Corporate treasurers facing new challenges

by Alaina Roussel

Adapting to the post-Brexit environment

brexit-finance-treasuryBrexit brings several challenges for corporate treasurers in terms of exchange rate volatility, cash management, counterparty risk and financing. In recent years, the pound has become difficult to control and its price has been closely impacted by the evolution of Brexit’s negotiations. Since the official confirmation of the exit of the United Kingdom from the European Union (EU) on 31 January 2020, the consequences have thus become particularly significant.

The post-Brexit environment is leading corporate treasurers to rethink their processes and the company’s exposure to cash flow risk.

Among their reflections, a review of relations with banks and other financial institutions is carried out in order to take into account the effects of Brexit on their subsidiaries and their partners in legal or regulatory matters, and on the new financial arrangements. Indeed, this exit from the EU may be an opportunity for British service and financing providers to review their offers (simplification, pricing…) in order to compete with Europeans and become a kind of offshore financial centre.

Preparing for the transition to Risk Free Rates (RFRs)

interest-rates-liborThe future discontinuation of the main reference rates on the interbank markets (e.g. LIBOR) will result in the use of new alternative rates. Thus treasurers and their suppliers of Treasury Management Systems (TMS) will have to adapt to new benchmark interest rates (SOFR in the United States, SONIA in the United Kingdom, ESTER in the EU, etc.), impacting many financial instruments (bonds, loans, derivatives, commercial paper, deposits, etc.). Treasurers are already tending to reduce their use of Libor, replacing it if possible with RFRs in order to limit future contractual impacts and associated costs.

The transition is likely to lead to changes in the pricing and valuation of financial instruments, with greater volatility in the short term, requiring an adjustment of market data curves and an update of the integrated Treasury Management System (TMS). This type of software is used, among others, for interest calculation and accounting treatments: fair value calculation (IFRS 13), hedge accounting (IAS 39 / IFRS 9)…

Moreover, the impact on companies’ Treasury management strategies and processes will be difficult to identify, particularly on cash pooling or inter-company loans, whose interest rate is often calculated on the basis of Libor and not of Risk-Free Rates. In an interview with the AFP (Association for Financial Professionals) in 2018, the director of financial services at Oliver Wyman, talks about the products most exposed to Libor, and also gives advice to treasurers on how to adapt to the Libor transition.

While the Financial Conduct Authority (FCA) in England has pointed out that the 2021 deadline for transition is still in effect, treasurers want to change this goal, as the Covid-19 pandemic makes the transition even more difficult. As a result of these disagreements, the actual date of the postponement has still not been definitively fixed. In addition, banks, already facing difficulties in providing some of their services during this period, are reluctant to make the transition to the new RFRs in such a short time frame.

Reaching a More Dynamic Treasury Management Thanks to Instant Payments?

As end customers increasingly ask for more fluid and efficient payments, it is very likely that instant (or real-time) payments will grow, making the treasury department a key partner in developing the customer experience, marketing and business models of companies. Depending on the industry and corporate culture, the adoption of instant payments may be more or less compelling. For example, treasurers in a B2C market should adopt Instant Payments more quickly because of the nature of their consumers and their attraction to new consumption patterns that offer instant after-sales service reimbursement, fast delivery, easy payment, etc.

This transition for companies implies the adaptation of their Treasury Information System. The ability to execute and manage instant payments with their bank, via API or EDI, requires the implementation of new banking communication channels. This software must also include related processes such as automatic posting of incoming payments to the customer account, instantaneous reconciliations and management of intraday account statements in particular.

The crisis related to COVID-19

covid-19-financeWhile COVID-19 (Coronavirus), an international viral epidemic, has not significantly altered the missions and organisation of corporate treasury departments, particularly through the democratisation of teleworking, the pressure on cash management and the search for secure investments has increased.

After the first payment defaults from China, where the first viral cases were detected, the problem spread to companies around the world and their suppliers as the contamination progressed, with a considerable impact on cash flow. The balance sheets revealed by the Rexecode survey of treasurers of ETI and major French companies show that the cash situation has never been worse.

As a result, fundamental changes in financing and investment are likely to emerge, with banks willing to continue to support companies in their financial strategies, but on less advantageous terms than before the crisis.