MiFiD II – 10 days old: Status Report

| 16-01-2018 | Lionel Pavey |


MiFiD II is a regulation leading to reform in the European financial industry. This is an update to the original MiFiD regulation which started in 2007. It is expected to offer greater protection to investors and to increase transparency within the markets. There is a strong determination to move trading from “Over the Counter” such as voice activated markets, to more established electronic venues as these are easier to audit and monitor.

 

What are the aims of MiFiD II

  • Greater transparency and efficiency in markets
  • Moving from OTC trading to regulated trading areas
  • To restore confidence lost by investors after the financial crisis

What markets are affected

  • Equities
  • Commodities
  • Fixed Income
  • Foreign Exchange
  • Futures

Who is affected

  • Everyone who is a participant in the market

How will it work

  • Caps on the volume that can be traded in dark pools
  • Pricing transparency for OTC markets
  • Division between payments for trading and payments for research
  • Increased standards for investment products

What has happened since 3rd January 2018

Some major exchanges – Eurex, London Metal Exchange, ICE – have received reprieves from implementation and do not have to fully comply with open access rules for the next 30 months. This is despite legislation that took more than 5 years and was delayed for 1 year. This also means that certain investors will choose a deliberate route to market for their transactions that do not need to be fully reported on for the next 30 months.

ESMA (European Securities and Markets Authority) announced on 9th January 2018 that there will be a delay in implementing the cap on dark pool trading volumes until at least March 2018. These dark pools are favoured by investors and traders who wish to trade a significant amount of stock without the rest of the market knowing or the price moving.

Markets that have traditionally worked on voice activated trading – fixed income and interest rate derivatives – are still going strong. However, there is a threat to their existence if more trades are done on recognized exchanges and/or platforms.

What about research

As the cost of research has now been split from trading, it will be very clear what an investor is having to pay. Furthermore, analysts will be more inclined to only produce analysis on the larger “Blue chip” companies – both for equity and fixed income. There is a fear that smaller companies will now fall away from the spotlight and little or no research will be produced and published. Consequently, investors might become averse to taking a position in a small company where there is no research available. There is a threat that what independent research is produced will be biased as the cost for the research has to be earned back. There are rumours that maybe the exchanges will pay for research – this could be paid out of listing fees.

So, to conclude, MiFiD II is alive and running – but they are some serious disappointments compared to how it was envisaged. Perhaps such all encompassing legislation should be reduced to bite sized chunks and drip fed into the market. Any legislation that is late in being implemented and extends to more than 17 million words is, perhaps, not what the market needs and/or wants all in one go.

Lionel Pavey

 

 

Lionel Pavey

Cash Management and Treasury Specialist

 

Planning & Operations – a clear vision and purpose

| 15-01-2018 | treasuryXL |

Planning & Operations
Treasury is a function which entails many different roles and responsibilities. The main task is to monitor and manage the cash within a company ensuring there is sufficient liquidity. This means monitoring all the cash flows – both inflow and outflow, together with the sources of the flows – current operations, investments, borrowing etc. There must be enough liquidity to maintain the daily operations, whilst excess funds need to be invested. At the same time, Treasury must ensure that excess funds are invested in a safe and prudent manner and that future assets and liabilities are hedged where appropriate.

Due to the complexity of the task, it is very difficult to give a short description of all the different roles. This is an overview of the main roles that Treasury undertake:

  • Planning and operations
  • Liquidity Management
  • Planning and operations
  • Risk Management
  • Funding
  • Stakeholder activity
  • Corporate Governance

Planning and Operations

This relates to the routines that Treasury perform to ensure that a company can move forward from day to day.

Payments – ensuring that a company meets its financial obligations – specifically to debtors, banks, tax authorities etc. It is very important for a company that it is seen by its counterparts to be secure, organized and that debts are paid on time.

Cash flow forecasting – this is the main planning element within Treasury. Information must be gathered from the entire organization both at head office level and subsidiary level. Information can come from accounting, capital investment budgets, operational budgets, loan maintenance records, tax and dividend records, etc. It is the responsibility of Treasury to ensure that there are sufficient funds within a company to meet all its operational requirements.

