About Me

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I am deputy editor at The Banker, a Financial Times publication. I joined the magazine in August 2015 as transaction banking and technology editor, which remain the beats I cover. Previously I was features editor at Profit & Loss, an FX and derivatives publication and events company. Before that I was editorial director of Treasury Today following a period as editor of gtnews.com. I also worked on Banking Technology, Computer Weekly, and IBM Computer Today. I have a BSc from the University of Victoria, Canada.

Thursday, 29 August 2013

Cross-border pooling: the Holy Grail for treasurers in China

August 2013

Cross-border pooling would go a long way to end the pain of trapped cash in China. Speaking at the EuroFinance Singapore conference, Robert Yenko, Regional Treasurer, told the story of Intel’s journey to effectively and efficiently manage its cash on a global basis.

Robert Yenko, Regional Treasurer, Intel, began his talk at EuroFinance Singapore 2013 with a short story to illustrate the transformation that has occurred in China during the past 20 years. In 1994, as part of a team selected to set up Intel’s first factory operations in Pudong, China, he went along with a couple of colleagues to visit the Head of the Capital Accounts Division of State Administration of Foreign Exchange (SAFE). They arrived at the office five minutes early to find a smoke-filled room and the capital accounts manager in his undershirt – he wasn’t quite ready for their arrival.

Today, the Chinese authorities are more than ready to do business. They are consciously building close relationships with multinational companies (MNCs) in order achieve their main objective: to make China the next global finance and treasury centre.


Intel in China

As the world’s largest semi-conductor company, Intel operates in 63 countries, reaps $53.3 billion in revenue worldwide and has a net operating profit of $14.6 billion (2012). It employs 105,000 talented people, including 80,000 technicians, 5300 PhDs and 4000 MBAs. Social responsibility is an important part of the company’s objective and it is one of the largest voluntary purchasers of green power in the US.

Today, 75% of the company’s product sales come from outside the US, with just over half (55%) coming from Asia and 15% from China, specifically, which accounts for $8bn of revenue.
Intel opened its first sales office in Beijing 1985. Just over ten years later, in 1996, it opened its first factory in Pudong and set up a research and development (R&D) laboratory in Beijing 1998. In 2003, the company built an assembly and test factory in Chengdu and then its first wafer fab outside US and Europe in Dalian in 2007. The company has invested more than $5 billion and now has 11 legal entities operating in the country.

The company holds approximately $1 billion of cash in China. “Although other companies hold much more, this is a large amount for us – almost a quarter of the total cash portfolio in Asia. Therefore, it is very important for us to be able to manage the cash effectively,” Yenko says.


SAFE engagement

Intel’s evolving relationship with SAFE did not happen overnight, emphasises Yenko. In 2004, SAFE introduced Rule 104, which allowed domestic cash pooling with US dollars, and at the same time it allowed one-way cross-border lending. However, there was a caveat – Rule 104 was specifically targeted at companies with a regional headquarters (RHQ), which Intel didn’t have at that time. “Therefore, we explored how we could restructure our legal entities in China so that we could participate in this Rule 104,” says Yenko. In 2005, it set up an RHQ for its subsidiaries and operations in China.

As a result, in early 2007, Intel was allowed to do its first cross-border loan, which was a significant milestone for the company. “We were one of the few companies that could move money outside China, and we took advantage of the programme. Of course there was a limit – it wasn’t a free-for-all,” he says. The limit was linked to the level of profits that a company generated in China.

Intel then petitioned SAFE for approval to perform domestic cash pooling in US dollars. “This didn’t address trapped cash issues because it is still a domestic cash pool in China. However, it allowed us to effectively manage our domestic liquidity within China, so that we can use our cash wherever we want to in-country. This vehicle allowed us to maximise the use of our cash and deliver it to the companies that needed it most,” explains Yenko.

But in 2009, SAFE suspended Rule 104 (cross-border lending) and replaced it with Rule 49. “There were no straight answers as to why the change was made, but after two years of cross-border lending all of a sudden we couldn’t do it anymore. Our in-country cash started to balloon over time,” says Yenko. That is, until the company caught a “big break” last year.

Since 2004 Intel has always maintained good relations with SAFE. “We don’t just approach them when we need something; there is always close collaboration, not just at a working level but at policy level.” This was Yenko’s key message to the audience in Singapore: it is important to maintain and develop the relationship over time. In Intel’s case, this closeness paid off.

In June 2012, the company was invited to participate in a US dollar cross-border cash pooling pilot programme. Yenko and his team had to come up with a proposal and application, and in December 2012 received SAFE’s approval to become a part of the pilot programme. In January this year, Intel made its first transaction. “This is the Holy Grail for treasurers in China – having the flexibility to move money outside of China and to be able to invest it the way we want to. It is a big win for us,” says Yenko.



There are two parts to the SAFE pilot scheme. One part is the foreign currency cross-border cash sweep. This means that a company has to set up two master accounts, one international and one domestic, where it is able to pool all the cash from subsidiaries in China. It can eventually move it to an original cash pool held outside of China. “This addresses our needs,” says Yenko. “We were building up cash in China and wanted to be able to move it and invest it or spend it the way we wanted outside of China.” Of course, this was all within a controlled quota, which is dependent on how much investment a company has in China. Intel doesn’t sweep cash on a daily basis but only on-demand.

The second part of the SAFE programme relates to the centralisation of collections and payments, and being able to centrally collate and process trade payments within the RHQ. This is effectively payment-on-behalf-of (POBO) or receiving-on-behalf-of (ROBO) scheme in cash management terms. “Our RHQ is able to manage, process and pay on-behalf-of other subsidiaries operating in China,” explains Yenko. “This comes in conjunction with a cross-border netting ability. So we are able to do cross-border netting for payables and receivables from offshore.”



Yenko listed a number of benefits, including:
  • Efficient liquidity management.
  • Achieving better returns through economies of scale.
  • Ability to fund expansion wherever it happens.
  • An effective platform to manage trapped cash.
“This last point has always been the primary issue for most treasurers in China – and we are not an exception to that. That why we participated in this pilot programme – to be able to move our money out of China and invest it in the way our board wants it invested. We also have better control and visibility via our master accounts,” says Yenko.



But the pilot programme also presents challenges. “It is a strain on our resources, whether before or after implementation,” says Yenko. “Before we implemented it, there was a lot of communication, documentation and applications going back and forth. One time SAFE asked us to submit an application in just four business days.”

In addition, there is a lot of post-implementation reporting. “This scheme is very important to SAFE, as it will determine the path to currency convertibility. Therefore, the managers want feedback on a regular basis – we meet with them face-to-face once a week to give them a status report and our future plans.”

Scalability of the pilot programme is another challenge. “Being able to scale the programme up and move $1bn outside of China is a challenge. It is something that we are working on and hopefully the second part of the programme will address scalability,” he says.

Yenko’s final tip for other treasurers: “It is very important to work with a bank that can address your company’s needs, is familiar with the landscape and one that understands the nuances of dealing with SAFE and the Chinese government.”

He ended his presentation by reminding the audience of the quote by Deng Xiao Ping: “Crossing the river by feeling the stones”. “This is what it is all about. The Chinese authorities want to be able to test every step of the way before they roll it out. That is how China operates and they have been very successful using that model – and we respect that.”

This insight was first published on www.treasurytoday.com

The drive to improve working capital

June 2013

Working capital management has risen up the agenda of large companies during the last year but they are still struggling to convert sales into cash, according to research by working capital consultancy REL. This insight includes a case study by Atlas Copco presented at the EuroFinance Singapore conference in May.

Europe’s largest listed companies are sitting on €762 billion in excess working capital, according to research from working capital consultancy REL, a division of The Hackett Group, Inc. A similar story is playing out in the US, where the opportunity for working capital improvement at 1000 of the largest public companies rose dramatically, topping $1 trillion for the first time. What are corporates in Asia doing?



Despite European corporate revenue increasing by 6% year-on-year (and 35% over a three-year period), there were clear signs of difficulty in converting these sales into actual cash, as cash conversion efficiency (operating cash flow/revenue) deteriorated three years in a row from 13.4% in 2009 to 10.6% in 2012. Profitability by EBIT Margin (EBIT/revenue) also decreased by 9% year-on-year.

The survey reveals a total of €762bn is tied up in excess working capital – equivalent to 6% of EU GDP in 2012. The biggest opportunity for companies lies in improving receivables, which represents approximately 36% of the total working capital opportunity. REL estimates that €272m is available within accounts receivables (AR), €257m in inventory and €232m in accounts payable (AP).

In addition, free cash flow (FCF) – an important indicator of the health of corporate cash flows – reduced by 18%. Cash on hand continued to increase – $57 billion year-on-year, or 9% increase, and debt increased by $147 billion (6% increase year-on-year) – indicating that companies continue to take advantage of the low interest rates to improve their cash positions. The borrowed cash however is apparently being put into use, with capex increasing by 9% year-on-year and 18% over a three-year period. Annual dividends paid out increased by 5% year-on-year and 29% over a three-year period.

According to REL research, there is a widening gap between the top performers in the study (companies in the upper quartile of their industry) and typical companies, with the leaders operating with less than half the working capital, collecting from customers more than two weeks sooner and paying suppliers two weeks later on average, while holding less than half the inventory.

