2014 Year in Review

December 18, 2014

A look at the treasury trends and priorities that shaped 2014.

Since 1994 The NeuGroup has advocated knowledge exchange for treasurers, giving them an unrivaled breadth and depth of information via publications, peer groups and websites. In 2014 The NeuGroup facilitated more than 30 meetings, across 18 different groups, the most in our history of leading NeuGroups. What follows are the best takeaways of 2014 from those meetings, as selected by each NeuGroup leader.

Senior Executive NeuGroups

The Assistant Treasurers’ Group of Thirty (AT30)

The path to the treasurer’s office is best taken through the business.Members got this message very clearly from a session featuring two seasoned treasurers on a panel to discuss their own experiences and advice. First of all, it takes more than number-crunching skills. Members were told that behavior and leadership qualities will outweigh technical skills, and that crossing over from individual contributor to leader is also critical to acquiring the necessary experience to be considered for the top treasury position. As one panelist pointed out, “Most analytical roles don’t move up to Treasurer.”

Members were also advised to spread their wings within their company. Dig in deeper in your company to get noticed. Taking positions outside of treasury and developing company relationships were noted as the key elements to carving out a path to the office. Both guests emphasized the benefits of knowing more people and better understanding the underlying business in order to ensure being considered. As one member noted, “The best treasury person is one who understands the underlying business.”

The impact of bank regulations is on the way. Bankers have been warning for years that corporates will eventually feel the pain from the mountain of regulations being imposed on them. And indeed members have begun seeing signs, most notably in their operating accounts where banks are taking unimaginable measures to ensure compliance with their new liquidity coverage ratio (LCR) such as turning away deposits with a tenor of 1 to 30 days and paying earning credit rates substantially higher than money market rates for overnight operating deposits.

Although only seen in isolated cases, bankers are warning that credit availability will become more selective and reserved only for the strategic clients.

The Bank Treasurers’ Peer Group (BTPG)

CCAR sustainability. Harnessing supervisory stress-testing and capital-planning review compliance to manage treasury and risk management functions has become a must for bank treasurers. Supervisory stress-testing and capital plan reviews (CCAR et al) have become so all-encompassing that banks must harness them to manage the bank for all practical purposes. Bank treasurers can quickly find themselves spending the vast majority of their time both leading and back-filling shortcomings in other function’s efforts involving CCAR. In response, treasurers must encourage senior management and the Board to delegate overall coordination of the stress-testing/capital plan review process to a centralized, value-adding project management organization (PMO). This coordinating PMO must also ensure that—along with treasury—the risk, credit and other functions integrate their normal responsibilities with the ever-more-stringent supervisory requirements. Treasury, meanwhile, must ensure that its core treasury objectives are in line with the regulator’s objectives, so that it fulfills compliance obligations while getting its main job done. This is all part of what EY consultant Adam Girling labeled CCAR sustainability.
Integrate the models and systems you use to manage the bank into the process and framework created for supervisory stress-testing/capital plan review. With data, models and systems so vital to CCAR and related supervisory regulation, it makes little sense for models to be improved, validated and placed under strict control frameworks for the purpose of stress-testing/capital plan review and not have these same models be deployed in the day-to-day management of the bank. Treasurers should also encourage the use of new data and modeling demanded by regulator’s supervising stress tests to guide policy and planning. Some of what regulators are demanding in the way of changes to interest-rate risk management policy and supporting models may actually improve your bank’s ability to manage the changing interest-rate environment with rising rates to come. In addition, data-to-model scenarios as part of stress tests and the tools to analyze the impacts can be harnessed with activities like deposit studies to provide quantitative support for decisions and improve strategic planning.
Stress-testing capital is replacing economic capital. Capital levels determined by stress-testing are the new risk-based measure and predominant capital constraint for most banks in most instances. Accordingly, FTP and other capital allocation models should be created to allocate stress-testing capital.
Deposit studies a key competitive advantage for banks. While deposit studies tend to be an annual exercise and focused on what can be found out readily at regional banks, getting better at deposit analytics may be a key competitive advantage going forward. LCR, for instance, makes it very valuable to know how deposits will react in a rising rate environment and to the extent that they shift to other products, e.g., CDs, or leave the bank. Factoring LCR into FTP models for deposits is something members agreed they should all seek to pursue.

