Professional treasury roles bring challenges aplenty. There are the tasks we need to carry out now, each day and each week, and then there are the longer-term issues that we need also to address and in some way embed so that they inform the working culture of our teams and our organisations more widely.
The ACT addresses just that dichotomy through its curriculum, of course, but there’s nothing like the day job to bring home the fact that leading from the front involves looking up from our desks and forming opinions on new legislation, political and economic upheaval, technological innovation and threats – change, in other words.
We asked 10 treasurers to tell us about their preoccupations for 2016. Here is what they said.
Credit ratings are really important for Centrica as we head into 2016. Managing credit ratings can be challenging, particularly when the analyst or analytical team takes a strong view on your company or industry – it can be hard to educate them out of it. The regulatory requirements for mandatory rotation of analysts don’t help, as you need to start from scratch every few years with a new person.
I’ll be communicating regularly with my primary analysts at the agencies – not just at annual review time, but whenever we make an announcement or if things change in our industry, and I’ll also continue to work on understanding how the analysts think about the company, its risks and financials. A good rating process requires strong communication from both sides, but I do see differences between agencies in how they run their processes. So I always try to provide good information and expect the same in return.
Katherine Horrell, group treasurer, Centrica
Our key concern is ensuring we get great service from our banks for our subsidiaries and strong execution when we raise finance. We do our best to ensure that banks are well briefed about our strategy, potential strategy and any upcoming opportunities for ancillary through regular meetings, and try to ensure that the banks have good access to senior management.
We are generally pleased with service levels, but we have been impacted by banks pulling out of markets where we are customers. This is a function of a tough macro environment for the banks, with growing regulatory costs reducing profit margins, while the continued low interest-rate environment in the UK, US and Europe means that there is little opportunity to make significant loan margin increases, while remaining competitive.
We are seeing many banks focusing more on core competences and key geographies, as well as being more selective in their choice of who they lend to. Happily, for investment-grade borrowers, the loan markets are currently strong enough that finding a willing lending partner is not difficult, but it is important to ensure that within a bank group, there is a core of strategically aligned long-term partners who can be relied on come rain or shine, particularly when much banking business, especially cash management, is sticky.
James Kelly, head of treasury, Rentokil Initial
I’d like to think that, after 25 years in treasury, I have a pretty good handle on interest rates. So much so, that I’d like to make the prediction that rates will go up this year, but they might also go down or stay the same. In fact, it is precisely because it is hard to predict rates, irrespective of experience, that treasurers need to be prepared for all eventualities on both interest rates and inflation.
If you studied the interest-rate curve in sterling today, you might say that rates are very low. Once you superimpose those rate curves from the eurozone, Switzerland and Japan, you might conclude that sterling is actually a high yielder! There is no impediment to rates going below zero – it may look ‘weird’, but, for example, real rates in index-linked gilts have been negative for years. Short-dated nominal euro rates are also negative.
Instead of predicting where rates might go, it is better to look at the interest-rate sensitivity of both your assets and liabilities, and try to understand what rate eventualities are going to cause you problems on, say, a cash-flow or covenant basis, and hedge accordingly. Oh, and by the way, rates are going up.
Andrew Kluth, head of treasury, UK Power Networks
What do I want in 2016? More, and committed, working capital. What am I likely to get? Less, and uncommitted, working capital.
It is important to look at the distorting role that Basel III has had to play in this. A 20% capital weighting on what is statistically the asset class with the lowest default rate is, quite frankly, ridiculous. Regulators have once more used not just a sledgehammer, but also a pneumatic drill, a steamroller and possibly a small nuclear device, to crack a nut.
In the Middle Eastern states, we are also seeing liquidity drying up as lower oil prices reduce cash flows.
Regulators have once more used not just a sledgehammer, but also a pneumatic drill, a steamroller and possibly a small nuclear device, to crack a nut
There has been much talk of funds, which don’t suffer from the same regulatory constraints as what I’ve described above, coming into a potentially profitable asset class. However, the pace of this doesn’t appear as rapid as many of us would like – difficulties over taking security don’t help.
From my perspective, I would say that the outlook for working capital in 2016 is for further tightening. The top credits will remain fine and will wonder what all the fuss is about, but for the rest of us, it will remain a challenge and commercial solutions will remain at the fore.
Treasury Insider
Each business we work in is unique and we, as treasurers, need to understand the nuances – the critical periods, the key metrics, the cyclicality of the entire business and its divisions, and the way our systems work and talk to each other. In other words, we need to get under the skin of and understand what is important to the business.
This might mean discussions with divisional finance teams, service centre teams and regional teams – to understand pain points and determine root causes where possible. Those pain points generally come down to three areas: people, processes or technology.
Our long-term game plan has to be coming up with ideas and solutions by talking to the various teams and connecting the right people to get to the best solution. We can bring in external providers as needed, but often simple fixes can be made first and the ideas come from within – they often just need coaxing out of people.
