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World Financial Symposium 2014 World Financial Symposium 2014

Building a World

Class Treasury


Chair Opening

Vijay Panday

Director, Group Treasury and Risk

KLM


Treasury Priorities

2015 and Beyond

David Aldred Managing Director, Regional Head of Sales, Middle East, North

Africa, Turkey and Pakistan, Treasury and Trade Solutions

Citi

Treasury Priorities 2015 and Beyond

September 2014

Treasury and Trade Solutions

1st IATA World Financial Symposium, Abu Dhabi

We are Living in Challenging Times

Globalization Digitization Urbanization Regulation Rates Reputation

The world is changing

The operating environment is changing

Our clients’ needs and expectations are changing

5

All are relevant for aviation

Route & Fleet

Expansion. Impact

on Supply Chains

Mobile Internet &

Technology Impact

Growth of EM.

Africa MENA, Asia Carbon, Airport,

Congestion,

Passenger Rights

Source : IATA & Porter’s 5 Forces

EM Expansion, Fuel

and Fleet Expansion

Managing FX Risk

(acquiring/real time)

Competition,

Supplier

Relationships,

Brand and

Customer Service

Primary Sources: EIU, Roland Berger, United Nations Statistics, Forrester Research, Citi Analysis.

Globalization

Urbanization

Digitization

The Major Forces

Driving Change Past (1990) Present Future

US JPN DEU

Largest World Economies Largest World Economies Largest World Economies

43% World Population in Cities 52% World Population in Cities 60% World Population in Cities

9% World Population >60 Years Old 11% World Population >60 Years Old 17% world Population >60 Years old (2030)

Mobile Broadband Subscriptions: NONE Mobile Broadband Subscriptions: 1.4bn Mobile Broadband Subscriptions: 5bn (2017)

Internet Users: Nominal

Web Browser Introduced in 1992 Internet Users: 2.4bn

34% Global Penetration

Internet Users: 3.5bn (2017)

50% Global Penetration

0 1.4bn 5bn

17%

Exports Share of GDP

26%


33%


The Major Forces Driving Change

US CHN

JPN

CHN US IND

6

Primary Sources: IATA.

Globalization

Urbanization

Digitization

The Major Forces

Driving Change Past (1990) Present Future

Emerging Market Expansion Emerging Market Expansion Emerging Market Expansion

The Major Forces Driving Change - Aviation

7

Asia ME

Asia Asia ME

Fleet Expansion Fleet Expansion Fleet Expansion

59% Growth

35K New

Aircraft

Telephone Base Sales and

Customer Service

Internet for Ticketing and

Carrier Portals Becoming

Standard

End to End Solution for

Passengers Leveraging a

Handset

Relative High Cost of Travel and Low

Cargo Levels

Growth of Cities and a More Mobile Population

Is Leading to Increasing Air Travel Between Cities

Massive Investment In Infrastructure is Required to

Cope with the growth in Aviation

2050

16 Billion

500T

Cargo

2.5 Billion 40T Cargo <1 Billion <20T Cargo

20K Aircraft

$4.8

Trillion

Investment

<15K Aircraft

Key Treasury Trends & Themes

The following trends and themes are from Citi Treasury Diagnostics (CTD), a benchmarking tool designed to

help companies assess treasury and working capital management practices, and identify opportunities for

treasury departments to deliver more value to their firms.

Results from CTD provide a clear indication as to what is most important to treasury practitioners across the

globe as well as insights into both emerging and existing themes within the treasury management space.

Need for Speed:

Real-time Treasury

Management

Embedding Treasury:

Growth in Importance and

Scope

Continued Centralization:

Efficiency and Control

Performance Management:

Increasing Accountability

Risk Management:

Still in the Spotlight

Key Trends

8

5%

8%

11%

16%

16%

38%

4%

8%

11%

13%

18%

43%

Working Capital Management

Liquidity and Investments

Policy and Governance

Risk Management

Systems and Technology

Subsidiary Funding

Universe Industrials

Liquidity Funding

Risk & Capital Planning

Counterparty Risk

Organisational Structure

Receivable Processing

Payables Processing

Treasury Strategy

Funding. Upstreaming

Downstreaming process

Dividend and New Legal

Entity Process

ERP & TMS

Benchmarking Results

On average, best practice results were more readily achieved in areas where treasury plays a bigger role in

setting policy…

Achievement of Best in Class Performance (Above 75th Percentile)

…In areas requiring coordinated execution from subsidiaries and investment in technology, far fewer firms

were successful at achieving best practice results.

© 2014 Citibank, N.A.

Source: Citi Treasury Diagnostics, April 2014

9

Aviation

Cash Visibility. Forecasting Outside of IATA Settlements

Need for Speed: Real-time Treasury Management

Corporate treasury is keeping pace with the rapidly increasing drive to achieve access to immediate, complete,

and actionable data.

Treasurers are increasingly leveraging “real-time” information to make faster, more informed liquidity

and risk management decisions for the business.

Increasing emphasis on

daily visibility of cash flows

and short-term investments

80% of corporates reported

daily cash visibility over 75%

of total balances


over 75% daily visibility to

short-term investments

This is consisently an area of

improvement for aviation and

is ranked 2nd and 3rd

Quartiles consitently

Visibility

Frequency of cash forecast

updates are increasing

across companies of all

sizes,

Among large companies,

33% are updating forecasts

daily, an 19% increase

between 2009 and 2013—

the fastest growing group

and likely due to wider

adoption of more

sophisticated treasury

technology

Wide spread of results.

50:50 Q1/Q2 and Q3/Q4

Forecasting

Increase in daily

concentration of cash into

a central pool


daily concentration

Daily concentration of cash

is a practice more commonly

used by large companies

– 83% of large companes

versus 47% of small

companies

• Wide spread of results.

50:50 Q1/Q2 and Q3/Q4

Concentration

Corporate treasury

departments are leveraging

technology to automate

processes and increase

efficiencies

77% of companies reported

full or complete automation of

pooling processes

Nearly 30% of companies

reported greater than 95%

automatic matching of

receivables to customer

invoices, up 9% between 2009

and 2013

Consistent case for

improvement

Automation

Source: Citi Treasury Diagnostics; participants data through year-end 2013

Large companies = > $25 billion; small companies = < $2 billion 1

0

Embedding Treasury: Growth in Importance and Scope

While the role of the treasurer has become more complex and challenging over the last few years, corporate

treasury continues to progress as a strategic advisor and valued partner to the wider business.

