Rates, Credit Risk and AI

Top NeuGroup Insights of 2023. We look back today at the 10 NeuGroup Insights posts that resonated most with members, sponsors and other readers during the past 12 months. These popular articles help tell the story of 2023 and merit reviewing or reading for the first time because they retain their relevance—for better or worse—as treasury and finance teams prepare for the year ahead.

For example, some of what corporate risk and cash investment managers did to prepare for the debt ceiling showdown that we described last spring may, unfortunately, become useful this winter as Congress faces two government shutdown deadlines, one on January 19, the other on February 2.
Interest rates—including when to swap from fixed to floating rates—remain a paramount concern of treasurers and chief financial officers weighing how the markets and the Fed are reading inflation data and weighing the risk of recession or the chances of a soft landing.
In addition and related to rates, you’ll also find posts on counterparty credit risk, an urgent concern that NeuGroup Peer Research explored in depth after the spring banking crisis prompted widespread fear among corporates about the credit worthiness of financial institutions. And for some regional banks, the crisis isn’t over.
Technology stories—yes, including some about artificial intelligence (AI)—also scored high this year as finance teams progress on their journeys of digital transformation and seek ways to reduce transactional work and focus on extracting actionable insights from data.
And while they’re not on this list, we want to call your attention to our two most popular Strategic Finance Lab podcasts from 2023. Top honors go to Aaron Bloomer of Baxter International and his insights on ChatGPT, AI and FP&A; and Sandra Ramos-Alves, who shared her career journey to becoming treasurer at Bristol Meyers Squibb.

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As June 1 draws close, treasury teams need to consider how a default might affect liquidity and what to do now.

Treasury Secretary Janet Yellen repeated on Monday that if the debt limit isn’t increased or paused, the US will probably be unable to pay all its bills as early as June 1. And while the worst case scenario of a default seems unlikely, few observers see a quick fix to the problem, despite Tuesday’s meeting between President Biden and House Speaker Kevin McCarthy.

What, then, should treasury and finance teams be doing to prepare for the extreme volatility and market dislocation that would almost certainly be sparked by a default following a failure to raise the debt ceiling?

Although answers to that question can be debated, it is incumbent upon treasury leaders—some still coping with liquidity concerns raised by the banking crisis—to consider, discuss and address the issue now if they haven’t already. That means digging into the potential implications for corporate funding sources such as commercial paper (CP), as well as cash investments like money market funds (MMFs).
One member at a recent meeting of NeuGroup for Tech Treasurers sponsored by Standard Chartered Bank has been preparing for volatility and default risks. “We are having conversations about how to diversify our liquidity,” the treasurer said. His team is also discussing holding higher cash balances as a liquidity hedge and keeping more cash in foreign currencies vs. converting it into USD.

To read the full story, please click here.

Multiple members have executed pre-issuance hedges in recent weeks, with many more strongly considering them.

Extreme volatility in interest rates is fueling strong interest in pre-issuance hedging among NeuGroup members who want to mitigate risk—especially those who plan to issue fixed-rate debt in 2023.

At the first-half meeting of NeuGroup for Capital Markets sponsored by Chatham Financial and Loop Capital Markets, members and representatives from Chatham agreed that this is an opportune time for companies to consider pre-issuance hedging, particularly using forward-starting swaps.
Pre-issuance hedging mitigates interest rate risk for a company’s future bond issuance by offsetting changes in the Treasury component of the bond coupon that occur between the date of the hedge and the date of bond issuance, according to Chatham.
“This strategy is particularly useful in volatile interest rate environments,” Chatham’s presentation said.

To read the full story, please click here.

Companies on the cusp of IG may want to push for an upgrade and sacrifice some flexibility amid higher interest rates.

The surge in interest rates to 15-year highs has treasury teams at companies with credit ratings on the brink of investment grade (IG) grappling with an important decision: Should they push to achieve IG status or maintain the financing flexibility of being just below IG—an easier choice when Fed Funds rates were near 0% vs. 5% today.

