Liquidity Dominates Risk Concerns for Corporates

Publication: gtnews.com

In 2010, the gtnews Treasury Risk survey tracked the challenges that corporates are facing in mitigating risk and popular risk management methods. The results show that concerns over liquidity remain high on the corporate agenda. 

One of the major effects that the credit crisis has had on corporate treasury is the wide amount of risks that the function has to manage. In 2010, gtnews carried out research into this trend - looking at areas such as liquidity risk, the effect of risk on treasury within organisational structure, counterparty risk, foreign exchange (FX) risk, interest rate risk and financial crime - as well as asking corporates which risk they perceived as the top risk to be mitigated and managed in the next year. 

Six hundred and one corporates took part in the research, providing a comprehensive set of results. Respondents came from a crosssection of company sizes - most respondents came from companies with revenue of between US$10-500m (29.5%), closely followed by those with revenues of US$1-10bn (29%). The next most represented group was companies with annual revenues of more than US$10bn. A large majority of respondents to the Treasury Risk survey came from one of three regions - western Europe (37.3%), North America (28.8%) and Asia-Pacific (18.1%) 

Liquidity Risk on the Wane? 

For the first few years of this century, cheap liquidity was easy to come by if you were at a company with good credit ratings - whether this was through bonds, commercial paper, notes or uncommitted bank facilities. The credit crisis had the effect of abruptly cutting off many of these options, with costs also spiralling. So a couple of years after the credit crisis hit, we were keen to understand just how easy it was now for corporates to access liquidity. The results show a rather mixed picture. 

Forty-two percent of organisations reported that it was easier to access liquidity currently compared to 12 months previously. Another 28% noticed no change in access to liquidity, while the remaining 30% consider it more difficult to access liquidity than 12 months ago. 

Table 1: How Easy is it to Access Liquidity Compared to 12 Months Ago? 

Source: gtnews Treasury Risk Survey 2010

This split between those organisations finding it easier to access liquidity and those who aren't is played out across different regions. A majority of organisations in the Asia-Pacific region report easier access to liquidity currently compared to 12 months ago (58%) while 50% of organisations in Latin America found it more difficult. In North America, 38% of organisations report that access to liquidity is easier currently than a year ago while, at the same time, 26% found it harder. These results were closely mirrored by western European respondents, where 37% found liquidity easier to access, but 32% found it more difficult. 

The mix in results may lead one to suspect that the size of an organisation is critical when it comes to ease of accessing liquidity. However, the Treasury Risk survey suggests that this is not the case. Forty-two percent of larger organisations - companies with annual revenues between US$1bn and US$10bn - indicate it is easier to access liquidity today compared to a year ago, while 31% found it more difficult. A slight trend can be argued when looking at the results from the largest respondents - with annual revenues of US$10bn or more - where 52% found it easier to access liquidity than 12 months previously, while 23% found it more difficult. The same percentage of smaller companies - those with annual revenues below US$10m - report that access to liquidity is easier than it was 12 months ago as those between US1-10bn did (42%), while 32% found it more difficult. 

Overall there is a slight trend towards liquidity being easier to access for some corporates, but these results also show that corporates still face a struggle to access liquidity and the conditions that existed before the credit crisis remain a distant memory for most. It is likely that corporates are experiencing a variety of different conditions from banks that they are striking up new relationships with in the effort to manage counterparty risk. 

Treasury structure 

The 2010 Treasury Risk survey sought to find out the level to which firms had changed their treasury structure, if at all, as a result of the liquidity risks posed by the credit crisis. During the credit crisis itself, it was reported on gtnews that companies that had once had a decentralised approach to cash management, funding and hedging were centralising these activities to improve control over cash flow, reduce the cost of funding and manage credit, interest rate and FX risk more effectively. Had this continued into 2010? The Treasury Risk survey asked corporates if they'd changed their treasury structure in the previous 12 months in order to manage liquidity risk. 

Fifty-two percent of respondents had not changed their treasury structure over the past 12 months. This leaves nearly half of all respondents making some change to their treasury set-up. One-third said that they had changed their treasury structure as a result of liquidity risk - 28% becoming more centralised and 5% becoming fully centralised. Another 11% of respondents made changes to their treasury operations unrelated to the liquidity risk they faced. 

Table 2: In the Past 12 Months, Has Your Treasury Structure Changed as a Result of Liquidity Risk? 

Source: gtnews Treasury Risk Survey 2010

Looking to the future, the Treasury Risk survey indicates that a large majority of organisations feel they have made the necessary changes to ensure their treasury department is able to successfully manage liquidity risk. Eighty-two percent of organisations indicate they will not make any change over the next 12 months. Only 16% report they plan to further centralise their treasury operations, while the remaining 2% indicate they would decentralise their treasury operations. 

Efforts to improve cash flow forecasting being made 

Accurate cash flow forecasting and information on liquidity reserves are critical for corporates if they are to 'expect the unexpected'. Inaccurate or untimely data can lead to a string of surprises that can heighten liquidity risk and leave treasury in a dangerous position. And judging by the response to the Treasury Risk survey 2010, organisations are responding to this challenge. 

Seventy-seven percent of organisations indicate that they have improved their cash flow forecasting system within the past year. Within this number, 35% took steps to improve both accuracy of their data and their forecast window (by forecasting further ahead). Thirty-three percent solely focussed on improving the accuracy, while 9% took steps to forecast further ahead. 

Table 3: What Steps Have You Taken to Improve Cash Flow Forecasting in the Past Year? 

Source: gtnews Treasury Risk Survey 2010

The majority of organisations within each region changed their cash flow forecasting system within the last 12 months. Fifty percent of Latin American organisations improved both accuracy and forecasting, while a further 36% put in place efforts towards improving one or the other. Most effort was made by organisations in the Middle East and Africa - 45% of respondents here improved both accuracy and forecasting, while another 48% devoted efforts towards one or the other separately. In Asia-Pacific, 44% improved both accuracy and forecasting and 36% improved one or the other. Thirty-six percent of North American companies improved both, while this number dropped to 32% for companies in western European countries. One explanation for these figures could be that firms in western Europe and North America had more sophisticated cash flow forecasting systems in place before the onset of the credit crisis and, as such, felt slightly less need to change their way of operating once liquidity risks were raised. 