Many functions, processes,

and activities are now more

firmly under the remit of

corporate treasury, including:

– Intercompany loan

administration

– Counterparty risk

management

– Supplier payments

– Financial guarantee

management

• Aviation – supplier payments

in bottom 2 quartiles on

average. Funding up-stream

and downstream is a

consitent area in need of

improvment

Scope

Treasury policies are

correspondingly broadening

with the expansion of the

treasury function

Consistently high treasury

policy coverage with regard

to financial risk management,

including:

– FX risk (89%)

– Liquidity risk (83%)

– Counterparty/credit risk

(78%)

– Interest rate risk (76%)

• Aviation – Procedures and

control is an area most

Treasurers identify as an

area needing improvement

Policy Coverage

Today’s treasurer has more

control than ever before

Expansion of type of balances

under the purview of treasury

– 62% of companies reported

including at least 75% of

operating flows in pooling

structure

Increasing ownership over

company-wide accounts (e.g.,

operating accounts)


complete control over non-

treasury accounts

– 24% increase between 2009

and 2013

• Aviation – generally ranked Q2

and above but some (EM)

limited to investments only

Control

Increasing treasury involvment

in coordination and oversight of

working capital management


direct and/or ad-hoc

involvement


and 2013

Treasury is increasingly

leveraging working capital

flows/products to drive

efficiencies

– E.g., 29% of treasurers

reported use of supplier

finance programs, up 8%

from 2009

• Aviation – Transactions mainly

Q1 but Q2 for strategic working

capital

W/C Mgmt

The role of the treasurer has expanded to meet the new responsibilities of funding and raising liquidity,

understanding and managing risks, and supporting business units as successfully as possible.



1

Continued Centralization: Efficiency and Control

Centralization remains at the forefront of priorities for corporate treasurers, who hope to continue realizing the

benefits of improved efficiency, transparency, and controls offered through centralized treasury activities.

As companies continue to expand their markets and operations abroad, treasurers have been faced with

the challenge of developing a treasury infrastructure capable of supporting the needs of a business that

is constantly evolving.

Corporates are shifting from

regional to global account

structures

Global mobilization of cash is a

trend consistent across

companies of all sizes

– Average of 10% increase

between 2009 and 2013

– Most favored by large

companies, 40% of which

reported global mobilization,

versus 19% of small

companies


and below

Pooling & Mobilization

Centralization structures such

as In-House Banks, Netting

Centers, and Shared Service

Centers (SSC) continue to be

utilized by companies of all

sizes

– 61% of total respondents,

and 81% of large companies,

have established global

and/or regional SSCs to

support business processes

– Large companies are much

more likely to have an In-

House Bank (61%), vs. 22%

of small companies

Centralization

Majority of participants now use

electronic payments to complete

high volume vendor payments

and high value treasury payments

to drive increased efficiencies

Companies leveraging a treasury

workstation (vs. spreadsheets)

are significantly more likely to

achieve daily monitoring of

investment policy compliance

monitoring (61% vs. 22%)

Aviation – Consistently cite

improvements in the payables

process

Electronification



2

Performance Management: Increasing Accountability

There is an appetite for stronger standards and increased oversight within corporate treasury, with a particular

emphasis on both internal and external performance management .

Substantial increase in

measurement of treasury

performance against quantifiable

KPIs as a proxy for accountability


(10%) and 2013 (76%)


and below

Treasury Performance

Measurement

Greater emphasis on formalizing

and documenting treasury

objectives and plans

– 74% increase bewteen 2009

(18%) and 2013 (92%)

• Aviation – Treasuries are typically

seeking to increase policy and

governance globally across their

finance and treasury functions.

Increasing dialogue with

Procuement. <75%.

Documentation

Within treasury departments, the

appetite for increased external

accountability has gained

popularity in recent years

58% of companies reported

conducting formal performance

reviews of their banking partners at

least on an annual basis. <50%.

Companies conducting quarterly

reviews increased 15% between

2009 (25%) and 2013 (40%). <25%

Bank Performance

Measurement

Across the wider economy, demand is growing for greater transparency and accountability. As a result,

corporate treasury has experienced substantive changes in practices and behaviors relating to both

internal and external accountability.

Internal External



Risk Management: Still in the Spotlight

Treasurers are increasingly adopting a more comprehensive approach to risk management.

Emerging risk-centric

treasury organization

Increasing number of corporates

employing methodologies to set,

monitor and calculate the usage

of counterparty risk

– 67% of 2013 respondents

– 11% increase between

2009 and 2013

• Aviation – 60%+ ranked Q1

Counterparty Risk

Management

Treasurers are more diligently

monitoring and assessing

various financial risks

Most corporates reported

assessing both interest rate risk

and liquidity/funding risk, 79%

and 80%, respectively

Settlement risk is also receiving

increased attention from

corporate treasury

– Large companies were more

likely to monitor settlement

risk (50%), versus 16% of

small companies. Ave Q1

Assessment & Monitoring

Increasing emphasis on

business continuity, likely due

to treasury’s renewed focus on

comprehensive risk

management


having a treasury business

continuity plan

Large firms were the most likely

to establish a formal treasury

business continuity plan

– 40% increase between

2009 (43%) and 2013

(83%)

Business Continuity

More and more corporate treasury departments are working to foster a risk-aware culture.



What is Achievable? Treasury resource is not unlimited and a Treasurer must prioritise projects to ensure maximum impact for the

investment made. What is achievable over the short, medium and longer term for Treasurers?

