Can the crisis make treasury stronger?

8/8/2019 Can the crisis make treasury stronger?

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Can the crisis maketreasury stronger?

Corporate Treasury SolutionsGlobal Treasury Survey 2010


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2 PricewaterhouseCoopers

In the 2010 PricewaterhouseCoopers (PwC) Global Treasury Survey weexamine treasurys reaction to the nancial crisis, covering both the initialcollapse o liquidity and the economic downturn that ollowed. Weretreasury teams prepared, how e ectively did they respond and what are the

lessons or the uture? With the impact o the crisis thrusting treasurers intothe spotlight, how has this attention a ected their infuence and statuswithin the business and how can they capitalise on the opportunities thispresents?

Can treasury emerge stronger rom the nancial crisis?


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PricewaterhouseCoopers

Franois MasquelierHonorary Chairman and Secretary,European Association o Corporate Treasurers

I am very pleased to introduce the PricewaterhouseCoopersGlobal Treasury Survey 2010. The ocus o the survey is theevolution o the demands placed on treasury teams andwhat they are doing to meet them in the wake o the nancialcrisis. However, given the unprecedented turmoil thatmarked the crisis and its continuing impact on almost everyaspect o treasury management, revolution might be a moreapt description.

The survey con rms that the best practice developed in theyears prior to the crisis would have provided a sound

oundation or dealing with its impact in areas ranging romliquidity and counterparty risk management to the volatility incommodity prices and oreign exchange rates. Yet ewtreasurers had su cient resources to apply best practiceacross the board and, even now, only a small proportion othe participants in PwCs survey have been able to securethe extra investment they need to help ensure the sa ety,liquidity and pro tability o the businesses they serve.

On a more positive note, the key role played by treasuryteams in tackling the allout rom the crisis has won ourpro ession new ound recognition and respect within the

boardroom and wider business. The key challenge isensuring that this pro le can be translated into investment inthe people and technology needed to apply best practiceand enable treasury teams to realise their ull potential.

Securing unding remains one o the toughest challengesacing treasury teams. A strong relationship with partner

banks remains the key to securing nance. However, as thesurvey highlights, many banks are moving away romproviding unding as part o a long-term port olio approachtowards ensuring that each transaction is pro table in its ownright. Clear and compelling metrics that demonstrate theoverall value o the relationship will there ore be essential inencouraging banks to o er avourable credit availability/terms.

With nearly 600 treasurers taking part, a survey such as this isa major undertaking. I would like to thank all the participants orsharing their time and insights. I would also like to commendPwC or their hard work in conducting the survey and preparingthis report. I believe that the ndings o this ar-reaching surveywill provide a valuable contribution to de ning the keychallenges and capitalising on the opportunities ahead. I wishyou an enjoyable and interesting read.


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PricewaterhouseCoopers

01 Introduction

03 Executive summary

09 Objectives o the 2010 Treasury Survey

13 Treasury: An overviewResources, demands and degree o centralisation

17 Treasurys response to the crisis Treasury approach

Bank relationships and liquidity management

Bank relationships: What has changed?

Cash management

Long-term unding

Working capital management

Risk management a. Commodity riskb. Foreign currency riskc. Interest rate riskd. Counterparty risk

Accounting: Help, hindrance or cause?

Tax implications

37 Priorities or investment

43 Appendices Breakdown o respondents

46 Contacts

Contents


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PricewaterhouseCoopers 1

John F Kennedy once noted that the Chinese use two brush strokes to write the word crisis. Onebrush stroke stands or danger, the other or opportunity. In a crisis, be aware o the danger, butrecognise the opportunity. Kennedys perceptive observation would provide an apt description o thecurrent state o the treasury pro ession.

Dealing with the nancial crisis, including the impact on unding, liquidity management, commodityprice volatility and nancial counterparty risk, has provided the sternest possible test or treasuryteams. Yet it has also brought the work o treasury to the ore ront o the boardroom agenda andthere ore created a once-in-a-career opportunity to raise the status and infuence o treasury withinthe business.

The latest in PwCs periodic surveys o treasurers worldwide examines how the pro ession hasresponded to the crisis, assesses its lasting impact and nally looks at how treasury teams can turnthe experience to their advantage.

We would like to thank all the participants who kindly gave their valuable time and input into thissurvey. We hope that the ndings summarised in this report provide some use ul insights at this pivotal

juncture or the treasury unction.

Introduction


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Executive summary


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Executive summary

Raised pro le

Nearly 80% o participants believe that the nancial crisis has won them greater boardroomattention.

Value recognisedNearly 70% o participants believe that the crisis has highlighted the value they createwithin the business.

Pro le not translated into investment

Only 20% have secured extra resources as a result o the crisis.