However, sustainability of working capital improvements remains a major issue across the board. Only 12% of companies improved days working capital (DWC) performance for three consecutive years. Even allowing for flat performance or slight deterioration (5%) extends this group to just 27%.



REL’s research found that as US corporate revenue grew by 5% in 2012, profitability – as measured by EBIT margin – decreased. At the same time, working capital levels increased by 6%, to levels 25% higher than three years ago. Actual DWC remained flat. But cash conversion efficiency deteriorated for the second year in a row, indicating that companies are taking longer to convert sales into cash. In addition, FCF fell by 14% year-on-year, indicating poor cash flow management.

The working capital opportunity at the companies in the study reached nearly $1.1 trillion in 2012, an amount equal to 7% of the US GDP. Nearly half of the working capital management gap represents excess inventory being held by typical companies. Overall, top performers now operate with about half the working capital of typical companies. They collect from customers more than two weeks faster, pay suppliers over 10 days slower and hold less than half the inventory. The research also found that few companies are able to sustain working capital improvements, with less than 10% of all companies in the study improving working capital performance for three years running.

Companies continued to borrow to grow their cash hoard in 2012, the study found, with debt rising by 10%, or over $350 billion. At the same time, companies reinvested heavily, with capex hitting a new all-time high, having risen by 50% over the past three years. Companies are also clearly spending in other key areas, including increased dividends, share repurchases, pension contributions, and global expansion.

“The overall ability of companies to manage working capital is clearly continuing to worsen,” said Dan Ginsberg, an Associate Principal at REL Consulting. “Companies know how to do better, because they did so during the heart of the recession in 2008, making dramatic improvements in just a single year. But very quickly their focus turned back to growth, and working capital rebounded.”



At the recent EuroFinance conference in Singapore, Audrey Deng, Head of Group Treasury, Asia Pacific at Atlas Copco, outlined the company’s decision to implement a $75m supply chain finance (SCF) programme in Asia, in order to support both its suppliers and its working capital objectives.

Atlas Copco, an industrial group headquartered in Sweden with a revenue of €10.5 billion, is keenly focused on maintaining the momentum to improve working capital management and has been seeking ways to further streamline the supply chain. The company had been running SCF programmes in Europe and the US for many years but very little in Asia. But as Asia has become increasing important, explained Deng, the company decided to implement a SCF programme in the region.

Its objectives were to:
  • Harmonise payment terms.
  • Enhance working capital management.
  • Help key suppliers meet their liquidity requirements.
  • Strengthen Atlas Copco’s supplier base.
Its main challenge was that market conditions have made it difficult for some suppliers, especially those less well-capitalised, to support Atlas Copco. So it embarked on an SCF programme in January 2011 with a feasibility study and the group made the strategic decision to go ahead in June 2011. In February 2012, it issued a request for proposal (RFP) and selected its SCF provider, J.P. Morgan (JPM), in April 2012. In August it kicked off its SCF programme with an IT review and documentation. The programme includes treasury, procurement and JPM teams.

SCF implementation included:
  • Enrolment strategy.
  • Data analysis.
  • Communications strategy.
  • Buyer training,
  • Supplier enrolment.
  • Supplier execution.
Based on the information provided by Atlas Copco, a phased approach was established, which included:
  • Selected suppliers were targeted to offer a SCF programme.
  • Programme scope covered over 54% of total Atlas Copco annual spend.
  • Suppliers were further grouped into three waves based on geographic and supplier specific prioritisation.
  • Each wave consisted of three tiers based on supplier profile.
Key considerations for supplier prioritisation include, but not limited to:
  • Interest rate differential opportunity.
  • Supplier-buyer relationship (strategic/non-strategic supplier).
  • Type of spend (direct/indirect).
  • Annual spend volume.
  • Payment terms and potential to extend the payment terms.
  • Geographic prioritisation.
The supplier onboarding plan is to be further analysed and updated throughout the actual implementation cycle in order to maximise the effectiveness of the SCF roll-out.

Atlas Copco went live with its SCF programme in November 2012. It was rolled out to 17 buying entities in China and Japan, with India currently under implementation. In China, suppliers across the country have signed up for this programme and the number is continually growing. The programme covers both domestic and overseas supplier entities. The programme supports local currency in the three markets, as well as US dollar in Japan.

This insight was first published on www.treasurytoday.com

The secret recipe for Yum!’s treasury proficiency – part two

June 2013

At the recent EuroFinance conferences in Singapore and Miami, Katherine Wei, Director of Treasury, China, and Nishat Grover, Director of Treasury, US, both of Yum! Brands, Inc., discussed their roles in supporting the needs of a fast-growing global business through inspiring cash management strategies in the two countries. In part two of this two-part series, Wei explains how the company manages cash, talent and acquisitions in China.

US-listed company Yum! has operated in China for 20 years, building up a network of almost 6000 restaurants in more than 800 cities. On its website, Yum! says that it considers “China to be the greatest restaurant opportunity of the 21st century.”

And China certainly has been good to Yum!. At the end of last year Yum!’s Chinese operation made up 60% of the company’s total global revenue. It currently opens a new restaurant every 18 hours, which accounts for very large in-country capital expenditure. The average return on investment (ROI) for each unit is 30%. It is no wonder that its long-term growth plan includes a goal of opening at least 20,000 restaurants in China.

However, an ambitious growth strategy also throws up a number of challenges, especially operating as a cash-rich foreign-owned company in China. As Katherine Wei, Director of Treasury, China, explained: “In the early days, we had 20 legal entities with more than 200 bank accounts. This was because every time we opened a new site, we would find a nearby bank and open an account there. We couldn’t stick to this model – we needed to centralise.” Yum! treasury decided to work together with local banks because the network’s footprint is closely married to the local banking network.

Cash pooling was almost unheard of ten years ago in China, so Yum! had to clearly articulate its needs to manage the cash in a centralised fashion for greater efficiency and effectiveness. Its main Chinese banking partner also clarified its business considerations and how Yum! could help its developments. “Through open communication, we found out that we had a lot of commonality in terms of goals and opportunities, so we could work together,” said Wei. Yum! treasury was able to have input as to how the cash pool would work. Within five years Yum! set up a regional treasury centre (RTC), where it sweeps and pools its cash.

The cash pool structure deals with daily cash inflows, but Yum! also wanted to develop a streamlined model for its payments. Importantly, the company has a shared goal of disciplined growth, so treasury worked in partnership with its supply chain team and business development team to design a disciplined payment pattern: it pays for utilities at the beginning of the month, materials in the middle of the month and capital spending at the end of the month.


IT aligns with customer evolution

As a restaurant chain, Yum! is not focused high-tech solutions; however, it realised that its customers were embracing mobile payments (m-payments). So treasury partnered with the IT team to develop mobile solutions for its restaurants. “For example,” explains Wei, “customers wanted to be able to use mobiles to order food and pay for it in advance, so that when they walk into the restaurant they have already paid. They want to get the food immediately, which fits in with the KFC fast food concept. We are working with IT to achieve a mobile solution.”


Retaining talent

Wei touched on how Yum! attracts and retains top talent in its finance department. “In a dynamic market, finding the right people and keeping them is very important,” she said. Yum! has two treasury teams, one in China and one in the US, working together to manage global cash (the China team now manages more than half of Yum!’s global cash).

According to Wei there is much cross-pollination between the two teams – Treasury China regularly invites Treasury US staff to do short-term projects, and vice versa, so that they learn the fundamental business. A high level of interaction is also promoted with the business units (BUs). “All treasury professionals in the company need to understand the BU business and the BU staff need to know the big financial picture, for example Yum!’s activity in the capital markets, how we handle external ratings agencies, etc,” she said.


Bundles of cash

Yum!’s treasury defines itself as a profit centre, and tried to manage its surplus cash in order to give more to its shareholders. It works with a number of international banks in order to diversify its assets and mitigate counterparty risk. “The international banks entering China are more eager to develop a creative model that meets the customer’s needs. We are working with them on many new initiatives for short-term investments, not just bank deposits but also money market funds (MMFs) and sovereign bonds. Beyond that, our international banks give us new ideas for dealing with structured deposits.” She said that Yum!’s first priority is safety, followed by liquidity and then yield.

In China, the company has a lot of surplus cash; while at the same time it is looking to take advantage of opportunities opening up in the emerging markets (EMs), such as India, Africa and Russia. Therefore, one of the goals for the finance team is to bring money out of China. The company is working with the People’s Bank of China (PBoC) on a cross-border cash movement structure, but Wei declined to comment on the details. However, she remarked: “We believe that the internationalisation of the renminbi (RMB) will bring many basic treasury management concepts to the company and that will present us with a number of new opportunities.”



Yum!’s aim is to be a Chinese company and the leading food brand in the country. In order to achieve these two goals, it acquired the Little Sheep Group, which operates hot pot restaurants primarily in China and is headquartered in Baotou, Inner Mongolia. In May 2011, Yum! acquired 93.2% of the issued share capital of the company, privatising it on the Hong Kong Stock Exchange (SEHK). The handover date was February 2012 and Yum! sent a “command” team to Mongolia in order to gain synergies through a shared service concept.

