A beleaguered Europe shoots itself in the foot

| 21-2-2019 | ICC Consultants | treasuryXL |

This blog analyzes the international political developments that can have an impact on the financial markets and the extent to which. The vision of ICC Consultants is based on a large network within the worldwide leading research houses and 40 years of experience in the financial markets. By means of the web link at the bottom of this blog you can download multiple reports from ICC Consultants.

Global central banks are starting to worry about economic growth, slowly but surely. The Fed made an about-turn recently. It announced it would put off further monetary tightening. The ECB was already treading cautiously. Now even hawks such as the Dutch member of the Governing Council of the ECB, Klaas Knot, are becoming jittery on signs of economic weakening both in the stronger euro countries and the struggling member states. Not just the western central banks are bracing themselves. Two months before India heads for the polls, its newly appointed central bank governor implemented a rate cut, much to the surprise of quite a few analysts. From Australia all the way to the Czech Republic and the Philippines, central bankers who wanted to tighten the reins not so long ago are increasingly speaking in dovish tones

Focusing on the prospects for Europe, we see plenty of economists and analysts who mainly attribute the disappointing economic data to once-off factors that are unique to the countries in question. They claim that German growth is mainly in heavy weather due to new emission regulations in the automotive industry. Likewise, the Yellow Vest protests in France are identified as a singular phenomenon that does not have a broader fundamental-economic effect on the country’s growth potential. The UK is fraught due to Brexit, Italy’s populist government seeks the confrontation with Brussels (and France), and a looming government crisis is what is undermining Spain. And so on.

Some analysts point at these factors and argue that such growth obstacles are specific to each country while there is little reason to expect a global, structural, and intensive growth slowdown. They think the recent pessimism of many market watchers is exaggerated. This is a dubious viewpoint from a political perspective. First, we are seeing plentiful and (potentially) substantial drags on growth, precisely in several of the world’s largest economies.

Second, quite a large number of growth impediments are symptomatic for wider developments that will not disappear from one day to the next. This does not automatically imply that a recession is nigh but owing to problems in individual major economies and various cross-border trends it is unlikely that growth will accelerate to any great extent.

To each state its own problems

As to the country-specific problems, we believe there is copious cause for concern:

> The German economy has cooled significantly. Most analyses point to the weaker German automotive industry, which faces new emission standards for greenhouse gasses as well as declining export opportunities. A leading industry for decades, it is especially reliant on diesel cars. The downside of progress is that while the German vehicle manufacturers (partially) set the tone for decades, they also became complacent and are now overtaken by manufacturers from elsewhere. More often than not, the Germans are focused on survival rather than on seeking out new opportunities. We have seen something similar in German politics. The German economy has mainly profited in the past years from reforms that were introduced in the 1990s. Angela Merkel has merely been holding the fort in that sense. Admittedly, she has done so in a very capable, quiet, and decisive manner but reforms and progress have been thin on the ground. A number of influential think tanks in Germany have been warning against this situation for years. Merkel is now in her twilight years as chancellor, while her successor is not exactly known for her revolutionary fervor. In addition, the SPD (the second-largest political party) has weakened and the German political centre has eroded in general terms – as has happened in many areas. Therefore, it does not seem likely that Berlin will become deeply enamored of reform any time soon. Meanwhile, the country’s population is set to age rapidly in the coming decades, which will bring a myriad of challenges.

> It cannot be denied that the Italian coalition government has a zeal for reform but it is often aiming for the wrong type of change. Many measures that were meant to render the economy more flexible and competitive have been reversed; most economists believe these policies will backfire. Having made a lot of headway between roughly 2011 and 2014 – if we take the Ease Of Doing Business Index as our benchmark, for example – Italy is once again sliding down the ranks. Rome is not just changing its economic course in a negative direction while in terms of diplomacy, its status is also blemished. Recent examples are its refusal (as the only EU country) to recognize the Venezuelan opposition leader Juan Guaido as interim president and the embarrassing tiff with France around Italy’s support for the Yellow Vests and its attempts to nix the construction of the railway link between Lyon and Turin. Government policies in Rome are an important reason why Italian economic growth is in the doldrums – the country is in a technical recession – as it buckles under the weight of debts and deficits. Consequently, it is again on a collision course with Brussels. On top of this, the coalition has already threatened to ‘clear out’ the Italian central bank. To sum, we cannot expect a lot of positive news from Italy in the short to medium term. A recent regional election gave off worrying signals; the rightwing populist parties with entrenched Eurosceptic sentiments made big gains.

