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Justin Jones
In Banking, FX, Risk Management

A Risk Manager Leveraging Flexibility to Benefit from Volatility

FX meeting sponsor Standard Chartered: Hedge policy flexibility may decide if volatility is treasury’s friend or foe.

Volatility in foreign exchange, commodity and other markets sparked by the pandemic presented risk managers with challenges to their hedging programs. And while some corporates ended up with financial pain, others turned the volatility to their advantage.

FX meeting sponsor Standard Chartered: Hedge policy flexibility may decide if volatility is treasury’s friend or foe.

Volatility in foreign exchange, commodity and other markets sparked by the pandemic presented risk managers with challenges to their hedging programs. And while some corporates ended up with financial pain, others turned the volatility to their advantage.

  • At a recent meeting of NeuGroup for Foreign Exchange sponsored by Standard Chartered, a representative of the bank used the positive experience of one member to underscore the benefits of hedging policies that give risk managers flexibility in how and how much to hedge, and for how long.

What you need to take advantage. “The volatility we’ve seen has been advantageous,” said the member. “We’re coming at it from a different perspective.” Unlike many members who have long exposures, in most countries, the company “is short, selling dollars, buying local currencies,” she explained.

  • The member described her company’s hedging policy as “very flexible; we use forwards and options—zero cost collars.” Treasury also has flexibility in how much to hedge, all the way up to 100% of the company’s exposures.
  • There are “no stipulations,” and the company’s traders “develop their own strategies” for hedging, she said.
  • “Right now we’re experiencing positive OCI (other comprehensive income) and mark-to-market gains,” the member told peers. “This is a good story for us.”

Nimble and quick. Standard Chartered’s head of client analytics said that policy flexibility like what exists at the member company gives corporates the ability to be “nimble and quick,” adding that, “Volatility can be your enemy or your friend depending on your flexibility.”

  • In addition to a flexible policy, an efficient trade approval process for trades also allow risk managers to add “interesting hedges to capture the volatility and momentum” of markets roiled by news and events, she said.

Options in theory, not practice. It appears that most risk management teams have the policy approval to use options in their hedging strategies but do not use them. As the chart below shows, about two-thirds of the companies surveyed at the meeting said options are allowed at their companies but are not in use.

Why not options? In response to questions from Standard Chartered, members gave several reasons why they are not currently using options to hedge risk other than the cost of option premiums:

  • “We have approval to use from an accounting, auditor and policy perspective. But there still seems to be a stigma against them internally. We are self-insured, and options often feel like insurance, so it’s a culture thing.  We just need a good business case to help us get to the finish line!”
  • “It’s a corporate governance issue; it takes time and effort to get approval, but we want to.”
  • “We’re trying to find the right time and haven’t found the right opportunity to dip our toes in.”
  • “Showing the value [to senior management] is the hurdle.”

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Justin Jones
In FX, Risk Management, Technology

Racing to Change Horses: A Risk Manager’s Quick Switch to AtlasFX

An FX risk manager changed exposure ID systems and implemented the new solution in just three months.

Changing horses in midstream is never easy, but sometimes it’s the right move. One FX risk manager who did it explained to members of NeuGroup for Foreign Exchange the benefits of jumping off his existing exposure identification system and hopping onto AtlasFX—in an extremely compressed timeline of three months.

An FX risk manager changed exposure ID systems and implemented the new solution in just three months.

Changing horses in midstream is never easy, but sometimes it’s the right move. One FX risk manager who did it explained to members of NeuGroup for Foreign Exchange the benefits of jumping off his existing exposure identification system and hopping onto AtlasFX—in an extremely compressed timeline of three months.  

  • The time and effort spent making the switch under pressure paid off big-time. “We now have our dream state,” he said at a March meeting sponsored by Standard Chartered.  
  • The new solution has boosted the company’s exposure accuracy, leaving the FX team more time for “value-add” activities, he said. Changing vendors also resulted in significant cost savings.
  • The member started his presentation by thanking peers at two companies he called “early AtlasFX explorers.”

Quick pivot. One day last year, the member told AtlasFX that he needed to stick with his company’s existing exposure ID vendor for at least another year.

  • The next day, for various reasons, he reversed course, set up a meeting with AtlasFX and explained exactly what he wanted, after the company asked him to describe his ideal state.
  • About five days later, the member told AtlasFX that he was all in. Key to the decision was having confidence in the AtlasFX team’s ability to deliver the dream state and “confidence they could pull this off in three months,” the member said.
    • He had to make a go-no-go decision immediately or would have to renew the contract with the existing vendor.

Making the dream real. His dream included opening up AtlasFX to see foreign exchange exposure data from his ERP, SAP, and current hedges from his TMS, Reval. And he wanted the ability to click a button to approve and move trade actions to his trading platform, FXall.

  • Further, after trade execution, he wanted the info straight-through processed to both Reval (to book external trades) and AtlasFX, where intercompany trades would be automatically generated and sent to Reval.
  • “To pull it off, there needed to be connectivity between all systems,” he said. “SAP, AtlasFX, Reval and FXall—and a new, novel connection between AtlasFX and Reval to automate back-to-back hedging at FXall trade rates.”
  • AtlasFX made it all happen, giving the member the ability to execute the company’s balance sheet hedge program (see chart below) the way he envisioned.
    • “I honestly thought that dream would be impossible to achieve,” he said.
  • He said the extent of the exposure discovery and automation the FX team has with AtlasFX was not possible with the previous vendor.
  • The solution AtlasFX devised to solve the member’s connectivity and automation issues can now be used by other corporates that use the same ERP, trading platform and TMS, he added.

Domain expertise. The member’s presentation listed several other reasons his company decided on AtlasFX, including “domain expertise provided routinely throughout implementation.” He noted that the fintech’s founders have experience as treasury practitioners, and said its representatives “are risk managers like us, they speak the language.”

  • The reps, he added, “learn a company’s process when implementing the solution.” This paid off when the AtlasFX team suggested a simplification of the company’s settlement strategy for derivatives, helping the FX team better “distribute our workload,” he said.

Exposure determination technology. The member said AtlasFX has so-called query software that “adapts to changes immediately” in the company’s general ledger, saving hours of maintenance time each month compared to what was required before.

  • He said delays in making this type of change can mean treasury misses exposures, potentially resulting in insufficient or incorrect hedges.
  • While exposure determination is faster using AtlasFX, setting up the automation, interfaces and workflows making that speed possible “was definitely more complex,” the member said.
    • “That took some deep thinking and partnership between fintech vendors, and we had to involve our IT team for the connection to SAP data.”

Performance analysis. Using its previous vendor’s solution, the company was not able to successfully configure end-of-month hedging analysis to determine how well its hedges performed relative to actual accounting losses and expectations. “With our prior vendor, we were only able to get 25% of the process working,” the member said.

  • He said that with AtlasFX, 80% of the process was working within a month. His presentation read, “AtlasFX: In process of configuring and testing—we will get there!”
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Justin Jones
In Capital Allocation, Insurance

Where Captives Fit in the Insurance Puzzle Corporates Want to Solve

Captives offer tax advantages and flexibility, but treasury teams must make sure trapping cash in them is worth the benefits.

Rising insurance costs are putting more focus on captives, a solution that offers tax advantages, flexibility and lower costs than traditional insurance.

