Impact of the financial crisis: new opportunities for the Treasurers Treasury Hot Topics Seminar 19...

Impact of the financial crisis: new opportunities for the Treasurers

Treasury Hot Topics Seminar

19 February 2009

PricewaterhouseCoopers

Availability of liquidity has fallen rapidly

Financial Market liquidity*

Note: *the liquidity index shows the number of standard deviations from the mean. It is a simple unweighted average of nine liquidity measures, normalised on the period 1999-2004. The series shown is an exponentially weighted moving average. The indicator is more reliable after 1997 as it is based on a greater number of underlying measure. The recent fall in the indicator is largely due to a sharp decline in the interbank market liquidity measureSource: Bank of England

“In the last 9 months credit has gone from being a very positive market to a very poor market.”

Group Treasurer, FTSE 100

Source PwC Survey 2008


There has been FX volatility with GBP falling in value

© 2009 by Prof. Werner Antweiler, University of British Columbia, Vancouver BC, Canada.

© 2009 by Prof. Werner Antweiler, University of British Columbia, Vancouver BC, Canada.


Credit risk has risen

UK, US and EU Bank CDS Spreads Index

0

50

100

150

200

250

300

350

400

450

500

Jul 2006 Sep 2006 Dec 2006 Mar 2007 Jun 2007 Sep 2007 Dec 2007 Mar 2008 Jun 2008 Sep 2008 Dec 2008

EU Banks CDS index UK Banks CDS index US Banks CDS index


Commodity Prices have boomed and crashed

0,00

100,00

200,00

300,00

400,00

500,00

600,00

700,00

04/0

4/01

04/0

7/01

04/1

0/01

04/0

1/02

04/0

4/02

04/0

7/02

04/1

0/02

04/0

1/03

04/0

4/03

04/0

7/03

04/1

0/03

04/0

1/04

04/0

4/04

04/0

7/04

04/1

0/04

04/0

1/05

04/0

4/05

04/0

7/05

04/1

0/05

04/0

1/06

04/0

4/06

04/0

7/06

04/1

0/06

04/0

1/07

04/0

4/07

04/0

7/07

04/1

0/07

04/0

1/08

04/0

4/08

04/0

7/08

04/1

0/08

04/0

1/09

Time

100

= 0

4/04

/200

1

ICE Brent Chinese imports LME Copper Cash price

Source: Bloomberg data and PwC analysis


Volatilities have reached record levels

0,00%

10,00%

20,00%

30,00%

40,00%

50,00%

60,00%

70,00%

80,00%

22/08/01

26/12/01

01/05/02

04/09/02

08/01/03

14/05/03

17/09/03

21/01/04

26/05/04

29/09/04

02/02/05

08/06/05

12/10/05

15/02/06

21/06/06

25/10/06

28/02/07

04/07/07

07/11/07

12/03/08

16/07/08

19/11/08

ICE Brent LME Zinc Cash price LME Copper Cash price

Source: Bloomberg data and PwC analysis


The Rules of the Game are bound to Change because…

• Fully liberalised markets do not work for the good of the majority, but only for the wealth of a minority. Wall Street has paid USD 18 Bln in bonuses this year…

• Plants are shut down, and jobs destroyed.• Systemic Risk has become a reality.• Taxpayers around the World are saving the Banks.• AAA rated companies and bonds have defaulted. Rating agencies have lost

credibility.• The Banking regulatory framework has failed.• The SEC and SoX have not prevented a single guy to fraud USD 50 Bln in full day

light.• Fair Value accounting is being blamed by Bankers as the root cause for the crisis.• Corporate Governance codes have failed.• …


Time to Re-Focus on Financial Risk Management

• Over the last years, the job of the Treasurer has to a large extent focused on cash management, process automation and cost efficiency.

• It is fair to say that many Treasury functions were and are still viewed too much by the Boards as cost centres.

• Financial Risks were thought to be acceptable and often absorbable by the Equity of Companies. Key exposures were FX and Interest rate risks, which have traditionally been well managed by Treasurers. Liquidity and Bank Counterparty Risks had become somewhat “theoretical” in financial markets thought to be “perfectly efficient”.


Time also for Reflection, after the Storm.

