  • Merchants, meanwhile, may be able to drive more sales with loyalty programs and targeted incentives, but also tap into a broader pool of data to manage inventory and product selection. This will also allow them to share more of the value in interchange fees and lower them via the data capture (e.g., so-called level 3 data such as invoice and order numbers).

Watch this space!

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Negative-Rate Concerns Spreading to Pension Funds

US MNCs with European pension funds are being forced to contend with negative rates in Europe.

Although the likelihood of negative interest rates in the US still seems remote, in Europe they’ve been a reality for several years, and pension funds are now grappling with what that means. 

In a recent NeuGroup meeting, the head of pension investments at a multinational corporation (MNC) with several European funds noted that for the first time the company will have to use negative interest rates to value liabilities, specifically in a Swiss fund.

This treasurer noted that he reviewed IFRS accounting rules that apply to European companies, and concluded a negative number must be used in those calculations, “even though it doesn’t sound right. You promised a $100 pension to someone, and you knew it wouldn’t be more than that, but today you have to say that my liability is $105.”

US MNCs with European pension funds are being forced to contend with negative rates in Europe.

Although the likelihood of negative interest rates in the US still seems remote, in Europe they’ve been a reality for several years, and pension funds are now grappling with what that means. 

In a recent NeuGroup meeting, the head of pension investments at a multinational corporation (MNC) with several European funds noted that for the first time the company will have to use negative interest rates to value liabilities, specifically in a Swiss fund.

This treasurer noted that he reviewed IFRS accounting rules that apply to European companies, and concluded a negative number must be used in those calculations, “even though it doesn’t sound right. You promised a $100 pension to someone, and you knew it wouldn’t be more than that, but today you have to say that my liability is $105.”
 
Falling rates are no fun either. Other participants noted that falling rates, even if not yet negative, are also problematic given the growing pressure they put on banks, and ultimately their services. One member noted the impact of falling rates on her company’s P&L and said her team is now concentrating on investment manager searches and debating the value of passive versus active managers. “Do we think active management would provide us with a bit more of a defensive posture, in our equity line up?” she said. 

Cutting costs. The topic of centralizing pension plans across European countries also arose during the meeting. This was in regard to enabling pensions facing the challenge of negative rates to cut costs while potentially smoothing out imbalances when some of an MNC’s funds across different countries are well funded while others are in the red. A participant noted that Belgian law permits pooling pension fund assets, and his team has considered the move with respect to funds in smaller European countries—Belgium and Austria, for example—but the complexity has hindered progress. “We don’t see blending Germany and the UK, Switzerland and the UK, or those in other large countries,” he said. 

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For Property & Casualty: Look Past the First Tier

If you’re not getting the premium reductions your’e looking for, shop around and check out low-cost brokers.

When thinking about top-tier insurance brokers for corporates the usual suspects come to mind: Hub International, Marsh & McLennan Cos., Willis Towers Watson, Aon PLC and the like. But after a quick look beyond that upper slot, one comes across unfamiliar names. Take for instance a broker called Oswald Companies.

  • Not a well-recognized insurance broker among treasurers attending a recent NeuGroup meeting, the Cleveland-based Oswald actually has a long track record, since 1893, that stems from its high quality, low cost services.

At least that’s what one treasurer told peers, noting his company’s existing market-leading broker had declined to reduce premiums by the requested 20%. Even with revenues of nearly $4.5 billion in 2019, “We felt we were not a big enough client, either inside or outside the US” to get the proper respect and that 20% reduction, the treasurer said.

If you’re not getting the premium reductions your’e looking for, shop around and check out low-cost brokers.

When thinking about top-tier insurance brokers for corporates the usual suspects come to mind: Hub International, Marsh & McLennan Cos., Willis Towers Watson, Aon PLC and the like. But after a quick look beyond that upper slot, one comes across unfamiliar names. Take for instance a broker called Oswald Companies.

  • Not a well-recognized insurance broker among treasurers attending a recent NeuGroup meeting, the Cleveland-based Oswald actually has a long track record, since 1893, that stems from its high quality, low cost services.

Request denied. At least that’s what one treasurer told peers, noting his company’s existing market-leading broker had declined to reduce premiums by the requested 20%. Even with revenues of nearly $4.5 billion in 2019, “We felt we were not a big enough client, either inside or outside the US” to get the proper respect and that 20% reduction, the treasurer said.

That prompted a search beyond the biggest names. “We went with Oswald, a tier 2 broker that has alliances overseas that its customers can access and is hungry for business. They cut our premiums by almost $2 million,” the member said, to the audible gasps of fellow treasurers. “Almost 40% in one year.”

In return, Oswald received a base fee and a percentage of premium savings.

Coverage quality still good. Asked if coverage quality suffered, the member said the level of coverage remained largely the same, as did the carrier group—Chubb Limited, Aegon N.V., etc. “And they were able to come to us and say, ‘Here’s the data you’ll need, here’s how to put it together, and this is what the insurance companies are looking for,” he said, adding, “They did a lot of heavy lifting.”

Related risk management. The member also noted Oswald’s ancillary risk management services, such as implementing driver monitor and safety programs for auto-insurance policies related to the company’s transportation needs.

Fast. The member said his treasury group moved quickly to replace its current policies, and Oswald kept pace, replacing policies “within a quarter.”

