Major corporates spearhead MACT relaunch

November 2013

MACT is back on the scene in Malaysia, spearheaded by a number of large corporates. Its mission? To help solve pain points for treasury professionals operating in the country and across the region.

Major corporates, including Telekom Malaysia, Astro, MISC, Axiata, Genting, UEM Group Berhad, Malaysia Airline System (MAS) and SunGard, have encouraged the relaunch of the Malaysian Association of Corporate Treasurers (MACT), which took place on 9th October in Kuala Lumpur.

In an interview with Treasury Today, Anne Rodrigues, President, MACT, identified two reasons for relaunching the association in the current conjuncture: “Corporate, as well as individual members, have found the need to have a forum for discussion and the exchange of views, plus have a representative body to meet with regulators on issues of common interest. The other impetus was that an increasing number of companies are going global and thus needed MACT as a resource centre for many of their transactions. Training for new entrants joining the profession is also key and remains as one of our strategic objectives.”

The MACT wants to position itself as a “centre of excellence” for all aspects related to treasury management within Malaysia. For the past several months, it has been working toward setting up a reliable forum for treasury practitioners’ to exchange views and share information on the financial market and the economy.

It aspires to be the recognised body to articulate common views of its members to regulatory bodies, banks, vendors, and training institutes. The MACT will also work together with these parties to raise the knowledge level of treasury management in Malaysia.

Membership

 

Currently with less than 100 members, the association will now spread its wings to other corporates and small and medium enterprises (SMEs) within Malaysia, as well as reach out to those who have already indicated interest in order to finalise their membership. “We hope to work together with the Central Bank of Malaysia and other banks to reach out to SMEs,” explains Rodrigues. “We already have a strong database of SMEs and intend to tap into this.”

MACT is committed in its approach towards providing financial literacy and training, thereby elevating present skill levels, particularly in the complex areas of treasury management, while at the same time supporting learning and on the job training and education for newcomers in the profession.
According to Rodrigues, the greatest challenges treasury professionals in Malaysia face include:

• Efficiency in cash management.
  
• High transaction cost.
  
• Tax and regulatory roadblocks.
  
• Reporting efficiency across entities within the group.
  
• Access to timely information for effective decision-making.
  

 

Regional integration

A main objective of the MACT is to “maintain, nurture and step up existing dialogue” with sister treasury associations in countries, including Singapore, Hong Kong, Australia, UK, and those associations affiliated to the International Group of Treasury Association (IGTA). One of the principle functions behind such information exchange is sharing of views on common issues and updates on matters of present day economic concern and interest. MACT will also serve as a single point of contact for treasurers worldwide intending to seek information on prevailing treasury practices and new regulations affecting the treasury scenario in Malaysia.

“We have been in touch with regional sister associations, as well as the IGTA, and intend to play a productive role as a reference point for information on treasury-related information required by these associations, as well as the other way around,” says Rodrigues.

Lloyds Bank and Standard Chartered extend partnership on Asian trade

November 2013

In September, Lloyds Bank and Standard Chartered announced a deepening of their relationship, specifically around Asian trade. Treasury Today caught up with Jacqueline Keogh, Head of Global Trade in the Transaction Banking team at Lloyds, to find out more.

Notwithstanding their long-lasting strategic partnership across many different product areas and geographical regions, Lloyds and Standard Chartered took the opportunity of Sibos in Dubai to announce a specific development around Asian trade, which both parties believe will “enhance the experience for UK clients importing from Asia”.

As part of this agreement, Lloyds Bank will use Standard Chartered’s on-the-ground capabilities to directly issue import letters of credit (LCs) locally in 20 Asian markets, including China, India and Korea. This provides UK clients with the benefit of local language and time zones, in-country document handing and local currency settlement, including Chinese renminbi (RMB).

In a press statement, Andrew England, Head of Transaction Banking, Lloyds Bank Commercial Banking, said: “This agreement will enable us to improve our product offering, accelerate our growth plans and is part of an on-going strategy to strengthen our international partner network.”

What’s new?

 

To gain a better understanding of what’s new in this deal, Treasury Today spoke with Jacqueline Keogh, Head of Global Trade in the Transaction Banking team at Lloyds. Keogh moved across to Lloyds from Standard Chartered just two months ago and is tasked with revitalising and significantly growing Lloyds’ trade business. Prior to Standard Chartered, she did an 11-year stint with SWIFT and was responsible for strategic development on many projects including the Bank Payment Obligation (BPO) and the Trade Services Utility (TSU).

Keogh says that a strategic partnership operates at a much deeper level than the correspondent banking relationships of the past. “We have a common strategy and objectives, as well as complementary geographical coverage and skills. We see each other as natural partners because Standard Chartered is focused on Africa, Asia and the Middle East, with no desire to engage in the UK other than to help their core client base. Lloyds, on the other hand, is firmly focused on the UK market.”

This new agreement “reinforces a shared strategy” on international flows and how to better serve clients, according to Keogh. “This is not for our mutual benefit, but for the benefit of our shared client base.”