SHORT TERM

Bank Rationalisation

Audit of bank account s and

benchmarking of existing cash

management structures

Visibility & Control of Cash

Review and implement

enhancements to Cash Pooling,

Cash Flow Forecasting and In-

House banking

FX Management

Dynamic, instant FX management

for the management of online

passenger ticket sales

MEDIUM TERM

Supplier Spend Analysis

Procurement and Treasury to agree

transformation of all non-fuel related

payment activity

Future Proofing Payment

Formats

Leverage XML when dealing with

banks. Eliminate multiple formats

with multiple banks

Governance & Control

Review and implement policies and

procedures to ensure consistent

treasury policies globally

LONG TERM

Supplier Finance

Managing supplier relationships to

protect the global supply chain and

enhance working Capital

Centralisation of all Treasury and

Commercial payments to One

Location

Design and implement a SSC

structure that delivers value &

efficiency across all business lines

ERP/TMS Strategy

Integration and elimination of non-

core systems to improve efficiency

and drive value. Transformation

Strategies are increasing.

15

All are possible now with payback. Timeline is an indication of the

resource requirement

Aviation Treasurer’s Scorecard – What Should it Look Like for 2015?

A Treasurer's Scorecard should be flexible and dynamic. From working with aviation clients globally, Citi

understands the following to be high priorities. As the planning process for 2015 begins the following are areas

worthy of consideration.

Key Result Area Key Performance Indicator Relevance to Corporate Strategy

and Potential Impact

Control & Visibility 1. Review bank Account Relationships and

Account Structures.

2. Is your Liquidity & Cash Management

Structure Maximising Potential?

A. Governance

B. Working Capital

C. Control & Audit

D. Risk Mitigation

E. Regulations

Treasury Impact on CFO

Centralisation & Working

Capital Projects

1. Develop a Transformational Blue-Print.

2. Implement Solutions to Increase Working

Capital for a) Fuel for b) Non-Fuel Spend

A. Supply Chain Management

B. Control & Audit

C. Risk Mitigation

D. Working Capital

E. Process Efficiency

Technology Strategy 1. What is Your TMS & ERP Strategy?

2. Bank Connectivity Plan?

3. Future Proof Links to Banks and 3rd Parties

A. Control & Audit

B. Risk Mitigation

C. Working Capital

D. Technology Blue Print

Partnership with Procurement 1. Understand the Projects that Procurement

are Working on.

2. Implement Solutions to Increase Efficiency

for Non-Fuel Spend

A. Working Capital

B. Supply Chain Management

C. Process Efficiency

D. Technology Blue Print

Innovation 1. Establish a Blue-Print With Strategic

Partners

2. What is the Road-Map for the Next 3-5

Years?

A. Competitiveness

B. Efficiency

C. Financial Impact

D. Process Efficiency

E. Technology Blue Print

Yield &

Self

Funding

Improve

DSO &

DPO

5-10 days

$ cost

Per Bank

$50.000

Removal

Of

Invoices

<EUR10

Item

Cost

16

?

What is the Business Case for Change?

Leveraging data analytics to run models to assess the financial and efficiency impact of new process solutions.

17

Relevant and personalised data analytics can significantly

enhance the internal sponsorship of a project

Recommendations for 2015 The Treasury function is at the hub of an airlines operations. However, demands on time and pressure on

resources requires prioritisation of projects.

18

1. Transparency - Agree a scorecard that is measurable, actionable and is in-line

with the key corporate strategic drivers

2. Strategic Partners – Ensure that your financial partners are seen as strategic and

are seen for the strengths they can bring to the table. Elevate 3rd party

relationships from provider to partner

3. Data Analytics – Demand and leverage analytics that are relevant and reinforces

the business case for a project

4. Prioritise Achievable Projects – Short, Medium and Longer term projects that

deliver measurable results will reinforce the significance of Treasury

5. Partner With Procurement – Significant economic and efficiency savings can be

unlocked. Synergies across the Aviation Supply Chain are achievable

6. Technology Integration – Align the Technology blue prints with Internal Business

Service providers (e.g. GBS) and Technology to maximise impact across the

group

1

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Citi works with its clients in greenhouse gas intensive industries to evaluate emerging risks from climate change and, where appropriate, to mitigate those risks.

efficiency, renewable energy and mitigation

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Treasury Technology Trends & Connectivity:

What Top Performing Airlines Must Have?

Christoph Feddern, Consultant, Senior Consultant, Treasury &

Finance Solutions, Zanders

Laurens Tijdhof, Director, Treasury & Finance Solutions,

Zanders

21

Abu Dhabi, 17th of September 2014 Laurens Tijdhof – Partner Christoph Feddern – Senior Consultant

Technology

Catalyst for Treasury Transformation

IATA Benchmarking Study 2014

22

1 Introduction

3

Key Results of IATA Benchmarking Study 2014 2

Conclusions

Agenda

23

• Zanders Treasury & Finance Solutions is founded in 1994

• Independent and specialised advisory firm

• Focusing on Treasury Management, Risk Management and Corporate Finance

• Over 150 qualified treasury consultants

• Advisory, interim, transaction and outsourcing services

• Offices located in The Netherlands, Belgium, United Kingdom and Switzerland

• Leading advisory firm in its area of expertise with a global client base

• Long-term relationships with corporations, financial institutions, public sector and NGOs based on highest levels of ethics and trust

“...Zanders believes that treasury and finance solutions should be advised in an independent, innovative and entrepreneurial manner based on thought leadership and conforming to the constantly changing demands of the market...”

Company Overview

24

Treasury Organization:

• Covers on average 31 countries (H: 150, L: 1)

• Covers on average 13 currencies (H: 60, L: 1)

• Large part of treasury activities are still decentralized (36%)

Recap IATA Benchmarking Study 2012

Treasury Centralization

Strategic Opportunities

Cash & Liquidity Management:

• Become more effective in cash flow forecasting (41%)

• Improve cash management (25%)

• Not measured against formal KPIs (74%)

Improve Availability of Data &

Management Info

Risk Management:

• Timeline and quality of information (58%)

• Availability of information (31%)

• Difficulty in quantifying risks (31%)

Improve Quality of Data &

Risk Quantification

Bank Relationship Management:

• Between 10 -30 banks (44%)

• More than 30 banks (38%)

• Average of 88 bank accounts (H: 1.500, L: 2)

Bank Rationalization

Treasury Technology:

• 61% does not use a treasury workstation!

