We Celebrate the Best-In-Class Deals and Teams from Last Year

The Treasurer

COULD DO BETTER THE FX CONUNDRUM FUTURE PROOFING Underfunding remains an issue Proposing a framework for How treasurers optimise technology for smaller corporates alternative strategies to support change and growth February 2016

THE MAGAZINE OF THE ASSOCIATION OF CORPORATE TREASURERS FEBRUARY 2016 The Magazine of The Association of Corporate Treasurers

PLUS A GOOD MIX Ralph Findlay and Rob Leach of Marston’s on teamwork and solid financial foundations

We celebrate the best-in-class deals and teams from last year www.treasurers.org/thetreasurer www.treasurers.org/thetreasurer

www.treasurers.org/thetreasurer TOGETHERSUPPORTING SUCCESS IN TREASURY

Lloyds Bank is committed to supporting excellence in treasury together with The Treasurer’s Deals of the Year Awards.

We remain dedicated to helping our customers achieve their funding requirements and would like to congratulate all of the winners.

In particular, we would like to congratulate British American Tobacco for winning the Bonds above £500m & Treasury team above £2bn market cap categories, National Grid – Corporate Finance, Worldpay – Loans above £750m and Easyjet – Loans below £750m. These were all deals we were proud to support.

lloydsbank.com/commercial

Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under Registration Number 119278. Lloyds Bank plc. Registered Oce: 25 Gresham Street, London EC2V 7HN. Registered in England and Wales no. 2065. Telephone: 0207 626 1500.

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The Treasurer is the official magazine of The Association of Corporate Treasurers 68 King William Street, London EC4N 7DZ United Kingdom +44 (0)20 7847 2540 +44 (0)20 7374 8744 [email protected] www.treasurers.org Engagement director Peter Matza Policy and technical Steve Baseby, Michelle Price Editor’s letter Sponsorship director Denis Murphy ADVERTISE WITH US For all enquiries, contact Tom Fountain It has become something of a cliché to declare market and exchange rate volatility as the new +44 (0)20 3771 7250 normal. But with no ceasefire in sight, or seemingly likely in the near or distant term, resisting that [email protected] idea is probably fairly futile. or Dan Gallagher +44 (0)20 3771 7244 So it is immensely to their credit that the winners of The Treasurer’s Deals of the Year Awards [email protected] 2015 have achieved their goals and those of their organisations in a global trading environment that grows more involved with each year that passes. Last year may come to be known as the most THE TREASURER ©2016 Published on behalf of the ACT by complex year for corporate treasurers yet. Just until we come to write a review of 2016, perhaps. Think, Capital House, Our coverage of this year’s winners begins on page 21. In our awards, we celebrate the bonds 25 Chapel Street, London NW1 5DH and loans executed by UK and European corporates and detail the fundraising achievements of +44 (0)20 3771 7200 our winners. In our team categories, we applaud the contribution that corporate treasury teams www.thinkpublishing.co.uk Editor Liz Loxton make to their organisations through sound treasury management; strong technical knowledge and Managing editor Rica Dearman ability; innovation in technology and systems; and their ability to build strong relationships with Art editor Finn Lewis the company’s bankers and advisors. Cover illustration Peter Crowther Group account director Jackie Scully Once again, our winners set the bar extremely high in their ability to handle that volatility, risk Managing director Polly Arnold and complexity. Congratulations to all our winners and runners-up. SUBSCRIPTIONS In this issue, we also meet the treasury team at Marston’s Brewery in the UK. Once a regional Europe, incl. UK (per annum) 1 year £260 | 2 years £370 | 3 years £480 brewing and pub business, today Marston’s is a national business with an organic growth plan that Rest of world many organisations would envy. That plan includes some 20 new pub openings for 2016 based on 1 year £295 | 2 years £455 | 3 years £600 a £140m investment against a market cap of £950m. It’s a programme that requires solid financial Members, students and IGTA/ EACT members and cash management, of course. Head of treasury Rob Leach leads a dynamic team that has [Self-certified members of national treasury an advocate in CEO Ralph Findlay, himself a former treasurer. Turn to page 32 for more on the associations, including the AFP in the US] securitisation programme and structured finance that underpin their growth plans. 1 year £135 – UK and Europe (MUKEU) 1 year £175 – rest of world (MRoW) Growth funds – or the lack thereof – are the subject of our feature on SME finance. The absence For information, visit www.treasurers.org/ of funds and, in smaller entities, a dearth of know-how when it comes to accessing markets and thetreasurer/subscription courting backers is holding high-potential growth companies back. We explore the solutions that exist within this important sector on page 36. Elsewhere in the issue, we look at how US treasurers are facing up to their pain points on page 40 and offer an approach for framing alternative FX strategies on page 42. Printed by Pensord I hope you enjoy the issue. ISSN: 0264-0937 Events and Publishing Forum Members of the Events and Publishing [email protected] Forum (EPF) provide the ACT with strategic Follow us on Twitter @thetreasurermag and consultative support a) developing relevant issues with a medium-term horizon; b) apprising the ACT team of competitor developments; c) broadening the speaker and contributor network; and d) underpinning the ACT’s overall aims (in education, membership growth, international development). If you are THIS MONTH’S CONTRIBUTORS interested in participating in the EPF, please contact [email protected]

Anthony J Carfang Lesley Meall is an Dr Rob Yeung is is a partner with US experienced business an organisational consultancy Treasury journalist specialising psychologist Strategies. He assists in business, at leadership clients with treasury accountancy and consultancy solutions and is technology. Before Talentspace, a The copyright of all editorial in this magazine is reserved actively involved in regulatory becoming a journalist, she business speaker and an author. to the publishers. None of the articles published may be issues, testifying to the US worked as a software engineer. He appears as a business copied, duplicated or reproduced in any form without the prior consent of The Association of Corporate Treasurers. Congress on the Volcker Rule, Her article on how businesses commentator on the BBC, CNBC The Association of Corporate Treasurers, the publisher and Dodd-Frank and ‘too big to can optimise their technology and CNN News and writes on editor cannot accept responsibility for any claim which may fail’ issues. His article on the to support change programmes personal effectiveness and be made against a contributor arising out of the publication of any article or letter. The views and opinions expressed challenges faced by US treasurers and regulatory load can be found leadership. His article on how in this magazine are not necessarily those of the Council can be found on page 40 on page 48 to stand out is on page 50 of The Association of Corporate Treasurers.

www.treasurers.org/thetreasurer February 2016 The Treasurer 03 ACT ANNUAL CONFERENCE where treasury minds meet 18-20 May 2016 | ACC, Liverpool, UK

FINANCING TOMORROW INTEGRITY / INFLUENCE / INNOVATION

18-20 May 2016 | ACC, Liverpool, UK NOW OPEN FOR BOOKINGS AT treasurers.org/annualconference

To discuss sponsorship or speaking opportunities, email us today at [email protected], quoting ‘TT’

treasurers.org/annualconference

8041_ACTAC_Advert_1_TT_c.indd004_ACT_Feb2016.indd 4 1 25/11/201525/01/2016 17:0311:43 What do you think of this issue of The Treasurer? Please write to: [email protected] or tweet @thetreasurermag CONTENTS

BRIEFING “The objective is to Agenda 36increase the financial 08 Lease accounting security of the banks” reforms and balance sheets; Brian Welch, director of UserCare China’s fortunes and renminbi Treasury Consultancy devaluation; US banks and Brexit campaign; defined 36 benefits pension schemes 32 under pressure; UK SMEs and their trade aspirations: survey findings; US regulator Profile: Rob Leach to look at ETFs and variable and Ralph Findlay annuities; EU updates its 32 Marston’s head of treasury data protection rules; has the support of the brewing resignation at one of giant’s CEO, a former treasurer Greece’s big four banks; Bank of England gets Financing options tough on banker bonuses; 36 for SMEs Technical Briefing; ACT Smaller corporates are still diary dates struggling to find funding – but there are choices open to them COMMENT SKILL SET Jeremy Warner 15 Is cutting the size of CONTEXT OF TREASURY the state the way forward How US treasurers are in the post-crisis world? 40 tackling their ever- growing number of challenges Economic Trends 17 An economist’s FINANCIAL RISK viewpoint on what it would MANAGEMENT mean if the UK left the EU FX hedging – JOHN HOLCROFT/IKON IMAGES JOHN HOLCROFT/IKON 42 a framework for treasurers to consider? Treasury Insider INSIGHT Counterparty risk Proposals for shared 15 18 Deals of the Year Awards management service centres need to be met 44 We celebrate the with a cool head 21 TREASURY OPERATIONS winners of the most impressive The European market Peter Matza deals and teams of 2015 for tri-party repos The treasurer’s role 46 19 Technology: is constantly developing due Future-proofing to a number of changes in 48 the finance industry BEHAVIOURAL SKILLS How confidence can Month End contribute to success 54 A simple tale on 50 whether there’s not enough BUSINESS SKILLS cash in society or there’s too Qualifications: much debt in the economy 52 Calculating yields

www.treasurers.org/thetreasurer February 2016 The Treasurer 05 NEW MOON RISING

THE C9 MOONPHASE

Mankind has looked to the moon to tell the time for over 34,000 years and now, with the introduction of our in-house modification, Calibre JJ04, we are proud to join this tradition. With the continuous setting of this new complication the transformation of the moon is perpetually accurate with a tolerance of just one day in 128 years.

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021_ChristopherWard_TheTreasurer_DPS.indd All Pages 25/01/2016 09:52 NEW MOON RISING

THE C9 MOONPHASE

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021_ChristopherWard_TheTreasurer_DPS.indd All Pages 25/01/2016 09:52 BRIEFING

AgendaFor the latest news and comment in the treasury world, follow us on Twitter @thetreasurermag

{ } $3 CONTEXT OF TREASURY WORDS 000, 000, Lease accounting reform to bring 000, 000 $3 trillion onto corporate balance sheets “I’m expecting Corporates in more than 100 revisions that investors, analysts the balance sheet, they will need to 2016 to deliver

countries will be forced to bring and rating agencies can make consider revising bank covenants in an even tougher IMAGES GETTY an estimated $3 trillion of leases when assessing lease obligations. the lead up to adopting IFRS 16. onto the balance sheet in a major Companies with significant IFRS 16 is the third in a series of environment than overhaul of accounting procedures lease arrangements, such as reforms since the financial crisis, 2015. Prices and that has implications for lending airlines, retailers, travel and leisure aimed at improving transparency in margins across arrangements, dividend policies, operators, and manufacturers are corporate reporting. It follows IFRS commodities tax planning and share prices. expected to be among those most 15 Revenue from Contracts with The International Accounting deeply impacted. But all companies Customers, and IFRS 9 Financial markets will Standards Board (IASB) recently with significant numbers of material Instruments, both of which will continue to feel published IFRS 16 Leases. The off-balance-sheet leases will need to come into effect from January 2018. the squeeze.” standard requires quoted companies prepare for the implementation of Before European companies can use Sam Walsh, CEO at Rio Tinto, to bring operating leases onto the the standard from January 2019. the new standard, IFRS 16 will need has low expectations for balance sheet and, according to While corporates will have time to be ratified by the EU. the year ahead, following the IASB, will make companies’ to adjust to the new regime, with The FASB, the US accounting a “brutal” year in 2015. obligations more transparent the new rules potentially materially standard setter, is due to publish an SOURCE: THE TIMES, 15 JANUARY 2016 and eliminate the guesswork and increasing assets and liabilities on equivalent standard shortly. “We hope [the EC’s Cumulative Impact { QUESTIONS YOUR FD IS LIKELY TO ASK THIS MONTH } Assessment] will help eliminate RENMINBI DEVALUATION measures that What’s behind the latest controversy prompted panic in foreign forecasts, but not by much. threaten the real in China? exchanges and stock markets. China posted GDP growth of economy. In this Many commentators and investors What was the verdict? around 7% for last year and it’s believe the Chinese government and Investors have reacted with caution, forecast to slow to 6.5% for 2016. I would include securities regulators have deliberately withdrawing an unprecedented But it still accounts for around one-third the unnecessary intervened to devalue the renminbi amount of capital from China, amid of global growth. proposals to in reaction to China’s weakening fear the market there could go into So what’s the balance of opinion? introduce bank economic growth. This would have the freefall. The other side of this is that Apart from a concern that data out of effect of making it cheaper for foreign China’s initial growth phase and Shanghai is not entirely reliable, most structural reform consumers to buy Chinese goods, while its need to construct an industrial commentators seem to agree that and a financial conversely making it more expensive infrastructure is slowing. So global while China’s economic performance transaction for Chinese consumers to buy foreign- energy and commodity giants have lost is not as stellar as it once was, it is still tax, which run made imports. The Chinese account ground, which in turn has sparked the growing, bringing China in line with the is that the yuan’s recent fall is not the global rout in equities, with many stock rest of the world. In the past four years, counter to the result of a direct intervention and if they markets entering bear market territory. growth rates for the global economy growth agenda.” have erred it is because they have failed Should we be concerned about have remained well behind pre-1998 Simon Lewis, CEO of the to communicate adequately with the China’s fortunes? levels. Slower growth is now normal, Association for Financial global investment community. Either Probably not; it’s true that some of and a feature of the landscape that Markets in Europe, warns way, the renminbi’s fall in early 2016 the economic indicators have missed we somehow still struggle to grasp. against over-regulation. SOURCE: THE TELEGRAPH, 20 JANUARY 2016

08 The Treasurer February 2016 www.treasurers.org/thetreasurer { KEY FINDINGS OF THE WESTERN UNION BUSINESS SOLUTIONS INTERNATIONAL TRADE MONITOR } 27% 27.2% 76% of SMEs exported to Average proportion of SMEs export China in the second of revenues SMEs to Europe, which half of 2015. For gain from exports. remains the the first time this of SMEs are predominant was higher than the increasing the market for UK of UK SMEs have proportion exporting countries they are companies. seen their exports to the US (23.7%). exporting to and grow in the past are looking east. 12 months.

“The third leg of the debt { CONTEXT OF TREASURY } super-cycle does seem to be upon us. Anyone who WHAT FTSE 250 defined benefit pensions is still telling the ‘this time THEY is different’ story for China SAID schemes may be heading for extinction has their head in The remaining defined Changes to economic – £3bn worse than a year the sand.” benefit schemes offered conditions and increased ago. Only 49 companies Professor Kenneth What do you say? by FTSE 250 companies life expectancy of are still providing more Rogoff, Harvard Tweet us could be extinct within a pensioners have than a handful of current University, speaking @thetreasurermag year as tough economic contributed to the employees with DB at the World conditions, rising costs growth in liabilities. benefits. JLT estimates Economic Forum and increasingly aggressive According to JLT, some DB pension provision has in Davos. regulations take their toll. 14 FTSE 250 companies fallen by 16% in the last

GETTY IMAGES GETTY According to research have disclosed pension year alone. for JLT Employee Benefits liabilities that are greater Charles Cowling, (JLT EB), total disclosed than their stock market director of JLT EB, said: { CONTEXT OF TREASURY } pension liabilities among value. FirstGroup, Go- “The ongoing spend the FTSE 250 surged to a Ahead Group, Phoenix and service costs on DB Brexit: tally of US banks record £81bn at 30 June Group, Balfour Beatty and pensions before any 2015 – up from £75bn a Carillion are among those allowance for deficit backing ‘remain in’ year earlier. to have disclosed pension spending is a burden that Companies have tried liabilities that are more many boardrooms would to stem the growth of their than double the value of like to remove altogether. campaign rises to four pensions liabilities by their equity. We believe the majority Another three US banks have joined Goldman closing DB schemes to new The total deficit of FTSE 250 companies Sachs in donating funds to the campaigning group, entrants, and sometimes for FTSE 250 pension will cease DB pension Britain Stronger in Europe, a report in the Financial all members, but this has schemes at 30 June 2015 provision to all employees Times has said. had little impact. was estimated to be £12bn within 12 months.” The new donors, JPMorgan, Morgan Stanley and Bank of America will commit substantial funds to the campaign, but are not expected to match the £500,000 that Goldman Sachs has given. $0.5 trillion $3.6bn The campaign would not be drawn on the specifics NUMBERS The estimated The level of venture of the donations, said the paper, but will face a legal aggregate value capital funding received obligation to publish a full list of donors in the spring. of technology by UK technology The US banks are reputedly concerned about unicorns at the end companies – a 70% the administrative burden an exit from the EU of 2015, according annual rise, according would bring, including vast amounts of contract 0.4% to M&A firm to CB Insights. renegotiations covering derivatives, loan agreements Greece’s inflation figure Magister Advisors. and credit default swaps. US bankers have gone on for December; its record about their fears. Morgan Stanley’s president, 0.75% first positive inflation Colm Kelleher, has argued publicly that an exit would 37% The deposit interest bring about a significant backlash against London as a reading since 2013. The proportion of UK rate in Switzerland. global financial centre. pension schemes Taxpayers are being The Vote Leave campaign, meanwhile, has received 141% reporting instances encouraged to significant funding from hedge fund chiefs. Leaders of Venezuala’s official of fraud in 2015, up pay their tax bills all kinds of financial institutions are likely to provide inflation figure. from 17% in 2013, as late as possible significant funds for both campaign groups. Commentators argue according to a survey so that authorities The four banks plus Citibank employ 30,000 workers that 200% may by accountancy aren’t penalised by in their London investment divisions. more accurate. firm RSM. holding cash.

www.treasurers.org/thetreasurer February 2016 The Treasurer 09 INTERNATIONAL BRIEFING

{ KEY FINDINGS FROM THE ALLEN & OVERY ANNUAL CORPORATE FUNDING MONITOR } { CONTEXT OF TREASURY }

Year-on-year fall in new leveraged $6 trillion Total funding SUPER-JUMBO loans due to deterioration in the for corporates during 2015 LOANS FUEL oil and commodities sectors, – only the second year THE SECOND RECORD syndication issues and the Federal in history this level has STATS Reserve’s leveraged lending guidelines. been breached. YEAR IN M&A Total funding for corporates remained above $6 trillion last The total amount Amount of new capital $1.58 trillion $450bn year for only the second time in of investment-grade loans in 2015 issued by public companies last year. history as the return of the ‘super- – a steep rise and overtaking the value jumbo’ loan fuelled a record rise in of investment-grade bonds for the first 94% Record rise in investment-grade investment-grade lending values. time since 2007. lending values during the year. According to the latest annual Corporate Funding Monitor from law firm Allen & Overy (A&O), the rise in lending values, including large-scale short-term bridge { AROUND THE WORLD IN 30 DAYS } financing, was a healthy 94%, thanks to booming mergers and acquisitions activity. DOUBTS PERSIST OVER US ECONOMY The clearest trend of 2015 was The strength of the US the steep rise in investment-grade economy remains in loans which hit $1.58 trillion and doubt, despite December’s overtook the value of investment- Federal Reserve decision SHUTTERSTOCK grade bonds for the first time to raise interest rates by a since 2007. quarter point. It was also a record year for Disappointing retail sales follow-on equity issues, with almost figures showed a 0.1% fall in $450bn of new capital issued by the final month of 2015. After public companies around the world. stripping out car and petrol Richard Cranfield, partner at sales, and other factors such A&O, said: “The jumbo M&A as construction materials, trend in 2015, which required large- sales were down 0.3%. scale bridge financing, has resulted The data showed total in a sharp rise in the number of sales rising 2.1% in 2015 – San Francisco, US loans scheduled to mature in 2016, the slowest pace of growth which will contribute to a bumper since 2009 – prompting The payment draws a biggest financial shocks year for bonds. some economists to question line under the affair which for years. “Of the $360bn lent to corporates when the Fed would again saw Iceland’s banking Economists subsequently in the top 20 investment-grade be in a position to hike the insurance scheme unable forecast the country’s deals, 38% was bridge finance – cost of borrowing from its to cover deposits and economy will grow by 1-1.5% we envisage these loans will be historic lows. sparking years of protracted this year following 2015’s refinanced in the investment-grade Government bond prices international litigation. decline in consumption, bond market with little difficulty.” have risen since the data Iceland’s financial trauma increased pressure on wages One downwards trend was in was published. led to capital controls being and job losses. leveraged loans, which fell sharply in imposed to protect the But the country has 2015 after two years of strong growth. Iceland refunds UK treasury nation’s krona currency. started the year weakly Elsewhere, the maturing of the Britain has received the Once creditors are paid off with analysts downgrading European high-yield bond market final payment from Iceland Iceland will be able to lift their forecasts for growth. means it is now seen as a normal following the collapse of these controls, which have The Credit Suisse instrument for chief financial Landsbanki, one of the held back investment. ZEW index, which officers and treasurers of any country’s banks which gauges respondents’ sub-investment grade company in failed during the 2008 Swiss shocks expectations for the next Europe. While issuance dropped financial crisis. Switzerland was already six months by measuring last year, total high-yield issues in The UK Treasury said it facing a difficult 2016 after the difference between Europe are now a fifth of the wider had received £740m from the the Swiss National Bank forecast improvement and bond market. Landsbanki estate, which ran suddenly removed the deterioration in the economy, A steady flow of loans and bonds the online savings business exchange rate cap of 1.20 slipped to -3 in January are maturing each year until 2020, Icesave, taking the total paid Swiss francs to the euro last from 16.6 in December – its which A&O said indicated a healthy back to £4.5bn. January. It was one of the weakest level since last July. flow of transactions over the next few years.

