Reporting, interest rate risk management and the future of Bellin’s treasury management system, TM5, were all on the agenda on the second day of the annual 1TC Bellin treasury conference on Thursday.
There has been an uptick of treasurers inquiring about interest rate risk management in recent months as interest rates in the US and UK have started to show a rise in momentum, said Chatham Financial in a morning treasury workshop.
Phil Scott, group treasurer of Ferguson Plc, spoke with two Chatham Financial executives in a case study about why he opted for floating rate debt over fixed rates.
“Unsurprisingly as a plumbing and heating business, we have quite a material working capital cycle. We buy a lot of product going into winter months and we get paid for that product going out of the winter months,” said Scott, at the conference in Rust, Germany.
“There are some parts of the year that we carry quite a lot of cash and, as a result, having some floating rate debts that are offset against the investment income … is helpful,” he said.
Ferguson is exposed to the underlying economic cycle as it is heavily correlated to construction, new buildings and people repairing and maintaining their buildings.
Scott has seen this become apparent recently in the US following the rise interest rates.
“Our derivates are out of the money into the single digit millions but we are $120m a year better off because of US tax cuts, so you can’t have it all ways.”
“Our derivates are out of the money into the single digit millions but we are $120m a year better off because of US tax cuts, so you can’t have it all ways.
“This is a good illustration of how floating rate debt has been a very good hedge for the (very short) period to date,” said Scott.
Along with increased interest in interest rate risk management, Chatham Financial has experienced an increase in treasury enquiries about floors in financing.
This is where banks are trying to guarantee themselves a minimum rate, such as 0% or 1%, depending on their negotiation skills, explained Svenja Schumacher, manager of risk management advisory at Chatham Financial.
“This not only makes the financing more expensive but also the traditional interest rate hedging instruments such as an interest rate swap are no longer possible to hedge anymore, because you will have a mismatch issue,” she explained.
More treasurers are also looking into forward rate hedging, according to Schumacher.
“Treasurers expect that the [interest rate] curve will rise at a quicker pace than currently indicated would like to look into today’s rate level, for instance of at future refinancing or a bond issuance that only happens in two years’ time further down the line,” she explained.
Streamlining reporting with data tools
Dan Smithson, assistant treasurer, Ferguson lead a second case study on Thursday discussing his use of ‘BELLIN vantage’ to streamline the treasury’s reporting and make the process more efficient.
Ferguson’s treasury was spending plenty of time taking all of the data out of its treasury management systems, Bellin’s TM5, and putting it into reports.
“We realised that that process could be done straight through without using Excel,” said Smithson.
“As a group, we are quite decentralised and the reporting of cash for us is vital.
“We can see all the data in TM5 so automatic reporting of that data should be the next logical step,” he said.
Ferguson’s treasury team worked with Bellin to incorporate all of the metrics that are specific to the company’s needs for these automated reports.
“We went through a major scoping process on what content and layout we wanted,” said Smithson.
“These reports can be scheduled and emailed to whoever and whenever they need to go. When you are at conferences or are on holiday there is no need for anyone to cover your role,” he explained.
While it’s important for a human to question whether the number look sensible, this can also be built into the automated process.
“One of the biggest things with us is managing our bank wallet. We can look at counterparty risk and see if we have enough or too much for certain banks.”
“One of the biggest things with us is managing our bank wallet. We can look at counterparty risk and see if we have enough or too much for certain banks,” Smithson explained.
“It has made our process a bit slicker. We’re not churning through Excel all the time and if we’re off-site these reports are still running in the background so it’s a useful tool to have,” he added.
Read more from the Bellin 1TC 2018 conference:
2018 is the year of the central bank: Bellin 1TC conference day 1