12 THE TREASURER MAY 2012

HSBC’s chairman told the conference that thedecisions taken by this generation of economic,financial and political leaders would haveconsequences for many years to come.

Douglas Flint, an ACT member, said thoseleaders had to make the judgements today onhow to move on from the worst financial andeconomic downturn since the 1930s against abackground of an ageing population and lowerthan expected growth rates. The problem for

policymakers, he said, was that “with interestrates in the developed world at record lows andwith fiscal flexibility all but exhausted, thearmoury to address the challenges is limited”.

Flint acknowledged that austerity measureshad limited popular support and that it would takepolitical courage and leadership to get themthrough. He said: “We have to recognise thatpolitical support is dependent inter alia on a beliefthat lessons have been learned from the recent

crisis and the financial system is aligned with thereal economy it serves.”

Political pressure, said Flint, had an implicitfocus on the benefits of regulatory reform fordomestic operations, which was in reality a formof protectionism. For example, higher capital ratioslead to domestic bias in branch-basedorganisations and funding availability from foreignbranches could be at risk if a company’s domesticoperations are troubled or capital requirementsare raised. And ringfencing raises the possibilitythat corporates will need more counterparties,fresh credit support annexes (CSAs) and areassessment of counterparty strength.

Flint characterised the current interactionbetween politics and regulation as the “line ofleast regret”.

He explained: “Hindsight allows deception onboth sides – we are convinced we really knowwhat caused the problem so that we can justifyactions to avoid repetition or justify no actionbecause lessons have been learned. We fuel thatself-deception by selectively pointing to eventsthat fit easily into our view of the world.”

Neither side wants to contemplate being askedwhy they did nothing to prevent another crisis, oralternatively why they turned the system upsidedown at huge cost to address an event that didnot occur or was less damaging than predicted.

act ANNUAL CONFERENCE

Following the line of least regret

AT THE ACT’S ANNUAL CONFERENCE IN LIVERPOOL THIS APRIL, A PANOPLY OFDEBATES ADDRESSED THE KEY TREASURY MANAGEMENT ISSUES FOR THE ONETHOUSAND-PLUS TREASURERS AND CORPORATE FINANCE PROFESSIONALS WHOATTENDED, AS THE REPORTS IN THESE PAGES DEMONSTRATE.

Flint (left):government’s

fiscal flexibility allbut exhausted

Treasurers must react as business becomes evermore global, was the message of a conferencesession on future-proofing the treasury functionfor an evolving world.

When you have a global business you need aglobal treasury, so Lesley Flowerdew, tax andtreasury director at Atkins, looked at centralisationversus decentralisation in a global business.Whatever individual business units need, treasurypolicy and processes will always be determinedat the centre, and Flowerdew explained howAtkins had set up cash pools giving greatervisibility. In a cash-generative business, control of

that cash helps to finance growth in all areasof operations.

As part of this process the engineering anddesign consultancy has been consolidating itsbanking partner group, with technology a strongfactor in determining which banks to work with,although bank strength is clearly vital too.Because Atkins often needs to move quickly, itneeds its banks to do the same. When a globalbusiness chooses its banking partner, the bank’sgeographical diversity should match itsrequirements, as in some areas banks will beoperating through respondent offices.

Aidene Walsh, head of GTS, UK and Ireland,RBS, looked at the drivers of change which globaltreasuries were facing. She said an RBS surveyof the working capital management priorities oftreasurers had found that (in descending order ofimportance) they were most concerned aboutrisk, liquidity, automation and centralisation.

She agreed that technology would continue tobe a big driver of change, that electronicinvoicing would become viable and that theSingle Euro Payments Area (SEPA) would simplifythe work of payment factories, which arespreading as far as China.

A global business demands a global treasury

MAY 2012 THE TREASURER 13

act ANNUAL CONFERENCE

The ACT annual conference finished in what hasbecome traditional fashion with a Question Timesession. Every year sees a new host for thesession and this year it was BBC Newsnight’stake-no-prisoners anchorman, Jeremy Paxman.

On the platform were four panellists. MatthewHurn, former president of the ACT, and TrevorWilliams, chief economist at Lloyds Bank, arefaces well known to treasurers. They were joinedby media adviser Heather Rabbatts and Peter

Hahn, a lecturer in the faculty of finance at CassBusiness School.

The tone for the session was set from the offby Paxman. He advised the audience: “Keep yourquestions pithy, and the ruder the better – it’sworked for me.”