Post-credit crisis, the Treasury Risk survey 2010 shows that a majority of organisations believe they have a suitable cash flow forecasting system in place to mitigate liquidity risk concerns. Sixty-three percent do not plan to change their cash flow forecasting process in the next 12 months. More than one in five (22%) plan to improve only accuracy or forecasting, while 15% still target improvements in both concurrently. 

Counterparty Risk of Banking Partners High on Corporate Agenda 

One of the most noticeable effects of the credit crisis for corporates was for those with direct or indirect exposure to financial institutions that collapsed, were bought cheaply by rivals or required state support to remain in business. Organisations faced the prospect of losing credit lines or having to renegotiate lines they were dependent on for much higher fees. 

Corporates were well used to carrying out counterparty risk analysis on other organisations they dealt with - for example, suppliers - but the shock of the credit crisis meant that this now also became a top priority for their banking partners. And the Treasury Risk survey highlights the fact that this trend has continued after the credit crisis as corporates pay close attention to the credit ratings of their banks. An overwhelming majority of organisations regularly review their banking partners’ credit standing. Half of all organisations review credit standings at least quarterly, with 27% carrying out a review on a monthly basis. Six percent review every six months while 15% percent annually review their banking partners credit standings. A further 20% review on a 'random' basis. Only 9% conduct no review at all. 

Table 4: How Often do You Review the Credit Standing of Your Banking Partners? 

Source: gtnews Treasury Risk Survey 2010

Larger organisations (with annual revenues greater than US$1bn) are more likely to review bank credit standings on either on a monthly or quarterly basis than smaller companies. On average, 53% of these larger companies review standings either monthly or quarterly, compared to 43% of those organisations with revenues of less than US$1bn. And the process still has a way to go, according to the Treasury Risk survey, with one-third of respondents saying that they plan on increasing the frequency with which they review their banking partners' credit standing to some degree. 

Late settlement from bank partners infrequent 

Over the past 12 months, organisations very rarely (if at all) experienced a late settlement from a banking partner. Just three percent indicated their organisations regularly experienced late settlements from their bank partner. Sixty-two percent report having never experienced a late settlement, while 11% experienced a late settlement once. Twenty-four percent experienced a late settlement only occasionally. 

Primary Objective for Hedging Strategies 

Corporate priorities for hedging strategies can cast light upon the current markets that they are operating in and, just as importantly, business confidence. The Treasury Risk survey discovered that the primary objective of an organisation's hedging strategy when managing FX risk was to protect the organisation from adverse markets, with 62% of respondents selecting this option. The next most frequently cited objective was hedging at the most favourable level to gain a competitive advantage (11%). This suggests that corporates are overwhelmingly still thinking to protect what they have, rather than chasing growth. 

Table 5: What is the Primary Objective of Your FX Hedging Strategy? 

Source: gtnews Treasury Risk Survey 2010

This thought is further backed up by the fact that 73% of survey respondents indicate that they have not changed their approach to FX risk management in the previous 12 months. In addition, 21% say that they have made moves to protect themselves from adverse moves in the currency market, while just 6% have become more optimistic and thus made moves to gain competitive advantage through their FX hedging strategy. 

Organisations with annual revenues greater than US$1bn were more likely than smaller companies to have maintained the same FX risk management strategy (average of 76% percent versus an average of 69%, respectively). Also, smaller organisations tended to change their strategy to become more conservative (24% average) versus large organisations (19% average). 

Hedging tools 

Turning to hedging tools used to mitigate risk, the Treasury Risk survey looked at which methods are most popular when it comes to hedging interest rate risk. Over two-thirds of respondents - 72% - use swaps for this purpose. The next most popular method was forward rate agreements, used by 38% of organisations. 

Focus on short-term investments 

Before the credit crisis, corporates looked for potential yield in short-term investment instruments as the key factor in deciding where to place their cash. However, as many of the money markets collapsed and credit lines were threatened, organisations were far more focussed on the liquidity and security of cash. This is still the case, judging by the results of the Treasury Risk survey. When making short-term investments, security is the most important consideration for a majority of organisations (60%). Liquidity followed as the second most important (31%) while yield was only chosen by 9%. 

Critical Risks to Manage in the Next Year 

Organisations view liquidity, FX and counterparty risk as the most important risks for treasury to manage above other risk types during the next 12 months. A quarter of organisations view liquidity risk as the most critical, followed by FX risk (23%) and counterparty risk (17%). Less frequently cited risks include: 

• Interest rate risk (14%). 
• Operational risk (10%). 
• Investment risk (7%). 
• Financial crime (2%). 

Organisations in the Asia-Pacific, central and eastern Europe, Latin America, the Middle East and Africa and North America regions all indicated liquidity risk as their top risk to manage over the next 12 months. Those in western Europe ranked FX risk as the top priority (26%) followed by liquidity risk (24%), which could well reflect the difficulties currently faced by the euro. 

Both small and large organisations were most likely to identify liquidity risk as the most critical risk to manage over the coming 12 months. Beyond that, a greater percentage of small organisations consider interest rate risk and investment risk as a top priority over the next year while large organisations are more likely to be concerned with managing counterparty risk (19%). 

What is certain is that risk management will continue to be a major burden for corporate treasurers through 2011. Liquidity will remain a precious commodity, while FX markets may still remain volatile. You can read thought leadership pieces on the wide variety of risks that treasurers face here. Later this year, gtnews will carry out the 2011 Treasury Risk survey, the comparison data of which will track the trends that have been seen in these results and highlight how corporate risk management is evolving.

2010 in Review: Mounting Challenges for Treasurers

Publication: gtnews.com

This year has seen treasurers face challenges on several fronts. This review of 2010 examines industry trends and reveals the top 10 most read topics on gtnews this year. 

Looking back at 2010, it is fair to say that, thankfully, it has been less tumultuous than the couple of preceding years. This was the year that many economies around the world emerged from recession and, while not exactly sprinting into growth, the widely predicted doubledip recession has failed to materialise. So far, so good? 