• 57% does not use an ERP system

• 82% does not use SWIFT for bank connectivity

• 77% is looking at technology improvement

Treasury Automation

25

3rd Stage of Centralization

2nd Stage of Centralization

1st Stage of Centralization

Technology Driving the Next Stage of Treasury Centralization Split between Operations (Centralization) and Value Adding Activities (Business Integration)

Level of Centralization

Decentralized Cash Mgnt

by Subsidiaries

Local Liquidity Centralization

Regional and/or Global Liquidity Centralization

(Netting & IHB)

SSC, Payment & Collection Factory

Virtual Treasury (Centralized &

Paperless Operations,

together with Business

Integration)

Simplifying and/or Automating Treasury

Operations & Processes (Banking, eBAM, FSCM)

Internal Funding and/or Centralized

FX Mgnt

Status Quo (Average Airline)

Time

26

1 Introduction

3


Conclusions

Agenda

27

IATA Benchmarking Survey Composition

• Mainly European airlines responded; other regions are evenly represented

• 46% of respondents with turnover of less than USD 1bn p.a.

• Majority are ‘traditional’ airlines, however survey also includes low-cost carriers

• Survey focusing on IATA member and non-member airlines (56 responses)

20%

34%

46%

Annual Turnover (USD)

Large (>5bn)

Medium (1bn-5bn)

Small (<1bn)

44%

15%

13%

16%

13%

Geographical

Europe

APAC

Americas

Africa

MENA

28

• What’s the current size of your treasury team?

Treasury Organization at Airlines

- Strong correlation between turnover and size of treasury

- 9% of large airlines have a relatively small treasury team

- 27% of small airlines have a relatively large treasury team

• Which best describes your treasury structure?

- 55% of all airlines implemented a centralized model

- Large airlines tend to centralize into global treasury operations

- Majority of small airlines have

decentralized treasury activities

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Small (<1bn) Medium (1bn-5bn) Large (>5bn)

1-4 staff

5-9 staff

>10 staff

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Local Treasury

Regional treasury teams

Regional treasury centers

Global Treasury

29

• Does your company perform cash pooling?

Cash & Liquidity Management (1)

- 59% of airlines make use of cash concentration structures

- ZBA pooling predominant; notional

and hybrid structures rarely used

- Relatively low level of cash pooling compared to other industries

- Cash pools are mostly bank administered (53%)

- Technology, either through ERP or

TMS, is only used by 39%

• What technology enables cash pooling?

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

No ZBA Notional hybrid

Large(>5bn)

Medium(1bn-5bn)

Small (<1bn)

53%

30%

9%

7%

Bank administered

Inhouse bank in TMS

Inhouse bank in ERPTreasury module

Other

30

Cash & Liquidity Management (2)

• Does your company conduct cash flow forecasting (CFF)?

- 89% of all airlines conduct cash flow forecasting

- 58% rolling and 31% static forecast

- Size and/or complexity of airlines are not related to the type of forecasting

• Which technology enables cash flow forecasting in your organization?

- 74% of all airlines use Excel as their main CFF tool

- Larger airlines tend to integrate CFF

into their TMS - Overall level of integration into TMS

or ERP Treasury Module is very low compared to other industries

11%

58%

31% No

Yes, rolling

Yes, static

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


ERP Treasury Module

TMS

Stand-alone tool

MS Excel

31

Risk Management

• Which risk classes do you actively manage?

- Financial risks are actively managed; liquidity risk is the top priority

- Importance of FX risk has declined from 85% to 61% (vs. 2012 survey)

- Commodity risk is managed by 43%

of the airlines (50% in 2012 survey)

• Which systems support you with your commodity risk management (CRM)?

- 54% of airlines (that manage commodity risk) use Excel and don’t have any CRM system

- 25% of airlines use best-of-breed CRM systems

- TMS or ERP Treasury usage for CRM is very low with only 14%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


ERP Treasury

MIS

TMS

others

none

Excel

32

• Which balance sheet financing options are used in your organization?

Corporate Finance

- Bank loans are the most preferred financing option (56% of airlines)

- Larger airlines tend to diversify their debt portfolio

- This development can be observed in other industries as well

• With regards to corporate finance, treasury technology is used to:

- Mainly used to record transactions and enter accounting entries

- 45% of airlines perform reporting and controlling tasks (i.e. headroom or covenant analysis)

- Corporate finance execution is typically done manually 0% 20% 40% 60% 80% 100%

Execute transactions

Report and control

Accounting

Record all transactions

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Private placements

Mezzanine

Bonds

Bank loans

33

• How do you connect to your banking partners?

Bank Relationship Management

- E-banking tools are very popular, with usage by 65% of all airlines

- Host-to-host connectivity is used by 25%, while SWIFT only by 10%

- Corporate access to SWIFT is low compared to other industries

• Which technology enables the external payment process?

- 35% of airlines process payments centrally with a Shared Service Center (SSC) and/or Payment Factory (PF)

- 44% of airlines have a decentralized payment process

- Stand-alone payment tools are used by 42% of all airlines, ERP Treasury by 29% and TMS by 19%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Processed locally,paid locally

Processed locally,paid centrally (PF)

Processed centrally,paid centrally

(SSC/PF)

other

TMS

ERP Treasury

Stand-alone tool

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Other

SWIFT

Host-to-Host

E-banking

34

1 Introduction

3


Conclusions

Agenda

35

Treasury Technology Landscape at Airlines

• Type of technology solution: - No treasury workstation (i.e. MS Excel) reduced to 41% of airlines (in 2012 this was 61%) - Treasury Management System (TMS) is used by 37% of airlines - ERP Treasury module is used by 22% of airlines

• The choice of technology solution is driven by airline size and complexity: - TMS usage is divided by Sungard (25%), WSS (6%) and multiple other vendors (69%) - ERP Treasury modules are mainly implemented by medium-sized and large airlines, where

the choice for SAP is dominant (68%, compared to 32% Oracle)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Kyriba

GTreasury

WSS IT2

WSS City Financials

Sage XRT Universe

Reval

Other

Oracle PeopleSoft Treasury

Oracle EB Treasury

Bellin tm5

SAP Treasury

Sungard AvantGard Quantum

Sungard AvantGard Integrity

MS Excel

36

• On average and compared to other industries, the airlines are lagging somewhat behind the curve in terms of centralization and applied treasury technology

• Therefore we recommend to define a strategic treasury roadmap to become a best-in-class treasury value center

• Start your treasury transformation ambitions with a processes redesign:

– Focus on further centralization and simplification of the airline treasury organization (i.e. on average 27% of treasury activities are still decentralized)

– Combine this effort with standardization of treasury processes

• Then continue with evaluating and implementing the ‘right’ treasury technology solution:

– Ensure that the solution fits with your specific requirements (which are driven by airline size and treasury complexity)

– Focus on treasury automation (i.e. reduce manual and paper-based processes) and seamless integration with other systems

Is Your Airline Ready for the Next Step?