The ability to issue LCs through Standard Chartered is one such customer benefit. Historically, Lloyds issued LCs through a number of correspondent banks. “From a corporate perspective, it meant being dependent on Lloyds having relationships in a multitude of countries, all with different terms and conditions,” explains Keogh. “Through partnering with Standard Chartered, we are extremely confident with regards to the level of service, price, process and how the whole transaction will be managed.” Also there is a clear escalation path in order to resolve any potential issue. “This provides greater assurance in terms of the product offering that we can provide for our UK corporate clients. Whereas with the correspondent banking model a bank is dependent on many different parties, so achieving that level of consistency and standardisation is close to impossible,” she says.

In terms of a reciprocal agreement, Standard Chartered is already directing its clients who are looking to expand in the UK towards Lloyds; however, the significance of the agreement relates to the much higher level of trade flows from the UK to Asia.

The future

 

Given Keogh’s experience of the BPO, we asked her whether this was an area of interest for future collaboration between the two banks. “Currently Lloyds is not signed up to the BPO, mainly because it is just beginning to revitalise its trade capability and strategy,” she explains. “It is an area that we are following very closely and, based on client demand and the on-going development of Lloyds capability, it is something that we will most likely sign up to in the future.

“When that does happen – and it is a ‘when’ rather than an ‘if’ – Standard Chartered would be a good partner to work with because it was one of the early adopters and has extensive experience of the BPO, both within its own organisation where it is on both sides of the transaction, and also in collaboration with other financial institutions,” she adds.

Keogh believes that it will take time to create the network and flow around the BPO. “Most instruments in this industry have been around for thousands of years. Therefore when a new instrument is launched, it is going to take time before it achieves the required level of adoption. But I think that it will gain momentum because the industry requires common standardised instruments around open account that operate cross border.”

Although the industry needs something like the BPO, it may not survive in its current form, according to Keogh. “There are very few people in the industry that would question the need – both from the financial industry and the corporate perspective – to have a common definition, shared standards, shared structure and shared products around open account. The BPO is the best we have today and it has the best chance of success, whether in its current form or another variation.”

Five areas of improvement for online banking

October 2013

Despite corporates wanting more, their online banking experience is lagging behind the times. Research from the Aite Group examined five key online banking initiatives to gauge corporate demand.

Corporate customers’ expectations in regards to their online banking experiences are higher than ever before, driven in part by the customised experiences treasurers enjoy in their personal lives from online retailers such as Amazon.com. However, most corporates are served through outdated bank technologies.

For example, according to the Aite Group’s recent report ‘Enhancing the online customer experience: feedback from corporate treasurers’, it is “not uncommon for corporations to face multiple system logins, non-intuitive customer interfaces that require searching and navigating the website, and reports that don’t meet their needs. The result has been low customer satisfaction levels and a corporate perception that banks don’t understand their needs.”

In order to better understand market conditions, the Aite Group surveyed 185 US-based corporates, mainly Union Bank clients, regarding the impact of several planned bank initiatives on improving their overall online cash management experience.

The research took stock of the following five bank initiatives:

1. Dashboards: 66% of those surveyed believe that a more customised dashboard is ‘very important’ to ‘extremely important’ to improving their overall online cash management experience.

2. Tighter system integration/portal creation: more than half (52%) of treasurers surveyed believe that single sign-on and a consolidated view will enhance their online banking experience.

3. Easier data exchange between bank and corporate systems: 67% say that having tighter integration and easier data exchange between the bank site and their ERP/accounting system for better straight through processing (STP) to improving their overall online cash management experience is ‘very important’ to ‘extremely important’.

4. Reporting: only 19% of corporate treasurers surveyed describe their bank’s reports as ‘highly customisable, easy to use and provide their organisation with that they are looking for’; whereas 22% create almost all of their own reports.

5. Real-time data: 81% of corporate treasurers state that access to more real-time information is critical to improving their online cash management experience.

In conclusion, the report states: “Tomorrow’s problems can’t be solved with yesterday’s technology. Banks must invest in newer, more flexible systems, break down silos to pave the way for integration, and focus on system usability.”

EuroFinance 2013: Regulations, relationships and rationalisation

October 2013

Over 1,900 attendees from more than 60 countries gathered together for EuroFinance’s International Cash and Treasury Management conference in Barcelona last week. Three ‘Rs’ were part of almost every panel discussion and case study presentation: regulations, relationships and rationalisation. In addition, technology and innovation remained cornerstone topics of the conference.

Incoming regulations are still top of mind for most treasurers, as evidenced at the EuroFinance conference held in Barcelona from 16-18 October. Attracting more than 1,900 delegates, including approximately 720 corporate treasurers, the conference streams reflected the need of corporate treasurers to know more and get ahead of the game. Two noteworthy session titles included ‘Wrestling with regulators’, led by Damian Glendinning, Treasurer at Lenovo, and ‘A game you can’t afford to miss: staying one step ahead of the banks’, which was ING’s interactive game to gain a greater understanding of how Basel III will force banks to alter their business models and the tough decisions that lie ahead.