> Further to the West, Spain has been frequently held up as an example of how to tackle a crisis and implement reform. Rightly so, to some degree. Jobless rates have dropped from 27% to less than 15% in recent years, the extremist parties did not gain a substantial foothold, and growth was robust in European terms. Yet, a political crisis is now looming as the left-wing Prime Minister Pedro Sanchez has lost the support of the Catalan parties. Fresh elections appear to be in the offing. The ruling coalition is already a hodgepodge of parties and the situation will probably not improve after the elections. Plus, the tensions between Catalonia and Madrid will undoubtedly mount once the conservatives take over the baton from Sanchez. The period of relative peace and quiet in Spain is over and we suspect this will have a negative impact on growth.

> As for France, factors including the Yellow Vests protest movement have knocked back the economy. Dissatisfied French citizens have been taking to the streets on a weekly basis for months. President Macron opted for an ill-advised hard line that has created a lot of resentment. On the other hand, the French are beginning to suffer from protest fatigue. The numbers taking to the streets are not as high as before while Macron’s popularity among voters is creeping up. Nevertheless, his reform agenda has been dented by setbacks so the president will have to scale down his ambitions whereas the French economy wasn’t doing that great before, in any case.

> The other major European economy is the only one (out of five) outside the Eurozone. Soon it may even leave the EU. Of course we are talking about the United Kingdom under PM Theresa May, who maintains that she will manoeuvre her country away from the EU on 29 March. We think this is not the most likely scenario. Neither is a new referendum or notification revoking Article 50 (meaning that the UK would remain an EU-member). The most logical outcome would seem an extension of the negotiations by a few months. Meanwhile, the UK is starting to feel the Brexit pain or rather, the adverse effects of the prevailing uncertainty. Businesses are postponing investment, growth is slowing, and consumer as well as producer confidence is waning. Faith in politics is also at a nadir: just 33% of the British thinks May is doing a good job and for opposition leader Jeremy Corbyn that percentage is even more depressing at 17%. The Tories are deeply divided and Labour is led by a left-wing populist who has shown several times that his knowledge of Brexit is deplorable. The gripping Brexit drama overshadows the entire British political landscape at the expense of other important issues. It is not a coincidence that Bank of England boss Carney did sound the alarm bell last week as he warned against the detrimental consequences of a no deal Brexit. Will the British people take any notice? Many are numbed by the ongoing spectacle. Increasingly, Brexit is tearing apart the fabric of the British economy whereas a real recovery is nowhere in sight.

The report was written by Andy Langenkamp , ​​political analyst at ICC Consultants. On the website of ICC Consultants you can download the full report.

 

Blockchain and big Data​: A great mariage

| 12-2-2019 | Carlo de Meijer | treasuryXL

Blockchain and Big Data are among the emerging technologies that are high on many companies’ agendas. Both are expected to radically transform the way businesses and organizations are run in the upcoming years. Long-time developing in a separate way, at first sight one might assume that these technologies are mutually exclusive. But that idea is rapidly changing.

There are growing expectations that distributed ledgers will help enterprises finally get to grips with Big Data, which thus far is struggling with a number of challenges. They are both powerful on their own, however when combined they may bring a large number of opportunities. Some even say that blockchain and Big Data are made for one another.

“Big Data is an incredibly profitable business, with revenues expected to grow to $203 billion by 2020. The data within the blockchain is predicted to be worth trillions of dollars as it continues to make its way into banking, micropayments, remittances, and other financial services. In fact, the blockchain ledger could be worth up to 20% of the total big data market by 2030, producing up to $100 billion in annual revenue.” Chris Neimeth, COO of NYC Data Science Academy.

In this blog I will look at what the interception of these two innovations may bring. Could blockchain be the solution for the existing Big Data issues and challenges?