  • For those reasons and others, several members at a recent meeting of NeuGroup for Retail Treasury said they plan to expand their captives to cover more risk.
  • Other members say captives are not a good use of capital for their companies.

Captives offer tax advantages and flexibility, but treasury teams must make sure trapping cash in them is worth the benefits.

Rising insurance costs are putting more focus on captives, a solution that offers tax advantages, flexibility and lower costs than traditional insurance.

  • For those reasons and others, several members at a recent meeting of NeuGroup for Retail Treasury said they plan to expand their captives to cover more risk.
  • Other members say captives are not a good use of capital for their companies.

The case for captives. “A captive brings a few benefits, and a few challenges,” one member said. “From a financial standpoint, managing the risk within the captive brings a lower general cost than translating those risks to a third party. There are some limits, but the day-to-day expenses for, say, worker’s compensation, can be lower.”

  • One retail treasurer whose company works on a franchise model said she had success with an offshore captive, which did a “bang-up job,” and proved a boon as insurance costs began to rise.
  • “Instead of paying premiums to the insurance company and the insurer keeping those profits, we are able to charge our stores individually for our expected losses; and when we didn’t reach those expected losses, we kept those profits,” the member said.
    • “Over a 10 year period, we were able to build up capital to increase our retentions, which minimizes the actual risk transfer insurance that we’re buying from an insurer, and we’re able to weather market swings much better.”
  • Members also discussed the non-financial benefits of captives, including a faster claims process and control over the standards used to handle claims.

Capital concerns. Saving on taxes and speeding up the claims process “may or may not be sufficient reasons to start up a captive,” one member warned. The big reason: captives trap capital.

  • “From a P&L perspective, [a captive] looks good, as it lowers tax expense,” another member said. “However, from a capital allocation perspective, we have trapped capital and it returns less than our WACC, and much less than the targeted ROIC we expect the business to return. So it’s not a good use of capital for us.
  • “It’s a capital allocation decision at the end-of-the-day,” she added. “You can allocate capital to the captive, to the business or back to shareholders. This would be a circumstance specific to each company.
  • “For instance, for us, many states do not allow us to self-insure workers’ comp without an insurance company backing the self-insurance. In this case, the captive acts in that capacity. We would need to analyze whether it’s worth the capital.”

Monitoring performance. To combat capital inefficiency, multiple members recommended incorporating routine strategic reviews, measuring a captive’s benefits against its cost.

  • During one of these reviews, one treasurer saw that a captive established before he had the job had more cash trapped than he found justifiable reduced the “static” balance in the captive by one-third without significantly impacting the captive’s tax benefit.
  • Another member learned during an internal review that the location of the company’s international captive was no longer viable due to recent regulation.
  • “The captive was set up because it could provide direct policies to some companies, saving us some fronting costs,” the member said. “Since recent policy has been implemented [in this country], we’ve found the capital requirements and solvency requirements overly burdensome.
    • “We undertook a study to see if there is a different domicile that we should be using for that risk and opened a new captive and shifted those policies over.”
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Justin Jones
In Banking, Cash & Working Capital, Talking Shop

Talking Shop: Do You Have One Banking Partner for AR and AP?

Member question: “In the US, do you have one banking partner for AR and AP, or do you split the business, with one bank for AR and a separate bank for AP?

  • “For those that split the business, is this a share of wallet decision or an operational decision? Are there any operational pain points associated with having two banking partners?”

Member question: “In the US, do you have one banking partner for AR and AP, or do you split the business, with one bank for AR and a separate bank for AP?

  • “For those that split the business, is this a share of wallet decision or an operational decision? Are there any operational pain points associated with having two banking partners?”

Peer survey results: The majority of survey respondents use a single bank, with about one-third splitting the business.

Peer answer 1: “We have historically had two AR banks (two different business units), and one of those was different than our AP bank. Recently, we awarded the other AR business to the same bank and now we are fully concentrated.

  • “This was more due to the other bank leaving the AR space. From a share of wallet perspective, it has created an issue for us where we are too concentrated with one bank relative to the credit participation.”

Peer answer 2: “We currently have our US AR and AP with the same bank, but we are in the middle of an RFP for the US AP business. The share of wallet is an important factor for us, but technological capabilities of the bank (e.g., supporting POBO) is an even larger factor in the RFP.”

Peer answer 3: “We use one US AR/AP banking partner. We actually had one banking partner for our global cash management operations, but transitioned to a regional strategy through an RFP about five years ago.”

Peer answer 4: “In the US, we split the business, one bank for AR and one for AP. This was driven by a share of wallet decision but also a risk diversification and business continuity decision, which has proven to be helpful for us.”

  • Response to another peer’s question: “[There are] no manual transfers [between AR and AP], everything’s automated. Frankly, there are so many ways to do so—you just need to be creative and ask your bank the right questions.”

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Justin Jones
In Banking, Capital Markets, Senior Executive

No Sale: Convertibles at Great Prices Fail to Impress IG Corporates

Companies rated investment grade expressed reluctance to issue convertible bonds, despite favorable conditions.

It can be a nonstarter to raise the topic of convertible bonds with treasurers at investment-grade companies that can already issue debt with very low interest rates and don’t want their stock diluted when investors convert bonds to equity.

  • But many NeuGroup members whose companies have high credit ratings, including some at a recent meeting of NeuGroup for Capital Markets, say all their banks have pitched convertibles. And some treasury teams are also getting questions internally from CFOs and board members.
  • One member, echoing others, said 0% coupons and conversion premiums in the range of 50% to 70%, along with updated FASB accounting standards (see chart) that could simplify the process, makes convertible bonds “more attractive, but it’s an odd gamble when rates [for straight debt] are below 3%.”

Companies rated investment grade expressed reluctance to issue convertible bonds, despite favorable conditions.

It can be a nonstarter to raise the topic of convertible bonds with treasurers at investment-grade companies that can already issue debt with very low interest rates and don’t want their stock diluted when investors convert bonds to equity.

  • But many NeuGroup members whose companies have high credit ratings, including some at a recent meeting of NeuGroup for Capital Markets, say all their banks have pitched convertibles. And some treasury teams are also getting questions internally from CFOs and board members.
  • One member, echoing others, said 0% coupons and conversion premiums in the range of 50% to 70%, along with updated FASB accounting standards (see chart) that could simplify the process, makes convertible bonds “more attractive, but it’s an odd gamble when rates [for straight debt] are below 3%.”

Ideal conditions. One member with experience issuing convertibles before his company became investment grade said the most difficult part of the process was documentation, so the simplification by FASB is significant.

  • The FASB changes come amid market factors that have historically been good for convertible bond issuance:
    • Low interest rates
    • High equity prices and high valuations such as PE (pricing/earnings) ratios
    • High volatility levels
  • These condition have sparked a flood of companies with non-investment grade ratings, or no ratings, to issue convertibles. The Financial Times, citing Refinitiv, reported that in January and February, companies raised almost $34 billion, 68% more than in the first two months of 2020.

Dilution. The big downside to convertible instruments, NeuGroup members said, is dilution of a company’s common stock, which potentially makes the shares less valuable to shareholders.