“This year the focus will be on system integration and bank consolidation,” says Wei. “After that we will bring together our supply chains. At our current stage, Yum! has two strong brands – KFC and Pizza Hut – but in the near future we will showcase the three brands together.”

This insight was first published on www.treasurytoday.com

The secret recipe for Yum!’s treasury proficiency – part one

June 2013

At the recent EuroFinance conferences in Singapore and Miami, Katherine Wei, Director of Treasury, China, and Nishat Grover, Director of Treasury, US, both of Yum! Brands, Inc., discussed their roles in supporting the needs of a fast-growing global business through inspiring cash management strategies in the two countries. In part one of this two-part series, Grover explains how Yum! manages cash flow forecasting.

Yum! Brands, Inc. is the world’s largest restaurant company in terms of restaurants, with over 39,000 restaurants in more than 125 countries and territories. Approximately 7,700 restaurants are company owned and 31,600 are franchise, joint venture (JV) owned or licensed. The three major restaurant brands are KFC, Pizza Hut and Taco Bell.

Yum! is a US-based Fortune 250 company, with revenues of $13 billion (2012). It originated as a spin-off from PepsiCo. in 1997, so it is a relatively young company but incredibly fast-growing, led by its Chinese, Russian and Indian markets. To illustrate its evolution: in 2002 operating profit was generated mainly in the US (69%) with international operations making up less than a third (31%). In 2012, the situation was reversed with international operations generating 72% of the company’s profits.

Like many other global companies, Yum!’s cash is at held at three different levels:
  1. US and US subsidiaries.
  2. International subsidiaries and holding company.
  3. Market.
“When we first started looking at cash flow forecasting, most of Yum!’s cash was generated and held in the US. However, today more and more cash is in the field and held internationally. Therefore, we had to re-examine how we refine our forecasting processes, tweak them for each level and consolidate them into a master forecast,” says Nishat Grover, Director of Treasury, US.

“Forecasting is a bit of a science and a bit of an art. It is highly dynamic – you have to continually go back to fine-tune and refine it. You can apply historical trends and come up with a certain degree of predictability, but in other cases something can completely blindside you. Therefore, you must have the appropriate level of contingency on the upside, as well as the downside,” he advises.

The key to cash flow forecasting, according to Grover, is communication. “All of your information sources must know what is at stake and that you need the information in a timely manner with as much accuracy and consistency as possible.”

The reasons that Yum! Forecasts its cash include:
  • Liquidity management.
  • Financial control.
  • Strategic objectives.
  • Capital budgeting.
  • Cost management.
  • Currency exposure.
Yum!’s calendar is comprised of 13 four-week periods. For its short-term (under one year) forecasting, treasury uses the receipts and disbursements method, which is maintained in Excel spreadsheets but it has put in place an automated process to pull actual data by using links within the spreadsheets. “The fact is that it is a highly manual process. We have tried to automate by creating spreadsheets that are linked together and we encourage our markets to feed their forecasts directly into a specific template – but they don’t always do that unfortunately,” says Grover.

For medium- (one to three years) and long-term (up to ten years) forecasting, on the other hand, it employs the adjusted net income method. Its net cash position is determined at a central ’master’ bank account level. Grover explained that the US bank account structure was similar to other structures across the globe. “We have a master account that sits at the centre of the banking structure and cash comes into this account from all our retail outlets. Zero balancing accounts (ZBAs) are linked to master account for payments, control disbursements, one-offs, tax, etc. We set our daily net cash amount at the master account, which is held by J.P. Morgan (JPM).”

The US-based treasury performs a daily consolidated cash flow forecast for rolling 90-day period – “and we have now started extending that to six months,” explains Grover. The short-term 90-day operational forecast is aligned with the one-year forecast on a weekly basis. Then once a quarter, treasury aligns this with the three-year forecast. Every other year treasury prepares a ten-year forecast.

The technology underpinning this process is Wallstreet Treasura workstation, which acts as the central database of historical data and is used to pull actual data for forecast reconciliation purposes.

Yum! measures its forecasting success in terms of:
  • Meeting operating cash flow targets.
  • Managing discretionary spending to forecasted levels.
  • Maintaining forecasted debt levels.
  • Ensuring appropriate year-end cash levels.
  • Managing changes/sensitivities and communicating in a timely fashion.
Grover concludes that there are significant challenges to forecasting, not least is predicting specific cash flows and working capital, which is everyone’s challenge. “We tried using all the fancy models, Excel spreadsheets and software that claimed it could help forecast working capital, but there is no such thing in our experience. Therefore, we basically look at net working capital, not at the line item level.

“We have tried to do line item analysis of accounts receivable (AR)/accounts payable (AP) and inventory, etc but it just didn’t work. Instead we look at it on a net working capital basis, which gives us a fairly high degree of accuracy. There are always unknowns that we can’t predict but for the most part it works. Based on where we are today, in terms of our cash levels and access to credit, I think we have the right level of accuracy.”


Global multi-currency notional pooling

In order to facilitate better cash flow forecasting, a year ago Yum! embarked on a global multi-currency notational pooling project, which has “really helped us gather intelligence on what cash flows look like, how they vary and gave us some ability to forecast, at least in that middle level of cash, with a higher degree of precision than before,” says Grover. Yum! had implemented a physical pooling structure in 2008/9, which gave it visibility over just 20% of its cash in one currency.

Although it is not possible to implement notional pooling in some markets, such as China, India, Russia, South Africa, Thailand and Korea, which are key market for Yum!, according to Grover it is still useful to obtain balance information. “You may not be able to get your hands on the cash but you can check your balances, which is half the battle won,” he explains. Yum! has also benefitted from eliminating FX swaps, as well as intercompany loans to markets that need funding. “We have a better line of sight, better monitoring, better policy compliance and better risk management. We have used data from the notional pooling structure to fine-tune our forecasts.”

Despite treasury thinking that it would only take six months to set-up a global multi-currency notional pool, after one year it is about 80% of the way through. “Most of that is because of China, where each province has its own bank and they are not all linked to the master account. So first we have to get them all linked and then report out of the master account. On the cash side, however, we are almost fully implemented, with only Australia left to be brought on-board,” Grover explains.

This insight was first published on www.treasurytoday.com

UNifying cash management in conflict zones

May 2013

Operating in war-torn countries on a daily basis would be a challenge for any company, but what if it is your raison d’etre? Pedro Guazo Alonso, Director of Finance at the United Nations (UN), gave some insight as to the UN treasury’s specific cash management challenges at EuroFinance Miami 2013.

Not surprisingly, the United Nations (UN) has a complex corporate governance structure, which in turn translates into a complex organisational and business model. The highest governance body is the General Assembly, made up of 196 countries members on a co-operative basis with each member having one vote. The only organisation that has more members is FIFA, the international football association. In addition to the General Assembly, there are four principal organs, including the Security Council, which is responsible for peacekeeping missions.

Each year the UN receives money to carry out its operation from each member based on a percentage of the member state’s GDP – this totals around $15 billion. Half of the money is allocated solely for peacekeeping operations – today there are 30 peacekeeping missions in countries experiencing social unrest. All the money, which comes in within the first 30 days of the year, is earmarked from the outset to more than 300 different projects across the world.

“As you can imagine, we are not exempt from bad collectibles,” said Pedro Guazo Alonso, Director of Finance at the UN, as not all countries submit their payments in time. Therefore, the finance department has an accounts receivable (AR) team that reminds members to pay; otherwise they will lose their voting rights in the General Assembly. “Some countries are faced with very difficult economic conditions and they can’t pay, so there is a clause that allows them to keep their voting rights if they can show they don’t have the means to pay.”

All the money is collected in US dollars and half of the UN’s expenditure is in US dollars, with 20% in euros, 15% in Swiss francs and the rest distributed in a basket of more than 30 currencies. “These are really soft currencies that are extremely difficult to hedge,” explains Alonso. “The other way to hedge these currencies is to take US dollars, convert to the local currency and buy local securities, but in many of these countries there are no securities, let alone a central bank.”

It is also difficult to convert money into local currency and deposit it in a local bank because the counterparty risk is too great. “So we keep the money in US dollars and then distribute it to the local offices in lump sums of a month’s expenditure,” said Alonso, “in order to control counterparty risk.”

The UN has 50,000 employees, 20,000 suppliers and more than 100 million beneficiaries. There are two levels of employees: national staff members, who are paid in local currency; and professional staff that are paid in US dollars.


Cash management challenges

The UN has one principle when it comes to cash management: it tries to rely on the formal financial system wherever possible. It has zero balance accounting (ZBA) in three global banks, which covers approximately 65% of its needs. For the other 35%, the UN has more than 400 bank accounts distributed around the world in local and regional banks; but, as previously indicated, it doesn’t place more than one month’s expected expenditure in these accounts.

However, some of the countries that the UN is working in don’t even have a central bank, so for those countries the UN treasury provides petty cash and cash-at-hand in the local offices. “We also support new technologies and use mobile payment companies, rechargeable e-wallets and cash remittances,” says Alonso. “Although cash remittances are not attractive for us, in some cases we need to use them. In some areas, like sub-Saharan Africa and the Philippines, mobile payments has been extremely successful. Everyone has a mobile, but only a small proportion of the population has a bank account. They have jumped a whole generation, going directly from a cash-based society to mobile payments, skipping over credit and debit cards.”

