The impact of COVID-19 is likely to preoccupy businesses into 2021. As of early October, financial markets appear to be pricing in a recovery.
However, contingent on developing and rolling out an effective vaccination programme, economists disagree as to whether the recovery will be shaped as a ‘V’ (fast), ‘L’ (slow), ‘W’ (a second or even third wave of the virus) or – perhaps more insightfully – a ‘K’ (growth for some sectors, decline for others).
Much has been written about the pandemic, but here in the policy and technical team at the Association of Corporate Treasurers (ACT), there are any number of other topics that grab our attention.
Here are six significant topics on which we expect to spend time in 2021:
After what feels like forever with very little outward signs of progress on interbank offered rate transition, the markets have finally picked up momentum during the last quarter of 2020.
In the UK and US particularly, large strides have been taken to identify market conventions – thereby enabling systems providers and banks to develop solutions to be passed along to the corporate market.
The International Accounting Standards Board has also opined on the impact (or lack of impact) that transition should have on hedge accounting, and in the lending markets in particular, the number of transactions undertaken is growing steadily.
Clearly, LIBOR is endemic in many organisations, not only in financial transactions, but it is also used extensively in commercial contracts, and in financial planning and analysis.
Companies will be looking at restructuring in response to COVID-19
As treasurers we will need to support the whole organisation through transition, but focusing on financial instruments for a moment, these can be distinguished between derivatives and cash products.
International Swaps and Derivatives Association has led the work in transitioning derivatives and this is largely ‘sorted’, but corporates need to be alive to the possible unintended consequences of signing up to the protocol that has been published to address the challenges faced in the derivatives market (signing may result in creating risk between the derivative and underlying loan).
There are three categories of lending transaction that need to be addressed by the end of 2021: new deals, tough legacy (which can’t reasonably transition) and other legacy.
In the UK, the Financial Conduct Authority has required all banks to offer new lending, referencing an alternative to LIBOR from the end of Q3 2020, and from the end of Q1 2021, all new lending must adopt an alternate reference rate.
There is legislation planned that will address the tough legacy transactions; and so that leaves the other legacy transactions that need to be actively transitioned well ahead of the end of 2021.
Treasurers will end 2020 carrying much larger levels of debt than they had started the year. And for many of them, this will include borrowings from the various government schemes offered to companies in 2020.
Many of these borrowing facilities will need to be refinanced in 2021, and companies will be looking at restructuring their businesses in response to the COVID-19 pandemic.
One area will be leverage, and businesses will need to consider how far they may have moved from an optimal level of gearing.
Many companies will have cancelled dividends and will determine what their policy in the future should look like. Additional equity may be required, or businesses sold, in order to pay down large levels of debt.
New rules on insolvency will require businesses to review credit assessment of suppliers, customers and other counterparties; ‘going concern’ tests will require a review of financial strategic risks.
This will need to be undertaken as customers and suppliers themselves undergo strategic reviews of their business.
Treasurers will need to go back to basics to assess their target weighted average costs of capital and to revisit contractual obligations and credit limits with key customers and suppliers.
Whether you’re making the most of it or not, 2020 was the year when many of us were forced out of our comfort zone to use and become familiar with tools like Zoom and Teams.
The need to work from home highlighted the benefits of technologies such as cloud computing, and earlier investment in treasury management, banking and cash-forecasting systems proved their value.
At the same time, working from home has brought new challenges for risk management and compliance.
The year 2020 showed the impact of a dramatic and unexpected event, and boards responded by asking more from their treasury teams. Those having access to reliable data in a form that enabled easy analysis and the ability to drill down to the level of detail required saved themselves many late nights.
Banks and technology vendors continue to bring out new ways to use application programming interfaces (APIs) to provide treasurers with more customisable information that does not require large investment, and products such as Tableau and Power BI are growing in popularity as data-visualisation tools.
The need to work from home highlighted the benefits of technologies
As we head into 2021, treasurers need to have reviewed their technology landscape and decide if it is still fit for purpose.
For some, this may mean investing in a new treasury management system (TMS). For others it may be a renewed focus on a cash-forecasting system – whether it is based on an enterprise resource planning system, their TMS, a bespoke cash-forecasting system or just a better version of Excel.
Either way, the solutions will need to be agile and flexible enough to handle the next crisis – whatever it may be.
Treasury functions are full of business-critical activities and many continue to have a high degree of manual intervention. This creates risks around business continuity, operational resilience and manual error.
Treasurers need to find the investment budget and the bandwidth to get more from their existing technology and to look at how APIs and fintechs can provide cost-effective solutions to everyday problems.
The year 2020 was billed by many as one in which ESG factors and sustainable finance would come to the fore. The COP26 climate change conference in Glasgow, originally scheduled for November 2020, had been intended as a key milestone to review progress against pledges made at the Paris Agreement signed five years earlier.
