Tax reform headlined a range of issues discussed by assistant treasurers.
As multinationals continue to gobble up competitors and interest rates remain just above record lows, members shared ideas including the optimal structure for treasury departments, where cash can find a home, and tips on effectively offering deferred compensation plans to employees. Credit Suisse explained how potential tax reform could affect capital structure as well as trends in global markets and political economics. Here are three key takeaways:
1) Planning for Tax Reform. A bill has yet to take clear shape, making planning a challenge. It pays for treasury to collaborate with tax, IR, FP&A and the business CFOs.
2) Risk Shift. A member that has pursued a relatively aggressive investment portfolio is de-risking in light of anticipated global volatility.
3) Slow Growth. Global growth will be stuck in the 2% range and stimulative effects will take longer than anticipated. Credit Suisse expects one more rate hike after June’s.
Capital Structure Considerations in Light of Potential Tax Reform
Republican leaders are intent on passing tax reform, which has potentially significant implications for corporates. Managing Directors Sumit Khedekar and Sal Seguna provided Credit Suisse’s outlook on how repatriation and other elements of tax reform could impact global trading and capital allocation. Members discussed what planning their firms had done so far and potentially restructuring their balance sheets if there’s a sudden shift of cash from foreign to US books.
KEY TAKEAWAYS
1) Mildly bullish on regulatory front. Members expect President Trump to sign a bill in some form to repatriate cash. A Dodd-Frank Act rewrite was the deregulation-of-banking move that the most members (56%) thought likely to arrive, followed by the Fiduciary Rule rollback (50%), and the Volker Rule carve-out for market making in financial securities. Three-quarters do not expect regulation changes to impact their bank relationships.
2) Repatriation? Forget about capex. Republicans and Democrats alike anticipate companies to steer mandatory repatriated cash under tax reform to capex and new manufacturing jobs. Not so fast. Credit Suisse anticipates much of that cash going to share repurchases and dividends, with M&A a close third. Down the road, when companies can use overseas profits in their calculations to allocate resources, they’ll be able to think about growth plans more holistically.
3) Near-term considerations. Credit Suisse has seen an acceleration of debt issuance so far this year, driven by the expectation of rising rates and concerns about getting on the right side of a possible grandfathering clause should tax reform limit interest-rate deductions. Issuers are going further out the curve, issuing longer-term debt. The bank has also seen companies contributing to underfunded pensions in the US, to take advantage of the higher tax deduction before the corporate rate drops from the current 35%.
4) The rating agency impact. Queried by a member whether tax reform could prompt the rating agencies to reassess or modify their methodologies, Credit Suisse said agency reports so far have focused on repatriation and its potential impact on net debt treatment. Moody Investors Service has viewed trapped cash, despite the current tax hit to repatriate it, as a source of cash to service domestic interest and principal payments.
Is There Really Such a Thing as a Superforecaster?
Michael Mauboussin, head of global financial strategies at Credit Suisse, reviewed the key qualities of superforecasters, including their personalities, how they work in teams, and how training can bring out the forecasting abilities of employees. He geared the discussion to helping members improve their decisions in their organizations. Superforecasters can be important assets in corporate treasury’s planning and forecasting activities because they:
- Clearly understand what they know and what they don’t, compared to most people who tend to overestimate their knowledge, resulting in poorer forecasts.
- Are willing to adapt their views when reality doesn’t match their visions, also a rare trait.
- Have an excellent rationality quotient (RQ), as opposed to an intelligence quotient (IQ) that may be just average with superforecasters—which is good news for treasurers as an RQ can be cultivated whereas an IQ cannot.
- Work well on their own but even better in groups, with the ideal group having four members.
Given the value of superforecasters, members are encouraged to search and screen for them in the hiring process—Mauboussin said the Comprehensive Assessment of Rational Thinking may be one of the more effective tests to screen for them.
OUTLOOK
The most recent news suggests tax reform may not arrive until early 2018 and likely will be less transformative than hoped. But components such as repatriation of trapped overseas cash could very well survive.
Where to Invest Cash Now
The potential for offshore cash repatriation, the anticipated upward-sloping yield curve and the potential focus on “America First” could dramatically change asset-allocation considerations and risk correlations. A member from a cash-rich technology company with plenty of cash explained why his firm was shifting its sophisticated and previously riskier investment portfolio to safer ground.
KEY TAKEAWAYS
1) Risk shift. The AT said treasury traditionally split investments into buckets for operating cash, short-term investments and a strategic return portfolio. It has improved operational efficiency, cash forecasting and pooling structures to identify excess cash more quickly and move it into higher-yielding investments. However, perceiving a more volatile world ahead, coupled with an ever-more-diverse collection of businesses to manage, the company decided it was time to reduce the investment portfolio’s risk.