• Isn’t time to reconsider the risk appetite of the Company for financial risks?

• What should be the key mission of the Treasurer?• Is it acceptable for Boards and Executive Committees

not to invest more in a Treasury Function which is the key safeguarder of the Company’s assets against Financial Risks?

• Is it acceptable for Companies not to have a well structured and thought through Treasury Policy, which is focusing first on Risk Protection, and not on Return and Performance metrics.


Proposition

“The downturn offers the Treasurer great opportunities to add value to the organisation. Unfortunately for a variety of reasons this may not be maximised”


As a result business priorities have changed – treasury issues to the fore


Business priorities

10 priorities for managing through the downturn

Act decisivelyWith increased uncertainty and volatility it is important to take tough decisions early. Focus relentlessly on the key value drivers and the key risks across the business. Don’t sit back and wait; the winners will be those that position themselves to take advantage of the upturn

Focus on what really mattersEvaluate which products, customers and channels create or destroy value. Revisit your existing investment programmes – what initiatives could you stop or defer?

Recognise the value of your peopleRegular and clear communication with employees is key to their engagement. Identify key talent and develop appropriate Incentives for them – retaining and Motivating the best people is critical to your future

Take advantage of the opportunitiesDon’t stop innovating or investing in those areas of growth you will need for the future; don’t forget your brand.

Have an eye for the future; think beyond the next quarter

Take a closer lookThe goal posts are moving; understand the true picture not what you would like to believe. Get to the bottom of what’s driving the business; what you do best and why. Understand how the business is being impacted by the downturn

Plan for different scenariosWinners demonstrate agility and flexibility; model a range of financial, operational and workforce scenarios that reflect the impact of the downturn on your business; adapt quickly; explore your strategic options

Specific priorities for the CFO

1

2

3

4

5

6

Remember “cash is king”Ensure that your finances and working capital are in good order; protect your liquidity; re-examine your treasury, financing, funding and pension exposures. Monitor your performance against financial and non-financial covenants. Adopt a hands on approach to cash management

9

Manage your cost baseFocus on enhancing operational performance; go for targeted rather than across the board cuts; extract better value; reduce unnecessary complexity; look at whether your business model needs to change

8

Reliable management information is keyNow more than ever you need the right management information; clearly defined KPIs are essential. Decision making needs to be based upon facts; speed of decision making needs to improve

7

Take your stakeholders with youEvaluate the likely impact of the downturn on your stakeholders; make sure you understand their agendas. Perception is often reality so maintaining regular and open dialogue is essential

10

Specific priorities for the Treasurer


Treasurer - Cash is “King”

• Many companies will face severe financial pressures during the economic downturn; more than ever, cash is “king”;

• Businesses which emerged as sector leaders after the last recession typically had an average net debt-to-equity ratio of half of their less successful competitors before the downturn;

• Successful businesses also held more cash on their balance sheet than their less fortunate competitors.

Increased emphasis should be placed on…• Assessing whether your external financing arrangements are appropriate in the light of

changing circumstances; • Adopting a more proactive hands-on approach to cash management;• Ensuring treasury management practices are aligned to the business focus;• Optimising working capital management.


Treasurer - Cash is “King”Key focus areas for Treasurers attention

Financing Arrangements

Working Capital Management

Cash Management (lessons from Private Equity sector)

Treasury Management

• Re-financing risks

• Loan agreements

• Adequacy of facilities

• Efficiency of financing structure

• 0-30 days: Detailed operational focus

• 1 mth to 1 yr: Tactical focus

• 1 yr +: Strategic focus

• AP – efficiency terms

– payment terms

• AR – reduction to

•

• FX volatility

• Interest rate volatility

• Commodity price volatility

• Credit risk (commercial / financial)

• Policies – aligned to environment - direct

- indirect

terms

• Contract compliance

• Inventory levels:

standard terms

- renegotiate


Treasurer - Take your stakeholders with you

Stakeholders, Banks, Institutions and Analysts• Proactively appraise Investor / Analyst community about financial projections / outturns;

• Regular scenario planning / modelling becomes critical as a source of strategic information;• Be prepared and ready to tap investor markets as “windows of opportunity” open up.