  • “If the stock price goes to 10% above my strike price, my upper bounds, I’m diluting myself $4 billion, is that really worth 20 basis points of savings?” one member asked. “Your base is much higher because your company has doubled the wealth, but you still have to explain why you’ve taken $4 billion of dilution.”
  • The same member said, “As much as banks love to pitch convertibles because they can charge [more than for straight debt deals], some of our closest banks have been honest and been like, ‘You’ve heard about convertibles a lot I’m sure, but we don’t recommend them for investment-grade companies.’”
    • Another member added, “Some [banks] said, ‘If your stock goes up by a hundred percent, are you really still going to be worried about dilution?’ Economically, yes, I will.”
    • “I’ll echo those thoughts,” another member said. “Although there is great headline attractiveness, 50 basis points is not worth the risk of dilution.”

Pair convertible with a buyback? One member raised the intriguing idea of pairing a convertible issue with a stock repurchase plan to offset or hedge the dilution of additional stock. The member, however, said he’s still too skeptical of convertibles to embrace the strategy.

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Justin Jones
In Cash & Working Capital, Technology

Future State: Data Lakes, Straight-Through Processing and APIs

Takeaways from NeuGroup’s TMS working group featuring discussion of automation, consolidation of ERPs and more.

Straight-through processing (STP) that involves several systems, including payments and bank connectivity, sounds great. But members at a recent NeuGroup TMS Tuesday working group session agreed that efforts to accelerate STP first require a more detailed plan for the overall technology end state of treasury infrastructure.

  • For example, one member said his company is still unsure if it would be best to further integrate all payment processes into the ERP, or create a payment factory, which may sound like a nuance but requires technology process decisions.

Takeaways from NeuGroup’s TMS working group featuring discussion of automation, consolidation of ERPs and more.

Straight-through processing (STP) that involves several systems, including payments and bank connectivity, sounds great. But members at a recent NeuGroup TMS Tuesday working group session agreed that efforts to accelerate STP first require a more detailed plan for the overall technology end state of treasury infrastructure.

  • For example, one member said his company is still unsure if it would be best to further integrate all payment processes into the ERP, or create a payment factory, which may sound like a nuance but requires technology process decisions.  

Consolidation of ERPs. Members also discussed whether it is worthwhile to migrate all ERPs to one point, or to leverage the TMS to bridge several different ERPs. Conglomerates and serial acquirers usually end up with more ERPs than they want; but consolidating many into fewer or just one can be a slog.

  • A self-described “portfolio of companies” is leveraging its Kyriba implementation to connect multiple ERPs to it to enable all its vendor payments. 

Data lakes and one source of truth. For some very large companies in the NeuGroup Network, the number of ERPs and the enormous volume of payment transactions expose the vulnerabilities of a file-based process underpinning their payment execution.

  • More and more companies are driving initiatives to centralize all the data in a repository—a data lake—that can be the “source of truth” for a variety of systems tools supporting treasury processes like payments, rather than having data sent around in files.

Automating payments and compliance. Payment automation is a big challenge, but another is regulatory compliance, a job nobody gets a kick out of but that can cause problems in a complex world.

  • Managing bank account signers, FBAR reporting and KYC-related processes is high on the list of desired automation for members. Both FIS and ION have built bank account management tools; two members mentioned ION and said they were pleased with IBAM, its tool.

You have to start somewhere. With systems like FXall for FX trading and a TMS, the key is that all systems work together seamlessly.

  • Does that mean that the FX trading process, for example, needs to always start in one place for it to work? Not necessarily.
  • One member noted that the process can start either in FXall or in Reval, their TMS, and it will work either way. Other members concurred that both 360T and FXall have worked out the integration processes well.

With APIs, the key word is consolidator. APIs remain a hot topic, but MNCs with a large number of banking partners cannot have one API for each one. Similar to the service bureau concept, members agreed that they would not move from a direct connection like SWIFT unless there were some consolidator as a service-type vendor to reduce the APIs.

  • Separately, adopting APIs is something most members assume they will eventually do as part of another transformation or implementation, not as a standalone project.
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Justin Jones
In Capital Allocation, Capital Markets, Cash & Working Capital

Do Stock Buybacks Create Value or Just Return Capital to Investors?

Members at companies with excess cash discuss whether share repurchases generate economic value for shareholders.

ConocoPhillips on Wednesday announced it is resuming its share repurchase program, citing its “long-standing priority to return greater than 30% of cash from operations to shareholders annually.” The company is not alone:

  • A recent NeuGroup Peer Research Survey showed that 82% of respondents consider the return of excess capital the primary objective of their company’s share repurchase program. Only 9% said creating shareholder value was the primary goal.
  • However, 59% of respondents said they believe share repurchases generate economic value for shareholders (see chart) and another 27% agreed—but only if the share purchase price is below the company’s intrinsic value.

Members at companies with excess cash discuss whether share repurchases generate economic value for shareholders.

ConocoPhillips on Wednesday announced it is resuming its share repurchase program, citing its “long-standing priority to return greater than 30% of cash from operations to shareholders annually.” The company is not alone:

  • A recent NeuGroup Peer Research Survey showed that 82% of respondents consider the return of excess capital the primary objective of their company’s share repurchase program. Only 9% said creating shareholder value was the primary goal.
  • However, 59% of respondents said they believe share repurchases generate economic value for shareholders (see chart) and another 27% agreed—but only if the share purchase price is below the company’s intrinsic value.

Surprising result? The NeuGroup member who requested the survey expressed surprise at the number of his peers who believe buybacks generate economic value.

  • He told the group that when his company asks banks do analyses of its total shareholder return (TSR), “They ascribe zero value to repurchases and dividends. Their rationale is that this is capital that the shareholders have a claim on regardless of whether it’s in the company or in their pocket.”
  • “My view is that repurchases might create value if they are below intrinsic value, but as people said, intrinsic value can be tough to define,” he said in a follow-up email. “And the reality is that a company’s shares probably don’t trade below it very often anyway.”
  • In his follow-up, he also cited a white paper that he wrote: “There is no certainty that any gap between intrinsic and market value will ultimately close; additionally, a study by Fortuna Advisors, a strategic advisory firm, indicates that ‘over time the market sees through this engineered EPS growth and typically drives down the P/E multiple for companies that rely heavily on buybacks.’” 
  • The white paper also says, “There is evidence to suggest that newly announced repurchase authorizations cause at least temporary share price bumps, but this is due to the signaling effect (of companies indicating they are bullish on their future), not repurchases themselves.”

In the yes camp. One of the members who believe share repurchases create value for investors if the price is below intrinsic value said his company “beats VWAP (volume weighted average price) more than we don’t.” He explained his strategy for executing buybacks and emphasized the goal is not to be a day trader but to “buy back as many shares as I possibly can” using the amount allocated for buybacks by the board.

  • Another member in the yes camp explained some of his reasoning in a follow-up email, writing, “Part of adding shareholder value is minimizing agency costs (arising from a lot of things but fundamentally to misaligned incentives and interests between management and shareholders). 
  • “So distributing excess cash is a way to reduce this, with the idea that when you get rid of excess cash by buybacks, in addition to a neutral cash distribution, you’re minimizing agency costs.”

Not convinced. The treasurer who requested the survey said the discussion at the meeting did not prove to him that repurchases generate economic value.

  • “The arguments mostly seemed to circle back to whether repurchases are beating VWAP, which in itself does not indicate they’re creating economic value,” he said.
  • That said, he does agree that the “avoidance of agency costs, i.e., the risk of making bad investments just because the cash is available” is one of the valid reasons to do a buyback.