He outlined four lessons he learned when developing a cash management strategy:
  1. Choose your bank like you are “choosing the Sherpa” to take you trekking through the Himalayas. “Trust them and pay them well, but make them compete once in a while to see if they got older or if they got wiser.”
  2. Evaluate alternative technologies and the needs of your employees and suppliers. “Sometimes it is easy to sit in New York and say ‘I will only use the financial system and make payments every 30 days using SWIFT, and you will have to open an account here.’ That works for 65% of the operations we do, but for the other 35% you have to adopt the local infrastructure and practices. They are reliable and cheap, and it also fosters economic development in these countries.”
  3. Do not be afraid to talk to authorities, because your money and the jobs you are creating are very important to them.
  4. Always have a plan ‘C’, which stands for cash. Unexpected things can happen, so always be ready to bring cash into your operations.


Banking relationships in war zones

How does the UN choose its banks at the local, regional and global levels? The UN issues requests for proposals (RFPs) almost every three years for the global and regional agreements, whereas the local agreements are done on an as-needed basis because they can quickly change ownership or even disappear in unstable conditions. In addition, legislation can change overnight, such as in Cyprus. Even though the UN has immunity, its accounts were also frozen for two months and it was forced to lobby the government to get its $2m in deposits out of the country.

Another example is Syria. When the conflict began, the UN’s global bank exited the country and the local bank was about to disappear as it gradually ran out of capital. Yet the UN still had to support 400 international staff and more than 1000 national staff in the country. “We didn’t know what was going to happen in the next three to six months, because the country’s infrastructure was quickly collapsing,” explained Alonso, “so we decided to take advantage of the local bank’s presence and pay our staff’s salaries three months in advance, randomly distributed in five days using different timings. These are the types of things we have to deal with.”

Alonso said that overall the UN’s banks have been very supportive through difficult times, and told the story of one global bank that went with the UN into Afghanistan when there were no banks there, in order to help establish its whole financial operations in the country.


Secure investments

As the UN receives $15 billion per year, which runs down as the year advances, it has very conservative investment guidelines. Its three mandates are:
  1. Protect capital.
  2. Protect liquidity.
  3. If possible, achieve some return.
The UN treasury manages all investments internally, so it doesn’t use asset managers. It has three portfolios separated by maturity: one to three months; three months to 2.5 years; and 2.5 years to five years. Its strict treasury policy means that it is not allowed to invest more than 15% of its cash in the latter portfolio, and can’t invest in any instrument that doesn’t have a short-term investment rating of A or AA for medium- or long-term.

“The problem with these restrictions is that we end up buying Treasury bills (T-bills). So we bought T-bills from the Ex-Im Bank in Norway, then a re-evaluation occurred and we lost about 40% of the investment,” said Alonso. “It is not optimal to buy only T-bills. We should diversify and modernise the management of our investments, taking a bit more risk but with a higher return.”

From his past experiencing as a market maker in the structured and asset backed securities market, Alonso added a few more lessons to consider:
  1. Assess if your company is better and cheaper than the asset managers.
  2. Decide how to invest the money by carrying out an asset and liability management (ALM) analysis.
  3. Rely less on credit ratings agencies – they have been given the power to decide where a company's money is placed, but they aren’t necessarily giving an adequate risk-adjusted return on portfolios.
At the end of the day, it’s all about risk management. Because the UN is making decisions based on risk assessment all the time, it is very important to communicate the risk levels to the governing bodies, according to Alonso. “We are operating in very risky environments but that doesn’t mean we don’t have to calculate the risk. We need to understand the risk involved in what we do, as well as the risk of not doing anything.”

This insight was first published on www.treasurytoday.com

Ripe for the picking: guide to alternative finance for SMEs

May 2013

With UK SMEs facing funding issues due to a contraction in bank credit facilities, the CBI has produced a guide to alternative sources of finance. Treasury Today was at the launch event in London.

As the UK economy wobbles around a triple-dip recession, the Confederation of British Industry (CBI) is educating small and medium-sized enterprises (SMEs) on the broad range of finance options available to help them grow, including asset-based lending, equity investment and peer-to-peer (P2P) lending.

CBI’s recently released guide, ‘Ripe for the picking: a guide to alternative sources of finance’, produced with support from GE Capital, addresses a significant knowledge gap: 50% of SMEs said that they did not know where to go for alternative finance.

The CBI alternative finance guide highlights some of the choices available, including:
  • Asset-based lending (like invoice financing).
  • Supply chain finance.
  • Trade finance.
  • Peer-to-peer and crowd funding.
  • Retail bond market.
  • Self-issued retail bonds.
  • Private placements.
  • Business angels.
  • Venture capital.
  • Corporate venturing.
  • Business Growth Fund (BGF).
  • Private equity.
  • Public equity markets.
At the launch event in London on 20th May, which attracted more than 50 people mainly from the SME space, a Managing Director of a growing biotechology firm was enthusiastic about the alternative finance “decision tree” component of the guide. “This is very useful,” he said.


Funding growth

Speaking at the event, Katja Hall, CBI Chief Policy Director, said: “We need to stop talking down the economy. Growth is improving, but the UK needs to be careful not to choke funding for growing firms.”

The CBI highlighted research showing that high-growth medium-sized businesses could be worth up to an additional £20 billion to the economy by 2020. It comes as a GE Capital report shows that SMEs plan to spend £51 billion over the next 12 months, but will need the right funding to realise their potential.

Giving his tacit support for the CBI guide, Vince Cable, Secretary of State for Business, attended the event in order to explain the government’s role in boosting the supply of finance to growing businesses. He spoke about the difficulties SMEs currently face when attempting to access bank credit lines – although there is an estimated £20 billion in available bank funds, the new terms and liability agreements that banks are trying to get SMEs to sign up to is the reason why they are looking at alternative funding.

Cable believes that the UK government can play a “catalytic role” in stimulating the alternative finance market. During the past year, the government has launched a number of initiatives including:
  • Business Finance Partnership (BFP): Launched on 5th December 2012, the government has made available £100m to SMEs through seven providers, including Funding Circle, Beechbrook Capital and Credit Asset Management.
  • Reviewing the policy environment: From April 2014 the Financial Conduct Authority (FCA) will regulate the P2P lending market after calls from providers themselves to be regulated.
  • Business Bank: Launched in September last year, this is the government’s “best kept secret”, according to Cable. Its aim is to rationalise the government’s interventions, with £3 billion of funding coming from a mix of loans and equity and £1 billion coming from private capital.
  • Prompt Payment Code (PPC): Today a total of 126 FTSE 350 companies have pledged to pay small firms promptly, after Business Minister Michael Fallon threatened in November to name and shame them.


The chocolate bond success story

To illustrate innovative ways to access alternative sources of funding, Peter Harris, Co-Founder and Development Director, Hotel Chocolat, shared the company’s success story of raising £4m through issuing chocolate bonds to its customer base and paying back the debt in chocolate. Its ground-breaking funding project garnered Hotel Chocolat the Judges’ Choice Award at last year’s Treasury Today Adam Smith Awards.

The Hotel Chocolat culture, based on the three tenets of innovation, authenticity and ethics, meant that it had a very loyal customer base of around 100,000, who were surveyed to see if they were interested in supporting the business’ development and expansion plans. The company was clear in communicating five reasons why customers should invest:
  1. Creating manufacturing jobs in the UK.
  2. Sustainable cocoa growing in St. Lucia.
  3. Opening of the Boucan restaurant.
  4. Expansion of UK retail activities.
  5. Exporting high quality British chocolate.
The company had tremendous success: it initially raised £3.7m and then six months later raised another £360,000 all from 1800 investors. Harris believes the company’s achievement was down to the fact that customers trusted the company, “unlike the banks”, and they like what the company does and want to help it grow. It was an “emotional response”, he said.

For other companies thinking about following a similar route, Harris had the following advice:
  • Ask yourself whether you company is suitable.
  • Decide on the terms: Hotel Chocolat issued a three-year, non-transferrable bond.
  • Make the invitation appealing.
  • Choose advisors, such as lawyers and accountants with experience.
  • Decide how you will pay back the bondholders.
  • Investigate tax implications.
The final point elicited a complaint from Harris about the HMRC’s response to alternative financing situations. When the company tried to obtain pre-clearance from the HMRC in terms of tax implications, the HMRC sat on the fence and said it couldn’t comment until after they issued the bonds. This was “disappointing”, said Harris.

This insight was first published on www.treasurytoday.com

The Asian growth story: can it continue?

May 2013

The 19th EuroFinance in Singapore, held from 15th-17th May with more than 450 delegates, kicked off with an economic overview of the Asian situation. The market dynamism is attracting investment and corporate development in the region, but are there dangers lurking beneath the surface?

Any corporate operating in the emerging Asian markets – whether global multinational or domestic dynamo – is well aware of the complexity that comes with the territory, but the region’s rapid growth story over the past seven years has been hard to ignore. However, in the past few weeks doubt has begun to creep in, with talk of economic data turning sour, the risk of a hard landing in China and a downturn in exports.

