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

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.

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.

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%


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.


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.


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