Perhaps not - looking beneath the surface, there are clearly still many structural cracks in the global economy that could derail future stability. In Europe, the sovereign debt crisis threatens to catch up with many more countries in 2011, while the euro itself is under the most intense pressure of its short history. How long will German taxpayers be content to lead the bailout of other nations? 

In the US, the Dodd-Frank Act became law, creating huge changes for both banks and corporates in their accounting and reporting processes, while ‘QE2’ showed a marked difference in approach to deficit management compared with most European countries. Even China, seen by many in the west as the saviour of the global economy, has been struggling with a number of economic issues of its own. Under fire from the US and Asian neighbours for manipulating the value of the renminbi (RMB), the spectre of inflation also looms large in China. 

With considerations such as these, the role of the treasurer is not getting any easier. The rise in profile of the treasury department over the course of the credit crisis has been well documented, but in many cases this has not been matched by a similar rise in resources. So in a situation of having to do more with less, what have been the topics that gtnews subscribers have been reading the most this year?

Cash Management Concerns to the Fore 

Perhaps unsurprisingly, cash management issues dominate the ‘most read’ list for 2010. But within this broad umbrella description, a number of issues emerge, including cashflow forecasting, cash management systems and the centralisation of cash management processes. 

Forecasting 

Looking at cashflow forecasting, the gtnews Treasury Insider’s blog on the topic had the rather provocative title “Cash Forecasting: Is It Really Worth It?” In the post, the gtnews Treasury Insider explains that, while they don’t need convincing of the importance of cashflow forecasting, there are a couple of major challenges they face in their organisation: 

1. I need to encourage the subsidiaries to get into the habit of forecasting regularly, by which I mean once per week, with updates when necessary. 
2. I need to improve the accuracy of these forecasts. I am keenly aware that the nature of our business dictates the frequency required for forecasting. 

The Treasury Insider sees the issue for their company as being an internal personnel issue rather than a system issue. And the blog post gained a large response from the gtnews readers. Selected reader comments include: 

• “I can only support the absolute MUST of cashflow forecasting and also the need to have a at least three months outlook especially when you have to plan out your short-term financing needs, like we are having to do in my company.” 
• “We went from a loose two-week forecast model in 2008 to a very rigidly enforced 13 week model in early 2009 in response to the economic crisis. The outcome played a large part in ensuring that our company avoided any breach of financial limits or covenants - its simply that important.” 
• “Regarding your issue no 1, the best way to solve this is from the top down. Your CFO [chief financial officer] needs to be behind you. Anything less than that will get short-term attention.” 
• “Better cash forecasting will not occur until the link between profitability and liquidity is measured more precisely, and those involved are rewarded for meeting their goals.” 
• “... treasury needs to take the lead not only by owning the cashflow forecast process, but by clearly articulating the benefits across the organisation.” 
• “Technology also helps complete the information loop by quickly communicating back forecasting effectiveness at a level of detail that is actually useful to the remote user.” 

Clearly the optimum forecasting rate - daily, weekly or monthly - varies from company to company, and there were different views on this from the readers who commented. Common themes surrounded the importance of getting senior management onboard with the forecasting process, and also educating business units as to the importance of accurate and timely cashflow reports. To get a successful cashflow forecasting project off the ground, treasurers need to be adept at communicating the benefits to all invested parties. 

A centralised approach to cash management 

In their article that looks at centralising the cash management function, Diejana van der Wal and Heijmert Rijken from Rabobank acknowledge the role that cashflow forecasting can play as part of a centralisation programme. Integrated with cash pooling, it can be an important tool for improving cash management as it lets the treasurer have visibility of their company’s cash, no matter which country or currency the account is held in. 

In terms of pooling, one example of this helping to centralise liquidity management that is given is this article is the end-of-day sweep. This process makes it possible to transfer balances from local accounts to one central account or to centrally maintained accounts in the name of the local subsidiaries. It is also possible to automatically move the balances back to local subsidiaries, while profiting from the advantages of a central interest pool. 

Van der Wal and Rijken explain that this allows the treasurer to have better control over their cash, while they can also view it as a corporate asset within the organisation. 

System choices 

The most read piece of content on gtnews in 2010 was an article from Joergen Jensen at Nasarius, who provided a guide to cash management systems in Europe. In the article, Jensen examines a variety of areas related to cash management systems, such as the type of vendors (banks, enterprise resource planning (ERP) providers and specialist vendors), what you should look for in a system to suit your organisation, and how to approach the selection process. Jensen also takes a look at some of the specific offerings from the different types of vendors that are available, and offers some advice as to which types of systems may better suit which types of organisations. 

This year, gtnews also published a buyers guide to treasury management systems (TMS), providing a comprehensive report on the various issues that treasurers face when selecting and operating a TMS, featuring interviews and case studies from a variety of treasury professionals and a TMS matrix comparing the functionality of a large range of systems. You can download the TMS buyer's guide free of charge. 

SWIFT Success? 

Articles related to SWIFT take up two of the top four places in the most read chart on gtnews this year, demonstrating the demand for information that exists when it comes to the role that SWIFT can play in making corporate bank communication more efficient and secure. The content with most relevance to corporates in this list is Debunking the SWIFT Myth, written by Joy Macknight and published in July this year. In this feature, Macknight asked the question why, despite the benefits that SWIFTNet offered corporates by providing a single, standardised and secure channel, had not a greater number signed up to use the service? It certainly seems that preconceptions about the accessibility of the SWIFT network had played a role in the slow take-up, with many corporates questioning whether they have the volume of payment information necessary to justify the cost of gaining SWIFT connectivity. 

To combat this perception, SWIFT has launched a variety of different connection methods for corporates - from plugging in a USB stick to gain off-the-shelf connectivity through Alliance Lite, through to outsourcing connectivity to a SWIFT service bureau (SSB). The additional services that SWIFT is now looking to offer as part of an overall package is also helping to gain traction, through innovations such as: 

• Exceptions and investigations. 
• Trade finance. 
• Secure e-mail. 
• SWIFT Secure Signature Key (3SKey). 
• Electronic bank account management (eBAM). 
• Electronic invoicing (e-invoicing). 