Other reasons to do buybacks. This treasurer’s other main reasons to do repurchases include moving “inefficient capital off the balance sheet. Excess cash is inefficient capital; bank deposits, money market funds, etc. earn well below WACC (weighted average cost of capital).”

  • His white paper offers another reason to buy back stock: “Investors frequently redeploy the proceeds of stock sales to other investments in the economy, essentially shifting capital from companies that have more than they need to companies that need capital to grow. 
  • “This cycling of capital is healthy for the economy. According to Lloyd Blankfein, former CEO of Goldman Sachs, the proceeds investors receive from selling shares get ‘reinvested in higher growth businesses that boost the economy and jobs.’”

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Justin Jones
In Cash & Working Capital, Investment Management

Counting Cash: Many Companies Will Maintain or Up Cash Levels in H1

An ICD survey also shows steady and growing use of money market funds and higher interest in ESG products.

Cash on corporate balance sheets reached a record in 2020, topping $2 trillion, as companies responded to economic uncertainty created by the pandemic. New data from money market fund portal ICD suggests that a majority of corporates do not plan to cut cash levels in the first half of 2021.

  • 61% of the 150 treasury clients surveyed by ICD plan to maintain or increase their cash balances in the first half, with 39% expecting to reduce cash levels.

An ICD survey also shows steady and growing use of money market funds and higher interest in ESG products.

Cash on corporate balance sheets reached a record in 2020, topping $2 trillion, as companies responded to economic uncertainty created by the pandemic. New data from money market fund portal ICD suggests that a majority of corporates do not plan to cut cash levels in the first half of 2021.

  • 61% of the 150 treasury clients surveyed by ICD plan to maintain or increase their cash balances in the first half, with 39% expecting to reduce cash levels.

Prime funds. The survey also showed fewer than half (47%) of the companies are invested in or plan to invest in prime money market funds in 2021. That’s down from 64% in 2019, ICD said. Many companies moved out of prime funds and into government funds before and during the pandemic.

  • But as the first chart below shows, nearly all respondents (86%) plan to maintain or increase their overall money market fund investments this year.

Growing interest in ESG. The second chart shows that 41% of respondents expressed interest in ESG products. That’s up from 32% in 2020, according to ICD. In Europe, about half (49%) of the treasury professionals ICD surveyed plan to invest in ESG or socially responsible investing products.

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Justin Jones
In Banking, ESG

Green Discount: Treasury Wins With a Sustainability-Linked Revolver

After a corporate successfully launched a sustainability-linked revolver, the treasurer’s phone started ringing.

When it came time for one NeuGroup member to renew an existing five-year revolver, he saw an opportunity to improve pricing and generate positive PR by leveraging the ESG goals that the company had recently put in place.

  • The member’s company worked with BNP Paribas and Unicredit to structure a multibillion-dollar sustainability-linked revolver, the first one in its industry sector.
  • “I’ve received a lot of calls from other treasurers in the last few months asking how we did it and what it entailed,” the member said. “So I’m sure you’re going to see more in the next few months.”

After a corporate successfully launched a sustainability-linked revolver, the treasurer’s phone started ringing.

When it came time for one NeuGroup member to renew an existing five-year revolver, he saw an opportunity to improve pricing and generate positive PR by leveraging the ESG goals that the company had recently put in place.

  • The member’s company worked with BNP Paribas and Unicredit to structure a multibillion-dollar sustainability-linked revolver, the first one in its industry sector.
  • “I’ve received a lot of calls from other treasurers in the last few months asking how we did it and what it entailed,” the member said. “So I’m sure you’re going to see more in the next few months.”

Link to realistic goals.  Sustainability-linked loans incur cost penalties in the form of higher rates or fees if companies do not meet agreed-upon goals. That’s one reason that Martin Rogez, vice president of sustainable finance at BNP Paribas, said banks work with corporates to identify goals the company can realistically achieve and still have a measurable impact.

  • These vary from sustainability-focused key performance indicators to the company’s official ESG rating. The member’s company had two linked goals, based on a five-year plan for reducing greenhouse gas emissions and workplace injuries.
  • Mr. Rogez said these deals typically do not require much time investment on the corporate’s end, as long as it already has an ESG strategy in place. He said he recommends the company appoint a “sustainability coordinator” to help manage and monitor its ESG goals, someone the bank works with throughout the process.

Setting the rate framework. Mr. Rogez said the interest rate for the revolver is determined by starting with the classic lending criteria of the borrower’s credit profile and a corresponding base rate.

  • The bank and the company then agree on a pricing adjustment, which he said is typically a handful of basis points (the same amount for discount and penalty) and depends on the ambition of the goals set, among other factors.
  • The pricing impact of meeting the ESG goals could be applied to the loan’s interest rate, its commitment fee or both, he said.
  • Each year, a company reports whether it met the goals, and the impact is applied. If the company meets its goal, the discounted rate will apply. If not, the penalty or premium amount will be added to the base rate.

Sending a message. The amount of the impact for the member was ±5 basis points on the interest rate for the revolver’s drawn price, and ±1 basis point on the undrawn fee. The member suggested that before the pandemic these numbers could have been higher.

  • And while the pandemic and the company’s credit rating will keep the ESG discount from having much impact on the company’s bottom line, the member said the deal was worthwhile. “Even though it’s not a huge number, symbolically it’s an important message to send.”
  • The member said that his company’s revolving credit facility is typically not used; so only having a discount on the revolver’s drawn price “would not be as compelling.” A smaller discount or premium applies to the undrawn price for the company’s revolver as well.

European banks. The member said European banks have more experience working with ESG loans, which is why he chose BNP and Unicredit to be the deal’s primary ESG banks.

  • Because there is so much public interest in ESG, the member said it was easy to attract banks. He had the opportunity to choose between 10 banks vying to be partners on the ESG component of the loan.
  • The member said he used this opportunity to help one bank to tier one of the credit facility.
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Justin Jones
In Capital Markets, Talking Shop, Technology

Talking Shop: A Fintech Collects Capital Markets Pricing Data

Background: Members of NeuGroup for Capital Markets recently heard a presentation from InterPrice Technologies, a woman-owned fintech that collects pricing data for issuers. The company says its platform gives corporates access to their costs of capital “at any point in time and streamlines their communication with financing partners.”

  • The technology “automatically aggregates bond, commercial paper and loan indications into intuitive dashboards across currencies and financing products,” InterPrice says.
  • InterPrice on Monday announced it has raised $2.5 million in seed money led by Bowery Capital.

Background: Members of NeuGroup for Capital Markets recently heard a presentation from InterPrice Technologies, a woman-owned fintech that collects pricing data for issuers. The company says its platform gives corporates access to their costs of capital “at any point in time and streamlines their communication with financing partners.”

  • The technology “automatically aggregates bond, commercial paper and loan indications into intuitive dashboards across currencies and financing products,” InterPrice says.
  • InterPrice on Monday announced it has raised $2.5 million in seed money led by Bowery Capital.

Member question: “Has anyone signed on with InterPrice? We worked through a demo and it looked interesting. As we look for ways to work more efficiently, curious if anyone has found the offering to be worth exploring further?”

Peer answer 1: “We haven’t signed up for it yet, but have looked at it more thoroughly and have been advising [InterPrice] on functionality that I think would be helpful for corporates.

  • “They are still early in their process, but so far I think there a lot of value to what they are trying to create. They are also very open to product suggestions if there is specific functionality that you think would be beneficial.”

