Allocating cash remains a top priority for corporates, despite challenges including securities market volatility, the strong dollar and ultra low interest rates.
The T30 met in September to discuss macro challenges faced by corporates, including the strong dollar, and banks’ new liquidity and leverage requirements that are changing their relationships with clients. The meeting also addressed current threats facing treasury, including the growing Cyber menace and the current equity market structure that that can add costs to share repurchases. Other issues included:
1) Buy or Buyback? Skyrocketing valuations are making acquisitions increasingly hard to justify, raising the question of just what metrics acquirers are using these days. The best course of action now, since slowing economies globally limit companies’ growth prospects, appears to be returning excess capital to shareholders.
2) High Frequency Threats. Stock exchanges and alternative trading systems (ATSs) are rewarding high-frequency trading firms (HFTs) that rely on speed to trade ahead of other orders, driving up the cost of trades and corporates buyback programs. Tell your brokers to mix up their execution patterns.
3) Mitigating Cyber Threats. Sophisticated Cyber-attacks span the breadth of a company’s entire ecosystem, from suppliers through to customers. Attacks are inevitable, so a corporate’s response is the most critical factor.
4) The Big Three Turning Points. A global recession may not be imminent, but the lackluster economy worldwide will slow China’s economic transition, keep the price of oil low, and drag out interest-rate increases by the Federal Reserve.
Strong USD Here to Stay—Deal With It
The strong USD is having a major impact on corporates and their hedging strategies.
- Impact: Fully 78% of T30 members’ corporate parents have been negatively impacted by the strong USD, and 56% have instituted new foreign-exchange (FX) hedging approaches.
- Rules-based: Rules-based hedging more actively uses valuation to determine the hedge ratio and optimal hedging instrument.
- VAR: Value at Risk (VaR) estimates can change along with market inputs. Risk-management policies with fixed limits could end up setting targets before hedging strategies are put in place.
- Stressed VAR: Deutsche Bank suggests running “stressed VaR” scenarios using market history; increasing VaR for pegged or managed currencies; supplementing VaR with forecasting; and using a “risk dashboard” to display a range of VaR estimates.
With increasing volatility and the dollar still in a strong cycle, corporates have a lot to consider as they begin determining 2016 budget rates and planning their FX hedging. Adopting a more sophisticated, rules-based approach to dynamic hedging and looking more closely at how VaR and related risk measures are used, are two ways to improve FX management performance in this environment.
Protecting Stock Buyback Programs in an Opportunistic Market
An Investors Exchange (IEX) executive described the current equity market structure and its potential impact on share repurchases. Deutsche Bank then described current buyback trends and developments.
Key Takeaways
1) The Stock Market Ain’t What It Used To Be. Now occurring over 60-odd trading venues, the trading of publicly issued stocks has changed dramatically. Dark-pools compete with the exchanges, and the quality of quote data varies dramatically. Technology enables opportunistic traders to jump ahead of trades, raising the bid and trading costs. Execution venues providing rebates to participants exacerbate the problem.
2) Grill Your Buyback Broker. Corporate may not have resources to do post-trade analysis, but they should nevertheless ask their brokers pointed questions. Do they prioritize trading venues offering rebates? To what extent do they internalize trades in their own dark pools?
3) Use The Right Dark Pools. Corporates shouldn’t tell brokers to avoid dark pools, but instead instruct them to mix up the time and size of trades. IEX protects participants from opportunistic traders, and it doesn’t provider liquidity rebates.
4) Buybacks Lose Their Sizzle. Debt capacity is still available for share repurchases, but sizable leveraged buybacks have not been seen. Announcements of buyback-program increases are no longer packing the usual share-price punch, perhaps because they will not deliver on growth expectations set by the failed acquisitions they often follow.
Outlook
Share buybacks appear likely to sizzle given M&A targets’ high valuations, although they may not deliver the anticipated share-price results. Taking steps to avoid opportunistic traders will enables corporates to optimize their share repurchases.
Cash No Longer King
Dealing with cash when rates are low and banks no longer want your money.
- Big Shift: T30 members are moving away from bank deposits and traditional money market funds. They should be considering how to reduce the ROIC drag that strategic and trapped excess cash on their balance sheets represents.
- Dashboards: Banks are developing dashboards to provide clients with information about credit exposures, actual investments, their maturities and which are maturing soon, cash needs, and the ability to invest excess cash in an automated fashion.
- Returns: Near zero rates are pushing corporates outside the box to reduce the cash drag. One member reported investing in a fund of hedge funds; even a small investment can boost overall returns by a few basis points.
Treasurers should be prepared for a “mainstreaming” of alternative cash investments, aided by sweep solutions and dashboards for visibility and analysis. Portals and platforms to transact in time deposits and money funds will provide access to these investment alternatives.
Cyber Breaches Are Inevitable; Response is Everything
T30 participants voiced concerns about Cyber threats to a panel of Cyber security experts. The two most common security threats involve third parties posing as legitimate banking or corporates reps, an approach that is nearly three times more likely than an unauthorized user infiltrating a legitimate banking portal or treasury system.
Key Takeaways
1) No Longer Just at IT Problem. Cyber risk has morphed into a corporate issue, driven by boards, regulations and the C-suite, since attacks can result in lost funds and client trust. Cross-functional teams are emerging to deal with the issue, including representatives from internal audit, business units, IT and finance. Cyber risk extends to companies’ broader ecosystem, from supply-chain vendors to end-customers..
2) Systems Breaches Are Inevitable. Hackers now analyze organizations to find their crown jewels, whether retailers’ databases of customer information or biotech firms’ intellectual property. Organizations are shifting their focus from defenses, since breaches appear inevitable, to crisis management: What are the implications and the plan to communicate with customers and suppliers.
