The Treasurer December 2005
Motherhood and apple pie
Transparency, as we all know we should know, is an excellent attribute for any corporate to possess. Dealing with an ever-increasing range of stakeholders, treasurers are just like any other senior professional in corporate life, and must play their part in reporting fully and openly to the whole range of stakeholders: shareholders, bondholders, pension trustees – well, the list goes on and on.
Any sensible treasurer knows that the City does not like to get surprises – even when they’re nice ones – and one of the key tasks of the major focus on risk management is to try and anticipate and communicate the potential pitfalls that corporates are all too often heir to.
While reporting to the various parts of the City has always been part of the corporate reporting territory, there are now new lessons to learn. Dealing with the nuances of how to report to the Pensions Regulator, for instance, is bound to cause problems, even if they are only classified as teething troubles.
But one of the most intriguing issues will be how the corporates and the City will cope with the new requirements of the soon-tobe Operating & Financial Review (OFR), which has become a statutory requirement for companies, effective for financial years on or after 1 April 2005.
A key part of the disclosure framework is “the position of the business, including a description of the capital structure, treasury policies and objectives, and liquidity of the entity, both in the period under review and the future”.
In other words, for the first time, beyond discussions with the finance director and the rest of the board, the bankers and key analysts and shareholders, treasurers are expected to lay bare to the world and his wife their thinking behind the capital structure of the company. For perfectly valid reasons many corporates don’t have the sort of capital structures you would find recommended in the corporate finance textbooks. What the OFRs will actually say on that point will be fascinating – let’s hope it does not descend into boilerplate – and treasurers are bound to be indulging in comparing and contrasting.
The pressure to provide detailed and accurate reporting to stakeholders as well as regulators is growing on corporates. And the nature of the reporting required means it seems obvious that treasurers are set to be drawn more into the front line of making critical calls about who gets told what, when and how.
If asked, treasurers would undoubtedly say that transparency is an excellent thing. But how the motherhood and apple pie ideal actually translates into practice may at times be rather less than clear cut.
PETER WILLIAMS
Editor
marketwatch NEWS (TT Dec05 p6-7)
Pensions Regulator sets out approach to scheme funding
A consultation document describing how the Pensions Regulator plans to regulate new funding requirements for defined benefit schemes has been published.
Prudence visits US PPs (TT Dec05 p8-9)
Following a boom year in the US debt private placement (PP) market in 2003, activity has slowed but remains buoyant. European-originated transactions – the key driver for 2003 – have slowed noticeably in 2005. Total US PP volumes to end-August were $21.3bn, a 2% increase on the same period in 2004, but the non-US share of volumes fell heavily (see Chart 1). Likewise in the public eurobond market, volumes have fallen by nearly a fifth to €111.7bn in the first three quarters of 2005.
The case for cheaper oil (TT Dec05 p10-11)
Oil prices have peaked and will gradually slip back from 
40-$45. Oil production costs are falling, not rising; technological advances are overcoming reserve depletion; and energy producers are cranking up supply. A retreating oil price should bring down general inflation and help push UK GDP growth back towards its trend rate of 2.5%.
Ask the experts: Treasury challenges for 2006 (TT Dec05 p12)
What will be the key challenges for treasurers over the coming year?
The task of treasury (TT Dec05 p13-17)
Highly leveraged loans may have had their heyday and the tide could be turning on unrestricted access to funds. Holding cash can be a concern but gives flexibility and headroom. Value at risk analysis is increasingly popular as way of correlating risks. Approaches to risk mitigation are changing.
The weakest links (TT Dec05 p18-21)
Four weak spots are fraud, significant error, unauthorised position-taking and operational breakdown. Combat weak spots with an effective suite of controls in and around the treasury activity, plus good governance. In addition to the main prevention/detection measures, it is advisable to conduct key tests each year. Urgent action is needed over bank and counterparty mandates.
Have you got clearance? (TT Dec05 p22-24)
The regulator aims to deal with clearance applications flexibly and responsively, striking the right balance between reducing the risk to members’ benefits and not intervening unnecessarily in the conduct of employers. The regulator can penalise attempts to avoid pension scheme liabilities and enforce financial arrangements to cover pension liabilities. A clearance statement protects a corporate transaction from the regulator’s anti-avoidance powers.