Despite only having a handful of sessions addressing the Single Euro Payments Area (SEPA), this was one of the most popular points of discussion inside and outside the main conference session, with the migration end date less than 20 weeks away. PwC and Citi hosted a breakfast briefing, while BNP Paribas presented a SEPA case study over lunch.

Most agree, however, the time to talk is over and greater action needs to be taken. As reported in a previous insight, the ‘Treasury Verdict’ voting plenary results showed that only 14% of respondents are compliant today; in addition, only 8% of those polled are currently completely prepared to use SEPA Direct Debits (SDDs). But the situation remains even direr for the small and medium-sized enterprise (SME) sector.

SEPA fatigue is pervasive throughout the corporate and banking community – there is a great need to move from ‘what now’ to ‘what next’. As one banker said: “We are all tired of talking about SEPA problems – now we must move on to the solutions.”

Relationships

 

With great uncertainty still remaining around how the regulatory changes will play out, corporates are increasingly turning to their banks for trusted and detailed advice. This is driving a much deeper relationship between corporates and their banking partners. In a plenary on the final day, entitled ‘Banks: altogether now or bust’, Jennifer Boussuge, Head of Global Transaction Services – EMEA, Bank of America Merrill Lynch (BofAML), touched on this point. “I don’t believe that the regulatory environment is going to change anytime soon. If anything, I think the uncertainty, volatility and rapid pace of change is going to continue – it is the new normal. Therefore, we all need to understand how we can function in this new environment.

“Some of the key considerations that we need to look at is the risk/reward trade-off and the balance between the two. We have to look at the increasing cost of credit for banks and what that means for corporate clients. Corporates need to ensure that they have shored up their bank relationships and are having open conversations, to be able to understand first of all how the regulation impacts their financial institutions and then the knock-on effect for them.” Boussuge stressed that communication will be critical to this valued partnership, in order for banks to keep pace with the corporate’s needs.

Speaking on the same panel, Rajesh Mehta, EMEA Head of Treasury and Trade Solutions, Citi, agreed, saying that already the “dialogue is becoming much more strategic” as a result of trying to work through the regulatory issues together.

Rationalisation

 

On the flip side, however, to maintain such an intimate relationship takes time and effort – and much mutual trust. This is driving corporates to re-evaluate their core banking relationships and, wherever possible, reduce the number of banks they work with. In the ‘Treasury Verdict’ voting plenary, 39% of corporates in the room said that they had reduced the number of banks they work with.

One example of a bank rationalisation case was provided by Tom Jack, Assistant Treasurer, Mondelez International, a Kraft Foods spin-off with revenue of $35 billion, who explained the treasury’s three-year banking simplification project in his session entitled ‘Feel the fear and do it anyway: from workflow to liquidity management’. The aims of the project was to “simplify, harmonise and establish a stable foundation to move forwards from”. The company went from 29 clearing banks down to one (Citi) for the whole European region. It also went from 0% straight through processing (STP) for payments to 95% STP.

However, most corporates would not be so quick to move to just one bank – effectively putting “all our eggs in one basket,” admitted Jack. He explained that this was the reason treasury went down a bank agnostic route by using SWIFT and a single file format ISO 20022 XML. “We wanted to ensure that we had an easy mechanism in place to change banks, should we need to.”

Technology and innovation

 

New technology and innovation were very much part of the EuroFinance agenda in Barcleona, and many banks took the opportunity to run closed sessions for their clients on specific developments.

For example, Swedbank ran a lunchtime briefing for its customers on digital payments – looking at how tomorrow’s consumers will act and how businesses need to adapt to these changes. Jesper Ahrgren, Business Development Manager in the Digital Engagement Department, gave some interesting analysis as to how the digital wallet is beginning to dominate. He explained that this was best thought of as a container for payment instruments interacting with other apps, which was where the customer perceived real added value and would in turn led to increased acceptance of the technology. Some of the domestic developments in the Swedish market are providing interesting trends that we may all be following before too long.

With a little help from your banks

October 2013

With a swathe of new regulations coming down the pipeline, how can corporates cope? A panel during the Corporate Forum at Sibos in Dubai argued that the answer lies in a strengthening of the relationship between corporates and their banking partners.

Most corporate treasurers tend to be more reactive than proactive when it comes to new regulations, according to François Masquelier, Treasurer, RTL Group and Honorary Chairman and Founder of Euro Associations of Corporate Treasurers (EACT). Speaking at a Corporate Forum panel entitled ‘How treasurers are coping with regulations’ at Sibos in Dubai last month, Masquelier explained: “Apart from a few exceptions, most treasurers do not actively anticipate a new regulation and its impact – they always come late or even after the event.”