THE Engineering & Construction Treasurers’ Peer Group (E&CTPG)

Are you ready for a crisis? Members were indeed a bit rattled following a members-led session on crisis management that posed a few potential scenarios and ask the question: “How would you handle this situation?” One scenario was complete inaccessibility to the building. Another was a company-wide systems failure. How would treasury maintain continuity in such situations and are you prepared to do so?
Some solutions included plans such as:
- Keeping two dedicated PCs offsite that are kept updated with needed software and web access.
- Requiring treasury people to take their PCs and bank tokens home every day. Some have gotten away from tokens and gone to chip cards.
- Utilize a separate facility for treasury operations.
- Call a bank and ask if your staff can come to the bank’s office and log in to accounts from there.
- Utilize a larger legal entity that does their own cash management to make emergency payments in a pinch.
It was notable that most members are not yet comfortable with running treasury from tablets.

High taxes are better than high risk. Most companies go to great lengths to avoid the egregious taxes associated with repatriation of profits including leaving it offshore or developing complex legal entity structures through which to flow funds. However, these companies are usually in a country for the long-haul with perpetual business. But for the E&C industry, they enter a country to complete a project and leave. They don’t know when they will be back so there will be no future use of the cash locally. Therefore, they typically take the cash out and pay the taxes. But since this approach is known well in advance, they factor this expense into their pricing of the project.

There is also the risk of the cash simply being misappropriated. One member remarked, “If you leave cash in place (in-country) someone will figure out a way to spend it.” Members also agree that as a rule of thumb, you don’t let tax people direct how money is managed.

The Tech20 Treasurers’ Peer Group (Tech20)

Activists driving change in capital plans and plan communication. Activist investors targeting of member firms is driving more sophisticated thinking on capital planning, but even more so well-thought-out articulation of the capital plan to investors. Cash distribution may not be enough to keep members off activists’ target lists. Members will need to deliver transparency regarding their firm’s capital plan and support this transparency via ongoing dialogue with key investors. Investors sold on the plan will be less likely to agitate for change. Just remember that shareholders want to see capital allocated to investment in future growth articulated, as well as plans to return capital to them. If the growth is deemed below potential, the new call may be for their firm to be split up—for example, into a capital distributor and capital gainer.
Offshore cash issue has been “solved” by debt financing. Synthetic repatriation via debt financing of shareholder distributions continues to “solve” the offshore dilemma for most tech names. The risk of fixed income investor pushback can be mitigated by actively communicating a capital plan—just as it helps with activists. For example, one member communicates a “net realizable cash” balance that suggests it continues to have too much cash and this justifies returning cash pretty aggressively. This gives fixed income investors comfort and defuses activists. Depending on domestic cash generation (and E&P), investors may look more favorably at buybacks vs. dividends past a certain dividend yield. Unfortunately, the onshore debt for offshore cash solutions may not be permanent, as eventually debt limits will be reached where the repatriation taxes match the borrowing cost, especially on a risk-adjusted basis, as the strategy leaves offshore cash exposed to adverse tax changes.
Increasing ALM thinking with balance sheet. As cash-rich tech names continue to use debt to “solve” their offshore cash dilemma, they are also starting to analyze their capital structure more closely as they add leverage. From strictly an interest-rate risk perspective most might be better off with more floating-rate debt, given that their cash yield increases would help offset floating debt cost as rates rise. Alternatively, they may also see an asset-liability matching interest in extending duration on some cash investments if the incentive to lock-in low rates with longer-term debt remains irresistible. Cash trapped offshore and invested longer-term may also warrant long-term debt as an asset hedge. The point is that as they add debt, members are increasingly applying ALM principles to their cash investment portfolios as well as their overall balance sheets.
America against the world on taxes. The OECD-led base erosion and profit shifting (BEPS) initiative also includes a number of non-OECD G20 countries, 44 in total. Against these competing interests, the US is having difficulty getting its interests to prevail—hence, the project is akin to the US against the world, or a land grab going after the offshore earnings of multinationals. US MNCs are those principally affected because they are forced to look more to tax planning in order to compensate for the lack of a territorial tax system enjoyed by most of their foreign competitors. The OECD is moving surprisingly quickly and has agreed to 7 of 15 actions on BEPS, and it will consider the remaining 8 for the December 2015 deadline. These 8 are the more controversial actions, however, so tax planners should be watching carefully to see if they can get agreement on them over the next year. It will also take time for the OECD model treaty provisions to roll into bilateral tax treaties and be renewed going forward. However, the biggest potential impact may come from information sharing and disclosure requirements. This will allow tax authorities to see their jurisdiction’s share of the global revenue pie, regardless of source, and provide them with a roadmap to make the case that they deserve more. BEPS is just part of a larger problem for US MNCs and the US economy as the US share of the multinational flows of funds will continue to suffer as long as there is such relative disincentive for US firms to repatriate and redistribute funds in the US. Thus, the longer the US waits on tax reform, the more time value it loses to put these funds to work and the greater the risk that other jurisdictions will find a way to claim them.

