niall speaks out for treasurers · of unilever and ultimately became its chairman ... medical...
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DECEMBER 2004 THE TREASURER 05
Treasurers can, and should, progress up thecareer ladder to the post of financial director,provided that they develop a good understandingof the wider business in which they work, theissues it faces and the industry in which itoperates.
This was one of the key themes of an upliftingspeech made by Niall FitzGerald, Chairman ofReuters, at the ACT’s Annual Dinner, sponsoredby RBS, which was attended by 1,600 membersand guests.
FitzGerald, who spent two years as Treasurerof Unilever and ultimately became its Chairmanand CEO, said there are plenty of opportunitiesfor treasurers to raise their profiles in theircompanies. They also have a crucial role to playin helping the board in its strategic planning andin developing the financial flexibility of theorganisations they work in.
Reviewing how treasury and the financialmarkets have changed since 1987, Fitzgeraldalso discussed the growth in transaction-basedrelationships between banks and companies aswell as the development of the more complexproducts being promoted to companies today.The emergence of new exposures and increasedpressure to match assets to liabilities are keydevelopments in treasury which will require even
greater skills from treasurers in the years tocome, he said.
He added that the increased complexity ofderivatives is likely to test and enhancetreasurers’ skills sets. The management ofcorporate pension schemes is also an area thatrequires greater attention from treasurers,particularly when it comes to matching liabilitiesto assets.
The new chairman of Reuters also discussedpredictions he made in 1987 of greater activitybeing encouraged in issuance, trading andtakeovers and banks’ motivation by fees andleague tables.
The evening, held at the Grosvenor HouseHotel in London on 10 November, which alsocelebrated the ACT’s 25th Anniversary, wasintroduced by Chris Jones, President of the ACT,who paid tribute to the pioneers “who had theforesight to recognise the challenge of thediscipline of treasury and to form the Association”(see The way we were, page 37, The Treasurer,July/August). Today the Association has 3,300members who operate from more than 40countries and work in companies representingabout 95% of the FTSE 100.
Jones discussed the ACT’s role in educationwhere there are now 1,500 students and a rising
number enrolling. One of the qualifications –Cert ICM – is now available to students in HongKong, Brussels, Dublin and Sydney.
The President then presented the prize for2004 ACT Student of Honour to Patrick Lindleyfrom Zurich Financial Services, who gained adistinction in both Corporate FinancialManagement and Treasury Management exams.
Returning to the ACT’s key roles, Jones said:“The Association has, over the last year, beenvery active in representing treasurers’ interests.We have been heavily involved in thedevelopment of an effective code of practice forthe credit ratings industry. Just as important hasbeen our challenge to certain aspects of a new,little-known, user-friendly and much lovedaccounting standard… IAS 39.”
He concluded: “We do, however, remain of theview that a comprehensive set of standards ismore important than addressing the concerns ofevery vested interest.”
Jones also discussed the current trends in theprofessional association landscape. “The eurozone grouping of corporate treasurers’associations has voted to admit all Europeanmembers, which is certainly preferable to uswaiting for the UK to join the euro. We aredelighted with this development and see it as asignificant opportunity to become moreinternational by supporting the other associationsin Europe much more effectively.”
UPLIFTING: Reuters Chairman Niall Fitzgeraldaddresses diners at the ACT Annual Dinner
Niall speaks out for treasurers
marketwatch NEWS: ACT ANNUAL DINNER
The ACT’s Annual Dinner also proved a majorsuccess in that it raised £19,500 for Cancerand Leukemia in Childhood(CLIC), the UK’s leading cancercharity for children.
The money was raisedfollowing a moving speech byformer boxing world championBarry McGuigan (pictured) whoseyoung daughter has suffered fromleukemia.
Attendees were invited to beton the length of speeches anddonate money; those with theluckiest punt on each table wereinvited to complete a prize drawentry ticket. The prizes awarded included anovernight stay at the Celtic Manor Resort, a case
of champagne and Red Letter Day vouchers.“We are delighted to have raised such a large
amount. It really was a fantasticnight and we all thoroughly enjoyedbeing a part of the ACT’s 25thanniversary dinner,” said Vicki Hill,CLIC’s Corporate Account Manager.
The charity provides grants tomedical practitioners and fundsresearch, as well as providing afinancial cushion for familiesduring a crisis.
CLIC was introduced to the ACTby Dyson UK, which also agreed todonate some of its equipment, on
behalf of the ACT, to a CLIC carehome for children who are in need of bonemarrow transplants.
Charity donation is a real knockout
Reuters Chairman addresses ACT Annual Dinner andencourages corporate treasurers to raise their profile.