10 The Treasurer February 2016 www.treasurers.org/thetreasurer { RISK MANAGEMENT } { CONTEXT OF TREASURY } US regulator to spotlight EU DATA LAWS TO BRING IN FINES ETFs and variable annuities FOR BREACHES The US Securities and Exchange It is the regulator’s intention to evaluate If financial losses arising from data Commission (SEC) has declared its liquidity-related risk-management practices breaches and cyber crime were not enough regulatory agenda for 2016, setting its sights among broker-dealers and investment advisers of an incentive to take technology security on key financial products for investigation. and to look at their compliance with last year’s seriously, the EU has announced data The US regulator has said that protocol aimed at improving technology protection laws that could see corporates investigations of financial products including infrastructures in the US securities market. fined up to 4% of their global turnover. variable annuities and exchange-traded funds In addition, the regulator will use big After three years of negotiation, the (ETFs) will be prioritised, along with scrutiny data techniques to assist its investigations EU’s modernisation of its data protection into how institutions promote these kinds of into anti-money laundering compliance, laws will bring in mandatory data breach products. Liquidity controls, cybersecurity, microcap fraud detection and reviews of notifications, tougher restrictions on microcap fraud and fee selection will also be excessive trading. It is hoped data analytics profiling and a requirement to appoint on its radar over the course of the year. will help OCIE examinations of what it a data protection officer. The SEC’s Office of Compliance, deems to be high-risk areas. Corporates will now have two years to Inspections and Examinations (OCIE) will SEC chair Mary Jo White said: “These prepare for the changes, but in that period carry out the required legwork as part of the new areas of focus are important across the many will need to radically overhaul their spectrum. Through information sharing and collection and use of customer data. It is the regulator’s conducting comprehensive examinations, Jens Puhle, managing director of cyber intention to evaluate OCIE continues to promote compliance security firm 8MAN, said: “With the strict with the federal securities laws to better new rules on data protection agreed by liquidity-related risk protect investors and our markets.” the EU, meaning that large firms could regulator’s intentions to increase protection now see the cost of data breaches reach for retail investors, and has announced it will the billions, there should no longer be a explore how products like ETFs are structured single organisation leaving any element and the trading practices around them. It of their data protection to chance. Harsh will also make recommendations and explore financial punishments appear to be the disclosure in the variable annuities market. best way to drive home the message that “To help fulfil the SEC’s mission of data security should be at the top of maintaining fair, orderly and efficient the agenda for the board and extend markets, the OCIE will continue its throughout the organisation.” focus on cybersecurity controls at broker Under the new regime, corporates will dealers and investment advisers,” said an SEC chair, need to provide complete visibility on how Mary Jo White SEC spokesperson. IMAGES GETTY and when data is accessed.

government and The Bank of England Tucker goes to US regulator Committee and served on US hedge fund Paulson wants to tackle situations Former deputy governor the board of the Bank of MAKING & Co, the bank’s leading where bankers receive of the Bank of England International Settlements. THE foreign shareholder. bonuses, but move on to Paul Tucker is to chair UK interest rates on hold NEWS Piraeus Bank has been another employer before independent US regulator, Expectation of rising widely seen as the poorest any poor conduct or the Systemic Risk Council, interest rates in the UK performer among the reckless behaviour can succeeding the founding receded when Bank of Greek bank CEO resigns country’s four biggest be detected. chair Sheila Bair. England governor Mark Greece’s economic banks. But Thomopoulos The proposed rule As well as his role at the Carney announced another reconstruction continues had enjoyed the support of changes target buyouts, Bank of England, Tucker hold, as falls in the oil price, to be hit by controversy, investors including Paulson when a bank compensates has served as a member of uncertainty in new markets with the Piraeus Bank & Co, which holds a stake a new employee for any the G20 Financial Stability – particularly China, and chief executive standing of 9%. unpaid bonus that may Board’s steering group. slower-than-expected down last month in the Bank of England to get have been cancelled in the The Systemic Risk growth in the UK marked face of apparent mounting tougher on bonuses event of a job change. Council was formed to the turn of the year. government pressure. In what is regarded as one “Individuals should monitor and encourage Carney indicated that Anthimos Thomopoulos’ of the world’s toughest be held accountable for regulatory reform of US the bank would wait to resignation came as a regulatory climates on their actions and not be and global capital markets, see greater progress on result of state pressure, bankers’ conduct, the able to actively evade the focusing on systemic risk. growth, a firming in UK according to a report by UK’s central bank is set consequences of their Tucker, who left the Bank domestic cost pressures the Financial Times, and to introduce new rules actions,” said Andrew of England in 2013, was also and more certainty that followed prolonged conflict enabling bonuses to be cut, Bailey, deputy governor of a member of the bank’s inflation is moving closer between Greece’s left-wing stopped or clawed back. the Bank of England. rate-setting Monetary Policy to its 2% target rate.

www.treasurers.org/thetreasurer February 2016 The Treasurer 11 TECHNICAL BRIEFING

For those based in the EU, we have the Call for Evidence. For those in the UK, we have HM Treasury’s initiative on BEPS and THIS the Payment Systems Regulator’s advice as to how its own £15m MONTH cost will be spread across the payments industry. If you have views you’d like the ACT policy and technical team to take into account in responding to any of the subjects covered in this article or elsewhere FINANCIAL in The Treasurer, please email us at [email protected] REGULATION Steve Baseby is ACT associate policy and technical director @BasebyStephen

{ IN DEPTH } EU REGULATION: PAUSE FOR THOUGHT The EU Commission The disclosure concern issued a Call for Evidence remains for corporates and to review the state of this arises from efforts to EU financial regulation make the risk factors more (see tinyurl.com/obgupfg) readily readable to retail following the six years of investors. The corporate implementing legislation concern is not so much because “…there is a need the degree of disclosure, to understand their but that efforts to prescribe combined impact and risk disclosure and ranking whether they give rise to any of risks will constrain unintended consequences.” discussion with the The ACT has responded by longer-term exposure to the due date, which had been investors claiming they extended to end January were not appropriately 2016 (see www.treasurers. informed by debt issuers org/EU-Call-for-Evidence) and sponsors. Yet another after consulting the ‘unintended consequence’ Treasurers Forum to gather of noble efforts. ‘real economy’ examples of We will continue to the Call for Evidence derivatives over time and adverse effects of legislation. monitor the implementation discussed above. some non-financial This has been a welcome of these proposals and keep Check your EMIR data corporates (NFCs) may exercise for corporate members updated. What this discussion has find they unwittingly exceed treasurers and an EMIR shown is mistrust of the the clearing threshold opportunity to put responses The EMIR consultation high percentage of corporate as collateralisation is on specific subjects such was completed in August. derivatives reported as progressively implemented as European Market Since then we have met with non-hedging, which is over the next three years. Infrastructure Regulation the UK Financial Conduct 14% across Europe. The Central clearing (EMIR) into context. We Authority, Directorate- conclusions can only be that Central clearing, that is discuss EMIR below, but General for Financial either data is mis-recorded collateralisation of margin, do please feel free to provide Stability, Financial Services or that taking speculative commences in June 2016 any further comments on the and Capital Markets Union positions is more prevalent for OTC interest rate swaps state of legislation to assist us in the Commission and than had been expected for NFC+s. in our ongoing dialogue with European Securities and when the hedging exemption We strongly recommend regulatory authorities in the Markets Authority to present was agreed for corporates. that direct reporters check UK and the EU. the corporate treasurers’ Talking to both the their use of the clearing Prospectus Directive view and gain a better regulatory side and threshold fields, and The EU Commission has understanding of their treasurers suggests that delegated reporters gain published its proposal concerns and intent. delegated reporting and access to their trade data for updated regulations, We do not expect complex field specifications at trade repositories and known colloquially as further change to, or public for direct reporters may be ensure they are content PD3, which reflects last discussion on, EMIR leading to mis-recorded that hedge transactions month’s briefing (see tinyurl. until the Commission trades. Couple this with the are reported as such. com/jh5nufo). has been able to digest compound effect of layering

12 The Treasurer February 2016 www.treasurers.org/thetreasurer View technical updates and policy submissions at www.treasurers.org/ technical. Elsewhere on the web: NEW A reminder of The Treasurer’s Wiki: ON THE www.treasurers.org/wiki WEB Delay in the publication time of the European Central Bank FX reference rates from 14:30 CET to 16:00 CET as of 1 July 2016: www.ecb.europa.eu/ press/pr/date/2015/html/pr151207.en

{ TECHNICAL ROUND-UP } { INTERNATIONAL } EBA, VICKERS AND PSR LEASE ACCOUNTING EBA SHADOW-BANKING INITIATIVE UK PSR ANNOUNCES STANDARD The Euro Banking Association (EBA) FEE ALLOCATIONS PUBLISHED has published its guidelines on The Payment Systems Regulator IFRS 16 shadow banking (see tinyurl.com/ (PSR) has published for consultation As reported previously in Technical Briefing goaqljh), which recognise the use its 2016/17 allocation of its £15m (see The Treasurer, September 2015), the of treasury companies. budget (see www.fca.org.uk/news/ International Accounting Standards Board has UK members should not be cp15-44-psr-regulatory- completed its re-deliberations and published the affected by the essential thrust of fees-2016-17). Fees long-awaited IFRS 16, Leases accounting standard. the EBA, which has been to bring will be allocated The new standard will apply for annual periods ‘credit intermediation’ and ‘maturity over the main beginning on or after 1 January 2019. Early adoption transformation’ activities under banking payment is permitted if the entity also applies IFRS 15, regulation. UK practice has been for services, Revenue from Contracts with Customers. regulators to oversee finance arms which the PSR Broadly speaking, the new accounting standard of corporates, but the EBA document regulates (Bacs, requires a customer leasing assets (lessee) to provides guidance for those businesses CHAPS, Cheque recognise assets and liabilities for all identified seeking to promote sales aid financing. and Credit, Faster leases. This includes leases that are currently IMPLEMENTATION OF VICKERS Payments Scheme, off-balance sheet, as IAS 17, Leases required only IN THE UK LINK, Northern finance leases to be recognised on the balance sheet. As the banks start to agree their ring- Ireland Cheque Clearing, One of the first steps when implementing will be fencing structures with the Financial MasterCard and Visa Europe), as to identify whether a contract is, or contains, a lease Conduct Authority, members need to well as the interchange fee over card and the standard contains application guidance to start working with their key relationship service providers. assist users in interpreting the lease definition. banks to understand how the banks Although a significant reduction For many companies, this will result in a are planning to restructure in order from 2015/16, which included a grossing-up of the balance sheet, potentially to identify which entity or entities of £12.2m ‘one-off’ set-up cost, these fees impacting financial covenant ratios that include the bank they will transact with and can only trickle down to transaction ‘debt’, ‘net financial position’ or similar indicators. the new level of counterparty risk they fees. The ACT does not propose a EBITDA and the interest cover ratio are also likely may be exposed to. formal response. to be impacted.

{ WATCH THIS SPACE } ARE YOUR SYNDICATED LOANS TRULY COMMITTED? Article 55 of the Bank Resolution country, as long as an EEA financial However, as part of the resolution as committed as you think, and your and Recovery Directive – which institution has any potential liability process, regulators will also look documentation will almost certainly provides regulators with a common under the document. This means to address the liabilities side of the need revisiting to ensure that set of tools and powers for dealing that practically all loan facilities bank’s balance sheet and, as a result, appropriate language is included. with failing banks – becomes will now be caught if you have loans and similar liabilities may be The Loan Market Association has effective from 1 January 2016. relationships with European banks. subject to bail-in actions, which may issued guidance, but you may need This extends the existing write- It is widely understood that, in the include a reduction of the principal to talk to your legal advisers, as the down and conversion powers of event of a bank entering resolution, or outstanding amount, or even the whole area is far from clear. European Economic Area (EEA) deposits with that bank may be cancellation of the facility. This also emphasises the regulators to include documents converted into share capital or in This means that many (if not all) importance of checking the credit governed by the law of a non-EEA other ways ‘lost’ to the corporate. of your loan agreements may not be strength of your banking partners.

www.treasurers.org/thetreasurer February 2016 The Treasurer 13 BRIEFING

including governance, risk, investors’ expectations Also, make every effort to understand the and the impact of FX volatility. Taking instant significance of global financial events and their decisions appropriately is a great feeling; that’s impact on your business model. what I enjoy the most. What’s your ultimate career goal? What’s the best thing about being a treasurer? To become a top contributor within an It’s a great responsibility and an exciting job, with organisation, to create wealth for it and its the opportunity to add value and raise funds investors, and to champion risk management as needed or even in a crisis. There is also the and good governance. satisfaction of completing a great FX deal. Who is your greatest inspiration and why? PREM K THAKUR What’s the most unusual responsibility Life is always changing, so the individuals I’ve AVP IN TREASURY AND FINANCE, you have as a treasurer? looked to in the past are not same as now, and STERIA (INDIA) LTD We have strong governance and control in place, doubtless won’t be the same in the future. hence I deal in treasury only. If you weren’t a corporate treasurer, what How did you get into treasury? What’s the most important lesson you’ve would you be and why? Since the start of my career, I’ve been fascinated learned during your career? I’ve spent 16 years in corporate treasury, but by the interplay of money, global financial I am a great learner and experiment regularly. if I hadn’t done that, I would have been an systems, economics and banking. These interests This job has given me a platform to be innovative, investment banker or financial consultant. drew me towards treasury. disciplined, to build a great team and manage If you would like to star in our 60-second What do you like about treasury? the fine balance that exists between policy and interview slot, email [email protected]. Everything; every challenge! Treasury works on operational needs. Please provide a photo of yourself, your email a real-time basis and there is a pressing need to What would be your best piece of advice to address and telephone number. We won’t publish balance regulatory issues, economic drivers and anyone considering a career in treasury? your details – it’s just so we can contact you in management strategy with other considerations, Be open to learning and accept new challenges. the event of queries.

13 April, London management processes, then this corporates. Get your most pertinent Foreign exchange is for you. The course develops an questions answered, and make the Learn about the different types of understanding of the powerful political most of increased networking time. FX risk and some of the instruments agenda behind Fintech, and provides www.treasurers.org/cashmanagement used to manage them, how they a framework for filtering the many 9 March 2016, Düsseldorf, Germany are traded and the risks around this. announcements and approaches you ACT Europe Conference 2016 14 April, London will be subjected to. Organised in partnership with the Interest rate risk 3 May, London Verband Deutscher Treasurer, this is Gain a deeper understanding of the Treasury, security, control and audit the ideal occasion for treasury and many aspects of interest rate risk, Develop an understanding of how to finance professionals from across TRAINING, EVENTS how it affects different firms and its create a secure environment in which Europe to come together and discuss inevitability. This PC-based course treasury transactions can be managed their key challenges. & WEBINARS will teach the concepts for evaluating and carried out with minimum risk of www.treasurers.org/europe different aspects of interest rate risk, fraud or error. Learn about assurance 18-20 May 2016, Liverpool ACT TRAINING with hands-on modelling experience. practices to effectively plan and ACT Annual Conference 2016 15 March & 12 April, London 19 April, London execute a risk-based treasury audit. Join more than 1,000 corporate Treasury in a day The nuts and bolts of 9-13 May, London finance leaders and learn how digital A one-day introduction aimed at cash management The A-Z of corporate treasury advancements and global disruptions anyone new to treasury. You will learn Develop an understanding of the An intensive five-day overview of are shaping the future. This year’s about the role of a treasurer within the principles and practices of cash treasury management, perfect for new theme is ‘Financing tomorrow – context of business, and be introduced and liquidity management, and its entrants to the profession, bankers and integrity, influence, innovation’. to key treasury concepts and importance to the business and those working alongside the treasury. www.treasurers.org/annualconference commonly used financial instruments. treasury function. Learn about corporate treasury within 22 March, London 20-21 April, London the context of international markets, ACT WEBINARS Working capital optimisation Advanced cash management and build a deep insight into the core Giving direction on regulatory Understand why working capital The cash management marketplace is areas and how they function through a change and key treasury concerns management is vital for the generation morphing. New techniques are being mix of theory and practical application. Led by the ACT’s policy and technical of sustainable cash flow and survival introduced: partner banking, SWIFT To view more courses or to book experts, ACT webinars give direction of companies. The course deals with Corporate Access, ISO20022. And online, visit www.treasurers.org/ on regulatory change and key treasury the principles of payables, inventory regulators, whether via SEPA or Basel III, training. For more information, contact concerns direct to your desk, wherever and receivables management. are enabling competition to traditional Radmila Trkulja at rtrkulja@treasurers. you are in the world. 23 March, London banks. This course will prepare you org or tel +44 (0)20 7847 2573 For details of our 2016 Cash forecasting fundamentals for the changing environment. webinar programme, visit ACT EVENTS Learn how to review or 26 April, London www.treasurers.org/webinars redesign your cash forecast BRAND Fintech storm 10-11 February 2016, London To attend an ACT webinar, book framework. Learn a ‘best fit’ NEW If you’re involved in online at www.treasurers.org/ BRAND ACT Cash Management Conference methodology for assessing/ eCommerce, payments, NEW Europe’s largest conference devoted events. For more information, email designing an appropriate forecast financial supplier to cash management, featuring [email protected] or call environment for your organisation. relationships or cash world-class case studies from leading +44 (0)20 7847 2589

