1 Treasury Broadsheet | Quarterly newsletter of snippets and stories from the world of treasury management 28 November 2017 CCCan Corporate bond market window open Investors around the world continue to seek out anything with a yield return. The demand appears to be continually growing as many fund managers start to allocate funds away from the potentially over-hyped equities asset class towards fixed interest securities/bonds. The pursuit of yield in some areas is getting into dangerous territory with European corporate junk bonds (non-rated) trading at yields below US 10-year Government Treasury bonds (2.37% pa). Here in New Zealand we have witnessed insatiable investor demand (retail and wholesale) chasing the small number of new corporate bonds issued in the debt capital markets. Companies like Summerset and Wellington International Airport have commanded very attractive pricing from a borrower’s perspective this year. It is a little surprising that a larger number NZ corporate borrowers have not advantaged from these conducive market conditions to lock into longer-term debt at lower issuance margins. The advice to borrowers, who can access the debt capital markets under their own name, is to issue corporate bonds when the market window of opportunity is open (i.e. strong investor demand in present). That timing may not necessarily coincide with the borrower’s own maturity profile/issuance plan. However, bank facilities are normally flexible enough to cancel without penalty and thus it is prudent “funding risk” management to engineer the debt issuance timing to when the market window is open. Corporate bond issuance volumes in New Zealand have dropped off in 2017 compared to previous years, so it makes one wonder why more borrowers have not come to the market given the investor demand and lower issuance margins. One explanation for the lower than expected activity levels is the fact that overall bank lending to corporates is not exactly increasing currently, therefore the banks are very keen to hang on to their direct lending books and not be repaid from a corporate bond issue. One of the main reasons a borrower goes to the corporate bond market is to secure longer term debt of seven years plus that is generally not available from bank sources. Retail investors here have historically had an aversion to investing beyond five years in corporate bonds. However, the appetite for longer term maturities from retail investors has been increasing of late, 28 November 2017 (Click to view) Corporate bond market window open The weather and forecasting models Digital transformation: Visualisation of risk and the Corporate Treasurer Beginner’s guide to FX management The challenges of cash flow forecasting Expectations for an optimal transactional banking solution The impact of digital currencies and the blockchain technologies they rely on for corporate treasury What is driving the cards and payments industry? Can analytics strengthen your forecasting?
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1 Treasury Broadsheet | Quarterly newsletter of snippets and stories from the world of treasury management 28 November 2017
CCCan
Corporate bond market window open
Investors around the world continue to seek out anything with a yield return. The
demand appears to be continually growing as many fund managers start to
allocate funds away from the potentially over-hyped equities asset class towards
fixed interest securities/bonds. The pursuit of yield in some areas is getting into
dangerous territory with European corporate junk bonds (non-rated) trading at
yields below US 10-year Government Treasury bonds (2.37% pa).
Here in New Zealand we have witnessed insatiable investor demand (retail and
wholesale) chasing the small number of new corporate bonds issued in the debt
capital markets. Companies like Summerset and Wellington International Airport
have commanded very attractive pricing from a borrower’s perspective this year.
It is a little surprising that a larger number NZ corporate borrowers have not
advantaged from these conducive market conditions to lock into longer-term debt
at lower issuance margins. The advice to borrowers, who can access the debt
capital markets under their own name, is to issue corporate bonds when the
market window of opportunity is open (i.e. strong investor demand in present).
That timing may not necessarily coincide with the borrower’s own maturity
profile/issuance plan. However, bank facilities are normally flexible enough to
cancel without penalty and thus it is prudent “funding risk” management to
engineer the debt issuance timing to when the market window is open.
Corporate bond issuance volumes in New Zealand have dropped off in 2017
compared to previous years, so it makes one wonder why more borrowers have
not come to the market given the investor demand and lower issuance margins.
