Members of The NeuGroup’s Treasurers’ Group of Thirty continue to refine the way they do their jobs and also, make more efficient the way they manage cash globally.
At the spring meeting there was continued focus on improving tactical efficiencies within treasury as well as ongoing rationalization of global account structures. Process review and improvement continues as many are further challenged to do more with less, even above and beyond the consolidation that has already occurred over the past several years as a result of the economic downturn. Further highlights from the meeting, hosted and sponsored by Standard Chartered, included:
1) Setting liquidity requirements. Given the challenges presented by low rates and sluggish economic growth, companies are putting an emphasis on making sure liquidity management is as efficient as possible. This can present a challenge when setting liquidity requirements, which is more a balancing act between the use of credit facilities, onshore cash and offshore cash than one exact stance.
2) Share repurchase strategies. According to financial experts, many executive management teams have become infatuated with how buyback strategies increase EPS and perhaps aren’t considering what The Wall Street Journal highlights as “overwhelming results that heavy buyback companies usually create less value for shareholders over time.”
3) Fixed vs. floating. Increases in US interest rates are all but certain, with the debate being one of timing and size. A number of financial experts feel the actual pace and magnitude of these rate increases may not be as aggressive as current forward rate curves imply.
4) China update. China’s initiative to internationalize its currency is being embraced by market participants all over the world. Sovereigns are signing RMB swap agreements, foreign MNCs are re-denominating trade and funding in the offshore RMB market, RMB hedging opportunities continue to grow, and more channels are opening for RMB to move offshore. Standard Chartered’s Caroline Owen discussed optimizing the developments shaping China and its currency both on- and offshore.
Sponsored by:
Setting Liquidity Requirements
The challenging economic environment has driven businesses to enhance efficiency and control over their liquidity. This session, with a wide range of member input, sought to define liquidity requirements, taking into account the various components.
KEY TAKEAWAYS
1) In case of an emergency only. The dynamic of borrowing onshore while having growing levels of cash offshore is common for most, but several members agreed that offshore cash is typically not used in the overall cash liquidity calculation. Only in an extreme emergency would these funds be considered accessible after the appropriate tax haircut.
2) Does that come as a shock to you? When discussing the topic of setting liquidity requirements, most use shock analysis as a key tool for determining target liquidity. Stress testing most often includes a variety of scenarios that shock the business in several ways over an extended period of time. Scenarios include worst-case assumptions for business growth, sources of liquidity and operating cash flow.
3) Keep some dry powder. As was learned in 2008, unexpected events can happen, and sometimes in greater number and with greater velocity than ever imagined, so keeping dry powder available is always a good idea. It was thought to be more efficient to have this dry powder available through the use of a short-term credit facility than having to use onshore cash.
OUTLOOK
The takeaway here was that most members keep as little cash on hand (and onshore) as possible, with some type of short-term facility available in case of a liquidity event. Offshore cash balances continue to grow and most do not have an immediate strategy to repatriate these funds.
APB23—It’s Only Just Begun
Many members voiced concern over the amount of audit scrutiny they’ve gotten over the past audit season as it relates to the APB23 certification that requires US multinationals to assert that its foreign investment is permanently reinvested so there is no current or deferred US tax liability. The auditors are requiring a deeper dive into this assertion and have requested documentation down to the legal entity level. Although the increased scrutiny seems more prevalent by certain audit firms, most believe it’s a matter of time before the others jump on the bandwagon and require a significant amount of review and documentation. One member described this new paradigm as an outcome of too many failed audits by the audit firms themselves. Members discussed tactical processes they are putting in place to collect data required to produce the new documentation as requested by their audit firms.
Share Repurchases: Good Idea or Bad?
Although it seems most companies have come down on the side of buying back stock, there’s still a lot of debate about its efficacy. This roundtable discussion allowed members time to share their buyback strategies and opinions, and to discuss how they balance the program to ensure the most efficient execution possible.
KEY TAKEAWAYS
1) The share repurchase addiction. Members have previously discussed the market theory that executive management teams sometimes become infatuated with how share repurchase increases EPS and how it can then become difficult to wean them away from this mentality, but it was generally agreed that having a structured program in place helps to level-set the expectations among Board members, while at the same time making efficient use of excess cash.
2) Strategies vary. Most members use accelerated share repurchases (ASRs) in addition to open market trades to allow for the greatest possible flexibility. Dollar-cost averaging is used by several members and is seen as a way to help quiet the critics when it comes to questions about purchases at specific strike prices. Everyone agreed that as long as markets behave normally, stock buyback would continue, but in the event of a crisis, it could be scaled back or stopped at any time. As one member noted, “Don’t deliver EPS just by buying back shares.”
3) Grids matter. Most members agreed that outlining a pricing grid with market price and order levels was the best way to manage the share buyback program. Most members rotated their program allowing a variety of their banks to take a turn in the rotation throughout the year.
OUTLOOK
Share buyback programs continue to be popular among members as a way to offset dilution from option programs as well as utilize excess cash. Most programs are approved either quarterly or annually and have a clearly defined grid structure that shows order levels at a variety of prices. Members use ASRs along with open market trades and most expect to grow the size of their buyback programs over the course of the next year.