Masquelier believes that this is where treasurers’ associations, such as the EACT, can step in to be “proactive and anticipate the treasury community’s needs ahead of the game”. He used the example of discussion with the European Payments Council (EPC) regarding the Single Euro Payments Area (SEPA). The need to federate the national associations in order to be stronger and listened to by the EU body in Brussels became crystal clear. “SEPA was a great opportunity for us and it profiled the EACT. We decided to be part of the game and not let the banks and software vendors define the payment schemes and formats alone,” he said. “But this was brand new for us because we were accustomed to acting in nation silos.”

Attempting to influence the evolutionary process of emerging regulations is one area that collective action can bring results, but fundamentally dealing with the impact of regulations transposed into national terrains is very much an individual company response. John Christensen, Assistant Treasurer, New Ventures and Products, PayPal, said that as a consequence of the changes going on in the regulatory environment, PayPal’s treasury reviews its bank counterparties and constantly looks at its allocation, not only in terms of credit but also risk. “Treasurers now need to have real-time data of ratings, spreads, balances, etc. They need to be having a conversation with their banking partners about what to do, which is not just about products and services but how comfortable they are with the risk involved. That is a different type of dialogue – it’s not just about agreeing prices.”

Christensen is tasked with the objective of keeping PayPal’s treasurer abreast of Dodd-Frank and Basel III. “The impact that will have on us is directly related to what the banks will be required to hold as capital buffers,” he explains. “Some of those costs will be passed on to us via processing or underwriting fees for debt, or the capacity of that bank to re-enter into our revolver. We have to think about all these things in advance because it will affect which bank will want to continue doing business with us, and we need to ensure that we have a clear line of sight over what we are offering those banks.”

Coming out of the financial crisis, ‘counterparty’ is a loaded term. According to Tom Schickler, Global Head of Liquidity, Payments and Cash Management, HSBC, most treasurers have credit default swap (CDS) spreads on their desks and are looking at them on a real-time basis. “That is the reality today. So what are we doing about it? I believe that the answer is about enriching and elevating the dialogue, so that we are less transactional and more strategic. How can we partner together to deal with the challenges we face?

“Although regulations are painful and can be viewed as a problem, the main motivating force for regulators is greater transparency. Basel III, which is a set of guidelines that are meant to be interpreted globally and enacted into law, presents such an opportunity because through transparency we can simplify, streamline and globalise approaches, and that takes risk out of the equation. This is true not just for banks but for corporates as well, so we can focus our effort and capital on the things that add value from a corporate perspective,” he said.

Both corporate treasurers on the panel described how they were working towards deepen the relationship between themselves and their banks, which is necessary for navigating the uncharted waters of the oncoming regulations. Masquelier said that after the crisis, his company reinforced its bank relationship policy with its core banks in order to “protect our company”, effectively cutting its ties to Tier 2 and 3 banks. “One of the positive aspects of these regulations is that it gives you an opportunity to concentrate and reduce the number of counterparties. Unless they have credit needs that can’t be solved by the market, most corporates are trying to reduce the number of banking relationships.”

Masquelier added that it is important to make sure the counterparties are satisfied with the relationship. “It has to be a win-win or at some point they may change their strategy. If you are not a profitable customer, they could decide to cut the relationship.”

Christensen acknowledged that PayPal uses more banks globally than it has in its credit facility and views that as a problem. “Bringing the number down is very important to us because changes in regulations raises the question as to whether the banks going to participate in the revolver going forward. So we have to be razor sharp as to what business we are taking to which banking partners.”
This deepening relationship has paid off. Christensen reports banks being remarkably open about their business. “When we had questions about our counterparties’ balance sheets and other concerns, our banks have been very forthcoming. They have immediately offered a call with their CFO. The two or three banks that we have called have been very open – they know that other treasurers will also have the same questions as word gets out pretty fast.”

Arwa Hamdieh, Co-Founder, Financial Services Association (UAE), said that in the Middle East corporates are now using the strong relationships with the banks to communicate beyond the issues that they are looking to resolve immediately. “Corporates in this region are using their banks as means to communicate to regulators, which is an indicator that the relationship is stronger. We are focused on developing the dialogue and explaining the importance of working collectively,” she said.

SAP’s FSN: the difference a year makes

October 2013

During last year’s Sibos in Osaka, Treasury Today attended the launch panel of SAP’s Financial Services Network (FSN). One year on, we caught up with Sanjay Chikarmane, SVP and General Manager of FSN, at the event in Dubai to gain a better understanding of what is on offer.

Last year’s launch of SAP’s Financial Services Network (FSN) at Sibos in Osaka left more questions than answers as to what made this connectivity initiative different from those that came before it. As reported in an earlier Insight, despite the big banking names involved – including Bank of America Merrill Lynch (BofAML), the Bank of Tokyo-Mitsubishi UFJ (BTMU), Deutsche Bank, Nordea, Standard Chartered, Citi and the Royal Bank of Scotland (RBS) – there was a lack of clarity on what exactly ‘it’ was.

