The global financial crisis transformed corporate priorities, pushing financial risk management high up the list. In turn, this shift has raised the profile of the executive who is often responsible for managing that risk: the corporate treasurer.
Before the crisis, the prevailing treasury trend was to concentrate on benchmarking and on best-in-class systems, processes and controls. In today’s environment, it’s all about access to liquidity, and there’s a greater focus on debt covenants.
Treasurers have also been working more closely with CFOs as risk and cash flow management have become greater corporate priorities.
To better manage risk, many treasurers have chosen to run a very conservative treasury operation in response to the economic crisis.
As the economy improves, however, many treasurers expect to spend the next few years focused on balance sheet repair. So what are the views of treasurers?
We asked two people responsible for their organisation’s treasury function – Timon Drakesmith, CFO, Hammerson, and Joe Romenesko, global treasurer, Jones Lang LaSalle – to offer their views on the top priorities for the treasury function in the current economic climate, how the culture of their organisations has changed in the years since the financial crisis began, and their relationships with their banks, among other things.
Hammerson has been managing retail destinations and office buildings across Europe for more than 50 years. A FTSE 100 company with a real-estate portfolio in the UK and France of around £5.7 billion (about $9 billion), Hammerson has investments in 18 major shopping centres and 18 retail parks and owns six London office buildings. Jones Lang LaSalle is a financial and professional services firm specialising in real estate services. The company’s services include capital markets, tenant representation, real estate investment banking, merchant banking, corporate finance, and consulting and investment management, among other things.
What are the top priorities for your treasury function in the current economic and financial environment, and why?
Drakesmith: Our priorities are very clear. With deposit rates being so low and margins on borrowing increasing, it has become increasingly important to efficiently manage our cash to minimum levels to save interest costs. We also regularly review who our cash is held with for counterparty risk. Liquidity is another priority – with banks restricting lending, maintaining access to funds from a variety of sources has become very important. Foreign exchange exposure is the third priority – the euro-zone crisis has led to a lot of volatility over the strength of the euro. We have therefore reviewed our hedging strategy for our French portfolio to ensure our assets are protected.
Romenesko: We focus first and foremost on ensuring sufficient liquidity for our 200 offices in 70 countries to operate with confidence that we will always meet our financial obligations, and also have the ability to grow the firm. We manage a $1.1bn credit facility, with 18 banks participating in the facility. These banks have headquarters in seven different countries, so the group reflects the global nature of our business.
Can you give examples of how the cash culture at your business has changed in the past couple of years? Can you quantify the benefits?
Drakesmith: To maintain minimal cash balances, we have sped up processes to pay cash out of subsidiary entities and pay down debt on our credit facilities. If we can reduce the average cash holding for the year by £10m, this will save us in the region of £100,000 (about $160,000) in interest.
Romenesko: We have been a net borrower for many years and, as a result, we have always been quite disciplined about using excess cash generated to repay our outstanding debt on our credit facility. Our employees understand that we are not a bank and, therefore, cannot extend long payment terms for our clients – although the typical payment terms vary greatly across the globe. We partnered with our clients to minimise the impact of bad debt during the global financial crisis, but that period was a good reminder that we need to remain vigilant in collecting our fees for the good work we perform for clients.
To what extent are cash management and other treasury issues discussed at board level today and how does this compare with the typical situation pre-crisis?
Drakesmith: The credit crisis of 2008 has changed the attitudes of everyone to the availability of funding and to how much interest and foreign exchange rates can move. Our board is committed to maintaining high liquidity levels and ensuring that our risk management strategies protect investors.
Romenesko: We provide quarterly updates to our board on our balance sheet position, our contemplated spending plan and our sensitivities for downside scenarios. We maintain an investment grade rating from both Moody’s and Standard & Poor’s. Our ability to demonstrate this financial strength is important, not only to our banks and shareholders, but also to our clients who are choosing long-term partners and to our employees who want to work for a financially strong and stable firm.
In what ways have you improved the efficiency of the treasury function through the use of technology developments or outsourcing? Can you quantify the benefits?
Drakesmith: We are fortunate to have a relatively simple treasury operation, but we have kept up to date with developments in information systems and internet banking systems. Having instant access to market information has become increasingly important and we have become closer to our banking group to keep in touch with the financial markets to evaluate our treasury strategy.
Romenesko: We have consolidated our European cash management to one banking partner and moved the payment processing into our in-house shared services organisation. Incorporating processing efficiencies has provided capacity for us to grow our European operations without the addition of significant infrastructure costs. With a regional banking platform, we utilise cash pooling to optimise the use of our cash balances across the region.
Which factors have had the greatest influence on how you manage your funding strategy and capital structure in recent times – volatility in financial markets, constraints on banks’ balance sheets, shareholders attitudes to risk etc? Can you explain what the effects have been?
Drakesmith: Volatility in the financial markets has led to borrowers having to take funding opportunistically when it is available. Hammerson has been able to maintain sufficient funding to not have to enter the markets at suboptimal times, but it can no longer be taken for granted that markets will be open. The reduction in banks’ balance sheets has led borrowers to seek alternative forms of finance and increasingly companies are using overseas forms of funding. However, we have substantially deleveraged since 2008, so while banks’ balance sheets have become constrained, our funding requirements have reduced.
Romenesko: We increased the capacity of our credit facility in 2010 and amended it in 2011 to obtain more favourable pricing and terms. We benefit from excellent relationships with the banks in our syndicate, many of whom are important clients of the firm. Our banks were very supportive during the global financial crisis and continue to be supportive. We attempt to direct reciprocal business to these lenders wherever we can.
Photo: Getty Images
Timon Drakesmith, CFO, Hammerson
Drakesmith, a chartered accountant, joined Hammerson as CFO in June 2011 from Great Portland Estates, where he had been finance director since 2005. Before this, Timon worked at Novar PLC as finance director of MK Electric and group director of financial operations. He was previously at Credit Suisse, Barclays, and Deloitte Haskins & Sells.
Joe Romenesko, global treasurer, Jones Lang LaSalle
Before joining the firm in 2000, Romenesko worked for eight years at Household International, where he held a number of positions. He has a Masters in management from the Kellogg School at Northwestern University and a BS from the University of Denver.