Taking a New Spin Around the Neighborhood

By Joseph Neu

“I came back to the same house, but the neighbors are really different.” This is how Gary Bischoping described what it was like to return to Dell’s treasury to become treasurer after several years in a business-finance-related role. His comment largely underscores the key conclusion from the Eurofinance 13th Annual Conference on International Cash and Treasury Management in Miami last month. The financial and economic crisis may not have changed the job of treasury, but it has made treasury’s role more vital, since its key service providers—in particular for capital, liquidity and vital banking services—have been severely impaired, if not put out of business by the crisis.

COPING WITH VOLATILITY

Asked by Conference Chair Martin Giles, a senior business correspondent with The Economist in San Francisco, how to build a volatility-proof business (which he described as the new, post-crisis ideal), Daniel Franklin, The Economist’s executive editor stated that firms cannot. The best they can hope for is to maintain flexibility in order to respond to different outcomes.

• Emphasize treasury’s strategic role. And this is where treasury comes in to help: 1) by taking a more strategic view of the world and building a more robust framework for operations with its risk management capabilities; 2) by acting protectively to secure external funding and maximizing internal capital utilization; while 3) managing and supplementing necessary financial services (especially in scenarios where banks are hurting). By fulfilling these three primary strategic roles, treasury goes a long way to maintain flexibility to respond in different outcomes, if not making firms fully volatility-proof.
• Maintain a current and future view on cash. Treasurers able to provide their firms with the most flexibility are those that have lots of cash, or so the subsequent panels concluded. And even cash-rich firms noted among their key lessons from this crisis the importance of cash visibility and forecasting, because if you are forced to become reliant on your own cash you want to know as much about it as you can, including how much of it is coming in the future. For example, Salesforce.com Treasurer Joachim Wettermark pointed to the importance of excess cash at risk in investment funds and cash forecasting as his takeaways from the crisis.
• Emphasize flexibility in capital structure and funding. And keeping with the flexibility theme, another lesson was that optimal capital structure is less about the benefits of leverage and more about the need for flexibility, according to eBay’s Treasurer Jennifer Ceran. This means multiple sources of funding, of different types and maturity. And given how bank relationships have been strained by a crisis that mostly shut credit markets down, having the flexibility of not being immediately reliant on banks—for direct credit, access to capital markets or services to ensure adequate liquidity—also allows time to work through the new realities of bank relationships.

NEW BANK RELATIONSHIP DYNAMICS

Among the new realities of banking relationships is that banks, being faced with rising cost of risk management products, capital charges and regulation, “need a business case like never before to offer credit,” noted Jon Richman, managing director and North American head of trade finance and cash management for corporates with Deutsche Bank. As a result, banks are becoming more selective in their relationships with customers, favoring those where there is a strategic fit of mutual value over time, which means they can generate a return for the bank.

For a global bank like Deutsche Bank, the preference is for a global vs. merely domestic relationship, since a global product mix offers more in return than a purely domestic one, and one characterized as a partnership vs. a vendor.

• Be mindful of long memories. The partnership theme extends both ways, of course. Implicit in the relationship banking theme is that the bank also stands ready to assist customers, and provide credit, when they are in need.

Thomas Avazian, SVP/regional executive for Bank of America’s Global Product Services in Latin America/Canada and US International made this point with a shared anecdote about a senior executive at a customer that faced severe liquidity problems during the Latin American debt crisis where Bank of America stepped up to offer funding. Even today, that customer says often, “I remember when your bank stepped up to help.” Thus, Mr. Avazian noted, banks (and customers) need to step back and look at their relationships in the context of long memories about how the partnership performed in times of crisis.

For a bank’s customers, this means looking at their one-, three- and five-year plans and integrating the bank into them. It also means not abusing the relationship with constant bidding out of the business and then expecting the bank to be there in time of need.

While there is a risk that these new banking relationship dynamics will lead to “haves and have nots” on both sides of the banking relationship (see sidebar below), “both sides must be aware of a decision’s impact five, ten, fifteen years down the road,” noted Bank of America’s Mr. Avazian.

Praxair, for instance, is not likely to soon forget the decision taken by its lead bank of twenty years not to participate when the company made the decision last October to go to the CP market for additional funding. The bank advised Praxair not to go to the market, and when it decided to do it anyway, treasury had to scramble to find a new lead bank. Asked how he reacted, Michael Allen, Praxair’s VP and treasurer noted he was “stunned,” since at the last year-end review the bank had pledged its support to him and the CFO. Plus, Mr. Allen noted, “I don’t want to be told how to run my treasury.”

This is but one example of many where you find out in a downturn “who your friends are in your bank group,” Joel Starr, treasurer of Kelly Services, noted.

• Consolidate the number of banks. For a company like Tyco, which had experienced a near-bankruptcy not many years ago, the lessons of too much reliance on any one bank or source of funding were already learned. Thus, according to Mike Giakoumatos, senior manager for global liquidity at Tyco, the bank relationship lessons of the crisis have been more subtle. As a good generator of free cash flow, Tyco can look to those banks with which it wants to deepen its relationships and consolidate the core banking group. “The crisis has brought us closer to a core group of banks,” Mr. Giakoumatos noted, and the number has shrunk from 20+ to 15. In looking at which banks to retain, credit risk (measured by CDS spread) is a key criteria, but there is also the constant tension of how to satisfy all the banks in the group with business.

Since ultimately treasury needs to feed its banks business, it has to consider which ones have the best products and services, so that the best providers for needed business are part of the core banking group. Those outside the group come in for greater scrutiny, especially at a local level. For example, if a core bank has capabilities locally, according to Mr. Giakoumatos, treasury must ask the question, “do we really need to use XYZ bank in Thailand?” Unfortunately, not every treasury is in a position to be so choosy.