Big data and data science/analytics: present challenges

Big Data is one of the fastest growing sectors in the world. Every business wants to get insights into usage patterns of their consumers. Massive datasets are thereby analysed using advanced statistical models and data mining. These Big Data sets will become even more prevalent over the coming years.

“It’s not the amount of data that’s important. It’s what organizations do with the data that matters. Big data can be analysed for insights that lead to better decisions and strategic business moves.” Data Analytics Company SAS

“Data analytics has become the key to corporate competitive advantage because of its role in identifying emerging market trends. In turn, companies can use this information to make quicker and better decisions that help them drive profitability”.EY

The rise of Big Data has presented a slew of issues for both big businesses and everyday consumers. With the growth in data good analytics is becoming all the more problematic. Some major problems to data management and analytics include so-called dirty data, inaccessible data, and privacy issues. And as Big Data increases in size and the web of connected devices explodes, it exposes more of companies data to potential security breaches..

With the advent of Big Data, data quality management is both more important and more challenging than ever. Companies that are dealing with large datasets should ensure that the data are clean, secure and not been modified and come from an authentic source. They have to make sure that the latest version is synchronized among all of the data centres in real time. It should also be ensured that these data are accessible. For most, however, the data silos are still a major issue and a full company-wide digital transformation is still more concept that reality.

Blockchain and Big Data: two sides of the same coin

Main question is: how do both technologies relate to each other, if any? Notwithstanding blockchain has not been explored extensively in aspects of Big Data management and analytics, both technologies could and should be seen as two sides of the same coin.

While blockchain is focused on recording validating data (data integrity), data science analyses data for actionable insight, making predictions from large amounts of data (prediction). While blockchain is changing data management, the latter is transforming the nature of transactions. Or said in another way: “If Big Data is the quantity, blockchain is the quality”.

Read the full article of our expert Carlo de Meijer on LinkedIn

 

Carlo de Meijer

Economist and researcher

 

Management of Large Treasury Teams

| 11-2-2019 | by  Pieter de Kiewit |

Last month I was contacted by one of our clients -we found many staff members for them- about the organisation of the treasury team. The team has over 10 employees and recently has undergone extensive changes. We both know there is not one way to set up a team and after a short brainstorm, we decided it might be a good idea to gather her peers for a round table meeting. What can we learn from each other?

Last Friday a small group of treasury people managers, each of their teams has 10 members or more, gathered for a two hour meeting. The expected topics were team structure, hierarchy, job titles and the profile of the ideal treasury team member. Our hypothesis was that there are certain standards most of us can apply to optimize our treasury teams.
After a brief introduction it became quickly clear there were more than enough topics, two hours was not enough. And the aforementioned standards might exist but this meeting did not result in making them very clear. This in line with a previous blog I wrote about the shape and size of treasury teams. The following observations dominated the meeting:

  • The size and structure of a treasury team depends on questions about the company like: is it a HQ treasury or treasury hub?, what is the geographical footprint of the company?, what is the primary process of the company?, what is the maturity of the company as a whole and the willingness to invest in support functions?
  • Technology has an increasing impact on corporate treasury. Cloud and other solutions enable outsourcing, although the following remarkable statement was made: “if you can outsource it,  you can automate it”. One of the participants told exciting initiatives using robotics;
  • Substantial time was spent on HR aspects like how to deal with Millenials, age versus IT literacy, hiring the ambitious and unstable candidate versus the stable non-ambitious one and how do you screen to hire the proper candidate (see also our blog about the Treasurer Test).

The variety of topics, the different points of view and approaches applied by treasury managers is inspiring. As was the energy and enthusiasm of all participants. Together with them I will decide how we will proceed. Let me know if you want to join this initiative!

Pieter de Kiewit

 

 

Pieter de Kiewit
Owner Treasurer Search

 

 

Effective Finance & Treasury in Africa: Unlocking Africa’s potential

| 8-2-2019| Eurofinance | treasuryXL |

As Africa strives to modernise and reform, the continent continues to offer enormous business opportunities. Nevertheless, in an environment of permanent market, regulatory and geopolitical change, optimising liquidity and risk management is key to successfully leveraging these opportunities.

