Capital Markets and Funding
Capital markets and funding covers all the different techniques and sources for raising funding to finance the business, from bank debt to equity finance. There are choices to be made between the different forms of borrowing, their structures, terms and conditions and relative costs. The relationships with lenders and investors will need to be built and the borrower’s business and risk characteristics explained to credit analysts and credit rating agencies.
Capital Markets and Funding includes:
Asset and Project Finance
More complex forms of finance can be structured to finance a specific set of assets or a narrowly defined business or project where the lenders will have recourse only to those particular assets or projects. Often the borrower is seeking to limit their own risk to the project and if this is the case the lenders will want to build in more protection for themselves. Asset and Project Finance therefore covers: international securitised and collateralised debt markets; managing a securitisation, a CDO (collateralised debt obligation) / CLO (collateralised loan obligation) transaction or ABCP (asset backed commercial paper) programme; and public private partnership funding e.g. PFI, PPP. It includes asset backed or asset based loans, leasing and "sale and lease back". The complex structuring and security packages mean that care and expertise will be needed in the finance documentation and in the management of conduit companies and SPVs (special purpose vehicles).
Bank Lending
This refers to the different forms of bank lending such as bilateral, club, and syndicated loans – committed or uncommitted, revolving facilities and backstops or standbys. Treasurers also have responsibility for the loan terms and conditions, covenants, security whether subordinated or unsubordinated and the negotiations and relationship management with lenders.
Credit Ratings
This incorporates the role of the credit rating agencies, their methodologies and processes, default probabilities and their data on defaults. Managing the rating relationships and what information to provide to them on an initial rating or at subsequent reviews.
Debt Capital Markets
This covers a range of debt capital markets and instruments from short-term Commercial Paper, Medium Term Notes (MTNs) to bond issues and more complex instruments such as convertibles, exchangeables, preference capital, puttables, callables and hybrid debt with equity characteristics. It incorporates day count conventions. Also the mechanics and processes involved in managing a one-off issue or issuance programme including prospectus obligations, US shelf regulations, disclosures, and investor relations.
Equity
The treasurer needs to be aware of the nature of the international equity markets including the US markets and ADRs (American Depositary Receipts). The treasurer will be involved in managing the processes of an equity issue including dealing with advisors, pricing, rights issues, bonus issue, IPO; the regulatory matters, listing rules, pre-emption rights and documentation including prospectus requirements, disclosures, accountants reports. Also incorporates private equity, venture capital markets and stocklending.
Trade Finance
This refers to managing overseas trade financing such as open account, export credit insurance, guarantees, supplier / buyer credit, price bases (COD, freight paid etc). Incorporates trade finance instruments and documentary credits such as Letters of Credit, acceptances, bills, evidentiary e.g. bills of lading. Also supply chain finance and electronic systems.
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Cash and Liquidity Management
Cash and liquidity management is about forecasting the company’s cash needs to run its businesses and then managing the group wide cashflows, short-term borrowings and cash in the most efficient manner to ensure that those cash needs can be met. With the help of IT and communications systems, cash can be pooled internationally. Funding and liquidity needs are intimately connected with understanding and managing working capital, and using the payments and cash reporting systems to best advantage.
Cash and Liquidity Management includes:
Cash Management
Incorporates bank account and bank documentation management e.g. SLAs, mandates, signatories, SSIs, Nostros Retail cash management - alternative approaches to physical cash management and security. Treasurers need to be aware of comparative aspects of cash management practice in differing jurisdictions. Also covers cash concentration techniques: notional pooling, zero balancing, overlays. There are various structures and systems for international cash management. Also incorporates management of payment factories or netting centres. Treasurers will be responsible for regulatory, tax, legal and other cash concentration/transfer issues such as exchange controls, insolvency, central bank reporting, withholding tax, transfer pricing.
Cashflow Forecasting
Incorporates cash forecasting approaches and systems such as methodology, intragroup systems, short or long term forecasts. Treasurers deal with forecasting and the links to cash management processes and systems.
Payment and Clearing Systems
Incorporates payments/clearing infrastructures - RTGS (Real Time Gross Settled) such as CHAPS, TARGET, UK Faster Payments and CLS. End of Day net settled (BACS, STEP), speed, costs, internet payments. Cheque clearing arrangements, timescales and value dating. International financial messaging such as SWIFT. SEPA - the Single Euro Payment Area, the Payment Services Directive. Securities and equity clearing systems such as Euroclear, Cedel, CREST.
Short-Term Liquidity
Incorporates liquidity management objectives such as reliability, liquidity, return, relationship management, commercial aspects. Treasurers deal with the working capital cycle, the financial supply chain and trade credit such as credit control, supply relations and liaison with the business. Also incorporates short-term investment instruments - money market funds, depos, CDs, bills, repos. Plus short-term borrowing such as overdrafts and money market lines.
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Corporate Financial Management
Corporate financial management looks at the organisation’s business and financial strategies and seeks to determine the optimum solution to mesh the two together. It answers the fundamental questions as to what assets the business should invest in and what capital structure should be put in place to raise the money to make the investments.
Corporate financial management includes:
Accounting and Reporting
In relation to treasurers, this covers interpretation of financial statements, ratio analysis etc. There are certain financial reporting standards IAS and IFRS which are particularly relevant to treasurers. They also need to be aware of the Operating and Finance Review (OFR) disclosure and transparency rules.
Business Valuation
Business valuation is the technique and processes for determining the economic value of a business for use in an acquisition or disposal or to determine whether a business is worth more as a single entity or as a separated sum of the parts. Based on the financial results and projections with suitable modelling and adjustments, fair market values can be calculated using appropriate discount rates. Discount rates can involve a risk free rate plus risk premium and calculations of Weighted Average Cost of Capital and use of the Capital Asset Pricing Model.