One explanation for the lower than expected activity levels is the fact that overall
bank lending to corporates is not exactly increasing currently, therefore the banks
are very keen to hang on to their direct lending books and not be repaid from a
corporate bond issue. One of the main reasons a borrower goes to the corporate
bond market is to secure longer term debt of seven years plus that is generally not
available from bank sources. Retail investors here have historically had an
aversion to investing beyond five years in corporate bonds. However, the appetite
for longer term maturities from retail investors has been increasing of late,
28 November 2017
(Click to view) Corporate bond market window
open
The weather and forecasting
models
Digital transformation:
Visualisation of risk and the
Corporate Treasurer
Beginner’s guide to FX
management
The challenges of cash flow
forecasting
Expectations for an optimal
transactional banking solution
The impact of digital currencies
and the blockchain technologies
they rely on for corporate treasury
What is driving the cards and
payments industry?
Can analytics strengthen your
forecasting?
2 Treasury Broadsheet | Quarterly newsletter of snippets and stories from the world of treasury management 28 November 2017
particularly as they realise that seven and eight year maturities are the only bond investments on offer. Education
of more retail investors to accept seven and 10 year tenors is perhaps required. However, often the carrot in the
form of an increased interest coupon is what is needed to entice these investors to go longer. That may not fit with
the borrower’s own pricing aspirations. It is always a trade-off between risk and reward (i.e. suitability and
acceptance) for both the borrowers and investors.
The general rule of thumb is that diversification of core debt sources away from solely banks starts about the
$300 million to $400 million mark. The materiality of funding risk becomes more meaningful at and above these
levels. Surprisingly, there still appears to be many local corporate borrowers (who would be strong enough from a
credit rating perspective to utilise the debt capital markets in their own name) who have bank debt only for much
higher debt amounts. Board of Directors of these borrowers totally dependent upon bank debt should be asking
the questions about funding risk and appropriate debt source diversification. It is not too long ago (the 2009
GFC) that banks struggled to fund themselves in a credit shock and corporate borrowers from those banks
inherited the banks’ funding risk problems and paid extra in the form of sharply higher borrowing margins.
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
($m
)
Corporate bond new retail issuances
Source:KangaNews
3 Treasury Broadsheet | Quarterly newsletter of snippets and stories from the world of treasury management 28 November 2017
- -
82
-
40
-
42
164
18
48
424
77
-
50
100
150
200
250
300
350
400
450
Jan 18 Feb 18 Mar 18 Apr 18 May 18 Jun 18 Jul 18 Aug 18 Sep 18 Oct 18 Nov 18 Dec 18
($m
)Upcoming NZD corporate bond maturities
Source: Bloomberg
12 bonds maturingTotal: $896m
0
50
100
150
200
250
0 1 2 3 4 5 6 7 8 9
Issua
nce
ma
rgin
to
sw
ap (
bps p
.a.)
m
Tenor (Years)
2017 corporate retail bond issuance margins
Source: Bloomberg
4 Treasury Broadsheet | Quarterly newsletter of snippets and stories from the world of treasury management 28 November 2017
The weather and forecasting models
(Things that keep us up at night)
There is no disputing the key inter-relationship between our most socially talked about subject, “the weather” and
New Zealand’s economy. The weather influences our agriculture, recreation, retail sales and hydrology.
Hydrology influences our electricity generation/prices as well as wider regional infrastructural investment.
Environmental impacts from water management and climate change are critical factors. The cause/effect
impactor list goes on. Every business and government/local government entity is impacted by the weather’s
dynamic stressors.
So, how can we incorporate the weather and weather patterns into our forecasting models?
To emphasise the relationship, the following chart clearly links the influence of macro weather patterns on New
Zealand’s agricultural GDP growth performance from La Niña and El Niño effects.
The Southern Oscillation Index (SOI) measures the pressure differences between Tahiti and Darwin to predict La
Niña and El Niño episodes.
What makes this chart exciting is that is potentially providing a predictive lead to understanding the weather’s
influence on agricultural business forecasting. The current index is pointing to a more positive agricultural GDP
outcome. The last serious El Niño adverse event in 2007 caused a drought in the Waikato and subsequent overall
economic recession.
The problem facing New Zealand companies in terms of further granulating predictive data on the weather to
assist with more accurate business forecasting is the localisation of weather i.e. it can be raining in the Waikato
but drought conditions can simultaneously be experienced in the Hawkes Bay.
The localised weather patterns takes us to new and exciting advancements in remote sensing technology and the
miniaturisation of this technology that can accurately map (measure) water in its varying states such as snow,
lake capacity, river capacity and soil moisture. The satellite technology has been around for some time, however
the ability to measure and model regional and localised water capacity accurately has been the tough nut to crack.