14 The Treasurer February 2016 www.treasurers.org/thetreasurer COMMENT

{ WELFARE SPENDING } JEREMY WARNER Cutting back on the size of the state makes for energetic political debates – and there is only so much that can be achieved in any case

What is an appropriate challenge, automatically size for government? limiting its ambitions for This question is once a significantly smaller state. again centre-stage in the British In countries that spend the political debate after a spending least relative to size, healthcare review that aims to reduce and pensions are likely to be government as a share of GDP provided privately so that to 36.4% in five years’ time, they are taken out of taxation from an expected 40% this year. altogether. Switzerland is A similar argument is taking known as a relatively low- place throughout much of tax jurisdiction, but this is Europe. Is small, or at least largely because Switzerland’s smaller, government the way healthcare is privately paid forward in the post-crisis world for through compulsory social for economies struggling with insurance. If these premiums mountainous public debt? Or were counted as income does Europe’s social market tax or national insurance, economic model demand high Switzerland’s effective tax levels of spending and tax in burden would look much more the economy? like the UK’s, if not higher. Figures compiled for the Protecting welfare spending

International Monetary IMAGES KENYON/IKON MATT loads more of the work in Fund’s latest Fiscal Monitor cutting the state back to show big variations in size of significantly so. Even this 40% of GDP. Much above that, size onto what used to be government among advanced relatively unambitious target is and historically, tax raising thought of as core government economies, ranging from nonetheless proving extremely tends to run into the law of functions: policing, defence, less than 20% of GDP for difficult to achieve. Under diminishing returns. Already, local government and so on. Hong Kong and Singapore, pressure from backbench MPs, the top 1% of earners in the Advanced economy through 31.4% for Switzerland, the UK chancellor, George UK contribute more than a governments can certainly to approaching 60% for Osborne, has been forced third of income tax. Since do more to modernise the way Denmark, Finland and France. to scrap some of his planned many of these high earners are in which these public services Government’s share of spending cuts, including less likely to consume public are provided, but there is only the economy rocketed just reductions in income support services and are also relatively so far you can go before the about everywhere during and the police. mobile, it might well prove fabric of government begins the financial crisis, but as Ability to sustain a larger counterproductive to attempt to suffer. The bottom line is growth returned, it has since state without running up to tax them more. that, as long as welfare remains shrunk back down again – huge public debts depends at the heart of the political to an average of around 40% crucially on the willingness If it is hard to tax more, consensus, efforts to cut the for advanced economies, of the economy to tolerate it is proving even harder size of the state are likely to which is roughly where the relatively high levels of to cut by more, particularly prove marginal at best. UK sits at present. taxation. Some countries, when it comes to pensions If the government in particularly the Nordics and and healthcare, accounting the UK achieved its aim of France, seem culturally more in Britain for more than Jeremy Warner is 36.4% by 2020, it would be at home with high tax burdens half of total spending. Any assistant editor of The Daily Telegraph a little bit lower than the than others. In Britain, the politician who attempts and one of Britain’s prevailing average, but not ceiling seems to be around to make significant cuts in leading business these areas risks alienating and economics the increasingly powerful commentators If it is hard to tax more, it is proving ‘grey vote’. The present UK even harder to cut by more government has ducked that

www.treasurers.org/thetreasurer February 2016 The Treasurer 15 CHAMPION YOUR TREASURY TALENT

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016_ACT_Feb2016.indd 16 25/01/2016 11:50 ECONOMIC TRENDS Britain is not prepared for Brexit Kallum Pickering argues that leaving the EU would be a potential own goal for the UK. Is he right?

Britain does not have the political far slower than anticipated due to or economic might to live up to the a softer-than-expected recovery. challenge of Brexit. Prosperity outside of the EU would require a leading These failures reflect more than a party that can credibly deliver swift and suboptimal economic policy. They effective changes to economic policy to reflect an innate optimism bias and create an economy that is both balanced an insufficient capacity to properly and robust to risk. Unfortunately, on these recognise economic realities. Indeed, this accounts, Britain falls short. Brexit would optimism bias runs strongest within the fatefully reveal these fault lines. Conservative heavyweights. When Boris Britain has become politically Johnson, a strong contender for the next disorientated since the financial crisis. prime minister, says that Britain should After 13 popular years, the ugly demise of not fear an exit, he is fatefully wrong. centre-left New Labour in 2010 created He exemplifies the same false optimism. a void that has been only partly filled by We know from the past few years that the current centre-right Conservative Britain can enjoy solid growth within leadership. This has allowed for more the EU even when there are significant activity on the fringes. The past five problems in other countries of the union. years have seen the rise and demise To say that Britain can succeed if it were to of the centrist Liberal Democrat party, leave is another over-optimistic prediction. the worrying rise of the far-right UKIP, Recent experience indicates it would That track record speaks for itself. a landslide victory in Scotland for the probably be hard to secure such support. The bottom line is this. Although the Scottish National Party and, most What is more, there is little evidence UK economy has made considerable recently, Jeremy Corbyn and his band to suggest that even the pro-economy SHUTTERSTOCK progress post-Lehman, with decent of hard socialists taking over the Labour Conservatives would be able to deliver the growth and an impressive labour market party after a disappointing 2015 election policy changes needed to secure growth recovery, it is still very vulnerable to risk result. In a way, the decision to vote on after exit. Since elected six years ago, the and needs repair in almost every quarter. EU membership reflects this volatile Conservatives have not yet delivered on In addition to a lopsided sector split, the underlying trend. some of their key policy objectives. Firstly, UK has a high current account deficit, Of course, such divergence in support they have failed to bring about a more a broken housing market and too much on how and who should govern is balanced economy. Construction and debt. Not to mention the lack of fiscal fine from a democratic perspective. manufacturing are still around 5% and firepower. There is little doubt that if the Democracies should facilitate dialogue 10% respectively, below pre-crisis peaks. UK left and the economy were to go sour, and change. However, these major But the services sector has grown by more policy headroom would be limited. These fluctuations in the popular mood are than 10% and now accounts for 80% of realities would come to the fore if Britain not an ideal backdrop when decisiveness GDP. To some extent, this is a product of were to exit the EU. Is it ready for this? and quick response are needed. Do the economic circumstance rather than poor Surely not, but does it really know it? fluctuations reflect genuine variation economic management. Industry has in electoral opinion or, worse, a lack suffered under a weaker global backdrop. of political competence to gather a Secondly, the Conservatives have consensus? Brexit would require a large failed to meet their fiscal goals, too, Kallum Pickering is senior UK succession of swift and potentially and probably won’t balance the budget economist at unpopular policy changes in order until at least 2020 – assuming no Brexit. Berenberg Bank recalibrate the economy and keep it afloat. The pace of fiscal adjustment has been Brexit would require a large succession of swift and potentially unpopular policy changes

www.treasurers.org/thetreasurer February 2016 The Treasurer 17 COMMENT

{ TREASURY INSIDER } An offer you can’t refuse Treasury Insider advocates playing the long game in the face of proposals for shared services

I returned from a break to find an urgent Would it free me and the remaining • How valuable is any separation if meeting in my diary with an ambitious team up to be more strategic? I decided to functions are to consolidate and be colleague (who I’ll refer to as ‘X’) off-site. raise that with my boss, the CFO, who was effective as a finance team? This seemed intriguing and I attended with positive, and who suggested that I would • Who writes and owns treasury SHUTTERSTOCK an air of expectancy: be better positioned with operational and policies? If it remains the treasury team, control issues by becoming the head of then organisational separation may X “I’m making you an offer you shared services’ responsibility. be irrelevant. can’t refuse.” The proposal was introduced a few Me “Tell me more, and is it negotiable?” months later with some, but not all, of If other functions such as internal audit still X “We are going to reorganise finance the operational team transferred. look to the treasury team for all aspects of the with part of your treasury team joining Of course, soon afterwards, operational policy before and after the so-called change, an expanded shared-service centre.” issues arose, due to manual entry errors then it’s likely it was more cosmetic than real. Me “Really? Which consultant has come up and systems failures in sister teams, with For groups with potential changes, greater with this and will it be based anywhere potential payment delays for suppliers. integration could affect business disposals exotic overseas or locally?” I heard through an early morning email with continuing requirements for transition X “No, it’s our own plan to streamline and and text from the CFO! agreements. Some contacts advise me that integrate finance teams, and you as a I responded: “Of course our team will a number of organisations are decentralising customer will benefit from this service support the head of shared services to resolve in order to be more flexible. provided in our main UK office.” Treasury teams with multiple locations Me “That’s interesting – I’ve moved from This leaves the issue ideally would periodically switch off one and head of an integrated function to a test the process at another live. Admittedly, customer instantaneously! What of whether ‘internal’ not all companies have the freedom to do other advantages do you see from service level agreements so, but with everyone in one building your this proposal?” risks are high due to weather, power or X “Well, you will reduce headcount, have are effective or divisive transport factors. less HR management, more cover for This leaves the interesting issue of whether specialist roles, and we can centralise this.” The message back was: “Thanks, but ‘internal’ service level agreements are disaster recovery and systems.” actually can your team lead this to solve today?” effective or divisive. The team did and was thanked by other Oh, by the way, if you were wondering I agreed to consider it. functions for resolving the issue seamlessly what role the ambitious colleague had Clearly outsourcing – externally or – as far as the outside world was concerned. after the reorganisation, it was head of internally – is often popular, then reversed So in reality, I had not lost the operational shared services. Until the operational issue when another consultant proposes smaller issues! There was probably a veiled arose, anyway… central teams, greater local control and compliment somewhere in this story. accountability. However, recognising The key messages I perceive in such the mood, I did a rational analysis of the proposals are that: The Treasury Insider has led corporate potential benefits. • The treasurer has to establish clear treasury functions I agree a fully integrated treasury team accountabilities and responsibilities. inside a well-known might be scrutinised if front, middle and • Is treasury a problem solver of the last institution back offices all reported to one functional resort, with controls and skills, anyway? head, despite our extensive control processes • Will organisational changes make much and clean audit reports. This new proposal difference? Will people in fact continue may enable better segregation of duties. to operate as before?

18 The Treasurer February 2016 www.treasurers.org/thetreasurer COMMENT

{ INFLUENCE } Peter Matza is engagement director at PETER MATZA the ACT Technological innovations, safeguarding the corporate reputation – the treasurer’s remit is an expanding and all-encompassing one

As you are reading this ‘a good man always knows in our February edition, his limitations’, and then 2016 will be well under does something to address way, but it still gives me an them. People management opportunity to talk about some is now a greater load for consistent themes from the treasurers – it’s always the past few years and some new key to delivering a successful ones for this year and beyond. business, and treasurers The explosion in financial have got to learn to read and services regulation that we understand people as much have seen since the financial as the rules in an International crisis is probably the most Swaps and Derivatives remarkable development Association agreement. in the industry since the breakdown of Bretton Woods There’s a final area where (youngsters can go and look I think treasurers have to that up!). What makes it more look at the world differently. impactful is that it’s not yet While there has always been completely global (though volatility in business and will be) and not consistently markets, there’s no leeway applied in the Organisation any more. Reputational risk, for Economic Co-operation therefore, the impact of and Development or Western The picture overall is of a faster-moving business decisions on the economies. That means organisation, now sits firmly treasurers have to worry about world and a faster-moving profession on a treasurer’s desk. It’s not regulation as if it were the FX his or hers alone, but as the market – some markets liquid, treasury system that is to a different aspect of VW emissions debacle and some controlled, some opaque changing (where we are seeing professional life, namely other similar issues have and some closed. It’s not software as a service, mobile career development and the proved, the financial impacts getting any easier, of course, and cybersecurity issues all skills that individuals need SOURCE IMAGE of business scandals are and indeed likely to get more clamouring for attention), to become successful and felt much quicker, more confusing, more painful and but the ever-increasing range rounded as business people. pervasively and with greater certainly more intrusive. of business processes that Of course, the operational effect than ever before. What’s to come? Well, is being affected in digital aspects of that mean better So the picture overall is bank resolution schemes, terms. Supply-chain finance, (and quicker) reporting, of a faster-moving world and new regulation in previously trade finance, collateral data management and a a faster-moving profession. unaffected markets (such as management and logistics are clear grasp of the business Clearly, our role at the ACT the Middle East and Asia) all now specifically important environment. More subtly, is to help identify those and much more on cyber to treasurers because of though, treasurers must see winds of change and then management. There is some their impact on cash and beyond the day-to-day and to try to equip treasurers and evidence that the regulators – the balance sheet. Often look to deliver the strategic others with the tools and at least in the EU – are pausing overlooked, though, is that financial management that skills to act and react to them. for breath, but, as the saying the demand for ‘live’ business their organisations need. It’s not going to be easy or goes, the light at the end of the information means treasury That means having a clear straightforward, but we’ll do tunnel might just be a train is having to commit to the understanding of risk appetite, our best. heading your way. information age. Knowledge, being clever in the selection of I’d like to hear your views, so The rise and rise of tech it seems, really is power. business and financial partners please contact me at pmatza@ and systems shows no signs In this magazine, over the (house banks? Going, going, treasurers.org or look out for of slowing, either. Of course, past three or so years, we gone…), but, most importantly, me at one of our events. it’s not solely the in-house have tried to draw attention in the words of Clint Eastwood,

www.treasurers.org/thetreasurer February 2016 The Treasurer 19 2016 TRAINING COURSES ARE NOW OPEN FOR BOOKINGS

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8075_ACT_LA_Training-ad_AW.indd020_ACT_Feb2016.indd 20 1 21/01/201625/01/2016 16:3212:36 Boxing clever AGAINST A BACKDROP OF PRONOUNCED MARKET VOLATILITY, EUROPE’S WINNING TREASURERS AND TREASURY TEAMS HAVE EXERCISED THEIR CREATIVITY AND DEMONSTRATED ASTUTE THINKING AND EXECUTION

The past 12 months have been particularly testing Chairing the judging of these for treasurers. Market and currency volatility and awards is always rewarding. They question marks about the overall cohesion of the provide an opportunity for us as a community European Union have brought much complexity to to applaud the acumen, experience and hard our day-to-day operations and have become work that goes into building a dynamic treasury something of a given. team or executing a stand-out transaction. From my vantage point as chair of the ACT’s Deals Treasurers remain a reserved lot, but it’s my hope – of the Year Awards judging panel, treasurers have and that of the ACT – that more individuals and teams responded to these exceptional challenges with will take on the task of promoting and celebrating ingenuity and great skill – a level of professionalism the work that we do. And it’s surely incumbent on that we can all celebrate. the organisations that we work for to do more to The call for entries for the Deals of the Year Awards encourage and train their treasury professionals for 2015 attracted submissions from a diverse sector in this respect. Treasurers are enjoying greater base: retail, infrastructure, aviation, housing and interaction with, and respect from, boardrooms. education among them. It’s surely time to capitalise on that and begin to As judges, we were looking for achievements on enjoy a wider profile and recognition. timing, execution and demonstrations of strong I would like to extend my thanks to my fellow market knowledge. And although we saw fewer entries judges (see page 22) for their insights and for across most categories than in previous years, we also generously giving up their time to the Deals of the saw treasurers and their teams innovating, working on Year Awards judging process. Once again, we are more unusual deal structures and acting with dispatch indebted to Lloyds Bank, which continues to when market changes demanded quick action. sponsor the awards. Our thanks, too, go to the BAT, which of course goes to the market regularly ACT for continuing to promote this important and won in two categories – the larger of the two programme of awards. UK treasury teams of the year awards as well as the I hope you enjoy reading about our winners from bonds above £500m category – pulled off a suite of 2015 and would encourage you to enter next year’s challenging transactions working within a complex awards when nominations open later in 2016. battery of regulation. New Look, which won the smaller team of the year award as well as coming runner-up to BAT in the bonds above £500m category, provided a fascinating counterpoint to BAT with Lesley Flowerdew is group tax and treasury director at design, Proudly supported by a refinancing and acquisition (all managed by the engineering and project management in-house treasury team). And while BAT and New consultancy Atkins. She chairs the Look’s transactions and activities were very different, Deals of the Year Awards panel the juxtaposition of the tobacco giant and the much smaller retailer prompted much debate around the judging table.

www.treasurers.org/thetreasurer February 2016 The Treasurer 21 Meet the judges Deals of the Our 2015 Deals of the Year and Treasury Team of the Year Awards Year Awards – the categories were judged by: Page 22 Meet the judges Lesley Flowerdew, Clare Francis, managing Peter Matza, Paul Watters, head group tax and treasury director, global engagement director, of corporate credit Page 23 director, Atkins (chair) corporates, commercial ACT research, Standard Corporate finance and banking, Lloyds Bank & Poor’s overall Deals of the Year María de la Fuente Richard Sedlacek, Awards winner Lecanda, head of Paul Johns, head of tax managing director, Henryk Wuppermann, Page 24 banking business and treasury, Selecta Rothschild head of corporate Bonds above £500m planification, Iberdrola finance, E.ON Philip Learoyd, head Mark Venner, treasurer Page 25 Julie Fabris, group of funding and treasury operations, BAE Systems Bonds below £500m treasurer, Britax risk, SABMiller Page 26 Loans above £750m Page 27 How the awards were judged Loans below £750m The Treasurer’s Deals of the Year and Treasury including: sound treasury management, Page 28 Team of the Year Awards provide recognition of, innovative structures, ability to work with UK treasury team of and applause for, the professionalism and skills stakeholders and efficient pricing. the year (market cap above £2bn) that treasurers contribute to their organisations. On occasion, we have situations where a All kinds of deals are eligible for entry, judge’s company has been nominated for an Page 29 UK treasury team of regardless of their size or complexity. In judging award. In these cases, the judge concerned sits the year (market cap the awards, the judges look at a range of criteria out the discussion. below £2bn) Page 30 European treasury team of the year A It is not hard to diversify their identify risk in TREASURY organisations’ funding our current business structures and support environment: we can complex mergers or take our pick from the ELITE acquisitions. All this Greek crisis or identify and the day job, too. wider volatility experienced On the following pages, in the eurozone within you will find the narratives individual markets and across behind this year’s best-in-class foreign exchange markets. Then there is – the winners of The Treasurer’s Deals broader geopolitical risk, emerging market of the Year Awards. There can be little doubt turmoil, increased sensitivity around that the hard work that goes into designing corporate reputation, erratic stock markets… and executing these diverse facilities and the you get the picture. wider support that treasurers provide for the In the face of these risks, and in spite of the business deserves our applause – and much increased frequency with which they appear wider recognition, too. in the world’s media and on the corporate dashboard, treasury teams are instrumental in constructing the deals that will refinance, Liz Loxton, Editor provide backing for IPOs or acquisitions, Awards reporting by Michelle Perry

22 The Treasurer February 2016 www.treasurers.org/thetreasurer Corporate finance category and overall Deals of the Year Awards winner NATIONAL GRID AMPING UP SUCCESS NATIONAL GRID’S POWERFUL YEAR CAN BE ATTRIBUTED TO THE PROFESSIONALISM AND FLAIR OF ITS HIGHLY EFFICIENT TREASURY TEAM

Energy giant National Grid accessed the markets debt; so, for us, pricing was critical. This was very last September in a bid to diversify its funding attractive because it reduced the cost of debt.” sources, but in a rare move the corporate did so Since National Grid finalised its deal, three other without risking any dilution to its shareholders, and large corporates across Europe have followed suit, raised debt financing at a lower cost than available in copying the utility’s lead and benefiting from the Deal highlights the traditional bond market. path that National Grid took. The transaction was all The UK electricity and gas corporate took advantage the more impressive for the fact that just two to three Issuer: National Grid of investors’ appetite for investment grade paper, people out of a treasury team of around 12 worked on Amount: £400m after a quiet few months in the market, to raise the deal. Structure: £400m of convertible debt at a fixed rate of 0.9% “We are very pleased with the outcome and grateful Single tranche/ to 2020. to the support we got from our lead banks. And, as convertible bond The transaction resulted in National Grid North people say, ‘imitation is the sincerest form of flattery’,” Rating (at time of deal): America Inc raising fixed-rate debt at an effective Cooper added. Baa1 (Moody’s)/BBB+ (S&P and Fitch) interest rate materially lower than conventional debt. The nominating bank called the deal “an It was the first time anyone has accessed the sterling innovative funding structure from a very professional Currency and tenor: convertible bond market with no equity dilution and treasury team”. £/5yr no share price risk. One of the bankers heavily involved in the deal Interest rate: At the same time, the FTSE 100 corporate bought said: “We really enjoyed working with National Grid 0.9% call options on its shares to offset the economic because of their professionalism, expertise, good exposure from a potential exercise of the conversion market judgement and their open attitude to rights embedded in the convertible. This innovative this innovative debt financing. Working with the approach provided attractively priced funding from National Grid team, we were able to take advantage an additional source of liquidity for the group. As a of the unique market opportunity and to secure an result, National Grid secured good liquidity in line attractive funding advantage compared to straight What the judges said: with its risk policy. debt, while broadening the investor base.” “The deal The deal was oversubscribed multiple times and Over the next few years, National Grid expects ultimately upsized from £350m to £400m due to to raise, on average, around £2bn to £3bn of showed demand, which further highlights the deal’s success. new long-term debt every year to finance innovation Credit Suisse was lead bank on the deal and had expansion of its business and refinance maturing been working on the transaction with National Grid debt – the vast majority of which is raised in the and excellent for some time to get it right. BNP and Morgan Stanley capital markets. execution” were joint bookrunners. The judges said: “It was a very good team, smoothly Malcolm Cooper, group treasurer at National Grid, executed. It was that combination that stood out said: “As a utility, we can sustain large amounts of compared with other deals.”