One treasurer attending a recent meeting of NeuGroup for Life Science Treasurers said she is planning to lobby the ratings agencies to upgrade the company to IG for the first time, in large part to help lower financing costs when the acquisitive corporate next needs to tap the debt markets.

“We don’t have any maturities for a while, but the cost of debt is different and access to the debt market for high yield is changing too,” she said.
Jacques Ouazana, head of US ratings advisory at meeting sponsor Societe Generale, said current circumstances make arguing for an upgrade a sound strategy. “With high-yield becoming more expensive, there’s more of an incentive to get higher [credit ratings]. The environment is different now.”

To read the full story, please click here.

Corporates weigh when to swap fixed-rate debt to floating as inflation cools and the rate outlook shifts.

Growing conviction that the Federal Reserve is at the end of its interest rate hike cycle and may cut rates next year has turned up the heat on the simmering issue of whether and when corporates with debt should swap some of their fixed-rate exposure to floating rates. Many companies in the NeuGroup Network say nearly all their debt is fixed—a byproduct of very low rates that prevailed for about 15 years following the global financial crisis of 2007-2009.

The issue is particularly compelling now because some treasury professionals and bankers are for the first time in their careers adjusting strategies and tactics to a market where rates are relatively high today but are expected to decline in the not-too-distant future. This, of course, follows the challenges created in 2022 by soaring inflation and skyrocketing rates.
Speaking at a recent meeting of NeuGroup for Mega-Cap Assistant Treasurers sponsored by Societe Generale, Subadra Rajappa, head of US rates strategy at the bank, said decisions about whether and when to swap to floating are best addressed on a case-by-case basis. Subsequent discussions by members underscored that point and made clear that companies approach the issue from various perspectives—informed by debt levels, average weighted cost of debt, future issuance plans, internal risk tolerance and business cyclicality.

To read the full story, please click here.

Treasurers are adding new ways to measure the credit risk posed by their banks, new NeuGroup Peer Research shows.

The nearly overnight demise of Silicon Valley Bank jolted many corporate treasurers into taking a hard look at what metrics to include when assessing banks’ creditworthiness. New NeuGroup Peer Research shows many treasury teams are now going beyond the obvious to evaluate their counterparty credit risk.

Missing the signs. The urgency of this review and retooling is fueled in part by the realization, in hindsight, that there were red flags indicating SVB was in deep trouble. However, credit agencies and many others failed to recognize them, in part because they were not looking at the right indicators.

Expanding the menu of measures. NeuGroup’s Best Practices in Assessing Bank Counterparty Risk Survey shows that 73% of companies that took immediate action in the wake of the SVB debacle planned to add new metrics to their risk models (see chart below).

Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: insights@neugroup.com.

Context: The failures of Silicon Valley Bank, Signature Bank and Credit Suisse dramatically drove home the critical need of corporations to keep close tabs on the credit worthiness of their banking partners. In response to the crisis of confidence, some companies moved money out of smaller, regional institutions into large, global systemically important banks. The tumult also sparked questions for treasury from audit committees and the C-Suite about counterparty risk and investment policies.

Sharing investment policies. In response to the inquiry posted below, two NeuGroup members shared edited versions of their investment policies with the peer who asked the question. Excerpts from those two policies, also provided to NeuGroup, follow a response from another peer.

Don’t change the policy? When asked by NeuGroup Insights, the treasurer of one company that provided its policy said he did not change it in the wake of events in the banking world. “We believe a good investment policy should not need to be changed for every crisis. If it is a good policy, it covers all the potential risks,” he wrote.

“We do and have given our investment managers tactical guidelines that are more conservative than the investment guidelines,” he added. “In this case, for financials since 2009, we only allow the purchase of specific bank names from a list we provide. We review and edit it from time to time.
“One example why we do that is our primary operational bank. Worldwide, we have plenty of exposure to that specific bank via balances in our bank accounts; therefore, we do not allow our asset manager to buy their bonds even though they meet the ratings threshold.”

