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What the Experiment With Modern Monetary Theory Means for Risk Managers

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

By Joseph Neu

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

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

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

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

By Joseph Neu

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 A good start. Another participant noted the pride he felt in seeing how both his current and former employers have tackled the issue of race head-on, including the CEO of the company where he works now urging conversation and learning. “I couldn’t be prouder of how people have responded,” he said.
 
Accelerated change.  In the last few weeks, the national conversation shifted from COVID-19 to racial justice crisis, focused on diversity and inclusion and black lives.

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

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Can You Save A Month a Year Automating FX Trades?

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

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


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

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

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

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Pandemic Creates Too Many Unknowns to Change Pension Strategies

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

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

Pension managers struggle with strategy amid a pandemic pace unlike the drawn-out financial crisis.
 
Rapidly changing conditions during the pandemic have made it extremely difficult for many NeuGroup members and other treasury practitioners to create forecasts and devise strategies. Pension fund managers are in the same pickle, finding it nearly impossible to change their overall pension strategies given how fast the landscape is shifting.

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

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

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

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

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

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

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

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

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

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

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

LDI. Liability driven investment and de-risking clearly was the winning strategy at the end of 2019, which caused collective sighs of relief when the pandemic hit. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

  • “But if you asked me three years ago to bet on what German 10-year bond yields would be, I never would have bet they would be negative.”
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Pandemic Hits Argentina Hard – With Tighter FX Controls in Its Wake

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

The pandemic has inflicted serious pain on world economies and it could be extra painful for Argentina.  
 
Argentina has faced recurring fiscal crises, and now the global pandemic-induced economic recession has once again pushed the country to the brink of defaulting on its dollar-denominated sovereign debt. For corporates doing business there, including members of NeuGroup’s Latin America Treasury Peer Group (LatAmTPG), the most visible manifestation of the crisis is in the defensive measures the government is taking to preserve FX reserves, i.e., getting local cash and earnings out is getting harder and harder.
 
In the “good” column, the government has confiscated USD held privately, which was the so-called “pesofication” policy implemented during the last fiscal crisis. Second, the Argentine government does allow a parallel FX market (aka, the blue-chip swap market) to coexist with the official rate available from the Argentine Central Bank (BCRA).

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

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

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

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

  • On the working capital management side, members also noted that some banks are willing to factor receivables (without recourse) “at a reasonable rate.”
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A Win-Win Solution to Save Suppliers and Manage Corporate Cash

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

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

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

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

 

C2FO gives on and off-balance sheet options for early payments to suppliers in need.
 
As suppliers struggle in the COVID-19 economic environment, getting cash to them quickly can be a lifesaver, and even better is letting them choose the rate that’s most suitable for their circumstances.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Weakness in Europe. The strategist said that while US banks are in top form, European banks are not. That’s because of the zero interest rate environment in the European Union. The European bank sector is weak because zero rates makes banks inefficient, the strategist noted. “European banks are as weak as they were in during the ’08-’09 financial crisis,” he said. US banks have taken a hit and are a great shape, and “nowhere near ’09 levels.”
 
Negative rates in the US? While there are negative rates globally, the strategist didn’t think the US would go that route. “There are now unprecedented levels of negative rates” globally, he said. “Will US go there? No, because we have a huge money market fund market and if we break the buck again, then it will be a huge mess.” And it certainly would be “negative for bank profitability.”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

NeuGroup and Latin America

By Joseph Neu

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

Here are few key takeaways I wanted to share.

By Joseph Neu

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

Here are few key takeaways I wanted to share.

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

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

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

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

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

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

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

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

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

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

In March alone, institutional investors plowed $821 billion1 into government MMFs. That massive flight to quality sent monthly trading volume on Morgan Money surging about 40% to $120 billion2 , fueled in part by inflows into the JPMorgan US Government Fund, whose assets reached $228 billion.