the treasurers’ group of thirty (T30)

The focus on ROIC prompts reexamination of surplus cash. Apart from activist pressures to return cash to shareholders, the focus on ROIC as a value driver further highlights the drag excess cash represents on balance sheets in this low-yield rate environment. With the forecast for low rates expected to carry through most of 2015, this ROIC pressure is not expected to subside anytime soon.
TMS implementations. Workstation implementation projects are still very much front and center for many member organizations. Based on recent statistics from The NeuGroup/Treasury Strategies webinar on TMS implementations, more than 50 percent of our member companies are dealing with this type of project and many continue to experience the challenges of delayed timelines and lack of IT support.
Supply chain finance adds more than just better working capital management. Retailers in the group are looking at supply chain, both supply chain financing and driving greater efficiency overall. Complicating the picture is the drive toward omni-channel distribution where they are selling online and in stores, delivering and servicing the customer as they choose. Others spoke of creating one customer experience across all channels. This is forcing lead times to shrink and building in greater flexibility into supply chains. Localizing is a part of this, too, and treasurers are looking to use this to build in more natural hedges and reduce financial risk as they expand into new markets.

the treasurers’ group of thirty 2 (T30-2)

Greater visibility and cash control. Often Regional Treasury Center projects dovetail with efforts to improve visibility over cash or to streamline payments—e.g., connecting to banks via SWIFT and further centralizing payments building on SEPA standards to gain greater control over liquidity. Along these same lines, several members noted efforts to improve intercompany lending programs as well. These two come together in In-House Bank structures, which one member is in the process of refining. That company also is taking cash visibility further into liquidity planning and contingency funding plans for stress events (e.g., a 180-day loss of access to capital markets, CP or revolver). Cash management improvements are goals for RFPs or cash bank changes that members discussed.
Leveraging working capital for financial optionality. An area of growing attention by treasury is involvement in improving working capital for both their own firm and key suppliers and customers. While improving working capital offshore contributes to the offshore cash dilemma, members also saw the benefits of helping different segments of suppliers improve their working capital financing via programs that leverage the member firms’ credit/payment standing. New methods of pooling and securitizing trade payables (and receivables) offer risk mitigation and asset-backed financing alternatives.

the treasurers’ group of thirty 3 (T30-3)

Capital structure is top priority. One member summed it up this way; “Capital structure is a mirror to the business; you must be clear with what you need to run your business. Explain it and take control over how your shareholders view you.” Based on trends presented by MUFG, investors have rewarded dividend-paying firms with higher valuations than non-dividend payers, relative to growth. These trends also point to the increase in M&A activity and an increase in the average Total Shareholder Return (TSR) for companies that engaged in M&A, averaging around 4.5 percent per year, compared with 3.3 percent for those that did not engage in M&A.
Next generation of common global structures. Members have had SSCs and/or RTCs in place for many years, and although these structures are not new, the evolution of activities that are being placed in these locations continues to expand and is seen as a way to further relieve corporate treasury from having to spend too much time on tactical operations. The trend among global MNCs is to further refine the activities being managed at the RTC or SSC locations to expand on the level of strategic activities managed away from the corporate headquarters.
A loud knock at the door. Based on pre-meeting survey statistics, 32 percent of members have been the target of an activist, with added statistics from MUFG showing a doubling in the number of activist campaigns targeting $1.0B+ market cap companies every year since 2009. Members agreed that they are taking these statistics seriously and often have an Activist Playbook on the shelf ready to go in the event of a knock on their door. This playbook includes key considerations and decision scenarios, and is sometimes reviewed at the Board level on a periodic basis.