Go long. One member asked if peers recently renewing their property and casualty policies had done so annually or for multiple years, and the consensus was a combination, although today’s rising premium environment favors longer rather than shorter. A couple of members said their brokers had locked them into two-year contracts that had worked out well. “Insurers have been hit very hard recently,” noted one. “The industry is saying we need to make money on these products.”

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Making Bank on Receivables

Founder’s Edition by Joseph Neu

Investor demand for receivables-backed securities presents opportunities for banks that harness data, technology.

Last week, I noted how supply chain finance (reverse factoring et al) was raising concerns with accountants, rating agencies and regulators because it allows unscrupulous firms to potentially extend payables to fund their working capital without considering it to be debt.

This week I focus on the positive sides of trade finance and, especially, supply chain finance: Thinking about receivables plus data opens exponential possibilities to secure financing, usually at lower rates than many imagine. Here’s the story as it applies to reverse factoring:

Investors want trade receivables. Attending a bank session last month, I learned that every asset manager and insurance company (and probably a sizable segment of other smart investors) wants receivables-backed investment opportunities from credible supply chain programs. They are coming to banks asking to put $10 billion or more to work and the banks are asking themselves how to satisfy this investor demand. The banker leading the trade finance session said there is an estimated $1.5 trillion gap between supply and demand for trade finance paper. The gap will soon climb another trillion as SMEs become more integrated into supply chains.

Why trade receivables? What investors really want are securities backed by diverse pools of trade receivables that have mitigated credit risk due to commercial relationships. Critical suppliers to strong- credit buyers are a good risk, because the buyer is not going to let a good supplier go under by not paying an invoice; the payment ensures the cash flow that supports the security the investor purchases.

Has the invoice been approved? Clearly, if the invoice has been approved, then the credit risk is further diminished. Thus, a whole ecosystem of machine learning and AI has emerged to help predict which invoices are expected to receive approval. Some solutions are said to be accurate enough to win a government guarantee based on their predictions of whether and when the invoices will be approved.

Data as a risk mitigant. Of course, the predictive power of technology is very reliant on the data accessible to it. Indeed, the data is quickly becoming as or more valuable than the receivable itself. The more data a supply chain finance vendor/arranger has that indicates when buyers approve and pay which suppliers, not to mention the commercial importance of the transaction, the more confidence investors will have in the certainty and timing of the underlying cash flows.

Founder’s Edition by Joseph Neu

Investor demand for receivables-backed securities presents opportunities for banks that harness data, technology.

Last week, I noted how supply chain finance (reverse factoring et al) was raising concerns with accountants, rating agencies and regulators because it allows unscrupulous firms to potentially extend payables to fund their working capital without considering it to be debt.

This week I focus on the positive sides of trade finance and, especially, supply chain finance: Thinking about receivables plus data opens exponential possibilities to secure financing, usually at lower rates than many imagine. Here’s the story as it applies to reverse factoring:

  • Investors want trade receivables. Attending a bank session last month, I learned that every asset manager and insurance company (and probably a sizable segment of other smart investors) wants receivables-backed investment opportunities from credible supply chain programs. They are coming to banks asking to put $10 billion or more to work and the banks are asking themselves how to satisfy this investor demand. The banker leading the trade finance session said there is an estimated $1.5 trillion gap between supply and demand for trade finance paper. The gap will soon climb another trillion as SMEs become more integrated into supply chains.
  • Why trade receivables? What investors really want are securities backed by diverse pools of trade receivables that have mitigated credit risk due to commercial relationships. Critical suppliers to strong- credit buyers are a good risk, because the buyer is not going to let a good supplier go under by not paying an invoice; the payment ensures the cash flow that supports the security the investor purchases.
  • Has the invoice been approved? Clearly, if the invoice has been approved, then the credit risk is further diminished. Thus, a whole ecosystem of machine learning and AI has emerged to help predict which invoices are expected to receive approval. Some solutions are said to be accurate enough to win a government guarantee based on their predictions of whether and when the invoices will be approved.
  • Data as a risk mitigant. Of course, the predictive power of technology is very reliant on the data accessible to it. Indeed, the data is quickly becoming as or more valuable than the receivable itself. The more data a supply chain finance vendor/arranger has that indicates when buyers approve and pay which suppliers, not to mention the commercial importance of the transaction, the more confidence investors will have in the certainty and timing of the underlying cash flows.
  • New value in data sources. This data, unfortunately for banks, resides mostly in ERP systems and not in the banking system. This explains the opportunity for ERP vendors and fintechs to partner to source this data to reduce trade friction and mitigate credit risk. If every invoice that gains approval were updated in the ERP and that information was made available instantly to a bank or securitization pool, the world would be a different place.
  • Trusted intermediary for the data. With concern growing about who has access to what data, especially when it involves historical relationships between trusted counterparties, who plays the role of intermediary for receivables data matter.
    • Banks would be one option, but they are limited in how many counterparties they can onboard to their systems (and how quickly) due to KYC regulations. Unregulated fintechs have more scope to onboard, but do they have the trust factor?
    • Another option might be platforms like Marco Polo or Voltran (now Contour), that could use their distributed ledger/blockchain to provide secure intermediation of the transactions and the data.
  • Who provides balance sheet? Corporates in the Fortune 50 that look at supply chain finance programs also want to have someone else’s balance sheet behind them. “If the whole thing goes upside down, they want to know that there is a backer able to write a half-billion-dollar check,” said one banker. Yet no bank wants to support a platform that is not exclusively theirs and no corporate wants their supply chain dependent on one bank. Bolero and Swift efforts have shown the challenges of pleasing all constituencies.