“Don’t worry too much about this in the near term,” says Frederic Neumann, Co-Head of Asia Economic Research and Managing Director, HSBC, Hong Kong, speaking at the opening plenary of the EuroFinance Singapore conference. His attitude is that this negative talk is “all noise” and the region remains in an upward trajectory.

Having said that, Neumann is not blind to potential upcoming risks. “There are some parallels in Asia with what we see in the West, such as increasing household debt. Although not an immediate concern, it is something we need to keep an eye on.”

Starting from the global economic situation, one important area to look at is the level of industrial production: emerging Asia has reached a level 47.1% above its pre-crisis peak, whereas the level of industrial production in the US is -1.7% and Europe is -13.4% compared with previous peaks. This shows that some form of decoupling is happening, according to Neumann, as the increase in Asian output has occurred despite the West not reaching its previous levels.

The other important area to consider is the Western central banks’ response to the global financial crisis. There is a rule of thumb amongst economists that after a recession central banks only start to tighten monetary policy when output is 10% above the previous peak, mainly because only at that point will unemployment rates start to drop and inflation re-emerge. “Continuing with the current recovery rate in the US, to reach 10% above the previous peak will take another two years or so,” says Neumann. “Therefore, there is no need to worry about the Federal Reserve withdrawing quantitative easing (QE) despite the recent media hype.”

In Europe, the European Central Bank (ECB) should do much more to support economic growth, believes Neumann. The ECB cut interest rates but it will have to turn to QE to arrest the decline. This response is important for Asia because the monetary easing policies in the West are partly responsible for the increase in the East’s output. This is where the decoupling story goes awry. “In the real sense, in terms of trade flows, we have decoupling – growth in Asia is not dependent on exports to the West. However, financially the Asian recovery is closely linked to the stimulus coming from the West, and its continuance will allow Asia to grow for another two years,” he states.


China: engine of growth

Despite Neumann’s positive outlook, the talk of a hard landing in China is still a worrying development, as the driving force in the region’s economic growth. The country displayed disappointing growth figures in 1Q13 and most economists lowered the growth projections for 2013 as a result. However, looking at leading indicators, he argues, the Chinese economy should accelerate into the year-end. The key driver of this growth within China is infrastructure spending.

After last summer’s scare, when many thought the Chinese economy was about to fall off the cliff, the Chinese government “very quietly” unleashed a fiscal stimulus that allowed local government entities to reinvest in infrastructure. “If you tally up the projects announced in the second half of last year, most will start to hit the ground now and in the third quarter, and that alone will add 1.5 percentage points to GDP in China, so there is a big lift still to come,” says Neumann.

Another reason to be optimistic about the growth in China is the record amount of liquidity being injected into the economy. “We refer to this as total social financing (SF), which is a combination of bank lending, bond issuance and other types of lending that is made available. This was a record high injection, so we expect some pick up in infrastructure investment over the coming two quarters. In addition, consumer spending is not dramatically slowing down and retail sales in real terms are accelerating.”

Neumann explained how Chinese policy makers truly think about investment. “When you talk to incoming Chinese officials, they always stress one thing: China is not even halfway through its urbanisation process. In order to cover the inflows from the countryside to the city they have to continue to invest.” About 400 million people are expected to move to the urban centres during the next 10 years. As of last year, the majority of Chinese people now live in urban areas. “The urbanisation rate jumped from 40% to 51% last year and we can expected that they will reach urbanisation rates of up to 70-80%,” he says.


Emerging risks: a replay of 1997?

The large injections of liquidity into the Asian markets has generated many questions about the effects and sustainability of the stimulus packages, East and West, raising the spectre of the Asian crisis in 1997.

When interest rates in the US and Japan fell in the early 1990s, investors looked for higher yields elsewhere and began lending into emerging Asian economies. This led to an increase in the region’s leverage and the bank credit to GDP ratio started to rise until 1997. During those seven years, growth in Asia was not export led but domestic demand led. In fact many of these countries had trade deficits and growth was entirely driven by loose liquidity. This is very similar to what is seen today, according to Neumann.

In late 1996 when Japan started to slide into recession, Japanese banks realised that they had non-performing assets at home and start withdrawing money from the rest of the region to protect their balance sheet. “That was the first sign of a liquidity squeeze in the rest of Asia,” says Neumann. “Quickly other banks started to cut their credit lines into Asia, liquidity dried up and the Asian crisis ensued. This triggered a vicious deleveraging process, during which the bank credit to GDP ratio in Asia fell, growth slumped and it was a terrible time for anyone who lived through that period.”

From 2001 to 2006, Asian banks repaired their balance sheets and the region’s growth was driven by exports to West, not domestic demand. “Once their balance sheets were repaired and the region regained financial confidence, it started to leverage up again and bank credit to GDP started to rise up until the global financial crisis. But the crisis barely registered in Asia – only in two quarters is there a blip in the bank credit to GDP ratio and after that it shoots up again, driven by the liquidity pouring in and record low interest rates. Since 2006, Asia’s growth has again been driven by domestic demand, investment and consumption. We don’t need the Western consumer necessarily because we can use leverage to pump up growth.”

Neumann is quick to point out that just because the region is above the previous peak doesn’t mean that it is as vulnerable as before. “For example, we are mostly local currency financed, not US dollar like in 1997. We have current account surpluses today and the richer a country is in per capita terms, the more debt it can carry, etc,” he explains.

But he warns that there are imbalances building up. What can be a trigger for this whole process to unravel? Neumann came up with three possible scenarios that would prick the Asian debt bubble:
  1. Higher global interest rates.
  2. Exploding local inflation that undermines financial confidence.
  3. Some sort of financial scandal or crisis that again undermines financial confidence, such as a Ponzi scheme, a European bank getting into trouble at the level of a Lehman Brothers or a “Chinese Bernie Madoff” appearing.
He believes that neither Europe nor the US will raise interest rates soon, at least for another 12-18 months. In addition, Bank of Japan (BoJ) recently announced one of the most aggressive monetary easing programmes in recent history, pumping $1.5 trillion into the economy over next two years.

“There will be even more money flowing out of Japan and where will it go? Into emerging Asia, which will add further fuel to the fire. You will see Japanese banks increase lending into the region, liquidity will rise and there will be a low interest rate environment for even longer,” says Neumann. “The liquidity train has just left Tokyo station, is at Yokohama right now and will be in Bangkok by the end of the year.”

This insight was first published on www.treasurytoday.com

Taking shared services to the next level

April 2013

Talking about shared services is like opening Pandora’s Box – the debates over which processes a shared service centre (SSC) should include are endless. No matter what your definition is, the concept is evolving from solely a cost saving exercise to one that delivers value across the organisation.

To support a corporate through increasing economic uncertainty, the shared services model is evolving from function-centric to one that is focused much more on business value, according to Joel Roques, Managing Director EMEA and Asia, The Hackett Group, speaking at a SunGard client event in London. Corporates are looking to improve visibility and control, process quality and overall business performance by implementing best practices around collections and payments.

Twenty years ago the first wave of shared service centres (SSCs) had one goal: cost reduction. They achieved this through lowering the cost per transaction, labour arbitrage, greater automation and process standardisation. These SSCs were focused on functions, transactions and unit cost reduction.

Since then the model has evolved to stage two: service level excellence. Many SSCs are now much more focused on accurate and reliable reporting, cash optimisation and reduced error rates. Corporates want a higher level of standardisation across the enterprise and performance technology improvements, effectively developing knowledge centres of excellence. This is the first step towards global business services (GBS), where the SSC is adding value to the corporate by bringing multiple functions inside.

Today there are a few “world class” corporates, as termed by The Hackett Group, which have reached stage three of the evolutionary process: strategic business enablement. In this model, the SSC provides enhanced decision-making, operational agility and resource optimisation. It is a service oriented standalone entity with an end-to-end process orientation and a commercial performance profile. Importantly, it is a centre for innovation.

According to The Hackett Group’s research, 59% of SSCs are in stage one, 33% have reached stage two and only 8% are truly strategic business enablers. Roques points out that it is very difficult to reach stage three, which needs a high level of maturity in the SSC as well as substantial support from within the organisation. “It doesn’t make sense for every company to aim for stage three because the effort to get there may prove to be too great,” says Roques.

The Hackett Group’s research indicates that world-class GBS organisations have nearly twice as many finance activities in their service scope compared with their peers: 43% versus 26%. In addition world-class organisations have moved nearly half of the finance function’s scope into GBS, including accounts payable (AP), cash application, collections, credit and customer billing. Less integrated are areas such as tax planning and capital and risk management.

Hand-in-hand with GBS is the concept of global process ownership, which covers the span of authority, process breadth and organisational reach. This addresses the end-to-end process, where there is a dedicated person responsible across functional boundaries. By thinking holistically about how each area impacts another, GBS can truly tap new sources of value and increasingly deliver business insight as they evolve.

But it also means changing the corporate’s governance structure, says Roques. “A C-level executive should be responsible for GBS and in charge of the budget. It should have a business unit under them, engaged in commercial negotiations with internal clients/stakeholders.” He adds that although necessary in the beginning, service level agreements (SLAs) tend to disappear at stage three because of the trust built up with internal clients.