While we move towards an economy of prediction in which data is the raw material of business, digitalisation is changing the way companies manage treasury in Africa. Lack of visibility, speed and control will soon be a thing of the past. Initiatives such as Vision 2020 in Nigeria are fast driving digitalisation in areas that include legal and finance. The adoption of real time payments and faster reconciliation in several markets are helping treasuries improve working capital. Mobile solutions have changed the payments landscape in Kenya specially and increasingly across the region. Blockchain technology could help drive efficiency too.

Who should attend?

Corporate treasury and finance professionals who are responsible for their company’s African operations – whether you are already in Africa or thinking about it.

Product, sales and marketing teams from financial institutions and service providers who want to meet with corporate treasurers and better understand the challenges they face in Africa.

Why attend?

Hear how you can tap into the potential of this dynamic region

Connect with other treasurers and finance professionals operating in Africa facing the same challenges as you and finding ways to overcome them.

Meet the key banks and solution providers operating in the region.

Hear corporate case studies from treasurers who have overcome the challenges you are currently facing.

Hone in on your area of interest by joining round table discussions on: Angola, Egypt, Ethiopia, Morocco, Nigeria, South Africa, Sudan, Somalia, Zimbabwe, West African Economic and Monetary Union and Trade Finance in Africa.

Thursday 7 March 2019
8 AM – 6 PM
Greenwich Mean Time

Hilton Canary Wharf, London, UK

For more information or if you want to register for the event visit the events website.

 

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ACT CASH MANAGEMENT CONFERENCE

| 31-1-2019 |  treasuryXL |

The 15th edition of the ACT Cash Management Conference takes place on 12 February 2019 in London.

The ACT’s flagship cash management event of the year provides a unique opportunity to share best practice, hear practical case studies from leading corporates and network with fellow cash management and treasury professionals.

Programme

The payments landscape: keep up to date with the latest changes in payments innovation and regulation:

  • the latest regulatory changes and payment fraud (panels)
  • cross-border payments, the New Payments Systems Organisation (breakout sessions)
  • setting up a payments factory (best-in-class case study)

Cash management evergreens: lack of control and visibility remain the top cash management challenges for treasurers. Discuss key questions such as:

  • what really makes good cash management? (panel)
  • cash pooling structures and trapped cash (breakout sessions)
  • how to get cash forecasting right from the beginning (best-in-class case study)

The bigger picture:look beyond day-to-day cash management and listen to frank discussions on:

  • the profitability of cash management products from a bank’s perspective (panel)
  • designing an optimised liquidity portfolio (breakout session)
  • the future of cash management innovation (panel)

For more information or if you want to register for the event visit the events website.

 

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Treasury Intelligence Solutions: Centralizing Corporate Payments System

| 29-1-2019 | TIS Treasury Intelligence Solutions | treasuryXL

Interview with CEO and Co-Founder of TIS Jörg Wiemer by CIOReview

In today’s era where the face of IT is changing drastically, enterprises are facing a multitude of challenges germane to regulation, risk management, and most importantly performing business to business payments. Having served as senior vice president and global treasury veteran at SAP, Jörg Wiemer, the CEO and Co-founder of Treasury Intelligence Solutions (TIS) highlights that corporate transactions often involve multiple parties from both internal and external departments, and the legacy systems often cause recurrent delays in payments. The failure to bring this mission-critical process under control may affect the supplier relationship to the extent that the supplier may discontinue the business relationship. In the thick of grave challenges, modern CIOs are keen to bring in a robust technology that assists them to streamline payment processes. At TIS, the leadership brings to bear its vast experience to aid enterprises to efficiently and effortlessly manage corporate payments and cash flows through a SaaS platform.

The platform works as a central hub that is dedicated for enterprises to manage, organize, and analyze their corporate payments flowing across and within the organization. Through the power of SaaS, TIS’ cloud-based platform helps clients quickly connect their ERP systems with different banks to manage bank accounts. Moreover, the platform allows enterprises to perform analysis of liquidity and cash flow in real time. It also conveniently addresses complexities triggered by different communication protocols and channels, enabling clients to communicate and process transactions in their customers’ preferred language. “The clients can simply leverage the library of bank formats and the bank connector, which we have built over the last year, to allow transactions between ERPs and banks seamlessly,” informs Wiemer.