Meanwhile, the opportunity to package trade receivables and the underlying data to create optimal pools of receivables at scale to meet investor demand remains.

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Treasurers Educate HighRadius on Cash Forecasting Needs

NeuGroup members give to get by providing feedback on AI-based cash forecasting solutions.

Treasurers at a NeuGroup meeting in Texas sponsored by HighRadius provided feedback to the Houston-based technology company on what they’d like to see from cash forecasting solutions that use artificial intelligence (AI) and machine learning (ML) to improve accuracy, reduce treasury’s need to input data and allow a wider variety of pertinent data.

  • HighRadius has long provided forecasting services for accounts receivable (AR), the biggest component of cash forecasting, that make use of ML. It now is applying the methodology to accounts payable and other cash forecasting components.

Input wanted. HighRadius executives eagerly sought input on the company’s cash forecasting solution now being developed, and here’s some of what they heard from NeuGroup members:

NeuGroup members give to get by providing feedback on AI-based cash forecasting solutions.

Treasurers at a NeuGroup meeting in Texas sponsored by HighRadius provided feedback to the Houston-based technology company on what they’d like to see from cash forecasting solutions that use artificial intelligence (AI) and machine learning (ML) to improve accuracy, reduce treasury’s need to input data and allow a wider variety of pertinent data.

  • HighRadius has long provided forecasting services for accounts receivable (AR), the biggest component of cash forecasting, that make use of ML. It now is applying the methodology to accounts payable and other cash forecasting components.

Input wanted. HighRadius executives eagerly sought input on the company’s cash forecasting solution now being developed, and here’s some of what they heard from NeuGroup members:

  • Drill down to the invoice level. The HighRadius app enables companies to explore which of dozens of variables—business line, currency, country—generate most of the variance between forecasted and actual cash. A NeuGroup member suggested going deeper still, to reveal which customers generate the variance.
    • A HighRadius representative said the firm’s technology already predicts payments by individual customers on the collection side, and “we’ve been debating how far to take it” with cash forecasting.
  • A longer tail. Orders for goods and services would be another helpful variable, one member said, because they look out further than invoices.
  • Size matters. Another member suggested that HighRadius include the ability to drill down to customers responsible for 80% to 90% of a company’s AR and provide details on those accounts.
  • Override. The app allows for manual overrides when, for example, a major customer wants to pay early, prompting one meeting participant to say it should identify the customer and explain the reason for early payment.
    • “We’ve heard similar requests, so it’s on the roadmap,” a HighRadius rep responded.
  • Cross-company learnings. A corporate customer may historically pay its annual invoice on time but face challenges this year that aren’t captured by historical data. A member asked whether HighRadius’ app incorporates that company’s more recent payment history with other clients, indicating potential troubles ahead.
    • That will come as High Radius’ customer base grows, a rep said, since “learnings from one company could apply to others.”
  • Sales forecasts? Yes, said a HighRadius rep, sales forecasts provided by a company’s FP&A group could be included in the model to generate long-term forecasts.
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Steps on a Technology Journey to Data-Driven Decisions, Actions

A detailed look at the progression of one tech company’s digital transformation.

Building and using a data lake that is a centralized source of data is a key part of the modernization and technology journey for treasury at one leading tech company; a progression from being data aware to data proficient to data savvy to achieving data-driven decisions and actions.

  • A treasury cash operations manager presenting details of this journey at a NeuGroup meeting said a top priority was “wading into the data lake despite the complexity” because treasury is “tired of pulling data from multiple systems.” Among the goals are data transparency, standardization and control.

Data analytics. This company’s treasury adopted Power BI (everyone is trained to use it) for creating standardized dashboards with drill-down capabilities so it could address questions immediately but also create a more self-serve environment. Using the tool’s capabilities to do data analytics, the member said, reveals both data-driven answers and, initially, data shortcomings.

  • Hence the benefit of the data lake. And as other NeuGroup members have noted, treasury’s ability to use AI and machine learning for cash flow forecasting and other purposes depends on having data that has depth and detail.

A detailed look at the progression of one tech company’s digital transformation.

Building and using a data lake that is a centralized source of data is a key part of the modernization and technology journey for treasury at one leading tech company; a progression from being data aware to data proficient to data savvy to achieving data-driven decisions and actions.

  • A treasury cash operations manager presenting details of this journey at a NeuGroup meeting said a top priority was “wading into the data lake despite the complexity” because treasury is “tired of pulling data from multiple systems.” Among the goals are data transparency, standardization and control.

Data analytics. This company’s treasury adopted Power BI (everyone is trained to use it) for creating standardized dashboards with drill-down capabilities so it could address questions immediately but also create a more self-serve environment. Using the tool’s capabilities to do data analytics, the member said, reveals both data-driven answers and, initially, data shortcomings.

  • Hence the benefit of the data lake. And as other NeuGroup members have noted, treasury’s ability to use AI and machine learning for cash flow forecasting and other purposes depends on having data that has depth and detail.  