- The company anticipates increasing global volatility in light of issues including Brexit, the US elections, a potential government shutdown and squabbles over the debt ceiling. Other risks include tighter Fed monetary policy and rising rates, and emerging sources and types of risk, including cyber and driverless cars.
2) Key changes. After six months of reviewing portfolios and analyzing optimization models, the company recently got board approval to pursue two major changes.
- Given the intent to reduce the risk of the investment portfolio, treasury has shifted the portfolio to a shorter duration and put a maximum limit on the maturity for any given security in the portfolio, compared to the past where there was simply a duration range at the portfolio level. The company also reduced by half its allocation to agency MBS, which had been one of the largest allocations in the portfolio and has performed “tremendously well” over the last eight years.
- No more high-yield debt in the portfolio; now it’s BBB and above. The AT noted that high-yield tends to trade along with oil and other commodities, because a lot of those companies have issued high-yield debt, and there was simply too much volatility there. Non-investment grade bank loans are less volatile, but there’s also less liquidity.
Optimal Treasury Structure
Members representing the industrial, technology and pharmaceutical sectors explained to peers how their treasury departments are set up and why. NeuGroup Peer Research also showed how a core activity like cash management gets allocated from an ownership of responsibility standpoint across treasury, FP&A and regional treasury and shared service centers.
Most members are trying to get cash reconciliation out of treasury, with 50% indicating that it is owned by the SSC. This contrasts sharply with cash forecasting and bank account management, where more than 80% indicated the activity was owned by treasury. On the cash forecasting side, one of the challenges is keeping the short-, medium- and long-term forecasts in sync, or at least using the same numbers (with proper accounting for FX translation, etc.), which is why treasury has been quick to take ownership. Account management simply dovetails with treasury ownership of bank relationship management, but it is likely an area wheretreasury can delegate more, as it is doing with cash reconciliation.
There are no hard-and-fast rules for designing corporate treasuries, which will evolve to meet the changing needs of growing companies. Shifting treasury activities to less costly regional hubs and shared service centers appears set to continue.
OUTLOOK
As cash-rich growth companies mature, they will tend to want less excitement to come with their cash investment portfolio. Reducing cash investment risk may also reflect a desire to explore new exposures on the business side.
The Changing Global Markets and Political Economics
Besides changes to the US corporate tax code, what changes to trade, economic and monetary policies may shake up corporate treasuries, and what possible changes should treasurers be thinking about (and positioning themselves for)? Credit Suisse experts updated members on major political/economic and market events they may soon face and what to consider in anticipation.
KEY TAKEAWAYS
1) Could be worse. Optimism now will likely taper as uncertainty grows around Republicans achieving their policy goals. Looking ahead, Credit Suisse predicted:
- Total of three rate hikes this year, when growth will be stuck in the low 2% range. This and any stimulative measures will take longer to impact than many anticipated when Trump was elected.
- The Fed is likely to change its formal investment policy and seek to shrink its balance sheet, potentially sapping economic growth.
- How these issues play out is difficult to predict, because President Trump has only filled a small fraction of positions at the Fed and throughout the executive branch.
2) Obamacare’s unlikely supporters. Jeremy Schwartz, economist at Credit Suisse, noted that Medicaid expansion provided a significant boost to US economic growth, providing money to low-income households who quickly ramped up their healthcare spending, which overall jumped to a 3% growth rate from closer to 2%. Hospitals saw their credit performance improve. Much of the healthcare debate has centered on the marketplace for individual plans, but the Medicaid expansion has had a significant economic impact. The Republican’s current plan would reverse its expansion, putting a drag on growth that concerns Republican governors and senators from states that have expanded the program.
3) Trump won’t scare Treasury buyers. China has been selling Treasuries since last year, potentially steepening the long end of the curve. One member asked who would step in to buy Treasuries should infrastructure spending and/or tax reform widen the federal deficit. Mr. Schwartz pointed to US banks as first in line and noted that the pain of ultra-low rates over the last several years would prompt a variety of buyers looking for longer duration and slightly cheaper bonds.
Smorgasbord of Member Initiatives
A member discussion of current initiatives revealed a range of topics, with several linked to preparation for US tax reform. For example:
One company anticipating an opportunity to further centralize with tax reform has worked with Deloitte, their partner on their SAP treasury installation, to provide a framework to think about a treasury operating model that will be more efficient from a structural standpoint. This will keep treasury from being still very decentralized to having a more centralized structure.
Another company noted that it was focused on M&A preparation in conjunction with cash freed up by tax reform and the competitive situation of the company over the next two years, as it may bean acquirer. Recently, it has been leaning on its CP program and, because of this, managing the rating agencies’ discomfort with its serial acquisition of small companies.
OUTLOOK
In a time of extreme political rhetoric, the outlook for the financial markets and global economy is relatively mild. There is not likely to be a big ramp up in growth, but neither will President Trump’s policy moves create significant economic damage.