Bank relationships in fuxMore than 70% o participants are keen to sustain a long-term port olio-style relationshipwith their bank, though 60% believe their banks would pre er an individually pro tabletransactional approach.

Earlier warning

Participants are augmenting credit ratings with earlier warning systems or counterpartyrisk, with nearly three times more participants monitoring credit de ault swaps (CDS) thanbe ore the crisis.

Back to basicsThe proportion o participants rating cash management and working capital managementas highly important has more than doubled ( rom 35% pre-crisis to more than 70% duringand a ter).

On top o exposuresRisk management tops the list o priorities or the uture.

Key ndings


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Survey aimsThis years PwC Treasury Survey examines how the global

nancial crisis and subsequent economic recession havea ected the treasury unction. Were treasurers prepared?How did they react during the crisis? What will be the newshape o treasury in the very di erent environment emerging

rom the crisis?

As this was a global crisis, we have endeavoured to expandthis years survey beyond its traditional European ocus tochart the response and lessons learned rom across the world.

585 treasurers responded rom 26 di erent countries acrossall ve continents. The participants came rom 330multinational companies, covering all sectors and withturnovers ranging rom less than 1 billion to over 10 billion.

Raised pro leTreasury teams ound themselves at the sharp end o thecrisis. The upheaval began with a sudden and catastrophicrestriction in access to liquidity, a key element o thetreasurers remit. This was then ollowed by global panic,which saw the turmoil spread into the real economy,resulting in huge alls in previously record-breakingcommodity prices and dramatic shi ts in once-stablecurrency pairs. Again, managing such nancial risks is a coretreasury responsibility.

Despite the huge pressure they aced during this time, mostsurvey participants recognise it as an opportunity to pushtheir issues to the top o the corporate agenda. Nearly 80%o participants believe they now have the boards attentionand more than 70% have seen their reputation or addingvalue increase throughout the business (see Figure 1).

The survey shows that many treasurers were prepared, atleast in part, or the e ects o the crisis. However, ew wouldclaim to have been su ciently prepared in all areas and allhave drawn important lessons rom the experience. Ratherthan highlighting the need or new approaches, the crisis hasunderlined the importance o bringing established bestpractice to the ore.

Cash is king againCash is king has been an enduring mantra throughout ourcareers. However, it would appear that many practitioners inboth banks and treasury teams neglected the undamentalso cash and liquidity management in avour o more exoticactivities (including derivatives, structured bonds and M&A

services).This situation has now reversed. As access to liquiditydeclined, the proportion o survey participants rating cashmanagement and working capital management as highlyimportant has increased signi cantly ( rom 35% pre-crisis tomore than 70% during and a ter).

Treasurers have been reminded that having large amounts odebt rom any one source and with the same maturity maybe more e cient to structure and negotiate, but can result inconcentration risk. Many companies are now not onlydiversi ying this risk across counterparties, markets and timeperiods, but are also holding an excess o cash as theirultimate backstop acility.

0 20 40 60 100%

27 73

27 67 6

60

80

Boards attention

Business unitsinterest

Treasury budget

Treasury seen asadding value

Increased Remained the same Decreased

79

69 30

21

0

1

53 46

20 75 5

1

Figure 1: Impact o the nancial crisis on treasury teams

Executive Summary


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Bank relationships based ontransparency and reciprocityFor many years, both businesses and banks have spokeno the importance o their long-term relationships, o tenbased on an understanding that while unding is providednow, other more pro table business will ollow. The crisistested these relationships to the extreme and in many casesthey ailed.

From a technical perspective, the crisis provided a tellingreminder o the importance o negotiating and monitoring loandocumentation and covenants. These were used in manysituations to withdraw unding when it was needed most.

On a more philosophical level, many treasurers have wokenup to just how important their bank relationships are (56%rated these as highly important pre-crisis compared to 84%during the crisis) and are now questioning what type orelationship they have.

The survey shows that most treasurers now want a long-term relationship more than ever, but note that their banksare moving to a more transactional ocus (see Figure 2).

Figure 2: Pulling in di erent directions: the relationshiptreasurers want/The approach they believe banks would pre er

0 20 40 60 100%

27 7327 67 6

60 40

80

The bankrelationship

treasurers want

The approachtreasurers believe

banks would prefer

More transactionalMore long-term/portfolio

It may be possible to have both to some extent, but this willrequire more transparency and detailed monitoring (includingbalanced scorecards) on both sides to ensure therelationship stays mutually bene cial, and hence robust, inthe long term.

Counterparty risk sophistication A crucial aspect o a banks willingness to grant unding is,o course, its own nancial strength. While it has long beenknown that a major bank could collapse, ew treasurersbelieved this was su ciently likely to lead them to activelymonitor the resulting risks.