37

Zanders Netherlands Brinklaan 134 1404 GV Bussum The Netherlands T: +31 35 692 8989

Zanders UK 26 Grosvenor Gardens SW1W 0GT London United Kingdom T: +44 207 763 2510

Zanders Belgium Place de l’Albertine 2 1000 Brussels Belgium T: +32 2 213 84 00

Zanders Switzerland Gessnerallee 36 8001 Zürich Switzerland T: +41 44 577 70 10

Contact Details

Laurens J.A. Tijdhof Partner E: [email protected] M: +32 476 05 45 58 Christoph Feddern Senior Consultant E: [email protected] M: +41 76 388 59 04

38

Disclaimer

This presentation was prepared exclusively for the benefit and internal use of the recipient. It does not carry any right of publication or disclosure, in whole or in part, to any other party. This presentation is for discussion purposes only and is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by Zanders. Neither this presentation nor any of its contents may be disclosed or used for any other purpose without the prior written consent of Zanders.


The Low Interest Environment and

the Future of Electronic Trading

Arjan Hes

Director, Client Acquisition

MyTreasury Ltd

My Kind of trading platform

The low interest environment and the future of

electronic trading

Treasury as a cost centre 43

• The cost per transaction has gone up when measured against interest

income

• Resource transaction costs rarely taken into account

• Platforms introduce operational efficiencies and risk controls

• Broadly same return and more / better control

• More time to focus on higher value part of Treasury

Trends with regards to electronic Term Deposit trading at banks 44

• FX e-trading has been around for well over 15 years

• Mature, well established, well understood models

• TD trading follows broadly similar model

• Banks have increasingly focussed on client profitability

• Some instances where banks removed lines for some TD clients

• Taking of deposits is a resource intensive low margin business

• A number of banks are implementing initiatives to roll out electronic deposit taking

• Most TD trades handled in the same way as FX trading through an RFQ model.

• More banks will follow as price pressures remains and clients demand it.

What is changing for Corporate Treasury 45

• Single bank multi product proprietary platforms are going to become less prevalent

• Single product multi provider platforms become less relevant

• Introduction of Joint ventures between single product platforms - marriage of convenience

rather than linking best in class technologies.

• Current trend is to launch multi-currency, multi-product platforms / add new markets on

proven technologies.

• Output files to not only integrate all data into a TMS but:

• Ability to convert data held in the TMS / ERP into trade files for execution simplifying the

route to market

• Ability to settle out of the trading app, rather than wait for trades to flow into the TMS.

How does this impact Treasury 46

• Multiple ways:

• Banks might prefer you to trade plain vanilla trades electronically

• Price differentials between telephone and e-trading will be reduced

or even inverted

• Are you looking for best in class technology per product (FX, TD,

MMF etc) or;

• Best multi product platform

• Conversation to get “lay of the land” will be a value add for the

banks rather than the pre-amble before any trade – not mutually

exclusive with technology

• Corporates and banks will always have objections to trading

electronically - what is your preference

What are Treasurers doing 47

• Looking closely at money market instruments

• Exploring and implementing best in class technology

• Cooperating in the design of relevant multi product

technology

48 Are Airline Treasures farther advanced

• We believe so due to the long term use of e-FX and MMF

trading

• Cultural risk aversion due to the nature of the business

• Tech savvy

• Size and negotiating power with banks to keep e-rates

competitive

49 What is happening around you

• Acceptance and proliferation of e-trading platforms has driven

further development and refinement

• Platforms becoming single provider multi-currency, multi-product

platform

• Development to use existing (TMS / ERP) data to create orders

• Removal of more fingers from keyboards

• Banks could unwittingly accelerate the spread of multi-product

platforms

50 Virgin Atlantic Experience

Key Investment Challenges • Daily operations efficiency- Money Market Funding was heavy and manual process

• Confirmation of Investment, performance assessment and reporting was time consuming

• Limited visibility on funding options

• Cost reduction environment where maintaining a low fee structure is essential

• Managing credit control and risk exposure

Investment portal selection based on • Daily and Trading Capabilities

• Risk Analytics

• Trade Confirmation (SWIFT confirmation was a priority)

• Magnitude of documentation and legal review

• Reconciliation

• Contingency Plan

“In order to make our operations efficient and allow more focus on strategy and

management decision, finding a technology solution was a necessity”

Khurram, Treasury Controller – Virgin Atlantic

In Conclusion

Demand from Treasurers and Banks to be more efficient is ultimately going

to accelerate the development and wider acceptance of e-trading platforms

for corporate cash. The low interest rate environment is just the catalyst.

51

Arjan Hes MyTreasury Limited 2 Broadgate London EC2M 7UR United Kingdom Tel: +44 (0) 20 7000 5162 Email: [email protected]


Networking Break


Managing Risk in a

New Environment

Vijay Panday, Director, Group Treasury and Risk, KLM

Eu-Jin Ang, Corporate Adivisory Group, RBS

17 September 2014

IATA WFS 2014 Treasury Track Managing risk in a new environment: QE, its tapering/unwinding,

& financing/risk management considerations

cib.rbs.com

I. What is QE?

How big has it been?

Could it be unwound?

57

The “new normal”: QE & other stimuli … any ends in sight?

Before 2008, central banks typically targeted medium-term inflation (“stable prices”) via …

Direct monetary expansion =

Quantitative Easing (QE)

• Fed QE1-3

• BoE QE1-3

• BoJ 2001-2006, since

2013

• ECB ABSPP announced

4 Sep (a CE response to

QE problem?)

Sovereign QE in 2015?

