Demand for improved systems and analytics

The corporate treasury has never earlier experienced being so in demand from the rest of the organization. The treasurer needs to answer: “How is the credit crunch affecting us?” “How can we support our suffering vendors?” “Can we assist our customers with financing?” “Can we find funds for our capex?”

The need for integration of multiple systems, getting access to the information, having the ability to perform analytics and precise and immediate reporting have not been more evident than today. The ability to perform scenario analysis is becoming paramount to succeed. The quest to Get Control of Cash and Risk has never been stronger. This requires modern, scalable and global processes and IT solutions. Probably there have never been easier times to get approval for those investments than today.

Bail-out of Banks only? What about Corporates?

We do not have a liquidity problem any longer but we still have a confidence problem. The bail-outs have been geared towards saving the banks and financial institutions with the expectation they will restore lending practices again. However this is taking time, maybe too long time. Much of the bail-out money is still stuck in the system and several corporates complain that the funding conditions have not eased. This is worrying and what is even more worrying is that this is a pattern we can see from far back. For those of you who have followed my blog you can see how I claim that regulation basically focus on the welfare of the financial system expecting it automatically will do good for rest of society. But there are few actions taken to ensure or even follow up that it actually happens.

Now we need to ask ourselves of how the governments will support the corporates. Many corporate treasurers ask this question now. The squeeze is still on and many suffer from their customers cannot get sufficient funding to invest. Many have loans soon to roll-over. How to get the whole system greased? Can we trust the bankers to do it?

Report from AFP Annual Conference in LA

Great event, huge audience being very active. AFP's ambition for world domination is clear. They have initiatives going on in Europe and Asia Pacific and they are soon launching on a PC near you a new interactive website with communities and enhanced research capabilities. With 15,000 active members AFP must be the largest treasury association, the AFP Annual Conference certainly is.

Today I noticed:

1. Treasury's role is more elevated. Many treasurers found themselves in the spotlight from boards and CEO. Initially many are intrigued but what does this mean? How has the expectations changed? Many treasury professionals expect one effect will be higher remuneration. Wishful thinking? Treasury topics get in corporate focus anyway and some expect implementation of cash flow forecasting and liquidity planning will be forced for increased transparency.

3. Some banks are trying to buy market share. There are highly creditworthy companies witnessing that the solid banks are contacting them to win business that might have been lost by less fortunate banks.

4. A lot of buzz and initiatives around benchmarking and knowledge sharing.

5. Rating agencies are being scrutinized. There are even some parties claiming that one of the reasons for the magnitude of the sub prime crisis was that the rating agencies did not properly gauge the actual risks, instead they took the bankers word stating that the papers were "safe". I do not know how true this is but anyway the effect was that as long the papers had sufficient rating they did fit in a bank portfolio compliant to Basel II. And this is obviously crazy, but when trying to regulate how the banks should invest with relation to rating - the effects have been very predictable. Basically when Basel II entered the front door, common sense banking left thru the back door.

6. Another thing on rating institutes is the lack of competition amongst the agencies. Basically Moody and S&P rule this market. There were speakers suggesting that the corporates promote third options together with choosing only one of Moody or S&P. To improve quality, service levels and price. Up to the corporates to decide. Makes sense to me.

7. There were also discussions on the credit crunch and the effects on corporates. What I could hear the only focus was on investment credit risk and funding problems. What surprise me is the lack of discussion on what effect the crisis has on the markets in fx, interest rates and commodities. Maybe this is because the Americans do focus more on cash management and less or not at all on price risk management? I find this discussion much more vivid in Europe.

A final note on Magic Johnson. I complement AFP for having him as opening speaker on the first evening. What a guy! Americans are masters in promoting success stories as role models. Something we seldom see in Europe. Anyway I loved to hear from him telling us about his mindset that gets him to continuously succeed and overcome challenges. Thanks!

AFP Annual Conference in Los Angeles

I have just arrived in lovely Los Angeles and preparing myself for the presentation "Achieving Treasury Excellence" together with Stacy C. Calomino from First Data. You can find the presentation Treasury Excellence Magnus Lind NFS AFP2008.

First time to this conference I will keep myself busy meeting as many as possible and listening to the presentations, and examining all new exhibits. Will return soon with what I found.

Have we seen the bottom yet?

Hopefully, but there seems to be an understanding amongst some treasurers that they are expecting the crisis to spread further into the emerging markets. We have already seen it happen in countries in Eastern Europe. We would expect that the most affected will be those countries relying heavily on foreign cash in Eastern Europe, South America and some Asian countries experiencing high inflation and/or lack of domestic financing.