Arguably, the delay of COP26 and the urge to ‘Build Back Better’ have added impetus to further developments in the ESG space during 2021.
Green bonds, revolving credit facilities with ESG key performance indicators and bilateral loan facilities with ESG components are no longer newsworthy events and, for many lenders and borrowers, it is becoming the default position. The day when completing non-ESG-related borrowing becomes significant is getting closer.
The development of the EU taxonomy is helping to apply a more standard set of principles that allows investors and lenders to make comparative assessments of the meaning of ‘green’, both within a sector and across different ones.
Many companies are addressing the impact of COVID-19 by rebuilding to be more ESG-friendly, with some early claims of a correlation between ESG and resilience, and treasurers are looking at external financing solutions to support these changes.
The extension in scope of the non-financial reporting directive in the EU will increase the efforts that companies will need to apply to their reporting frameworks.
As the standards evolve and as investor requirements become more complex, companies will need to build more robust reporting frameworks that enable them to pull together relevant information more easily and more accurately.
Whether or not the treasurer is responsible for the reporting, they will need to be able to articulate their company’s approach to investors, lenders, rating agencies, customers and suppliers.
The payments landscape continues to evolve as some initiatives come to fruition (such as the deployment of Confirmation of Payee in the UK and Request to Pay (RtP)).
These require operational planning to ensure they do not disrupt business activities (RtP will affect those treasurers reliant on direct debit income as their cash forecasts may change significantly if customers choose to delay payment).
New announcements such as FedNow (a 24x7x365 instant payments infrastructure from the US Federal Reserve) and European Payments Initiative (a single digital cross-border payment solution for the EU) will continue the trend towards 24/7 instant payments.
Inevitably, criminals look to take advantage of developments and, in response, there was a big push by the EU to have the final part of the Payment Services Directive 2 – strong customer authentication completed by September 2019.
The payments landscape continues to evolve as some initiatives come to fruition
However, as it became clear that both card processors and merchants were not ready due to technical issues (more than 40% of merchants were not ready in May 2019), it was agreed to delay the deadline for implementation to September 2021 (December 2020 for European Economic Area organisations).
Central bank digital currencies are being discussed more widely outside of academic institutions. Several ‘proofs of concept’ have already been piloted and it is possible that one or more central bank may start to roll out a digital currency in 2021.
These changes (and others such as the work now under way on cross-border payments) will affect key payment activities – both inbound and outbound.
For most treasurers, it will provide an opportunity to look at the overall payment activities to ensure that the different channels available are being optimised and that innovations such as SWIFT’s gpi payment solution (that offers track and trace) are being taken advantage of.
Many of these changes will require investment in payment and customer systems, and treasurers will benefit from ensuring they are included in any technology investment plans.
From the start of 2021, the UK will operate outside of the EU, with the Brexit ‘transition period’ ending 31 December 2020.
At the time of going to press, many of the details are still being negotiated and it is not yet clear whether a free trade agreement (FTA) will be settled, nor what would be the final scope of such an FTA.
What is clear, however, is that the UK will start to diverge from the EU in a range of areas at the same time as it negotiates new trade deals with other countries and trading blocks.
Businesses will need to look at their cash-flow forecasts with increased attention to identify any changes to ‘normal’ customer and supplier behaviour.
In addition, exchange-rate movements will continue to have an impact on many businesses, and reviewing currency risk appetites on a regular basis will be important.
Tools such as Value at Risk may be useful as a component in identifying what currencies need to be hedged – especially if businesses look to new countries for suppliers and customers.
Trade finance and supply chain financing are likely to become more important areas of focus than in previous years, as existing trading patterns become disrupted and companies search out new customers and suppliers.
With limited trading history, new technology solutions – such as using blockchain for trade finance or dynamic discounting for suppliers – may enable new relationships to be forged more quickly and efficiently.
Brexit will not be the only geopolitical consideration for 2021; at the time of writing, Joe Biden has only just begun the formal transition process to his presidency, albeit amid lingering uncertainty. Neither is it clear how the US election results may affect America's trade relations with China.
After the year that was 2020, we should all be hoping for a quieter and more predictable 2021. This, however, is extremely unlikely and the treasurer’s to-do list will be longer than ever.
We’d love to hear your key topics for 2021. Drop us a line here.
Naresh Aggarwal, Sarah Boyce and James Winterton are all associate directors, policy and technical, at the ACT. You will find lots of material relating to all of these (and many other) subjects at the Knowledge Hub
This article was taken from the December 2020/January 2021 issue of The Treasurer magazine. For more great insights, log in to view the full issue or sign up for eAffiliate membership