Treasurers Are Learning to Work With Changing TMS Systems and Providers

Among a long list of priorities, treasurers focus on systems projects and managing FX.  

The T30-3 met for the third time in Atlanta, where they were hosted by one of the founding members of the group. The meeting, sponsored by HSBC, covered a broad range of core treasury topics including the practical implications of selecting and implementing a treasury management system (TMS). But it also included strategic considerations, such as adjusting FX strategy to the strengthening dollar and capital planning. The meeting was notable for an extended introductory session of members sharing their priorities.

1) Are TMSs Worth the Cost? Many members have recently implemented a new TMS or are about to. This session featured the experiences of two treasurers who are up and running with a new solution and their advice for those coming after them. Cloud-based solutions are making inroads in corporate treasury departments, and the benefits they bring likely outweigh the perceived risk for most companies.

2) FX Responses to USD and Volatility. HSBC reviewed with the group a macro view of the rising dollar, as well as practical solutions for responding and an outlook on what more to expect. Make sure your hedging objective is clearly defined and adjust and review your policy and strategy to ensure the objective remains achievable.

3) Capital Planning and IRR Management. A new member company shared a review of a recent acquisition that dramatically changed the nature of the company balance sheet, which had been “quiet” for years. After many years of stable capital structure, a little excitement from a sizeable acquisition in the form of a eurobond can go a long way toward broadening your investor base, lowering your interest expense and hedging a new exposure.

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Are TMSs Worth the Cost?

The notion of a TMS spitting out data such as FX exposures, hedge positions, investment holdings and allocations, accurate forecasts, global cash balances, current bank accounts, and account signers — all on a daily basis — sounds like a dream. Many companies have achieved much, if not all of this nirvana state, but not without significant investment of time, energy and money. This session featured two members and their TMS infrastructure as well as a review of member experiences with selection, implementation, performance, and vendor satisfaction.

Key Takeaways

1) When do you get rid of a Ferrari? The answer is when it goes faster than you need and wasn’t assembled properly. This was the analogy used by the vice president and treasurer for one T30-3 member company. He had inherited SunGard’s Quantum TMS when his unit was spun-off from its former parent company. For the size and complexity of his organization organization, Quantum was simply overkill. It also wasn’t implemented properly in the first place, so it tended to be problematic in its capabilities. Consequently, the company went back to SunGard and negotiated an exchange for a more practical product, Integrity, and completed the implementation of that solution at the end of 2014. This implementation was done by the treasury team that would be using the product and was therefore much more applicable to the operation.

2) Measure twice and cut once. It’s an old saying in the construction business, but also applies to TMS installations. “Whatever solution you use, you need to take the upfront time to implement it properly,” noted the member who had struggled with the Quantum TMS. Another member suggests that you negotiate hard on SLAs with the vendor and also interview their implementation manager to make sure you are comfortable with their skill set and that they are a fit for your company.

3) Resource the project adequately. A TMS implementation is a job unto itself, and adding that to someone’s already full plate almost always ensures failure, or, at best, delays. One member chose to back-fill his assistant treasurer, allowing him the time to lead the project. Another member suggests getting commitments from all of the vested stakeholders and informing them that they should expect “60 days of hard work, and then life gets easier” (he also utilized a consultant that specializes in Oracle Treasury implementations and noted that the hardest part of the project is establishing the connectivity with banks).

Outlook

At the time of the meeting, at least five participants were in the RFP process, and two others were planning to be within the next 12 months. Still, others may find themselves needing to change products or vendors and will certainly benefit from the experience of other members. Nirvana is accessible.

FX Responses to USD and Volatility

FX risk management has moved to the top of treasurers’ agendas in the last year, and for good reason. The almost decade-long slide in the value of the dollar, accompanied — for USD reporting companies — by favorably translated earnings and offshore cash balances, reversed last year. This has already caused US companies FX losses and, since this cycle could last several years, has put a spotlight on whether corporate FX management.

Key Takeaways

1) Dollar strength will stick around a while – time to reassess hedge policies and strategies. Citing fundamentals like the relative strength of the US recovery vs. other countries and regions, HSBC’s advisory team predicts that the dollar’s strength is not going away anytime soon (it could last years). In addition, there are structural shifts, such as FX becoming an asset class of its own, meaning FX swings are no longer as correlated to other asset classes, i.e., “the asset allocation decision no longer determines the currency decision.”

A strong USD adversely impacts the economic value of foreign-denominated monetary assets, cash, revenues, sales margins, profits and accounting presentation of companies reporting in USD.