Customers• Ensure any retention efforts

are targeted and cost effective (rewarding loyalty..);

• Greater focus on customer credit to reduce bad debts;

• Ensure plans are in place to proactively capture customers from failed competitors;

• Examine sales aid / customer financing opportunities

Management & Staff• Look at pay structures / flexible working time and benchmark remuneration against competitors;

• Look at outsourcing opportunities; consider Works Council / Union implications;

• Focus attention on retention of highest value employees – those that must be retained as growth engine of the business.

Suppliers• Review contract and

procurement policies;

• Categorise suppliers into critical / desirable groups and focus priority spend on priority categories.

• Financing of suppliers a possibility

Value chain

Treasury issues

Treasury issuesTreasury issues


So why might not treasurers be able to fully respond ?


Not enough people / too many business constraints

4%

12%

13%

14%

17%

22%

24%

24%

26%

27%

41%Limited resources (people)

Compliance requirements or regulatory constraints

Decentralized nature of the underlying business

Technology/IT infrastructure

Lack of understanding of what treasury really is

Insufficient info of underlying fin.risks/exp

Restrictive management mandate and / or support

Limited resources (budget)

In-house skills

Poor management reporting or poor KPI’s

Other Source:PwC European Treasury Survey 2006


Treasurers are most comfortable focusing on core financing / risk mgt - other areas involve getting into the business which is difficult!

“Treasury has always had a bitof an ivory tower impression– no one really understands whatthey do. The challenge is to ensurethat treasury becomes part of theeveryday business decisions.”

Treasurer, FTSE 100


“I’m starting to take a wider view of risk for the organisation …

Treasurers can bring a lot of benefit in terms of understanding and quantifying risks.”

Director of Treasury, FTSE 100-200


PwC Treasury Survey 2006 showed treasurers preferred banking and funding to business issuesStakeholders (CFO’s) wanted them to concentrate more onthe business risks


The financing issue is just too big to focus on anything else

From The TimesNovember 5, 2008

Corporate debt refinancing is the next

crisis

David Wighton: Business Editor’s commentary

“Financing has become amuch bigger issue. Keepinga credit facility in place hasbecome harder and more

expensive. If you wait untilyou need the credit it will beharder to obtain and muchmore expensive than priorto the crunch. The decision

is how much ‘headroom’to maintain.”

Group Treasurer, FTSE 100-200Source PwC Survey 2008

“Developing appropriatebanking relationships –

treasury wants to partnerwith banks on a long termview. The banks need tohave a good fit with what

they offer.”Group Treasurer, FTE 100-200.

Souce PwC Survey 2008


Focus not in the right place

Safeguarding assets

Influencing business performance

Inte

grat

ion

with

the

busi

ness

Time

Complying with

regulationand

controls

Minimising costs

Maximising shareholder

value

Focus on regulatorycompliance& control

Focus on regulatorycompliance& control

Focus on efficientand

effective treasuryprocesses

Focus on efficientand

effective treasuryprocesses

Focus onvalue throughout

the business

Focus onvalue throughout

the business

Focus on debt and liquidity

Focus on debt and liquidity

Controls / efficiency very important but priorities are up the value chain

Source:PwC European Treasury Survey 2008


So what should the treasurer do ?


This is the opportunity for the treasurer

• Be prepared to make tough decisions in reshaping the treasury strategy. Focus on key banks / lenders and key risks. Cash is king.

• Be flexible – just following policy may not be good enough. Old certainties have gone. Confirm principles but adopt a more responsive approach. Report as such to senior mgt and develop the team.

• It is not enough to merely survive – take, anticipate and exploit opportunities in the new world. Lead and educate the business in focussing on FX, credit risk, commodity risk, key suppliers and customers etc.

Survive

Adapt

Win

A new world for Treasurer

© 2009 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP (US).

Thank you!

Olivier Cattoor [email protected]+32 2 710 4118

Damien McMahon [email protected]+32 2 710 9439

Didier [email protected]+32 2 710 9634

Impact of the financial crisis: new opportunities for the Treasurers Treasury Hot Topics Seminar 19...

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Transcript of Impact of the financial crisis: new opportunities for the Treasurers Treasury Hot Topics Seminar 19...