Large organisations, for instance, have dedicated teams for areas like cash and banking operations, but for SMEs and depending on the sector, this may be covered by an accounts payable team whose focus is on the accounting. A discussion with treasury on how different payment methods can yield huge time savings and improve controls is clearly going to benefit everyone.
The soft skills – the analysing of people and their roles and the problems that need addressing – are often overlooked. But the year ahead will look much better if we attend to them.
Angela Kipping (née Clarke), head of treasury, Misys
Do you know anybody who’s had their email or social media hacked, or credit card cloned? That’s how common cybercrime is, and it is just as annoying and disruptive as a physical break-in. It is a lucrative and relatively low-risk activity that involves perpetrators across the range, from inventive schoolchildren to trained professionals in organised groups – freelance criminals, organised crime and corporate- or even government-sponsored activity.
Treasurers, by definition, happen to be sitting on top of a high-value target – commercially sensitive data, bank account details and electronic fund transmission. What this means is that cyber risk is not going away for the rest of your career. Unless we get rid of all the computers, of course.
The good news is, you are aware and can start to prepare. The basics are simple: keeping passwords secure, backing up data, limiting access to sensitive systems and not opening attachments on unfamiliar emails. And as long as somebody else is forgetting these foundations, then they will be the easier, hence more attractive, target… generally.
Andrew Burgess, FX manager, GE Alstom
One matter that has weighed on the global economy for a couple of years, and will continue to weigh for several years ahead, is the excess global productive capacity in commodity industries, in particular in China. Commodity products, such as chemicals, plastics and metals, rely on industry utilisation rates to provide margins. If capacities increase at a faster rate than demand growth, as they have done quite spectacularly, then utilisation rates fall and the ability to make profits decreases.
Further, much of this capacity growth has been predicated by quasi-government investment using cheap dollars; first of all, in the early 2000s, as the world believed in non-inflationary growth and then, as the reaction to the bursting of the asset bubble created by that belief, on more cheap money (quantitative easing) around a decade later. This has led to a massive debt overhang around the developing world.
Therefore, rises in the US dollar or even euro interest rates could cause the cost of the funding of this debt overhang to spark a further wave of uneconomic price cuts to retain incomes and market shares. In the short term, this can help keep inflation low, but the impact on aggregate demand through the supply chain could have an overall negative impact on global growth with the risk of a chain of debt default.
Gary Slawther, financing adviser to the CEO, Octal
In debt capital markets, we seem to be facing somewhat of a curate’s egg. The good bits are that there is innovation evident that can help the treasurer achieve their funding aims in a more efficient and customised way – this can be seen particularly well within the US Private Placement market.
More and more investors are prepared to offer deferred funding at low cost, in order to reduce the impact of cost of carry, and to offer funding in currencies other than the US dollar to reduce the treasurer’s swap costs and preserve bank credit capacity. I do believe that increasing investor flexibility will continue to be a theme of debt capital markets.
On the downside, the lack of secondary liquidity in public bond markets, particularly sterling, is a worry. It is really problematic when it comes to pricing a new issue, when you are pricing wider something that you may not have had a lot of faith in to start with. This is a problem that the whole public bond community – issuers, banks and investors – has to solve.
John Jackson, group treasurer, Severn Trent
I have been responsible for the corporate sponsorship of the BBC’s defined benefit pension since 2015, providing a new and interesting challenge. The year 2016 is certainly going to be a big one. The next triennial valuation is due at 1 April 2016. With UK Gilt yields remaining stubbornly low, from a defined benefit (DB) pension perspective, the BBC, like most other corporates with a DB scheme, is facing a persistent deficit position.
The objective of the valuation is to agree a funding plan with the scheme trustees that recovers the deficit over the long term, thereby securing the maximum resources to spend on creative content and the services our audiences love, while providing a strong and enduring financial covenant to the pension scheme and its members. Since the last valuation in 2013, we have taken steps to reduce volatility in the scheme by de-risking scheme investments and liabilities.
Stephen Wheatcroft, group treasurer, BBC
Until now, it’s been difficult to get a clear understanding about the impact of regulation on the banks’ behaviour. The reduction in interchange fees are estimated to take around £700m out of the banks’ income. The impact of Basel III is coming into effect.
There is still a lot of liquidity at good prices, but the raw returns on debt don’t meet the hurdle rates, and there is even more of a dependency on the ‘ancillary wallet’. The model is straining and some banks appear to be starting to take a more economic view in the rationing of credit.
So, where is it going and what are the implications for treasurers now? Most major refinancings have been done, but I am ensuring my bank liquidity is locked down for the medium term (and beyond) on current pricing. Ring-fencing is also getting much nearer. Non-ring-fenced customers may not always be supported by a deposit-based bank, but an open-market-funded one. So, again, who will be where and for what products, and where does that leave the future cost of banking services? Securing a place in a ring-fenced bank could be key.
Joanna Hawkes, group treasurer, Marks and Spencer