When to blow the whistle (TT Dec05 26-29)
The first tranche of the Pensions Act 2004 came into force on 6 April 2005 and gave the new Pensions Regulator the demanding objectives of protecting pension benefits, reducing the risk of claims on the Pension Protection Fund and promoting good administration of pension schemes.
Made in China (TT Dec05 30-31)
An 8,000 mile trip saw an impressive manufacturing business with world-beating ambitions, although staffing issues are beginning to emerge as the Chinese economy expands.
A flawed model (TT Dec05 p32-33)
Dispute remains whether there is a reliable method of valuing options. IFRS 2 Share-based Payment leaves it to the market to identify generally accepted option valuation models. Black-Scholes model is being adopted by default but key assumptions are often invalid for smaller quoted companies. Accounting rules could deter the use of options as an appropriate part of employee incentive packages.
Islamic finance (TT Dec05 p34-35)
The total value of funds that are compliant with Islamic religious guidelines is estimated at 
800bn. Over the last 1,400 years Islamic economies have devised a number of ways of providing commercial finance. The sukuk is the form of Islamic finance which is potentially of greatest interest to treasurers. Tapping Islamic finance will remain attractive as long as there is a shortage of sharia-compliant investment assets.
Towards transparency (TT Dec05 p36-38)
IAS 39 Financial Instruments: Recognition and Measurement should not curb the use of currency options. Accounting issues can be surmounted and FX options are an effective tool to manage risk. As past derivative catastrophes have shown, many corporations have lacked the technology and knowledge to revalue their option positions properly. If an organisation relies on Black-Scholes, there is a real risk that a sudden loss will materialise.
The strategic view (TT Dec05 p39)
In his first major speech since his appointment on 2 August 2005 as Permanent Secretary to HM Treasury, Nicholas Macpherson explained how HM Treasury is working to help the UK economy rise to the challenge presented by the global economy. The key message was that HM Treasury is there to provide strategic direction and leadership.
In for the long term (TT Dec05 p40-42)
Trevor Mant joined Slough Estates in 1989 and was made Group Treasurer in 1991. He currently has two assistant treasurers. The company operates a centralised treasury function, which is responsible for raising all funding worldwide and managing the interest rate risk and the foreign exchange risk. Property investment is a long-term business, and the company is building assets that will last 20, 30 or 40 years.
Rain or shine (TT Dec05 p43-45)
Centralisation, systems integration, standardisation and legislation have all played their part in enhancing the reliability of cashflow forecasting. Corporates have found a level of volatility has to be accepted. Internal structures are the cause of forecasting problems. While banks’ services and technology are alleviating problems, issues remain over the proliferation of standards. It is a good time to review forecasting arrangements.
Under the microscope (TT Dec05 p46-47)
Regulatory concerns exist over processing credit derivative deals. Dealers pledged to cut backlogs in trade confirmations. Markit RED is the standard identification methodology for reference entities and reference obligation pairs in credit markets. Automation keeps costs under control, and error level acceptable.
Technical Update (TT Dec05 p48-49)
Loan confidentiality breaches
When setting up a syndicated credit facility it is normal practice to provide confidential information to your relationship banks to help them in their credit evaluations – but can you be really sure that this information will be kept confidential and not misused?
Technical Update Extra (TT Dec05 p50-52)
Credit support, amendments and novations
In parts 1 to 3 of this series, Gary Walker and Guy Usher examined each of the core constituents of ISDA documentation: the Master Agreement, the Schedule, the Confirmation and related Definitions. In this fourth and final part, they turn their attention to some of the technical issues relating to the provision of credit support, the effecting of amendments to existing relationship and/or transaction terms, and the novation of transactions to a third party. Concluding with a summary of the series, they suggest a roadmap for treasurers to follow when next faced with an ISDA negotiation.
On yer bike (TT Dec05 p53)
Is there a form of insurance for this metaphor for life? Le Tour de France through a treasurer’s eyes.
Increasing activity (TT Dec05 p54)
A review of 2005 reveals a significant increase in treasury activity at the more senior end. The demand for qualified accountants and treasurers at this level is without question on the top of employers’ essential human resources shopping list. Most organisations have now reached the conclusion that becoming competitive in the remuneration stakes is a necessity. Companies have to ask themselves whether their approach to pay and reward is fair and competitive. Do their existing staff value the benefits offered? And on the other hand, do their employees measure up to their roles?