Interestingly, GBS tends to attract the best in the organisation – with other business units continually trying to poach the talent. “It used to be that if you misbehaved, you were sent to the SSC,” says Roques. “But now it is seen as a hothouse of talent, with new best practice ideas and dynamism.”

This insight was first published on www.treasurytoday.com

Is distributor finance coming of age?

April 2013

Supply chain finance (SCF) programmes may take centre stage today, but waiting in the wings is distributor finance (DF). Corporates across the industrial spectrum are now looking at supporting downstream businesses in their supply chains via DF programmes, particularly in emerging markets (EMs).

Both corporates and banks are showing a growing interest in distributor finance (DF) programmes, according to research by Demica, a working capital solutions company. Many global manufacturers wanting to ship more goods into dynamic emerging markets (EMs), such as Eastern Europe, Asia and Latin America, are introducing DF programmes for their distribution networks.

At a time when small and medium-sized enterprise (SME) distributors are struggling to obtain affordable credit in many EMs, DF programmes are being used to support the working capital needs of a corporate seller’s distributors. It gives them access to affordable finance, enabling them to increase sales and grow business volumes with lower capital requirements. This in return allows sellers to expand into new or under-served regions/segments and unlock sales potential.

According to Demica’s research, corporate respondents exhibited rising interest in DF products, largely due to their ambitions to expand into EMs. Corporates implement DF solutions in order to:
  1. Increase sales in high growth regions without applying more of their own working capital.
  2. Give the offered product a competitive advantage.
  3. Reduce SME distributor risk.
  4. Make favourable financing available to the distributor base.



One of the main considerations when developing and implementing DF programmes is the risk involved. The Demica report lists a number of common approaches that can be deployed to manage credit, business and country risk in DF programmes. These risk reduction mechanisms include seller support, assets as security and structural risk mitigation. The seller, for example, can help mitigate risk by providing detailed information on distributor history, performance, inventory levels etc. It can also introduce first loss default guarantees (FLDG), potentially shared with the banking partner.

“From the funder’s perspective the big issue is who bears the loss if the distributor goes bust,” says Phillip Kerle, CEO of Demica. “A bank may be prepared to take on a percentage of the risk, but this percentage depends on the commercial strength of the manufacturer. If it is a large multinational IT company, then a bank will be more prepared to shoulder the risk; whereas if it is a family-run shampoo manufacturer, for example, then a bank may not have the same risk appetite.”

Setting up a DF programme calls for the consideration of the principal legal, regulatory and tax and accounting elements, therefore a complex tailored approach is required, according to the report. From the legal perspective, perfection of the true sale (of receivables) and/or security, including requirements on notification and/or acknowledgement, needs to be carefully structured. Country sovereign risk, insolvency laws and commingling risk as well as off-set risk (credits) all need to be taken into account in determining legal framework predictability and stability.


Case study: mobile manufacturer

One of the report’s case studies focuses on a global tablet mobile device manufacturer that has a distributor network mainly consisting of SME entities. In some EMs, this group constitutes a large portion of the sales. These distributors generally have limited access to financing. Even though their financing needs are short term (normally no more than 90 days), the volumes can be high, particularly in EMs where a single distributor handles large sales volumes. As business margins are thin, distributors need to have access to reasonably priced financing.

This manufacturer set up several DF programmes in co-operation with large global banks as well as local banks, depending on the country conditions. These programmes offer revolving type, short-term credit lines for 30-60 days. Such facilities are extended by the international or local financing bank and normally require a personal guarantee by the owner of the distribution company or a pledge of physical assets as collateral. In terms of eligibility for the programmes, in addition to the company’s own selection criteria (e.g. history with distributors, share of business, etc), the banks may also impose certain criteria on the distributors. The volumes of financing vary across different countries, but most are over US$5 million.


End-to-end: linking up DF and SCF

Although DF solutions can complement supply chain finance (SCF) programmes in providing efficient financing for SMEs both upstream and downstream within a major corporate’s supply chain, Kerle doesn’t believe that the two will link up end-to-end anytime soon. “Although the common theme is invoice-based financial transactions, I think the two programmes exhibit different dynamics. A DF programme is probably easier to set up than an SCF programme, mainly because smaller distributors are captive in relation to the manufacturer, whereas more persuasion is needed to encourage suppliers to participate in an SCF programme.

“Therefore, I think they will remain separate to an extent. But banks will need to be flexible as to what they offer, whether it is traditional financing, invoice discounting or asset-backed lending. They need to offer a range of invoice-based finance programmes.”

This insight was first publishedon www.treasurytoday.com

What do corporates want from their banks?

May 2013

During a SWIFT Business Forum in London, Anne Coghlan, Head of Group Treasury at Dyson, talks about the realities of corporate banking and whether the banks are stepping up to the plate to deliver a home run in corporate customer experience. 

As corporates face new and continual challenges due to the sluggish global economy, their banking needs are evolving – and so are their expectations as to what banks should deliver in order to support their business. Much of this expectation is also driven by rapid technological innovation.

For Anne Coghlan, Head of Group Treasury at Dyson, which designs and manufactures vacuum cleaners, hand dryers, bladeless fans and heaters, there are two levels to the bank interface. Firstly, there is the “bread and butter” of day-to-day treasury transactions, such as payments and cash management. She voices her surprise that many banks do not offer a “health checklist” to assess how a corporate is functioning in the basic areas.

Secondly, there are the new tools, or “sexy bits”, such as helping corporates achieve better market penetration with their goods. She believes that these two levels need to be intertwined for a qualitatively better corporate experience, but that banks “haven’t quite got it right”.

Technology and system design goes to the heart of what Dyson is all about, and the whole company including treasury actively seeks state-of-the-art solutions. “We are continually striving to improve our treasury practice,” says Coghlan. Currently she is reviewing the company’s cash management strategy particularly around bank connectivity and electronic bank account management (eBAM), and is effectively creating a roadmap for the next three to four years.

At present, the company has six transaction banks, with almost 80% of activity going through just three of them. Coghlan would like to consolidate still more but admits that one bank is too few – reflecting a consensus most corporates reached after the recent financial crisis – whereas six is too many. “Today we are putting in place the building blocks that will help us achieve Nirvana – which is greater efficiency.” To reach enlightenment will take a full and frank discussion with their banks and technology providers, she argues.

Coghlan believes that for corporates the issue is more about internal efficiencies, and less about transaction banks and their specific offerings per se. “Today we handle five or six different file formats. So the strategic question is whether we continue maintaining all these formats or not. Do we put in an overlay or use XML file formats for everything?” She adds that XML is not a panacea, only solving about 80% of the format issues for corporates.

Even a relatively small multinational company (MNC) like Dyson finds it challenging to manage the many different formats, especially when it comes to documentation. Coghlan was surprised that she had to push for standardisation with her banking partners because it wasn’t a “given” that the company would want that.

Data collection and manipulation continues to be an issue for Dyson, as for most corporates.  “We usually receive data from our banks in a PDF instead of Excel, for example, which means we need to re-key it before we can use the data,” she explains. This manual process potentially introduces errors, as well as tying up valuable resources.

At the end of the day, Coghlan wants two things from her banks:
  1. To know that the solution that she chose after a request for proposal (RFP) process and put in place is actually doing what it is supposed to be doing.
  2. To have confidence that they will come to the regular six-month meeting with targeted suggestions as to how to improve the business.
“I am looking for a simple and efficient way to do transaction banking, with the bank providing a value-adding service,” she concludes.

This insight was first published on www.treasurytoday.com

Treasury verdict: low-key optimism amidst treasury challenges

May 2013

A majority of the 350 attendees at the EuroFinance Miami conference, held from 8-10th May, feel more confident about their ability to do business in today’s environment, compared with 12 months ago. However, that confidence level did not quite extend to their view of global economic prospects. A panel session looked at the fact that centralisation and efficiency gains figure high on the treasurer’s agenda and explored how this is affecting their banking relationships.

In a straw poll of the audience at the 2013 EuroFinance Miami conference, 60% of treasury and banking professionals said that they feel more confident about their business prospects this year compare with the past 12 months. Only 18% reported feeling less confident and one in four felt the same.

Debra Hinds, Director, Global Cash Management at Bombardier, who participated in the panel entitled ‘The treasury verdict: your views make the debate’, said that she agreed with the majority result. “Bombardier, for example, is having a better year. Although we haven’t seen huge gains, we are much more optimistic because governments are starting to build up infrastructure on the transport side. We have heard this for a number of years but now governments are really starting to move on these projects.”

Interestingly, the level of optimism was more subdued in terms of the global economic prospects: only 43% said that they felt more optimistic about the situation this year, whereas one in five said they were less optimistic and 28% said they felt no different.

Still, this is a much better result than at the EuroFinance conference in Monaco eight months ago, when 71% of the attendees said they felt less confident about the global economic outlook than they had in 2011.

Diane Quinn, Managing Director and Sales Segment Executive, J.P. Morgan Treasury Services, reminded the audience that there was much to be buoyant about, such as:
  • Global GDP is expected to rise at 5% per year to $93 trillion by 2017.
  • Global growth is going to drive 57% more investment in infrastructure.
  • By 2050 more than 70% will be living in large urban centres, again acting as a driver for investment in schools, hospitals, roads, etc.
“Although we are facing challenges with increased regulatory pressures and the cost of compliance, as a bank we remain confident about future growth,” said Quinn.