As Marilyn Spearing, global head of trade finance and cash management corporates, Deutsche Bank, and chair of SWIFT’s Corporate Access Group, says in the feature: “Everybody is talking about electronic bank account management and e-invoicing - in other words really expanding what can be done through the same channel.” While SWIFT connectivity is still not going to be high on the agenda for some corporates, these value-added offerings look likely to give a welcome boost to SWIFT’s corporate numbers. 

To compare and contrast a selection of the SSBs available for corporates, download the buyer’s guide to SWIFT service bureaus that gtnews published this year. 

Evolution of corporate payments 

But there was a lot more going on in the world of corporate payments during 2010 than just debate over SWIFT. An article from Nigel McCook of Edgar Dunn & Company discusses the possibilities for future trends in payment systems. Analysing survey results, the article focusses on understanding the importance, both today and in the future, of individual payment products, as well as the key industry events that are expected to shape the payments markets over the coming five years. Some of the key findings discussed include: 

• Credit cards were the payment product given the highest rating in terms of current importance, followed by domestic debit cards. 
• Respondents from Asia gave comparatively higher ratings of importance to cash, mobile SMS, remote payments and remittance. 
• The top four payment products, in terms of their expected growth in importance over the next five years, are: 

1. Contactless cards. 
2. Mobile SMS/remote payments. 
3. Prepaid cards. 
4. Mobile NFC. 

These were among the payment topics under discussion at this year’s Sibos conference in Amsterdam. Following the past couple of years of battering this conference has taken - both from the Lehman Brothers’ collapse in 2008 and typhoon Koppu in 2009 - this year saw delegates and exhibitors alike emerge from their emergency shelters and hit the conference ready to do business and network. You can find full gtnews coverage of the conference here, including both the Corporate Blog and Banking Blog and a wealth of video interviews with perspectives from a number of industry experts. 

Risk Management Issues Rise 

One of the more blatant legacies of the credit crisis has been the rise of risk management and mitigation that treasurers are responsible for. A glaring example of this is the fact that corporates now actively need to carry out counterparty risk analysis of their banking partners - something completely at odds with the ‘one global bank’ policy that many corporates were actively pursuing when credit was both plentiful and affordable. 

A key area of risk management this year has been foreign exchange (FX) - from currency volatility in Europe and South America to concerns over ‘currency wars’ in Asia, corporate treasurers have had to be increasingly mindful of their FX exposures. As such, it is no surprise to find the article from SunGard’s Ryan Heaslip in the top 10 content list. Entitled Cost-effective Foreign Exchange Risk Management, the article looks at steps corporates can take to ensure they have an efficient FX risk management strategy in place. Some questions Heaslip suggests treasurers start by asking include: 

• Are you currently able to gather a complete dataset of exposures?
• Is exposure information provided in a timely, detailed and accurate manner? 
• Is there an operational focus on reducing exposure? 
• Are risk factors used to rank exposures? 
• Is there a strategy that prioritises the types of risk to hedge (e.g. balance sheet, short-term forecast, long-term forecast)? 
• What type of derivative strategies will be used to hedge, after operational considerations? 

The topic of FX risk management was also high on the agenda at the inaugural Global Corporate Treasurers Forum Europe that gtnews hosted at the Grosvenor House Hotel in London in June. The event is an annual independent forum bringing together European corporate treasurers to meet face-to-face, listen to leading speakers and network with industry peers in a high level and exclusive environment. 

Discussion at one session of the forum turned specifically to the transaction risk element of FX risk - where the risk of value changes depending on where the transaction is. Some transaction exposure is not shown in the profit and loss (P&L) because it has not yet been recognised, or the contract is anticipated rather than committed to. A couple of the questions raised at the forum referred to a) whether transaction exposure should be hedged; and b) if it was hedged, whose responsibility within the organisational structure was this? 

One group treasurer explained that their company had decided not to hedge its transaction exposure as they would have had to involve all of its investors, which would have added complexity. It has an impact on reporting - the company would have had to have shown like-forlike figures, and they wanted to protect this information. The factors involved in weighing up whether or not to hedge this risk requires a full evaluation by corporates. 

If you are a treasurer or group treasurer, and would like to find out more about the Global Corporate Treasurers Forum Europe and register your interest in attending the 2011 forum at the Ritz Hotel in Paris, click here. 

Growth in Supply Chain Finance 

Another area of interest to corporates that received a ‘boost’ from the credit crisis is supply chain finance (SCF). The contraction of available credit in the market led to an increased need for bank financing. With a dearth of liquidity solutions available, SCF solutions gained a much greater global popularity. Picking up this trend, Alexander Mutter from Deutsche Bank examined what the future may hold for SCF offerings in his article that rounds out our top 10 for 2010. 

Mutter sees the growth of SCF leading to more diversified and bespoke solutions emerging, driven by banks. He uses the example of a supplier portfolio where there are large, mid-sized and smaller enterprises involved. “Today, a similar supply chain finance solution will be offered to all of them. In the future, the offering to the individual supplier will be customised according to their balance sheet objective, based on the need analysis of this portfolio and risk policies, as well as financial needs,” suggests Mutter. By taking this approach, the SCF offering will be more flexible and tailored to suit the individual customer profile. 

Responding to the growth in popularity of SCF as a topic among corporate treasurers, this year gtnews has worked with Enrico Camerinelli, a senior analyst at Aite Group and SCF expert, to publish a monthly blog on key SCF issues. Topics covered in 2010 include the return on investment in SCF, the importance of sustainable supply chains and the need for an industry standard taxonomy in SCF. You can find every blog post on the topic here. 

Looking Ahead 

2010 proved that, while the role of the treasurer has grown in stature, the demands this places on the treasurer are fierce and come in many forms. The economic world can still be paranoid and reactionary in the aftermath of the credit crisis and, as many corporates stockpile cash, perhaps some treasurers could be accused of fuelling the fire in this regard. It seems that this year has answered a number of questions - regarding global recession and the credit crisis - but thrown up several more challenges. 