The role of the cloud. The presenter said that moving treasury applications to the cloud to co-locate data reduced IT’s footprint by 60%. Treasury has about 40 applications; 24 of them are first-party apps (meaning the company builds and maintains them in-house), and the rest are third-party apps. The first-party apps address:

  • Cash forecasting
  • Cash visibility
  • Bank account management
  • Intercompany loan management
  • Wire requests and tracking

SWIFT gpi and transparency. The company was an early adopter of SWIFT gpi, which allows treasury to track wires once they leave treasury’s banking partner. One member said this is good news for her treasury. “This will be very beneficial to us as we have limited visibility to transactions once they leave our banks,” she said. “SWIFT gpi will provide more transparency on payment statuses.”

SWIFT and the cloud. The company and SWIFT have worked together on a cloud-native project that allows SWIFT wire transfers to be done over the cloud. The teams have enabled SWIFT wire transfers on this setup. The company is the first cloud provider working with SWIFT to build public cloud connectivity and will work toward making this solution available to the industry. 

How it works. Treasury sends a wire instruction through a web app on the cloud, which is validated by using machine-learning algorithms.

  • Once validated for authenticity, these wires are sent to SWIFT via the company’s SWIFT installation on the cloud. SWIFT validates the wire instructions and sends it off to the appropriate bank. Once the bank carries out the wire instruction, it sends confirmation through to treasury.

Machine learning. Treasury built a machine-learning forecasting solution that is addressing a key FX exposure for the company while improving forecast accuracy of AR and operational efficiency for the team.

  • Historical data in the cloud was cleaned and used to create the solution using the R programming language and other tools.
  • Cumulative forecasting of notional exposure improved by 6%.
  • Volatility of FX impact on other income and expense was reduced by ~25%.

The people part. Like many treasury teams, this one is trying to strike the right balance between people in possession of core treasury knowledge and skills and those who are more adept at data analytics and have advanced quantitative abilities. In addition to everyone learning Power BI, treasury recently hired its own data analysts.

The problem remains, though, that some staff lack the skills, ability or interest to learn new tools and technology at a point when data science is increasingly critical. The treasury team highly encourages employees to take courses to increase their skills in the data analytics space and provides sponsorship to help them achieve these goals.

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Tales from the Cyber Crypt

Assistant treasurers exchange recent scary cyber tales of success and failure.

In a breakout session at NeuGroup’s Assistant Treasurers’ Leadership Group focusing on securing companies from cyberattacks, members recounted recent experiences and the conundrums they face combating them.

Digital protection, à la carte. NeuGroup’s own Scott Flieger, director of peer groups, said a fellow member of a college board who runs a cybersecurity advisory firm recommends companies make a menu of their digital assets, from bank accounts onward, and seek to value them. Then ask how much the company is willing to pay to protect that asset. He added that few understand a company’s digital assets better than assistant treasurers. “Being the person in treasury who has an inventory of the digital assets and can value their importance—that’s an important position,” Mr. Flieger said.

Assistant treasurers exchange recent scary cyber tales of success and failure.

In a breakout session at NeuGroup’s Assistant Treasurers’ Leadership Group focusing on securing companies from cyberattacks, members recounted recent experiences and the conundrums they face combating them.

Digital protection, à la carte. NeuGroup’s own Scott Flieger, director of peer groups, said a fellow member of a college board who runs a cybersecurity advisory firm recommends companies make a menu of their digital assets, from bank accounts onward, and seek to value them. Then ask how much the company is willing to pay to protect that asset. He added that few understand a company’s digital assets better than assistant treasurers. “Being the person in treasury who has an inventory of the digital assets and can value their importance—that’s an important position,” Mr. Flieger said.

Bad timing. The email system of a NeuGroup member firm’s collections team was compromised, revealing all its customer contacts. The fraudsters then sent realistically scripted emails to customers requesting payments be sent to a different bank and providing the necessary details.

The member’s security team wanted to alert customers, but it was two weeks from quarter end, “and you don’t want to spook customers so they don’t pay you—a real treasury issue,” the member said.

Cyber reticence. Companies develop their cybersecurity plans internally, but then what? “One of our biggest challenges was that people don’t want to talk about cybersecurity,” one participant said, noting wariness about discussing the plan with third parties.

  • “We had a hard time finding peers to benchmark against, and we were paranoid as well, creating a special NDA that we made all of our banking partners sign before talking about our cybersecurity,” he said. Even his team’s discussion about how to store the plan was challenging, “because we effectively created a playbook for how to hack us.”

Cryptocurrency conundrum. A ransomware attacker may demand the transfer of $50,000 in Bitcoin to a cryptocurrency account to unfreeze a company’s system. If news breaks on CNBC about the attack, pressure will mount to meet that demand, but opening cryptocurrency accounts takes time. Companies may open cryptocurrency accounts in preparation for an attack, but would this information becoming public in an earnings call invite such attacks? And should any payment be made at all, given that the attacker could be a terrorist organization?

  • One solution: “We back up all our data, even on the desktops, so if we get locked out of our primary system, we can just reload everything,” one member said.
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Crisis Management Brings Executives Together

Having a crisis response plan can help make the company more resilient now and later.

Following a framework for crisis response planning that engages management as well as the board can create significant political capital for internal audit, not to mention better prepare the company for crises that may arise.

Having a crisis response plan can help make the company more resilient now and later.

Following a framework for crisis response planning that engages management as well as the board can create significant political capital for internal audit, not to mention better prepare the company for crises that may arise.