Developments this year seem to have shed more light on the question, especially since the solution was made available to financial institutions and their corporate customers in March. According to Sanjay Chikarmane, Senior Vice President and General Manager of Enterprise Information Management (EIM) and FSN, speaking to Treasury Today at this year’s Sibos in Dubai, the FSN sits in the SAP HANA Cloud between a corporate and a bank, enabling the corporate’s SAP enterprise resource planning (ERP) system to send transaction files to the FSN, which in turn transforms them into any bank format and routes them to the bank, and vice versa. The secure network is owned and managed by SAP as an on-demand offering.

Banks can benefit from a simplified approach to electronic service development, deployment and delivery. Corporate treasurers will be interested because it solves the issue of multiple banks and formats, at a time when most are looking to cut costs. “The FSN has a zero IT footprint,” Chikarmane says. “Corporates don’t need to upgrade their ERP systems to join the network. It is a rapid deployment solution, taking just a few weeks to configure, and we have developed a package onboarding service.” SAP will use a scalable pricing model, based on the number of transactions, so that corporates of all sizes can benefit from the solution.

The FSN also leverages SAP’s 2012 acquisition of Ariba, the cloud-based network that connects 730,000 buyer and suppliers, to solve three other persistent problems for corporates: poor reconciliation, staying up-to-date with master data and gaining visibility across an organisation’s cash position. “Reconciliation can be a problem for corporates, as there is often not enough information in the ERP system to reconcile transactions. With thousands of suppliers on the Ariba network, which is connected to the FSN, it is possible to merge reconciliation information with the bank statement – providing an automated ‘touch-less’ reconciliation,” explains Chikarmane.

Secondly, when dealing with thousands of suppliers, many corporates’ vendor master data can fast become out of date. “We capture vendor data through the Ariba network, so can provide our corporate clients with up-to-date master data.”

Thirdly, many corporates run different ERPs across different regions which makes it difficult to have true global visibility over their cash position. SAP is planning to launch a cash visibility application in 1Q14, which will route all transactions through the FSN.

The real test will come when the first banks are operational on the network in 1Q14. Although currently aimed at the top banks, with each bank identifying two corporate clients to pilot the programme, Chikarmane says that SAP intended the solution to scale down to the smaller banks. Once SAP has what it considers to be enough banks on board, then it will take its offering directly to the corporate community.

BPO: SWIFT’s viewpoint in Dubai

September 2013

Sibos, SWIFT’s four-day user conference, has engulfed Dubai this week, with more than 7,300 bankers, technology vendors, consultants and a few corporates registering to attend. The main themes of the conference are around the changing global dynamics, regulatory reform and operational excellence. Incorporating all of these elements, the Bank Payment Obligation (BPO) is getting a lot of air time inside and outside the main conference agenda.

Everything is the biggest or tallest in Dubai – and SWIFT’s user conference certainly plays in this big league. With more than 7,300 registrants (although less actual attendees), Sibos is claiming to be the largest banking conference in the Middle East to date. Seventy-two percent of attendees have come from Europe, the Middle East and Africa (EMEA), with 12% from the Americas and 16% from Asia. Unlike in Osaka last year, the Chinese banks are also in attendance.

The main themes of the financial messaging consortium’s conference are around the changing global dynamics, regulatory reform and operational excellence. But it is the Bank Payment Obligation (BPO) that is stealing the stage, whether inside or outside the main conference agenda. Maybe that is because it encompasses all three themes: it is proving to be much more popular in the still vibrant Asia region; it may help to mitigate some of the risk surrounding regulatory reforms; and it should make the lives of corporates that much easier through greater efficiency in trade. Or maybe it is because SWIFT has decided to make a big push this year to ramp up adoption.

Since the International Chamber of Commerce (ICC) approved the basic legal framework of this new payment method for trade in April this year, the uptake has remained surprisingly low. To date there are just six banks live on BPO, and these are all Asia-based. Six more banks are ready to go live, and 53 banking groups are adopting BPO.

Conversations with a number of banks on the conference floor has indicated a lack of demand for, or understanding of, BPO. Without corporate customers clamouring for this tool, the banks are hesitant to put much effort into rolling it out; however, that leaves the industry waiting for a groundswell of first movers to really push it forward.

Which is the reason why SWIFT has gone on an educational offensive, as much for the banking community’s benefit as for the corporates. But BPO is caught between the proverbial rock and a hard place: for corporates, it is a tool that could take away the pain of letters of credit (LCs); whereas the banks, who benefit from LC fees, would prefer to see it replace open account transactions – which accounts for 85% of global trade yet is a space where the banks have no role to play. SWIFT is trying to position it in the middle, claiming that there will be a coexistence of LCs, BPO and open account.

At a Barclays breakfast briefing, ‘BPO: reshaping global trade’, Andre Casterman, Global Head of Corporate and Supply Chain Markets, SWIFT, was clear that BPO was not a product in itself, but a tool that products can be built upon. “BPO is a decision between two corporates, similar to the LC world. Bankers need to build a commercial value proposition around this tool.” He argued that BPO allows supply chain finance (SCF) to start when it should, ie pre-shipment financing and purchase order services.