Risk assessment – Treasury needs to develop and maintain the risk matrix. This means not only identifying the risk, but also ascertaining the appetite within the company for the risk. A clearly defined matrix will ensure that all risks are recognized, and the correct procedures are carried out to mitigate the risk to the agreed level.

Treasury systems – how is data received and stored? If a decision is made to purchase a dedicated TMS, then Treasury is involved in discovering the criteria to meet the company mandate, the search for a relevant supplier, the implementation and maintenance of the system, together with the operation of the system. A good TMS system should enhance workflow, lead to more concise reporting and lead to financial savings.

Banks – banks and other financial service providers are an integral part of Treasury and their operations. This requires analysis, negotiation and selection of the preferred supplier. Treasury needs to keep a close eye on the costs charged against the service that is offered. This can mean regular appraisals and renegotiation of the fees. Ultimately, a company needs to know that the operations are performed smoothly, timely and accurately.

Strategic development – Treasury are responsible for the operational risk that have been agreed by the Board of Directors. Treasury needs to liaise, inform and alert the Board when issues arise – be they internally or the result of changes in legislation that have an impact on the smooth day to day operations that they perform on behalf of the company.

Next: Liquidity Management

Lionel Pavey

 

Lionel Pavey

Cash Management and Treasury Specialist

 

 

Financieringsstructuur: solide fundament of kaartenhuis?

| 12-01-2018 | Bianca van Zeventer |

Leningen worden vaak gezien als een goede manier om lange termijn investeringen te financieren. Een (gecommitteerde) meerjarige lening levert veelal zekerheid voor de middellange termijn. “Voor meerdere jaren vastgelegd” blijkt in de praktijk vaak niet waar te zijn. Leningen worden afgesloten als een aanvullende vorm van financieren, naast rekening courant, lease en/of andere leningen. Hoewel het aangaan van de meerjarige financiering ‘an sich’ niet heel risicovol hoeft te zijn, zijn de voorwaarden dit soms wel.

Elke vorm van financiering heeft zijn eigen voorwaarden. Aan de verschillende leningen worden specifieke voorwaarden toegevoegd. En dan zijn er nog de algemene (bank)voorwaarden.
Veel bedrijven nemen onterecht aan dat dit ‘standaardvoorwaarden’ zijn en er maar beperkte onderhandelingsruimte is.

De voorwaarden van de verschillende arrangementen spreken elkaar vaak tegen, zijn niet zoals beoogd en/of dienen niet het doel en het belang de onderneming.

Financiering in welke vorm dan ook blijkt vaak een kaartenhuis. In plaats van mooi gestapeld, zijn de arrangementen een domino met de eerste steen in handen van de kredietverlener.

Wanneer uw onderneming onverhoopt in zwaarder weer terecht komt, dan is het belangrijk dat het staat op een solide financieel fundament.
Voorkomen is beter dan genezen geldt hier ook. Beter vooral goed uit-onderhandeld dan later de financiering amenderen of herstructureren. Of zelfs geen keuze meer hebben. Uw bank of financier eenzijdig de mogelijkheid geven alle financieringen te herroepen of betaalbaar te stellen, biedt geen financiële stabiliteit.

Maar vaak blijken de verschillende voorwaarden zodanig in elk kaar te grijpen, dat dit wel het geval is.

Een FlexTreasurer met gespecialiseerde financieringskennis, kan u helpen een snelle scan te maken van uw financieringsstructuur, aanbevelingen doen voor aanpassingen en/of financieringsarrangementen namens u of samen met u (her)onderhandelen.

 

Bianca van Zeventer

Treasury and Finance Specialist / Owner of CuCoFin

 

 

MEER INFORMATIE

Wil je meer weten of iets anders over de diensten van Flex Treasurer of heb je een andere vraag?
Pieter de Kiewit helpt je graag verder.