Multipurpose framework. The head of internal audit at a major government contractor said in a recent NeuGroup meeting that his company uses the National Fire Protection Association 1600 Standard on Continuity, Emergency and Crisis Management. He described it as a “fairly transferable” framework that can be used across a variety of scenarios, from fire drills to much more complex and resource-intensive corporate initiatives. Most members participating in the meeting were unfamiliar with the NFPA document and listened raptly as the IA chief describe the benefits.

The member noted that the company’s risk committee chairman had required adopting the framework and given the nature of the company’s business, most of its provisions were already in place.

What not to do. The member said a fascinating outcome of crisis response planning is understanding better what executives are not supposed to do or say, “particularly for the C-suite, where it’s not uncommon to have lots of type A personalities.” The exercise clarifies what each executive’s role is and emphasizes letting the crisis manager inform them about developments so they can better determine their next steps.

By promoting understanding of the various scenarios and analyzing what to report versus what to disclose, the requirements and the cadence of reporting, “We really challenged management to think about that, and it was very helpful,” he said.

Muscle memory. “Every time we went through the exercise, whether [for a major initiative], or for cyber, or an inside threat, we’d learn something new, or ask questions we hadn’t thought to ask before,” the member said. The future will always bring situations that can’t be anticipated, and he recounted a few humorous ones. “There’s always something you don’t think about, but the more you do it, it builds muscle memory,” he said.

Political capital. The member noted that facilitating these conversations in his capacity as IA was highly rewarding. “It engaged management at different levels and created political capital that has paid dividends in so many different areas for IA,” he said.

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Appealing to Millennials and Gen Zers: The Academic Perspective

Insights from the Foster School of Business on what today’s MBAs want—and what treasurers have to say.

Corporates who want to hire MBA finance graduates face a highly competitive market and are well served by knowing what the current crop of millennials and Gen Zers value most when weighing job offers. That was among the key takeaways from a presentation by faculty and administrators at the University of Washington’s Foster School of Business to the members of a group of treasurers at mega-cap companies. Here’s what matters most:

Insights from the Foster School of Business on what today’s MBAs want—and what treasurers have to say.

Corporates who want to hire MBA finance graduates face a highly competitive market and are well served by knowing what the current crop of millennials and Gen Zers value most when weighing job offers. That was among the key takeaways from a presentation by faculty and administrators at the University of Washington’s Foster School of Business to the members of a group of treasurers at mega-cap companies. Here’s what matters most:

  • Strategic thinking
  • Business decision-making
    • A Foster School assistant dean later elaborated: “New graduates are seeking jobs in strategic positions that impact a company’s present and future direction. They are savvy in technology, use of communication networks, and see both the present and the future in how they think, so where they can exercise these attributes and skills makes a difference to them.  They think with innovation in mind and have a global sense of their potential impact.”
  • Cross-functional teams
  • Salary
    • The average salary for Foster’s 2018 MBA finance graduates was about $115,000, plus a signing bonus of $25,000.
  • Flexibility/work balance.
  • Promotions.
    • In an earlier session, one treasurer asked his peers if they found that new hires expected a promotion every year. He said that’s unrealistic and his approach is to tell people the company is “going to get you where you ultimately want to go,” but don’t expect a promotion every year. Another treasurer said finance has a 70% retention rate and warned, “You’ll lose them if they’re not advancing.”
  • Frequent feedback. The Foster School professors added that MBAs want contact with senior leadership.

How to engage potential recruits. The Foster School presentation recommended members take these actions to appeal to MBA students:

  • Give a guest lecture or serve on a panel at the school.
  • Host a group of students for a tour or talk.
  • Sponsor a spring analytics project.
  • Mentor a student.
  • The obvious: Hold on-campus recruiting events.

The corporate perspective. Not all the treasurers present said they favored MBA graduates. In fact, one member said MBA grads who are on rotations in the company’s leadership program usually don’t return to finance roles because they “want to do exciting business stuff, sexy biz dev stuff.” It’s easier, he said, to retain undergraduates who start in finance. “I love the leadership program when we get undergrads,” he said.

  • Another treasurer asked, “How do we make finance sexier?” He noted that corporates are often competing against investment banks for top talent.
  • The first treasurer said that when he does hire MBAs, he takes graduates from “second tier” schools who did well and are intent on proving themselves, as opposed to trying to recruit Ivy League MBAs. “Let them go to McKinsey or Goldman Sachs,” he said.
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Supply Chain Finance Faces Rising Regulatory Scrutiny

Founder’s Edition, by Joseph Neu

Making sense of calls to increase debt classification and disclosure requirements for reverse factoring.

I received an email recently from a consultant giving me a heads-up about a potential financial reporting change that could adversely impact the multibillion-dollar market for supply chain finance.

Founder’s Edition, by Joseph Neu

Making sense of calls to increase debt classification and disclosure requirements for reverse factoring.

I received an email recently from a consultant giving me a heads-up about a potential financial reporting change that could adversely impact the multibillion-dollar market for supply chain finance.

  • Extended payables vs. debt. At issue is the ability of companies to use a financial intermediary to pay suppliers at a discount while extending their payments terms to the suppliers (sometimes in conjunction with raising financing against their own receivables, too), or simply extend payables beyond the norm to preserve cash (aka reverse factoring, payables financing or supply chain finance). Many such transactions are not recorded as debt but rather as trade payables.