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

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

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

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

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

Investing in tech, talking to clients

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

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

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

Trading carts, analytics and APIs

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

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

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

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

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

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

Looking ahead

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

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

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

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

By Joseph Neu

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

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

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

By Joseph Neu

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  1. Baseline
  2. Adverse
  3. Severely adverse

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

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

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

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Differing Opinions About Audit Opinions

Internal auditors use a variety ratings or opinions for their reporting, despite a trend of not using them.

There is a growing trend of internal audit departments moving away from using audit opinions, or ratings, to rate the progress of a mitigation effort. The idea is to focus on the audit issue itself and mitigate it. Despite this trend, many auditees and audit committee members are happy with the current system and push back against suggestions to get rid of ratings.

Following an audit of a process, the auditee gets a rating or opinion on the progress they’ve made on fixing the process – the audit issue. Ratings methods differ; some employ colors.  Green generally means good while colors like yellow or orange mean “needs work” or “needs improvement;” red means things are bad and not being addressed at all. “I’ve never seen a red since I’ve been an auditor,” one member said at a recent virtual meeting of NeuGroup’s Internal Auditors’ Peer Group (IAPG).

Internal auditors use a variety ratings or opinions for their reporting, despite a trend of not using them.

There is a growing trend of internal audit departments moving away from using audit opinions, or ratings, to rate the progress of a mitigation effort. The idea is to focus on the audit issue itself and mitigate it. Despite this trend, many auditees and audit committee members are happy with the current system and push back against suggestions to get rid of ratings.

Following an audit of a process, the auditee gets a rating or opinion on the progress they’ve made on fixing the process – the audit issue. Ratings methods differ; some employ colors.  Green generally means good while colors like yellow or orange mean “needs work” or “needs improvement;” red means things are bad and not being addressed at all. “I’ve never seen a red since I’ve been an auditor,” one member said at a recent virtual meeting of NeuGroup’s Internal Auditors’ Peer Group (IAPG). 

In the meeting, members described their various rating scales – no two the same – and said in some cases they were asked to move away from them. One reason for this was that many of the functions being audited focused too much on the rating and not on the underlying issue. “The (audit) finding gets lost,” said one auditor. 

  • But auditors say they get pushback when they discuss moving away from ratings. “Execs like the overall rating because they don’t have to read the whole audit report,” said one IAPG member. Added another member, “Audit reports sometimes have too many pages. [AC members and executives] will read through them and then ask, ‘what’s important here?’ So the ratings and colors are needed.” 

And despite the industry effort to drop ratings, some IAPG members have actually added more rating categories to their scales. Several members who have three ratings for findings, typically along the lines of “satisfactory,” “needs improvement” and “ineffective” or “unsatisfactory,” have added more nuance. In a few cases they have split the middle rating, “needs improvement,” into “moderate improvement opportunity” and “needs significant improvement.” 

Language matters. Members also mentioned that there’s sometimes pushback over the language of ratings. 

  • For one member, the legal department made IA change the red rating “ineffective” to “major improvement needed.” This was because, in the case of a lawsuit, ineffective could be misconstrued and create a problem.
  • Another member mentioned that sometimes auditees, particularly millennials, take issue even if their mitigation efforts are good or get the top rating. In this member’s case, that rating is “satisfactory,” which to some ears sounds mediocre or worse. But the auditor said it’s not his job to say it’s anything more than that. 
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Goldman Sachs’ Bold Vision for Virtual Accounts and the Future of Cash Management

Goldman Sachs is entering the cutthroat and increasingly crowded world of corporate cash management determined to play the role of innovative disruptor—no easy task. A cornerstone of Goldman’s strategy is a product whose name is familiar to many corporate treasury professionals but that is not fully understood by all of them: virtual accounts.

That state of affairs has put Mark Smith, Goldman’s Transaction Banking head of global liquidity, on a mission to answer every question treasury teams have about virtual accounts, particularly as the bank has just launched its own Virtual Integrated Account (VIA) offering in the US, with plans to roll it out internationally later in 2020. “Virtual accounts are a foundational product for us and we’re conscious that awareness and understanding of them is inconsistent,” Mr. Smith says. “We’re here to change that.”