In the wake o the crisis, the probability o a major bankcollapsing is seen as real and the impact o this risk is nowbetter understood. The lesson companies have learnt is howdevastating this impact can be. More subtly though,treasurers have realised that banking counterparties do notnecessarily need to collapse to withdraw unding or otherservices.

The survey shows that this is one o the areas where bestpractice has evolved the most as a result o the crisis. 82%o respondents viewed counterparty risk as either a mediumor high priority during the crisis and saw this continuingpost-crisis.

The tracking o counterparty risk has evolved rommonitoring credit ratings (which many now believe are tooslow in reacting to changes) to also looking at more real-timeindicators such as CDS spreads, equity prices and bondyields (see Figure 3). In addition, many are also nowcalculating their exposures not only on a nominal basis, butalso based on air values and potential uture exposures.

Figure 3: Approach to counterparty risk management

0 20 40 60 100%

51 4 22 67 11

42 10 6 24 12 6

45 9 6 23 11 6

80

Before crisis

During crisis

After crisis

Check published credit ratings

Monitor equity pricesMonitor bond yieldsMonitor CDS spread evolutionNot monitoredOther

Counterparty risk is major issue 82%rank it as medium or high priority.

Many treasurers have woken up to justhow important their bank relationships areand are now questioning what type orelationship they have.

Executive Summary


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Shi t rom standardised to active

nancial risk managementThe survey ound that approaches to nancial riskmanagement, particularly oreign exchange (FX) risk andcommodity risk, have had to evolve to cope with the extrememarket conditions and the fuctuations in their underlyingbusiness exposures.

In both areas, the survey not only reveals an increase inhedging o these risks but also a gradual move towardsmore active hedging ( or example, 33% o participants haveadopted an active or aggressive approach to commodity riskhedging, compared to 25% be ore the crisis). It appears thatthe previous standardised approaches are increasingly seenas not being up to dealing with the volatile markets duringthe crisis.

Treasurers will increasingly be adding value by combiningtheir in-depth knowledge o market orces with an activepartnership with the business, thereby determining theoptimal hedging strategy and timing.

Best practice has been neglecteddue to lack o priority/investmentExisting best practice has been proved right by the test othe crisis. Our 2006 treasury survey cited areas such as bankrelationships, unding and risk management as the areaswhere treasurers believed they could add the most value,priorities that were critical in the crisis (see Figure 5).

The question is why so many companies did not appear togive best practice the priority it deserved.

Standardised hedging techniquesinsu cient to cope with theunprecedented market turbulence.

Figure 5: Treasurers perspective on value-adding activities PwC European Treasury survey 2006

87

10087

86

76

66

51

5

6756

7567

8478

0 4020 60 80 100%

Bank relationshipLong-term fundingCash management

Treasury risk managementCapital structure

Decision support tomanagement

Working capital managementSupport/services to other

areas to businessTax

Credit rating managementM&A support

InsurancesPensions

Other

Percentage of responses

Treasury unctions have traditionally been small, understa edand under- unded departments. The crisis has shown thatthe consequences o neglecting the treasury unction can bedevastating. Nonetheless, the survey shows that althoughboth boards and business teams now realise the scale orisks managed by treasury, only 20% o treasurers havereceived any additional investment budget in the wake o thecrisis.

While the pain o liquidity pressures and market instability is

still resh in CEOs and CFOs memories, the key challengeor treasury teams is how to press the case or su cientresources to implement best practice.

PwC 2006 versus 2010 survey show bestpractice has been proven right.

Executive Summary


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Figure 7: Most promising developments

0 10 20 4030 50 60%

Cash flow forecasting

Bank relationship management


Reviewing/improving risk management policiesIn-house banking

SWIFT connectivity

Payment factories

New technology/systems

Credit risk management tools

SEPA

Shared service centres

Global banking

Partnering with the business

Commodity risk management

Supply chain financing

Enterprise-wide risk management

Bank industry consolidationInnovative financial instruments/structured finance solutions

IFRS US GAAP convergence

Web services

Additional regulations following the financial crisis

Outsourcing

Other, please specify

Weather derivatives

52

52

3245

23

26

26

16

21

23

15

14

14

1010

9

7

5

4

1

1

17

22

57

Add value in the utureFigure 6: Where treasuries can add the most value in the next

ve years

0 10 20 30 50%40

Liquidity


Cash management

Risk management

Reviewing/improving risk

management policies

FX management

New technology/systems

Funding

Cash flow forecasting

Partnering with the business

46

31

30

24

22

18

13

13

12

11

It would appear that while unding is at the top o the agendanow, this is perceived to be a temporary blip (see Figure 6).Presumably, treasurers eel once they have taken on boardthe lessons learnt during the crisis about unding, theyshould resume their ocus on the core business o risk andcash management, but this time with the active partnershipo the business.

