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.

Finding Best Practice for Corporate Treasury in the Deepening Credit Crisis

Publication: gtnews.com


At the annual Eurofinance International conference, key issues of treasury and finance were discussed in Barcelona while, in the rest of the world, global markets appeared to change from rollercoaster to bucking bronco. 


To bailout or not to bailout? That was the question vexing the US Houses of Congress last week, with every twist and turn being followed by near-hysterical stock market peaks and troughs around the world. Meanwhile, the Irish government took the unprecedented move of stepping in to guarantee all deposits, bonds and debts in its six main banks for two years… unprecedented until other nations fell over themselves to offer similar guarantees for fear of losing billions in savings to countries that beat them to the punch. But as Irish savings now outnumber national GDP, how watertight can this guarantee be? (Read more in the commentary: Europe's Response to the Market Meltdown). 


It was against this backdrop of extraordinary global financial turmoil that EuroFinance’s annual International Cash and Treasury Management conference took place in Barcelona. With such uncertainty and, in some cases, panic in the air, maybe it was to be expected that in the test of the interactive voting facility 12% of delegates listed their gender as ‘other’. And with the only possible example of interbank lending of the week seen when a number of delegates from one major bank had their wallets pick pocketed outside a party held by one of their rivals, what lessons can be learnt from the past 12 months and how can treasurers negotiate a path for their organisation through these turbulent times? 


A Year in the Life of Liquidity and Risk 


The financial panic felt in western markets was put into some perspective in the first session at the conference, which looked at risk and liquidity changes in the past 12 months and examined what regional differences there may be. Damian Glendinning, global treasurer at Lenovo, is based in Singapore and so was able to offer a perspective from Asia. He said that while it was difficult to judge the overall impact in Asia, there was not the same feeling of crisis there. This is perhaps borne out of the fact that Asian corporates are generally happy to accept higher risks in order to generate higher rewards. The Association of Corporate Treasurers in Singapore has tried to introduce more caution into its members risk management policies but, as Glendinning pointed out, maybe now is actually the time to be less conservative because of the opportunities presented by current market conditions For example, a conservative hedging policy doesn’t make the most out of volatile FX markets. Lenovo also has a negative working capital position, which means it looks for funding from suppliers, not banks. In the current climate, this looks like a very strong position to take. 


Andrey Rostovsky, head of treasury at OAO Lukoil, gave a slightly different perspective from Russia, alluding to the huge drop in the share price that forced the government to make a serious move to inject cash into the system. He added that Lukoil had tried to move into commercial paper, but that was hard to do. So, it needs a good relationship with its partnership banks on working capital. 


But what effect is the credit crisis having on the risk management profile of large US corporates? According to Brent Callinicos, vice president and treasurer of Google, the crisis has made his company change their risk policy in the short term, by bringing in an added focus on the preservation of capital. But in the long term, he explained that their risk management plans were not changing for the sake of it, although they are adding flexibility earlier into these policies, which will allow proactive risk management that can be tailored to the many possible fluctuations of the credit crisis. 


Callinicos’s point about the changes in short-term risk management policy changes was supported by Andrés Garcia Peralbo, treasury director at Inditex, who said that his company is also focussed on preservation of capital. A banker sitting next to me in the auditorium commented that this is why people were turning to his bank, as they have a AAA rating. This of course offers some sort of security. But the banks themselves admit they aren’t 100% sure of the asset quality on their books and the ratings agencies are trying to keep up with every development in the banking industry. It is sensible for treasurers to adopt a cautious and methodical approach when assessing their bank relationships, so as to ensure that, if they feel they must transfer banking allegiances, that this truly is a ‘flight to quality’ and not simply a case of ‘out of the frying pan, into the fire’. 


Members of the panel for this discussion seemed largely happy with their banking relationships at the time of speaking. Inditex’s Peralbo said that his company’s relationships had not changed as they were with bigger banks - although maybe they were talking more often with them. Rostovsky from Lukoil explained that they have long-term bank relationships and that, while there may be ups and downs, on the whole it was ok. Lenovo’s Glendinning gave a very upbeat assessment, saying that nothing has changed in his company’s bank relationships, adding that the banks had been unstinting in their support. The only cautionary note came from Google’s Callinicos, who said that he is hearing from banks on a daily basis saying that they’re ok. However, he added that even if you’re comfortable with a bank’s credit rating, you should be careful as it may be totally different tomorrow. (Read more about bank consolidation in Effective Risk Management Must Underpin Bank Consolidation.) 


