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ACTA Appoints Technical Director

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The Australian Corporate Treasury Association (ACTA) is thrilled to announce the appointment of Dr. Kurt Smith to the crucial newly created role of Technical Director.

 

Kurt has a long and successful career across both sides of the Treasury community, firstly via Fund Management and senior Bank trading positions, before moving into Corporate Finance and Treasury. This coupled with Kurts strong Startup and Academic background make him the ideal person to help us to take ACTA’s CPD, Education and Advocacy forward. 

Kurt’s initial focus will be on our overarching CPD curriculum, including our developing Certification program.

Welcome Kurt!

A Message from the President – March, 2021

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March 2021

Welcome belatedly to 2021.  As with everyone I’m sure, it has been a hectic start to the year.

When I wrote this welcome last year, the big external issue was the bushfires – I only briefly mentioned COVID as an emerging risk.  None of us at the time had any idea how much of an impact COVID would have or how long it would go on.  Clearly, that impact is still being felt in our day-to-day lives, both personally and in our work.  How we come out the other side, and what we can learn, are top of mind for all of us.  With that in mind, I recently sat down with three of my fellow ACTA Board members – Kurt Smith, Alice Van Der Geest, and Sarah Scopel to discuss where we saw 2021 heading.

What do you see as the big issues for 2021 in Treasury and what are your thoughts on the three key areas of FX, Interest rates, and debt markets.

Kurt – My focus is over the next ten years.  In the short term, it’s about interest rates – the RBA has been clear that they intend to keep the yield curve low at the short end for a while and tight swap spreads are likely to continue owing to the level of liquidity in the banking system.  This means managing the cost of debt will be dependent on the type of business you are in and the time horizon.  For example, with long-term infrastructure businesses, the most cost-effective way to fund in a steepening yield curve with tight swap spreads is by reweighting between fixed and floating-rate exposure.  For businesses with FX exposure, taking a longer-term view allows you to look through near-term volatility to establish where forward rates are in relation to the corporate strategy and to long-term trading ranges.  For importers, for example, forward contracts will be more attractive towards the top of the trading range, and towards the middle to bottom of the trading, range options will be more attractive provided volatilities and skews are not too large.   Active risk managers should be looking for interest rate levels that are consistent with their strategic plan and entering the derivative market at those times rather than waiting for physical issuance or refinancing.  The risk ahead is that interest rates increase further and/or faster than is currently priced into the market; and for FX, that the global desire for weaker currencies to support economic growth leads to larger changes in currency relativities.  

Alice – There are significant pools of available liquidity across markets globally which is pleasing coming into 2021. Debt investor engagement is vital on an ongoing basis, to enable businesses to present each organisation’s individual response to COVID, and the recovery profile in a post COVID world.  It is important to shine light on the Australian context relative to the rest of the world.  External marketing is key, especially for new and less frequent borrowers to provide investors with time to complete the required credit work.   For me, I have a keen interest in seeing the rollout of the vaccine, its success, and the ability to return the world to a more normal setting.  The recent increase in rates, off a low base, with interest rate curves beginning to steepen, so people are starting to be more optimistic – so the question there is, is now the time to lock away term funding?   Treasurers  must be nimble and agile and manage execution windows

Sarah – If COVID taught us anything, it is to be prepared for the extreme scenarios that are outside the normal bounds, such as what happens if the business completely shuts for a period of time.  (Alice, yes, sensitivity norms are now way outside what we are used to).  And we need to get everyone onboard faster.  We need to educate everyone in our businesses about the need to balance the focus on preserving cash (including minimising cash interest cost), compared with holding a prudent liquidity buffer (that has a cost to hold).

What is the state of funding markets, are liquidity and cost levels back to normal?

Sarah – It all comes down to what sector you are in and whether COVID impacts are permanent or temporary and how easily you can look through the cycle to what conditions will look like once the COVID distribution globally dissipates

Alice – Yes, it comes down to COVID affected vs non-affected.  But overall, margins are lower than last year regardless. And that’s on the back of people fighting for yield with QE around the world.

