Large-cap treasurers grapple with tax-reform implications and cyberthreats, talk training, and consider how technology will change the role of treasury.
Treasurers of large-cap companies covered a range of timely topics at the T30 LC 2018 spring meeting sponsored by US Bank at Starbucks’ headquarters in Seattle. Subjects discussed included planning for the effects of US tax reform—on capital structure and allocation, for starters—and how they may impact treasury’s global cash and tax structures; the damage caused by cyberattacks and the insurance available to address it; rising rates and interest rate risk management; issuing debt in a foreign currency; and the impact of new technologies on treasury. Here are three areas that stood out:
1) Tackling Tax Reform: Many Questions, Some Answers. Treasurers heard expert commentary on the key elements of US tax law changes they need to consider, including whether treasury structures for, say, overseas cash pooling are still relevant under the new rules. Also reviewed: possible responses by tax authorities in other key jurisdictions, as well as regs, rules and clarifications to look out for.
2) Relieving Cybercrime Pain: Assessing Insurance. Cyberattacks expose corporates to significant losses of cash and reputation. Given the changing dynamics of the cyber insurance industry, what should treasurers be thinking about and doing? This discussion focused on actions triggered by recent incidents of cyber intrusion, what cyber risk looks like today and how to protect your company.
3) Deploying New Technologies in Treasury. The advent of robotic process automation (RPA), artificial intelligence (AI) and machine learning informed a session on the various ways treasury teams are implementing new technologies. Of equal importance: What do technological advances mean for treasury roles and responsibilities, and what new skills are needed?
Tackling Tax Reform: Many Questions, Some Answers
US Bank’s presentation covered the timing of paying tax on deemed repatriation and the potential effects on global liquidity structures, as well as the foreign tax implications of the BEAT, GILTI and FDII provisions that expand the base of cross-border income. This was followed by a discussion on the effects of tax reform on areas including capital structure and debt paydown.
An Uncharted Interest Rate Environment
The head of fixed income and capital markets and the vice president for interest rate derivatives at US Bank offered insights on the current state of fixed-income markets and some prognostication about where we may go from here. Of special interest is the shape of the Treasury yield curve and what it may or may not imply. The curve has flattened dramatically over the past year, with the two-year to 10-year note spread at about 47 basis points, leading to fears that an inverted curve is now possible or likely.
Historically, an inverted yield curve almost always has led to a recession as credit tightened. But US Bank is among those saying this time may be different. The curve has been flatter for quite some time, and the rise in rates has been gradual, not steep, as it has been in the past. We are in uncharted territory, coming off practically zero for the federal funds rate for seven years, and with all major central banks pumping liquidity into the markets for an extended period. Of course, it’s possible that inflation in the form of wage pressures comes back stronger than anticipated, which would cause the Fed to tighten more and faster than the forecasts. That, the experts say, could force a recession, especially since we are at the far end of an extended period of growth.
KEY TAKEAWAYS
1) When to pay the tax? The tax on foreign earnings may be spread over eight years, but doesn’t stay at the same rate. For years one through five, the tax is 8%; it jumps to 15% in year six, 20% in year seven and in year eight reaches 25%! So it clearly may behoove companies to pay the tax earlier to reduce the total tax hit. The downside of early payment is paying the IRS more money earlier because the tax is applied to a bigger base amount. This is just one example of the numerous decisions tax reform is forcing treasury to play a role in making.
2) Time to deleverage? A key effect of tax reform will likely be deleveraging fueled by increased free cash flow, limitations on net interest expense deductions, and the reduced value of the deduction at a lower tax rate. The natural result will be to let debt mature or to buy it back early. US Bank cited companies that “indicated they will use the extra tax reform cash flow to deleverage at a faster pace.” Treasury needs to weigh the effects of deleveraging from its perspective.
3) Need to get everyone on the same page. A common theme among the treasurers discussing tax reform issues was the difficulty of getting finance, tax and senior management to sing from the same sheet music. That’s probably because each group has its own idea of how “best” to deploy the cash. Singing in unison will take time and effort, but is a must as the decision clock continues to tick.
OUTLOOK
The presentation and comments by members indicated that, no surprise, the tax overhaul passed at the end of 2017 will significantly benefit US multinational corporations and may provide longer-lasting advantages than markets are factoring in today. That said, clarity is needed as the IRS fleshes out the details of a bill that was passed in haste. The lack of clarity around various elements of the complex rules means it will take companies substantial time and effort to settle on actions and strategy that satisfy all stakeholders, including activist investors. Indications from other NeuGroups suggest that many companies are still making decisions on how much cash to repatriate and when, how exactly to transfer securities and how to spend the money.
Relieving Cybercrime Pain: Assessing Insurance
The head of the cyber practice at Marsh laid out the big picture on cyber risk, underscoring that most companies will constantly face cyberattacks and that cybersecurity can only do so much. He then delved into the cyber insurance market. That followed a description by the treasurer of a large shipping and transportation company of a malware attack on the company’s European subsidiary that shut down all the sub’s systems. The attack cost the company a significant amount of revenue; unfortunately, the business had no cyber insurance.
Training, Anyone?
Several treasurers at this meeting mentioned the need for treasury training, not only for their staffs but also for those at more senior levels, including themselves. There are, of course, training courses out there, as well as the Certified Treasury Professional certification from the Association for Financial Professionals in the United States, and the Certificate of International Cash Management offered by the Association of Corporate Treasurers out of London. But there seemed to be a feeling that there are not enough options and those that exist are not accessible enough. Some treasurers would like more on-demand training courses where team members could take courses at their convenience.