Not to be outdone by the panellists, delegates also had their chance to have their opinions heard, by voting on statements made about the key issues discussed. Sixty-seven per cent of delegates agreed that the credit crisis will effect companies investment programmes, 72% agreed that the credit crisis has prompted a flight to quality in investment portfolios, while 65% of delegates agreed that the credit crisis has prompted changes to FX hedging needs and management of counterparty risk. This echoes the sentiment of the panel and demonstrates some of the ways that the credit crisis is affecting corporates in their normal working procedures. However, 62% of delegates in the auditorium said that the credit crisis was not causing disruption in the financial supply chain (FSC). So, there is room for optimism, but again it is prudent to be vigilant, as there is a possibility that the effects of the credit crisis may take longer to be felt in some areas of the finance industry, such as FSC. Once again with this crisis, expect the unexpected. 


The Voice of the Delegates 


Once the experts had given their views on how the credit crisis is effecting liquidity and risk issues for treasurers, the delegates had their chance. Now, as the gender question mentioned earlier shows, you can get a few unexpected results when taking a poll of hordes of treasurers, but the results can give a good general insight into the themes and trends that are occupying the minds of treasury professionals. 


Thinking about credit availability, 57% of the delegates in Barcelona said that there has been less availability of credit in the past three months. But when given the option of whether they were more concerned about credit availability, recession or inflation, credit availability only received 29% of the votes, comprehensively beaten by recession, which scored 64%. This was backed up by the fact that over a quarter of delegates (27%) thought that central banks around the world have handled the financial crisis badly. Sixty per cent thought the response had been ‘Ok’, but this was certainly not an overwhelming vote of support. Looking forward, 33% of delegates were ‘very worried’ about credit availability in the next six months, with a majority of 53% saying that they are ‘moderately worried’. And the air of caution was backed up by the fact that an overwhelming 85% of the audience rejected the idea that the credit crunch will be a distant memory by this time next year. With the number of extraordinary events in the financial industry that have taken place in the past few weeks, it is hard to disagree with this point of view. 


Moving onto a more positive footing, 80% of delegates thought that the crisis is an opportunity to buy assets cheaply, demonstrating a very bullish attitude from the audience. Possibly this could have been added to by the bankers in the hall, similar to the gentleman from the AAA bank mentioned earlier, who are seeing institutions that 18 months ago would have been their rivals now crumbling in value. When looking at which region will grow faster in 2009 out of the US and the EU, the EU came out on top nearly two to one ahead (62% to 38%). Bearing in mind the venue for the conference being in warm and sunny Barcelona, this result may have partly reflect some continental pride from the European majority of delegates. In reality this is a tough question to call and the action taken by the US government in the short-term will go a long way to deciding the final result. This is one topic to revisit in one year, five years and even a decade from now. 


With governments around the world having received a metaphorical bloody nose from delegates earlier in the day, the audience now had the chance to play politics by casting their votes on a couple of very important upcoming elections. When asked who the next president of the US will be, Barak Obama won by a landslide 74% to John McCain’s 26%. If this turns out to be the percentage split in November, there may not be enough chads in Florida (pregnant, hanging, or otherwise inclined) to deliver another Republican president. While this result reflects similar polls carried outside of the US throughout the campaign, global polls tend not to make too much difference to the American public who know that it is they alone who have the responsibility to make this important choice every four years. The McCain vote here may also have been hit by his perceived weakness on the subject of the economy, praising the strong fundamentals of the US economy and then trying to suspend campaigning in order to concentrate on finding a solution to the economic crisis. If Senator McCain does happen to find himself in Florida on the campaign trail, he may well need a new pair of flip-flops. 


Another of the traditional powerhouse global economies with an election on the horizon is Germany. When asked who the next German Chancellor will be, delegates gave incumbent Angela Merkel an even larger majority than that of Obama, as she received 76%. Frank- Walter Steinmeier’s campaign team should possibly be concerned as he only finished third in the poll on 10%, behind ‘A.N. Other’s’ 14%. However, since this poll, Merkel has appeared to guarantee 100% of bank savings in Germany in a similar model to Ireland, before it then transpired that there will probably not be formal legislation in the country to formally increase protection. Even by the standards of the current market confusion, this seems to be an astonishing clarification that has already had a large effect on European markets. The credit crisis will make and break several high profile political careers, and it remains to be seen what effect this breakdown in communication will have on Chancellor Merkel’s long-term prospects. 