HIGHLY COMMENDED

Thames Tideway infrastructure projects, and Establishing a separate The TTT requires around The cost of capital Thames Water Utilities surpasses the scale of any infrastructure company £3bn of debt to be raised will be fixed for 15 Ltd successfully secured single project undertaken in significantly de-risked the during construction, which years, covering the full investors in a complex deal the UK water sector to date. transaction from Thames represents a significant construction period. to create a new company The cost of capital Water’s perspective. The portion of the debt The backers behind to deliver the £4.2bn for the project came structure not only shares issuance in the whole Bazalgette Tunnel – Thames Tideway Tunnel in at just 2.497%. It the construction risk with UK water sector. named after Sir Joseph (TTT), one of the biggest was considered to be private-sector investors, The new company – Bazalgette, the engineer infrastructure projects a complicated deal for but it also reduces the owned by a consortium behind London’s in London. the critical underground impact on Thames Water’s of international investors Victorian sewers – The deal stood out as construction project and household customer – will be an independent, include insurer Allianz, an innovative structure compares well to more bills from the original regulated utility company Amber Infrastructure, because of the ongoing typical costs for the UK estimate of £70-£80 established for the design, Dalmore Capital and challenges faced by the water sector of between a year – set four years build, finance and delivery investment firm Dutch private sector in building 3.6% and 3.85%. ago – to £20-£25 a year. of the super sewer. Infrastructure Fund.

www.treasurers.org/thetreasurer February 2016 The Treasurer 23 Bonds above £500m category winner BRITISH AMERICAN TOBACCO “SIMPLE IS GOOD” BAT’S FOUR-STAGE BOND ISSUE TOOK ADVANTAGE OF INVESTOR DEMAND AND PROVIDED SCOPE FOR REFINANCING AND ACQUISITION SUPPORT

British American Tobacco its pre-existing 42% stake. BAT also acquired (BAT) returned to market the remaining 24.7% equity stake in its Brazilian in March last year in operation Souza Cruz for around £2.3bn. a refinancing initiative, but The company was able to manage its debt-maturity in a rare move the corporate profile while adhering to strict internal treasury undertook a four-tranche policies regarding concentration of maturity. The €3bn deal in a bid to maximise overall cost of funding was attractive in a historic investor engagement. context (with the 30-year tranche only paying 2%). Deal highlights BAT group treasurer In a single approach, the “Overall, it was an efficient process, as we expected, Neil Wadey: We transaction was able to avoid supported by our core issuing banks that provided us Issuer: BAT wanted to do a bigger transaction cannibalisation of demand with good advice,” Wadey added. Amount: €3bn between tranches and achieved The deal underlined the organisational efficiency of Structure: pricing that minimised the BAT, which meant that the tobacco company was able Four-tranche public, new issue concession. to minimise exposure to market risk at the same time senior facilities Neil Wadey, BAT group treasurer, said: “Based as managing two separate bridge facilities. Rating (at time of deal): on our cash-flow assumptions, we wanted to do The nominating bank said that strong leadership A3/A- (Fitch, a bigger transaction than we usually do. Based in deal timing and market judgement is an underrated Moody’s and S&P) on demand, we realised skill in treasury. Currency and tenor: a long tranche would be “Too many dismiss it €/4yr + 8.5yr “Too many dismiss it by saying, + 12yr + 30yr more attractive to investors by saying, ‘no one can call – and it suited us.” ‘no one can call the market’, but the market’, but having Interest rate: Although the official a strong sense that what 0.375% for 4yr/0.875% having a strong sense that what is for 8.5yr/1.250% for use of the proceeds was is achievable is transient, 12yr/2% for 30yr to be for general corporate achievable is transient, is a core skill is a core skill and BAT purposes – including consistently does this. the financing of working and BAT consistently does this; It asks the right question capital and refinancing it asks the right question” – is there an opportunity of bonds and commercial that I can do today that What the judges said: paper – the two large I might not be able to do transactions coincided with two acquisitions by the tomorrow?” the bank said. “This deal tobacco giant last year. The judges said: “Often deals are overcomplicated showed flawless BAT was then able to pay $4.7bn to subscribe to and that can often come back to haunt deals further execution and Reynolds American’s equity offering to maintain down the line. Sometimes simple is good.” perfect timing. HIGHLY COMMENDED

It is the model New Look refinancing at a time secured notes at 6.5%, Fast execution of a larger New Look completed of market volatility and €415m denominated capability and real-time one of the largest deals an overall challenging floating rate notes at structuring expertise bond issuance” in the European sub- environment. The New Euribor +4.5% and £200m meant New Look could investment grade market Look transaction was 8% senior unsecured lock in an attractive in 2015, refinancing the executed in the early notes. A new six-year all-in funding cost and group capital structure weeks of June against revolving credit facility a diversified funding at the same time as selling a backdrop of volatile of £100m was also put structure. The nominating the group to a new private markets driven by in place to provide bank said: “Outstanding equity owner, Brait. concerns relating incremental liquidity. work by the treasury team The retail group to Grexit, as well The most significant in guiding the board, successfully finalised as other negative benefit to New Look CEO and CFO with real an £800m M&A macroeconomic factors. was the achievement of time and independent while simultaneously The transaction a lower cost of capital, market assessment, and completing a £1.2bn consisted of three enabling higher future delivering in context of high-yield bond tranches of £700m senior cash-flow generation. a very short time frame.”

24 The Treasurer February 2016 www.treasurers.org/thetreasurer Bonds below £500m category winner LONDON & QUADRANT HOUSING TRUST STRONG FOUNDATIONS L&Q’S £250M BOND HAS SECURED STRATEGIC FINANCING FOR THE HOUSING GROUP IN A WELL-PLACED LONG-TERM ISSUE

London & Quadrant Housing Trust (L&Q), provide housing for families one of the UK’s leading housing associations, in London and the South East demonstrated how to complete a difficult sale in of England. one of the UK’s most challenging sectors last October The opening level offered a when it raised £250m via a bond issue. high single-digits premium to L&Q, one of London’s largest residential developers, L&Q’s outstanding 2040 notes returned to the market in 2015 after a three-year hiatus and by having flexibility on with a 34-year benchmark deal, which priced at a tenor, the company was able coupon of 3.75%, and was significantly oversubscribed to take advantage of a slight L&Q director of by investors. inversion at the longer end of treasury Martin Watts: We are In spite of market volatility as well as UK Chancellor the gilt curve, saving an prepared to face George Osborne’s housing policy changes – additional 6bps. up to the challenges Deal highlights announced in the Budget last spring – L&Q achieved Watts added: “In terms of Issuer: London & an unparalleled spread, coupon and order book size market participation, it was clear Quadrant Housing Trust with its deal, demonstrating investors’ support for from the transaction where it was priced that there Amount: £250m the sector. was fantastic support from the investor base; that they Structure: Osborne announced valued the L&Q name. And Senior secured bonds plans to reduce the in supporting our name, they In spite of market volatility as well Rating (at time of deal): household benefit cap have confidence in our ability A1/AA (Moody’s from £26,000 to £23,000 as George Osborne’s housing to deliver and in the strength and S&P) a year, while housing of our management.” policy changes, L&Q achieved an Currency and tenor: benefit will be reviewed, Given the exceptionally £/34yr both of which will unparalleled spread, coupon and strong demand, syndicates Interest rate: impact significantly were able to tighten guidance 3.75% on L&Q’s customers. order book size, demonstrating to G+135-140bps with a Martin Watts, L&Q investors’ support for the sector statement that bonds would director of treasury, price within that range. said: “We wanted to The majority of orders outline to our investor base that although we are in a remained and pricing was What the judges said: challenging environment where government policy is set at the tight end of the range at G+135bps. influencing our business, we are prepared to face up to “The 10bps movement was the largest tightening “The well- the challenges and have the desire and capabilities to in the sterling market since July and was testament rated housing achieve our objectives.” to the strength of the credit and the excellent job by The deal developed the company’s credit curve and the L&Q presenting team during the roadshow,” the association was fundamentally critical to the implementation nominating bank said. sector has taken of L&Q’s group strategy, securing strategic financing The borrower was last in the market in April 2012 that supports the housing association’s ambition to with a 4.625% December 2033 bond. considerable advantage HIGHLY COMMENDED and this was Hammerson the reference gilt and The proceeds will be sterling bond issue by an excellently Property developer has an annual coupon used to fund its recent Hammerson for almost Hammerson issued its of 3.5%. The issue €1.85bn acquisition of 10 years and represents placed, long- first sterling bond in nine was more than two a distressed loan portfolio a welcome return to a term issue years, which was all the times oversubscribed. from Ireland’s National home-funding market. more impressive in a Hammerson subsequently Asset Management Agency, We are appreciative of the leading the volatile market. swapped the sterling as well as refinancing a support shown by our key way in 2015” The successful launch bond nominal amount forthcoming bond maturity. bond investors, and our and pricing of the 10-year, and coupon payments At the time of issue, relationship banks have £350m bond maturing into euros, resulting in Timon Drakesmith, CFO assisted in swapping the in 2025 was priced at a net coupon cost to of Hammerson, said: “This coupon to a low 2.5% level 173 basis points over Hammerson of 2.5%. transaction is the first in euros.”

www.treasurers.org/thetreasurer February 2016 The Treasurer 25 Loans above £750m category winner WORLDPAY FROM PRIVATE TO PUBLIC WORLDPAY’S OVERSUBSCRIBED IPO IN AUTUMN 2015 WAS UNDERPINNED BY A £1.7BN MULTI-BANK FACILITY

Worldpay was catapulted in Worldpay launching with £1.2bn of the required into the FTSE 100 this year £1.7bn, which “was a powerful starting point”. valuing the global payment Although Roberts used Lloyds to coordinate processing group at around documentation, he said he was mindful of all the Deal highlights £4.8bn thanks to investor banks in the group and ensured he had direct support for its flotation. relationships with all 18 banks. Issuer: Worldpay To achieve this end, the The loan allowed the group to successfully Amount: £1.7bn treasurer secured a £1.7bn transition from a leveraged debt structure to a Structure: Worldpay treasurer bank facility to refinance corporate framework representing its new listed Three senior unsecured Nigel Roberts: existing indebtedness and status. The facility allowed this to take place We were delighted facilities – £600m 3yr establish the group’s new capital immediately at the point of IPO through a single term loan, £900m 5yr with the outcome term loan and a £200m structure following the UK’s facility agreement. revolving credit facility largest private equity (PE) initial Following the IPO, Worldpay was able to partially Rating (at time of deal): public offering (IPO) to date. Prime minister David refinance its £600m term loan (due in 2018) with a Ba3 (Moody’s and S&P) Cameron called the listing “fantastic news”. new €400m senior unsecured notes due 2022, issued Currency and tenor: The £1.7bn facility was split across three facilities, by its wholly owned subsidiary Worldpay Finance plc. £/3yr + 5yr including a £600m three-year loan, a £900m five- Total demand for the transaction was in excess year loan and a £200m of £2bn from the banks Interest rate: 2.25% for 5yr RCF/1.75% revolving credit facility The payment services management invited, with the majority for 3yr term loan with a syndicate of 18 of banks choosing to international banks. company was able to create a wide participate at the top- The deal was increased international banking group to tier commitment level. from its original terms The payment services reflecting the open and support its global banking needs management company concise management was able to create a wide What the judges said: communication, which led to strong demand. international banking group to support its global Nigel Roberts, Worldpay treasurer, said: “It banking needs and worked under tight deadlines “This was the went extremely well. We were delighted with with a high degree of uncertainty due to equity largest PE IPO the outcome.” market volatility. Roberts said he wanted pure senior debt from a Worldpay was sold by Royal Bank of Scotland five in the UK last group of relationship banks, despite some banks years ago for around £2bn. The company rejected year, and allows offering alternative structures. The treasurer started a £6.6bn offer from France’s Ingenico to push ahead the process in June last year with a group of four with the share offer to raise £890m. the team to banks, all of which signed up for the highest level The judges said: “This was a classic structure when a settle down ticket – £150m. This was then expanded to other company comes out with an IPO in terms of stepping banks involved in the IPO process, which resulted and restructure up its balance sheet.” the treasury HIGHLY COMMENDED

function” Wolseley $800m US private The transactions also the issuing of a USPP Wolseley successfully placement (USPP) across raised significant capital delivered a full financing completed a two-tranche a range of tenors from against a challenging solution quickly and facility last year, as it five to 12 years, required credit backdrop in a quick efficiently for Wolselely sought to remove a major careful coordination across time frame. Its treasury during strong market refinancing hurdle in its different stakeholders, team took around just conditions, while also debt-maturity profile, and geographies, asset seven weeks from the delivering a significant to lengthen and diversify classes and parties, as the selection of its six banks upfront ‘underwrite’ deal its funding sources. The company chose to execute to completion. and strong competitive deal, an £800m revolving in both the USPP and loan The parallel running of tension from the lead RCF/ credit facility (RCF) and an markets simultaneously. the RCF refinancing with USPP banks.

26 The Treasurer February 2016 www.treasurers.org/thetreasurer Loans below £750m category winner EASYJET TAKING FLIGHT A CAREFULLY DESIGNED REVOLVING CREDIT FACILITY AT EASYJET PROVED ATTRACTIVE TO THE MARKET AND PUT THE TREASURY FUNCTION IN POLE POSITION WITH THE JUDGES

FTSE 100 airline easyJet launched its debut issue last year with a $500m revolving credit facility (RCF) using a unique structure that contained few draw-stop events and avoided any financial covenants. Deal highlights The deal was all the more impressive for one of the UK’s Issuer: easyJet top public companies given its Amount: $500m relatively small treasury team, Structure: led by group treasurer Mike Hirst, Single tranche who, at the time of the deal, had Rating (at time of deal): been with the airline for less than Unrated a year. Currency and tenor: Hirst and his team oversaw $/5yr + 1yr + 1yr the facility’s design and leveraged Interest rate: key relationship banks in order Undisclosed (but market- to secure an efficient structure leading pricing) for the company and its lenders. Nominated for the awards by several of its banks, Despite it being a challenging sector, the one bank described it as a clever way of taking transaction – which was oversubscribed – was advantage of the company’s balance sheet together uniquely crafted to support easyJet’s liquidity with market-leading pricing. The same bank said the position and better manage the impact of downturns facility delivered “a first-class deal” for the airline and in business or temporary curtailment of activities. its shareholders. easyJet has a target minimum liquidity requirement Ultimately, the deal provides the company of £4m per aircraft in the fleet. with financial flexibility and, importantly, it also The facility’s structure avoided introducing provides a more appropriate funding mix to support covenants into the company’s operations by instead the company’s capital expenditure and strategic What the judges said: providing security over unencumbered aircraft, while development targets. “This was an retaining a corporate loan approach. One nominating bank said: “Mike Hirst, who It was so carefully designed that the security was the thought leader both in respect of the unusual debut only ‘bites’ when drawn and is based on complex introduction of an RCF into easyJet’s structure and RCF for a long- valuations. From the outset, the aircraft valuations the deal itself, had been in the company for less were agreed upon for the duration of the deal and in than a year at execution, demonstrating his very established FTSE this way the facility contained barely any draw-stops, rapid gaining of traction within the company and 100 company” which is unusual in the market. development of a strong depth of understanding The transaction was two-pronged in its aim so of its needs.” that Hirst could create an international core banking Hirst added that the three law firms involved in the group – which easyJet had not previously had – that deal contributed to its success thanks to their various would cover all the no-frills airline’s funding needs legal specialisms. for the tenor of the deal. “Three may sound like a lot [of law firms] to have, As a result, easyJet created a new international but they all played their roles really well and that banking group of 12 global banks, ensuring the helped the deal to be a success,” Hirst said. airline has a strong and varied group of worldwide easyJet is one of Europe’s leading airlines – relationship banks for the future. operating over 600 routes across more than 30 Hirst said: “This gave us a liquidity facility no countries with a fleet of 200-plus Airbus aircraft – matter what. There was a lot more to this than just and employs more than 8,000 people, which includes a facility. This was a strategic deal to define our 2,000 pilots and 4,500 cabin crew. Last year, the airline group of banks.” carried more 60 million passengers.

www.treasurers.org/thetreasurer February 2016 The Treasurer 27 UK Treasury Team of the Year (market cap above £2bn) BRITISH AMERICAN TOBACCO BEST IN CLASS BAT’S ABILITY TO EXECUTE COMPLEX TRANSACTIONS TO SUPPORT CORPORATE STRATEGY WHILE COMPLETING A SYSTEMS UPGRADE IMPRESSED THE JUDGES

of execution meant they were less exposed to the credit spread widening seen later in the year. The team was also able to secure strong support and competitive pricing from its banking group, demonstrating the value of its long- term relationships. Glenn Forbes, a banker at Lloyds who worked with the BAT team on a number of recent transactions, said that in both cases of refinancing, the team had to manage a volatile backdrop with narrow windows of opportunity for best execution, which the team skilfully made happen. “Had they been unable to move at the earliest opportunity, BAT treasury team pricing would have been very different from what they achieved,” Forbes said. If you’re looking for an example of a team to hold In the background to the refinancing exercises up as the best in class in treasury, look no further and funding of the acquisitions, the treasury team than British American Tobacco’s (BAT’s) treasury also oversaw the final stage of a SAP roll-out. team, this year’s winner of the UK Treasury Team of BAT is one of the UK’s most global companies, the Year award. and as such the group consistently looks to BAT, one of the world’s largest companies with a develop optimal structures for the centralisation globally centralised treasury function, showed how of treasury activities. to undertake several large-scale strategically critical Last year, its treasury team finalised the last deals skilfully, while playing a pivotal role in the stages of a landmark SAP project – a fully integrated successful conclusion of two major acquisitions enterprise resource planning system with treasury last year, as well as overseeing a systems upgrade. management system, which is SWIFT-enabled What the judges said: The team was nominated by several banks, all of and connected to external trading platforms. The which could not speak more highly of the treasury arrangement supports end-to-end integrated “BAT has got to team. BAT’s nominating banks consider BAT’s treasury operations, including cash management, have one of the treasury team members to be not only professional forecasting, risk management, dealing, payments and talented, but also “great communicators”. and accounting. best treasury One of the nominating banks said the team had The team also integrated a global treasury teams. It is the an “impressive track record of successfully combining operations organisation embedded in a shared and executing several M&A, DCM [debt capital services centre to execute treasury activities globally leading edge; it market] and loan-market transactions”. from Japan and Australia to Russia and South Africa is the team to Treasury was closely involved in several complex to Costa Rica. Treasurers around the world would M&A transactions, in particular, the £1.8bn public concur that this in itself is no small feat – let alone look up to” tender offer for 24.7% of Souza Cruz in Brazil, and negotiating the intricacies of it while accessing the a $4.7bn investment in Reynolds American in the market for refinancing and funding acquisitions. US to support its acquisition of Lorillard. Moreover, BAT has an excellent track record Both transactions were notable for their scale of developing treasury professionals with a and regulatory complexity, which in turn created combination of technical qualifications and a considerable challenge for treasury. The team had commercial experience. Neil Wadey, group to execute concurrent funding and risk management treasurer, is a former ACT student of the year. exercises against an uncertain timeline and a volatile The group also has a well-established clear market backdrop. structure and support for team members to BAT minimised the new issue concession it paid complete ACT qualifications. by pre-funding the Souza Cruz tender at the earliest “Long term, it has a fantastic reputation for possible opportunity with a four-tranche €3bn developing people, setting the tone in treasury deal and then by executing its five-tranche $4.5bn and in advancing in implementing best-in-class trade shortly after regulatory approval was provided systems to maintain their position at the forefront,” on the Reynolds/Lorillard tie-up. Their efficiency added Forbes.