Kurt – if you’re a fund manager looking for yield, it’s almost like equities have less risk than Bonds because the risk on the Bond side is highly asymmetrical because of very low traded yields.  Most fund managers don’t have much incentive to go too far down the credit curve to pick up yield – making investment-grade bonds much more attractive than sub-investment grade bonds.  I think a low flat yield curve is partly what has fuelled the equity increases as it is almost a lower risk trade than low-yielding bonds. Quite an interesting idea to get your head around!

How is Treasury now viewed within business?  Clearly, there was a huge focus in 2020, has that remained early in 2021? Is there a permanent shift in Treasury as a profession and how its viewed?

Sarah – Yes. A greater appreciation for the granular parts of Treasury that we focus on that maybe didn’t get as much attention before, for example, forecasting agility and accuracy, flexibility in documents, not only in relation to covenant headroom but also the reps and warranties.  Our ability to forecast and pre-empt outcomes of various scenarios is definitely highly valued – being proactive vs reactive, including with our approach with lenders and rating agencies.  Treasury is responsible for managing a key external stakeholder group which is now very well recognised (if it wasn’t already).  Conveying the ‘credit’ messaging including a path to recovery from downturns and maintaining credit relationships is key to our roles and I believe general treasury functions are now increasingly recognised as being strategic rather than purely a compliance or reporting function. 

Alice – There is nothing like a crisis that shines a light on Treasury, certainly providing an opportunity to have a seat at the table strategically.  It is as important to be able to translate treasury issues both Internally and externally.  As Treasurers, we are often solutionists, we come up with ideas on responses,  our opinions are and should be sought.  Our role is to explain it all in simple terms.  It’s important to explain the why so that you are supported.  So essentially, our ability to influence those key decisions around capital allocation and other strategies is higher than it has ever been.

Sarah – we’re more involved in decisions such as reviewing transactions before they go for approval as people understand the Treasury and capital structure implications better now.  There is definitely a higher appreciation for the complexity of Treasury, it’s not about “pressing a button” to release funds.

Kurt – Treasury needs to have strategic influence, no doubt. Operationally, when 99% of the time everything is going well, things aren’t noticed, it’s just normal.  Conversely, a 1% compliance breach in Treasury is usually escalated to Board and hence, is quickly noticed.  You have to do the operational very well so that you can get access to strategic conversations, and credibility in providing strategic contributions.

It’s all about getting Treasury to the front of the value chain rather than at the end. To Sarah’s point, it’s being involved at the beginning, to influence decisions before they are made.

Treasurers who haven’t previously had access to ExCo or the Board now is a terrific opportunity to change that and have some proactive strategic influence rather than just being operationally reactive.

Looking back on 2020, and in particular, Australia, as an economy, a place to do business, where you get funding, how the financial system works – do you think it all worked, or do you think, gee that was tough and didn’t work as well as we’d like.  Did it expose flaws in the system?

Sarah – The support of the financial institutions early, when no one knew what would happen with COVID, was phenomenal – I was working at an organisation where the business ultimately completely shut down with very little notice and the banks were able to navigate around this to provide confidence through the highly uncertain environment which allowed us to focus on returning to reopening and looking after the people in the business. There was Government support at the same time.  Thanks to the leadership of the domestic banks, Australian companies were lucky enough to have access to global funding as we were effectively operating in that protected environment. 

Alice – While the co-ordination was hard work, things went as well as possible. What was different to normal crises, was that everyone was feeling the same pain from a liquidity point of view.  The view across all parties was, let’s work together to get it done.  Relationships with lenders matter, it is evident that having strength in the relationship built over time does make it easier, especially in response to a crisis.

Kurt – I think the jury is still out for Australia as an open economy.  In the very short term, we’ve done okay. Given the nature of COVID, it has been great to be as isolated as Australia, and probably even more so for me as a West Australian.  But, we essentially have an oligopoly in Banking, and the economy has very much been underwritten by taxpayer funds through Government.  How that works its way through the economy over the next decade is going to be interesting.  COVID levy?