Goldman Sachs is entering the cutthroat and increasingly crowded world of corporate cash management determined to play the role of innovative disruptor—no easy task. A cornerstone of Goldman’s strategy is a product whose name is familiar to many corporate treasury professionals but that is not fully understood by all of them: virtual accounts.

That state of affairs has put Mark Smith, Goldman’s Transaction Banking head of global liquidity, on a mission to answer every question treasury teams have about virtual accounts, particularly as the bank has just launched its own Virtual Integrated Account (VIA) offering in the US, with plans to roll it out internationally later in 2020. “Virtual accounts are a foundational product for us and we’re conscious that awareness and understanding of them is inconsistent,” Mr. Smith says. “We’re here to change that.”

The Basics

Virtual accounts began in the Asia-Pacific region in the early 2000s and started being used extensively in Europe in the last 10 years. In the last five years, they’ve become more mature in Europe, where there is less dependency on cash. They’re a relatively new concept in the US, presenting Goldman with an opportunity to help corporate treasurers who are seeking more efficient liquidity solutions.

“At their most basic,” Mr. Smith says, “virtual accounts are simply a way of organizing and reporting data within a real bank account.” Traditionally, he explains, companies have organized cash flow information by having separate physical bank accounts. He cites an example of a corporate with 10 divisions, with each division having its own bank account; in this instance, the cash balance, incoming receipts and outgoing payments can be tracked for each. “But that means maintaining 10 bank accounts,” Mr. Smith says. One alternative is to have one bank account and tracking information on an Excel spreadsheet with 10 tabs. The trouble with the Excel model is that “correctly allocating the incoming receipts and outgoing payments can be time-consuming and error-prone.”

Unique Identifiers

Virtual accounts organize data within a bank account so that it looks as if it’s divided into mini-accounts or sub-ledgers (i.e., virtual accounts). Just like a real bank account, each virtual account has an opening balance, a closing balance, incoming receipts and outgoing payments. The key to achieving this is assigning a unique identifier to each incoming receipt and outgoing payment so that the bank’s VIA solution can attribute it to the correct virtual account, and in turn the bank account with which it is associated. These identifiers can be reference numbers, in which case each payment instruction needs to contain the real bank account number and the reference number.

Alternatively, the virtual account identifiers can be configured as a clearing-recognized account number, such as an International Bank Account Number or IBAN. This method means that the payment instruction only needs to contain the clearing-recognized account number; no additional reference number is required. When the bank receives the incoming payment, the VIA system automatically posts it to the relevant real bank account and (simultaneously) reflects it in the correct virtual account. Virtual accounts and the real account are always kept in sync.

Mr. Smith says the benefits of the reporting capability of virtual accounts have helped fuel their growth among corporates. This is particularly true in Europe, where many cite the typical treasury need for better control and visibility over cash and liquidity. But the potential of virtual accounts goes far beyond reporting and visibility.

Rationalization

Virtual accounts are a great tool for tackling the challenge of bank account and bank rationalization. Treasuries worldwide have witnessed a proliferation of bank accounts over the past several decades as customers and supply chains have expanded globally. This has brought with it the time and cost required to open and maintain all those accounts.

With virtual accounts, once the master physical account has been established, any number of virtual accounts can be opened—all with minimal additional documentation, if any. This will be one of the main features of Goldman‘s VIA offering. “The Goldman Sachs offering is self-service, putting the full power and flexibility of virtual accounts in the hands of the treasurer,” Mr. Smith says. This means treasurers “can effectively open and close virtual accounts instantly, and update hierarchies in real time. It’s a totally different experience to managing traditional bank accounts.

At their most basic virtual accounts are simply a way of organizing and reporting data within a real bank account.

In certain situations, virtual accounts can eliminate and replace real bank accounts, but with no loss of reporting detail. What’s more, Mr. Smith asserts that a virtual account could end up costing at most a tenth of what a traditional account would cost—and in many cases, virtual accounts may be free altogether. Consequently, rationalizing traditional accounts into virtual accounts should save both time and money.