2) Clearly define your hedge objectives. Not all risk management objectives (volatility reduction, tail-risk protection and budget-rate outperformance) can be satisfied with one hedge approach, and this calls for clear prioritization and balancing when making decisions on hedge instrument, tenor and hedge ratio. The competing objectives may be even starker when it comes to emerging markets due to market conditions.

3) Use natural offsets. One of the “first lines of defense” in FX risk management is to offset foreign-denominated assets with liabilities by borrowing in non-USD. Local bank loans or intercompany loans in local currency have long been ways to reduce foreign subs’ exposures, and indeed, “interest in non-USD bond issuance has increased as the USD has embarked on its current bull cycle,” as noted by HSBC’s senior vice president of FX Risk Advisory, Ivan Asensio.

4) Consider protecting earnings translation and net equity. Corporates by far favor cash-flow and balance-sheet hedging, but in strong-dollar periods, swings in earnings translations and net equity become much more visible, though only a small minority hedge these, noted Mr. Asensio. Because of hedge accounting treatment (unfavorable), they are typically hedged indirectly via revenue hedging, for example (cash-flow hedge treatment).

5) VaR-based hedging: beware correlation breakdowns. Taking a portfolio view of exposures is gaining ground in the corporate community, and more and more of The NeuGroup’s members incorporate some version of at-risk (CFaR or EaR) metrics in their risk assessment (although to varying degrees with regard to actual hedge decision-making). However, with the strong dollar and higher predicted volatility, as Central Banks diverge on tightening vs. easing on interest rates — and while the economic outlooks of different regions also diverge — some caution may be in order, as correlations may shift or break down. For example, the inverse correlation in commodities and the USD cannot always be counted on, as one of the corporate examples in the HSBC deck illustrated.

Outlook

Many members have recently found that it is important to distinguish what works all the time from what works better in a dollar-weakening vs. a dollar-strengthening cycle. Efforts are afoot in companies across multiple NeuGroups to use all the flexibility current policies allow, or propose policy adjustments, for tenor extensions or ramping up hedge ratios when it makes sense to lock-in favorable rates, or when choosing a different hedge instrument. As 2015 progresses, it is likely we’ll see more such assessments and adjustments of policy and strategy.

Capital Planning and IRR Management

In light of an anticipated rate rise, how are member treasuries positioned vis-à-vis rates, and what are recent experiences and plans for capital raising, structure and distribution? This session featured a member company that went for years with a very “quiet” balance sheet, took proactive measures to get in front of potential investor activism in recent years, and in early 2015 completed a substantial public debt-financed acquisition resulting in a leveraged capital structure. This all marks quite a departure from the company’s history.

Key Takeaways

1) Acquisition background. The company previously had two business segments that its member practitioner noted were, essentially, oligopolies. In 2014 the company sought to make its largest-ever acquisition of a company with complementary business segments. The combined company took revenue from $2.3 billion to nearly $4 billion. Financing the acquisition with a purchase price of $5.7 billion took the member company’s finance team to new places.

2) Keeping the investment-grade rating. Obviously an acquisition of this size can disrupt the financials. The company takes great pride in its IG rating, and it was important that it be maintained. To get insight on the potential rating impact, the company had the rating agencies review three acquisition scenarios and assess the impact each one would have on the views of the agencies. As the deal progressed and financing plans developed, it became apparent that net debt-to-EBITDA would go from 1x to 3.7x. Recognizing that the rating agencies could frown on this level of leverage the company promised they would de-lever back to 2.5x.

3) Taking the deal to Europe. The company took a traditional approach to funding the acquisition, with a roughly $1 billion US bond issue of 5-, 10- and 30-year notes. But it also took a non-traditional, but increasingly favored, approach with a $700 million eurobond. The member company’s vice president and treasurer cited three key reasons for the eurobond: (1) to hedge that newly acquired European exposure; (2) to introduce the company to the European investor base; and (3) at 1.875%, the coupon rate was significantly lower than in the US. To help grease the skids, the company executed the US debt first. Nevertheless, since its credit rating did drop a bit to BBB-, the European investors requested a coupon step in the event the company’s rating drops below investment grade.

Outlook

This transaction is a good example of a wise and prudent treasury performing well for the company. Because of the historical strength of the company and the structure of the deal, the US bond issue was 5x oversubscribed, significantly outpacing most other deals in 2014. Further, the company was ahead of the curve on the eurobond. Since their issue in December 2014, when they were the only issuer for that month, the eurobond activity has increased dramatically with 21 other issues in the first three months of the year.