By challenging the status quo of legacy solutions, the TIS platform empowers multiple leadership executives with the ability to make smarter decisions and assists them to process, view, and analyze transactions in real time using a cash flow analytics feature. Cementing the digitalization objective of enterprises, the TIS cloud platform helps keep processes fully under control through increased efficiency, visibility, and transparency in corporate payments and audit trails.

“The clients can simply leverage the library of bank formats and the bank connector, which we have built over the last year, to allow seamless transactions between ERPs and banks”

Citing an instance, Wiemer brings to fore the case of a luxury goods company, Oettinger Davidoff AG, which faced the challenge in standardizing their payment processes while restructuring their ERP systems to migrate to SAP S/4HANA. Aside from centralizing their international payment transactions, the retail company sought to achieve a better overview of a large part of the liquidity in the company. Partnering with TIS, the client had seamless SAP integration and quick bank format hosting, which helped them successively onboard all the bank accounts to SAP without any hassle. Fast-forward to today, the client has about ten bank accounts of foreign subsidiaries in Switzerland that are connected to the TIS platform to perform all of the international payments of local subsidiaries.

Having researched the potential market for corporate payments solutions, Wiemer states that the total market for “ERP systems” is roughly about $80 billion (ERP) per year and for “payments” $1,000 billion per year, respectively. Tapping this huge market, TIS initially plans to expand its wings to Europe and the U.S. within the next month. The success of TIS reflects in its rich portfolio of clients from diverse industries including finance and insurance, retail and automobile, among others. Emphasizing the fact that TIS continues to help customers switch into a new way to collaborate and execute payments, Wiemer concludes saying, “The fintech industry will fuel the payments industry to become more efficient over time, and it will have customers save cost immensely.”

Original published on CIOReview

Crypto-assets and EU regulation: to a global format

| 28-1-2019 | Carlo de Meijer | treasuryXL

It is increasingly becoming a certainty that crypto-assets are here to stay. Also regulators are now more convinced that these will be here for the long run. Long time taken a wait-and-see attitude, there is growing consensus at European regulators to come up with EU-wide regulation. While on the one hand EU regulation could give the crypto market legitimation and encourage the adoption of crypto-assets. Doing nothing could endanger both investors and financial markets.

Question is however: how should this regulation be shaped taken account the various specifics of crypto-assets and its users. And to what extent may the EU intervene on existing local member state regulation. Early this month, both the ESMA and EBA published their advice to the relevant EU institutions.

So let’s have a deeper dive.

What are crypto-assets (not)?

What makes shaping regulation for crypto-assets so difficult is that these are a unique phenomenon when compared to conventional financial instruments. According to Oliver Wyman they are governed by “a fundamentally different set of constraints, and as a consequence regulators have to take into account these specifics”.

First of all crypto-assets are not tied to national governments and central banks. No government regulation or guidance currently exists around managing crypto-assets. Most crypto-assets are not based within any one specific jurisdiction.

Second, the crypto-asset environment is not bound to one country. There is no single sovereign state that is responsible for regulatory oversight at all times. This will make it difficult to apply traditional regulation to control these crypto-assets.

A third complicating factor for shaping regulation is that cryptocurrencies as they are generally known today in fact do not perform all the functions that are generally understood to define the term currency. They are not acting as a medium of exchange; they are not particularly good as a store of value, given their volatility; and they are not being used as a unit of account. That is why for reasons of regulation it is better to use the term ‘crypto-assets’ instead of the more commonly ‘cryptocurrencies’

Why regulation for crypto-assets?

Regulatory certainty is a critical prerequisite and catalyst for technology adoption in financial services in general, also for crypto assets. It is becoming more evident that regulatory certainty can support safe innovation in the crypto-asset sector.

There are a number of issues that ask for specific attention by regulators.