James Bidwell, Head of Product Development, Global Trade Product at Barclays, gave some indication of the challenges BPO presents for banks, namely how to prepare to go live while minimising the cost associated with such a large change programme. For example, to change to the ISO 20022 format and fully automate the upload into SWIFT’s Trade Services Utility (TSU), or another matching engine, is a big spend for banks right now.

Reassuring the bankers in the room, Bidwell argued that the BPO is not “an electronic LC”, positioning it as a way to speed up the process but not necessarily replace LCs. He agreed with Casterman that it is “all about SCF” and that the success of BPO will be driven by corporates. When issues around the ability to match shipment data was raised by an audience member, Bidwell stated that “BPO is not a panacea”, and there will still be times when an LC is appropriate, especially when dealing with new trading partners.

At the end of the session, Bidwell put the call out to any banks who would like to work with Barclays in pushing forward adoption.

What do corporates want?

Interestingly, in a session entitled ‘Exploring the evolution of SCF’, which is part of the dedicated Corporate Forum stream, Gary Slawther, Treasurer, Octal Petrochemicals, was vocal in his support for BPO. “I like BPO for it provides a level of liberation. The main benefit is that it puts the power into the treasurer’s hands. With this new tool, I no longer have to negotiate with the banks.” He believes that as soon as there is a critical mass of corporates using BPO, then everyone will follow.
Controversially Slawther went as far as to say that the LC is “dead”, effectively arguing that it is possible to take LCs out of the picture, as they only provide “a bank account and credit”. However, the LC death toll has been heard many times in the past and yet they continue to be an important risk mitigation tool.

The Corporate Forum opening plenary attracted more than 150 people, with approximately 20%-25% of the audience from the corporate community. In its second and final day, the forum will look at payments and trade in Africa, how corporates are coping with the ever-increasing burden of regulation and mandate management.

Whither go European money market funds?

September 2013

On 4^th September, the European Commission (EC) released its long-awaited proposals for increasing money market fund (MMF) regulation. Treasury Today spoke to industry players to gauge their reactions, as well as understand how these proposals will affect corporates.

In a move to address financial systemic instability, on 4th September the European Commission (EC) put forward a number of proposals to regulate the European money market fund (MMF) industry, in a similar way that Basel III’s Liquidity Coverage Ratio (LCR) has put constraints on banks to ensure that they adequately manage their liquidity.

The proposed regulation, which will apply to all MMFs domiciled, managed or marketed in the EU, affecting nearly €1 trillion in investor assets, requires:

• Certain levels of daily/weekly liquidity in order for the MMF to be able to satisfy investor redemptions – MMFs are obliged to hold at least 10% of their assets in instruments that mature on a daily basis and an additional 20% of assets that mature within a week.
  
• Clear labelling on whether the fund is short-term MMF or a standard one (short-term MMFs hold assets with a residual maturity not exceeding 397 days while the corresponding maturity limit for standard MMFs is two years).
  
• A capital cushion (the 3% buffer) for constant net asset value (CNAV) funds that can be activated to support stable redemptions in times of decreasing value of the MMFs’ investment assets.
  
• Customer profiling policies to help anticipate large redemptions.
  
• Some internal credit risk assessment by the MMF manager to avoid overreliance on external ratings.
  

 

Industry frustration

In a statement, the Institutional Money Market Fund Association (IMMFA) lambasted “this ill-considered regulation”, saying it will “effectively mandate a conversion to variable NAV (VNAV) MMF to the detriment of investors, issuers and the economy in general”.

The association, which has 22 members who operate funds and a number of associate members, supports the introduction of minimum liquidity requirements, ‘know your client’ policies, enhanced transparency, and the use of trigger-based liquidity fees and gates (similar to the Securities and Exchange Commission’s (SEC) proposals, which ends its consultation period on 17th September). However, it stands firmly against a 3% capital buffer for CNAV MMF and argues that it won’t contribute towards enhancing systemic stability.

“Some of the measures in today’s EC proposal will make a positive contribution to the robustness of MMFs, but there are several which are extremely unhelpful, to investors and to the short-term debt markets in general,” said Susan Hindle Barone, Secretary General of IMMFA, in the statement. “We reject the assertion that there is a greater degree of systemic risk inherent in CNAV MMFs. The EC has not demonstrated that CNAV funds are more susceptible to run-risk than VNAV funds, and the discrimination between these two accounting techniques is unjustified.”

With the requirement for a 3% capital buffer, IMMFA expects that CNAV providers will convert their funds to VNAV, as it is uneconomic for an asset manager to hold 3% capital against an MMF. The buffer will also have a significant impact on the wider economy. The association calculates that, at 3%, the European-domiciled CNAV MMFs would have to raise €14 billion, €10 billion by banks and €4 billion by independent asset managers. Assuming banks are currently levered by 20-25 times, reassigning the capital from other business to cover the MMF buffer would withdraw €200 billion-€250 billion from the European economy.