The collapse of the UK construction firm Carillion in early 2018, linked by critics to its misuse of supply chain finance, is seen as one tipping point. But the broader use of reverse financing to help firms fund themselves at lower cost that is being promoted by a growing number of financial intermediaries is also driving regulatory scrutiny. Here are some recent examples:

  • Big Four ask for guidance. The Big Four accounting firms in October took the rare step of sending the FASB a joint letter, asking it to weigh in on how companies should classify various supply chain financing transactions and what details they should disclose.
  • Rating agencies. Fitch has a formula it uses to adjust company debt ratios to reflect their use of supply-chain finance. Moody’s has issued a warning.
  • SEC calls for MD&A disclosures. At the American Institute of CPAs conference in December, SEC Corporation Finance Deputy Chief Accountant Lindsay McCord said businesses needed to use the Management Discussion and Analysis section of their financial statements to give investors insight on their use of supplier finance programs that might change their financial condition.

To get the views of our members, I reached out to a few who manage significant supply chain finance programs.

  • Transparency and standardization needed. “The significant variations among accounting professionals in how they treat SCF reporting, even within the same accounting firm, does create external reporting challenges,” one member said. He would support standardization of interpretation and transparency of reporting.
  • The ESG component. Standardization would support good governance “to remove financial engineering and creativity merely for the sake of metrics reporting (for MNCs and large corporates) that are not necessarily beneficial to the overall business environment,” the member said. SMEs can be especially victimized by extraordinary extended terms (240-360 days), he added, with settlement delays of another 30-60 days in some countries.
  • Are new rules really needed? In another member’s opinion, “Any hack analyst can tell what is going on. Yes, it is a bit of a trick with the ratings agency’s metrics, but they too know exactly what is happening.”

I think it is fair to say that audit firms should be able to come up with a more consistent application of the current principles-based approach—i.e., the extent to which an intermediary’s involvement changes the nature, amount, and timing of payables, plus the direct economic benefit the entity receives—even without the intervention of those who set accounting standards.

  • We should all support disclosures that are sufficient to determine adherence to this principal and make clear how financing techniques affect the statement of cash flows. Reputation risk and ESG ratings related to the treatment of suppliers will also help prevent abuse if capital providers are paying attention.

To see what such disclosures might look like, take a look at examples from Masco and Keurig Dr Pepper in their responses to SEC staff comment letters.

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Managing FX in Currency Tiers to Control Cost, Workload

Why one company’s treasury spreads currency management among teams for large exposures, currency clusters and “tier two” currencies.

At a recent NeuGroup meeting of treasurers in Europe, one member shared how his company manages FX risk management-related costs and workload by considering currencies in tiers.

Why one company’s treasury spreads currency management among teams for large exposures, currency clusters and “tier two” currencies.

At a recent NeuGroup meeting of treasurers in Europe, one member shared how his company manages FX risk management-related costs and workload by considering currencies in tiers.

Global policy, local execution. Generally speaking, at this company, corporate treasury at HQ is responsible for the framework and policies and the global hedging approach, but local (in-country) treasury staff implement the hedging strategy with advice and approval from HQ.

Big countries have their own treasury organization. Some countries in the global group are so large relative to the size of the company and have their own currencies that they will have their own treasury. Other countries together form a “cluster” that also can be managed on its own.

But “tier two” countries don’t. Various tier two countries can be served directly by corporate treasury. Here, local treasury and in-country project controllers forecast and monitor FX risks resulting from purchase orders, sales orders and tender offers, but the exposure is hedged at the group level by corporate treasury.

Other tier two countries are served by local treasury, such as India, China, South America and Africa; here, risk identification is done as above but the exposure is hedged with local banks by local treasury. (However, the valuation of the local third-party hedges is performed by corporate treasury.)

Group guidance promotes the use of global currencies like USD or EUR for project tenders in emerging markets but when that is not possible, negotiators need to ensure that currency fluctuation clauses are in the contracts. Failing contracts in global currencies, local treasury consults closely with corporate treasury to monitor risk and manage the cost of hedging.

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Smoother Sailing: The Benefits of Dynamic Discounting

How C2FO’s solution helps one company’s treasury team smooth its cash flows.

Successfully adopting dynamic discounting (DD) to execute early payments requires internal alignment across multiple functions in a corporate’s organization—as well as finding the right vendor and solution. However, the technology’s many benefits, including smoothing out cash flow for both the company and its suppliers, provide a persuasive argument.

How C2FO’s solution helps one company’s treasury team smooth its cash flows.

Successfully adopting dynamic discounting (DD) to execute early payments requires internal alignment across multiple functions in a corporate’s organization—as well as finding the right vendor and solution. However, the technology’s many benefits, including smoothing out cash flow for both the company and its suppliers, provide a persuasive argument.

A treasury executive from a major technology company explained her firm’s challenges and the benefits of implementing C2FO’s DD platform at a recent NeuGroup meeting sponsored by the Kansas City-based fintech.

The biggest challenge. The member said that aligning top executives internally was probably the most time-consuming aspect of the adoption, noting that there were multiple areas and teams impacted whose cooperation was critical. Besides the initial IT investment, the implementation required changing the company’s procurement and accounts payable processes.

  • The assessment and ultimately the recommendation to adopt C2FO were made by an executive committee comprising representatives from finance, treasury, IT, supply chain, procurement, and credit and collection. Ultimately the company’s CFO signed off on the project.

Three choices. The company considered employing the traditional discounting model, in which vendors receiving early payment within a certain number of days would accept a specified discount. Also contemplated: a sliding-scale model that tied the discount percentage to how many days early the vendors were paid.