First (and foremost) from a risk point of view. There are the inherent risks to investments due to volatile crypto-asset markets, when compared to conventional fiat currencies. Related to this is the vulnerability of crypto-assets to market manipulation given that the exchanges currently “sit outside of market abuse regulations”.

There is also increased scope for hacking, leading to the theft of the crypto-assets. Crypto-asset platforms are widely considered to provide opportunities for money laundering and other criminal activities because exchanges allow anonymous access and are not governed by any (AML) regulation.

Each of the above concerns underpin the need of a secure regulatory environment that offers investors and consumers sufficient safeguards. There are however many ways to create a workable, balanced regulatory framework. One that addresses consumer and market risks while supporting innovation, efficiency and competition. But finding this is a real challenge.

Read the full article of our expert Carlo de Meijer on LinkedIn

 

Carlo de Meijer

Economist and researcher

 

1TC | Treasury Convention

| 24-1-2019 |  treasuryXL |

1TC Treasury Convention, hosted by BELLIN, will take place for the seventh time on February 13/14, 2019. 1TC is the first conference in Germany dealing exclusively with treasury topics. The two-day event focuses on sharing specialized treasury knowledge and application-related expertise.

BELLIN hosts the BELLIN Community and offers an engaging program focused on customer case studies alongside product workshops. This is complemented by an exhibition showcasing select businesses who – in combination with BELLIN services and solutions – provide added value to customers.

Whether it is top management or the many BELLIN users in entities worldwide – everyone benefits from this treasury highlight. 1TC premiered in 2012, and by 2018 we could boast 420 attendees from 17 different countries.

1TC – Catch up with the BELLIN Community

The 1TC motto is, “meet, talk, learn and enjoy!” BELLIN clients, partners and exhibitors from around the globe get together to enjoy treasury input, an exhibition as well as plenty of networking time!

Meet: fellow tm5 users, the BELLIN treasury specialists and select BELLIN partners.

Talk: about new products and solutions, trends and developments, and tips and tricks.

Learn: from best practice solutions, presentations, workshops and panel discussions.

Enjoy: treasury pure, a great atmosphere and communal spirit, an outstanding evening event.

For more information or if you want to register for the event visit the events website.

 

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Global Financial Market Outlook

| 15-1-2019 | ICC Consultants | treasuryXL |

Deze blog bevat concrete middellange termijnvoorspellingen voor de mondiale rente- en valutamarkten. De visie van ICC Consultants is gebaseerd op een groot netwerk binnen de wereldwijd toon-aangevende researchhuizen en 40 jaar ervaring in de financiële markten. Middels de weblink onderaan deze blog kunt u meerdere rapporten van ICC Consultants downloaden.

 

Groeigevaren gepareerd met geldpomp

Ons eerste rapport van dit jaar willen we graag beginnen met al onze lezers een voorspoedig nieuwjaar toe te wensen. Een jaar dat waarschijnlijk gekenmerkt zal worden door grote volatiliteit op de financiële markten. Velen vrezen dat dit tot uiting zal komen in de vorm van lagere aandelenkoersen en rentes naar aanleiding van een afzwakkende wereldeconomie. Wat daar met name zo gevaarlijk aan is – en voor veel volatiliteit kan zorgen – is dat de lagere groei gepaard gaat met een grote schuldenlast. Dit laatste kan lage groei gemakkelijk laten doorslaan naar een diepe recessie. Denk bijvoorbeeld aan het recordaantal obligaties met een BBB-rating dat is uitgegeven. Dit is een rating die nog net toestaat dat institutionele beleggers daarin mogen beleggen. Zodra deze rating echter verlaagd wordt, worden het zogenaamde junk bonds waarin de institutionele beleggers veelal niet mogen beleggen. Vandaar dat de rente omhoog schiet zodra de rating van een BBB-obligatie verlaagd wordt. Het betreffende bedrijf moet dan tegen veel hogere rentes herfinancieren, hetgeen veelal niet opgebracht kan worden. Er ontstaat dan een zichzelf voedende negatieve spiraal van hogere rentes, meer faillissementen, lagere groei, nog hogere rentes enzovoort.