Capital Structure
Using the Capital Asset Pricing Model (CAPM) and the cost of equity and cost of capital, a company will aim to optimise its Weighted Average Cost of Capital (WACC) through its capital structure. This topic takes in the gearing decision, share buybacks, treasury shares, hybrid capital and the dividend decision.
Corporate Strategy
Includes many elements of strategy such as treasury strategy, business strategy acquisition and defence strategy. Also private equity, mergers and acquisitions, joint ventures and the concept of shareholder value.
Investment Appraisal
Incorporates the core techniques such as Discounted Cash Flow (DCF) analysis and performance measurement. Also cost accounting and accounting based appraisal methods such as accounting return, marginal costs.
Legal Documentation
This refers to the form of agreements behind common treasury activities, taking in loan agreements, standard ISDA swap agreements, listing and prospectus requirements.
Regulation and Law
Incorporates corporate governance and director responsibilities, corporate social responsibility and ethics, commercial and company law, insolvency law. There are also financial services and market regulations affecting treasurers such as market codes, takeover rules, money laundering regulations, MiFID, market abuse and European directives.
Taxation
Includes corporate taxation with regard to financial transactions and interest. International tax aspects taking in branch vs subsidiary, transfer pricing, thin capitalization, double tax planning, corporate reorganisations.
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Risk Management
Risk management is about understanding what business and financial risks the company is exposed to and considering whether the returns generated are sufficient to justify taking those risks. The risks need to be evaluated and assessed so that decisions can be made on whether to retain them, to employ techniques to mitigate or transfer risk. The underlying risks can be managed to limit risk. They can be hedged with counterbalancing exposures often created through the financial markets, or insurance taken out to protect the company’s financial health.
Risk Management include:
Business and Operational Risk
Incorporates economics (micro/macro), monetary/fiscal policy and the financial system. Also covers types of business and financial risk including strategic, market, credit, gearing, refinancing, operational, technology. Deals with the insurance market and insurance products and captive insurance aspects. Planning for business or whole market interruption and contingency planning including shadow sites, key personnel, emergency liquidity.
Commodity Risk
Incorporates managing commodities, commodity futures, energy.
Credit Risk
Incorporates managing credit and counterparty risk, credit analysis and credit ratings, credit insurance, credit derivatives, collateralisation and security. Also deals with credit risk models, Basel II, duration hedging.
Exotic Risk
Refers to managing inflation, weather and other risks such as index linked derivatives, weather derivatives, emissions trading.
FX Risk
Refers to foreign exchange (FX) risk from transaction, translation and economic exposures and the techniques for managing these, including financial instruments such as FX forwards and currency swaps.
Interest Rate Risk
Incorporates assessing and managing risks from interest rates and the tools available to mitigate or hedge that risk. Also fixed/floating rates, duration and financial instruments like FRAs, interest rate swaps, options caps floors collars.
Managing Risk
Risk management is a fundamental part of treasury and a large subject in its own right. Under the category ‘managing risk’ we take in the overarching approach to creating a risk framework, including enterprise risk management (ERM). It covers the generic concepts that can be applied to any sorts of risks and incorporates risk identification and assessment techniques e.g. likelihood/impact analysis, process mapping, portfolio theory, holistic approaches. From that starting point the risk manager typically moves onto risk policies and reporting systems; market risk modelling such as gap analysis, value at risk (VAR), PVBP, stress testing, Monte Carlo simulations; the features and valuation of risk hedging instruments; and the administration such as derivatives documentation and legal issues.
Pensions Risk
Refers to managing the cash flow and balance sheet impacts of funding for occupational defined benefit schemes. Incorporates pension valuations, regulation and accounting and pension investment management. Also understanding the role of the occupational pensions trustee and pension practices internationally.
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Treasury Operations and Controls
Treasury operations and controls looks at the running of a treasury function, taking in its overall policies, the procedures, staffing, systems and controls, and the relationships with parties within and outside the group.
Treasury operations and controls includes:
Control and Reporting
Refers to treasury, payments and dealing room security, procedures and controls. Incorporates treasury reporting and key performance indicators (KPIs). Also deals with managing the relationship between treasury and internal / external auditors; combating money laundering, fraud and financial crime.
Policy and Objectives
Refers to the preparation and approval of a treasury policy, making sure it is appropriate for the business and the business objectives. Incorporates performance measurement and benchmarking for the treasury function; treasury authority limits and detailed procedures.
Technology and Systems
Incorporates market developments in treasury management systems (TMS), dealing and information systems, the internet and technologies. Also the selection and implementation of TMS. Deals with specific technology security, identity and other risks together with treasury process re-engineering and enterprise resource planning (ERP).
The Treasury Professional
Treasurers operate under ethical and professional standards. ACT members are required to comply with the ACT Ethical Code. Treasury professionals have to keep their skills up-to-date in order to perform their jobs and should undertake continual professional development. Training and professional qualifications have a large part to play. The ACT is a member of the European Associations of Corporate Treasurers (EACT) and the International Group of Treasury Associations (IGTA) and promotes good treasury practice globally. Treasurers also need people management skills and will often be responsible for the training and development of their staff.
Treasury Organisation
Deals with the issues of profit centre versus cost centre versus added value. Also decentralised versus centralised versus in-house bank. Incorporates managing interfaces with the treasury function including intragroup communications, taxation, recharging, measurement, cultural aspects. Also treasury outsourcing, agencies and shared service centres and cross-border treasury operations.
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