The rescue activities have been very significant in the US and EU so far. It will be interesting to see how it turns out. Many of the emerging markets obviously does not have similar long term experience and well developed financial system. The intentions from IMF and the World Bank they made clear last week would support this proposed development.

Where to find the money?

Where shall we now find the money when the depth of the funding markets in the US, Western Europe and Japan is gone? This is a question to answer at the treasury peer group meeting in Paris on November 20. There are money available in parts of Asia and in the Middle East, but how prepared are they to take on the role as global financial centers? Certainly some countries have been investing heavily during recent years, but a banking industry and a sound regulatory environment takes a long time to develop.

The question remains unanswered as of now. I will most definitely have more answers after the meeting in November.

Topics for Next Treasurers' Peer Group

I have recently started the research for our new Treasurers' Peer Group on 20th November in Paris, France. We originally decided for the topics: KPI (Key Performance Indicators) and Optimal Financial Strategies. But these are extraordinary times. As one of the peers noted "Why have a KPI when we any longer cannot gauge it and us anyway cannot manage the risk?" He raised a crucial point, how should we actually structure the meeting this time? Maybe we focus on:

1. Sharing experiences from the present market environment. Each of the peers has lots to share and together we could gather a huge experience base.

2. Drawing conclusions on trends and events. For instance since the funding markets in Japan, Europe and the US are not deep enough anymore - where to go and what are the tricks and pitfalls? What will be the role of the treasury in the future? There are lots of questions to answer.

The peer group gathers extraordinary people from extraordinary companies. Collecting and structuring their collective knowledge provide opportunities for the peers to deliver paramount value to their respective companies. Superior knowledge of how to steer a treasury in the financial markets of today is a competitive advantage, there is no question about that.

If you want to apply to the European Treasurers' Peer Group, please contact me.

Concerns and experiences from the market turmoil

We have just had one of our meetings in the European Treasurers’ Peer Group (ETPG) discussing managing credit risk as one topic. The meeting was held in the midst of the financial turmoil. Lehman Brothers had defaulted a few days earlier and the US government was planning a USD700B rescue plan to buy up defaulted portfolios from the banks. The peers had experienced difficulties to redeem money from money market funds and to draw from credit facilities. It was evident that the problem emerged from the capabilities of the financial sector and not the corporate sector, which is much richer on cash reserves than in previous crisis periods. The topics of this meeting turned out to be exceptionally relevant at the time. We summed up the present situation:

Assets
o Money Market funds had low liquidity or even cases of trapped cash
o Acquisitions and IPO postponed
o Massive repositioning of investments
o New investment policies drawn up
o Cautious governance of fund managers
o Banks offer LIBOR + 200 bps
o Rating not sufficient for credit policy. Early warning system required

Liabilities
o CP market drying up
o What is the value of a backup facility?
o Look for geographical spread of facilities, e.g. the CP market dried up to different degree in different countries
o Refinancing of facilities
o How to extend credit periods?
o Increase number of core banks to counteract the decrease of redundancy caused by decreased lines and bank mergers and defaults

Insurance
o Worries over AIG
o What is the policies worth?
o How will the premiums be affected?

Pension funds
o Some bad experience from compliance of pension fund managers

Other
o Rating institutes are getting tougher
o What is the value of a rating?
o Migrate to one system platform to easier and faster gauge the enterprise wide positions and exposures
o Consistent conservative approach (investments, leverage etc) pays off over time

Our next peer group takes place in Paris on November 20 and one of the topics is “optimal financing strategy”. Hopefully the unrest has settled a bit meaning it will be easier to come to actionable conclusions. Anyway we will be able to share experiences, draw conclusions and find new ideas. This peer group still has a few seats open, please contact me if you are interested to attend.

Is rating sufficient to measure risks in your investment portfolio?

In our recent European Treasurers’ Peer Group (ETPG) meeting in Nice, France we discussed this topic at length. I have also had the opportunity to discuss it with other treasurers for the past few weeks. There is considerable concern that the rating agencies do not really cope with the market conditions changing so rapidly. There is no one blaming them because they would need to be not of this earth to foresee the recent turmoil already 6-12 months ago. And the agencies need to tell everyone at the same time, so when they downgrade your investments it is too late to act anyway. This means that rating can not be the sole indicator of credit risk in your investment portfolio.

Therefore we concluded that the investments have to be protected with early warning models using many of the different indices and prices available in the market. The charts never lie.