 

This is why corporate treasury is great – The laymen introduction to corporate treasury

| 09-01-2018 | Pieter de Kiewit |

My father was a civil engineer and would have liked one of his kids to follow in his footsteps. Regretfully for him we all went in different directions, me landing an engineering degree of the wrong type. What I did like to learn from my first business management professor was about creating bridges between various functional areas. That is what I have been doing as a recruiter for almost 25 years, the last 8 solely in corporate treasury. Why treasury?

All organisations, even the small ones, can benefit from good treasury. Only the bigger ones hired permanent experts. The main three areas, perhaps oversimplified, they focus on are:

  1. Money logistics: opening and closing bank accounts, doing (bulk) payments, forecast money coming in and going out;
  2. Managing (treasury) risk: understand and manage the implications of interest or currency fluctuations. If your manufacturing costs are in Euro and you sell in Dollars and the price of the Dollar drops, what to do? What to do if you have excess cash on your current account;
  3. Funding: where do you get your money for new or current business? Bank loans, equity, mortgage, leasing?

This does not sound sexy, does it? But do understand that during the crisis treasurers found solutions for companies how to survive. They found funding to pay salaries, helped sales finding creative funding solutions to make complex transactions achievable, helped prevent companies going belly-up due to currency exposures, forced banks to offer better solutions at a more acceptable price.

Treasurers manage huge amounts of money and operate very close to the CFO. They are involved in mergers & acquisitions, reorganisations and international expansion. They act in small numbers but have huge impact if they would stop doing their work. And the job type evolves continuously. Creating new treasury bridges to traditional job types like accounting, tax, sales helps all doing a better job. The academic world is showing increasing interest. In the Netherlands the post graduate education at the Vrije Universiteit is becoming more prominent in the treasury community. Corporate treasury is very dynamic!

What I love doing is helping CFO’s, HR, internal recruitment and senior treasury managers with their staffing questions. What qualifications and personality type matches best with your current and future business situation. If you only hire one treasurer per year, what do you need to know to choose the best candidate? I hope now you can understand my passion for creating bridges in treasury and recruitment.

I look forward to your thoughts to the above and further contact,

Pieter de Kiewit
[email protected] / +31 6 1111 9783

Pieter de Kiewit

 

 

Pieter de Kiewit
Owner Treasurer Search

 

 

Bitcoin – hype or reality?

| 08-01-2018 | Lionel Pavey |

Having spent my  working life in international finance, I have patiently listened to all the news about the Bitcoin over the last few years. During 2017 whilst the Bitcoin was on a spectacular price rise, my interest was awakened in this new phenomenon – is this the future? I attended seminars, read articles, learnt the difference between the Bitcoin and the Blockchain, searched and investigated via the web, and tried to form an opinion. These are my findings:

Here is a technology that has recently been created – started in 2009 – that has caused a huge debate and led to passionate arguments on its merits or demerits. Those in the know understand its concept – the rest are baffled by its very existence. At essence it is a digital currency – there are no coins or notes in existence. It is decentralized – there are no governments controlling it. If you own it, your identity is anonymous to others – transactions take place via encryption keys. The supply is limited – protocol dictates that a maximum of 21 million Bitcoins can be produced. At the end of 2017 there were 16,774,500 coins in circulation – roughly 80% of the maximum allowed. So, the supply is clearly limited, but they have no real intrinsic value – they do not represent a claim on an asset.

My main area of interest has been on the price – the rise in 2017 of more than 1,400% is astounding. I decided to collate some information and have a chart showing Bitcoins price of the last 2 years.

Such a stellar performance should mean that the trade volume has increased dramatically.

Well……. here is another chart

The daily volume in September 2017 when the price was about $4,000 was the same as the start of February 2016 when the price was about $400. I had to create this chart as all the data I could find related to the $ value of turnover – which was phenomenal – and not the actual number of Bitcoins traded. Normally, when an asset sees a huge increase in price, this goes together with a corresponding increase in turnover. Clearly this has not happened with Bitcoin – why?