Peer answer 2: “I’m a bit reluctant to sign up now because I don’t know how much it’s going to cost when they start charging for it. I don’t want to get everything set up and then [reverse course].”

InterPrice response. Asked for comment, InterPrice CEO Olga Chin responded, “We are incredibly appreciative of the support we have gotten from multiple treasury teams in building the InterPrice platform.

  • “In the last few months, InterPrice has attracted some of the top corporate issuers in the market. As part of our rollout, we have offered a free trial to every corporate treasury team.
  • “Based on feedback from corporate treasury teams, we anticipate a fee model that is based on issuance versus a subscription fee after the trial period.
  • “If you would like to discuss a suggested fee schedule or schedule a demo, please reach out to [email protected].”

Peer answer 3: “We are using the platform on a pilot basis. The setup has actually been fairly painless, as we were already tracking much of this information in Excel and were able to upload our history.

  • “Banks are starting to fall in line with onboarding, though we are still sending the bulk of our pricing indications to the email parsing inbox for upload. The use case for commercial paper is also quite compelling.”

Member response: “Our Excel record-keeping system is lacking; part of the appeal of the offering. Understood on historical data—that is a great data point.”

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Justin Jones
In Insurance, Risk Management

Insurance and the Efficient Frontier: What Happens in a Soft Market?

NeuGroup members respond to Willis Towers Watson’s risk strategy of using modern portfolio theory for insurance. 

Willis Towers Watson recently presented to NeuGroup members an approach to modernizing how corporates buy insurance. As NeuGroup Insights explained last week, it involves modern portfolio theory and the efficient frontier.

NeuGroup members respond to Willis Towers Watson’s risk strategy of using modern portfolio theory for insurance. 

Willis Towers Watson recently presented to NeuGroup members an approach to modernizing how corporates buy insurance. As NeuGroup Insights explained last week, it involves modern portfolio theory and the efficient frontier.

  • The presentation intrigued many members, including one who said WTW provided a great overview of the central idea. He wondered how treasury would effectively convey this new way of managing risk to the CFO and the board, including the idea of buying less or none of some coverage.
  • WTW said the process requires a lot of preparatory meetings, ideally face-to-face, and that no one answer fits all companies.

What if insurance market softens? In a follow-up interview, another member who attended raised some questions about the approach if the current, hard insurance market were to soften. Among her comments:

  • “My guess is that this strategy is popping up right now due to the fact that the market is tougher in certain spaces than it has been in the past.  Without a firm policy on what you’re buying insurance on and what you’re seeking to protect, this is something that will fall on its face if the market softens.
  • “I agree that insurance is a method of risk management that is likely not being used effectively relative to a company’s desired outcome. This approach is one way to solve it. 
    •  “But without goal setting and benchmarking, when the correlations break down, there will be a lot of 20/20 hindsight on this methodology. It only works if you have the right infrastructure in place.
  • “I’m not sure I would be interested in buying on the efficient frontier, as correlations work until they don’t. That being said, I find there is little guidance or understanding internally as to why we’re buying insurance and what we’re really trying to protect. 
  • “For us, this session was helpful, as I think we would approach it as a goal-setting exercise. What is our goal? What are we trying to protect? What is our anticipated outcome? How do we benchmark our results?
  • “Then we would look to [WTW] to analyze our exposures and tell us which strategy best achieves our goals, and where we should be investing in insurance, regardless of market conditions.”

WTW’s responses. A spokeswoman for WTW provided these responses:

  • “It is Willis Towers Watson’s position that this is a market correction. Due to climate change, social inflation and many other factors, we do not expect insurance prices to fall. [See] our 2021 Marketplace Realities.
  • “While it is true that the cost component will matter less if the market softens, the risk component is much bigger. Considering all risks together in portfolio is the only way to get an accurate picture of the risk an organization faces, and only then can they make decisions aligned with their corporate financial goals.
    • “It’s still valuable to take a portfolio view regardless of the cost of insurance.
  • “There are certainly good reasons for organizations not to move all the way to the efficient frontier. Not every insurance decision is a financial decision based on the numbers; there are qualitative considerations as well.
  • “We have seen organizations decide that moving toward the efficient frontier (reducing risk and cost, but not to their minimums) works for them.
  • “The assumption of no correlation is an assumption of 0 correlation, or independence of every risk. Our position is that we know that the assumption of total independence, or zero correlation, is wrong. While any assumption about correlation is also possibly wrong, it’s ‘less wrong.’”
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Justin Jones
In Insurance, Risk Management

Solving the Insurance Problem With an Efficient Frontier for Risk

Willis Towers Watson advocates an approach that makes use of modern portfolio theory to assess the true value of insurance.

For more than a year, buying and renewing insurance policies has been a severe pain point for many finance teams, all suffering through a hard market of rising premiums, higher retentions and lower capacity. And the pandemic.

  • That makes now a good time to consider a modernized approach to insurance and risk finance strategy that takes what Willis Towers Watson (WTW) calls a portfolio view of risk, making use of technology and data analytics to arrive at an efficient frontier of cost and risk.

Willis Towers Watson advocates an approach that makes use of modern portfolio theory to assess the true value of insurance.

For more than a year, buying and renewing insurance policies has been a severe pain point for many finance teams, all suffering through a hard market of rising premiums, higher retentions and lower capacity. And the pandemic.

  • That makes now a good time to consider a modernized approach to insurance and risk finance strategy that takes what Willis Towers Watson (WTW) calls a portfolio view of risk, making use of technology and data analytics to arrive at an efficient frontier of cost and risk.
  • Sean Rider, head of client development in North America for WTW, explained the firm’s solution to NeuGroup members attending a recent presentation titled “The Modernization of Risk and Financial Strategies.”
  • At the outset of his remarks, Mr. Rider said, “Insurance is a problem to solve,” a sentiment shared by many of the roughly 60 members in the virtual room.

Taking a page from insurance carriers. A key goal of WTW’s more strategic, less tactical and transactional approach to solving that problem is to bridge the gap between how corporates buy insurance and how insurers price risk, a gap that gives the carriers an information advantage, the firm said.

  • That advantage arises in part because corporates often manage insurance in silos, assessing coverage lines individually and placing insurance outside the many other risks finance and treasury teams manage.  
  • Insurers, meanwhile, underwrite risk in the context of a portfolio, holistically, employing technology for modelling and other functions.
  • In the past two years, WTW developed a dynamic analytic platform called Connected Risk Intelligence for its consulting clients that provides data visualization and access to the same statistical framework and stochastic analysis available to insurance companies that use software sold by WTW.

The payoff. Armed with better information and the ability to “map and model and test all the potential transactions” available to them, Mr. Rider said, corporates can optimize their risk financing strategy and move to the efficient frontier, making data-driven decisions that he called courageous and “rooted around your priorities.”

  • This approach, WTW’s presentation said, allows corporates to “exploit arbitrage opportunities among mitigation, transfer and retention levers.”
  • This may result in buying less of some coverage and more of others as a company maximizes efficiency by analyzing its financial risk weighed against other risks and the cost for mitigating them to various degrees.

A portfolio review. In the graphic above, shown at the NeuGroup presentation, each point in the “cloud” represents one of tens of thousands of combinations of insurance options, such as buying D&O, workers compensation and liability coverage at various costs and levels of coverage.