It was not perhaps advice that was alwaysfollowed by those who posed questions but it wasstill a lively session, with discussions ranging overthe future of the euro, the potential monetary

policy of an independent Scotland, the role ofgovernment, consumer confidence, the role of themedia in the popular psyche, sources of growth,youth unemployment and training, why corporatesaren’t spending their cash piles, the advantagesand disadvantages of the world speaking English,US presidential elections, Euro 2012, and,perhaps inevitably, when the panellists had lastconsumed a Cornish pasty. On the last question,the answers were not always 100% transparent.

China flies the world growth flag

TV Rottweiler keeps pack in order

China is no longer an emerging market, but agrowth market like the other BRIC economies ofBrazil, Russia and India, according to AnnaStupnytska, macro-economist with GoldmanSachs Asset Management.

Stupnytska told the conference that Chinacould add $8 trillion to world GDP in the decade2011–21, assuming an average of 7.5% growtha year – by no means a miracle condition. That’stwo to three times larger than the GDP additionthe US is expected to contribute.

Stupnytska added that no euro zone countrywould make the top 10 for additions to worldGDP over the decade, although the UK would –but only just.

All this means that companies should belooking to access the opportunities for growth inChina. And those opportunities are changing. Forinstance, with the emergence of the Chineseconsumer, companies in China are not justmanufacturing and exporting but are starting tosell product in the country itself.

In a panel discussion chaired by KathleenHughes, managing director and head of global

liquidity sales at Goldman Sachs AssetManagement, the issues in doing business withChina were explored. Despite the country’seconomic size and the emergence of a domesticconsumer ready to spend, challenges still exist.

The capital markets still need demystifying;and raising funds onshore is difficult as theregulators are presented as infallible, so theidea of a bond default simply cannot beenvisaged. However, the renminbi bond market inHong Kong is an attractive proposition due totrade flows and the increasing convertibility ofthe renminbi.

But the legal, regulatory and culturalchallenges go beyond the capital markets. Onecontributor suggested it was easier to remitdollars from China than renminbi. The panelagreed that companies should not underestimatethe amount of documentation and regulation thathas to be overcome and how time-consumingthis process is.

The conference heard that companies withoperations in China agreed about the importanceof building relationships. Employing local staff

who can be a company’s eyes and ears on theground and who can understand and explain thelocal culture is an absolute must.

Local staff also need to understand grouppolicies and practices. For instance, onecompany had set up natural hedges by paying indollars, only for local staff to unwittinglyundermine the practice by paying in renminbi inreturn for a discount.

Many businesses still have to or choose towork with Chinese partners and it is importantthat all parties in a joint venture share the samegoals. It is crucial to continually ask questions ina bid to understand the issues. The samequestions should be put on a regular basisbecause the answer may change often.

But while there are differences and languagestill presents an ongoing barrier, it is essentialthat companies keep checking the key principles.Goldman Sachs, for example, has to ensure thatany market it enters is deep and has liquidity. Allother businesses need to be equally clear abouttheir key principles as they set out to explore theopportunity that is China.

14 THE TREASURER MAY 2012

The deputy governor of the Bank of England toldtreasurers that their companies had to “navigatea demanding obstacle course while the realeconomy rebalances”.

Paul Tucker, who is responsible for financialstability at the bank and a member of theMonetary Policy Committee, told the conferenceof the “compounding effect of the headwindsfacing the financial system”.

Pointing to the increasing importance of bondmarket financing for large companies, he saidthat such companies “may, for the moment, bewell placed to support the financing of smallerfirms. But it is fanciful to entertain the notion thatanyone other than the banking system can be themain backstop for working capital finance.”

He noted the historical role of bankers’acceptances in trade finance, and said that hehad wondered more than once whether a revivalwould be useful. But he added: “That is for you,as corporate treasurers and bankers, to pursue ifyou wish to.”

Tucker also described the Bank’s securedcommercial paper facility, which was launched acouple of years ago. He said that while invoice-based financing by banks had increased, take-upof the Bank’s facility had been limited, although itremained open.

But while important, he added, improvements

in working capital finance were insufficient. “Forlonger-term finance, I hope that businesses andthe City can work together to broaden access tothe corporate bond markets.”

Outlining various initiatives already under way,he revealed that “securitisation might even play arole”, but emphasised the importance of learningthe lessons from badly designed securitisations inthe past. “Sadly, the repair of the credit systemwill take time.”

Describing the process of putting in placebetter “rules of the game” for the financial system,Tucker warned that “for all the measures in train,they will, I fear, eventually be found wanting.” TheBank’s Financial Policy Committee (FPC), he said,was “the body charged with being on the case”.