There appears to be a “strategy” of buying Bitcoin to hoard them. There does not appear to be a sizeable free float of Bitcoin. If there is more demand than supply, then obviously the price will increase dramatically. Bitcoin is touted as an alternative currency, yet the advocates do not seem to want to spread it around with everybody else. It is a currency that is not used to settle transactions – this makes it difficult to consider Bitcoin becoming a recognized mechanism for payments. One of the criteria of money is that it is a “medium of exchange” – yet again Bitcoin, which appears to be hoarded, does not meet the criteria.

How can a cryptocurrency replace a conventional fiat currency if it is not freely tradeable? Furthermore, if you hold Bitcoin and want to take your profit, then this will be realized in a fiat currency. As Bitcoin is generally quoted and traded in $, this means receiving your profit in an antiquated currency that your cryptocurrency wishes to replace – ironic?

The underlying technology – Blockchain – is here to stay. As to whether Bitcoin is here to stay – if people hoard Bitcoin, it will exist. What the value of Bitcoin should be – whatever someone is prepared to pay for it. Will it replace fiat currency – maybe one day, but not in its present Bitcoin form.

Lionel Pavey

 

Lionel Pavey

Cash Management and Treasury Specialist

 

Forward Rate Agreement (FRA)

| 05-01-2018| Arnoud Doornbos |

Money Market outlook

At the press conference on 14 December 2017, the ECB announced that expectations for economic growth and inflation have been adjusted upwards. But despite optimistic growth, the ECB is not yet fully convinced of a continued upward trend in domestic price pressures. And thus Draghi: “An ample degree of monetary stimulus … is necessary for underlying inflation pressures to continue to build up.”

For this reason, the ECB will maintain the buying program at least until September 2018. And only then will an increase in policy rates come into the picture. Since the beginning of 2017, investors have seen the chance that the ECB will implement an increase in policy interest rates. This has not yet had an effect on the three-month Euribor rate. This has been stable at around -0.3% for the whole of 2017, and we expect that this will be the case in the vast majority of 2018 as well.

But markets will go up again for sure during time and borrowers need to prepare themselves for that moment. A good interest rate risk management can help to extent the pleasure of using favorable low interest rates for your company. Hedging your short term interest rate exposure with FRA’s could be a good idea. Good timing is essential.

 

 

Definition

A Forward Rate Agreement’s (FRA’s) effective description is a cash for difference derivative contract, between two parties, benchmarked against an interest rate index. That index is commonly an interbank offered rate (-IBOR) of specific tenor in different currencies, for example LIBOR in USD, GBP, EURIBOR in EUR or STIBOR in SEK. A FRA between two counterparties requires a fixed rate, notional amount, chosen interest rate index tenor and date to be completely specified.

FRAs are not loans, and do not constitute agreements to loan any amount of money on an unsecured basis to another party at any pre-agreed rate. Their nature as a IRD product creates only the effect of leverage and the ability to speculate, or hedge, interest rate risk exposure.

 

 

 

How it works

Many banks and large corporations will use FRAs to hedge future interest or exchange rate exposure. The buyer hedges against the risk of rising interest rates, while the seller hedges against the risk of falling interest rates. Other parties that use Forward Rate Agreements are speculators purely looking to make bets on future directional changes in interest rates.

In other words, a forward rate agreement (FRA) is a tailor-made, over-the-counter financial futures contract on short-term deposits. A FRA transaction is a contract between two parties to exchange payments on a deposit, called the Notional amount, to be determined on the basis of a short-term interest rate, referred to as the Reference rate, over a predetermined time period at a future date.

At maturity, no funds exchange hands; rather, the difference between the contracted interest rate and the market rate is exchanged. The buyer of the contract is paid if the published reference rate is above the fixed, contracted rate, and the buyer pays to the seller if the published reference rate is below the fixed, contracted rate. A company that seeks to hedge against a possible increase in interest rates would purchase FRAs, whereas a company that seeks an interest hedge against a possible decline of the rates would sell FRAs.