And finally, after the serious nature of most of the topics on discussion, it should cheer everyone up that 15% of all delegates think that, in the new James Bond film, Quantum of Solace, Bond’s enemy will be none other than SEPA: 


JB: “Do you expect me to talk, Hartsink?”* 
GH: “No Mr Bond, I expect you to standardise cross-border and domestic payment flows into a single scheme.” 
JB: “You’ll… you’ll never get away with!” 
GH : “But it has already begun Mr Bond, mwhahahaha!!” 


It should make for riveting viewing at cinemas around the world later this month. 


The Emerging Markets Perspective 


One of the highlights of the conference was an interview by Axel Threlfall, from Reuters and former CNBC and Market Watch presenter, with Dr Mark Mobius, managing director of Templeton Asset Management. Mobius began by demonstrating how bull markets have traditionally always lasted far longer than bear markets - a positive message for these times and certainly something to bear in mind when it may be more tempting to reach for the financial panic button. It was from this perspective that, when asked if he would vote for the US bailout plan, Mobius said that he would vote against it. (This was after the House of Representatives had rejected the initial bailout plan, but before the Senate had approved the amended plan.) The main argument from Mobius was that the market has to pull the figures down itself, whereas any bailout is artificial. “Investors will get over it,” he reasoned. “[Opposing the bailout] is the only way that the system will learn from it.” Mobius added that Templeton expected the ‘deadwood’ to be routed out quickly if the bailout was rejected - in this scenario he expected there may be six to 10 months of downturn or flat markets, followed by growth and recovery. 


Turning to Europe, Mobius predicted that it could be the French who will lead Europe out of the financial crisis. France's President Sarkozy is calling for change in accountancy rules regarding mark to market and, if he is successful with this legislative push, Mobius predicted that France could help European financial markets turnaround in one year. Eastern Europe will also help Europe as a whole, through its growth and productivity. Mobius used the example of Poland, which is now in a new phase of development and productivity as Polish migrant workers in the UK have begun returning home, something that is boosting their domestic economy. Mobius also suggested that there could be a better inter-relationship between Russia, eastern Europe and western Europe, mainly if the US is forced to focus on its internal financial fundamentals. 


Has there been a knock-on effect from the US crisis into emerging markets? According to Mobius, there may have been but not in a negative way. He argued that China has been ready for this - for example it has been keeping exports ‘in-house’ while at the same time decreasing US imports. Income in the BRIC countries (Brazil Russia, India, China) is increasing at double the rate of the US/Europe. One of the main messages from Dr Mobius throughout his conversation with Threlfall was that now is the time to selectively invest in emerging markets, such as the BRICs. He also tipped Turkey and South Africa as good smaller markets to be involved with. 


Emerging market funds were seen as risky places to invest, but people are having second thoughts now when looking at the turmoil in ‘emerged’ markets. Long-term returns can be good on emerging funds and Mobius argued that a diversified portfolio can reduce risk. The example he gave was to highlight how the BRICs countries are all very different. While individual countries can be volatile, a diversified emerging markets portfolio has a balance to it. 


Is Centralised Treasury Versus Decentralised Treasury the Wrong Debate? 


It is understandable that the ongoing seismic events in the global financial markets dominated conversation at the conference in Barcelona, but there was still time for a detailed discussion about the preferred organisational structure of treasury. Sebastian di Paola, a partner at PwC, spoke to Kristian Pullola, vice president and head of treasury of Nokia and Aidan Clare, head of corporate finance and treasury for Tetra Laval and examined how each treasury has approached the centralised versus decentralised debate. 


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A Tale of Two Treasuries 


Nokia 
Nokia is a globally managed, integrated company. It also manages the infrastructure business within a 50/50 joint venture with Siemens. 


Business units are responsible for their profit and loss up to an operating profit level. 


Business units are the risk owners for all business risks. 


Treasury is the risk owner for all financial risk. 