Turning our mind now to 2021 and beyond,  have Corporations now turned their minds back to growth?

Alice – cautiously optimistic. I think most still need to see some more proof points that the trajectory is positive.  So, you’d be planning for positive, but not yet acting. 

Sarah – Again, I think that is sector-specific and also dependent on the competitive dynamics in an industry to be best placed for the world post-COVID.

Kurt – an interesting lead indicator for me are the bank and consulting firms recruiting in industry-facing roles.  It seems they are starting now to recruit, and given their exposure to all sectors of the economy, that is a positive.  Western Australia has also been performing well economically as the mining sector is quite strong.

Any last thoughts?

Alice – I think we need to focus on our Treasury teams, there could be increased external opportunities.  Make sure you do your bit to look after good people

Kurt – for the ACTA, we need to keep thinking about how we are positioned to help our Community.

Kurt’s last point is a key one.  As a professional association, our role is to provide services to our Community.  With that in mind, a number of deliverables for 2021 are very exciting.

We will soon be advising details of our Certification program, offering a true learning and consolidation experience for Treasurers.  Not only will this program provide education, it will give the Treasury community recognition of the individuals within it as professionals in their own right, as we see with accountants, engineers, and lawyers.

We are super keen to begin bringing back face to face networking and CPD opportunities.  This will always be carried out with the best health and safety requirements top of mind, and will also provide options for people who are unable to be face to face. Our digital experience over the past 12 months has been a big plus and we plan to make the best use of it!

And we are planning on Conference for 2021 to be bigger and better than ever.  Notwithstanding any further changes to restrictions and requirements, we will be in Melbourne, at the Melbourne Convention and Exhibition Centre from November 30, bringing our usual world-class program and exhibitors back to a face-to-face experience.  As with the above comment though, we will also be managing risk by having alternatives available should they be needed.

I am immensely proud of what we have been able to achieve over the past 12 months as an industry, but I am excited for the coming 12 months ahead and how the Australian Corporate Treasury Association can assist you and your organisation to stay informed, stay connected, and continue to deliver in your vital role in the Treasury profession, all of us being part of Australia’s Treasury Community.

 

Steven Cunico

President

Australian Corporate Treasury Association

Member Satisfaction Survey 2020

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We want to thank each of you for your continued support of the Finance and Treasury Association in 2020. This was a challenging year in many ways for all of us, our shared organisation no different. While those challenges remain, we are well placed for 2021 and have some exciting developments in store for the year.

Striving to always improve our service, we want to check in with you and hope that you can spare 10 minutes to complete our Member Satisfaction Survey. It covers engagement, value and member services and will help us ensure we are meeting your expectations.

The survey is anonymous however if you’d like to be in the draw to win one of two $100 JB HI-FI e-Gift Cards, there is a chance to add your contact details at the end. If you have any questions, please don’t hesitate to contact me.

I look forward to publishing the survey results with you.

Regards,

Ben Leaver
CEO
Finance and Treasury Association

COMPLETE 2020 MEMBER SATISFACTION SURVEY HERE

A message to the Australian Treasury Community

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A MESSAGE TO THE AUSTRALIAN TREASURY COMMUNITY

FY20 is about to come to a close, and I’m sure you would all agree this has been one of the most challenging years the world has had to face in a very long time.  However, for the FTA and the treasury community, the challenges have been tackled head-on, and we have emerged stronger and more confident in the importance and relevance of our profession.

Thank you

Firstly, a huge thank you to the staff, board, and committee members who have helped the FTA navigate these troubled times.  Without their support, the FTA would not be in the strong position that it is.  We have had a huge increase in the online delivery of events, with weekly webinars, and the Treasury Management Course being delivered virtually since the crisis hit.  We were on the front page of the AFR, highlighting the very important issues facing Corporate Australia, and hosted top-level talks with senior treasurers across Australia.

The FTA is stronger than ever

I am pleased to report the FTA is about to close yet another profitable year, and has a strong cash and capital position to see us through this crisis and emerge on the other side stronger than ever. A huge thank you to our members and sponsors for their continued support. This will allow the FTA to further invest in the treasury profession and execute on its strategy over the next few years.