 

Valuation and Pricing

 The cash for difference value on a FRA, exchanged between the two parties, calculated from the perspective of having sold a FRA (which imitates receiving the fixed rate) is calculated as:

where N is the notional of the contract, R is the fixed rate, r is the published -IBOR fixing rate and d is the decimalized day count fraction over which the value start and end dates of the -IBOR rate extend.

For USD and EUR this follows an ACT/360 convention and GBP follows an ACT/365 convention. The cash amount is paid on the value start date applicable to the interest rate index (depending in which currency the FRA is traded, this is either immediately after or within two business days of the published -IBOR fixing rate).

For mark-to-market (MTM) purposes the net present value (PV) of an FRA can be determined by discounting the expected cash difference, for a forecast value r:

where vn is the discount factor of the payment date upon which the cash for difference is physically settled, which, in modern pricing theory, will be dependent upon which discount curve to apply based on the credit support annex (CSA) of the derivative contract.

Quotation and Market-Making

 FRA Descriptive Notation and Interpretation

 

How to interpret a quote for FRA?

[EUR 3×6  -0.321 / -0.301%p.a ] – means deposit interest starting 3 months from now for 3 month is -0.321% and borrowing interest rate starting 3 months from now for 3 month is -0.301%. Entering a “payer FRA” means paying the fixed rate (-0.321% p.a.) and receiving a floating 3-month rate, while entering a “receiver FRA” means paying the same floating rate and receiving a fixed rate (-0.321% p.a.).

Due to the current negative Money Market rates means receiving actually paying and the other way around.

 

 

 

 

 

 

Arnoud Doornbos 

Interim Treasury & Finance

 

 

Cashforce: Treasury year-end meetup

| 04-01-2018 | Nicolas Christiaen | Cashforce | Sponsored content |

Onderstaand een kort verslag van ons Treasury year-end meetup-event van eind 2017. 

Tim (Jonk – Thomson Reuters) en Martijn (Duijnstee – Cashforce) trapten af met een (uiterst!) korte terugblik op 2017 want alle ogen waren eigenlijk al gericht op het progamma waarin de 3. Top-challenges 2018 voor corporate treasurers de revue zouden passeren.

Nicolas (Christiaen – Cashforce) gaf inzicht in wat er bij komt kijken om, in 6 stappen, een daadwerkelijk nauwkeurig en geautomatiseerd 1. Cash forecasting-proces in te richten. No more Excel!

Bart-Jan (Roelofsz – HERE Technologies) kwam letterlijk net uit ‘de vlieger’ uit Chicago stappen en kon gelijk door naar het podium waar hij een bijzonder aansprekende presentatie gaf over 2. Financing in het algemeen en de transitie van bedrijfsactiviteiten en opbouw van het Treasury en Finance Team in een snel groeiende organisatie. Top!

Alex (Goraieb – Thomson Reuters) nam het stokje over en gaf ons meer dan een kijkje in de wondere wereld van 3. Risk Management. Een wereldreis in de achtbaan van volatiele markten en valuta, via de onderliggende techniek van trading in grote posities naar een lesje ‘hoe selecteer ik de beste bank’. Well done!

En toen was het snel! naar de borrel want in het kader van ‘Act Global, drink Local’ stond het Ijndejaarsbier van Brouwerij ‘t Ij koud en op fust te wachten, en wat had iedereen toch een dorst gekregen…

Tijdens de borrel werden er meerdere robbertjes uitgevochten tijdens de Kick-off 2018 games op de Cashforce-voetbaltafel.

Voor hen die er waren, dank voor jullie komst en voor hen die er niet waren: volgend jaar een nieuwe kans want wat ons betreft zeker voor herhaling vatbaar!

 

Nicolas Christiaen

Managing Partner at Cashforce

 

Commercial Paper – alternative short term funding

| 03-01-2018 | treasuryXL |

 

There are many different products that a company can use to meet its funding requirements. These products mainly fall into (but are not exclusive to) 2 major categories – equity or debt. Within both categories that are many different bespoke products that can be used. Debt can be either for long term or short term – both in respect to the tenor and the interest rates. Furthermore, interest rates can be fixed or floating. In this series we shall be looking at popular products that are used to help fund a business.