One integrated logistics and finance ERP system. 


80 people in the Nokia treasury organisation - one-third in Helsinki, one-third in Geneva and one-third at centres around the world. 


Treasury groups breakdown into: 

• FX risk management - identification and validation. 
• Insurance and risk finance - hazard risk management. 
• Customer finance - sales support and credit risk management. 
• Corporate finance. 
• Cash management solutions. 

Risk management not in siloes - Nokia try to take an integrated risk management approach. 


Tetra Laval 
The default mode for the Tetra Laval treasury is decentralised, unless there’s a strong rationale for centralisation. Treasury has sought to exert its mandate in this environment. 


Key areas of treasury responsibility: 

• Financing. 
• FX and IR management. 
• Cash management. 
• Projects. Middle- and back office, and accounting. 

Table 1: Tetra Laval Organisational Structure 

After hearing the organisational structure for both the Nokia and Tetra Laval treasuries, delegates were invited to describe their company’s level of centralisation in treasury activities, and how this may evolve. The results were as follows: 

• Centralised and happy: 38% 
• Centralised, but trying to get closer to the business: 34% 
• Decentralised and trying to centralise more: 23% 
• Decentralised and happy: 5% 

Clearly there is a very mixed picture out there, something recognised by the speakers. The main message from the session was that treasurers should try to look for ways to make a ‘distributed’ treasury, one that is not 100% centralised or decentralised but rather one that is best suited to the specifics of the treasury’s responsibilities and the individual business strategy. As Nokia’s Pullola explained, it doesn’t matter whether your company is organised in a centralised or decentralised manner, as long as it fits with the corporate structure. Certainly companies that grow through acquisition can find centralisation a challenge, but as Nokia is integrated it is easier to be centralised. 


So what is the right level of centralisation? According to Tetra Laval’s Clare, it depends on scale (for example, Tetra is smaller than Nokia), on culture and strategy of the overall business, and on how the current crisis evolves. It is not something that you should be evangelical about - be pragmatic and don’t lose touch with the business. 


Pullola from Nokia made the point that, whatever the balance of centralised and decentralised functions, it is vital that you recruit the right type of people. Treasurers need to think critically about the challenges of having a distributed team - how can they work together as part of one team. “Go out there and work with the business,” he summarised, “but watch out when they see how much value you could add!” 


How Treasury Can Underpin the Business 


Finally for this review of the EuroFinance conference in Barcelona, a discussion based on the results of the company’s Business Unit Survey put the boot on the other foot and showed what business units think of treasury. Martin Giles, managing director and EVP of The Economist Group North America, moderated the extended results conversation between Scott Hogate, assistant treasurer at Advanced Medical Optics, Annette Owen, global cash and banking manager for British American Tobacco, Paul Jonckheere, treasury project coordinator with Carrefour, François Masquelier, SVP head of treasury and corporate finance at RTL Group and, last but by no means least, Hans van den Bosch, head of treasury operations for Unilever. 


A summary of the survey results showed that treasury is not thought of as being in an ivory tower and that it is actually getting better at communicating with business units. The respondents also agreed that treasury adds value but, before anyone’s ego gets too carried away, business units also suggested that treasury may not be doing enough to mitigate financial risk. Finally, the omnipresent credit crisis may elevate the role of treasury, again. 


When delegates in the auditorium were asked if they formally benchmark business unit satisfaction with treasury services by conducting regular customer surveys, over three-quarters (76%) said they did not. This is something that could be of benefit for treasury to do, as a way of aligning treasury targets with the strategic goals of the business for the overall benefit of the company. Unilever’s van den Bosch provided an example of a centralisation programme between treasury and business in his company that had featured: 

• Streamlined banking relationships. 
• Streamlined IT infrastructure. 
• Treasury centres established. 

Implemented under the catchy working title ‘One Unilever’, the new structure is working well, but also provided an example of the friction that can be created as a change is made to the organisation structure of treasury - in this case a change towards centralisation. Change will never please everyone, so to make the journey as positive as possible it is important to make clear to every unit involved: 

• The goals of any change. 
• How you will achieve these goals. 
• What the overall benefits to the company will be. 

In organisational structure, as in the global credit crisis, transparency is key to a successful future. 

*These characters are entirely fictional, and any similarities to individuals past or present are completely coincidental.