  • Those approaches typically require extensive negotiations with suppliers and allow limited flexibility. The company chose the dynamic-discounting model, which lets it define the amount and timing of cash it deploys into the program and enables vendors to bid on the discount percentage they are willing to provide.

Smoothing out cash flows. The flexibility of the C2FO platform allows the company to better manage its cash flows, making the model especially attractive given the transactional, potentially volatile nature of the company’s business.

Benefits across the company. Treasury’s DD benefits include a risk-free investment opportunity, optimizing working capital and payment-term extensions. In addition to being a tool highly leveraged by treasury, there were benefits in other areas too:

  • Procurement: Stronger supplier relationships; standardized processes and payments; no more negotiating one-off discount terms.
  • IT: Minimal support required; a secure SaaS platform; easy user experience with minimal training; operations on multiple ERP systems.
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Share Repurchases: Don’t Wait for the Sell-off

The case for spending all (or almost all) the cash allocated to buybacks right away.

Monday’s stock market sell-off provides an opportunity to revist an insight on stock buybacks from a NeuGroup meeting last spring: A risk management expert at Deutsche Bank argued that waiting for dips is not the most effective way to repurchase shares. That’s worth considering given that many companies only buy back their stock when the price dips below what they consider its intrinsic value.

The case for spending all (or almost all) the cash allocated to buybacks right away.

Monday’s stock market sell-off provides an opportunity to revist an insight on stock buybacks from a NeuGroup meeting last spring: A risk management expert at Deutsche Bank argued that waiting for dips is not the most effective way to repurchase shares. That’s worth considering given that many companies only buy back their stock when the price dips below what they consider its intrinsic value.

Danger in waiting. Research by Deutsche Bank suggests that for almost all sectors, more shares are repurchased (at a lower price per share) if companies buy as soon as cash becomes available instead of waiting until the stock declines.

“Management is notoriously optimistic about its undervaluation,” the Deutsche Bank expert said. But given the commitment companies make to repurchase shares, they have to buy them back eventually, even the dip never comes, he said. “So the danger is waiting.”

Methodology. The back-testing research assumes that if the required dip does not occur after one year, the company starts spending incremental cash flow on share repurchases because “we assume that no more than one year of cash flow can be retained,” the banker said.

Dollar cost averaging. In simple terms, the problem with spreading out buybacks over a longer period of time is that stock prices have risen over the long term, the banker said. And while dollar cost averaging makes sense on an emotional level, “It’s best to spend the money as soon as it’s available.” The one caveat, he added, is that it’s smart for companies to have a liquidity reserve in case of severe downturns.

Buyback ups and downs. S&P Dow Jones Indices in December reported that share buybacks for S&P 500 companies reached $175.9 billion in the third quarter of 2019, 6.3% higher than Q2 2019, 13.7% lower than Q3 2018, and 21.1% lower than the $223 billion record set in Q4 2018. Numbers for Q4 2019 aren’t available but S&P says most estimates call for $189 billion.

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Activist Investors Who Care About More Than One Kind of Green

Founder’s Edition, by Joseph Neu

Takeaways from a fireside chat with ValueAct founder Jeffrey Ubben.

Based on a head’s up from a top Wall Street activist defense adviser, I went to an event earlier this month hosted by Refinitiv and Reuters Breakingviews that featured a fireside chat with ValueAct co-founder Jeffrey Ubben. Mr. Ubben has stopped trying to increase his net worth and is now focused on making the world a better place (at least according to his worldview). One of the vehicles for him to do this is the ValueAct Spring Fund launched in 2018, which invests in companies aiming to address environmental and social problems.

Founder’s Edition, by Joseph Neu

Takeaways from a fireside chat with ValueAct founder Jeffrey Ubben.

Based on a head’s up from a top Wall Street activist defense adviser, I went to an event earlier this month hosted by Refinitiv and Reuters Breakingviews that featured a fireside chat with ValueAct co-founder Jeffrey Ubben. Mr. Ubben has stopped trying to increase his net worth and is now focused on making the world a better place (at least according to his worldview). One of the vehicles for him to do this is the ValueAct Spring Fund launched in 2018, which invests in companies aiming to address environmental and social problems.

  • Inspired by Silent Spring. According to Ubben, the Spring Fund name was inspired by the Rachel Carson environmental science book published in 1962.
  • What makes the fund unique. It’s run by one of the leading activist investors at a firm with $16 billion under management that’s famous for, among other thing, forcing its way onto the board of Microsoft, proving mega-caps were not off limits. “It takes a profit maximizer to know a profit maximizer,” Mr. Ubben said. Bringing an activist mindset to an environmental and social investment mandate has appeal, and Mr. Ubben has raised $1 billion in capital so far.