Despite this, there are excellent examples of corporate treasury departments and individual treasurers demonstrating best practice across the myriad different disciplines mentioned above. We were lucky enough to witness this first-hand at gtnews in 2010 through the quality and quantity of entries we received for our first annual Global Corporate Treasury Awards, which was this year held in Amsterdam alongside the Sibos Corporate Forum. As you can see from the winning projects, teams and treasurers, innovation is alive and well in treasury departments around the world. 

Coming up on 4 January in our first upload of 2011, we’ll be publishing a series of articles offering perspectives and predictions for the year ahead and mulling over the challenges that are likely to come the way of the treasurer. Until then, best wishes for the holidays from everyone here at gtnews.

Counterparty Risk a Key Concern as Treasurers Predict More Bad News to Come

Publication: gtnews.com

In late October, the EuroFinance International Cash and Treasury Management conference in Copenhagen, Denmark, saw risk management issues top the agenda. 

In October, the annual EuroFinance International Cash and Treasury Management conference took place in Copenhagen, the capital of Denmark. The city will be dominating the global news media next month when the UN Climate Change Conference brings world leaders here, but first it was the turn of bankers, vendors and practitioners to enjoy the Danish hospitality and discuss finance issues of the day. 

The View from the Delegates 

After a slight mix-up in the running order, the first session of the initial day began with the audience being polled on the issues of the day. The audience’s starter for 10 was ‘Is the crisis over?’ A landslide 71% of the audience predicted that there will be more bad news to come, a result in line with a similar poll at the Association for Financial Professionals annual conference in San Francisco in early October. This may be seen as a sign of the banking crisis making the transition into the real economy, which could spell bad news for retailers as we approach the end of the year. Fourteen per cent of the audience, very honestly, said that they didn’t know if the crisis was over or not. 

Given the response to the first question, the statistics to the second question, ‘Are you bullish or bearish?’ provoked an interesting counterpoint, with 64% of the audience stating that they were feeling bullish for the future. This could be a sign that, while most believe there will be more bad news coming out of the crisis, they may also believe this could present them with opportunities, perhaps for M&As at a knockdown price. At last year’s conference, only 41.5% of the audience said that they were feeling bullish, so this year’s results indicate a major shift in confidence - hardly surprising seeing as last year’s event occurred just a month after Lehmans collapse. 

Cash management 

Turn to cash management and the crisis doesn’t seem to have to much of an impact on the overall pattern of treasurers collecting their invoices, with 56% of the audience saying that that they collect at the same time as last year. Those saying ‘earlier’ (20%) and ‘later’ (25%) are fairly balanced. In contrast, when it comes to paying invoices, a mere 3% of voters in the auditorium are doing this earlier than last year, with 33% giving themselves the extra breathing space of paying their invoices later than last year. The overwhelming majority (64%) stated that they’re paying their invoices at the same time as usual, showing a consistent payables strategy. 

As always, cash forecasting accuracy remains a concern for corporates, and the Copenhagen crowd proved to be no different, with the following split of results when asked how far into the future they were comfortable forecasting: 

• One year plus - 14% 
• Six to twelve months - 15% 
• Three to six months - 19% 
• One to three months - 22% 
• One month - 18% 
• One week - 8% 
• In the dark - 7% 

Fifty-five per cent of those polled stated that they are not comfortable predicting cash flow beyond three months. Reasons for this could include incomplete or late data from business units, inefficient forecasting systems and methods, and of course the fluctuating market activity - if 71% of the audience expect more bad news to come, it could be that they are keeping a healthy scepticism towards the data they are seeing. 

Bank relationships 

Since the Lehmans collapse of September 2008, the majority of delegates (52%) said that they are still using the same number of banks that they were before. The rest of the delegates showed a clear split in strategy, with 28% indicating that they are using fewer banks, while 21% opted for the counter opinion of increasing their bank relationships. On the one hand, there was a clear ‘flight to quality’ during the height of the crisis, which would explain why some corporates reduced the number of banks they used. However, because at one time it seemed a very real prospect that more major banks might fall by the wayside, it seems realistic that other corporates would be looking to spread their banking counterparty risk among as many institutions as they could conceivably manage. It will be fascinating to see how these different strategies play out in 2010. 

With a large number of the delegates made up of bankers, it will come as no surprise that some of the poll results had a very different complexion to them when you drill down into the different demographics. When asked ‘Should the G20 be so concerned about bankers bonuses?’ on the face of it the audience voted 58% to 42% in favour of the G20 being concerned. However, it might not surprise you to learn that this figure was much higher among the corporate demographic (72%) than the bankers (33%). Kudos to the third of bankers who agreed though, it can’t have been easy to effectively take the role of turkeys voting for Thanksgiving. Hopefully, for them, the polling data will remain anonymous from their bosses. 

The split theme continued on the topic of pricing. Looking at the past six months, delegates were asked if lenders been measuring and pricing risk more realistically or too conservatively. On the face of it, this split the auditorium in two, with ‘too conservatively’ just pipping it with 51%. However, predictably, nearly two-thirds of corporates (63%) voted for ‘too conservatively’, compared to just 29% of bankers. And, when asked if banks are unfairly using the crisis as a way to get higher prices, there was an even greater disparity - 72% of corporates said yes, compared to just 15% of the bankers in the room. While this type of polling can be a bit of fun, it does point to a wider disconnect between the views of the two parties. I’d suggest that there is scope for banks to move into this gap between the two general points of view, demonstrate to corporates how they are addressing these clear concerns, and win a lot of business on the back of this. 2010 will be a competitive year, and banks that have already moved quickly to address their clients' concerns could be the big winners. 

Future concerns 

Looking to the future, corporates have a wide variety of challenges, something reflected by the delegates who, when asked to select their top three concerns are, gave the following results: 

• Counterparty risk - 25%
• Availability/cost of credit - 22% 
• Cash forecasting - 18% 
• State of the economy - 18% 
• Inflation - 4% 
• Lack of yield - 5% 
• More regulations - 8% 

Counterparty risk has an elevated status due to the credit crisis, not least as corporates now need to be much more focussed on their bank counterparty risks than ever before. The availability and cost of credit again comes through, another major trend from the crisis. While the threat of more bad news emerging from the crisis still exists, these twin concerns are likely to be dominating treasury thinking in 2010. 