Treasury is more important than ever

The global pandemic has reminded the government and business community of the importance of treasury professionals.  As they say, you should never waste a good crisis, and no doubt the next few years will see governments and corporations reflecting on lessons learned.  Treasurers should be asking for more resources to invest in people, policies, processes, and systems in order to strengthen the treasury function and prepare businesses for the roadmap out of the crisis.  To further support this, the FTA is executing its strategic objective to create a formal qualification for certified treasury professionals – watch this space as we plan to launch this exciting initiative later this calendar year.

Virtual FTA Conference 2020.

Back in March this year, as the FTA board met to discuss strategy, the first critical decision we made was to make FTA Conference 2020 an online only event.  The conference committee has pulled together a fantastic program and the technology platform promises to deliver everything an in-person conference would offer, and more!  Networking will be much more targeted as you can connect with other attendees virtually over the 3 days.  If you haven’t checked out the event details, here is a link on how to register.

Renew your membership!

To those members who continue to support the FTA – thank you!  For those who have yet to commit, we invite you to renew and continue to support the treasury community – you have 1 more day to claim that tax deduction!

Happy EOFY to all, and wishing you all the best for FY21.

 

Regards

Steven Cunico, FFTP

President

Melbourne Senior Treasurers Dinner

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The Australian Corporate Treasury Association had the pleasure to host a number of Melbourne’s Senior Treasurers last night, representing some of the countries largest corporates.

The evening was full of fantastic discussion around the table on what the key issues effecting treasurers, treasuries and their business including the impact of Corona virus; the low interest rate environment, and the fact that it impacts not just borrowing; what would a negative rate environment look like and the need for an industry view; benchmark rate changes, when, how; ESG for both sides of the balance sheet; the shallow market currently existing for business with lower ratings; the advantages of Treasurers working in Investor Relations; supply change finance – reporting and implications of that, effect on ratings, possible change to accounting standards?

Thanks to Alice Van Der Geest, Uri Gordon, Shane Healey, Mark Tarlinton, Diane Crossley, Kim Kerr, Darren Murphy, Peter Kopanidis, Martin Dunton, Andrew Vandeligt, Karen Jordan, and Steven Cunico for your insights.

We look forward to doing it again, starting in Sydney in April!

 

Message from the CEO: COVID-19

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Dear Members,

I’m writing to update you on the FTA response to the growing COVID-19 threat.  Given the amount of information you are already receiving, I will keep this brief.

From a resource perspective, we are very small, but we are now working separately to each other, while maintaining member servicing.  While this is important for the well being of the team, it is vital that we play our part in restricting the spread of the virus through our communities, and therefore to those most vulnerable people.  This is something we feel very strongly about and believe everyone should be undertaking where possible.

For our members and Treasury community, we are working hard to ensure ongoing value and a continuing viable business.  To that end we are

  • Not holding any face to face meetings or functions from March 16 until May 31 unless advised by authorities that it has become safe to do so.  We will further advise any addition to this.
  • Working  hard on delivering an increased online CPD program via increased numbers of webinars and content sharing
  • Exploring ways to deliver other educational programs in a virtual or online environment
  • Finalising improvements to our website including a communications forum to facilitate online networking and discussion

On behalf of the Board, I thank you all for your ongoing support, and while we consider these steps to be the only option for our wider community, we do apologise for any disruption this may cause.

If you have any questions, do not hesitate to contact us at comms@financetreasury.com.au

Stay safe, take care of each other – we look forward to resuming normal programs as soon as possible.

Regards

 

Ben Leaver

Chief Executive Officer

Finance and Treasury Association 

Reserve Bank of Australia – Uncharted territory for unattainable goals

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Reserve Bank of Australia – Uncharted territory for unattainable goals

3 October 2019

 

 

Aidan Shevlin, CFA
Head of Asia Pacific Liquidity Fund Management
J.P. Morgan Asset Management

 

 

At the beginning of October, the Reserve Bank of Australia (RBA) cut its overnight cash rate by 25bps to a new record low (Exhibit 1a).  The third rate cut in five months has effectively halved the central bank’s key policy rate – leaving the RBA in uncharted territory and one step closer to unconventional monetary policy to achieve potentially unattainable employment and inflation goals.  The current trajectory of cash rates will have significant and far-reaching implications for local currency cash investors.