In addition, given the SEC’s decision to reject the use of capital buffers for US MMF, the IMMFA believes that there is now a “serious risk that cross-border arbitrage opportunities will be created”. In an interview with Treasury Today, Hindle Barone says: “The SEC flatly rejected the use of capital buffers, so I can’t see them reconsidering this measure any time in the near future. Instead, they are considering a mixture of moving to VNAV and/or the use of liquidity gates and fees. European regulators don’t like to draw attention to the fact that they are going down a different path than the SEC, but they are. As an industry association, we hope that good sense prevails and the US and Europe jurisdictions become more aligned, but we continue to be disappointed.”

The proposed reforms will need to be agreed with the European Council and Parliament, a process unlikely to be completed before the May 2014 European elections. However, once the regulation is accepted into law, the transition period for these changes is only six months. This will not be feasible given the extensive operational and educational changes which would be necessary. “This is one of the biggest challenges in the proposals,” says Hindle Barone. “It is not practical to make sweeping changes and expect them to be implemented in six months.”

What about corporates?

The biggest investors in MMFs are corporate treasurers who need to hold large amounts of cash on a short-term basis and who do not want to put all of their cash in one single bank deposit account. MMFs provide a high degree of liquidity, diversification and stability of value which is combined with a market-based yield. In Europe, the split between CNAV and VNAV models is roughly 50/50, according to the EC. The 3% buffer would apply to CNAV funds, to build up a cash reserve and give the fund a buffer in the event that the value of the share dips below €1.

Mireille Cuny, Global Head of Liquidity and Investment Solutions, Société Général Corporate and Investment Banking (SGCIB), thinks that it is fair that the regulators underline the fact that there are no capital guarantees with MMFs. “Corporate treasurers are realising that, in an environment where short-term rates are very low, credit spreads are decreasing and asset managers have increasing internal costs because of incoming regulations, the return on MMFs can be very low or even negative.”

But will the proposed regulation change corporates’ investment strategy? Cuny believes that MMFs will remain attractive for those corporate treasurers that manage less cash, ie up to €50m, and who can’t develop the minimum expertise needed in-house. “If a corporate has few resources but a lot of volatility in its cash, then an MMF is probably a good investment instrument because the company can still benefit from diversification and an asset manager’s expertise. In addition, if a corporate is managing a lot more cash, it might still make sense to use MMFs for the very volatile cash between one and 30 days maturity. But for cash beyond the 30-day mark or for higher amounts where a corporate needs to monitor its diversification, then it is probably better to invest directly in commercial paper, or look for a bank deposit with some investment solution attached.”

An example of new developments in the latter space is SGCIB’s liquidity and investment solutions desk launched in 2011. Via the desk and in dialogue with its corporate clients, the bank has developed rolling deposits paying a fidelity premium, increasing at each roll. The ‘roll period’ is defined with the client according to their business constraints. The bank also offers notice call accounts and other solutions with daily liquidity, by taking into account the client’s estimate of the steadiness of the cash.
SGCIB’s rolling deposit solution has attracted more than €1 billion. “It is not only the €1 billion which is impressive, but also the fact that corporate clients all over the world are interested in this solution,” says Cuny.

What you can do

As the proposals start moving through the political process, there is still time to influence the decision-makers. The IMMFA is working together with the Association of Corporate Treasurers (ACT) to ensure that the corporate voice is heard. Each member of the association will also be reaching out to its investors to get involved in the debate.

Hindle Barone recommends pointing out directly to local MEPs, as well as representatives from the Bank of England (BoE) and the Treasury how damaging these proposals could be. “We are encouraging anyone who cares about this to make their voices heard, whichever avenue that takes,” she says. “We are trying to explain that this has a real impact on the broader economy and we struggle to get that message through.”

And input from the real economy could make a significant difference to the end result. For example, in his keynote speech at the annual IMMFA dinner in June, Sajid Javid MP, Economic Secretary to the Treasury, indicated the UK government’s strong commitment to the MMF industry. The time is nigh to get involved in the debate.

Is SWIFT service bureau consolidation a good thing?

September 2013

Treasury Today asked a similar question at the beginning of the year with regards to consolidation in the TMS space, after Wall Street Systems swallowed IT2. But does it make a difference that SWIFT itself is pushing for greater consolidation in the market?

With Bottomline Technologies’ recent announcement that it was picking up two SWIFT service bureaus (SSBs) – Sterci and Simplex – in one go, whether or not consolidation in the marketplace is in the best interest of the clients they serve becomes a topic of immediate concern.

According to SWIFT, of the more than 850 corporates who have a SWIFT BIC, 80% are supported by an SSB. Worldwide there are more than 130 SSBs that operate their own infrastructure.
The SSB space has seen a rash of acquisitions over the past few years. This isn’t Bottomline’s first foray: in October 2010 it picked up SMA Financial. In addition, SunGard acquired Syntesys in September 2011, whereas Fundtech was an early mover, acquiring three bureaus: BBP (1999), Datasphère (2004) and Synergy Financial Systems (2008).