28 The Treasurer February 2016 www.treasurers.org/thetreasurer UK Medium/Small Sized Business Treasury Team of the Year (market cap below £2bn) NEW LOOK FLEET OF FOOT A QUICK RESPONSE TO OPPORTUNITY AND A WILLINGNESS TO ADAPT TO A VOLATILE MARKET HAVE PROPELLED NEW LOOK’S TREASURY TEAM TO THE TOP

The coveted award for UK Medium/Small Sized Business Treasury Team of the Year goes to New Look, which attracted praise for hard work and technical knowledge, successfully guiding the company’s board with real-time market assessment, and going on to deliver a successful deal in a tight time frame. New Look’s treasury team secured one of the largest deals in the European sub-investment-grade market last year, when it locked in an attractive all-in funding cost and a diversified funding structure against a backdrop of market volatility.

The small New Look treasury IMAGES SIMON DAWSON/BLOOMBERG/GETTY team sealed both an £800m M&A acquisition by Brait and a £1.2bn in line with a listed public company. The team refinancing between March and June last year to managed to progress bank financing to the point ensure a successful conclusion for existing and new where the company was ready to proceed early, shareholders. Also on the agenda was full refinancing allowing time to continue ongoing discussions of the balance sheet, transforming the company’s with the potential buyer, Steve Humphreys, head capital structure to ensure the future growth of of group treasury at New Look, explained. the business. In May, New Look announced a share sale and “The treasury and finance team that delivered the purchase agreement with Brait. However, in the What the judges said: successful completion of both the acquisition by Brait lead-up to the announcement, the team also had to and refinancing demonstrated exceptional ability continue to work on all IPO streams, IPO refinancing “The team to deal with very technical issues across all facets of negotiations with more than 10 core banks, as well demonstrated the transactions, while building strong, long-term as completing the year-end statutory accounts, relationships with the company’s advisers, which annual report and negotiating a successful sale of the exceptional remain today,” said one of the judges. business to Brait. ability to deal New Look’s owners – private equity firms Apax Despite the huge achievement, in the background Partners and Permira Advisers, together with Tom the team also had to start early discussions on what with technical Singh and senior management – had been waiting capital structure would be appropriate for the new issues across for the right opportunity to exit the business. That owners. An opportunity arose to refinance the existing opportunity arose last year, following the company’s debt on the balance sheet of around £800m bonds and all facets of the improved performance over the previous 18 months. £370m PIK [payment-in-kind] loans, with a full cash transactions” It was decided that New Look would prepare for an pay bond refinancing of £1.2bn. As a result, the team initial public offering (IPO) in the summer of 2015, achieved both a lower cost of debt and extended the but would also quietly explore the opportunity for group’s debt maturities from 2018 to 2022/23. In June, a trade sale. the project team completed a full refinancing of the A small team began the multiple work-streams £1.2bn of debt on New Look’s balance sheet. required to deliver a successful IPO, including “This happened faultlessly and on time, a corporate appointments, board meetings, engaging true testament to the preparation, planning and advisers and preparing accounting reports. management of the treasury and finance team,” Simultaneously, a smaller team within that main the judges said. team began exploring options for a trade sale. It is also worth noting that the majority of the At the same time, the treasury team also had to treasury team’s work was completed against a secure post-IPO financing, moving the company backdrop of market volatility and heightened balance sheet from a highly levered business at uncertainty around stability in the eurozone due around 5.5x leverage down to below 2.5x leverage to the Greek debt default crisis.

www.treasurers.org/thetreasurer February 2016 The Treasurer 29 European Treasury Team of the Year MERCK DELIVERING THE DEAL MERCK’S POSITION AS ONE OF THE WORLD’S PHARMA GIANTS WAS REINFORCED BY ITS ACQUISITION OF SIGMA-ALDRICH AND ITS TREASURY TEAM’S PERFORMANCE

The treasury team at Merck’s treasury team German pharmaceutical company Merck is named as this year’s European Team of the Year thanks to the treasury team’s unstinting efforts to help ensure the success of the $17bn acquisition of US life science Rando Bruns company Sigma-Aldrich. Group treasurer The treasury team’s pivotal role in the acquisition of Sigma- Aldrich – creating one of the leaders in the $130bn global industry – began in 2014 and continued until the deal was passed by regulators late last year. In September 2014, Merck’s treasury team, led by group treasurer Rando Bruns, arranged the largest corporate acquisition financing in Europe since the financial crisis in 2008. The team secured a $15.6bn dual-currency loan facility to finance the acquisition. The transaction was favourable, as the banks provided financing on a ‘certain funds basis’ without What the judges said: any financial covenants and with limited restrictions. The deals contributed significantly to the overall “Merck has been Merck’s team also negotiated long availability periods strategic direction of the group. Moreover, across all and maturities, which would safeguard the availability transactions, the treasury team worked together with a serial nominee of the financing. all 17 existing relationship banks. Eleven of them and a respected In March 2015, the next take-out measure followed played an active role in one of the three transactions. with a $4bn US bond. During a four-day roadshow, “The negotiation of the combined facility for the previous winner. the Merck treasury team met 20 of the largest US term and bridge financing ($15.6bn) with three It is a high- asset managers and held conference calls with around banks within a very short time frame was of vital 60 asset managers. This allowed Merck to issue a five- importance for the offer. It was also the goal to quality team in a tranched bond with maturities between two and further strengthen the relationship to all the group’s global business” 10 years. The order book peaked at around $7bn with relationship banks by fair distribution of fees to all more than 130 investors involved. banks, equal league table credits, and transparent This was Merck’s inaugural US bond and it has communication about role and fees from the allowed the corporate to enlarge its investor base with beginning on,” added Tim Nielsen, head of group demand from domestic asset managers driving the treasury, capital markets at Merck. transaction. Ultimately, US accounts took over 80% Aside from the strategy to engage all 17 of the total offering. relationship banks, Merck’s team used the hybrid The last and final deal took place in August with a and the US market for the first time, and enlarged €2.05bn bond. The transaction was carried out against its investor base and geographic reach significantly. the backdrop of the Greek euro crisis, meaning that Bruns added: “The relationship approach taken its treasury team had to closely monitor the market in the Sigma-Aldrich financing enabled us to further in order to take advantage of the first available strengthen and leverage the excellent relationship opportunity to announce the bond. Merck is having with its banks.” Bruns said: “All these projects and achievements The structure of the deals was strategically were accomplished by a centralised and relatively considered, as it was critical for Merck that the small group treasury unit, next to their day-to-day rating agencies granted a 50% equity credit, which activities. We believe them to have shown excellent underpinned Merck’s commitment to a strong treasury-management skills in financing and risk investment grade rating. management. Due to our technical knowledge and The judges said: “Merck has been a serial nominee abilities, as well as innovative systems, we are able to and a respected previous winner. It is a high-quality integrate Sigma-Aldrich as quickly as we are doing.” team in a global business.”

30 The Treasurer February 2016 www.treasurers.org/thetreasurer 9 March 2016 InterContinental Düsseldorf, Germany

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031_ACT_Feb2016.indd 31 25/01/2016 12:37 BUSINESS IS BREWING Brewery and pub business Marston’s is fortunate in its dynamic treasury team led by Rob Leach. And it does the cause of treasury and cash management no harm that CEO Ralph Findlay is a former treasurer and a strong advocate of the team

Words: Liz Loxton Photography: Rob Whitrow PROFILE

Marston’s, based in Wolverhampton in the Midlands, is a pub and brewery business moving at a rapid clip. With 25 pub openings signed and delivered over the course of 2015, the business has committed to at least 20 for 2016 – which adds up to a huge organic growth strategy and an investment close to £140m for the year. Clearly, this kind of growth trajectory brings a hefty capex requirement and, fortunately, Marston’s benefits from a strong treasury team, led by head of treasury Rob Leach, plus an advocate for the treasury discipline in CEO Ralph Findlay, himself a former treasurer at Bass Brewery and an ACT member. Marston’s, as it is today, emerged out of what was formerly the Wolverhampton and Dudley Breweries. The business adopted the name Marston’s in 2007 because, having spent a decade acquiring pub and brewery businesses from across the UK, it needed a name that reflected its nationwide aspirations.

“We’ve got visibility two or three years out on where our growth is coming from”

Marston’s network of pub-restaurants are typically freehold and the majority are new-builds – big, stand-alone family-oriented environments. It’s a very specific strategy and a demanding one. “We’ve got a team of property people out there acquiring sites. It’s a very specialised business to be in; but we’ve got control and we’ve got visibility two or three years out on where our growth is coming from,” says Findlay. “By the time we’ve completed the investment, we will have spent about £3m on each individual pub. As a strategy, what that means is that we are building our own growth,” he says.

Solid foundations Such a consistent call on capital can’t be achieved without great financial management and funding discipline. The business needs the right amount at the right time – no small order for a cash-generative, but seasonal business. “We don’t want to lose those opportunities when we see them come along,” says Leach. “So it’s hugely important that our cash forecasting is accurate and working capital is managed effectively, so we can help the business with its strategy. We don’t want to hit problematic pinch points where we have to say no.” The value of property on Marston’s balance sheet is in the order of £2bn. Around £900m of that is funded through a securitisation programme, initiated in 2005. “We have also approximately £200m in structured finance – long-term leases where the freehold reverts back to Marston’s at the

www.treasurers.org/thetreasurer February 2016 The Treasurer 33 PROFILE

The greater the knowledge and expertise within treasury, the more cash-literate the business becomes end of the term. And we are a business with significant cash-flow and working capital requirements,” says Findlay. The securitisation is fixed interest and amortises out in 2035. It has to be monitored and administered, particularly covenants. The structured finance element, however, is, unusually for the pub world, pension-fund-backed. “When we build one of these pubs, we go to UK pension funds, who are looking for yield; it’s a yield-hungry market. We agree, typically, 35- to 40-year money, and it’s structured as if it were a lease, but there’s an option for us to take the freehold back at the end of that lease at effectively nil cost,” says Findlay. “So it remains on balance sheet and we retain the freehold interest, but what we’re aiming at is attractive long-term financing. In comparison to the securitisation structure, what we’ve got is something that has no reporting requirement, no covenant test, no administrative burden and complete substitution on assets.” Marston’s treasury team is eight-strong – small perhaps for a business with a £950m market cap, but efficient and fit for purpose. “Our turnover has increased more than 40% over the past 10 years, but that team has got smaller as processes have become more streamlined,” says Leach. “There is less physical cash now. A lot of the job used to be counting cash. Twenty years ago, we used to take more physical cash than the local Barclays Bank.” And although the treasury team and Marston’s in general gone wrong. It’s a very dynamic environment. You can’t really has many long-stayers, Leach says the environment is a plan day to day.” dynamic one. Team members learn each other’s roles to facilitate job-sharing and between them cover off interest Treasury virtues and debt forecasting, working capital and loan management, It also falls to Leach’s treasury team to manage significant money market deposits, invoice financing and banking swings in working capital over the year. In the pub trade, relationships. The capex requirements mean there is a need takings still mostly come in towards the end of the month, so for intricate cash forecasting. The team tries to identify every pubs and pub businesses see a spike each month as customers payment as far out as possible, Leach says, partly to educate spend their pay packets. But month to month, takings can be other parts of the business on the importance of cash visibility. highly variable, and as Marston’s manages its own pubs, it’s the Automated systems take out a lot of iterative tasks, but treasury function that takes ownership of that issue. it’s the unforeseen that team members are there to cover off. “Within our first half-year, October through to March, “They’re very skilled at identifying what it is that might have December is a good month, and March is reasonable, too, but there are four months there that are probably the worst four months of the year in terms of cash flow. We have to manage through that. We’ve got our close relationships with the banks RALPH’S CV ROB’S CV to help us through those times,” he says. 2001-present > CEO, Marston's 2009-present > Head of treasury, With 90% of profits coming from the pub business and the 1994-2001 > Finance director, Marston's remainder from the brewing business, the significance of that Wolverhampton and Dudley 2006-2009 > Head of payroll, seasonality has to be shared knowledge across the business. Breweries ledgers & treasury processing, Leach made a presentation to the divisional boards just before 1992-1994 > Group chief Marston's Christmas on how the business can manage that working accountant, Geest 2001-2006 > Group management capital swing. 1990-1992 > Treasury Accountant, Marston's The Christmas boom hits the brewing side of the business, manager, Bass 1998-2001 > Management too. Marston’s holds around 20% of the UK’s bottled ale 1988-1990 > Chartered accountant, pubs division, Marston's market and 20% of the UK’s premium cash beer market, accountant, PwC 1994-1998 > Management says Findlay. “So ahead of a huge trading event like Qualifications: accountant, Lyreco UK Christmas, our stocks of working capital have to build MCT (1992) 1992-1994 > Local government up. Last year, we had to spend £4m building a new auditor, Audit Commission warehouse in Burton upon Trent just to handle the Qualifications > AMCT (2015) amount of stock we were required to send into the supermarkets at the back end of the year. So it was

34 The Treasurer February 2016 www.treasurers.org/thetreasurer ROB'S TOP TIPS FOR SUCCESS

Don’t be insular within My favourite gadget is your business. Take the my iPad. I am a massive opportunity to talk to as sport and news junkie, so many people from other I always like to be up to functions as possible and date with what is currently encourage your team to happening in the world interact in a similar fashion. (I also like to play Clash of Clans while my wife Continually analyse your is watching television). daily processes and look to identify those that may The secret to career success be inefficient and can depends on how you define be improved. We have a success. One thing that has fantastic IT team that has always stood me in good automated most of our stead is to treat everyone interfaces and download with the same amount of programs. The more you respect and courtesy, no streamline your processes, matter what job they do in the more time you have for the business. After all, we value-adding activities, such are all working towards a as forecasting and working common goal. cap management. Surround yourself with Invest time in your banking great people. We have a relationships and you will wide mixture of experience reap the rewards. If your and skill sets in our treasury really helpful and informative to our businesses to hear Rob banks understand your team, but they continually explain how all of that affects our cash flow.” It’s knowledge that is more effective when shared. “Because we are pretty efficient in the treasury team and we are able to provide the capital when required, I think people forget that The AMCT qualification has filled we do, as a business, have debt and we have to manage it. We have to manage day-to-day working capital requirements and many holes in my knowledge and we have to draw on our bank loans, which is what we use on provided me with new ideas that a daily basis. If everyone can do their bit, that can only help,” says Leach. I want to develop further The greater the knowledge and expertise within treasury, the better informed and cash-literate the business as a whole becomes. Both Findlay and Leach see an important corporate strategy and amaze me with their communication role for treasury within Marston’s. “The range how your business ticks, ‘can-do’ attitude and their of areas that the treasury team is involved in has steadily it becomes a lot easier to ability to problem-solve become wider and the issues they deal with have steadily work together and for them under pressure. become more complex,” says Findlay. “I have always thought to provide timely solutions the treasury qualification is a really useful one. We are a cash when you need help. The most difficult question business; most of our customers are spending money in cash. my FD is most likely to ask: To me, the treasury qualification has always been something With regards to the AMCT when will Liverpool win the that has helped us understand those things in a much more qualification,I am very Premier League? (He is a big effective way. And I’ve also thought it’s a really good way of familiar with the Marston’s Reds fan.) differentiating yourself in a career sense.” world of treasury, but the Findlay counts himself as fortunate to work in a business AMCT qualification has given The best way to wind focused on people enjoying themselves and having fun. It’s me a much broader viewpoint down after a stressful day also highly dynamic. “It’s a sector that has changed a lot and on treasury than I realised is a meal out (at a Marston’s continues to change very fast,” he says. “The competitive existed. It’s filled many pub, of course!) with my environment is constantly developing. For us, to be able to holes in my knowledge and wife and children, or a game make Marston’s the place to be for our customers is something provided me with new ideas of five-a-side football with that we’re fortunate to be able to do.” that I want to develop further. my friends.