Question: “I’m looking to see if anyone has a framework in their investment policy around counterparty risk on cash? The news about SVB, Signature and CS prompted an audit committee inquiry about our investment policy. I would appreciate it if anyone is willing to share their investment policy.”

To read the full story, please click here.

Automating trade operations lets treasury focus on strategy and understanding economic drivers of FX exposures.

“Automate the operations, unlock the strategy.” That concise phrase encapsulates the transformational and holistic approach to consolidating and managing data, including exposures, at high velocity within the FX trade life cycle adopted by one NeuGroup member company. And the phrase served as a subheading for a presentation made by a manager in the company’s global treasury FX risk management group at the fall meeting of NeuGroup for Foreign Exchange 1.

“It has been a tremendous help to automate it,” the member said of the FX trading process. “Because most of our operations are automated, we can focus on strategy, understanding the current macroeconomic environment, and managing the P&L.”

To read the full story, please click here.

Using Tableau to collect and aggregate data, a Salesforce treasury manager sidesteps IT to build a cash dashboard.

Having a dashboard showing where all a corporate’s cash is invested, how much yield it’s generating and the company’s exposure to numerous counterparties—on a daily basis—is not just a dream for one member of NeuGroup for Cash Investments. Cam Bowen, senior treasury manager at Salesforce, impressed peers at the group’s first-half meeting sponsored by DWS last week by presenting a dashboard he built himself that does all that and more.

His accomplishment validates the idea that technology developed by front office finance professionals who take matters into their own hands rather than wait for internal IT departments to come to their aid can help finance teams report valuable analytics to senior executives and the C-Suite faster and more efficiently.
Carlos Fernandez, a DWS coverage support specialist for Corporates & Insurance, praised the company: “By adopting cloud infrastructure and DaaS (data-as-a-service), Salesforce is moving forward with diminishing lines between technology and the front office to quickly create views and dashboards without dependency or need for time-consuming and costly IT projects.”
One of the members wowed by the presentation added, “The project highlighted that treasury orgs don’t need a large, dedicated team of data scientists to unlock insights from their own data.”
Mr. Bowen said, “We built this all, front office. If we had waited for the IT team to build some of this, we’d still be waiting.”

To read the full story, please click here.

A portfolio manager at a forward-thinking tech company seeks an edge by tapping the power of generative AI.

Turning the power of generative artificial intelligence (AI) into a competitive edge by using tools including ChatGPT is a top priority of one member of NeuGroup for Cash Investment. He has begun using the technology’s ability to analyze massive amounts of text using natural language processing, with the goal of improving qualitative investment analysis.

That sets his company apart: While many finance orgs are on the automation bandwagon and want to leverage the wonders of AI and machine learning, not many have committed to finding uses for generative AI right away.
Some finance professionals fear security breaches and other potential risks presented by the technology. Many financial institutions prohibit staff from using ChatGPT and some corporates are following suit.
The member embracing generative AI underscored the need for companies to implement strict controls, guardrails and governance processes.

To read the full story, please click here.

How one member uses the blockchain-based JPM Coin System to streamline cash sweeping.

One NeuGroup member whose company operates in Asia, North America and Europe faced a persistent issue with cash trapped in bank accounts after closing hours. To address the problem, he was invited to collaborate with Onyx by J.P. Morgan—and in the process helped shape a new infrastructure for instant payments built on the blockchain.

The member, along with a small group of peers, worked with team members from Onyx to provide feedback on how its blockchain-based payments system can benefit the companies. In the years since, the program has grown to dozens of institutional J.P. Morgan clients, with over $1 billion in transactions flowing through the system each day.
In a recent session, the member, as well as representatives from Onyx, presented on how the blockchain-based payment rail, called the JPM Coin System, alleviated a major pain point by offering 24/7 instant payments—with further features that streamline and automate the company’s entire payments process.

To read the full story, please click here.