Goldman Sachs’ offering can also function across ERP systems. This means users will have the ability to send information using all industry formats; it’s also API-enabled and integrated across all the firm’s product offerings, real time if required. This is unlike incumbent payment mechanisms, which many banks use, and which use a host-to-host connection or node. Moreover, once the SWIFT structure is implemented, it’s hard to change.

More than Just Accounts Receivable (AR)

Arguably the most documented use case for virtual accounts is in receivables management, which is how virtual accounts got started in Asia over a decade ago. Virtual accounts address an inherent problem with traditional receivables structures in which many receipts are received into one bank account, requiring significant manual intervention to reconcile.

Breaking up a traditional bank account into virtual accounts can, Mr. Smith says, drive much higher rates of straight-through reconciliation if, for example, one virtual account is assigned per client. Reconciling receipts vs. open accounts receivable in the one-to-one relationships in virtual accounts is, Goldman says, more straightforward than in the “many-to-one” relationships typical in traditional account structures.

Nikil Nanjundayya, Goldman’s Transaction Banking head of emerging products, says that using virtual accounts this way eliminates the need to dedicate personnel to manual reconciliation, resulting in potentially significant cost savings. Furthermore, faster reconciliation can mean faster cash application and better working capital availability. Faster reconciliation can even lead to a better client experience.

Payments/Receipts On Behalf Of (POBO/ROBO)

Virtual accounts also drive significant efficiencies within a given legal entity, but they can be a powerful on-behalf-of tool when applied to corporate structures, Mr. Smith says. Subsidiaries no longer need to maintain their own bank accounts. Instead, they can maintain virtual accounts with a parent entity or treasury center. In this case, the virtual account becomes an intercompany ledger, recording the parent entity’s or treasury center’s position with the subsidiary, as well as all the underlying transactions.

If a treasury center makes a payment on behalf of a subsidiary, that outgoing payment will bear the subsidiary’s virtual account number and will reflect simultaneously in that virtual account and post to the physical account. Incoming receipts similarly can be reflected on behalf of a subsidiary to the relevant virtual account.

Goldman Sachs’ offering can also function across ERP systems. This means users will have the ability to send information using all industry formats; it’s also API-enabled and integrated across all the firm’s product offerings, real time if required.

While virtual accounts can drive POBO/ROBO structures, clients will still need to organize their payment and receipt operations centrally. This may require a time investment up-front, but the time and cost savings of POBO/ROBO structures will be well worth it and are well documented.

Virtual accounts can therefore sit at the heart of an in-house bank. Here, Mr. Smith is keen to reiterate the advantage of the Goldman Sachs virtual account offering. “Goldman virtual accounts can be configured to be clearing-recognizable, which some other in-house bank solutions cannot,” he says. He adds that other “engines” for virtual accounts rely on reference numbers, but those numbers can be mistakenly omitted or transposed, resulting in the inefficiency of manual intervention.

Some European banks, and even European corporates, believe virtual account structures may be a convenient way to address regulatory pressure on notional pooling. In Europe, Basel III requires capital to be held against the gross assets in a notional pool, not the net position. This has made notional pooling more expensive for capital-intensive European banks, which are subject to the supplementary leverage ratio; it has even called into question the future of notional pooling altogether.

“Single currency notional pools can absolutely be replicated virtually,” Mr. Smith explains. This is done by assigning virtual accounts to subsidiaries within the same physical accounts, he says. Mr. Smith adds that individual virtual accounts can be overdrawn, but if the physical account maintains a positive balance, no overdraft charges are incurred. The virtual pool is also self-funding and self-collateralizing. Crucially, only the net balance on the physical deposit is reflected for general ledger and regulatory reporting—including capital reporting. “There’s no risk of gross-up as you have with a notional pool,” Mr. Smith says. Finally, pooling in this way doesn’t require cross guarantees as the bank faces only the one physical bank account.

Pooling Not Out Completely

Virtual multicurrency notional pools should also be possible through multicurrency virtual accounts, in which the parent physical account is denominated in one currency while the virtual accounts represent wallets in different currencies. The currency balance on the virtual accounts is translated into the nominal currency of the parent account but isn’t converted via any FX trade—they remain in source currency. The economics should be like a traditional multicurrency notional pool, where net negative balances are charged a cost-effective collateralized overdraft rate. But again, cross guarantees aren’t required as the bank faces the net position on the parent physical account.