Optimistic rate cuts

In recent speeches, RBA governor Philip Lowe struck an upbeat tone, noting the economy had reached a “gentle turning point”1 helped by a combination of low interest rates, tax cuts, lower currency, infrastructure spending and housing market stabilization.

Despite this professed optimism, the RBA still cut rates in October and remained dovish, committed to “ease monetary further if need to support sustainable growth in the economy, full employment and the achievement of the inflation target”2. However, given current lack of macroeconomic drivers to achieve the central banks full inflation of 4.5% was last reached in 2008 and core inflation target of ≥2% (Exhibit 1b), the probability of attaining either goal remains remote.

The reality is more nuanced: While Australia is currently in its 28th year of economic expansion, gross domestic product (GDP) growth has slowed to a decade low; moreover the rising participation rate is offsetting almost 2-years of positive jobs creation and despite the recent recovery, housing prices have fallen below their long-term trend.  Meanwhile, the long term slowdown and rebalancing of the Chinese economy will eventually weigh on exports – although short-term Chinese infrastructure stimulus will benefit Australia’s commodity driven economy.

Sluggish consumption and structural trends

Apart from weak global growth, the RBA’s other key domestic concern remains the lack of growth in domestic consumption – especially during a period of rising employment.  However, this can partly be explained by job insecurity, muted wage growth and the high level of consumer indebtedness (Exhibit 2a).  All these factors should still benefit from lower interest rates – suggesting that monetary policy remains an effective policy tool – provided commercial banks pass the rate reductions on to consumers.

Interestingly, for the first time, the RBA alluded to a new rationale for the latest rate cut.  The structural shifts in global interest rates (Exhibit 2b) – which have fallen to record lows have also placed downward pressure on Australian interest rates.  The central bank fears if it ignored the actions of major central banks, the “exchange rate would appreciate, which in the current environment would be unhelpful on terms of achieving both the inflation target and full employment”3. 

The implications of sustain lower interest rates

The recent rate cuts, fiscal stimulus and continued Chinese commodities demand, suggest the modest Australian economic recovery is likely to endure.  However, growing expectations of additional monetary policy easing by major central banks may force additional, unnecessary RBA rate cuts and even trigger unconventional monetary policy to restrain unwanted capital inflows and AUD appreciation.

For Australian cash investors who are more familiar with high interest rates, steep yield curves and competitive deposit rates, the prospect of extremely low or even zero yields represents a significant challenge.  These difficulties have been compounded by the Royal Commissions impact on commercial banks demand for deposits and the Australian Prudential Regulatory Authority’s (APRA) clarification on the definition of cash.

Nevertheless there are several techniques developed and refined during the past decade of zero US interest rates which should help Australian corporate treasurers mitigate some of these complications.  These include diversifying beyond deposits into money market funds and ultra-short duration funds,   segmenting cash by liquidity requirements and identifying sectors and tenors that offer additional return for minimal reductions in liquidity and security. 

Although combining these three techniques will not fully offset the negative impact of RBA rate cuts on cash returns, they will allow treasurers to achieve a competitive return consistent with the objectives of capital preservation and maintaining a high degree of liquidity.

To read more our liquidity insights, visit www.jpmgloballiquidity.com

 1 An Economic Update by Philip Lowe; as of September 24, 2019

2 Statement by Philip Lowe, Governor: Monetary Policy Decision; as of October 1, 2019

3 An Economic Update by Philip Lowe; as of September  24, 2019

IBOR Fallbacks: 7 Questions Corporate Treasurers should ask

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Anyone who’s been reading the financial press knows that LIBOR is on the nose. Billions of dollars in fines, sanctions, regulatory action and even jail time have ensured LIBOR has a limited life.