Definition
Commercial Paper is a money market product issued by large companies to receive funding for short term needs. The tenor (maturity) is normally for a short period up to 270 days. The paper is a promissory note that is unsecured – there is no collateral/security offered against the paper. As such Commercial Paper is normally only ever issued by large well-known companies who have credit ratings.

How it works
When a company needs short term funds it can issue paper (promissory note) against receiving the funds. Issuance can take place either via a recognized dealer who can sell the paper into the money markets, or paper is directly issued to an investor who wishes to buy and hold the paper until maturity. Paper is normally issued at a discount to its face amount and redeemed at par.

The programme
Commercial Paper is subject to a company issuing a programme. This provides details as to the maximum amount that can be borrowed; the lifetime of the programme; registered dealers etc.

Why borrow?
Commercial Paper allows a company to be flexible in its short term funding. Yields are, traditionally, lower than bank borrowings and are not subject to additional bank covenants. A company can benefit quickly from changes in interest rates. It is both a quick and inexpensive way to raise short term working capital.

Why lend?
It allows lenders to get a better yield than available if they placed their funds on deposit with a bank. The paper is negotiable – this means that the paper can be sold on in a secondary market. If a lender suddenly had a funding issue, they could sell the paper to a third party, rather than approaching their bank for funding. As the issuers have credit ratings, it is possible to apply your own criteria with regards to who you will accept as a counterparty.

Lionel Pavey

 

Lionel Pavey

Cash Management and Treasury Specialist

 

 

Bitcoin mania: what is it not?

| 20-12-2017 | Carlo de Meijer |

During our stay in South Africa I was reading an article in Die Burger (newspaper for Afrikaners) where a spokesman of Cape town-based PWC gave his ideas on the recent rise of Bitcoin and the future of Blokketting (Afrikaans for Blockchain). This inspired me to write this blog. Since I started writing about blockchain I categorically refused to use the term Bitcoin. But this time it is different. As Bitcoin nears the end of a record-breaking year, it seems an appropriate time to dive into this – by many traditional players said – over-hyped thing. Others describe this fascination for Bitcoins as a “speculative mania”. The broader public has discovered this phenomenon. I will not say it is (already) the end of the rise in Bitcoins or other crypto currencies. But let me be clear: Bitcoin is a lot not!

Bitcoin rate explodes

Since April this year the Bitcoin (but also crypto currencies like Ether and Bitcoin Cash) is showing a continuous rising trend and in the past few months it even exploded to unexpected levels. In one month time the rate of the Bitcoin almost doubled. In the meantime the Bitcoin rate increased further to reach almost 20.000 dollar, before falling back to 16.000 dollar. But now it is back at  19.000 dollar. At the beginning of this year the Bitcoin rate was not even 1000 dollar. The total market capitalisation of Bitcoin is now exceeding that of a company like Boeing and that of New Zeeland’s GDP.

Bitcoins traded on futures market

The recent firm rate rise of the Bitcoin has much to do with the launch of Bitcoin future contracts. Before that Bitcoins could only be sold or bought via internet platforms. Last week the trade of future contracts in Bitcoin started on the Chicago Options Exchange ( CBOE). These futures enable speculators (without having Bitcoins) to buy or sell Bitcoins by betting  via the leverage instrument on future increases of the Bitcoin or an eventual decrease thereby hedging against fluctuations. In total 500 contracts were traded on the first trading session. The rate of Bitcoins increased nearly 2.000 dollar to 18.700 dollar. On the American market place Coinbase the Bitcoin even reached 20.000 dollar, after having raised 40% in the two previous days. This indicates that investors do not (yet) expect a crash short term.

In the meantime also the Chicago CME, the world’s largest exchange,  started trading Bitcoin futures and the Nasdaq is also in the race to enable the trade in these future contracts. Many professional investors however did not yet enter this market because the difference between bid and offer rates is still much too large. This indicates there is too less liquidity in this market. There is also insufficient clarity of the required margins, trade limits, stress tests and clearing.