In a separate poll question, 44% of the audience said they thought the euro would depreciate 5-15% against the US dollar over the next 12 months. Only 13% thought the euro would appreciate by the same amount within that timeframe.


Banking relationships: less is more

When asked about the expected change in the number of banking relationships corporates have, 40% of the corporates in the audience stated that they will decrease the number of banks they work with, 18% said that they will look to increase the number and 16% reported that they expected no change, whereas 28% said the while the number will remain the same, they expect the composition to change.

Speaking from the platform, Nishat Grover, Director, Treasury, Yum! Brands, said that the company had recently renewed its credit facility and reduced the number of banking relationships, as well as changed its composition. About 70% of the banks were the same and 30% had changed, which reflected the company’s growing global footprint. “We conversed with the banks to determine what they are good at, where their interest lies, where they make money and whether there is an overlap of where we can work together,” says Grover. “For example, we are growing very rapidly in China and we now have several Chinese banks in our facility, which is not surprising for us. I think we are going to see the composition change over time as we continue to expand internationally and have relationships with more international banks, rather than US-based domestic banks.”

Bombardier has two credit facilities – the one in Europe for its transport group had recently been extended. According to Hinds, the composition was similar with just slight changes. The company is in the midst of extending its North American letter of credit (LC) facility which will happen at the end of May, and she expects that there might be a decrease in the number of banking relationships.
Grover made the point that there are bank relationships and then there are credit facilities, and although these two are correlated they are not entirely synonymous. “For corporates that are continuing to expand internationally, the number of banking relationships will continue to increase. But how that is translated into group credit facilities depends on the size of the facility , who your key partners are and how many mouths you want to feed,” he explains.

For companies that are cash rich, it makes sense to reduce the number of banks they work with. But if a company is debt heavy and looking to access credit, then it might be difficult to get that done without finding ways to increase the number of banks it works with. There is also the potential to approach non-bank entities for funding needs.

When questioned as to whether they are looking for alternatives to bank financing, 41% of the audience said no, while slightly less (35%) said yes. One member of the audience said that in Latin America where they operate some of the banks charge quite high spreads for the financing that they need, so they look for other corporates that are cash rich and may have trapped cash issues. Therefore this is an opportunity to avoid using banks in this instance, or to explore different ways to use the banks for business in those countries.

The vast majority (86%) of corporates in the room reported that they did not expect to have problems accessing long-term funding in the foreseeable future. In addition, 64% said that they did not expect Basel III or Dodd-Frank regulations to harm their access to funding.

This insight was first published on www.treasurytoday.com

EMIR: what corporates need to know

March 2013

The recently published thresholds for centrally clearing over-the-counter (OTC) derivatives is another trigger point in a long line of legislation to address market risk through the European Markets Infrastructure Regulation (EMIR). Corporates need to sit up and take notice, for this affects them.

On 15th March, the technical standards supplementing the European Markets Infrastructure Regulation (EMIR) entered into force. According to the European Securities and Markets Authorities (ESMA), the main obligations under EMIR are:
  • Central clearing for certain classes of over-the-counter (OTC) derivatives.
  • Application of risk mitigation techniques for non-centrally cleared OTC derivatives.
  • Reporting to trade repositories.
  • Application of organisational, conduct of business and prudential requirements for central counterparties (CCPs).
  • Application of requirements for Trade repositories, including the duty to make certain data available to the public and relevant authorities.
In support, the European Securities and Markets Authorities (ESMA) released a number of papers, including a Q&A to “promote common supervisory approaches and practices in the application of EMIR” and a quick guide to EMIR for non-financial companies.

The latter publication is of paramount importance to treasurers, for it lays out exactly what EMIR means for corporates that enter into derivative contracts. These compliance obligations can be grouped into three categories:
  1. Reporting
    – applies to all corporates engaged in the derivatives business.
  2. Central clearing
    – applies if the corporate exceeds the clearing threshold.
  3. Risk mitigation
    – applies to those derivative classes not subject to the clearing obligation.



Corporates must report derivative contracts – new contracts, changes to existing contracts and termination of contracts – to a recognised trade repository no later than the following working day. Reporting can be delegated to a counterparty or third party.



If a corporate exceeds the clearing threshold, then it will need to centrally clear “those OTC derivative contracts that are subject to the clearing obligation”. Derivative classes that don’t count towards the clearing threshold are those “entered into in order to reduce risks relating to the commercial or treasury financing activity of the non-financial entity”.

The value of the clearing thresholds are:
  • €1 billion* credit derivative contracts.
  • €1 billion* equity derivative contracts.
  • €3 billion* interest rate derivative contracts.
  • €3 billion* foreign exchange (FX) derivative contracts.
  • €3 billion* commodity derivative contracts and others.
* in gross notional value


Risk mitigation

There is a range of risk mitigation obligations, such as the timely reporting of the confirmation of the trade, dispute resolution obligation, portfolio reconciliation/compression obligations and, most importantly, the posting of margin collateral. Corporates must evaluate and report, possibly on a daily basis, its collateral and positions it holds with other counterparties, who are obliged to route this to the CCP.


Implementing EMIR

According to Alexander Schwenk, a Banking and Capital Markets Lawyer at Norton Rose, corporate treasurers need to take a number of actions now that these regulatory technical standards have come into force. The first step is to determine who should assume responsibility for the EMIR implementation project. Although in most cases it may make perfect sense for the treasury to take ownership, if the company is a commodities trader then maybe the traders may look after it, or some may argue that because it is regulation that legal should control implementation.

No matter who is ultimately in charge, it is important to implement a project which involves all company departments, particularly for the purpose of calculating the clearing threshold. “It is possible that if treasury doesn’t know what the trading unit is doing and the company exceeds the threshold in one class of derivatives, then the entire company will become subject to the clearing obligation, even if they don’t exceed the clearing threshold in respect to another class of derivatives,” explains Schwenk.

A number of corporates are waiting to see how things develop, which could theoretically be considered a legitimate approach since EMIR has been postponed a number of times and the different compliance obligations have differing implementation deadlines. “We are still waiting for a number of trigger points to be established,” explains Schwenk. However, once they are established corporates may have to react quickly because the implementation – or the phasing-in period – for the various compliance obligations may become quite short.


Clarification needed

The lack of clarity on a number of issues has contributed to corporate confusion. For example, corporates may be able to benefit from group exemptions, particularly in terms of risk mitigation obligation and margin posting, according to Schwenk. “Group exemptions are precisely defined under EMIR and if a corporate can benefit from group exemptions then it will have to apply for an exemption, or file a notification, to the relevant national competent authority (NCA). A number of corporates are asking when can they file the group exemption notification under EMIR – is it already possible now or do they need to wait until the class of derivatives that they are trading in has been defined by ESMA? This is one of the questions we have been looking at.”

Another unresolved question is what transactions are considered hedging transactions or, as EMIR states, are eligible from an objective point of view to reduce risks, so will not to be counted towards the threshold. “One of the most prominent exemptions in this respect is hedge accounting, where companies are accounting these transactions under the International Financial Reporting Standards (IFRS) hedge accounting regime, which is a safe harbour under EMIR,” says Schwenk.

The third point is the clearing obligation itself. “Corporates will have to closely monitor which CCPs will be licenced,” says Schwenk.


Still to come

Important regulatory technical standards still to come are the ones for margin requirements for non-centrally cleared derivatives. At the end of February, the Bank for International Settlements (BIS) and International Organisation of Securities Commissions (IOSCO) have submitted a paper as to how this could be implemented on a global scale. ESMA has been waiting for this and are now working on these standards.

“If people are talking about a collateral crunch these days, BIS and IOSCO have tried to alleviate this,” says Schwenk. “They have stepped back from very strict collateral requirements, in order to make it possible for a range of market participants to have enough collateral to post. So they are thinking of a collateral threshold for the posting of margins, which may be in the range of €50m.”

This insight was first published on www.treasurytoday.com

Building a greenfield treasury

April 2013

In this Q&A, Marjut Artimo, Treasury Manager at Lumene group, a Finnish skincare and colour cosmetics company, outlines a number of important considerations when building a treasury from the ground up.

Treasury Manager Marjut Artimo joined Lumene group, a Finnish skincare and colour cosmetics company utilising the effective ingredients of Arctic nature, in March 2005 to set up the company’s treasury department from scratch.

Her responsibilities among other things include:
  • Financial risk management.
  • Liquidity and cash management, forecasts and reporting.
  • Treasury reporting and budgeting.
  • External and internal funding operations; managing group loan portfolio and financial covenant calculations.
  • Cash management, including payment procedures and bank account structure.
  • Credit risk management.
  • Subsidiary control and aid on treasury matters.
In this Q&A, she gives a few words of advice to those starting out on the journey.

Treasury Today (TT): When brought in to build a treasury, what are the important questions that treasurers need to ask before they begin?

Marjut Artimo, Treasury Manager, Lumene group (MA): I think that first off you need to understand the present situation, core processes and financial risks of the company. It is important to identify the most crucial treasury issues and risks for that particular company, and address them first. That will then help you to determine the scale of the treasury function.