The Heroic Treasurer 

The first keynote panel discussion, titled ‘Treasurers, Everyday Heroes’, saw a free and frank discussion on the events of the past year among three senior treasury professionals. Moderated by Anne Boden, head of EMEA, global transaction services, RBS, the panellists were Michael Wallace, group treasurer of Marks & Spencer, Gary E. Bischoping Jr., vice president and treasurer at Dell, and Martin Gries, group treasury director for Reckitt Benckiser Group. 

Recalling the worries that were rife 12 months ago, Marks & Spencer’s Wallace said that one of his main worries was another one of their banks would fall over, as well as concern over whether the crisis would hit the real economy. This was particularly important for Marks & Spencer in its role as a commercial retailer. To counter these worries, he explained how his company implementing a new strategy, which was split between: 

• Corporate governance: the board have a keen eye on ongoing concerns such as liquidity, credit rating, counterparty risk. 
• Treasury has to get far more commercial: educating the company about cash, looking after working capital, educating buyers on FX movements, etc. 

Dell’s Bischoping jumped straight into the crisis, rejoining his company’s treasury in October 2008. You have to admire his timing there. For Dell, securing liquidity was a key concern. He’s now seeing downside scenarios being looked at by his board, something that never happened previously. Bischoping also described how Dell needed a strong investment policy, focussed on liquidity first. 

Gries of Reckitt Benckiser was faced with a slightly different prospect, as there is no debt culture in his company. Rather, its funding model is designed around generating cash flow. His board have been following treasury since he started at the company six years ago, and so is used to the scrutiny that some treasurers have only felt for the past couple of years. The main change that Gries said he noticed is that, while he can do everything he did before, it is harder to do and takes longer. The company has big US dollar and euro foreign exchange (FX) exposure, so managing this has also become far more important. 

Nobody on the stage particularly felt that their treasury policy had changed as a result of the policy, it had possibly just been refined instead. Dell’s Bischoping was of this opinion, but noted that some of its investments changed - Dell pulled out of mortgage/asset-backed securities, and I’m sure they aren’t the only company that has done this. Marks & Spencer’s Wallace also concurred that the company didn’t really change policy, but just tweaked a few things and got closer to counterparties. “Don’t leave things to the wire,” was his main advice to the corporate delegates in the audience. The Marks and Spencer credit lines were long-term and in place. Also, Wallace’s treasury is getting involved in commercial decisions. He’s met with suppliers to see how he can help them, which demonstrates a real understanding of the importance of strong and successful corporate relationships with integral counterparties. 

When the question of what the panel wish they’d known pre-crisis, Reckitt Benckiser’s Gries says it would have been great to know that prices would go through the roof, as his treasury would have negotiated longer credit lines previously. Sticking on the funding theme, Marks & Spencer’s Wallace says that if his company finances hadn’t been in good shape going into the crisis, they’d have found the past year a struggle. 

Finally, the number one priorities for each of the panel were as follows: 

• Wallace, Marks & Spencer: Future finance. 
• Bischoping, Dell: Keeping his team challenged. 
• Gries, Reckitt Benckiser: He’d quite like more yield. Gries also mentioned that he’s looking for someone to join his treasury team… not a bad platform to announce this from. 

Stress Testing Treasury and the Integration of Risk 

With the heightened profile of counterparty and liquidity risks, among others, the topic of stress testing treasury has become prominent throughout the year. One of the panels in Copenhagen brought together three senior treasury professionals to discuss what can be learnt about stress testing treasury as a result of the credit crisis. These were Dr Mark Kirkland, VP treasury at Bombardier, Christian Jakobsen, SVP group treasurer with ISS, and George Zinn, corporate vice president and treasurer of Microsoft Corporation. 

To start the discussion, all three panellists gave a quick outline of their funding set-up. For example, Bombardier’s Kirkland explained how his company has a negative working capital position - customers pay upfront for the trains that Bombardier manufacture. Jakobsen from ISS described how his company has been in the highly leveraged markets for four years now and that they look to have as large a funding base as possible. In contrast, Microsoft only entered the debt markets this year. Zinn explained how, through this process, they’ve been getting to know the credit ratings agencies. This wasn’t without its problems however, especially in the area of governance, as the ratings agencies revealed some information that Microsoft didn’t want to appear in the public arena. 

Since the crisis hit, Bombardier’s Kirkland said that he has been frustrated by the speed of decision-making by the banks as it has slowed right down. Before a facility could be negotiated with a couple of phone calls, it was now taking weeks. Internally, his company began having weekly meetings looking at bank ratings, credit default swaps, etc, and in fact they still do. 

Microsoft’s Zinn explained how he spends a lot of time looking at the counterparty risk of his banks and large clients, and that the company like to adopt what they call a ‘360° visibility’ approach to this risk. As part of the 360° view, Zinn from Microsoft pointed out that electronic visibility into funds is important. Microsoft went onto the SWIFT MA-CUG in 2003, which he said made it easier to keep payroll around the world. Bombardier’s Kirkland looked back to his previous role at Phillips, where the counterparty risk management approach was changed to take mark-to-market out of the agenda. Meanwhile today at Bombardier, he’s moving more from bank deposits to funds, as well as using the crisis to explain within the organisation why cash visibility in countries such as Brazil and China is important for treasury. 

It was at this point of the discussion that a major theme cropped up - that of banks deliberately missing their settlement dates. Zinn explained how Microsoft has also changed its approach on counterparty risk, and moved some contracts from banks that missed or pushed back settlement dates. This announcement drew quite a murmur both onstage and among delegates, but was backed up by Bombardier’s Kirkland, who said he had also suffered from late settlement by banks. He was finding banks settling late on one side of an FX payment. Was this because the banks didn’t have the cash to settle and would rather pay the charges in order to settle late? That’s a scary thought if true. However, both Kirkland and Zinn said that they haven’t experienced this problem since April this year. The theme of late settlement from banks was supported by the delegates when questioned about it, with 29% saying that they had occasionally witnessed this problem. Six per cent voted that they are consistently witnessing late settlement from banks - clearly this group need to be re-evaluating their banking relationships and looking for more security from their banking partners. 