What is Bitcoin not?

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

 

Carlo de Meijer

Economist and researcher

 

 

Credit ratings Healthcare- a Fitch seminar

| 19-12-2017 | Lionel Pavey |

On 29th November treasuryXL attended a seminar organized by Fitch Ratings in Utrecht. It was a presentation by Fitch that explained the approach they had taken to determine credit ratings for 2 different entities within the Dutch healthcare industry: Stichting Elisabeth-Tweesteden Ziekenhuis in Tilburg – a hospital, and Stichting GGZ Noord-Holland Noord – a mental healthcare institute. There was a fair amount of interest in this seminar as more than 35 people attended, representing banks, financial advisors, healthcare industry and insurance companies.

Whilst both entities are in the healthcare industry there are distinct differences in focus and size: Elisabeth-Tweesteden caters to the surrounding area and had 632,000 hospital visits in 2016 and 4,000 FTEs, GGZ has 10,000 patients and 1,240 FTEs.

What is a credit rating?

A credit rating agency (Fitch) attaches a credit rating to an entity (debtor). A rating is an opinion as to the entity’s ability to meet financial commitments on a timely basis. It measures the ability of the debtor to repay principal and interest of loans on time and in full, together with the probability of default. To be able to come to a conclusion for the rating, the entity needs to supply all relevant information to the rating agency, which can then perform the necessary analysis to judge their creditworthiness.

Applying the criteria

Fitch uses two criteria to rate healthcare entities: the recently updated Government Related Entities Rating Criteria (currently published as an exposure draft) and the Revenue Supported Debt Rating Criteria. The first determines the likelihood of exceptional support in the case of financial difficulties at the Government related entity. The latter determines the Standalone Credit Profile.

An entity is defined as being government related if they are semi-publicly owned/controlled by the government and/or local authority has majority economic or voting control over the entity. Fitch assesses whether a government is likely to support an entity in financial distress to avoid negative socio-political repercussions of a default, or if the entity fulfills an important public policy mission. The Government Related Entity Criteria covers four key factors:

  • Status and control
  • Support track record and expectations
  • Socio-political implications of default
  • Financial implications of default

In order to determine the Stand-alone credit profile the Revenue Supported Debt Criteria is used that covers  revenue defensibility, operating risks and financial profile. Fitch concluded that both entities were able to receive a long-term credit rating of single A.

For investment grading criteria, Fitch applies a highest rating of AAA and a lowest rating of BBB-. A single A rating is a high credit quality. ‘A’ ratings denote expectations of low default risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.

What are the advantages of a credit rating?

  • Enhances access to capital markets
  • Facilitates risk pricing for funding
  • Improves bargaining power with banks and suppliers
  • Recognition amongst peers and in international capital markets
  • Rating process provides improved transparency and financial discipline for the rated entity
  • Annual Rating report may be used as a standalone marketing instrument

What are the implications in the Netherlands?

At present, the Dutch government has majority control in many companies including transport – NS; infrastructure – Prorail, Schiphol; energy – Gasunie, Tennet; and financial services – BNG (Fitch rated AA+, Stable, FMO (Fitch rated AAA/Stable). Furthermore local authorities also have majority control in local companies including transport – GVB, HTM, RET, energy – Eneco, and household waste – AEB, HVC. All the companies require funding, the majority of which is covered with either a national or local government guarantee, or direct participation. Fitch rates all types of government related entities, and with a rating it may be possible for these entities to further their scope for acquiring finance.

An important question that arises is: should national and local government restrict themselves to issuing guarantees and allowing the free market to determine the funding, or should they proactively engage in lending money to companies? Only if more entities were in the possession of a credit rating, could a clear decision be taken. At a time of low interest rates and a shortage of “prime” graded loans, it could possibly be advantageous if the loan market could be opened to more lenders – secure in the knowledge that the loans were guaranteed.

If you are interested in learning more, please contact us via email at [email protected]

Lionel Pavey

Cash Management and Treasury Specialist