Turnbull principles upheld
A principles-based approach to UK corporate risk management has been upheld following a fourmonth review, in contrast to the radical shake up undergone in US corporate governance.
Treasurers have a key role in understanding how managing financial volatility can contribute to meeting business objectives across a broad
spectrum of risk categories. What are the key financial risks facing treasurers today?
Liability Management (LM) – bond buybacks, exchange offers and amendments to bond terms and conditions – was a key theme in the debt markets in 2004 as we saw a surge of transactions for corporates across Europe. Following a period of relatively muted activity in early 2005 the sceptics were questioning whether LM might have been a passing trend. However, a recent resurgence of activity in the LM arena has confirmed that this treasury management tool is here to stay.
Global economic conditions have become more difficult in the first half of 2005, both globally and in the UK. And a further worsening is likely over the next year. The threat of recession is low, and our central scenario points to a “soft landing”. But the factors signalling lower growth are more pronounced, and the downside risks are increasing. Huge global imbalances are swelling, and the absence of corrective action limits medium-term growth prospects and could, in extreme circumstances, precipitate a crash.
The ACT has become a member of the European Associations of Corporate Treasurers (EACT). In October 2004 the EACT redefined its membership criterion to one based on the European Union and the ACT Council decided it was sensible for the ACT to join. The EACT has 15 organisations participating from 14 countries. Overlap exists between the EACT and the International Group of Treasury Associations (IGTA). Recently the EACT has focused on IAS 39 Financial Instruments: Recognition and Measurement, The Directive on Markets in Financial Instruments (MiFiD), the STEP proposals and payments harmonisation in Europe. Great emphasis is placed in EACT meetings on education, by both ‘old’ and ‘new’ Europe.
At the moment there is an over supply of money being offered by lenders to would-be corporate borrowers. One reason for low level of interest rates is unusually weak demand for credit from the corporate sector driven by the lowgrowth prospects. Treasurers should consider constructing risk management policies for interest rates that although may be low, may be subject to volatility. Treasurers should be reviewing whether they have the correct working capital management policies and balance sheet structure in place. It remains to be seen whether treasurers will rediscover an appetite for debt.
The economic advantages of option-based share buyback techniques have led to considerable amounts of such activity. The tax, accounting and legal aspects of such transactions are clear. Companies looking to repurchase shares in large amounts, or who are constrained in their ability to access market liquidity by closed periods or other considerations, might benefit by selling puts or using similar techniques within their buyback programmes.
The Accounting Standards Board (ASB) is looking to redefine its role in the new era of accounting standard setting. The International Accounting Standards Board (IASB) wants to achieve convergence with US Generally Accepted Accounting Principles (GAAP). This raises the question of both the principle and the detail of accounting standards. Changes in accounting standards which will have a major impact on corporate reporting seem likely in the next few years.
Developments in the capital markets have made hybrid securities more attractive than previously. Factors contributing to the rise of hybrid capital are the introduction of International Financial Reporting Standards (IFRS) and changes in the way equity credit is rated. An increasing number of companies have a rating and hybrid capital can contribute to maintaining the rating. Hybrid capital appears on the balance sheet as equity not debt and could be useful in merger and acquisition or in a share buyback. The use of hybrid capital will be event driven and careful communication would be necessary with the market.
Greene King plc is a managed and tenanted pub operator and brewer with a portfolio of approximately 2,100 pubs and brands including Greene King IPA, Old Speckled Hen and Abbots Ale. The company completed a £600m securitisation deal which enables it to diversify its funding sources through the securitisation of 904 managed and tenanted pubs. The inclusion of tenanted, leased and managed houses provides investors with a diverse mix of asset collateral. This is the only securitisation of both tenanted and managed pubs and introduces new levels of flexibility into a securitisation structure.
It is now widely accepted that pension fund deficits should be treated as corporate debt. Employing a borrow to fund strategy will be attractive to some companies. There is a growing belief that shareholder value is maximised by defined benefit pension funds investing in bonds and not equities. However there is a clash between the bond theory and the practical issues which encourage managers to hold equities. In the past trustees have driven investment strategy, in the future this may not necessarily be the case.
Treasurers often seek to avoid taking on title of physical assets and this is being encouraged by the incoming tax regime. Operating leases combine cost reduction resulting from capital allowances and the highest level of risk-transfer. Short leases are to remain while a new category, the funding lease is being introduced. Treasurers and banks will have to get to grips quickly with the new regime.
There is no difference between control and compliance as long as the processes controlled are compliant. Although there is no easing of the control burden, corporates can adopt a more sustainable and proactive approach to controls. Fundamental key controls are common across different regulatory environments and with planning it is possible to embed controls and processes within the organisation and eliminate duplication. Organisations should see regulatory issues as a business issue rather than silo projects.
Keenly aware that life takes unexpected turns when you least want or need them, Antony Barnes, Group Treasurer of GUS, the owner of retailer Argos and information services business Experian, has always ensured his armoury is well stocked. Despite pressures to follow particular professional routes, Barnes has always chosen to follow his instincts. So far, they’ve served him well.
Regulatory pressure is forcing treasurers to review their technology needs. Corporates are moving away from multiple treasury systems and are predicted to move away from the extensive use of spreadsheets. Focus of many treasury products currently is on derivative hedging and risk management with competition increasing in that area. Technology suppliers say that treasurers from industries not traditionally seen as active buyers of Treasury Management Systems (TMS) are looking to purchase.
Thomas Cook has restructured its business operations in response to a competitive market. The company has updated its treasury technology with meeting the needs of foreign exchange (FX) as a core objective. Thomas Cook has centralised its treasury operation and introduced an in-house bank. Any technology solution needs to be flexible and configurable to deal with business issues that are unknown at the time of implementation.
A new IAS 39? Time for a radical rethink
Sir David Tweedie, Chairman of the International Accounting Standards Board (IASB), addressing The Treasurers’ Conference in May, specifically asked for views from treasurers and the ACT on how one might devise a new form of standard for financial instruments to replace IAS 39 Financial Instruments: Recognition and Measurement.
The neglected piece of the ISDA puzzle – the Confirmation
In parts one and two of this series (The Treasurer October and December 2004) we looked critically at International Swaps and Derivatives Association (ISDA) documentation and the Schedule. We now turn our attention to perhaps the most neglected piece of the ISDA puzzle, the Confirmation. In the high-volume, automated, skills-intensive world of the inter-bank market, perhaps such neglect is understandable. In the end-user arena, however, the Confirmation is deserving of respect and scrutiny. This article explores some of the complexities.
From going to the cinema six times a week, through to seeing the same film for five consecutive afternoons. What exactly went wrong for the silver screen?
Chris Bunton, Adrian Buckley and Catherine Adair-Faulkner analyse the examination results for the April 2005 sittings of the MCT, AMCT and ICM. Included is a list of the names of all the students who passed.
The debate about treasurers becoming finance directors seems to be a constant one. As treasurers broaden their roles the argument in their favour grows stronger, however there are still a number of challenges to be faced.