Kirkland from Bombardier also gave a presentation at a tracked session later in the conference, focussing on the integration of risks. He started by giving an overview of types of risk measurement and their potential flaws: 

Ratings and CDs 

Ratings are a lag indicator. Kirkland used the ‘fresh’ orange juice principle to explain this - in the UK any carton of orange juice can have the word ‘fresh’ on it, but it could be made up of anything. He equated this to a AAA-rated product from a bank, which no doubt had some bankers in the audience choking on their orange juice. In addition, ratings don’t necessarily reflect recovery. Kirkland used the example that a AAA structured product has a lower expected recovery than a AAA bond. So CDs are the answer? According to Kirkland, these are not perfect, as in an illiquid market they can be easily manipulated. 

Value-at-Risk (VaR) 

On the one hand, VaR presents one clear figure, a summary that is easily understood by non-risk experts and therefore of interest to the board. It combines effects across many asset classes and can be extended to cash flow. However, statistics can be easily abused, and Kirkland uses the example of 2008 annual bank reports and how a bank can claim its VaR is US$3bn, and then ends up losing US$20bn in the year. As Kirkland put it, “there’s no point taking your risk expectations down to just one number, if that number’s garbage.” 

Efficient frontier analysis 

Efficient frontier analysis is carried out by studying a risk-reward graph made up of optimal portfolios. On one hand, this seems rationally to make sense. It’s easy to see the effect of one more risk. But Kirkland has two fundamental problems with the assumptions of this method: 

1. It relies on investors to make rational decisions. 
2. It relies on perfect information in the market. 

Neither of these assumptions are reliable, which casts a large question mark over this form of risk analysis. 

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Keep it Simple - Risk Analysis and Management Tips from Dr Mark Kirkland, VP treasury, Bombardier 

• Carry out scenario analysis of the top 10 financial risks for the company. 
• Stick to using financial instruments that you can value yourself. Identifying exposures is more important than spending time on complex instruments. 
• Be vigilant - read the small print of managed funds, even those that are rated AAA. 
• Keep cash reserves for working capital needs. 
• Review the credit standing of your banks and insurers frequently. 
• Be aware of the tenors of all deposits, especially in funds invested outside the treasury centre. 

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With his final thoughts, Bombardier’s Kirkland enthused the audience with the message that treasury is a skill, and is not just being an accountant. He advised that treasurers need to keep reminding senior management of this. With the enhanced role of the treasurer, every decision is coming under scrutiny so it is vital that, where possible, treasurers can explain what they’re doing to the CFO and the board, and more importantly show why they are taking the positions they are and demonstrate the value this adds to the organisation as a whole. 

The State of Banking 

In an address to the main auditorium, Ignacio Muñoz-Alonso, CEO & partner with Addax Capital and professor of advanced corporate finance at Instituto de Empresa, provided the assembled delegates with some banking truths and pondered some philosophical points: 

1. Banks are risk-taking entities by their nature. 
2. Banks do what they must do - to maximise profits - with what they’re allowed to do, i.e. regulation. 
3. Are markets inefficient because of the way they collapsed… or because of the way that they expanded? 
4. It is certainly difficult to find a salary employment where someone can obtain a similar compensation as some bankers do. 

Despite the salary potential, Muñoz-Alonso went on to underline some of the new limits that the banking world now faces. These include the extra pressure on revenues, new regulations, capital scarcity, capacity reduction, the fact that many banks are retrenching to domestic markets, as well as the fact that banks in many cases face a struggle to rebuild their reputations. 

Competition versus cooperation 

In many ways, a later session in the day gave the banks a chance to tackle that final point regarding rebuilding their reputations, as Catherine P. Bessant, president, global corporate banking, Bank of America Merrill Lynch (BofA), and Marilyn Spearing, managing director, global head of trade finance and cash management corporates, global transaction banking, Deutsche Bank (DB), debated current banking issues, in attempt to win around the corporate minds to the bank perspective. 

For example, the establishment of deposit protection schemes (DPS) has been big news in 2009, but the view from the stage was that this issue is a bit of a red herring, is this what corporates really want? In the US there is the possibility for banks to opt out of the DPS, which is exactly what BofA’s Bessant thinks that many of the big US banks may well do. The overwhelming opinion from the speakers is that the DPS is slightly cost prohibitive and doesn’t affect counterparty risk for corporates. 

Now I’m not saying that some corporates are fickle, but… when the delegates were asked to vote on whether now is the time for a global regulator of payments systems, to ensure consistent risk mitigation, 66% of the those assembled voted ‘yes’. Speaking on this topic, Spearing from DB made the point that, in the crisis, it wasn’t the payment systems that failed. Any day late payments came from counterparty risks and required manual intervention. Following the discussion on payments systems, the original vote was retaken, and now only 32% of delegates said ‘yes’ to the proposal that it is the time for a global regulator of payments systems, to ensure consistent risk mitigation. Needless to say, on hearing this swing of opinion, many banks exhibiting must have been looking forward to pitching to potential clients, in the hope that their opinions would still be so malleable. 

Also in the audience Q&A, the majority of corporates (55%) are not finding that funding constraints are preventing their company from capitalising on good opportunities. However, an even greater number of corporates (59%) say that banks aren’t delivering acceptable lending terms to healthy companies. There’s clearly a lot of dissatisfaction among corporates regarding lending terms, with some feeling that banks may be using the credit crisis to squeeze their corporate clients beyond acceptable levels. 