Functional NeuGroups

the corporate erm group (erm)

Own the process, not the risks. Part of the value added through the ERM program is in helping the BUs think through their strategies and what they are trying to accomplish, and what key risks they need to manage in order to meet their own goals. They can be encouraged to look a few years down the road to see what could affect them going forward and prepare to manage these eventualities. Then the ERM team can manage the layer of critical risks over all of the company that would otherwise not be assigned to anyone.
ERM is good for business. One member’s initial risk assessments took three hours, but this was reduced as they were worked into the businesses. This required that the businesses help build ERM tools, with the result that they were useful for the businesses themselves. A mutually value-adding experience between ERM and the businesses developed, with the most value for the businesses coming from the ability to identify significant risks to their objectives. Of course, this result benefited greatly from having the CEO on board and a mature strategic planning process to work with.
What can risk do for you? Another member, a private company, measures its risk-management success by the resulting economic gains, so when it found situations where not enough economic risk was being taken, the ideology changed from pure risk management to risk optimization—finding the right amount of economic risk for a given transaction that allows the company to meet its financial goals, but maintaining enough discipline to not take on riskier endeavors than it could handle. This involves a lot of margin analysis and focusing risk management on its ability to aid in growth. Part of risk-management’s job is to look at a given case, help the businesses build the upside and downside, determine key drivers in both directions, and build in flexibility and optionality for whatever decision is made.
Every company is a tech company. No major company operates without some degree of IT, and therefore some degree of vulnerability to cyber crime. For this reason, it is worth spending some time and some money to monitor your ability to sense, interpret and protect against threats, and fill in the gaps as they emerge. Every new addition to your system presents another opportunity for someone to compromise it.

FX Managers’ peer groups 1 & 2 (FXMPG1&2)

Structure key aspects of the business support function for efficiency. The notion that causes and effects of risk management and cash activities require a more integrated approach and therefore the two functions need close collaboration is gaining ground, and more organizations are considering how best to achieve a holistic cash- and risk-management approach. But it requires some rethinking of roles and responsibilities, optimal staffing levels, organizational structure and back-up procedures. Treasury centralization brings many benefits, but as a company grows in new markets, managing growth and profitability but also complexity and regulatory demands in those countries while keeping the treasury team lean and not overworked is a big challenge.

For example, for a company in services or construction, one of the key functions of treasury and FX risk management is support for contract negotiation teams. This support needs to be organized to ensure the company’s ability to meet its margin targets in long-term contracts while allowing the company to continue to offer competitive pricing. Supported by policy and guidance, contract language analysis, an appropriate FX risk management model and market data support, authority levels for deal approvals can be divided between senior treasury officers for large and complex deals, and lower-level treasury for other aspects of deal shaping, review and approval, with escalation points, and even regional treasury personnel for smaller deals and policy compliance.

Better to over-report than under-report under EMIR. Because of the various nations involved and how derivatives are defined, there are opportunities for confusion as to exactly which FX forwards will need to be reported under EMIR. Because both parties to a trade have an obligation to report, you don’t want to be the side of the trade that does not report it. The onus is on both sides to ensure that the reported trade information matches. If you delegate to the bank to report, chances are higher the data matches but you still need to check that it matches the data you have in-house.
Constant currency reporting is becoming more common. More and more companies are reporting certain key numbers, like revenues, in constant currency to emphasize the performance of the business without “contaminating” it with currency impact. It is often presented side-by-side with “as reported” numbers.
Peer comparison highlights efficacy of the program. One way to illustrate the efficacy of the FX program is to compare (using publicly available data) key competitors’ YOY growth including currency impact on a quarterly basis to the company’s own; if lower volatility in this metric can be demonstrated, the program can be said to add value, if volatility reduction is a key goal.
Hedge cost does not equal value. Measuring the cost of hedging does not show its effectiveness or value. Instead, look at risk reduction at given levels of option premium spend. To decide what level to hedge/spend, a company must have a clear view of its risk tolerance: a quantitative framework should be able to be calibrated for whether, for example, upside is worth less than downside.
Take a view. In a recent session sponsored by Deutsche Bank, the bank highlighted the benefits of currency diversification and correlation effects, but also how each individual currency’s contribution to overall risk must take into account its volatility. Applying value-at-risk modeling to this analysis, one can identify the greatest risk-reduction bang for the hedge buck. If you agree that there are systematic returns in FX, as Deutsche Bank proposed, you should be open to a systematic, rules-based approach to medium-term hedging, meaning stepping away from “no view,” market-neutral hedge decisions. Signals to look for are (1) purchasing power parity (PPP) and reversal to the mean (for example, in the last several decades, the EUR/USD has traded within a 20 percent band of PPP 71 percent of the time and periods outside of that have been short-lived); (2) carry, i.e., high-yielding currencies don’t depreciate as much as the implied forward indicates; and (3) momentum, meaning the past trend is likely to continue in the short-to-medium term. Each company can weight these three factors differently in the rules that will determine hedge decisions. A caveat: don’t “over-optimize” based on historicals: consider in-sample/out-of-sample choices, recognize that volatility is a blunt instrument and that there are more ways than PPP to measure the long-term fair value of a currency.