3) More SaaS, More Security. Session leaders said SaaS providers tend to have more security and expertise than the average company. Still, companies must scrutinize their business continuity plans, how they protect customers, their crisis leadership teams and response plans, and their insurance coverage.
4) The Risk from Within. The weakest link ultimately is from within the organization. Sophisticated malware captures details about managers from social media, resulting in highly realistic requests to click links that the door for malicious software. One T30 treasurer said that in an internal test, “Even the IT guys got burned 20% of the time.”
5) Cyber Insurance Still Limited. Cyber policies tend to cover liabilities stemming from lawsuits as well as out-of-pocket expenses, such as legal counsel forensic services; also the cost of notifying customers or suppliers, setting up cost centers, crisis management and public relations firms and other necessary outlays. No coverage yet for brand reputation or theft of intellectual property
Outlook
Cyber attacks are becoming more sophisticated, requiring a best-practice response plan. Cyber policies are evolving but remain spotty in terms of coverage; existing P&C, fraud and crime, fidelity policies can fill in some of the gaps. Coverage for catastrophic Cyber risk is economically
Cybersecurity: Is SaaS Safe?
As cyber threats and security come to the fore at the enterprise level, avoiding risk is as important as responding to it, so the question arises: Is it safe to use software as a service (SaaS) providers? T30 participants noted their increasing reliance on SaaS providers, whether for functions in treasury or elsewhere in the company, and questioned that trend from a security perspective. Turns out, the session leaders replied, that SaaS providers tend to have more security than the average company, often hiring experts from the CIA, FBI and other top government agencies. Still, companies must scrutinize just what kind of expertise SaaS providers employ, their business continuity plans, how they protect customers, their crisis leadership team and response plan, and their insurance coverage (since possessing cyber coverage means they have satisfied the due diligence testing of insurers).
New Regs Spell Trouble for Cash Management
The session started with Deutsche Bank describing banks’ new regulatory challenges, especially Basel III’s leverage and liquidity requirements, and how they’re impacting their products and services. A lively discussion ensued about the cash management impacts and alternatives to stash corporate cash.
Key Takeaways
1) Good Deposits/Bad Deposits. Banks once profited from technology-intensive transaction banking services by reinvesting corporates’ excess balances, but they may no longer want large deposits because regulators say only some is long-term operating cash and punish the rest. Thirty-plus days is now the sweet spot to be categorized as long-term.
2) Bank Creativity Abounds. A 30-days-or-more, term-deposit is the most straightforward solution, but treasury executives should expect a wave of pitches for alternative short-term investment products that satisfying Basel III-concerns, especially in stress scenarios. A time deposit that converts to demand when called may be one.
3) New Income and Fees For Intraday Liquidity? As banks’ push for longer-term investments may sap liquidity for intraday payments. One solution may be for banks to charge for providing intraday liquidity and pay-up for those providing it, letting corporates put excess cash to work in the intraday wholesale liquidity markets.
4) The Great Banking Retreat. HSBC exiting markets like Brazil and Turkey in the wake of RBS’s pullback from foreign markets raises concerns that other major banks will follow as Basel III unfolds. Members must look for signs, such as a hiatus on technology upgrades.
5) Farewell to Pooling? Some major banks have eliminated notional pooling, because of tax concerns and because Basel III has increased the cost of committing bank capital to the service.
Outlook
Corporates are likely to find increasing challenges parking their cash, as new regs push banks to clamor for short-term investments of 30 days or more. Look out for their creative new products to fill in the gaps, as well as signs that your transaction-banking-services provider may be exiting the business.
Turning Points Impacting Corporates Globally
Deutsche Bank led T30 participants through a detailed discussion of the three forces impacting global markets that are linked by the common theme of an underperforming global economy.
Key Takeaways
1) China’s New Export Is Volatility. The selloff in Chinese stocks in June should have little impact on China’s growth, but it highlighted the government’s mistake in overtly promoting the stock market starting in late 2014. The government’s subsequent renminbi (RMB ) devaluation and steps to halt the equity slide have raised concerns about its financial expertise.
2) Oil Price Doomed to Scrape Bottom. Oil’s price is unlikely to show significantly stronger legs anytime soon. Its 63% decline as of mid-September from its peak in June 2014 (54% decline as of early October) was in line with previous oil selloffs, but this time fueled by both too much supply and too little demand.
3) Shifting to Quantitative Tightening? With the US Fed set to raise rates, the world is poised for an end to quantitative easing. But China and other emerging-market countries are now selling assets, including Treasurys, so are we already in a phase of quantative tightening? Negative rates in Europe and volatility elsewhere are likely to maintain a strong bid for US Treasurys.
Outlook
The RMB devaluation and stock market plunge may not impede China’s growth, but they raised investors’ concerns. A low price for oil is good for the global economy, but financial markets overly exposed to oil may suffer.
Conclusion
Treasury is helping to shape capital decisions as well as fund them, support the businesses as they work to execute them, and finance as much as possible from the cash these businesses generate. Moreover, initiatives that treasury proposes that will move the needle on ROIC will get a hearing—from senior management and the board. This includes changes to investment policy to help mitigate the ROIC drag represented by sizable excess cash balances that so many companies choose to carry on their balance sheets. Part of the policy changes considered will be how to put these excess cash assets to work in ways that have not traditionally been a part of a corporate treasurer’s thinking. For example, corporates can look to be providers of liquidity in wholesale funding markets where traditional liquidity providers, e.g., banks, have been forced by regulation to pull back.