Slightly more positivity comes in the corporate responses to questions around credit conditions and spare cash levels. Compared to six months ago, 75% of corporates say that the credit conditions for their company have either improved or stayed the same. Similarly, 77% of corporates say that the amount of spare cash that their corporate treasury now holds is increasing or about the same as it was six months ago. This finds corporates in a fairly robust state going into 2010. Looking to next year, corporate respondents gave the following responses when questioned about the plans for their primary use of cash: 

• Reinvest in the business - 25% 
• Return to the shareholders - 12% 
• M&A - 15% 
• Pay down debt - 36% 
• Boost cash reserves - 9% 
• Other - 3% 

SEPA 

While the subject of the single euro payments area (SEPA) was a key topic for discussion at Sibos this year, it didn’t dominate this conference to a similar extent. In some ways this is to be expected, as it doesn’t focus solely on payments as Sibos does. However, this was a little unusual, bearing in mind the fact that this conference was hosted in Europe, and that key SEPA implementation dates were little over a week away. This probably reflects the general mood of corporate apathy towards SEPA, as did the less than full-house attendance for the one session dedicated to the topic, the thrillingly titled ‘SEPA: Embrace or Ditch’. Here, the debate offered counterpoint views as to why SEPA should be supported, or not, by corporates. Jon Alvar Øyasæter, senior vice president at Tieto, was speaking up for SEPA. He pointed out that, through Tieto’s work on the SEPA Direct Debit (SDD), he’s seeing his clients take a more tactical approach to payments, which will surely help them become more efficient in this area. Representing the other view, German consultant Christof Nelischer argued that there isn’t uniformity in SDDs across Europe, which is something that has to be addressed, and that the way it is being run is questionable and should be addressed. Nelischer also compared public awareness between the euro single currency project and SEPA as a way of justifying the ditching of SEPA. However, Øyasæter countered by claiming that you don’t need the average man in the street to understand SEPA, just the key players involved in the process. He also pointed to his conversations with corporates outside Europe, saying that they were very excited about the project. 

Overall, Øyasæter summed up his position as being that: “we’re not in any position to ditch SEPA.” Conversely, Nelischer claimed the statement of the conference when he suggested that: “SEPA will be kicked in the long grass and die a slow death.” Ouch! The outcome of the SEPA debate is probably still closer to the first opinion, a view that was supported by Pierre Fersztand, global head of cash management at BNP Paribas, when he spoke with gtnews. Fersztand made the point that SEPA is a regulation, and that the regulator will get to the end of the regulation. “The EC is very committed, there will be an end date,” he says. 

Additionally, he points out that the SEPA Credit Transfer (SCT) is a good opportunity for large corporates that want to improve their own systems to do it. “Everyone has to go to SEPA. It’s good for corporates and banks that want to rebuild their platforms. SCT transfer will be smooth,” says Fersztand. For example, BNP Paribas will use SCT for all their eurozone payments from mid 2010. Turning to the SDD, Fersztand points out that this instrument is a daily change for consumers, unlike the SCT. He advises that banks must pay attention to the Direct Debit services that they offer. For example, BNP Paribas will offer a corporate mandate management system for their clients. Once the banks have the solutions in place that offer corporates a more efficient way of operating their payment processes, and can make a convincing business case for these solutions, it is likely that SEPA will start to gain traction in the corporate payments space. However, this process may be long and slow, at least initially. 

At the end of the SEPA session during the conference, the audience voted overwhelmingly (80%) to embrace SEPA. The problem is that ‘embrace’ might be an overly positive spin to put on the result of a poll where the only other option was ‘ditch’. It’s more likely that corporates will embrace this project when the banks and the powers that be have assessed how far the project has come, and ironed out some of the flaws that have emerged to date during the current implementation. This was reflected in the 90% of the audience at the session who said it was either ‘vital’ or ‘very important’ to the success of SEPA that there is a formal end date for SEPA migration. And finally, when asked about how advanced their SEPA preparations were, the audience came up with the following mixed bag of answers: 

• Completed - 15% 
• Well advanced - 24% 
• In progress - 26% 
• Just started - 11% 
• Not started - 25% 

Clearly, corporates currently find themselves somewhere in the no man’s land between embracing and ditching SEPA. 

Corporate Social and Environmental Responsibility 

With the UN Climate Change Conference in December this year also taking place in Copenhagen, corporate social and environmental responsibility was also on the agenda at the EuroFinance conference 2009. This was a topic that Maggie Crompton, senior manager, group corporate sustainability at HSBC, discussed with gtnews at the conference. 

In order for banks to advise their clients on social and environmental issues, and in particular the business benefits that pro-active strategies in this region can bring, they first need to prove they have the authority to speak on these topics. According to Crompton, this is something that HSBC has done - for example, the bank has been carbon neutral since Q4 2005, their lending policy takes into account issues sensitive to the environment, and they have a dedicated team focussed on the issue of renewable energy. 

When dealing with their clients, the bank examines how the corporates' sustainability needs can be met while still achieving their business goals. For example, Crompton explained how the bank can help with sourcing new suppliers that are more environmentally suitable, and stressed the links between the financial supply chain, cash management, and the climate. A small change within a corporate’s supply chain relationships can go a long way to improving its carbon footprint, and the associated business and reputational benefits that come with this. Corporates should ask their banks what they are doing on environmental issues such as this, and find out what help they can provide. 

Obviously, with the UN conference a month away, sustainability and climate change are currently on the agenda, and most will be hoping to see commitments from nations such as the US and China to cut carbon emissions and to embrace energy efficiency. However, without being mandated through regulation, it is uncertain how all this talking will translate into tangible results. Perhaps one way that these results may be seen will come through the involvement of the markets - despite a rocky start, the European Union’s Energy Trading Scheme (EU ETS) still has some momentum. If the move continues in the carbon markets towards the auctioning of assets, then there’s a good chance that the business case for strong environmental policies will back the need for sustainable practices. 

Conclusion 

The key topics on discussion at the annual EuroFinance International Cash and Treasury Management conference in Copenhagen reflected the main talking points from the other conferences this season and issues that we’ve covered on gtnews in 2009. The fallout from the credit crisis has made liquidity risk and counterparty risk management become major priorities for corporates. Corporate bank relationships are under the spotlight post-crisis, as treasurers are re-evaluating the performances of their banks in the past 12 months from a counterparty risk perspective. And the role of the treasurer continues to grow in importance within the organisational structure, creating opportunities for treasurers to educate the board on the skills they possess and how these are adding value to the company. Moving into 2010, worries over a ‘W’ shaped recession mean that efficient cash and risk management will remain high on the treasury agenda. And, as some confidence starts to return to the banking market, those banks that can offer innovative and affordable solutions for corporates are sure to find themselves in a prosperous position.