He noted that both macro-economicpolicymakers and financial regulators had to learnlessons. “On the one hand, we all need to beattentive to the effects that easy monetary policyglobally can have on risk-taking behaviour. On theother hand, financial regulators cannot afford tofocus exclusively on the health of individual banksand dealers as though they were isolated atoms.The FPC is about filling the space betweenmonetary policy and microregulation with – in anadmittedly inelegant phrase – ‘macroprudential’policy: policy that is focused on the resilience ofthe system as a whole.”

act ANNUAL CONFERENCE

Tucker: headwinds affecting the financial system make rebalancing the real economy even harder

Bank juggles astreasurers dodge

Look to banksand beyond forM&A fundsBanks still have a major role to play in acquisitionfinancing but many companies may look elsewherefor their other strategic needs, according to DavidWilson, treasury project manager for packagingcompany DS Smith.

He suggested that banks or cash were the mostviable route for acquisitions, but that treasurersstill needed a clear view of the role of the debtcapital markets and a strong grasp of how debtinteracted with equity.

He recalled his company’s acquisition of theSCA packaging business, which involved lookingfor €1.6bn in financing, a third of which was tocome from equity. The starting assumption for thecompany was that the funds would come fromhigh-yield bonds, but Wilson said there was then asecond thought: why not ask the banks? Andultimately the banks delivered.

The finance for DS Smith to acquire SCAconsisted of a €300m bridge, a €400m four/five-year term loan, £342m cash and revolving creditfacility (RCF) plus £466m through an equity rightsissue 98.6% subscribed.

Thomas Neidert, group treasurer of Qiagen,explained how the financial structure of the bio-medical company had evolved over the years.Acquisitions for Qiagen have become a way of life,with the company spending near $2bn altogetherin cash since 2003 on acquisitions.

If a business is acquisitive this needs to bereflected in the financing structures. Neidert saidstraight equity had been great while the companywas in growth mode, but the required return onequity did pose some questions.

Echoing Wilson, he added that bank debt was amust in every corporate financing structure.Treasurers need to know their relationship banksand ensure that their bankers know them. Anddocumentation had to be structured to reflect theneeds of the business.

All a-TwitterThe Twitter feed was an amusing addition tothis year’s conference. Giving a runningcommentary on what was happening, thosewho contributed to the Twitter stream ensuredthat the important and the not so importantcould be duly noted by those in theconference hall and further afield.

Catch up on the ACT Twitter feed at#actupdate

MAY 2012 THE TREASURER 15

Don’t expect too much from the economy in2012, the group chief economist of RBS, AndrewMcLaughlin, has warned. Despite the title of histalk, “2012: make or break for the UK economy?”he said the UK would experience neither successnor failure this year.

The country has to confront three main issues:what kind of global recovery are we experiencing?what is the UK economic strategy? and willcorporates start spending? The 4% global growthfigures are close to the historic trends, but, asMcLaughlin observed, in the UK it feels like most

of the growth must be happening elsewhere.The idea is for the UK to export itself to growth

but as 80% of UK exports go to developedcountries which account for only 20% of globalgrowth, the exporters are, in McLaughlin’s words,“fishing in a shallow pool”.

The source of momentum in advancedeconomies is coming from the expansion ofcentral banks’ balance sheets as they try toreplace the shrinking balance sheets ofconsumers and companies. The policy is workingup to a point as it has removed the worst fears

act ANNUAL CONFERENCE

Economy toils against headwinds

On the exhibition floor

The exhibition at this year’s conference was the biggest and, dare we say?, the best yet. Inbetween the conference sessions delegates could see all the latest products that theincreasingly sophisticated treasury market had to offer. And this year for the first time therewas a seminar theatre running alongside the exhibition.

The ACT would like to thank all the delegates, exhibitors and sponsors for making the ACTAnnual Conference in Liverpool such a success.

Co-lead sponsors:

over what bankers like to call the tail risk. Indeed,there has been some improvement in riskappetite and the US has been adding jobs “at areasonable clip”.

Overall, McLaughlin concluded that while theDraghi put (the practice by ECB boss Mario Draghiof making unlimited loans to banks at low interestrates) had been reasonably successful, it couldnot promote recovery nor avert recession.

Indeed, the best example of the effect ofquantitative easing is the UK. The country hasexperienced a slow and protracted recovery,avoiding a deep and prolonged recession. To put“protracted” into context, McLaughlin said it couldtake seven years for the UK to regain the outputlost in its recession. To put it another way, it willbe 2015 before the country recovers the standardof living it enjoyed in 2007.

This has to be seen in the context of thebanking sector, where a “ghastly overreach” ledto everyone paying a terrible price. McLaughlinsaid that the banking sector was being repaired“at a rate of knots”, and its health was essentialto returning the economy to growth in the longrun. However, fixing the banking sector hascreated a headwind for the economy, hence theanaemic recovery.