SPEECH: Barry McGuigan
DECEMBER 2004 THE TREASURER 0706 THE TREASURER DECEMBER 2004
On the move...n Amy Aldridge AMCT has joined CraegmoorHealthcare as Treasurer. She was previouslyDeputy Group Treasurer for Wagon plc.
n John Ambrose AMCT, formerly TreasuryManager with Markel International, has beenappointed Assistant Group Treasurer at Group 4Securicor plc.
n Geoffrey Brown MCT has joined HongkongLand as Finance Director. He previously worked atJardine OneSolution Holdings Ltd as GroupFinance Director.
n Sharon Burgess AMCT, previously Group CashManager at MyTravel Group plc, has joined UnitedUtilities plc as Treasury Executive.
n Robert Carr AMCT, formerly Senior TreasuryAnalyst at 3Com Europe Ltd, is now FinanceManager – Treasury Reporting at ReckittBenckiser plc.
n James Coleman FCT has joined Abu DhabiCommercial Bank as Executive Vice President andHead of Treasury and Investments. He waspreviously employed at NatWest Capital andNationwide Building Society. Most recently he wasManaging Director for Ploutos Ltd.
n Les Cullen FCT has recentlyjoined Avis Europe plc as a Non-Executive Director and Chairman ofits Audit Committee, roles he alsoholds at DTZ Holdings plc.
n Simon Neville FCT has been appointed GroupTreasurer of Collins Stewart Tullett plc following itsacquisition of the Prebon Group where he wasGroup Treasurer.
n Jamie Smith MCT has been appointed InterimGroup Treasurer of the Weir Group plc. He wasformerly Group Treasurer at Tibbett & BrittenGroup plc.
n Sean West MCT has joined Land SecuritiesGroup plc as Treasurer. He previously worked asthe Funding Manager – Securitisation andFinancial Strategy at Network Rail.
n Phil Wood MCT, formerly Financial Controller,International, HSBC Bank plc, has been appointedDirector of Finance at Killik & Co.
The News section was compiled by Liz Salecka l Press releases should be addressed to [email protected].
MEMBERS’ DIRECTORY:Members’ contact details are updated regularly on:www.treasurers.orgEmail your changes to Anna McGee:[email protected]
CAREERS:For up-to-date treasury vacancies and careers articles logon to: www.treasurers.org/careers/index.cfm
marketwatch NEWS
Pension scheme accounting and theinvestment solutions available to managepensions risk were the key topics addressedat a recent evening symposium, sponsored byAXA Investment Managers.
Opening discussion on The Pension FundBlack Hole, Stephen Pugh, Finance Director ofAdnams, pointed out that corporate treasurersand finance directors should be concernedwith two key issues – the scale of a pensionscheme’s problem and how it appears in theirfinancial accounts.
Corporates’ key priorities, he said, should beto look at the approach taken to a scheme’svaluation and whether the figure it provides iscorrect, as well as the structure of the ongoingscheme. Escaping the problem altogether – bylooking for a buyer, for example, or managingthe problem by putting money directly into thescheme, are also options.
Vincent de Martel, Director, Liability-DrivenSolutions at AXA Investment Managers, thendiscussed ways of managing defined benefitrisks, pointing out that while ‘active’ risk isperceived as the most important risk, ‘liability’risk is where the attention should really befocused. “The design of the investmentportfolio must be closely related to theliabilities as they change with marketconditions,” he said.
De Martel also pointed out that new lines ofcommunication must be set up betweenfunding companies and their trustees.
Recognising that in today’s marketconditions, pension schemes are investingmore assets in bonds, de Martel stressed thechallenges of matching bond assets to theunderlying liabilities.
More than 70% of funds have liabilities thatexceed the longest duration index available .While most schemes have liabilities of 15-21years (see Figure 1), the most commonly usedbenchmarked indices start from 6.3 years andrise to 16.2 years (see Table 1).
“Duration mismatching can cause significantchanges to solvency levels,” added de Martel,pointing out that a slight change in interestrates can seriously impact the differencebetween the value of assets and liabilitieswhere there is duration mismatching.
De Martel also endorsed the use of swaps tomatch the duration of a fixed income portfolioto the duration of the liabilities.
While interest raterisk was identified asthe main risk forpension schemes,inflation risk, equityrisk, longevity risk andsponsor default allbring concerns too.“The world is movingto a marked-to-market(MTM), fair valueapproach,” said deMartel. “There shouldbe more emphasis onthe traditionalmatching of assets andliabilities.”
Steering clear of thepensions black hole
Use of derivatives is impacting companies’financial statements. All but one of thecompanies surveyed in a recent poll of 57global corporations (representing more thanUS$1 trillion of debt) had experienced significantprofit and loss swings, according to a recentsurvey by Fitch Ratings.
Of the sample, 95% had satisfied,and elected to apply, hedgeaccounting – at least to part of theirderivatives portfolios – but therewere consequences. Ford MotorCompany, for example, reportedUS$3.5bn of derivative gains inincome as a result of hedgeineffectiveness and derivatives ‘notbeing in a hedging relationship.’