TT: What are the main challenges and pitfalls to such a project?

MA: The biggest challenge is a lack of resources, whereas the pitfalls include trying to do too many things and changes at the same time. Many treasurers may also face a lack of support from top management.

TT: Is it possible to leap-frog to best practice? If so, how should a treasurer go about doing this?

MA: Yes, I think that it is possible to leap-frog to best practice. But this is dependent on whether you have a well-organised project, get support from top management, have access to the best available technology and provided with enough resources (both people and money).

TT: Should they look to bring in external help or outsource areas of treasury?

MA: This was an active discussion in Finland a few years ago, but not any longer. I think that you can use external help when planning, organising and implementing a greenfield treasury project, but at the moment I do not see many opportunities for outsourcing the actual treasury work.

TT: Do you think this is a career-making opportunity for corporate treasurers?

MA: This might be career-making opportunity and I for one could consider doing it all over again. However, I think that starting a greenfield treasury does not suit everyone. You need to be very hands on, an operative type and enjoy new challenges and project work. You should also be able to tolerate imperfection and be able to make decisions with limited information, since you cannot expect everything to be ready and running smoothly in one day.

This insight was first published on www.treasurytoday.com

Lack of mobility leads to salary stagnation across treasury profession

March 2013

The vast majority of treasurers at all levels of the profession are reporting that they are happy in their role, yet many are looking for new opportunities due to stagnating salaries over the past three years, according to MR Recruitment’s 2013 Treasury Salary Survey.

Despite 75% of corporate treasury professionals reporting that they are happy with their job, slightly more (78%) say that they are interested in considering new opportunities, according to MR Recruitment’s 2013 Treasury Salary Survey.  ‘Keeping one eye out’ may be a result of stagnating wages across the profession, as many have stayed put to ride out the tough economic conditions.

According to the survey, the average annual salary for each grade is as follows:
  • Treasury analysts/dealers – £41,416.
  • Treasury managers – £64,487.
  • Treasury consultants – £87,812.
  • Assistant treasurers – £78,833.
  • Deputy treasurers – £109,303.
  • International/regional treasurers – £107,643.
  • Group treasurers – £136,477.
Treasury managers and deputy treasurer categories saw the largest average annual increase in salary – up 7% and 5% respectively from 2012; however, other treasury ranks saw wage levels stagnate.

When taken together, it adds up to the start of some movement in what has been a very slow job market, according to Mike Richards, Managing Director, MR Recruitment.  “Today, four out of five treasury managers are looking for a new job – that is a significant shift from previous years’ results. Even if they are not proactively looking, they are now prepared to have a chat about what is out there.  I think that people are starting to realise that the only way to get a meaningful increase in salary in the current market is to move jobs.”

Treasurers have seen a small increase in overall packages due to the return of bonuses in 2013.  After a cut in bonuses two to three years ago, now is there a recovery starting to happen.  But “the boom times are over, certainly for the foreseeable future,” according to Richards.


Are treasury departments growing?

Although one in five respondents expect their treasury department to increase in size, the hope of more staff has diminished each year – in 2012, one in four held out the hope for more people.  Richards says: “There was a greater growth potential about five to six years ago, before the economic crisis when there was a lot happening in treasury.  Today, because of the challenging times, companies may want the whole ‘A to Z’ of treasury, but at the current level of staffing the treasurer may only be able to deliver ‘A to M’.  The ‘N to Z’ and other nice-to-haves will have to wait.”

Treasurers are focusing on the critical factors, not recruiting.  MR Recruitment has one client who has had sign off for a full-time equivalent (FTE) for nine months.  “They haven’t recruited yet because they are coping with implementing a new treasury management system (TMS) and day-to-day treasury activities,” says Richards.  “At the moment, the pressure is on to keep their heads down and carrying on as business as usual.”

To cope with the lack of staffing resources, many treasuries are operating a ‘zone defence’ where everyone is sufficiently proficient at another’s job that they can cover during holidays or sickness.  “This is a very good description,” says Richards.  “One of our FTSE 100 treasurers says that they are happy to do the treasury dealing if the dealer is off sick, but they are a very expensive treasury dealer.  But currently a request for another member of staff would be denied, as the whole company already has a recruitment freeze in place.”

Although some have reported a large jump in interim treasury recruitment, Richards refutes this.  “It has been quiet because there hasn’t been anything new to do.  Treasurers are being asked to make do and mend.”  But some large change projects are coming down the line, such as the Single Euro Payments Area (SEPA), as well as a need to improve cash management initiatives.  “The only way to improve or take treasury to the next level is to bring in interim resources, or perhaps a junior operational member of staff which will then give the senior members of staff some time in their schedule to carry out new projects,” Richards says.


Future plans

The 12th survey in 10 year, the MR Recruitment Treasury Salary Survey surveyed 682 participants globally, at all levels from treasury assistant to global treasurer.  The survey has a large proportion of respondents from the UK and EU, but with the opening of MR Recruitment’s new office in the US, Richards is hoping the US portion of the survey will make a leap in participation level.  The recruitment firm also plans to do a Swiss survey, which is well-timed given the recent news that all 26 Swiss cantons voted to cap the pay of top company executives.

This insight was first published on www.treasurytoday.com

Daily NAV reporting comes to Europe

February 2013

J.P. Morgan Asset Management (JPMAM) has begun publishing daily market-based net asset values (NAVs) for three US dollar-denominated money market funds (MMFs) in its European range.  This follows on from similar announcements in January made by a number of US asset managers.

J.P. Morgan Asset Management (JPMAM) has announced that three of its Luxembourg-domiciled US dollar-denominated European money market funds (MMFs) will begin disclosing their market-based net asset values (NAVs) per share (also known as shadow NAVs) on a daily basis.

Although this is the first such announcement in Europe, it follows on from similar announcements in January made by US asset managers BlackRock, Dreyfus (a unit of Bank of New York Mellon Corp), Goldman Sachs Asset Management, Fidelity Investments, Federated Investors Inc. (FII), Invesco and Charles Schwab Corp, as well as JPMAM.

As of 19 February, the JPMorgan Liquidity Funds - US Dollar Liquidity Fund, the JPMorgan Liquidity Funds – US Dollar Government Liquidity Fund and the JPMorgan Liquidity Funds – US Dollar Treasury Liquidity Fund will calculate their market-based NAVs per share to four decimal places at the funds’ close of each trading day and disclose it the following business day on its website.

According the JPMAM, this additional disclosure will provide investors with greater transparency regarding the market-based NAV’s fluctuation.  The market-based NAV will not impact the price at which shareholders will deal in the funds.  Distributing classes will continue to transact at $1 per share, and accumulating classes will transact at the daily price disclosed on the website.

Jim Fuell, Head of Global Liquidity EMEA at JPMAM, says that this is a further evolutionary step in providing greater transparency to help fund investors make more informed decisions about their investment choices.  “Daily disclosure of market-based NAVs will help investors better understand how day-to-day market movements or events can affect the value of the funds’ portfolios.  It doesn’t impact how we operate the funds, but hopefully the transparency gives investors a better understanding of the nature of MMF risk.”

He adds that JPMAM intends to roll out daily disclosure across its stable sterling- and euro-denominated MMFs at a later date, but a specific date has yet to be set.  He expects that other European asset managers will follow suit.


Added volatility?

However, opponents of daily disclosure claim it creates additional volatility in an already stressed market.  More proactive investors can look at the asset manager’s portfolio every day and either question why they are holding certain securities, or threaten to take out their cash unless the asset manager sells certain positions.  “The investors are able to second guess the portfolio managers, which isn’t always helpful,” says an industry expert who asked not to be named.  “In the past disclosure has been on a delayed basis, so that by the time an investor sees the holdings they are probably a couple of months out of date.

“If I were a portfolio manager, I would have reservations about daily disclosure.  At the end of the day, an investor is paying a manager to invest their money and there has to be a degree of trust.  An informed investor isn’t necessarily a reasonable or fair investor, and one awkward investor shouldn’t be dictating investment policy.  On the other hand, firms are very happy to be open about the investments they make.  There needs to be a balance.”

Fuell doesn’t expect this move to increase volatility in the marketplace.  “We believe that we have consistently informed investors even prior to this disclosure, as we have a substantial direct sales team who talk to clients about how we manage and run their investments.  Clients understand that constant NAV funds – ones that transact at $1/€1/£1 per share – have a level of mark-to-market volatility behind the transactional value.”

Speaking on behalf of the Institutional Money Market Funds Association (IMMFA), Secretary General Susan Hindle Barone says: “All IMMFA fund managers believe it is healthy to provide good and clear disclosure to investors.  However, not all our members agree that providing daily disclosure is appropriate.  The IMMFA Code of Practice specifies a minimum level and frequency of disclosure; it is then up to individual members if they wish to provide more information.”

A question for corporate treasurers to resolve is whether they have the capacity – in terms of time and resources – to review these daily reports.  Obviously today there are some that do and others that don’t, but Fuell believes that seeing this information on a daily basis will encourage treasurers to put in place a monitoring process that benefits them going forward.

This insight was first published on www.treasurytoday.com