McLaughlin dismissed the idea that the UKgovernment did not have a strategy for economicgrowth. He said the government had both talkedand acted tough in terms of fiscal restraint, whichwas helping to avoid a rating downgrade. Andwhile the strategy of low interest rates might behorrendous for savers, like democracy, it is betterthan the alternatives.

Equally, low interest rates are part of thegovernment’s economic strategy to keep sterlingcompetitive. The currency fell precipitately early onin the crisis and has stayed there since.McLaughlin said its value looked fair and “prettyrange-bound”.

The promise of cuts in both corporate andpersonal taxes, along with radical reform of theplanning system, underlines the message of jamtomorrow for risk takers.

One element that helps puncture the gloom hasbeen corporate balance sheets. Cash balanceshave never been higher because capitalexpenditure has never been lower.

The government hopes corporates will spendmore, but regular surveys of investment intentionshow muted enthusiasm. But the government hashigh expectations of corporates: it wants to seeexports double in the next decade. That meanscreating new products and services and wouldrepresent a huge supply-side effort.

16 THE TREASURER MAY 2012

Anybody got a crystal ball? I thought not.Uncertainty is the name of the game nowadays,and there was no shortage of diverse opinions atthe ACT Annual Conference on all matters fromthe future of the euro to the economy.

My reasons for attending the conference wereprobably similar to most delegates – I wanted toconnect again with old contacts, meet some newones, and generally update my knowledge. I havetaken a career break after redundancy threeyears ago. Prior to that I was group treasurer oftelecoms and IT company KCOM for 10 years,and the world is now a very different place to dobusiness in.

A key theme of the conference was theeconomic shift from West to East. Haiyan Wang,managing partner of the China India Institute,forecasted that by 2050 both China and Indiawould have a bigger GDP than the US. This bringsboth challenges and opportunities for treasurersand their organisations. China and India are fast-moving markets, and an entrepreneurial mindsetis required to scale up at speed. As they areearly-stage markets, Wang advised corporates tofocus on market development and not just marketshare development.

Not so long ago the biggest issue fortreasurers was availability of funding. In thetalkingtreasury briefing, which was exclusivelyfor corporate practitioners, the biggest issueseemed to be that corporates now have too muchcash. What then should they be doing with it?

Clearly, holding cash on any more than a short-term basis is detrimental to weighted averagecost of capital and the value of the business. Ifwe are through the crisis, should we reduce cashlevels, then? Do we need cash, or just certainty offunds? Should we be looking to avoid the costand counterparty risk of carrying cash?

This was a recurring theme of the conference.In a later session, Andrew McLaughlin of RBSlisted it as one of his “make or break” factors foreconomic recovery. He asked what it would taketo get corporates to save less and invest more.Should it be part of government strategy?

The main conference sessions tended to lookat the wider economic picture, and the breakoutsessions and workshops went more into the detailand specifics required by treasurers, with anumber of case studies. These covered topicssuch as corporate funding, managing risk,pensions, the future of treasury, investing cash,supplier finance, ratings, regulation – to namejust a few.

The only problem was deciding which to goto, particularly with the workshops, where therewas a choice of a dozen going on at the sametime at least 10 of which were relevant to mostcorporate treasurers.

The conference was a great opportunity fortreasurers to meet key suppliers. The sponsorsand exhibitors included banks, asset managers,technology providers, rating agencies, recruitersand advisers. There were also many networking

opportunities to meet other treasurers – thehighlight being the ACT gala dinner, which washeld in the amazing Liverpool Anglican Cathedral.

Treasurers often work alone or in small teams,and are expected to be experts on a wide rangeof technical issues. The conference providedhigh-quality, intensive training coupled withfocused networking, and is an essential way fortreasurers to keep their knowledge up to date andto build a support network.

If I want to issue a retail bond or convertiblebond, implement a treasury system or move tocomplex cash pooling, I now know a treasurer Ican ring up for unbiased advice. Attending theconference may mean three days out of a busyschedule, but treasurers can return to work to bemore effective and ready to add even more valueto their organisations.

All in all, the conference was a huge successand I would like to congratulate the ACT onstaging an event that was incredibly wellorganised and well thought out.

I’m not sure about the conference slogan ofclarity in a complex world – I think that there isstill far too much uncertainty around to be able toget much clarity – but we were definitely shownthe opportunity.

Next year’s conference is 29 April to 1 May2013. If I’ve got any advice for treasurerswondering whether to attend, it’s this: go!

saraheclarke@live.co.uk

act ANNUAL CONFERENCE

The delegate’s viewSARAH CLARKE MCT FOUND THE ACT ANNUAL CONFERENCE TO BE AN EXHILARATING EXPERIENCE.