Approaches not focussed on money supply

• Refinancing/Liquidity Operations

(sovereigns & banks)

• Credit Easing (CE), including:

• Securities Market Programme (SMP)

Long Term Refinancing Operations

(LTRO) Outright Monetary Transactions

(OMT)

• Funding for Lending Scheme (FLS)

• Operation Twist, etc.

Ineffective when IRs near zero but deflationary pressures, requiring …

Conventiona

l monetary

policy

Un-

conventional

monetary

policy

• Banks’ reserve requirements

• Targeting short-term IRs through:

• IRs on reserves

• Buying (short term) government securities

• Collateralised lending (to banks)

58

What is QE?

Quantitative Easing (QE) is: • Central bank’s monetary stability operations that inject

(typically pre-determined amount of) money into

economy

• To increase money supply & hence inflation

• By buying bonds (usually sovereign debt, but possibly

other financial assets too)

Bank of

England

(BoE) creates

£ by crediting

its own bank

account

BoE buys

government

bonds (Gilts) in

the secondary

market from

Financial

Institutions (FIs)

FIs invest in corporate

bonds/equity or

increase lending.

Why? Gilts increase in

price (reduce in yield)

and become relatively

less attractive

Companies and

individuals

spend more

money in the

economy due to

cheaper & more

available capital

Later, when economy

has recovered and

deflation risks warded

off, BoE can sell Gilts

back into the secondary

market

How QE is supposed to work (simplified UK example)

• From bank & non-bank private sector entities (e.g.

pension funds or insurers)

• On an un-sterilised basis (i.e. creating net new

money via excess reserves)

• Also lowers yields (nominal & real) on risk-free

assets, encouraging investment into riskier

assets

Bonds

BoE

Secon-

dary

Market Equities,

Bonds,..

Goods

BoE BoE

Bonds

Secon-

dary

Market

59

US Fed balance sheet

Source: US Federal Reserve Board

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Jan

07

Jul

07

Jan

08

Jul

08

Jan

09

Jul

09

Jan

10

Jul

10

Jan

11

Jul

11

Jan

12

Jul

12

Jan

13

Jul

13

Jan

14

Jul

14

US

D t

rilli

ons

Total Fed Assets US Treasury Securities Agency Debt + MBS

US Fed QE

QE1 QE2 QE3

Tapering

$1.24trn in

mortgage

securities

Target $0.6trn

in Treasuries

$40bn mortg.+

$45bn Treas.

monthly

Still buying,

but $5bn less

mortg.+ $5bn

less Treas.

each month

60

China, Japan & now Eurozone on stimulus …

US & UK stopping/stopped, rates to rise (& QE to unwind?) Central Banks’ balance sheet expansion Total central bank assets, USD trillions

CBs big govt. bond holder, depressing yields CB holdings of gov.securities, % of total (Q3 2013)

QE can cause distortions in

asset prices, investor behaviour & wealth distribution

61

What’s next for policy decisions? Fed, BoE & BoJ

When should short term interest rates be increased? When/how should QE be

unwound?

• US tapering (i.e. a reduction in additional purchases, not unwind) likely finished Oct ’14

• UK stopped additional QE Nov ’12 … gilt holdings constant GBP375bn

• Next for US/UK = increase in policy rates driven by data about: inflation, employment/GDP growth, real

wages, spare capacity, etc.

• Timing/scale uncertain (UK spring 2015? US summer/late spring 2015?) More likely given ECB’s

ABSPP (announced 4 Sep), or if Eurozone sovereign bonds purchased too?

• Likely gradual increases & IRs end up below historical averages (e.g. UK c. 3% vs historic 5%)

• If the economy is recovering well (and state financing not disrupted), QE assets could be gradually sold

off

• If slow recovery, QE assets might be held till maturity (NB: UK QE long tenors so slow run-off) or re-

invested

One of Abenomics’ “3 arrows” … fired repeatedly, but still missing its mark?

• BoJ first central bank to implement QE (2001-2006), but positive growth and inflation elusive. Re-

activated Oct 2010 as Asset Purchase Programmes

• PM Abe’s “3 arrows” launched 2013 = fiscal stimulus, structural reforms & monetary easing (QE)

• BoJ targeting 2% inflation via monetary base doubling by end 2014 & open-ended asset buying (USD

1.4trn in first 2 years)

• However, tax hikes in 2014 & 2015, and negative GDP growth in Q2 2014, despite dramatic JPY

devaluation & equity market rally

62

What’s next for policy decisions? ECB

Eurozone recovery not on track → negative IRs + ABS QE; sovereign bond QE to come?

• The Eurozone after periphery sovereign-banking crises: low inflation/deflation (ECB “reaction

functions” also include “unanchored inflation expectations”); high unemployment; low growth; (arguably)

strong EUR; worrisome Debt/GDP ratios (e.g. Italy); uneven structural/fiscal/banking reforms;

constitutional & practical objections to (sovereign-bond) QE

• Increasingly zero/negative policy IRs (refi & depo rates)

• ABSPP (Asset-Backed Securities Purchase Programme) announced 4 Sep, details & first buying Oct:

• Provides both QE (for declining inflation) & CE (for credit market fragmentation & policy transmission to

the real economy, esp. SMEs)

• What could be bought? ABS backed by loans to non-financial private sector, incl. real estate (e.g.

ABS of auto & consumer loans/leases & credit cards, SME securitisations, RMBS & CMBS = residential

& commercial mortgage-backed securitisations)

• How much to be bought? Wait for Oct; potential universe ca. EUR850-875bn with ECB aim to re-

expand balance sheet to early 2012 levels (i.e. EUR2.7trn incl. tLTRO, when EUR2trn today)

• Sovereign QE?

• Door left open. If inflation forecasts fall further, could still buy liquid, nominal fixed-rate, central

government debt (of say 2y to 10y tenors)

• Likely only after ABSPP launch (Oct’14) + tLTRO (targeted Long-Term Refinancing Operation,

Sep/Dec’14) + bank AQR (Asset Quality Review)/stress tests (Nov’14)

II. QE’s impact on economies & markets

… and where might they revert to?

64

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14

US UK Eurozone Japan China India Brazil

GDP growth (annualised %)

Source: Bloomberg

GDP growth: QE curtails recession; less effective as stimulant?