Liz Loxton is editor of The Treasurer

www.treasurers.org/thetreasurer February 2016 The Treasurer 35

INSIGHT

SHOEF RT ON FUNDS The range of funding options for smaller corporates and SMEs has never been greater, but it is likely to remain a fragmented market. Paul Golden reports

Funding challenges faced by transaction and investment functions in businesses ranging from the smaller the UK, for instance, is going to lead to corporates right down to start-ups higher costs and that it is unclear which have attracted headlines and even ire part of the bank corporates will deal from political and business quarters. with. “The objective is to increase the Much of the disapproval has been aimed financial security of the banks, but other at an apparent lacklustre offering from EU countries and the US are not forcing mainstream banks in relation to this part their banks to make the same changes, of the business world. so UK institutions may become less Studies suggest that SMEs may not be competitive,” he adds. exploiting all the possibilities, however. So what does this mean for corporate Research from the Association for treasurers? According to Practical Car Financial Markets in Europe (AFME), and Van Rental group FD Len Jones, for example, highlights the fact that the key cash, working capital and European SMEs find it difficult to access liquidity management challenge is equity finance and that many SMEs still to find the right type of funding. remain unaware of the options available “In some instances, a straightforward to them. Bank loans remain the most overdraft is not the best option, as it can common source of SME finance in be inflexible and fail to take account of Europe. Italian SMEs received €233bn strategic changes in capacity,” he says. in loans in 2013 compared with just €1bn “We rely heavily on asset-based finance, in private equity (PE) capital, while in because we have long-term assets that Spain, €273bn was advanced through are held typically for six to 18 months bank loans compared with less than to generate rental income.” €1.5bn from venture capital and PE Jones refers to a stocking plan sources, according the AFME report. for rental companies developed in Regulatory changes aren’t likely to ease conjunction with finance company the situation, at least in the UK. Banks Lombard, which accommodates will continue to compete for business retention periods on fixed assets and from the biggest and most profitable day-to-day flexibility on the number of companies, but there is little evidence vehicles on the facility as an example of that they are improving their service finance houses fine-tuning their lending to larger SMEs or small corporates. criteria in response to general economic That is the view of UserCare Treasury conditions. “Liquidity is obviously a big Consultancy director Brian Welch, who issue, but the key to obtaining the credit says that the separation of banks into line in the first place is to have a clear

www.treasurers.org/thetreasurer February 2016 The Treasurer 37 idea of why you want it and how you can are keen to lend and that terms are by equity crowdfunding is just under manage the stakeholder’s expectations, much more competitive than a few years £200,000. Just over half (54%) of the which is becoming more of a part of the ago, and starting to approach pre-2008 businesses that raised funds this way treasury function,” he continues. “In levels,” he adds. were seeking expansion capital. the recent past I have seen signs that Alternative finance volumes are banks are more willing to work with Looking for alternatives growing steeply, but have a long way their customers and are trying much Yet many start-up and early-stage to go before they reach quantum. These harder to maintain sustainable banking, enterprises still find it hard to access sources provide only a tiny fraction of the and realising they have to sit with their bank finance, which explains growing total amount raised annually in Europe, customers through difficult times.” interest in alternatives such as observes Rick Watson, head of capital Stephen Pugh, FD at brewery, hotelier crowdfunding, angel investment and markets at AFME and one of the authors and wine merchant Adnams, explains peer-to-peer (P2P) lending. Business of the association’s SME funding guide. that the company has net debt and seeks angel investments range from £10,000 “For the overall economy, these types to ensure that all balances are pooled to to £1m, although syndication can result of platforms are important, since many minimise the cost. “Cash forecasting is in deals reaching £2m-plus. SMEs need small amounts,” he says. “As important, but we are lucky in having The potential to raise funds via P2P or the alternative finance industry grows, strong asset backing, so that facility alternative finance provision is growing, it is important that there is a strong focus levels have never been beyond a level but is still mainly of interest for the on governance to reduce opportunities at which our bank feels comfortable. smaller end of the market. According for fraud and mis-selling. This should “As for whether banks are improving to The UK Alternative Finance Industry be accomplished with the right type of their service to larger SMEs and small Report 2014, published by innovation dialogue between the funding platforms corporates, our experience is that they charity Nesta, the average amount raised and the regulatory community.” Jones agrees that there is a place for alternative sources of business funding, “I have seen signs that banks are more willing provided there are sufficient safeguards around fundraising and the stewardship to work with their customers and are trying of these funds. “The advantage is that much harder to maintain sustainable banking” (in theory) people know what they are

38 The Treasurer February 2016 www.treasurers.org/thetreasurer INSIGHT

services to their SME clients to assist making SCF deals work, Jones is more them with the challenges of growth, supportive of the concept.

IKON IMAGES IKON including governance.” “We have practised this for years as Banks that engage with their a franchiser,” he explains. “The basic customers most effectively and give their premise is that firms should collaborate customers the best guidance, tools and more and perhaps share open-book services will be successful, concludes accounting, manage each other’s John Davis, MD of business application margins and have proper discussions developer BCSG, whose research about supply and demand.” suggests that, while almost half of small businesses have considered switching Smaller corporates’ headaches banks at some point, most have been SMEs, like any sub-investment-grade with their current bank for more than group, will always struggle to attract five years. institutional attention, of course, so it seems likely that market responses Supply chain finance – big to their funding woes – such as SCF numbers, small benefits and internet-based alternative finance According to research by business providers – will remain fragmented for management consultancy McKinsey, the time being. The headaches aren’t there is approximately $2 trillion in necessarily relieved as entities grow, financeable, highly secure payables either. A study from rating agency worldwide. However, the firm also notes Moody’s, for instance, into newly rated that only one-tenth of the potential companies, found that companies rated market for supply-chain finance (SCF) for the first time in the nine months to is being exploited. September 2015 were unduly optimistic Welch worked for a company that in their projections. On average, they was an early adopter of SCF. “The expected to achieve full-year revenue traditional view is that it is a way for growth averaging around 7.1% (up from “Firms should collaborate more and perhaps share open-book accounting… and have proper discussions about supply and demand” getting into and perhaps take a greater SMEs to finance their activities, but my the 5.1% revenue growth that companies interest in the projects. There will experience was different,” he recalls. first rated in 2014 expected in their first still be a place for banks and larger “The company I was working for wanted year), but in reality may see a shortfall institutions in the business finance to take longer to pay its suppliers, so in that revenue growth of 3%, according marketplace – alternative finance is more in practice our suppliers were financing to the report’s findings. suited to start-ups and riskier ventures a larger company’s longer credit terms. Moody’s also found that achieving than banks would normally fund.” The bank that provided the facility cash-flow goals becomes more Welch is more upbeat about the also supplied software to manage the challenging for companies in their first potential of private/direct loans. “I am programme, so everyone made money year of achieving a rating. Some 62% the trustee of a medium-sized (£400m) out of it except for the supplier, which of 2014’s newly rated companies missed pension fund and we have just agreed had to wait longer for its money.” their cash-flow expectations for the to invest £20m into a fund designed to Welch observes that, although larger following year, up from 58% in 2013. lend to medium-sized companies and companies’ stronger credit ratings “The increasing percentage of newly SMEs,” he explains. “One of the funds should enable smaller suppliers to rated speculative-grade companies that will be valued at about £500m and the borrow on better terms than they would miss their own cash-flow forecasts in other may be up to £2bn. Pension funds be able to achieve on their own, in the year of rating assignment further that want a longer-term, higher return practice that wasn’t necessarily the increases the risk of weakening liquidity are keen to invest. I used private loans as case, since the larger suppliers refused among speculative-grade companies a corporate treasurer in the 1980s when to agree to the extended credit terms. and could ultimately pressure ratings the market was mainly US-based and the Adnams has found itself on the for some,” say the report’s authors. investors were US insurance companies wrong side of SCF, says Pugh. “It is very Newly rated companies, it seems, show with long-term liquidity to invest.” frustrating to have large customers similar vulnerabilities, along with added It is also worth noting that the vast coming to us demanding very lengthy pressures around generating results majority of SME clients never borrow payment periods, but saying that we persuasive to backers. from their bank, but instead rely on shouldn’t worry as they can provide the it for a wide range of other services, finance,” he says. says Watson. “For example, a number While accepting that a transparent, Paul Golden is a freelance journalist of banks now offer general advisory long-term relationship is the key to specialising in finance

www.treasurers.org/thetreasurer February 2016 The Treasurer 39 Context of treasury The business context

STATE OF THE UNION US TREASURERS FACE A HOST OF UNFAMILIAR DECISIONS AND A CHANGING INVESTMENT CONTEXT, WITH GREATER MARKET UNCERTAINTY ON THE NEAR HORIZON. ANTHONY J CARFANG TRACKS THE RESPONSES OPEN TO THEM

There can be no doubt First of all, the challenges – move to a fluctuating net asset looking at diversifying funding that, today, corporate how is the US context affecting value. Several hundred billion sources, even at a premium.

treasurers around the corporate treasurers? to a trillion dollars may leave IMAGES IKON globe have major challenges: prime funds in favour of other Collateral scarcity slow economic growth, fallout Rising domestic investments. No one really As we have argued throughout from Basel III, FX volatility interest rates knows how much will leave, the regulatory debate, and financial crisis regulatory After nearly a decade of nor whether the outflow will cumulative effects of myriad overhang. Treasurers doing virtually zero-interest rates, be temporary (think Y2K). new mandates contain seeds business in the US face all suddenly the cost of US-dollar Since funds can invest in of the next debacle. Recently, these, as well as several borrowing is rising. The maturities of up to 13 months, we’ve pointed out that issues unique to the US opportunity cost of suboptimal we are already within the additional statutory demand market, namely: US-dollar investing is also window of impact. for high-quality liquid assets • Rising domestic rising. To make matters worse, This poses two dilemmas at banks and trading collateral interest rates; higher ‘too big to fail’ capital for the treasurer. As an at clearing houses could easily • New money requirements are leading to investor, should the company outstrip supply. This is acute in fund regulations; lower deposit and earnings stick with prime funds, the US because, unfortunately, • Collateral scarcity; credit rates at big US banks. maintaining yield, but giving the new regulations are • Reduced market liquidity; This is all against a backdrop up some liquidity on the procyclical and demand will • Corporate tax- of lower and even negative implementation date? If not, increase exponentially at the rate imbalances; deposit rates outside the US. where should the funds be first sign of market stress. • The strong dollar; and So a treasurer must make invested or deposited? Banks This scarcity has a direct • An eventual unwinding of a host of unfamiliar decisions. certainly have little appetite impact on US treasurers. the Federal Reserve’s swollen Borrow long? Invest short? for new deposits. How much Cost of hedges and other balance sheet. Reach for yield by reducing yield is the treasurer willing derivative risk management credit quality, or improve credit to forego? tools will rise and availability In our consulting work, we quality without forfeiting yield? As a borrower, if prime will decline. Treasurers are see US treasurers responding Take some FX risk and convert funds shrink dramatically, upgrading financial models to to these challenges in several investable cash to US dollars? companies will lose an determine which hedges have ways: expanding staff; doing important source of short-term become cost-ineffective, and more with more; optimising New money credit. That’s because money are explaining to their boards technology; focusing on cash fund regulations funds will have fewer dollars why they may now leave some forecasting; updating policies; On 14 October 2016, to buy their commercial paper. exposures unhedged. Their and centralising control. institutional prime funds must Some treasurers are already challenge is determining how

40 The Treasurer February 2016 www.treasurers.org/thetreasurer much risk the company should Strong dollar boards came to recognise the But rising rates change keep on its own books. The appreciating dollar leads strategic value of treasury. all that. US treasurers are to more challenges. Are sales Increasingly, treasury has now upgrading their cash- Reduced market liquidity forecasts still accurate and, become the financial nerve forecasting processes, which Dodd-Frank, in particular the if not, should cash and other centre of the firm and is being have historically consisted Volcker Rule section, limits balance-sheet forecasts be resourced appropriately. of limited spreadsheet the role of banks as market modified? How will it affect Given all the complexities calendaring functions. makers. This, in turn, creates the cost of goods sold, and how discussed above, we see Companies are now building a drag on underwriting for will that affect supply-chain treasury functions building sophisticated and integrated all but the most creditworthy financing arrangements? How their teams. With an expanded methodologies and using borrowers. Dealer inventories will it impact the company’s remit, they are adding staff tools in their TMSs. They are have fallen to a generational domestic or foreign customers’ who can navigate global doing more granular analysis low. Bid-ask spreads have credit quality? markets, manage risk and of historical cash flows to widened considerably, These are murky waters handle complex analytics – improve daily and weekly reportedly for some bonds at to navigate, requiring deep all in addition to the daily forecast precision, and more an unimaginable 10%. These understanding of each line blocking and tackling that has comprehensive statistical aberrations have even spilled of business, each geography always been part of treasury. analyses of other business over into the treasury market. and appropriate analytics for variables for intermediate US treasurers have long simulations and stress tests. Optimising technology and longer-term forecasts. enjoyed the world’s broadest Treasury technology has and deepest capital markets. Unwinding of the Fed’s improved immeasurably Updating policies and Regulation is now changing swollen balance sheet over the past decade. Rather centralising control that. Treasurers are actively If there is one wild card for than stand-alone systems, US treasurers are taking recalibrating processes in US treasurers, this is it. Most treasurers seek solutions a hard look at their global anticipation of not being able treasurers see this as a dark that can integrate into other treasury organisations. With to access capital markets as cloud that greatly increases corporate systems and provide empowered technology and readily as in the past. market risk. insights and analytics to updated treasury policies, The Fed’s balance sheet enhance shareholder value. many are able to centralise Corporate tax- has grown from $1 trillion to Companies still using control and authority, rate imbalances $4.5 trillion over seven years, spreadsheets are quickly and standardise global The US has one of the funded by excess bank reserves abandoning them, as auditors processes, while maintaining highest corporate tax rates that have skyrocketed from and cybersecurity groups raise decentralised operations. in the world, exacerbated $40bn to $2.5 trillion. What red flags. They are examining the proper by additional tax due when will happen to the markets as Even so, most companies structure of their regional overseas cash is repatriated. the Fed unwinds? What will using treasury management treasury centres and many are setting up payment factories. Along with this, treasurers A treasurer must make a host of unfamiliar decisions. are examining the size and Borrow long? Invest short? Take some FX risk and skill set of their staff. Many roles are becoming more convert investable cash to US dollars? technical and quantitative. Other roles require interface As a result, huge amounts happen to liquidity and access systems (TMSs) still have with both external and of cash are stranded in to credit when bank reserves much work to do. They have internal stakeholders. some jurisdictions, even decline? These transitions may generally done a good job The treasurer’s role has as a company must borrow cause wide price swings and with bank connectivity never been so complex, in others. liquidity gaps in a whole range and cash visibility. Now regardless of where the The US treasurer must of financial assets. they are moving on to company operates. In addition first ensure that overseas Unlike the other issues higher-order analytics and to macro factors impacting cash is put to its highest and mentioned, this one has modules, such as hedge all firms, US treasurers have best use, within tax-code no precedent and no proven accounting, risk management, some challenges unique constraints. In addition, empirical assessment in-house banking and to the US economic and the treasurer must optimise methodology. It’s an cash forecasting. regulatory environment. a consolidated balance exogenous risk that the sheet in which investments treasurer must manage. Focusing on and borrowings are both So how are US corporate cash forecasting artificially inflated by this treasurers responding? For several years of zero- cash immobilisation. Finally, interest rates, the opportunity at some point, this balance Doing more with more cost of bad forecasting has sheet stretches historical After the financial crisis, been close to zero. Idle Anthony J Carfang is a financial leverage ratios, and companies faced tight budgets, cash has not mattered and, partner with US consultancy could inadvertently violate but treasury was generally as a result, forecasting Treasury Strategies credit covenants. spared the axe. CEOs and processes atrophied.

www.treasurers.org/thetreasurer February 2016 The Treasurer 41 Financial risk management Risk frameworks STRATEGY A STRATEGY B THE FX CONUNDRUM IF TREASURERS ARE TO ARGUE THE CASE FOR A NEW FX HEDGING STRATEGY, THEY WILL NEED TO PROVIDE REASSURANCE THAT ANY NEW PROPOSALS FIT WITH THEIR BOARD’S VIEW OF RISK. MARK O’GORMAN PROVIDES A FRAMEWORK FOR A MORE FLEXIBLE APPROACH

There have been many ones – are attractive. However, way and within a corporate’s use to devise an objective, articles written in the options are often dismissed specific risk appetite. Critical to view-agnostic hedging policy treasury and risk on other grounds: they cause the analysis is to help treasurers that employs favourable

SHUTTERSTOCK management press in the past profit and loss volatility (an form a new hedging policy product combinations. year on the relative benefits issue soon to be banished from and robustly test it relative to Favourable strategies may or costs of using FX option IFRS accounting rules), they their current one and a range of be defined as when: contracts versus FX forwards are expensive or are considered other strategies under different • on average the strategy contracts for managing an expression of a ‘view’ on market conditions. produces a greater positive transactional risk. future rate movements. return than other strategies, With current euro weakness Many corporate treasurers A strategic solution including the all-forwards (the euro/US dollar exchange currently using an all- For illustration, we look at strategy; and stood at around 1.06 at the forwards strategy also take a UK corporate that uses • the ‘worst’ deviation (95th time of writing) and relative the philosophical view that an all-forwards hedging percentile confidence) from US dollar and pound sterling hedging is a strategic matter – strategy – layering forwards the all-forwards strategy strength against a range of manage risk within their given monthly out to 18 months. is exceeded by the average other currencies, this is no mandate and stick to it. Using The corporate is view-agnostic, positive return. surprise. Treasurers seeking to options would therefore be a but believes that at least its sell euros or buy pound sterling tactical change, an expression ‘majors’ (euros and US dollars) A back-testing approach for or US dollars forwards are now of a view that the rate is about tend to revert to their long- devising go-forwards strategies squarely stuck in the classic to improve. run averages. It therefore may well encounter scepticism. treasurers’ conundrum – hedge In this article, we suggest envisages that, relative to this However, the goal here is only with forwards to lock in a poor an approach for treasurers long-run average, there will to indicate that options may rate or leave their business aimed at building a strategy be times when the currency be introduced in a controlled exposed by reducing cover. incorporating options to may be considered under- or and simple manner to produce Faced with this conundrum, manage FX transactional risk. overvalued. It will nevertheless favourable outcomes. Forwards options – the ability to protect This is done using a framework not ‘position’ with a view points and option premium are against adverse movements where optionality may be used on how soon the rate will accounted for in the analysis. but benefit from positive objectively, in a predetermined mean revert. The corporate Any strategy, if selected, recognises that since implied must be easy to execute. For EFFICIENT FRONTIER OF HEDGING STRATEGIES volatility (the expected example, if spot and volatility variation in the FX rate over are both high, a favourable 102 time) is a key driver of option strategy may suggest using Strategy A Strategy B cost, there will be times when 100% forwards for the given 101 using options appears ‘cheap’ amount of cover that month, or ‘expensive’ relative to while if spot is low and 100 other times. volatility high, the strategy Ecient frontier These assumptions – may switch to using 25% points 99 spot may be under- or options, 25% collars, 50% overvalued and options forwards and so forth. The 98 Unhedged cheap or expensive – create same combination of products strategy All forwards the basis for the strategy. is used whenever the same strategy 97 The aim of the analysis is to combination of spot and Expected £-equivalent amount £-equivalent Expected -14 -12 -10 -8 -6 -4 -2 0 identify conditions that have volatilities arise irrespective

Worst-case deviation away from all forwards strategy historically favoured option of where each has been or RBS ANALYSIS SOURCE:

42 The Treasurer February 2016 www.treasurers.org/thetreasurer COMPARISON OF THE PERFORMANCE OF SPECIFIC STRATEGIES

All forwards Strategy A Strategy B Unhedged

Currency Expected £ Worst-case £ Expected £ Worst-case £ Expected £ Worst-case £ £ equivalent exposure equivalent equivalent equivalent equivalent equivalent equivalent Sales $155 100 101.6 96.6 101.2 99.2 99 87.3 Costs £90 (90) (90) (90) (90) (90) (90) (90) Equivalent 1.5500 1.5263 1.6052 1.5316 1.5620 1.5657 1.7761 FX rate Operating 10 11.6 6.6 11.2 9.2 9.0 (2.7) profit Operating 10% 11.4% 6.8% 11.1% 9.3% 9.1% (3.1%) profit margin

where the company thinks into pound sterling, it will lock or return in this context is will mean revert. It can also they may be going. in an average return on that an average and not the ‘best- support the treasury team’s However, because the strategy of 100 (an average case’ outcome, while a worse belief that using options when corporate’s board will not of the 18-month strategies outcome is to a 95th percentile spot is unfavourable (by an approve any strategy that at over the 15-year period), and confidence level. objective measure) will be times may suggest using ‘only perform no worse under the The table above illustrates able to provide upside even options’, it imposes constraints same market conditions than the potential impact of a shift after the costs of hedging. on both the minimum its current strategy. in FX hedging policy on the The company’s governance proportion of cover and the However, ‘Strategy B’, for results of a company adopting structure establishes control minimum proportion of example, produces an average some of these strategies, which around options use by placing forwards cover in all market return at 101.2 (1.2% better sources exclusively in pound constraints on the extent and conditions (of which there average rate than the all- sterling (its local currency) type of options used. are only four – high/low spot, forwards strategy), while its and has revenues in US dollars. However, as the number of cheap/expensive volatility). The 95th percentile worst outcome It shows the potentially strategies that fall below 100 on board will also only consider is 0.8% worse than the all- favourable bias in the the y-axis show, there are many purchased at-the-money forwards outcome in the same risk-return trade-off of ways in which options can be forwards options, purchased market conditions. Strategy B – remembering suboptimal – many of those out-the-money options and With the corporate’s that the ‘return’ is only the other strategies test the use of zero-cost collars as possible assumption that mean average return achieved by options when spot is already in alternatives to forwards. reversion of pound sterling/ incorporating a degree of the company’s favour relative Each strategy (greater than US dollars will continue, the option hedge cover and having to average historic levels. 100,000 random strategies inference is that, in the future, it expire out of the money, so As treasurers seek evaluated) is then tested over strategies from Strategy B the corporate can exchange alternative ways to manage the corporate’s 18-month to the all-forwards strategy US dollars in the spot market FX risk while achieving future horizon and across on the ‘efficient frontier’ at favourable rates. the best outcome for their 15 consecutive years of past may continue to achieve company, we see a place for market data, if available. a favourable outcome. Of Conclusion greater flexibility of hedging The results for each strategy course, as the risk axis shows, This analysis can provide strategies. The first step in are then compared to the there will be times when these a framework for a corporate achieving this is to define a company’s all-forwards strategy. strategies may underperform treasurer to present to their strategy within your company’s the all-forwards one. board a revised, tried-and- unique risk appetite, and then The results Unsurprisingly, the tested FX hedging policy. to test this extensively relative Using pound sterling/US strategies on the efficient Importantly, any of the to other strategies. dollars as the test case, the frontier suggest using a revised strategies must be average FX rates (y-axis) degree of optionality (within ones that the treasury feels are and worst rates (x-axis) the corporate’s specified within the risk appetite of its (see the graph on page 42) constraints) only when spot governance bodies and whose Mark O’Gorman is head of risk advisory, Financing are presented as an index is unfavourable relative to the performances have been & Risk Solutions, at wherein the all-forwards long-run spot average. assessed on a relative basis RBS Corporate & strategy is presented at the incorporating hedging costs. Institutional Banking coordinates (0,100). In other Operating in the margins The revised strategy is words, if the corporate sticks In this example, the risk-return substantially view-agnostic, with its all-forwards strategy pay-off of Strategy B may based only on the corporate’s to hedge US-dollar revenues appear slight, but the upside assumption that the currency

www.treasurers.org/thetreasurer February 2016 The Treasurer 43 Financial risk management Identify and assess risks

Risk hidden in plain sight SOURCE IMAGE MOST OF US THINK COUNTERPARTY RISK BEGINS AND ENDS WITH BANKS. BUT THIS VIEW OVERLOOKS THE RISK TO CORPORATES’ CASH POSITION FROM CUSTOMERS AND SUPPLIERS, ARGUES MICHAEL STEFANSKY

Counterparty risk occurs fluctuations. But what about could be not to sell anything Bank guarantees where one party in a the customers that owe us to a particular customer or A guarantee or letter of contract is not able to money or the down payments to make it a policy not to credit (LC) is a promise fulfil its obligation to the we extend to suppliers? make advance payments by the bank to assume other. This is a large topic in Do we always think to to suppliers. However, this responsibility for the debt the corporate and banking include these parties in approach could lead to obligation of the customer worlds, but when we talk our discussions on risk a default of the client or or supplier in the event of about counterparty risk management? And how supplier, which, in turn, a default. This arrangement management, the parties should we tackle this area? could harm our company. is tied to certain criteria and that tend to come to mind There are several options There are several other to bilateral agreements first are banks, where we as that can protect a company possibilities in the market between the customer treasurers hold cash and face from the default of a customer – the most appropriate ones or supplier and the bank. currency and interest-rate or a supplier. The first reaction are outlined here. There are a lot of different

44 The Treasurer February 2016 www.treasurers.org/thetreasurer guarantees available, and not received any payment as are taken off balance sheet, Receivable put all of them are useful in this of the due date. There is no but only in case of non- The receivable put allows context, however. (Below you material difference between recourse factoring. the company to purchase the will find a short explanation a payment guarantee right to deliver receivables of advance payment and a SLOC. The latter is Trade insurance to the bank in the event of guarantees and payment primarily used by US banks, Credit insurance is usually a default of a client. After guarantees or standby letters which are not able to use offered to companies wishing a customer defaults and in of credit (SLOC)). bank guarantees and which to protect receivables from case the receivable put has Both can be structured for therefore created the term loss due to protracted default, been triggered, the company short-term coverage or for as ‘standby letter of credit’. insolvency or bankruptcy. delivers its outstanding long as a contract runs. The The usual maturity of such receivables to the bank. After bank usually covers risks that Types of guarantees insurance is a minimum one the bank has validated the they can evaluate. The pricing Guarantees can be direct or year, but as for factoring, this claims, the company is paid of a guarantee is a matter of indirect. A direct guarantee form of protection is often the par value of the receivable credit risk and negotiation is where the bank issues unavailable for high-yield or a predetermined purchase with the bank as well, as it a guarantee directly in or distressed companies. price. This can be set at 100% necessitates a credit line or favour of the company. An pledged cash at the bank. indirect guarantee is where The bank usually covers a correspondent bank is Each company should have a 100% of the amount stated involved and is used in cases counterparty risk policy in place, in the guarantee. The default where the company doubts the trigger is as per contract creditworthiness and financial especially for customers and suppliers specification and as soon as stability of the house bank the counterparty is in breach of the customer or supplier, It may also involve a of the coverage amount or at the company may request due to legal requirements or substantial underwriting a discount. The receivable put funds from the bank. The domestic laws. A corporate process, which is another is a custom-made product to credit rating of the issuing may also use the house bank factor to consider. The benefit address the unique needs of bank is very important and as an advising bank. However, of all this, is that it can be a company. has to be looked at when its only role is to pass the inexpensive for available non- requesting a guarantee. SWIFT message on to the high-yield and non-distressed Conclusion • Advance payment company. This is often done companies. Usually it is not To tackle the problem guarantee – the advance once the company trusts the a full protection due to the correctly, each company payment guarantee client’s bank. deductible on the insurance should have a counterparty serves as a security for policy. Claims made against risk policy in place, especially the reimbursement of an Factoring trade insurance policies can for customers and suppliers, advance payment made by Factoring is a type of debtor be cumbersome, however, and with the definition of the the company in the event finance in which the company may include a waiting period approval process for a request that the supplier fails to sells its receivables to a bank of up to 180 days. for credit lines. Any amount supply the ordered goods or or a third-party provider at above this line should trigger as per the agreed contract. a discount, which covers the Credit default swap a request for protection. In order to make a claim, cost and a risk premium. A credit default swap (CDS) There are many possibilities the company is generally Invoice finance providers offer is a financial swap agreement available, but each company required to declare in factoring on a recourse or non- where the seller of the CDS has to evaluate its needs. To writing that the supplier recourse basis. Factoring on has to compensate the buyer protect large amounts, a CDS did not fulfil its contractual a non-recourse basis is a real in the event of a credit event. or a receivable put is available. obligations properly. protection against a default This is to say that the seller Factoring is feasible to protect • Payment guarantee or of a customer. Non-recourse of the CDS insures the buyer receivables of a company and SLOC – the purpose of the factoring is much more costly against some reference to increase working capital payment guarantee is to than factoring with recourse. loan. The buyer of the CDS at the same time. A bank ensure that the customer The maturity of this type of makes a series of payments guarantee or trade insurance will pay their payment product is usually six months. to the seller and receives a would make sense for single obligation on the agreed The downside of this product pay-off if the loan defaults. customers or suppliers. date. The documents is that it is often unavailable The CDS is a standardised required when drawing for high-yield and distressed product, tradeable on a lot the guarantee are checked companies. It is a lengthy of stocklisted names and against the details given process to establish a factoring therefore only useful if at the initial agreement relationship, as due diligence trading with big names. The most common maturity is the when the guarantee was into the invoices needs to be Michael Stefansky is negotiated. To make a claim, carried out. Factoring is a five-year CDS. A committee a treasury professional the company is required to good instrument for working decides whether or not a working for Swiss default has occurred, and the International Airlines, declare in writing via post or capital improvement, as the and has several years of email that the company has company generally receives recovery in case of a loss is par experience in the banking fulfilled all of its contractual funds earlier than it would minus a specific recovery rate, and corporate worlds obligations, but has not otherwise and the receivables as per the ISDA Agreement.

www.treasurers.org/thetreasurer February 2016 The Treasurer 45 Treasury operations Financial products and markets Tapping into new liquidity pools EUROPE’S MARKET FOR TRI-PARTY REPOS IS OPEN FOR BUSINESS AND LOOKING FOR CUSTOMERS, BUT APPETITE AMONG CORPORATE TREASURERS IS WANTING, SAYS OLIVIER GRIMONPONT

The European repo market’s need for new blood was underlined in the latest semi-annual survey of repo business conducted by the International Capital Market Association’s European Repo Council (ERC). Issued in September, the ERC study reported a market size of €5,612bn, based on the amount of repo business outstanding on 10 June 2015, a fall of 2.9% from 12 months previously. This might not look like a market in crisis, but repo is certainly a market in flux. The ERC itself noted both extraordinary positive factors – strong bond issuance in response to low interest rates, excess liquidity derived from the European Central Bank’s long-term refinancing operation and quantitative easing initiatives, as well as increased demand for high-quality collateral arising from the requirements of Basel III and the European Market Infrastructure Regulation for sell-side and buy-side firms, respectively. On the other hand, forces dampening repo activity include Basel III’s leverage ratio and net stable funding

ratio, which tend to reduce the IMAGES IKON profitability of repo market activity, while the Central Alternative liquidity in Europe’s evolving repo assets available to become Securities Depositories Speakers at Euroclear’s market. Specifically, large regular and substantial Regulation and the Bank Collateral Conference made corporates and other entities counterparties to banks Recovery and Resolution it clear that liquidity from structurally long in cash looking to use their securities Directive also pose challenges non-traditional sources (such as insurance firms as collateral to raise cash. to secured lending business. had a crucial part to play and pension funds) have the They may have the assets,

46 The Treasurer February 2016 www.treasurers.org/thetreasurer but do they have the appetite etc, are going to become a to build momentum, not bonds and swaps via voice- and capacity to meet rising permanent and meaningful least because banks are used brokered channels. Less bank demand for long- presence in the repo market. to negotiating terms with frequent market participants term cash from non- Already, we see corporates individual counterparties, will inevitably be used to financial counterparties? that started off in the repo but there is a level of more manual processes. Certainly, corporate markets conducting only confidence that initiatives Existing electronic trading treasurers have reservations very vanilla transactions such as the standardised platforms in the repo market about European Commission now beginning to go further GMRA will continue to gain have largely been developed proposals that require money along the curve in pursuit of market acceptance, as banks, to trade fairly commoditised market funds to be priced yield; for example, accepting too, look to knock down transactions between banks. on a variable net asset value equities as collateral, or the hurdles to broader As such, only now are they basis; they are also sensitive agreeing to longer time market participation. beginning to respond to to the counterparty risks and horizons, and generally being Transparency and access demand for a wide range of costs of placing more cash on open to innovation. This are also key themes from an functionality as non-banks the balance sheets of banks, openness is built in part on internal perspective. While assert their presence. some with lower credit ratings relationships, but also on corporates will need accurate Moreover, MiFID II is than themselves. But they’re transparent and easy-to-use and timely intelligence on imposing pre- and post-trade not yet ready to embrace repo. workflows. Industry efforts their upcoming cash needs transparency requirements The latest ERC survey towards standardisation when committing to the on a much wider range of shows a continued rise in the and automation of repo market, so institutional instruments, adding further share of directly negotiated information exchange are investors must be fully aware momentum to efforts to transactions, reflecting a important in this respect, of the changing mix of assets automate and standardise move away from low-margin, particularly when aimed within their portfolios and repo market activity. commoditised interbank towards easier monitoring managed accounts. Buy- This means dealing with transactions towards of collateral valuation and side firms that are long in counterparties on a bilateral, higher-margin, customised transaction pricing. cash naturally – or have a heavily negotiated basis with client business. However, suitably liquid asset pool non-standard terms likely the share of tri-party repo Overcoming the – may wish to leverage this to become a thing of the business – often considered challenges situation to obtain high- past. Clearer indications of a benchmark for non- But a fundamental quality liquid assets via the interest and greater certainty traditional repo activity as prerequisite of successful repo markets to support their of trading – delivered by standardised, automated platforms – will increase Large corporates and other entities structurally long the appetite and capacity of in cash have the assets available to become regular non-traditional repo market participants to the benefit and substantial counterparties to banks looking to of all. use their securities as collateral to raise cash We are very much at the start of the journey towards a new repo market. this tends to be intermediated long-term participation in OTC derivatives positions Uncertain regulatory and by tri-party agents – fell to the repo market is access, at a central counterparty. macroeconomic conditions 10% from 10.2% in June 2014, ie the freedom to select To do this, however, requires may at times slow the while the outstanding value counterparties as and when considerable workflow and rate of progress. But if we reported directly by tri-party interests coincide. For technological coordination, continue to keep talking agents was also lower. banks, this is facilitated compared with existing and keep shining a light on This hardly suggests by long-standing bilateral standard practice. less transparent and more overwhelming appetite, relationships underpinned by As such, for firms that do complex processes, the repo which is unsurprising a Global Master Repurchase not already have a repo desk market will attract sufficient in a low-interest-rate Agreement (GMRA), but or sophisticated collateral diversity and liquidity to environment. Nevertheless, for newer participants the management capabilities, meet the needs of a wide structural barriers to non- in-house legal expertise to the barriers to effective range of participants. traditional repo market manage these contracts is repo market participation participation can be removed not necessarily available, might be as much internal or at least lowered. In presenting a major as external. A degree of Olivier Grimonpont particular, there is great administrative hurdle. We comfort and familiarity with is global head scope for simplification and have made a contribution the trading protocols and of collateral management and automation of workflows, to wider repo market access mechanisms of the repo securities lending which will in turn improve by developing a standardised market is also required to for Euroclear transparency and capacity, GMRA that can be used optimise its potential. Asset thereby breeding a level by non-traditional market managers are used to trading of familiarity and comfort, participants to transact with equities and futures largely which is vital if corporates, all repo market participants. electronically, while dealing insurers, asset managers, Such initiatives will take time in OTC instruments, such as

www.treasurers.org/thetreasurer February 2016 The Treasurer 47 Treasury operations Technology

CAN YOU OPTIMISE YOUR TECHNOLOGY’S CAPACITY TO SUPPORT GROWTH OR CHANGE WITHOUT LOSING THE BENEFITS OF LEGACY APPROACHES? LESLEY MEALL INVESTIGATES

Predicting the future on your treasury function? What’s driving change? when one high street bank with any degree of Which technologies “Treasury and finance will with extensive enterprise accuracy isn’t easy; should you be adopting continue to change and new systems and a big IT budget whether you are trying to or exploiting? When is needs will be introduced was struggling to solve forecast future interest-rate the optimal time to do that might otherwise stress a payment protection movements or future-proof this? Are you missing legacy platforms,” suggests insurance remediation your treasury technology. opportunities to benefit Bob Stark, vice president, problem, in mere days, The only thing we can be from developments such strategy, at Kyriba, a cloud it turned to the low-cost, 100% certain of is that we as big data and predictive treasury software specialist. low-tech solution: gigantic can never be 100% certain analytics? Can your systems Even if the possibilities spreadsheets shared by of anything. withstand the rising tide offered or demanded by hundreds of staff – despite Will interest rates go of cybercrime? All these emerging technology don’t the horrendous drawbacks up this year? Will they questions prompt even drive you to change, future of taking this approach. go down? Will they stay more questions. developments similar to Time was, this bank (and the same? Faced with As we enter an era when Single Euro Payments Area others with spreadsheet questions such as these, technology will radically payments and European dependencies) might have you can assess the rate reshape businesses, all Market Infrastructure limped along in this way sensitivity of your assets future-proofing attempts Regulation reporting indefinitely, but new and liabilities, try to to minimise the extent probably will – and your types of software and understand what the to which a software technology infrastructure systems can make this potential impact might be, product, service or may make changes such avoidable. New approaches for example, on cash flow technology infrastructure as these more, or less, easy include solutions that or banking covenants, and will need to be updated to adapt to. look like spreadsheets, then you can hedge. But as technology advances Compliance is an area but are connected to hedging your bets when it may be doomed to some where treasurers and banks’ database systems comes to future-proofing degree of failure. Yet good finance chiefs must so that they are linked your treasury technology reasons remain for trying always react, regardless to legacy systems and may be a little trickier. to future-proof (and of how easily existing data and obviate the Which emerging IT and optimise) your treasury systems can or cannot need for complex and

trends will most impact technology infrastructure. accommodate this. So SHUTTERSTOCK expensive reprogramming.