Read more

LIQUIDITY INSIGHTS: DEFINING CASH FOR AUSTRALIAN INVESTORS

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Defining cash for Australian investors

Aidan Shevlin, CFA
Head of Asia Pacific Liquidity Fund Management
J.P. Morgan Asset Management

The definition of cash, while ostensibly straightforward – banknotes and coins – becomes increasingly challenging when the demands for higher returns counteracts the obligation to ensure adequate liquidity and the commitment to avoid losses.

As memories of the liquidity stress and market dislocation triggered by the global financial crisis faded, the range of financial instruments deemed acceptable in Australian cash products broadened dramatically. This was also a time when investors grappled with the challenges of outperforming attractive headline retail bank deposit rates.

Unfortunately, defining which instruments are truly cash equivalents is one of the most difficult tasks for modern corporate treasurers.

The Regulatory Dilemma

Globally, cash investors look to regulators and rating agencies to define and clarify suitable cash investment instruments and structures.  This is especially true in the United States, European Union, and China, where the size and systemic importance of liquidity and money market funds (MMFs) made this a critical regulatory issue following the 2008 financial crisis.

These rules and regulations vary from prescriptive, listing specific approved and unapproved instruments, to abstract, outlining key sources of investment risk and limits to mitigate them.  Regardless of the regulator’s philosophy, the ultimate goals remain the same – to ensure adequate liquidity and minimise the probability of losses.  Over the past decade, global regulators have strengthened MMF guidelines. They now demand higher levels of liquidity, impose tighter investment limits and require increased diversification.  For both retail and institutional investors, these new rules have raised the standard of MMF investing while significantly reduced the likelihood of funds suffering losses, albeit at the expense of lower potential returns.

In contrast to detailed global standards, Australian regulators have historically demurred the responsibility to define cash or the suitability of various instruments for cash investments.  The Federal government’s unlimited bank guarantee during the Global Financial Crisis helped shelter the local financial industry while a long history of self-regulation encouraged investors to create their own definitions of cash and cash equivalents.

However, in 2018, a review of cash investment products by the Australian Prudential Regulation Authority (APRA) raised significant concerns about the level of volatility and risk in these products.  Across the industry, the range of instruments and structures defined as cash varied enormously – as did returns. This created confusion for retail and institutional investors.  In its subsequent report, APRA highlighted “examples in the industry where cash investment options appear to include exposure to underlying investments that would not generally be considered cash or cash-like in nature”1.

To encourage investment consistency and reduce the volatility of cash investment products, APRA concluded that “cash equivalents represent short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value”1. 

Cash means security, liquidity and return

The report signalled a tougher regulatory stance and additional focus on questionable cash investments styles.  However, in the absence of detailed regulatory guidelines and exact definition of liquidity and risk, investor due diligence is still required to balance the need to preserving capital, while ensuring suitable levels of liquidity and maximising returns.

Three key steps in this process involve clarifying investment policies, creating well defined investment objectives and implementing cash segmentation.

Firstly, using an investment policy statement forms a solid foundation for cash investment decisions.  A well written policy provides clarity, instils discipline and allows the organisation to successfully navigate shifting markets, changing regulations and evolving business needs.

Secondly, by defining short term investment objectives and the strategies for achieving them, an organisation can establish acceptable levels of risk, identify permissible investments and detail relevant constraints.

Finally, by putting cash into different segments, the organisation can optimise its investment choices – ensuring it has sufficient liquid cash to meet its daily needs while avoiding the opportunity costs associated with very high levels of liquidity and principal protection by diversifying across different types of cash investment depending on their level of liquidity, volatility, and diversification.

In Conclusion

The new APRA definition of cash has already prompted a significant reorganisation across the Australian cash management industry with several instrument structures being avoided and more conservative investment guidelines introduced.  This, combined with more due diligence and understanding of the underlying risks by retail and institutional investors, should help the industry create a safer foundation for future growth.

To read more our liquidity insights, visit www.jpmgloballiquidity.com

  1. CASH INVESTMENT OPTIONS’ NON-CASH HOLDINGS: INDUSTRY GUIDANCE