• Global QE has probably shortened post-crisis recessions

• But stimulus effects on GDP growth have lags, and as markets/economies become conditioned,

arguably decreasing effectiveness of further doses

• What’s in store for global growth when there’re no further injections, or rates rise, or QE is unwound?

US QE1 US

QE2

US QE3

65

Year-on-year inflation (%)

Source: Bloomberg

Inflation: despite QE’s aims, deflation/low infl. fears persist

• UK inflation now below target, after years of overshooting

• But in most developed economies, low levels of inflation (and potential threats of deflation) are the

focus of monetary policy (conventional and unconventional)

• ECB just launched an ABS-focused QE programme … holding fire on a sovereign bond version

-3%-2%-1%0%1%2%3%4%5%6%7%

Jan

05

Jul

05

Jan

06

Jul

06

Jan

07

Jul

07

Jan

08

Jul

08

Jan

09

Jul

09

Jan

10

Jul

10

Jan

11

Jul

11

Jan

12

Jul

12

Jan

13

Jul

13

Jan

14

Jul

14

Jan

15

Jul

15

US CPI YoY (%) UK CPI EU Harmonized YoY (%) Euro stat EU HICP (%) Japan CPI YoY (%)

2%

target

US QE1 US

QE2

US QE3

Forecast

66

Term IRs – 10Y swap & real IRs

Source: Bloomberg

Interest rates: near historic lows … but for how much longer?

Central bank policy rates

Source: Bloomberg

Inflation (+ growth/employment) targets pre-crisis

→ effective zero IR policies

→“forward guidance” (inflation + employment)

→ back to “data-driven” US & UK policy?

• Central bank buying pushes bond prices up & yields

down

• EUR & GBP rates tend to follow the USD

• Fixed rates at/near historical lows mean very low

cost funding for corporates, but can make floating

rates less attractive

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

Jan

07

Jul

07

Jan

08

Jul

08

Jan

09

Jul

09

Jan

10

Jul

10

Jan

11

Jul

11

Jan

12

Jul

12

Jan

13

Jul

13

Jan

14

Jul

14

Jan

15

USD 10Y swap rate GBP 10Y swap rate EUR 10Y swap rate

USD 10Y real rate GBP 10Y real rate EUR 10Y real rate

QE3

IRs decline

despite tapering

QE1 QE2

Tapering mooted

May’13

0%

1%

2%

3%

4%

5%

6%

Jan

07

Jul

07

Jan

08

Jul

08

Jan

09

Jul

09

Jan

10

Jul

10

Jan

11

Jul

11

Jan

12

Jul

12

Jan

13

Jul

13

Jan

14

Jul

14

Jan

15

US Fed Funds Target Rate UK BoE Official Base RateECB Main Refi Rate

QE1 QE2 QE3

Sovereign

Crisis

67

Bond yield spreads to benchmarks - iBoxx Non-Financial

Corporates & Travel/Leisure (basis points)

Source: iBoxx, RBS

Credit: benign borrowing conditions …for how much longer?

• Central banks buy bonds from

banks & the markets so that

created cash & reserve

balances can be lent on to the

real economy (e.g. capex)

• But much has instead built up

on bank balance sheets,

leading to spread compression

in loan markets & deposit

pricing. Corporate & consumer

deleveraging compounds this

• Excess liquidity will be

siphoned off as QE naturally

unwinds (e.g. bonds mature),

but this could take many years

• However, taper tantrums,

recent High Yield investor

exits, and secondary market

illiquidity (driven by regulation)

suggest good times could end

suddenly & disruptively

0

100

200

300

400

500

600

700

800

Jan

07

Jul

07

Jan

08

Jul

08

Jan

09

Jul

09

Jan

10

Jul

10

Jan

11

Jul

11

Jan

12

Jul

12

Jan

13

Jul

13

Jan

14

Jul

14

iBoxx.EUR.Corporates iBoxx.EUR.Travel&LeisureiBoxx.GBP.Corporates iBoxx.GBP.Travel&LeisureiBoxx.USD.$Corporates iBoxx.USD.$Travel&Leisure

QE1 QE2 QE3

Sovereign

Crisis

68

Equities: resurgent …as a beneficiary of QE

Equity markets (index levels)

Source: Bloomberg, Financial Times

• As yield on fixed income drops, investors have pursued other returns, driving equity market returns

• There appears a relationship between equity market gains & Fed purchases

0

2,000

4,000

6,000

8,000

10,000

Jan

07

Jul

07

Jan

08

Jul

08

Jan

09

Jul

09

Jan

10

Jul

10

Jan

11

Jul

11

Jan

12

Jul

12

Jan

13

Jul

13

Jan

14

Jul

14

Jan

15

0

5000

10000

15000

20000

25000

30000

35000

S&P 500 (L-axis) FTSE 100 (L-axis) DAX (L-axis)NIFTY (L-axis) NIKKEI 225 (R-axis) Hang Seng (R-axis)

QE1 QE2 QE3

Sovereign

Crisis

69

EM FX (per USD, Jan 2007 = 100)

Source: Bloomberg

Implied FX volatility (% p.a., vs USD)

Source: Bloomberg

FX: EM currencies hit by tapering;

could global FX volatility spike on QE unwind?