THE global cash and banking group (GCbg)

Strong incentive to embrace RMB.Given the rapid pace of renminbi regulatory changes, and the uptick in global MNC adoption of these new measures, there has been a significant improvement in the ease of making RMB payments on- and offshore in China. The RMB can now be integrated as a part of a corporation’s overall liquidity management strategies with pooling of RMB and cross-border RMB lending becoming commonplace.
Plan for the unexpected. Contingency planning should be thorough in the identification of possible scenarios and should be tested periodically to ensure things go according to plan. Imagine yourself not having access to the business tools you have at your disposal today. How would you accomplish the most critical aspects of your job? Don’t wait until knee-deep in a crisis to begin planning.
PoBo ready for prime time. Pay-on-Behalf-of (PoBo) structures are becoming more popular as a part of next-generation globalization projects to further enhance the consolidation of account structures and system processing. With many members having implemented an In-House Bank structure across their organization, a PoBo structure can add even more efficiency to the management of global cash. Although the initial set up of such a structure requires close coordination with legal and tax, the ongoing benefits thereafter are well worth the initial legwork.
No one-size-fits-all for TMS. The GCBG agreed there is no “one-size-fits-all” when looking at TMS solutions, but there are best practices and lessons learned than can be applied across the board when making TMS-related decisions. The GCBG team will spend a portion of 2015 exploring and identifying these best practices and lessons to define a World-Class Treasury System.

the treasury investment managers’ peer groups 1 & 2 (TIMPG1&2)

Prepare for higher interest rates. Meeting sponsor Neuberger Berman advised members in the fall meeting to be short duration ahead of a rate rise. The firm is constructive, although cautiously, on adding credit. Neuberger Berman explained how it looks at short forward rates and teases out market expectations for fed fund rates. Currently the market is pricing a really bad economy, but Neuberger Berman does not agree. The firm believes that interest rates have to increase to move to fair value. Merganser, sponsor of the TIMPG2, echoed this sentiment, suggesting members prepare for an increase in rates in the form of a “Bernanke Twist” (front end increasing and long end decreasing). Both sponsors and the members expect the timing of the next FED move is most likely mid-year 2015.
Members take a wait-and-see approach on MMFs. After years of debate, the SEC approved a series of reforms to MMFs. Although implementation of the new rules is two years away members are starting to prepare. Most are comfortable waiting to see what changes will take place in the market. There were concerns regarding the redemption fees and whether government funds will be able to accommodate an influx of demand. However these concerns did not merit immediate changes to any of the members’ investment programs.
A benchmark is the clearest expression of one’s risk tolerance and return expectations. Over 80 percent of the TIMPG1 members use a benchmark. Some members have highly descriptive benchmarks and others have no benchmarks. One of the biggest complaints from members is benchmarks inspire certain behavior in managers. Dave Plecha from spring meeting sponsor Dimensional noted that there are two sources of risk in a fixed income portfolio, term and credit. Together these two factors explain much of the common variation in the cross-section of bond returns. Short- and intermediate-term benchmarks are very flat and static in both term structure and credit exposure, therefore a static benchmark would not give managers the flexibility to fully take advantage of changes in these factors.
Have we given up on excellence? In the member survey, only one member responded that they would give their custodian a 5 out of 5 (highest or excellent) score. Most members considered their custodian as average or very good giving their custodian a 3 (average) or 4 (very good) rating. Members are loyal to good customer service as this was the most-liked response. The chief complaints about the custodians were lack of security knowledge and mistakes.