Although the companies surveyedhad notional derivatives positionsnearing US$500bn, on a fair valuebasis the companies reportedUS$39bn of derivative assets. On anotional basis, interest rate swapsaccounted for the bulk of derivativetransactions, followed by currency andcommodity derivatives. On a fair-value basis, thelargest amount was in currency derivatives.
“Hedge accounting can alter important debtand equity ratios, making period-to-period andcompany-to-company comparisons tricky,” saidFitch Ratings.
“While hedge accounting may dampenincome statement volatility, there are balancesheet consequences that should be recognisedby investors and analysts. Moreover, there maybe wide disparities in the income effects.
“Additionally, the financial reportingconsequences of hedge accounting makeearnings before interest, taxes, depreciation andamortisation less viable as a cashflowmeasure.”
Fitch found wide disparities in disclosureacross companies and industries, even forgeneric instruments such as interest rate andcurrency hedges.
Another key concern was the potential forreporting and restatement risk across corporatesectors as a result of hedge accountingdifficulties. The study found a lack of consensusamong companies over disclosure andapplication of Statement of Financial
Accounting SFAS 133 and IAS 39.Fitch ratings added: “This, in turn, may
indicate an absence of uniformity ormisapplication of hedge accounting rules. Thisdoe not bode well for the pendingimplementation of International FinancialReporting Standards (IFRS) for most large
European companies. Consistency will beachieved only if auditors insist on applying therules rigorously.”
The survey revealed that companies are notengaged in widespread speculation usingderivatives, but a number of them had takenpositions over future changes in the prices ofcommodities and equities. Some of them hadalso used interest rate swaps to convert fixed-rate debt into floating rate debt. In the event ofinterest rate, exchange rate or commodityprices, this could result in unanticipatedearnings volatility and/or skewing of key creditratios.
Of the sample, 11% had derivative positionsin their own shares. This, particularly forwardpurchases or written puts, has led tounexpected losses in the past, warned Fitch.
There was limited use of credit derivativesamong the companies surveyed. Concernsabout self-referenced credit-linked notes andother forms of exotic derivatives wereheightened following the collapse of Parmalat.
Counterparty disclosure was weak. Only 26%of survey respondents provided detailedinformation on counterparty credit risk.
Independent futures broker Man Financialhas gone live with Simcorp’s IT/2 treasurymanagement system. It claims that the newtreasury has considerably reduced processingtime for thousands of cash transactions. “At atime when the company was experiencing rapidgrowth, handling considerably higher volumes oftransactions in a controlled fashion was becomingmore challenging,” said Director of Treasury JohnWilson. “Having integrated IT/2 with an upstreamand downstream system, processing times for thethousands of transactions we have every dayhave been reduced dramatically.”
PricewaterhouseCoopers has launched anew online tool, shareTax, to help companiesoperating across borders. It calculates tax andsocial security witholding obligations for employeesin each country a company operates in.
Foreign Exchange Funds TransferInitiation (FX FTI) is a new online service whichclaims to offer corporates the ability tostreamline FX payments through rapid paymentcreation and competitive real-time rates. FX FTIaggregates same currency payments andprovides optimal exchange rates for 39currencies, according to JPMorgan. Paymentsare automatically debited from a company’sdomestic currency account, eliminating the needfor multiple currency accounts and reducingmanagement and reconciliation costs. Theservice is available through JPMorgan’s web-based client access platform.
There have been a total of 307 responses toJPMorgan Fleming Asset Management’sInternational Cash Management Survey for2004, which is being conducted in associationwith the ACT. The full results of the survey, whichaims to provide an understanding of the currentdynamics of the cash management industry, willbe published in the January/February issue ofThe Treasurer.
IN BRIEF
Merry Christmasfrom the ACTAs has become customary, the ACT will not besending Christmas cards this year, but will bemaking a charitable donation. This year’s charity isGreat Ormond Street Hospital(www.gosh.org). The Treasurer would like to towish all of its readers a very Happy Christmas anda prosperous New Year.
marketwatch NEWS
Derivatives impactP&L, finds survey
30%
25%
20%
15%
10%
5%
0%2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Years
Prop
ortio
n of
com
pani
es
Figure 1. Duration of UK defined benefit plans (FTSE 350 companies)
Figure 1. Duration of UK defined benefit plans (FTSE 350 companies)
ration of UK defined benefit plans (FTSE 350 companies)
Table 1. Duration of most commonly used benchmarked indices
Duration (Years)
Bond Benchmark constituent 6.3
FTSE UK Gilts All Stocks 8.0
Merrill Lynch Corp Bond 8.3
FTSE 5-15yr UK Gilts Indexed 9.2
FTSE UK Gilts All Stocks Indexed 10.8
FTSE > 15yr UK Gilts Indexed 16.2
Ford has experienced derivative gains in income resultingfrom hedge ineffectiveness.