Risico’s alom

Gezien dit laatste gevaar is het van het grootste belang dat flink fiscaal en/of monetair gestimuleerd wordt, zodra zo’n negatieve spiraal dreigt uit te breken. Daar zit echter precies de angst waar de financiële markten zo mee worstelen. In belangrijke landen als China, Japan en de EU zijn de schulden al dusdanig hoog, de overheidstekorten dusdanig groot en staan de rentes zo laag, dat de bewegingsruimte op dit vlak zeer gering is. De Amerikaanse autoriteiten hebben wat dit betreft iets meer ruimte, maar groot is deze ook niet. Begrijpelijk is dan ook dat de markten met angst en beven naar de recente zwakkere cijfers uit vrijwel de gehele wereld kijken. Zwakkere cijfers die veroorzaakt zijn door de handelsoorlog tussen de VS en China en de dreiging dat deze zich uitbreidt. Daarnaast ondervindt men steeds meer de gevolgen van de gestegen rentes en het uitgewerkt raken van de fiscale impuls in de VS. Ook politieke onrust en de onzekerheid rondom Brexit helpen niet. Ook het vaak irrationele gedrag van Trump zorgt voor veel onzekerheid.

Meevallers

In dit kader is het dan ook zeer begrijpelijk dat de markten eind vorige week zeer positief reageerden op sterke werkgelegenheidscijfers uit de VS en uitlatingen van de voorzitter van de Fed dat verdere renteverhogingen en verkleining van de balans van de centrale bank niet in steen gebeiteld staan. De vraag die alleen nog overblijft, is of de markten dan niet van een te negatief scenario uitgaan voor de Amerikaanse economie, als ze ervan uitgaan dat de top van de rente al bereikt is. Daarover hieronder meer.

 

 

 

 

 

 

 

 

 

 

 

Het volledige rapport kunt u lezen op de website van ICC Consultants. Hier kunt u tevens meer rapporten downloaden.

Busting some of the ‘holy grail’ myth of reverse factoring as example of supply chain finance solutions….[Part 2]

| 8-1-2019 | by Marc Verkuil |

In the first part of this article, which focuses on the potential disadvantages, risks, and pitfalls of SCF and RF Programs in particular from the perspective of the Seller, the benefits of an RF Program were mentioned, while the almost unavoidable impact on a Seller’s WACC and the potential negative outcome for the Seller from an EVA, ROE and EPS perspective have also been discussed. In this final part of the article, focus will be on the possible commercial impact on account of SCF for a Seller, as well as on the regulators’, investors’ and credit rating agencies’ points of view. The article will present conclusions and some recommendations in the realization that since no company is the same, the thought-process going into the decision for entering or not entering into SCF will not be the same either; certain positive or negative arguments described herein may be more relevant for one company, while others may be more impactful to another. It is safe to conclude, however, that there is substantially more to SCF than what is typically presented and marketed, and it is hard to argue that SCF is the ‘holy grail’ to working capital finance for each and every party involved.

Both the immediate and potential future commercial impact of entering into an RF Program should carefully be considered…

What may be overlooked by Sellers when they are concluding upon a “cheap SCF solution that increases their ROIC and reduces their working capital balances”, is that such solutions are different from the usual forms of debt funding in the sense that even though the Buyers can not be a party to the transaction, these solutions implicitly involve all three parties in the combined commercial/financial transaction. This results in the Sellers having little control on the terms, conditions, and continuation of such funding solution, while there is an important commercial element that is not apparent in more common debt funding. The potential consequences of a lower credit-worthiness of the Buyer or less credit capacity or appetite of the Factor to the Buyer have already been mentioned in this respect. Moreover, and as argued before, an RF Program is usually offered subsequent to the Buyer, being the financially and commercially ‘stronger’ party, requesting an extension of its payment terms from the Seller. Even though the Seller may not be in a position to decline such a request anyhow, the Seller should carefully consider a number of commercial questions and, if deemed relevant, negotiate these as best as possible upfront with the Buyer: “does the RF Program provide real(istic) opportunities to increase sales and EBIT or ensure a more committed and longer term relationship between Seller and Buyer, i.e., do the commercial benefits outweigh the negative (financial and/or ratio) impact, if any?”, “can the Seller charge the additional funding cost, including the cost of extending its payment terms, of an RF Program structurally through to the Buyer?”, “could such a program create a precedent, and if so, what could be the impact (think of other customers requesting/requiring the same extensions and programs)? E.g., what are the long-term consequences of extending payment terms under an SCF program and what happens if or when the program is terminated; will the Terms & Conditions ‘automatically’ return to the old payment terms?” A sound argument in favor of an RF Program may be the fact that credit insurance (on the Buyer or in the market as a whole) may either no longer be available or be higher priced than what the Factor is offering. Hence, a number of questions and arguments a Treasurer usually does not need considered, let alone answered in a straightforward, bi-lateral working capital facility with a lender.