Regional NeuGroups

THE Asia CFO Peer Group (ACFO)

A lot riding on SFTZ. The SFTZ has generated much hype, optimism and expectations toward deregulating capital controls. And indeed, more than 18,000 companies have registered in the area since it was established in September 2013, with 10,000 of those being newly located there. The zone is also host to 14 Chinese banks and 23 foreign banks, as of June 2014, but more due to government pressure than belief in the opportunity. However, in spite of the flurry of actions to set up shop in the zone, actual growth of imports and exports has only been about 10 percent. One contributor to the slow pace is simply fear. Many of the regulatory restraints are ambiguous and therefore easily breached. Companies are fearful of stepping out of bounds and bringing on unwelcome consequences. All agree that the concept of the zone is encouraging and all hope that it will expand to broader geographies. But as the government works through its own comfort levels, most prefer to simply be present and ready for the time that the rules are more specific.
Balancing act. Staff recruitment and development has to counter strong opposing forces. This session revealed a litany of market and demographic factors that are working against the MNCs, beginning with the mismatch of skills associated with recent college graduates. Specifically, they lack the critical thinking skills needed for the MNC environment, where employees may not know the particulars about a specific job but at least have the ability to grasp concepts and think through objectives and steps to achieving them. Also cited was the aging population in China resulting in fewer young people available for the entry-level positions.

And if that wasn’t enough, the competition for these deficient individuals is keen from sectors such as the State-Owned Enterprises (SOEs), banks, accounting firms and the exciting local firms such as Alibaba and WeChat. According to participants, these entities have more flexibility for compensation packages. In the case of SOEs, they offer a work-life balance that is more appealing to this new generation, which is rejecting the corporate grind and race up the ladder.

THE Asia treasurers’ Peer group (ATPG)

Chinese banks may be worth investing in. Most members today use their global banks in China to meet their local cash management banking requirements, but one company has chosen to take a path less travelled by partnering strategically with a local Chinese bank. The company spent a lot of time training the local Chinese bank on the IT and operational needs of western MNCs. Choosing this approach to banking in China is a challenge up-front, but the company sees it as a worthwhile investment on a long-term banking relationship as the company further entrenches itself in a key market for its business. Strategies to consider include selecting a first level bank branch (i.e. hierarchically one step away from headquarters control and status) that has a high level of interest in your company’s business to ensure the appropriate level of attention and service from the bank branch. Shanghai branches may not be ideal for some, since there are many big companies located in Shanghai vying for banks’ top client attention. The largest Chinese banks which are preoccupied with servicing the State-Owned Enterprises (SOEs) may also not be ideal banking partners for the average corporate. But to successfully engage with a local bank at this level requires a dedicated team on the ground with the necessary knowledge of what they need vs. what the bank delivers currently and in the future.
Asia treasury organizations bring varying degrees of support and value. Members engaged in a comprehensive roundtable discussion on their different organization structures and scope of responsibilities. The discussion was anchored on organization charts and topics discussed included team size, scope of work (global functional vs. regional business support), reporting lines, and geographical responsibility. The complexity of a company can be seen through the number of legal entities and bank accounts they have. Members indicated responsibilities predominantly in the area of cash management, investment execution, forecasting, and bank facilities for their regional treasury mandate. However, some members had their Asia-Pacific treasury centers responsible for global treasury activities or supporting activities outside the region. One company has responsibility for European and US cash, global netting and FX settlement. At another company the Asia treasury team acts as a hub to manage inter-company loan documentation for the rest of the world (excluding United States). Many take the view that it is a good idea to centralize such activities in Asia to build up such centers of operational excellence. Similarly, at another company all international (non-US) inter-company funding is managed by the treasury team based in Asia. However, this is driven by the business structure, which denotes Singapore as its international headquarters for all its non-US business flows.