It’s worth mentioning that conferences and forums offer educational sessions, such as the AFP annual conference in the fall, which features more than 100 educational sessions over 2 1/2 days. The ACT also holds an annual conference, as do other European treasury associations. EuroFinance offers a number of conferences as well.
KEY TAKEAWAYS
1) Data and intangibles are the 21st century asset class. A Marsh slide showed that in 1975, 83% of the S&P 500’s market value was tied to tangible assets and the rest to intangibles; by 2015 it flipped completely, with 84% in intangible assets. This is a dramatic representation of the importance and value of data and the stakes involved because it’s so vulnerable to cybercrime. Marsh advocates a multi-pronged approach to managing risk around this new reality that, of course, includes insurance.
2) Cyber insurance is expensive. The high cost of cyber policies relative to other types of insurance is a key reason many firms have not embraced cyber coverage. Marsh said transferring this risk is viewed by some as a “defeat.” But transferring, say, half a billion dollars of risk to an insurer may be part of a smart risk management strategy that also includes mitigation and acceptance of the risks. Marsh argues that insurance comes at a fraction of the cost of mitigation efforts.
3) Cyber premiums may be poised to fall. Some analysts say cyber insurance is now a buyer’s market, citing a recent report by Fitch Ratings that says “various market pricing surveys” show cyber premium renewal rates are flat or down, “indicating that market underwriting capacity is meeting or exceeding demand.” Marsh reported that US cyber insurance prices in Q1 decreased for the fourth time in the past five quarters, and said “capacity and competition continue to increase as existing insurers expand their offerings and new carriers enter the market.”
4) How much coverage should you get? In today’s cyber insurance market, it is possible to get up to $1 billion of coverage, with the average policies being written in the $300-$500 million range. Marsh makes the point that “as cyber events become more complex, the potential for conflict increases between P&C, aviation, crime, and other towers and the cyber tower. Sometimes overlap is inevitable, and may even be desirable (e.g., free coverage extensions, legacy coverage enhancements).” Treasurers in some NeuGroups are exploring buying cyber insurance as part of aggregate coverage that bundles various risks under one policy. The idea is to get more bang for the insurance premium buck, apply coverage where it is most needed and avoid paying premiums for coverage that results in few claims.
OUTLOOK
What many are calling the fourth industrial revolution is giving rise to technology that will enable far-reaching business opportunities and connectivity to customers (the internet of things, for example). But it also poses enormous risks that can’t be completely avoided through cybersecurity and mitigation efforts. These include damages to reputation and underlying data integrity that won’t be fixed overnight. That explains why Fitch says cyber insurance coverage continues to be one of the fastest growing segments and represents a significant growth opportunity for US property/casualty insurers. The stakes are even higher for companies doing business in Europe because of the EU’s General Protection Data Regulation (GDPR). But while cyber insurance is surely a product for treasury to better understand, it might be more prudent to take heed of what Warren Buffett said in May at Berkshire Hathaway’s annual meeting: “I don’t think we or anybody else really knows what they’re doing when writing cyber [insurance policies]. We don’t want to be a pioneer on this.”
Deploying New Technologies in Treasury
Most treasurers remain focused on technologies that can improve processes and boost efficiencies, namely updated treasury management and/or ERP systems and systems that expedite the purchase-to-pay cycle. But there’s a lot out there with the potential to turn the mountains of data companies produce into actionable information. Can we analyze all communications between the sales team and customers in Salesforce, using AI to feed forecasts and do scenario analysis? That could replace FP&A. A treasurer who has been working on a project for more than a year looking at every process and function in treasury led this session. New technologies will play a part in changing how these processes are done, and will ultimately determine what that means for the roles and responsibilities of treasury team members, including the treasurer, and what new skills they’ll need.
Treasurers’ Top-of-Mind
The projects and priorities session brought forth plenty of discussion about acquisitions, divestitures, relocations, and designing and implementing shared services centers (SSCs). All of these issues affect the organizational structure and how the treasury team operates. This then leads to the resourcing of the treasury team as well as the location. And of course, no one size fits all. Some treasuries are completely centralized while many others operate on a regional basis with the bulk of decision-making and strategy being done at HQ with regional centers in Asia and Europe.
Another major topic discussed during the round-robin concerned issuing debt outside of the United States. Many companies have taken advantage of very low interest rates in Europe and issued eurobonds. Another reason to issue in other countries is to match debt with a locale where you have operations and sales. One company is looking to issue out of India, which brings plenty of challenges with it, mainly because of stricter regulations. In addition to looking outside the US, some are also looking at green bond issuance while others have already entered that market.
KEY TAKEAWAYS
1) Time to pay attention to emerging technologies. This isn’t something that may or not happen; technological innovation is part of the transformation every business and every business unit needs to embrace in this fourth industrial revolution. As one treasurer said, he needs to pay attention and understand what’s out there. The new world order will include humans, of course, but we need to learn to adapt, find where we add value and hand off the rest to programs, bots and systems.
2) These new technologies are already being deployed. Some technology companies have already developed RPA and AI for the cash forecasting process. And Microsoft has developed a streamlined letter of credit process using blockchain.
3) Banks are investing in fintech. US Bank conducts API hackathons with 150-160 people to see what they can create, and integrates some of the results into the bank’s core offerings. US Bank also proposes problems to fintechs (API shops) that they can solve and integrate.
OUTLOOK
Even though advanced technologies such as AI and RPA may not be fully embraced for five years or so, now is the time to look at treasury processes and understand how new technologies will impact your organization and the roles and responsibilities of the treasury team.
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