Also note the continuing trend of the desire for more transparency…

There is clearly a trend, driven both by regulators and investors, towards (public) companies being required or demanded to reporting or disclosing more financially relevant information, and as such, not only to leave less room for the non-disclosure of off-balance sheet transactions that may be relevant for the public, but even to add certain transactions that have historically been treated off-balance sheet, back into the financial statements for certain reporting parties; think of IFRS16 as a recent example in this respect. Currently, if receivables (invoices) are sold in an RF Program on a non-recourse basis there are no required reporting or disclosures in any financial statement filings under US GAAP or IFRS. For the MD&A section of a public company’s quarterly and annual filings (at least under the US SEC rules), however, disclosures are more judgmental and subject to materiality thresholds. Such potential disclosures cover a wide range of corporate events, of which the most relevant (from an SEC and FASB perspective, but probably similar for IFRS purposes) are: (a) “trends, demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, liquidity increasing or decreasing in any material way”, and (b) “any known material trends, favourable or unfavourable, in capital resources, including any expected material changes in the mix and relative cost of capital resources, considering changes between debt, equity and any off-balance sheet financing arrangements”. An exact materiality threshold above which a company would be required to disclose its off-balance sheet (SCF) programs has not exactly been defined (yet) from an SEC or FASB perspective.
The reference above to the impact of certain (SCF) transactions on a company’s liquidity position is worth explaining further, as this is a position the major credit rating agencies also tend to take: due to the uncommitted nature of basically all SCF solutions and certain other (significant) financial transactions that are not reported in the financial statements of a company, the rating agencies, if or when made or becoming aware of these types of deals, will add these back into the financial statements for ratings purposes. The most important reason for their argument is that the moment these programs are terminated, the company’s liquidity position will be impacted and the company will most likely need to replace the off-balance sheet funding with an alternative source of funding, which the agencies unconditionally assume to be on-balance sheet unless the company can and would want to proof differently, which is a difficult task. Although there are no exact materiality thresholds with the rating agencies either (to the author’s knowledge), it is clear they effectively decide to adjust for those known SCF solutions that they deem relevant and material (in total) in both the balance sheet and income statements.

Conclusively, SCF solutions may be a valuable funding tool, but be aware…

SCF solutions, including RF Programs, may be a valuable additional and alternative source of funding, even for financially and commercially ‘weaker’ Sellers participating in such programs. However, these parties in particular should be well aware of both the broader financial impact, i.e., beyond the “cheap discount rate and positive ROIC impact” as often advertised by the Factor, as well as of the immediate and strategic longer term commercial and financial consequences of such programs, i.e., these solutions should only be entered into for “all the right reasons” and at the “right” cost (of marginal debt funding as the upper limit). Finally, from a Treasurer’s point of view, typically targeted with at least considering, if not outright optimizing the investors’ interests and having a ‘bottom line’ (WACC, ROE, EPS, EVA) perspective on things, it is recommended to ensure that even if certain of these solutions do not tick all above boxes positively, they do not impact or threaten to impact the company materially, both instantly and in the future, which could include putting a firm limit, e.g., an x% of total debt threshold, for these types of programs in place. Finally, it would probably not hurt for Treasurers, particularly those employed by Sellers again, to pro-actively advise their executive management teams and wider (financial and commercial) organizations of those arguments in this article that they deem to be relevant for their businesses.

 

 

 

Marc Verkuil

Treasury Professional