  • The x-axis represents the average cost of those strategies and the y-axis shows the corresponding amount of risk the corporate will retain net of insurance in a severely adverse year.
  • “B” represents the example company’s exposure if it is entirely uninsured: $225 million in the adverse scenario, $11 million in a typical year. With its actual strategy, marked “A,” the company has reduced its exposure or residual risk to $120 million for the incremental cost of $5 million.
  • The green points represent the efficient frontier, where the corporate can no longer reduce risk without taking on more cost; and can no longer reduce cost without taking more risk.
  • That means the vast majority of combinations of insurance coverage decisions shown are inefficiently priced, including the company’s current strategy.
    • “X” shows that the company could achieve the same risk mitigation for less cost: about $14.75 million vs. $16 million.
    • “Z” shows the company could reduce its residual risk to $80 million (vs. $120 million) for the same $16 million. And “Y” falls between X and Z on the efficient frontier.
  • “In the example, let’s say the organization’s tolerance for insurable risk is $80 million at the one in 100-year probability level,” Mr. Rider said.
    • “Then the current approach (and any combination above Z) is not just inefficient, it fails the fundamental purpose of insurance: protecting against loss that imperils financial resilience.”

The difference. The discussion this portfolio review makes possible is “what’s not happening in how insurance decision making happens today,” Mr. Rider said.

  • Now, though, the conversation is shifting to meet the needs of corporates facing new challenges. “We are talking about risk, we are talking about value, we’re talking about efficiency. We’re recognizing the complexity of these decisions. And this approach is something that we’re not going to unlearn.”
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Justin Jones
In FX, Risk Management, Technology

AtlasFX and FiREapps: How Two FX Risk Management Systems Stack Up

NeuGroup members share what they need from FX risk management solutions, what they get and what could be better.

A need for automation, a user-friendly interface and consistent accuracy were among the highest priorities in selecting an FX risk management platform for members at a recent NeuGroup meeting that zeroed in on FiREapps and AtlasFX.

AtlasFX ‘dream state.’ One member who recently worked with AtlasFX to adopt the platform lauded the firm’s flexibility and willingness to meet his company’s requests.

NeuGroup members share what they need from FX risk management solutions, what they get and what could be better.

A need for automation, a user-friendly interface and consistent accuracy were among the highest priorities in selecting an FX risk management platform for members at a recent NeuGroup meeting that zeroed in on FiREapps and AtlasFX.

AtlasFX ‘dream state.’ One member who recently worked with AtlasFX to adopt the platform lauded the firm’s flexibility and willingness to meet his company’s requests.

  • “We came up with a list of must-haves: ‘If we can build this, we are future-proof,’” the member said, and complimented the vendor on its accommodations. “It got built. Some of it’s still falling into place, though we did have the capacity to have a team member spend most of their time on it for three months.”
  • The member’s system now features automated calculations for complex business-to-business trading, as well as automated connections to the company’s ERP system, its TMS and its FX trading platform.
    • The member said that before this, his team was making these calculations manually, and he had to upload data to the other platforms.
  • “[AtlasFX] helped get us to a dream state,” the member said. “When I think about the solution they helped us build, it just makes me happy.”

Watching the clock. Though members using AtlasFX said they appreciate the company’s commitment to customization, users did agree that it took more time and effort for FX teams to implement than other systems. Asked to comment, an AtlasFX spokesperson responded:

  • “A typical deployment from beginning to end would be three to four months, but can vary in either direction based on complexity. However, with that time frame, the customer typically will have partial access to much improved data and analysis in just a few weeks.
  • “We are laser-focused on automating whatever is manual wherever we can, so we try to save them time in the FX workflow early on during the deployment, and ultimately free up a lot of time once everything is completed. We’re quite familiar with their pain points and can quickly implement some time-saving best practices.”

FiREapps: rock solid. When one user of FiREapps, Kyriba’s FX risk management solution, was asked why he choose the system, his answer was simple: it was very user-friendly, and “completely bulletproof.”

  • One member said the platform “works great” for measuring exposure on balance sheet and portfolio hedging and trade decisions. The member does not hedge cash flows.
  • Another member, who has used FiREapps in the past, called it a “one-size-fits-all” solution that won’t suit some companies’ needs. “The configuration time is a bit shorter, but it’s a vanilla solution,” he said.
    • A Kyriba spokesman said, “Now that FiREapps is a part of Kyriba, there are numerous additional features and functions available for clients to take advantage of. Kyriba is investing significantly in our products and there are always new and innovative solutions to explore with us.”
  • “We’ve never had an issue with errors, it’s very efficient,” one member said. However, he said he wished FiREapps offered more functionality for visualizing data and looking at trends.
    • “FiREapps has lots of data, but can be light on information,” he said. “If you’re trying to look into trends or do some visualization, FiREapps just doesn’t have the capability, you have to put it in something else to really analyze it.”
  • A Kyriba spokesman said the company “provides a number of different ways to help clients visualize their data.” He said the platform has “powerful analytics for creating trend analysis, variance analysis, hedge performance analysis as well as a variety of powerful business intelligence analytics related to data integrity, exposure and risk views.
    • “We are also working closely with several of our clients to design powerful business intelligence views that provide a comprehensive understanding of their FX program.”
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Justin Jones
In Regional, Talking Shop

Talking Shop: Italy’s New Way to Make Public Administration Payments

Member question: “As of the end of Feb., it is mandatory to pay the public administration in Italy through a payment system called PagoPA. To my knowledge, none of the big banks support this. We currently use a local Italian partner bank for this purpose.

  • “Does anybody know if it is also mandatory to pay the public administration through this PagoPA system when paying from a nonresident legal entity outside Italy?”

Member question: “As of the end of Feb., it is mandatory to pay the public administration in Italy through a payment system called PagoPA. To my knowledge, none of the big banks support this. We currently use a local Italian partner bank for this purpose.

  • “Does anybody know if it is also mandatory to pay the public administration through this PagoPA system when paying from a nonresident legal entity outside Italy?”

Peer answer 1: “We are in the process of opening an account with [a European bank] in Italy for this sole purpose. So maybe you can inquire with [them]?”

Member response: “We’ve been in contact with [them] as well, having the impression that some investments still needed to be made at their end to support PagoPA. Notes from our call:

  • “Segregation of duties is not possible yet, i.e., one person entering and one other person approving the payment.
  • “No file upload functionality, it is only feasible to manually enter the payment.”

Peer answer 2: “I have been advised that for certain types of payment e.g., waste water or local taxes, PagoPA is required. However, in the main, the Italian government will accept different payment options, e.g., F24.

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Justin Jones
In Banking, Capital Allocation, Capital Markets

A Third Path for Stock Buybacks: Enhanced Open Market Repurchases

Some NeuGroup members have turned to eOMRs to get the flexibility of OMRs and pricing below VWAP, like ASRs.

Many NeuGroup members across groups at recent meetings agreed they have enough excess liquidity and trust in market stability to restart share repurchases; but there has been a range of views about how much emphasis to place on the price per share a corporate pays for its own stock.

Some NeuGroup members have turned to eOMRs to get the flexibility of OMRs and pricing below VWAP, like ASRs.

Many NeuGroup members across groups at recent meetings agreed they have enough excess liquidity and trust in market stability to restart share repurchases; but there has been a range of views about how much emphasis to place on the price per share a corporate pays for its own stock.