48 The Treasurer February 2016 www.treasurers.org/thetreasurer Should you jettison In response to these of that ERP can also deliver diverse currencies and with spreadsheets? problems, the treasury benefits. “We are in the final our rapid growth into new Not all organisations want team created its own Excel stages of implementing markets, we need to ensure to solve their spreadsheet workarounds. But these one SAP system group- full insight into global cash problems in this way. At spreadsheets needed wide,” says Daniel Wong, and be more aware of our CA Technologies, a provider frequent manual updates head of group treasury at potential liquidity and FX of IT management software and checking, and were British American Tobacco. risk,” she adds. and solutions, a cloud- error-prone. “We said to “The next step will then When BBC Worldwide based, on demand, software ourselves, ‘instead of doing be implementing a stable started a project to unify as a service (SaaS) treasury all this work to upgrade group-reporting structure, its public service and management system (TMS) some old legacy technology, which we will be able to commercial treasury teams offered a route out of let’s look at the market, see leverage on to obtain live, and its BAM databases, a spreadsheet dependency. what’s available and maybe real-time reporting.” SaaS offering (from Kyriba) “SaaS is the way CA is move into the modern age,’” seemed to meet this need moving strategically. says Markowitz. Having Are you on the edge? – and more. “We now hold We like the idea that a single cloud-based TMS Some treasurers and finance quality, up-to-date data the technology company (from Reval) gives all users chiefs have reservations across all of our accounts, manages the software for access to the same (and the about public cloud services. signatories and mandates,” us. The software is always latest) version of software But whether you consider says Michael Vasey, treasury

current, upgrades are and reporting formats, them bleeding edge, analyst at BBC Worldwide. pushed to us and everyone which makes it much leading edge or a step too The project will also enable across the company is on easier to manage treasury- far, some treasurers are fans. treasury to accommodate the same version,” says related data. Some treasurers see SaaS future changes and Kenneth Markowitz, vice “We now have everyone as nothing more than an opportunities: automating president and assistant around the world on enabler – a resource delivery as many BAM processes treasurer at CA. one platform, which is mechanism for the treasury as possible means that There seems to be something we’ve never had software and systems that treasury will be good to go little appetite at CA for a before,” says Markowitz, happen to best meet their when full electronic BAM system that enables those “and we have a single source needs. So where public (eBAM) becomes possible. in the business to solve of the truth.” Markowitz cloud SaaS sits in terms of At the moment, their own spreadsheet now gets one standard how comfortable treasurers all-singing, all-dancing problems. Before it made report he knows is accurate are with it is up for debate. solutions that offer multi- the transition to cloud and complete. “Instead At Averda, a provider bank SWIFT connectivity, treasury software, the teams of wasting a lot of time of integrated waste- plus the capacity to fully in treasury and IT at CA had doing reconciliations management solutions, automate eBAM and been finding it increasingly [of one report to another] a SaaS TMS is helping to seamlessly exchange all related data with each and every bank, are just a golden Getting all parts of an organisation onto the same ERP shimmer on the horizon. and a single instance of that ERP can deliver benefits The reality is multiple proprietary bank eBAM systems. But when true difficult and time- and ensuring that data is support the company in multi-bank eBAM systems consuming to deal with the correct, me and my team its ambitious strategic do arrive, as they will, shortcomings of their legacy can spend that time doing growth plans, by improving Vasey and the team will be treasury systems. “When analysis, which helps us to visibility into treasury and ready to exploit them. He issues came up it was a very drive the company forward,” adding rigour to financial says: “We have managed to big distraction to the daily he says. controls and bank account future-proof ourselves.” work that the treasury team The potential for management (BAM). “We needed to do,” explains standardisation to enhance wanted to empower our Markowitz. Also, the the treasury function isn’t treasury team with the most reporting that came out limited to TMS; getting all advanced tools it could of the legacy system was parts of an organisation find,” says Maria Bavelaar, Lesley Meall is a freelance incomplete, it wasn’t always onto the same enterprise Averda group treasurer. journalist specialising in finance and technology accurate and it didn’t meet resource planning system “Our company has offices in the team’s needs. (ERP) and a single instance remote locations, manages

www.treasurers.org/thetreasurer February 2016 The Treasurer 49 Behavioural skills Working effectively with others

Think about some of the Boosting self-belief It’s a terrible state of sadness and anxiety. The people you know who and debunking the affairs because it isolates the scientists then asked their stand out. What is it that confidence con innumerable people who feel friends to disclose their actual helps them get noticed? Is it You may be surprised to learn less than 100% confident. emotional experiences. that they speak slowly and how very many people succeed When we feel worry, doubt or The researchers spotted forcefully – or perhaps quickly in spite of their fears. There are even dread and outright panic, a clear disconnect. Most and with acerbic wit? Do they many actors, performers and we are conned into believing participants underestimated listen and make others feel entertainers who suffer great that we’re alone, that we’re their friends’ negative like the centre of the universe? fretfulness: actors Sir Derek losers and that few others emotions by 17.2%. Or do they just radiate some Jacobi and Dame Judi Dench, can feel the same way. The flip side of the kind of charm and good for example. But they get on But that’s not the case, as confidence con – the good humour that draws others with it anyway. They illustrate demonstrated by scientific news – is that your true to them? what I call the confidence con: surveys. For example, social feelings are likely less apparent Beneath the surface, the external appearance of scientists led by Alexander than you think. When you we can’t see the many, confidence in others deceives Jordan at the Tuck School of feel nervous, you may notice many pieces that make up us into believing that they feel Business conducted a series of your heart pounding in your standout individuals, but confident inside. The reality studies delving into this very chest. Of course, you have make no mistake, there are is that people often appear issue. They asked participants a whirl of negative thoughts many parts that can indeed confident by how they behave to guess the extent to which and self-doubts bouncing be analysed, understood publicly, but can be afflicted their friends experienced around in your head, too. But

and learnt. by anxiety and doubt privately. SHUTTERSTOCK negative emotions, such as no one can see the content Don’t go unnoticed SUCCESSFUL PEOPLE ARE DEEMED TO BE CONFIDENT AND RELAXED. IN FACT, MAKING PEACE WITH PRESENTATION ANXIETY IS KEY TO THE BUSINESS OF STANDING OUT, SAYS DR ROB YEUNG

50 The Treasurer December 2015/January 2016 www.treasurers.org/thetreasurer of your thoughts, no matter Neither instruction helped how negative they may be. to diminish their anxiety. Confidence con: the external appearance Putting it another way, you However, the difference was of confidence in others deceives us into are less transparent than you clearly detectable by others. may think you are. For the The individuals that had told believing that they feel confident inside most part, your inner turmoil themselves “I am excited” is probably far less visible than were ranked more highly by equal: gestures that involve everybody from a particular you may think. three independent judges and touching yourself may signify country is the same. But Many of my clients say that judged to be more competent, self‐doubt or deception. generally speaking, it’s understanding the confidence more confident and more Speakers should match worth thinking about con is liberating. The persuasive than those who had their overall non-verbal style how gender, culture, knowledge that other people told themselves “I am calm”. It to the nature of the message religious background, age, don’t feel as confident as they seems that trying to steer our they wish to deliver. Being educational level, class and look means that, if you ever emotional state from anxious dynamic and energetic is not other factors may affect feel worried or anxious, you’re to calm is like making a always appropriate. Consider your audience. likely in good company. 180-degree turn in a car at high when you may need to tone • Consider what your speed. It’s nigh on impossible. things down, too. There is no audience is thinking. Don’t try to calm down But making the shift from absolute right or wrong non- What concerns or issues Plenty of work situations anxious to excited is more like verbal style – only what works are your audience most might provoke anxiety – public a sharp 90-degree turn and best for any given situation. interested in? Are there speaking or presenting are eminently more achievable. If you want to improve your problems they’re wrestling key among them. In critical non-verbal communication, with or opportunities they moments, we often tend to Persuading through asking people for feedback would love to pursue? advise people to relax and body language and on on the appropriateness of • Consider how your calm down. When Harvard verbal communication your style is a useful exercise. audience is feeling. Are Business School professor Being memorable and Most people could do with they ecstatic to be there Alison Wood Brooks surveyed persuasive involves many becoming more non-verbally or have they been forced 300 people, she found that factors. We all know that expressive, but you may just be to attend and therefore the vast majority, 84.9%, said physically attractive people in that minority that needs to sceptical or even enraged? they would encourage anxious tend to do better in life, but cool things down a bit. Don’t Are they disappointed, friends or co-workers to relax a mountain of studies also assume you know what you frustrated, restless or and calm down1. suggest that people who are need to work on. Encourage something else? But according to her work, more non-verbally expressive those around you to tell you • Ask yourself what your encouraging people to calm may do better in life, too. what you may not realise audience may know down may be rather terrible Non-verbal cues essentially about yourself. about you. How much do advice. In an experiment with cover everything apart from they know about you, your profound implications for the words themselves – from Winning with words background and expertise? would-be public speakers, our facial expressions, gestures Inexperienced speakers To what extent do you need Brooks tested the effects and movements to the tone often focus on what they to introduce yourself and of different instructions of our voices and the pauses want to communicate rather explain your credibility or on the anxiety levels of 140 we use in our speech. All can than what an audience may interest in this topic? participants. She began by make a quantifiable difference be ready to hear. But the explaining to all of them to a person’s charisma, truth is that the very best The more you can see the that they would be given two memorability and impact. presenters, salespeople and world from the perspectives of minutes to prepare a short In terms of vocal traits, conversationalists consider the others, the more you can tailor persuasive speech on the topic speaking in a lower pitch can audience’s concerns, interests your messages for maximum ‘Why you are a good work help you to be perceived as and emotions first. persuasion. Understanding partner’. The participants were more leader‐like, competent • Think about the the starting point of your told their speeches would be and trustworthy. Somewhat demographics of your audience may well help you both delivered to a researcher, unexpected findings also audience. Clearly, not identify the best approach. and recorded and watched suggest that speaking more all men are persuaded later by a committee. quickly tends to be associated in the same way, just as 1 Brooks, AW (2013). Get excited: Immediately prior to with better performance, too. all women are not the Reappraising pre-performance anxiety as excitement. Journal of Experimental delivering their speeches, the Studies have shown that quick same. Likewise, not Psychology: General, 143, 1144–58 participants were split into speakers are judged to be two groups and told to repeat persuasive, more intelligent, either “I am calm” or “I am as having greater knowledge excited”. Immediately after and being more objective. Dr Rob Yeung is an organisational psychologist at their presentations, Brooks Weaving more gestures into leadership consulting firm Talentspace. This is an asked them how they felt and edited extract from his new book How to Stand Out: your behaviour can improve Proven Tactics for Getting Noticed (Capstone 2015) found both groups reported your persuasiveness. However, feeling equally uneasy. not all gestures are created

www.treasurers.org/thetreasurer February 2016 The Treasurer 51 Business skills Qualifications

MANY HAPPY RETURNS THE ABILITY TO COMPARE SHORT-TERM INVESTMENT PRODUCTS IS FUNDAMENTAL TO TREASURY. DOUG WILLIAMSON EXPLAINS HOW TO CALCULATE AND APPLY YIELDS

A fundamentally important task for treasurers is to oversee the Yield pick-up organisation’s cash flow and shorter-term investments. To do If the periodic yield were greater, for example, 1.02% for the same this successfully, the treasurer must: 90-day period, the interest or gain for the 90-day period would be • Understand the cash flows from investments; and correspondingly greater. It would become: • Be able to compare different investment products consistently. 3,000,000 x 0.0102 = 30,600. For the same length of period, a greater periodic yield indicates First things first a better deal, all other things being equal. Essential considerations for short-term investment are safety, liquidity and yield, in that order (see The Treasurer, June 2015, Where’s the catch? page 58). Once safety (or ‘security’) and liquidity are satisfied, But all other things are hardly ever equal in an efficient market. This is we can move on to compare yields. usefully expressed in the phrase ‘There’s no such thing as a free lunch’. This article focuses on calculating and applying yields. These ‘No free lunch’ means, if it looks like we’re getting an extra 0.02% are essential foundations for making valid comparisons. for free, we won’t be. We will be paying for it in some way. There will always be some catch or disadvantage. Happy returns Keeping that health warning in mind, let’s continue calculating Say we invest 3,000,000 units of our local currency for a 90-day with yields. period, expecting to get back 3,030,000 at the end. The gain, surplus or interest is the difference between the amount at the end and the Quote unquote amount at the start. In wholesale markets, yields are normally expressed as nominal, In this case it will be 3,030,000 – 3,000,000 = 30,000. or quoted, yields (R) per conventional year, rather than periodic yields (r). Yield appeal Short-term yields are normally quoted on a ‘simple’ basis, per To make returns comparable, gains are generally expressed as conventional year of 360 or 365 days. To convert between quotes a percentage interest rate, also known as ‘yield’. and periodic yields, we simply multiply or divide the rates by an The gain of 30,000 on the starting amount of 3,000,000 represents appropriate fraction. a yield (r) of: (r) = Gain / Starting amount Three million dollars = 30,000 / 3,000,000 = 0.01 (= 1%) Let’s apply this simple multiplication technique to calculate interest This is the yield per 90-day period. It is the ‘periodic yield’ for for a short-term period, based on a quoted rate for short-term 90 days. US dollars, which uses a 360-day year.

52 The Treasurer February 2016 www.treasurers.org/thetreasurer HELP FOR ACT STUDENTS You deposit $3m for 90 days at a quoted interest rate of 4%, based Download this and other useful on a 360-day conventional year. Calculate the amount of interest study information from the you will enjoy. student site you are assigned to: Based on a Certificate in Treasury Fundamentals (CertTF) specimen paper question either the Resources area of the ACT Learning Academy at Do the two-step learning.treasurers.org or the We’ll work through this problem in two steps: Exam Tips area of the ACT Study (1) Adjust the quoted interest rate to get the periodic yield. Site at study.treasurers.org (2) Calculate the interest from the periodic yield.

(1) Periodic yield (r) from quoted rate (R) r = R x days / year (2) Interest Where: Interest = start amount x periodic yield R = quoted yield per conventional year = 0.04 (= 4%) = £3,000,000 x 0.009863 days = number of days in the investment period = 90 = £29,589 year = number of days in a conventional year = 360 for US dollars here (3) Redemption value = end amount End amount = start amount + interest r = 0.04 x 90 / 360 = 3,000,000 + 29,589 = 0.01 per 90 days = £3,029,589

(2) Interest from periodic yield Different conventions, less interest Interest = start amount x periodic yield When we invested £3m at 4% for 90 days, we got back £29,589 of = $3,000,000 x 0.01 interest. Do you remember when we invested $3m at 4% for the same = $30,000 period, we got a bigger number for our interest, of $30,000? This difference results from short-term £ using a 365-day More days in a year conventional year to calculate interest, compared with 360 days for Our calculation of $30,000 of interest for short-term US dollars US dollars. These quoting conventions are sometimes known as used a 360-day year. Some other currencies and markets, for ACT/365 fixed and ACT/360, respectively. ‘ACT’ refers to the ‘actual’ example, short-term sterling (£), use a 365-day conventional year. number of days in the investment period. Let’s apply a 365-day year for £ now, in a Certificate in Treasury (CertT) question. Beyond compare We’ve seen that returns from fixed-rate short-term investments Three million pounds depend on several factors, including: Your organisation has an opportunity to invest £3m in a Certificate • Headline percentage rates; of Deposit (CD). Calculate the redemption value for such a CD which • Quoting conventions; matures in 90 days, quoted in the market at a yield of 4%. • Currency; Based on a CertT specimen paper question • Amount invested; and • Maturity. This question mentions the ‘redemption value’ for a CD. That means the total cash we will receive back at the final maturity, Only when all of these variables, and others, are properly in 90 days’ time. quantified and factored in, can we make properly informed comparisons and recommendations. One, two, three For this question we need three steps. The first two are the same Rewarding returns as before: In this article we’ve applied different percentage rates and two (1) Calculate the periodic yield. different interest-quoting conventions. The next article builds on (2) Calculate the interest from periodic yield, as before. this foundation by investigating the important differences between (3) Finally, add the interest to the start amount, to calculate yields and discount rates, and determining yields from more the redemption value. complex cash flows. With many congratulations in advance on your next exam success. (1) Periodic yield r = R x days / year R = quoted yield = 0.04 days = days in investment period = 90 Doug Williamson is a treasury year = days in conventional year = 365 for £ this time and finance coach who wants you to enjoy handsome returns from your wise investment in learning r = 0.04 x 90 / 365 = 0.009863 per 90 days (rounded to the nearest 0.0001%)

www.treasurers.org/thetreasurer February 2016 The Treasurer 53 MONTH END

What goes around, comes around More cash? Less debt? Mr Treasurer and the CFO debate the economy

Mr Treasurer and the drove the garage man and the £ CFO were doing what potential buyer in the British they liked doing best. racing green sports car. They were arguing. Sitting The garage man’s wife in their favourite watering spotted the £100, sneaked it hole, The Shiny Sixpence, into her handbag and walked they debated the state of across the road to the butcher. the economy. “Here’s the £100 I owe you, “There’s not enough cash Butch,” she said, as she handed about,” said the CFO. “The over the cash. chancellor needs to put more “Oh, smashing!” said the jumped into his white van “They’d already spent the cash into people’s pockets if butcher. “But do consider and drove to the garage. The money,” said Mr Treasurer. we’re to get ourselves off the joining my Christmas club garage man wasn’t in, but his “They used the cash to get floor, once and for all.” this year. Save a bit every week wife was. “Your gent of a hubby SHUTTERSTOCK out of debt!” “Cash isn’t the problem,” for the big end-of-year turkey serviced my old Ford Transit “What if the painter and replied Mr Treasurer. “There’s splurge!” As he spoke, the when I was skint,” said the decorator hadn’t owed £100 simply too much debt butcher hung up his apron, painter and decorator. “I’ve to the garage? How would weighing us down.” then nipped down the road to just come into a bit of cash, the garage man’s wife have “Heads and tails of the the local pub, The Thrupenny so here’s what I owe him.” repaid the buyer’s deposit?” same coin,” retorted the CFO. Bit. “I say, old bean,” he said to “Gosh! Yes, I’ll tell him,” said said the CFO. “Got you, there.” “I see your point,” said the pub landlord. “Here’s the the garage man’s wife, who was “Hmm,” mused Mr Treasurer. “But let me hundred smackers I owe you. surprised, but relieved to see Mr Treasurer. “Perhaps tell you a story…” Wipe my slate clean, will you?” the familiar pile of dosh. She we shall find out for real one day – when we try to “Cash isn’t the problem,” replied Mr Treasurer. reverse quantitative easing. Another brandy?” “There’s simply too much debt weighing us down” “My round,” said the CFO. “I’m running a tab…” And Mr Treasurer launched “No sooner said,” said the put the £100 back on the desk, into a tale of a garage man who pub landlord, who promptly just as her husband and the dealt in classic sports cars. disappeared out the back way potential buyer returned in One day, a potential buyer and headed for the painter an unscathed Austin Healey. Andrew Sawers came and asked if he could and decorator’s home. “Oi! “Not for me,” said the is a freelance business and financial journalist. take the 1965 Austin Healey Rembrandt!” called the pub potential buyer. “Steering’s a He is a former editor for a test drive. The garage man landlord when he got there. bit iffy.” And he picked up his of Financial Director asked the potential buyer for “Thanks for repainting my sign insurance deposit from where and has worked on Accountancy Age, a cash deposit of £100, to cover last week. Here’s the five crisp he left it and walked out. Business Age and the insurance during the test 20s I owe you.” “But your story proves my Commercial Lawyer. drive. Five £20 notes were duly “Lovely jubbly!” said the point!” said the CFO. “We need He tweets as placed on the desk, and off painter and decorator, as he more cash in the economy!” @Mr_Numbers

The highlights of the February 2016 issue of The Treasurer include: We celebrate the winners and runners-up of the Deals of the Year Awards, on page 21. Robert Leach and IN THIS Ralph Findlay discuss securitisation and the joy of fresh challenges, on page 32. We take ISSUE: a look at the funding woes of SMEs, on page 36. Find out about US treasurers and their unique challenges, on page 40. Discover the remedies for counterparty risk, on page 44.

54 The Treasurer February 2016 www.treasurers.org/thetreasurer HELPING YOU LAY THE FOUNDATIONS FOR A SUCCESSFUL 2016

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