Because cross guarantees aren’t required, virtual notional pooling should be significantly more straightforward to establish than traditional notional pooling. Theoretically, more clients should be able to benefit from the cheaper funding costs and lower FX fees as a result, Goldman argues.

There is one important difference between traditional notional pooling and virtual notional pooling. In a traditional notional pool, there are no intercompany balances between entities. In a virtual notional pool, all participating virtual accounts represent an intercompany relationship with the entity that owns the physical account. For some corporates, avoiding intercompany balances is an important objective in pooling. Such corporates will need to weigh the potential advantage of avoiding cross guarantees against any potential disadvantages of intercompany balances.

KYC Questions

Both banks and their corporate clients have wondered whether virtual accounts can ease the burden of know your customer (KYC) and anti-money laundering (AML) rules when physical accounts are replaced with virtual accounts. The use of virtual accounts may streamline customer onboarding obligations, with a focus on the customer—the physical accountholder. Still, it is reported that in South America, local regulations are requiring KYC by legal entity. “A certain level of due diligence will always be required on any participant in the US financial system, whether they participate physically or virtually,” Mr. Nanjundayya says.

Mr. Smith and Mr. Nanjundayya maintain that Goldman’s VIA is cutting-edge, and will continue to evolve, offering a best-in-class user experience, including full self-service capability as well as the ability to scale. As Mr. Nanjundayya explains, “Clients can open a million or more virtual accounts effective instantly themselves, should they need to—and to close them.” Further, he says, Goldman Sachs clients will be able to structure accounts into hierarchies and adjust those hierarchies using the same self-service capability. This ability to scale isn’t possible with traditional bank accounts, Mr. Nanjundayya says. Additionally, traditional cash structuring, including account opening, typically involves more engagement with the bank than is necessary with virtual structuring.

But Goldman doesn’t just want to be at the leading edge when it comes to virtual accounts; it wants to define that leading edge and drive it forward. “We are also future-proofing our product,” Mr. Nanjundayya asserts. While the bank is not willing to divulge specifics, Goldman’s offering will include capabilities expanding into FX, analytics, cross-border activity and even M&A management.

Virtual accounts drive significant efficiencies within a given legal entity, but they can also be a powerful on-behalf-of tool when applied to corporate structures.

It’s All About the User

Goldman Sachs believes that the benefits of virtual accounts can benefit all clients and that its offering is not a segment-specific solution. That means it is flexible and can be adapted to corporates that have a variety of use cases, i.e., different corporates will use the accounts in different ways. For example, a property manager may use them to track the cash flows for each building, while a software company may use them to manage developer payments.

Migrating to virtual accounts need only be as complex as changing bank accounts, although structuring them into more sophisticated solutions will need careful planning in partnership with the bank. However, the benefits of moving to virtual accounts should outweigh the costs many times over, Goldman says. In short, the bank says that virtual accounts should be at the heart of treasury transformation.

Transaction Banking is business of Goldman Sachs Bank USA (“GS Bank”) and its affiliates. GS Bank is a New York State chartered bank and a member of the Federal Reserve System and FDIC, as well as a swap dealer registered with the CFTC, and is a wholly-owned subsidiary of The Goldman Sachs Group, Inc. (“Goldman Sachs”). Transaction Banking services leverages the resources of multiple Goldman Sachs subsidiaries, subject to legal, internal and regulatory restrictions. Transaction Banking has compensated NeuGroup for their participation in the drafting of this white paper.   

© 2020 Goldman Sachs. All rights reserved.

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Financing the Fight Against COVID-19: Sustainability Bond Deals

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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C2FO Showcases Scope Expansion to AT Leaders

Working Capital Cycle

By Joseph Neu

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

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

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

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

By Joseph Neu

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

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

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

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

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

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

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

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

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

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

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

Stay safe and well.

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How Corporates Tapping Capital Markets Use Minority and Diversity Firms

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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