The european treasurers’ peer Group (EuroTPG)

The portfolio view of risk. In recent years, there has been a more pronounced trend away from a deal-centric or transactional approach to risk management to one that takes a portfolio view, be it on an asset-class-by-asset-class basis (FX for example) or across asset classes (interest rates, FX and commodities). The problem—other than the risk of correlation breakdowns—is that the models (EaR, CFaR, etc.) require deep understanding within the organization. But more fundamental is the perennial treasury challenge: Are the exposure forecasts accurate? Where is the wisdom in investing time and resources in a portfolio model before there is a high level of confidence in the available forecasts.
“Best of breed” approach is going away and software-as-a-service SaaS is becoming a requirement. The trend to choose best of breed applications for a variety of treasury functions has abated and more corporates now seek to consolidate functionality into one or as few platforms as possible. The ideal TMS should be able to handle any systems environment and “sit on top” of any legacy TMS or special applications in the business, but the major players are increasingly looking to also replace them with a complete offering. Meanwhile, with functionality additions and frequent adaptations needed to deal with regulatory requirements, upgrading a system on any other delivery basis than SaaS can become a real chore. While IT may still have concerns about it in some corporate cases, SaaS is increasingly becoming the norm. In that context, it’s important that systems have a range of choices so it can customized to a company’s needs.
Should you go from intercompany lending and netting structures to the full in-house bank? Depending on global footprint, legal-entity structure and other factors, a company can choose a number of points along the liquidity and risk management efficiency spectrum. Some remain at the intercompany lending level; many also institute a netting program and a cash pooling structure, or go to a full in-house bank. If a company already has a robust netting and intercompany lending program to shift liquidity, the business case for a full IHB may be diminished. This is the counterpoint to a full-scope IHB which obviates cash pools. Another consideration is the extent to which pooling and other bank liquidity management structures will be impacted by Basel III and related LCR (liquidity coverage ratio) regulations. Banks’ reluctance to accept large deposits may require greater intermediation by an in-house “bank.” An IHB may offer the most flexibility and structure to add a payment and collection factory with pay- and receive-on-behalf-of (POBO/ROBO), but the additional benefit has to be considered carefully before going to tax and legal to get clearance for the IHB. Scrutiny of intercompany lending structures and transfer pricing on intercompany loans has also had an impact. To keep liquidity out of regulated jurisdiction or in response to currency risk, there are also benefits of leading and lagging, which calls for treasury intervention in the global netting or intercompany lending cycle to delay, accelerate or partially settle intercompany payments.
Time for an investment policy review. Several factors in the current investment environment will contribute to increased demand for, but lessen supply of, the type of high-quality liquid assets that most corporate investment policies insist on. The old ”Plan A” relied on a three-legged stool of investment objectives, and the question was the order of priority: principal preservation, liquidity and yield (usually in that order). In the current situation and for the foreseeable future, liquidity investors may have to go to “Plan B,” according to an update from Goldman Sachs to the EuroTPG, i.e., “pick two out of three” as getting all three will no longer be possible. This will, for most, require a change in policy to allow longer durations, lower credits, or a combination of both, in addition to a cash-bucketing approach (corporates are responding to the low-yield, and in Europe, negative short-term rate environment, by bucketing out up to half their cash for longer duration, lower credit investment mandates). Most corporates are conservative and will take a phased approach to a broader and higher-yielding portfolio, i.e., first additional duration, then lower-rated instruments. High spreads between corporate and government issuers highlight that not including the former could be a missed opportunity for yield but also diversification. With money-market reforms taking shape in the US and Europe (a bit behind), a shift to floating NAV may also prompt a look at separately managed accounts (SMAs); factors to consider there are policy adaptation to allow them, choice of custodian and asset manager.

THE Latin AmericaN treasury managers’ peer Group (LATMPG)

What FX rate to use for converting Venezuela financials to USD? The dilemma with the early 2014 move in Venezuela—not a devaluation but an addition of a channel to convert currency and at a different exchange rate—is that the accounting rate stays at the official rate and unless companies can reliably transact on the SICAD market, using that rate is not appropriate. This is a discussion to have with auditors and the controller’s group.
Where to put Venezuelan cash? Due to local Venezuelan regulations related to mandatory lending to favored community projects, when banks hit a certain threshold of deposits, some foreign banks opt to refuse deposits above a certain level. Companies as a consequence need accounts with as many banks as possible to spread their deposits out. Some of the local banks may not meet policy on counterparty risk but, at the end of the day, the counterparty risk is the Venezuelan government anyway. With low interest rates on deposits, the idea of buying much-higher-yielding government bonds does not seem unreasonable; the risk of default does not make this appealing, but with CADIVI not paying and SICAD still a wild card, the risk might be worth it. Lending to other companies is a possibility but surprisingly competitive: don’t ask for collateral or too high a rate or you will get outbid. Purchasing real assets may make sense if they are related to the business (e.g., a warehouse), but prices are high and the process can be very cumbersome.

Posts