For Bottomline, these recent transactions build on the financial messaging expertise that SMA Financial brought to the organisation. “That experience has been a great success for us – the business doubled in terms of revenues in three years and brought us some important customers – so that made us hungry for more,” Marcus Hughes, Director of Business Development, Bottomline Technologies, told Treasury Today. “By adding Sterci and Simplex, the group now has more than 530 financial messaging customers in over 20 countries using us for SWIFT, with 200 SWIFT experts in key financial hubs, such as Geneva, Frankfurt, London, New York, Paris, Toronto and Singapore. We have expanded our global footprint in order to support our growing customer base.”

But is consolidation in the best interest of the market as a whole? Hughes argues that the trend has been encouraged by SWIFT itself and its member banks. "The financial community wants fewer but stronger SSBs to mitigate operational risk, which is consistent with what we are trying to accomplish – we are helping that flight to quality.”

It is true that in the recent years SWIFT has made the criteria for operating as a SWIFT-certified SSB much stricter, including the new SWIFT Shared Infrastructure Programme. All service bureaus will have to comply with minimum operational practice requirements by the end of 2013, and with even stricter standard operational practice requirements by the end of 2015. The intention is for SSBs to “demonstrate high standards of security and resilience, as well as appropriate business practices”, according to SWIFT.

Bottomline is creating a new global centre of excellence in financial messaging with a growing product range to support its customers, to make them feel “secure and confident” about their SWIFT connectivity, explains Hughes. The company is also adding many value-add services in the cloud around payments, reconciliation, data transformation, SWIFTNet funds messaging, data management, etc, in order to reduce cost and risk and cater for a full range of customers – banks, corporates and non-bank financial institutions (NBFIs).

This trend towards consolidation in the SSB market is set to continue and may impact the treasury management system (TMS) market, according to Enrico Camerinelli, Senior Analyst in Wholesale Banking at Aite Group. “Bottomline adds the capability to reach out to both corporate and banks, which further increases its competitive advantage. It can also claim experience in supply chain finance (SCF). This additional capability positions Bottomline as a serious partner for TMS vendors which want to help their clients extend the reach beyond the four walls of the corporation. Therefore, Bottomline is a serious contender in the TMS arena for a possible acquisition of a local treasury system vendor.”

Do you have a plan B for SEPA?

August 2013

The golden rule in any project design is to always have a Plan B. It’s becoming clear, however, that there is no fall-back plan for the Single Euro Payments Area (SEPA), despite all indications that many corporates will not be ready in time.

One in three companies is still at risk of not being ready for the upcoming Single Euro Payments Area (SEPA) deadline of 1st February 2014, according to a PwC report, ‘SEPA Readiness Thermometer August 2013 update – Prepare a Plan B’. A survey of 150 companies about their state of readiness indicate that companies have underestimated the effort required to comply, and few of them have a back-up plan should they fail to be ready in time.

According to PwC, 26% of respondents admit they have no readiness activities planned. This percentage has not decreased since its January survey.

“If every third company were unable to instruct its bank to settle its obligations, this would be alarming news to all,” explains Bas Rebel, Senior Director Treasury advisory at PwC in the Netherlands. “This goes beyond reputational damage to the individual company; it may create a backlog in repairs at banks and liquidity problems for beneficiaries.”

Interestingly, despite the European Payments Council’s (EPC) edict that “there is only plan A, so act now”, effectively dismissing the possibility of postponing the deadline, a mere 20% of respondents believe that the regulators will strongly enforce the deadline and disallow legacy formats to be processed by the banks. A few respondents (6.5%) still expect and actual postponement of the official deadline.

But corporates shouldn’t rely on this possibility becoming a reality.

 

Prepare your back-up plan

SEPA projects take on average six to 12 months. With less than 110 working days left until 1st February, the pressure is on for corporates to reach compliance in time for the deadline.
In the eventuality that they are not ready, less than half (46%) of the respondents admit to not having thought about a back-up plan, with 16% relying on assistance from their bank. Hardly any respondents have implemented or tested a back-up plan.

“The 34% of companies at high risk of not meeting the deadline should now seriously consider a back-up plan,” says Rebel. “But they should understand that a back-up plan cannot be implemented overnight. It needs preparation and does not necessarily provide a shortcut for all aspects of ‘plan A’.”

In the report, PwC makes a number of recommendations for those corporates preparing their plan B. The back-up plan should provide a clear scenario that can be followed should they be unable to make payments after the go-live date, such as:

• Temporarily switch back to the legacy payment schemes.
  
• Prepare for using a conversion service to produce SEPA-compliant payment batches.
  
• Prepare a communication plan to inform your stakeholders about delays.
  
• Have a credit facility on standby to cover short-term liquidity dips, in case your clients are unable to make payments.
  
• Prepare alternative payment products, such as bill payments, online money transfer schemes or other payer initiated payment schemes, in order to be able to get paid.
  

To read the full report, please click here.

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.

 

Details

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.”

 

Benefits

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.

 

Challenges

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?

 

Europe

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%.

 

US

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.”

 

Asia

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.”

 

Acquisitions

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