  • Where companies fall on the spectrum of answers may determine if they opt for open market repurchases (OMRs) or accelerated share repurchases (ASRs). And then there’s what’s called an enhanced OMR (eOMR).

Vanilla OMRs. A member in a meeting of large-cap companies said, in his experience, “All the Street ever cares is ‘did you buy back $100 million or $500 million or a billion?’ As long as it’s not egregiously over-market, it seems like there’s not much value given to the price paid, just the amount purchased.”

  • This member uses a traditional OMR that offers corporates relatively more flexibility than an ASR program, a strategy that allows companies to make opportunistic share repurchases at below-market prices but requires them to commit to the program.
  • Another member who also uses OMRs said he communicates with his company’s finance team every three months but has never been asked how he performed against volume weighted average price (VWAP).
  • The member added that although treasury typically tries to be as opportunistic as it can, “the primary objective is to get a certain amount done.”

eOMRs: The best of both worlds? Other members shared their success using so-called enhanced open market (eOMR) repurchases, a strategy that uses an algorithm to determine daily purchases, maximizing the discount to VWAP. This approach offers both flexibility and pricing advantages.

  • One member who uses eOMRs said he was pitched the strategy by his bank, which “uses a lot of the same trading algorithms and approaches that it uses for an ASR, except the bank doesn’t take the cash up front,” the practice in ASR deals.
    • He said the company doesn’t get the shares delivered upfront but that isn’t a high priority anyway.
  • The member said that the return to the company is a cut of whatever the trading performance is. “So if they outperform by a buck a share, you might get 75 cents of that and the bank will keep 25 cents, or whatever the mechanism is,” he said.
    • “We like using that when we know we’re trying to hit a target for the quarter.”
  • As an example, the member said, if his company wanted to do $500 million in repurchases for the quarter and isn’t price sensitive, an eOMR makes sense because the company can capture the volatility while definitely hitting its target.
  • Another member said he balances his use of ASRs with eOMRs. “We will take a look at implied volatility, and if volatility is high, an ASR allows us to lock in that volatility at a higher discount. Otherwise, an eOMR gives us some flexibility, still enjoying the opportunity for better than VWAP.”
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Justin Jones
In Capital Allocation, Capital Markets, ESG

Getting Granular on Green Bond Proceeds: Capex? Opex? Both?

Some investors prefer that green bonds finance capex projects, but corporates use proceeds for opex, too—with caveats.

How a corporate intends to spend the proceeds from a green bond is integral to deciding whether to issue the bond in the first place. You need to have sufficient uses to create a deal that is large enough to make the costs worthwhile and ensure that investors will participate.

Some investors prefer that green bonds finance capex projects, but corporates use proceeds for opex, too—with caveats.

How a corporate intends to spend the proceeds from a green bond is integral to deciding whether to issue the bond in the first place. You need to have sufficient uses to create a deal that is large enough to make the costs worthwhile and ensure that investors will participate.

  • NeuGroup members at a recent ESG working group meeting addressed a related, more granular issue of using green bond proceeds for operating expenses (opex) in addition to capital expenditures (capex).
  • Members also discussed the benefits of using the proceeds on fewer, big-ticket items rather than for multiple, smaller expenditures.

A case for big capex. One member said his company chose to use the proceeds from a recent green bond for large capital expenditures, excluding operating expenses and smaller capex opportunities.

  • “This made the post-transaction reporting less onerous,” he said. The company did not want to create a “big workload” in terms of reporting, he added.
  • Following the meeting, another member said, “I think there was fairly broad agreement that capex was preferable to opex,” all else being equal.
  • One reason for that is the preference by investors, especially in Europe, that proceeds from green bonds be used to create new assets that support sustainability.

Capex and opex. Another member’s company is looking into using the proceeds from a sustainable debt issuance for a combination of capex and opex. “Specific to capex, we are exploring how to tie R&D expenditures to particular product offerings,” she said.

  • After the meeting, this member said, “A key takeaway from the meeting from other members who have tied proceeds to capex and [opex] is the importance of clearly articulating the specific ESG value add derived from the service or product funded with green proceeds.
    • “Investors want to know that the proceeds are not simply being used to fund normal business operations.”
  • Another member’s company plans to use proceeds from a multi-tranche sustainable debt deal for both capex and opex. He noted that while investors like to know, companies are not required to reveal the ratio of capex to opex in use of proceeds disclosures.
  • That said, it’s likely “that we’ll allocate proceeds on the longer-dated tranches to longer-lived assets such as green buildings,” he said. That means that shorter-term tranches may fund operating expenses.
    • “I understand that some investors are sensitive to seeing a reasonable match between the tenor of bonds to the life of the eligible projects funded,” he said. He added that his company received different advice from different banks on whether this particular issue mattered.

What about PPAs? Many companies use green bond proceeds to finance power purchase agreements (PPAs) that allow a corporate to buy renewable energy from a third party. PPAs are considered operating expenses, one member explained.

  • He said investors, especially in Europe, “generally consider them lower quality—or even inappropriate—use of proceeds for a green bond.” That’s relevant, he said, is in cases where a corporate is buying power from an existing renewables project.
  • For that reason, this company included so-called additionality in its bond framework. “Our PPAs need to be catalyzing net new renewable energy onto electrical grids—which is partly the goal for investors who are capex focused,” he said.
  • “This additionality theme is a key focus for investors, and you heard several other members mention it during the session,” he said after the working group meeting.

EU green bond standard. A proposed green bond standard in Europe may offer corporates more guidance on which operating expenditures will pass muster:

  • “Green expenditures can include any capital expenditure…and selected operating expenditures…such as maintenance costs related to green assets, that either increase the lifetime or the present or future value of the assets, as well as research and development (R&D) costs.
  • For the avoidance of doubt, OpEx such as purchasing costs and certain leasing costs would not normally be eligible.”

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Justin Jones
In Cash & Working Capital, Talking Shop

Talking Shop: Holding Physical Cash ‘Under the Mattress’

Member question: For business continuity or emergency use purposes, are you holding any physical cash on hand at one of your sites?

Peer Survey Results: “No” wins in a landslide.

Member question: For business continuity or emergency use purposes, are you holding any physical cash on hand at one of your sites?

Peer Survey Results: “No” wins in a landslide.

Peer answer: “Our US company does not currently keep any cash ‘under the mattress,’ however I do think there are some places around the globe that do have some [a country in Latin America].

“I’m assuming you are asking this post-Fedwire disruption? Was anyone negatively impacted by that? I am wondering if anyone is preparing any sort of BCP plan for an extended Fedwire disruption.

“We did not have any negative impact – everything was able to be pushed through the systems. I am having some follow-up conversations with my primary US banking partner to talk through potential BCP scenarios in the event another outage occurs that extends beyond the business day.”

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Justin Jones
In Banking, Diversity & Inclusion, Investment Management

Treasury’s Key Role in ServiceNow’s Commitment to Racial Equity

ServiceNow has turned to RBC to create a $100 million fund to support Black homebuyers and communities.

ServiceNow in late January unveiled a $100 million “racial equity fund”—in the form of a separately managed account— that will be managed by RBC Global Asset Management’s impact investing team.

  • In mid-February, during Black History Month, ServiceNow senior treasury director Tim Muindi, who played a leading role in the process, described the project to other NeuGroup members who work at high-growth tech firms. ServiceNow runs a software platform to help companies manage workflows.
  • The company is among corporates paving the way by taking concrete action aimed at improving diversity and inclusion (D&I) and promoting racial justice in society.