Squeezing Out Some Yield
As yields continue at record-low levels, many members have carved out a portion of their excess cash and placed it in a Separately Managed Account which allows for a riskier investment profile, thereby increasing the yield. The investment horizon is extended but often it does not go beyond two years, with a close eye on interest-rate forecasts. Although many have the desire to increase yield, they do not have the desire to significantly increase risk, so a more measured approach is taken with the carve-out of Separately Managed Accounts.
Pitting Fixed vs. Floating
It’s a fact that at some point, despite most of the market thinking it’s not a possibility for another year at best (mid-2015?), interest rates will have to rise. This uncertain prospect leaves treasurers to decide: Is it better to issue fixed and swap to floating, stay fixed, or stay floating?
KEY TAKEAWAY
1) At the corner of fixed and floating. Over the past several years we have continued to poll members on when they felt the Fed was likely to begin raising rates and during that time the most prominent answer was always “sometime next year.” Five years later, it’s the same answer. Most believe it will be a slow and measured rate increase with the expectation that a Fed Funds rate of 3 percent won’t occur until at least the second half of 2016.
2) What’s your ratio? Members have varied opinions on the amount of debt that should be held fixed with the typical range falling between 70-80 percent fixed and 20-30 percent floating. Based on pre-meeting survey results, nearly 50 percent of members were looking to lock in fixed rates soon, with an additional 25 percent considering it.
3) Likely to lock soon. When asked how the eventual increase in US interest rates would impact the fixed/floating mix, only 20 percent of respondents were locking into fixed rates now, while the majority said they were likely to do so soon.
OUTLOOK
Based on member response, the most common ratio of fixed/floating was between 70-80 percent with many looking to lock in fixed rate debt soon based on their view of interest rates and the likelihood of rate increases in the near future.
SCF—the Efficient Tool
Supply-chain finance programs were popular several years ago as a way to help smaller vendors gain access to what was then a nearly frozen capital markets environment. These markets have significantly improved and supply-chain finance is now viewed as an efficient tool for managing working capital and not just a financing alternative of last resort. Many members, including Home Depot, Office Depot and Caterpillar discussed the advantages of their SCF programs and the likelihood of their ongoing offering.
OUTLOOK
With the current and impending regulatory changes, most are bracing for added challenges, both in time spent on audits and documentation required. Auditor relationships have taken on a much more contentious tone and most expect this to continue going forward.
RMB Moves on Up
There has been a significant increase in the use of RMB for payments, moving the RMB into the number 8 spot as a SWIFT payment currency. The market views the upward movement as a positive sign of what’s to come, as internationalization efforts continue. 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.
KEY TAKEAWAY
1) Bilateral currency swap agreements continue to grow. Since 2008, the PBOC has signed RMB bilateral currency swap agreements with 24 central banks totaling over CNY 2.5 trillion. These agreements provide foreign central banks with an important tool to promote RMB business and secure liquidity in the event of shortages. The footprint is growing rapidly, with Latin America at CNY 260B, EMEA at CNY 664B and Asia Pacific at CNY 1.665B.
2) Moving up the league tables. Given the rapid pace of renminbi regulatory changes, and the uptick in global MNC adoption of these new measures. Although it remains 1.3 percent of the total, the market views the upward movement as a positive sign of what’s to come as internationalization efforts continue. 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.
OUTLOOK
Since January 2012, increased utilization of the RMB has moved it from number 20 to number 8 as a SWIFT payment currency, with the expectation that this trend will continue as more multinational organizations begin to set up new RMB treasury structures that include pooling, invoicing and payments. The enhanced efficiencies from RMB settlement provide opportunities for improved margins and lower costs.
China Vehicles Becoming Popular
Issuing bonds onshore in China is becoming more popular and is seen as a low-cost way to enter a new market and broaden your investor base. The CNH bond market is seen as the world’s fastest-growing bond market with over CNH 1 trillion of issuance since market inception. Original issue tenors range from 1-10 years, with 1-2 years being most popular. The most common credit quality is single-A. RMB pooling structures are also growing in popularity, with over 40 percent of members expecting to implement this type of structure in the second half of 2014. One-way or two-way structures offer greater efficiency in the management of RMB exposures and the ability to borrow from offshore without consuming Foreign Debt Quota (FDQ) or seeking PBOC consent.
CONCLUSION & NEXT STEPS
Members continue to focus on process efficiency and innovation as they further consider out-of-the-box strategies for unlocking working capital. What was first implemented as an urgent financing program for vendors has now turned into an ongoing supply-chain finance program that adds value to the business. Global account rationalization continues to add efficiency by consolidating accounts and relationships to as few banks as possible without adding increased counterparty risk by having too many eggs in one basket. The tagline “less is more” was the mantra for many over the past several years as they endured the downturn. Still, for most, it remains very much the mandate as members are being asked to further rationalize structures and cut expenses. System efficiencies are a top priority for many as they continue the rollout of new treasury workstations to update old processes.
The T30 fall meeting will be held on October 1-2, 2014, in San Francisco. HSBC will sponsor the fall meeting.