• At QE's inception fears were voiced about "currency

wars" and competitive devaluations

• However, significant weakening in developed

market currencies has not occurred (except

JPY)

• QE's boost to asset markets may have attracted

foreign investor & safe haven flows

• Meanwhile, FX option volatilities are near pre-crisis

lows (incl. EUR, as break-up fears have receded)

• A very benign period existed for EM

currencies from early 2012 through the first

hint of tapering in May 2013

• The ensuing EM FX sell off meant many

companies with significant EM exposures

have seen a material decrease in financial

results

0%

5%

10%

15%

20%

25%

30%

35%

40%

Jan

07

Jul

07

Jan

08

Jul

08

Jan

09

Jul

09

Jan

10

Jul

10

Jan

11

Jul

11

Jan

12

Jul

12

Jan

13

Jul

13

Jan

14

Jul

14

GBPUSD EURUSD USDJPY USDINR USDBRL

70

80

90

100

110

120

130

140

150

160

170

Jan

07

Jul

07

Jan

08

Jul

08

Jan

09

Jul

09

Jan

10

Jul

10

Jan

11

Jul

11

Jan

12

Jul

12

Jan

13

Jul

13

Jan

14

Jul

14

USDTRY USDBRL USDZAR USDINR USDIDR

QE3

Tapering fears Sovereign

Crisis Post Lehman

QE1 QE2 QE1 QE2 QE3

Tapering fears Sovereign

Crisis

Post Lehman

III. Implications/considerations for

funding, risk & transaction management

71

Financing considerations (I)

Be prepared – prudent principles for uncertain times

• Debt maturities well distributed

• Reduce risks of large maturities/re-financings coinciding with policy actions & market disruption

• Make the most of current conditions

• Especially loan pricing & debt market demand

• Adequate cash/liquidity

• For industry cycles, and tiding over market disruptions + operational surprises

Opportunities to diversify may still exist

• Floating rate notes (FRNs)

• QE taper/unwind impacts duration-sensitive bonds → rise in investor demand for FRNs (at tighter

margins)

• Convertible bonds

• QE supportive of equity (and vol) makes convertibles cost-attractive means to diversify funding.

Opportunity may diminish when QE stops/unwound

72

Financing considerations (II)

Prepare for return of FX volatility

• Currencies as volatile as historically (especially Emerging Markets)?

• FX translation (accounting) could impact net assets, foreign earnings, and thus credit ratings,

covenants and key performance metrics

• Is the currency mix of debt optimal?

• Currency of debt issuance

• FX demand/supply affects spreads of cross-currency basis swaps

• Financing strategy should take into account changes in relative attractiveness & credit usage of

debt issuance in a currency vs another currency + swaps

More than just financial debt …

• Pension liabilities

• Pension deficits are often included in rating agencies’ net debt metrics

• As bond yields (hence discount rates for pension liabilities) rise, pension deficits reduce

• However, opportunities to fund deficits at low IRs also diminished

73

Risk management considerations

Think ahead

• Ready, steady, swap

• Consider swaps to floating – in USD & GBP, could benefit from receiving a fixed rate above that of

recently issued debt; in EUR & JPY, floating IRs low for even longer

• Credit lines, documentation and other logistics in place to take advantage of IR moves

• In USD & GBP, consider pre-hedging IRs of future debt

• Forward-starting swap rates have risen, but still low

• Corporates could still benefit from hedging IRs beyond typical horizons

• Can be hedge accounting friendly

FX hedging relatively cost-attractive

• Re-visit FX hedging

• IR differentials still low; attractive FX forward carry may not last (especially in EURUSD)

• Review FX risks from transactional sources (e.g. jet fuel & aircraft purchases) & translational ones

(foreign earnings & assets)

• Re-consider options

• Relatively cheap with many implied FX vols near historic lows

• Less consuming of bank credit lines (than FX forwards)

74

Transaction management considerations

Efficiency & Effectiveness … even when things change or are in crisis

• Globally-standardised electronic banking solutions

• Security, visibility & control of cash flows across network

e.g. multi-currency transaction platform that benefits airlines & customers (such as RBS Micropay)

• Centralising treasury functions

• Efficiency, accuracy (reporting & reconciliation), reduced operational costs

e.g. payment factories

• Rationalising banking structures

• Reduce network systems/platforms/services & redundancies, avoid complex fee structures, improve

transparency, optimise working capital

e.g. cash pooling & netting, supply chain & receivables financing

75

Considerations for Treasuries

Attend to the fundamentals

• Treasury partnering Operations

• Good mutual understanding/communications – business cyclicality/surprises & financial risks

• Core banking relationships, especially domestic ones

• When liquidity scarce, likely to be lent locally

• Manage ancillary income distribution

• Manage credit lines

Best practice Treasury policies/practices/systems

• Fit for purpose

• Strategic alignment, “crisis” resilience & flexibility

• Centralised management information/controls

• To properly understand, decide & act

• Efficient

• Every dollar of cost/revenue counts, whether from transactional CFs, cash management, working

capital, etc.

76

This presentation has been prepared by The Royal Bank of Scotland plc or one of its affiliates (“RBS”) exclusively for internal consideration by the recipient (the “Recipient”) for information purposes only. This presentation is incomplete without reference to, and should be viewed solely in conjunction with, any oral briefing provided by RBS. The presentation is proprietary to RBS and may not be disclosed to, or referred to, by any third party or distributed, reproduced or used for any other purpose without the prior written consent of RBS. RBS is not and shall not be obliged to update or correct any information contained in this presentation. This presentation is provided for discussion purposes only and its content should not be treated as advice of any kind. This presentation does not constitute an offer or invitation to enter into any engagement or transaction or an offer or invitation for the sale, purchase, exchange or transfer of any securities or a recommendation to enter into any transaction, and is not intended to form the basis of any investment decision. Neither this presentation nor our analyses are, nor purport to be, appraisals or valuations of the assets, securities or business(es) of the Recipient or any transaction counterparty.

This presentation is based upon information provided to RBS by the Recipient and/or publicly available information. It reflects prevailing conditions and our initial views as at this date which we reserve the right to change. We have relied upon and assumed, without verification, the accuracy and completeness of all information available to us, whether from public sources or provided by or on behalf of the Recipient, including any statements with respect to projections or prospects of the Recipient and related assumptions. RBS accepts no responsibili ty or liability for (and no representation or warranty or assurance of any kind, express or implied, is or will be made as to or in relation to) the accuracy or completeness of such information, the contents of this presentation or any action taken or omitted by the Recipient or any other person as a result of receiving it. However, this shall not restrict, exclude, or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not lawfully be disclaimed. The Recipient should not rely on any representations or undertakings inconsistent with the above paragraphs.

Nothing in this presentation constitutes a commitment to provide any formal advice or assistance to the Recipient or to enter into any transaction with the Recipient, which would be the subject of a separate mutually satisfactory engagement letter and/or other appropriate documentation between the Recipient and RBS. This presentation is not intended for distribution to retail clients (as defined in the Markets in Financial Instruments Directive (MiFID)) under any circumstances.

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