ServiceNow has turned to RBC to create a $100 million fund to support Black homebuyers and communities.

ServiceNow in late January unveiled a $100 million “racial equity fund”—in the form of a separately managed account— that will be managed by RBC Global Asset Management’s impact investing team.

  • In mid-February, during Black History Month, ServiceNow senior treasury director Tim Muindi, who played a leading role in the process, described the project to other NeuGroup members who work at high-growth tech firms. ServiceNow runs a software platform to help companies manage workflows.
  • The company is among corporates paving the way by taking concrete action aimed at improving diversity and inclusion (D&I) and promoting racial justice in society.
  • These businesses are often focusing impact investing efforts on communities where their employees live and work. To target specific geographic areas, some others have also chosen to work with RBC.

Take the initiative, identify a goal. A decision by ServiceNow to focus on boosting home ownership in Black communities began with Mr. Muindi asking himself what he could do personally, on a professional level, to effect social change given treasury manages about half of ServiceNow’s balance sheet. Finding the answer included reading “The Color of Money: Black Banks and the Racial Wealth Gap” and a Citi GPS report on the economic cost of Black inequality in the US ($16 trillion in the last 20 years).

  • To explain why his treasury team wanted to focus its efforts on Black communities, Mr. Muindi told senior executives, “The reason we’re going to start in Black communities is that’s what’s on fire. The house is on fire, let’s go and start working on that. And over time there will be other opportunities.”
  • At the meeting, he told members that home ownership has a multiplier effect by indirectly helping ancillary businesses supported by homeowners. Deposits alone in Black-owned banks are just a part of the solution, he said.
  • “We have many more roles to play in addition to deposits,” he said. “We have to be part of this entire ecosystem of capital movement, enabling the flow of capital.”
Tim Muindi, Senior Treasury Director, ServiceNow

A solution and a carve-out. Mr. Muindi needed a way to keep capital flowing to lenders in Black communities to enable them to have the capacity to continue generating new loans; in some instances where the banks securitize loans, the loans are too small to interest institutional investors, he said.

  • He decided, “Let’s become a catalyst so there’s an outlet on the other side” where banks can “have additional loan origination capacity” and create an income stream, which is extremely vital for Black-owned banks.
  • To do that, he worked with RBC to create the separately managed account, which buys agency mortgage-backed securities (MBS), Small Business Administration (SBA)-backed loans and taxable municipal securities. Black communities are the beneficiaries of the loans in 10 US cities where ServiceNow staff work and reside.
  • That required creating a “complete carve-out” within ServiceNow’s investment policy and shifting from a focus on duration limitations to weighted average life metrics, because of the assets in the account.
  • “We couldn’t invest in MBSs before this,” Mr. Muindi said.
  • The company’s $1 million minimum individual security investment amount has been waived for the RBC account.

The approval process. Before establishing the account and the carve-out, of course, Mr. Muindi needed the support of the company’s senior leadership and the audit committee (AC) of the board of directors. He said this involved educating people on historical context and how the company could best respond to fast-moving current events.

  • He answered lots of questions about impact, outcomes and other topics. He won approval, in part, he said, by emphasizing the positive impact the company’s investments would have on people in underserved communities.
  • He said the AC was very receptive to the recommendation. “So why didn’t we do this before,” he asked himself.

Slow down and communicate. Once he had the green light, Mr. Muindi’s attitude was, “Let’s get this started, let’s get going on it” by putting the money to work. His colleagues on the company’s communications team had to slow him down and helped him realize “there’s a lot more to it,” he said.

  • He ultimately learned the importance of both internal and external communications on a project of this nature, the need to carefully consider the messaging to both employees and the investor community. He recommends starting early and using all resources available, including FAQ sheets.
  • The communications process helped prepare him for a flood of questions following the announcements, including an employee who asked why the company chose RBC instead of a Black-owned firm. The response included RBC’s capabilities and track record in impact investing relative to other banks.

Measuring success.  At the NeuGroup meeting, another member asked Mr. Muindi how the company is measuring success. He said impact reporting is a work in progress that will include both stories about business creation and data on mortgages, among other elements.

  • The company plans to deploy the entire $100 million by the end of the year, Mr. Muindi said, adding, “There is a need.”
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Justin Jones
In Cash & Working Capital, Technology

Bridging the Gap With A Hybrid Solution for Cash Flow Forecasting

One NeuGroup member’s solution for more accurate quarterly forecasting combines old school and new school.

Accurate long-term cash flow forecasting may be treasury’s white whale, and while the hunt is certainly far from over, assistant treasurers at recent NeuGroup meeting heard about a solution for producing medium-term forecasts.

Lack of balance. At the meeting, one AT told the group he is having issues balancing two standard methods for cash forecasting in the short- and long-term.

One NeuGroup member’s solution for more accurate quarterly forecasting combines old school and new school.

Accurate long-term cash flow forecasting may be treasury’s white whale, and while the hunt is certainly far from over, assistant treasurers at recent NeuGroup meeting heard about a solution for producing medium-term forecasts.

Lack of balance. At the meeting, one AT told the group he is having issues balancing two standard methods for cash forecasting in the short- and long-term.

  • The short-term system forecasts two weeks in advance for AP purposes, based on a direct model of “cash positioning” that analyzes upcoming payments and receipts. It has a high degree of accuracy.
  • But his yearly long-term forecast, a top-down approach based on high-level revenue and expense forecasts from FP&A, has a higher margin of error.

The power of a hybrid. In response, another AT shared that his company’s treasury and shared service center teams worked together to build a hybrid between the two models, a tool that generates far more accurate cash flow forecasts over the coming six to 12 weeks.

  • He said the tool works by “looking into the system of AR and AP for what you see within your current terms.” Think of that as old school.
  • It then “uses some AI and machine learning techniques to figure out historically where the rest of that period is going,” and makes extrapolations about the next three-month period. New school.

Bridging the gap. The tool helps to bridge a gap the member’s company had when “planning around how much we need for AP, share repurchases, and other outflows for the whole quarter, not just the next week.”

  • “If you’re managing an investment portfolio that you’re using for liquidity you need to know your position on the curve in relation to your cash needs,” the member said.
  • Another member who uses a similar medium-term forecasting model said that this method is typically far more accurate over a single quarter than the one-year forecast.
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Justin Jones
In Cash & Working Capital, Talking Shop, Tax

Talking Shop: Allowing Direct Debits for Payroll Tax

Member question: “For those of you who use ADP for payroll in the US, do you allow them to do direct debits on your bank accounts, specifically for payroll tax payments?”

Member question: “For those of you who use ADP for payroll in the US, do you allow them to do direct debits on your bank accounts, specifically for payroll tax payments?”
 
Peer answer 1: “We just converted to direct debit with ADP in the US. Happy to put you in touch with the team that evaluated and executed the project.”
 
Peer answer 2: “We allow direct debits for both payroll and payroll tax. We fund to a separate, stand-alone payroll bank account that is solely used for this activity.”
 
Peer answer 3: “We reverse wire and direct debit for payroll tax and payroll respectively.”
 
Peer answer 4: “We allow ADP to reverse wire from a dedicated payroll account. ADP offered no other option (‘take it or leave it’), and we only got comfortable by establishing a stand-alone account.”

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