-30%
-20%
-10%
0%
10%
20%
30%
-20
-15
-10
-5
0
5
10
15
20
25
Agri
GD
P
So
uth
ern
Oscill
iatio
n i
nde
x (
9 m
onth
le
ad)
Southern Oscillition index and NZ agri GDP
SOI Agri GDP
La Nina (wetter conditions) = positive
El Nino (dry conditions) = negative Overall correlation since 2005: 40%
La nina resulting in positive GDP/ El nino resulting in negative GDP correlation: 60%
Source: Bloomberg
5 Treasury Broadsheet | Quarterly newsletter of snippets and stories from the world of treasury management 28 November 2017
The mapping technology, which was initially developed for NASA, can now be scaled down to the use of light
aircraft and drones. This, for example, is going to allow a dairy farmer to regularly map pastures for accurate soil
moisture content. Using this technology, the farmer will understand how much irrigation is needed, where it is
needed and accurately manage fertiliser application volume and timing. These methods not only create direct cost
efficiencies; it also has an environmental benefit through the reduction of water run-off. Snow mapping by
example provides for more accurate river management and flood control systems, accurately measuring the water
capacity of the snow fields feeding the water catchment areas.
PwC New Zealand is currently at the cutting edge of investigating the use of this technology to develop forecasting
models for our clients. The challenge to any good forecasting model is access to accurate and relevant data and
using this data to support material forecasting assumptions. If that data can also provide predictive elements to
the art of forecasting, then it is certainly getting closer to the holy grail.
Digital transformation: Visualisation of risk and the Corporate Treasurer
As the march of digital transformation continues, staying technologically relevant should be at the forefront of a
Corporate Treasurer’s objectives. Despite the wave of technological change that is sweeping over the global
financial services industry, Treasurers appear to be somewhat reluctant adopters of new technology. Whilst there
is truth to the old saying ‘if it ain’t broke, don’t fix it’, Treasurer’s cannot afford to ignore the enormous change in
technology that is happening all around us. To avoid being left behind, automated out of existence, or becoming
irrelevant, Treasurers of today need to be agile, embrace change, and be receptive to new technological
opportunities that will ultimately drive better solutions for managing financial market volatility and improving
financial performance for the organisation they work for.
One pertinent example of where technology is enhancing the management of volatility and improving financial
performance is through visualisation dashboards. Every week we see new geo-political, natural or economic risk
events that impact on an organisation’s financial position. The impact of the latter can be unpredictable, as
highlighted by the effects of the Brexit referendum outcome, the election of President Trump and (more close to
home) the recent New Zealand general election and associated political risk. Risk visualisation tools play an
essential role in the management of unpredictability and assist in judicious hedging decisions; the combination of
which have a direct influence on protecting profit margins, reducing costs and enhancing profitability. Through a
visualisation dashboard, a Treasurer has the opportunity to consider the following: -
Model the impact of different financial market rate movement and hedging scenarios.
Communicate risk factors that influence decisions more clearly to both to senior management and the wider
organisation.
Demonstrate how risk decisions can drive strategic advantage.
Beginner’s Guide to FX Risk Management
At times of increased short-term turbulence in foreign exchange markets it is helpful to remember there are ways
to manage this volatility. Effective foreign exchange (FX) risk management does not have to be complicated. The
six easy steps below are a simple way for small-t0-medium sized businesses to protect their profits.
Understanding your risks and sensitivity: What are the foreign exchange risks the organisation is
exposed to? Are these cashflow risks such as export receipts, repatriation of overseas profits and/or import
payments? What is the impact on company profitability from a 10% movement in the exchange rate versus
that budgeted?
Are there any naturally occurring ‘offsets?’: If the organisation is unable to increase its selling prices to
compensate any adverse foreign exchange rate movements, then it will probably need to manage the risks of
foreign exchange rate movements itself.
Develop a policy framework to manage foreign exchange risks: Factors to consider include the
length of hedging term, the percentage of exposures that may be hedged (minimum and maximum limits),
and the hedging instruments allowed. The first two steps noted above will help in determining these