Here are some key insights from Mr. Ubben:

  • Larry Fink’s letter ups the ante substantially. BlackRock Chairman and CEO Larry Fink’s latest annual letter to CEOs ups the ante on sustainability, calling for “a fundamental reshaping of finance.”
  • Building on multi-stakeholder and corporate purpose mandates. Climate risk as investment risk and putting sustainability at the center of investment mandates may be the most powerful driver of the multi-stakeholder, corporate purpose mandate that Mr. Fink helped usher into modern thinking in his earlier letter.
  • Sustainability is a way to get the long term back. The constituency to support sustainability includes at least two-thirds of CEOs who see it as a way to win back a long-term view from shareholders—give me more than a quarter to reallocate capital to save the world before showing returns on that investment. There are probably one-third of those that are really driven to save the world.
  • Profit maximization over decades. To make the case for profit-driven investment in sustainability, investors need to understand that the time frames must extend 30 to 40 years. Decisions made based on current values, versus terminal values, will lead to investments that will destroy capital over the next generation. They are not conducive to long-term profits.
  • Change the investor base. Thus, companies that want to embrace sustainability and long-term profitability in their corporate purpose need to move toward investors who share that purpose.
  •  This is the window to move. Not only is more research convincing more people to believe in climate risk and the need for action, but the cost of capital in the current lower-for-longer interest rate environment is conducive to making new investments and reallocating capital. As Mr. Ubben notes, we have moved from the traditional situation of being short financing to being short human, social and environmental capital.
  • The effort is capital intensive. Ultimately, the transition to sustainability will be capital intensive. Such a capital-intensive effort will require the capital structures of existing large companies. For this reason, Mr. Ubben is not a fan of villanization.
  • Big Oil capital budgets needed.  One of his investments is in Nikola Motor, for example, which is developing hydrogen fuel cells for long-haul trucking.  To move to this future, there needs to be substantial capital invested in refueling platforms and distribution. “We will need the capital budgets of a Shell or a BP to do this over the next 30 to 40 years,” he said.
  • Shifting value propositions. While shifting to long-term value propositions is one necessity for the fundamental reshaping of capitalist economies, another is a change in perception of value and unit economics. As an example, Mr. Ubben said that if biodiesel becomes mainstream, it would make sense for McDonald’s to pay customers to order french fries to generate more used frying oil to convert into fuel.
  • Utilities need pristine governance.  The grid is the most important asset in the energy economy, including a clean energy one. So it’s imperative that utilities embrace a multi-stakeholder model and adopt the best possible governance. If customers have no choice but to be utility customers, then the economy must rely on regulators and government to sustain their ESG viability. This drives Mr. Ubben’s activist investment in Hawaiian Electric Industries and his calls for a management shake-up. He favors performance-based ratemaking for utilities, encouraging them to become asset light and deploy micro grids.

Ultimately, it’s impossible to know if green activist investors like Mr. Ubben are motivated mostly by a philanthropic desire to fix a system they helped create and make capitalism work for society, or are using the increasing embrace of ESG to profit from green activism. It’s probably a bit of each. Regardless, finance professionals at multinationals have no choice but to pay attention and take action.

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Do You Need Outside Help for TMS Implementation? Maybe

Consultants can help TMS implementations, but practitioners retain some skepticism.

Implementing treasury management systems (TMS) is an arduous and complicated task that can benefit significantly from outside expertise but maintaining a skeptical eye can optimize the outcome.

Consultants can help TMS implementations, but practitioners retain some skepticism.

Implementing treasury management systems (TMS) is an arduous and complicated task that can benefit significantly from outside expertise but maintaining a skeptical eye can optimize the outcome.

ATLG members who had implemented TMSs expressed horror at the notion of returning to Excel spreadsheets. Nevertheless, TMS vendor consolidation and other factors have worsened already sketchy vendor support services, increasing the need for outside help and expertise. The peer group of assistant treasurers exchanged insights on how to best go about that:

Self-implementation is best. A member considering a new TMS said that while he’s comfortable using consultants on the front end to analyze current processes and potential treasury transformation opportunities as well as the RFP process, he and his team are debating whether to lean on outside resources to help with implementation. Another assistant treasurer (AT), whose experience included installing four TMSs, recommended treasury implement as much as possible to best understand how the system works. Be prepared for vendors’ poor after-sale service.

Some exceptions. NeuGroup members generally agreed with that advice, although one participant said her team did use a consultant to implement SAP’s treasury module, since the vendor’s “mindset” tends to be focused on enterprise resource planning (ERP) systems rather than treasury.

Consulting on infrastructure. Consultants can be especially helpful in early-on TMS implementation decisions, specifically when it comes to setting up the TMS infrastructure–such as static data, including entity and account structures, naming conventions and a variety of other items that can be difficult to change. “Things you have to live with forever,” said Tracey Ferguson Knight of HighRadius, whose prior experience spans sales, consulting and implementation services at Reval and Thomson Reuters’ TMS division.

RFP consulting concerns. A few members noted consultants’ familiarity with the range of TMS options and which may fit a company best. Ms. Knight cautioned about using consultants to guide the RFP process, however, given that many of their practices increasingly rely implementing systems. “Some are better than others, but they’re likely, even if subconsciously, to steer you toward solutions they know better, where they can earn more business on the implementation,” she said.

Make no promises. If a consultant’s systems selection help is necessary, don’t make any promises or even discuss the possibility of implementation work, to avoid potential bias throughout the implantation process, Ms. Knight said.

Just advice, please. Ms. Knight agreed that treasury should perform the bulk of the implementation itself, noting that consultants’ greatest value is advising treasury on how the TMS system works and applies to the specific business. The consultants at vendors, especially quickly growing ones, however, often have recently been hired and may not understand how to best tailor the TMS to the client company’s business. A third-party consulting firm may be a better bet, but make sure their staff is indeed experienced, since they, too—especially the biggest consulting firms—frequently bring on new hires.

One obvious solution. A participant noted her firm simply decided to hire one consultant for the RFP and a different firm for the implementation. “We selected a different one for implementation in part for price but also independence,” she said.

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