The crisis was a challenge or treasurers, CFOs and boardsalike. Treasurers have used this as an opportunity to showwhat they can do and where investment has been lacking.They now have a clear view o where they can add mostvalue in the uture and where the most promising newdevelopments will come rom (see Figure 7). This ispredominantly in the areas o cash, working capitalmanagement, and enhanced risk management capabilities.There is a strong belie that investment in the tools andtechnology needed to support these activities will be criticalin enabling treasury to prepare or uture crises.

Most promising developments are on cash & liquidity and the tools and technology to

support these SWIFT, in-house banking, systems.

Executive Summary


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Objectives o the2010 treasury survey


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As with PwCs previous treasury surveys, we

have set out to gather treasurers views onhow their pro ession is per orming, thechallenges it aces and the drivers anddevelopments that are set to shape theevolution o best practice over the next threeto ve years.

This survey assesses treasurers level opreparation or the crisis; their response to itsun olding impact and the lasting changes thatare likely to come in its wake as we seek toidenti y the key lessons or the uture.

A crisis o two partsTo gain a clear understanding o the impact o the crisis,our questions asked respondents to reply across three timeperiods:

What did you do be ore the crisis?a)

What did you do during the crisis?b)

What do you intend to do a ter the crisis?c)We have de ned the crisis as running rom July 2007 untilwell, today, as it is still debatable whether we are completelyout o the woods yet.

To ully understand the results o this survey it is important tobear in mind that the crisis was made up o two distinctparts, with each presenting di erent challenges and drivingdi ering behaviours.



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After crisisDuring crisis

Economic crisis

Before crisis

0

100

200

300

400

500

600

0 3 / 0 3 / 2 0 0 6

0 3 / 0 5 / 2 0 0 6

0 3 / 0 7 / 2 0 0 6

0 3 / 0 9 / 2 0 0 6

0 3 / 1 1 / 2 0 0 6

0 3 / 0 1 / 2 0 0 7

0 3 / 0 3 / 2 0 0 7

0 3 / 0 5 / 2 0 0 7

0 3 / 0 7 / 2 0 0 7

0 3 / 0 9 / 2 0 0 7

0 3 / 1 1 / 2 0 0 7

0 3 / 0 1 / 2 0 0 8

0 3 / 0 3 / 2 0 0 8

0 3 / 0 5 / 2 0 0 8

0 3 / 0 7 / 2 0 0 8

0 3 / 0 9 / 2 0 0 8

0 3 / 1 1 / 2 0 0 8

0 3 / 0 1 / 2 0 0 9

0 3 / 0 3 / 2 0 0 9

0 3 / 0 5 / 2 0 0 9

0 3 / 0 7 / 2 0 0 9

0 3 / 0 9 / 2 0 0 9

0 3 / 1 1 / 2 0 0 9

0 3 / 0 1 / 2 0 1 0

0 3 / 0 3 / 2 0 1 0

0 3 / 0 5 / 2 0 1 0

0 3 / 0 7 / 2 0 1 0

0 3 / 0 9 / 2 0 1 0

0 3 / 1 1 / 2 0 1 0

C D S s p r e a

d ( i n

b a s

i s p o

i n t s )

Time

5yr credit defaultspread US banks

Liquidity crisis

Figure 1: Credit de ault swap developments since 1 January 2006

Part 1 The credit crunch

The credit crunch, as it was dubbed by the media, denotes theliquidity squeeze that precipitated the crisis (which or somecompanies and countries alike continues to this day). This canbe seen as starting in around July 2007 when CDS spreads,which with the bene t o hindsight we now recognise as havingbeen irrationally low, suddenly shot up to unprecedented levels(see Figure 1). The subsequent collapse o Lehman Brothers inSeptember 2008 brought the once unimaginable scale o thecrisis into the sharpest possible ocus.

For most treasurers, this was the period when the availabilityo easy (or or some any) liquidity stopped abruptly. Thisprovoked, as we will see, emergency responses rom allsections o the markets as deepening uncertainty translatedinto near paralysis.

Bizarrely, this was also the period where commodity pricescontinued, i not accelerated, their upward spiral, presentingairlines and others with a doubly adverse impact.



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By the summer o 2008, commodity prices had also begunto slide (see Figure 2) as the liquidity crisis became aneconomic crisis. Suddenly, treasurers were not onlycon ronted with the problem o accessing liquidity rom the

nancial markets to und their operations, but their revenuestreams were drying up too.

This second part o the crisis was also accompanied byturbulent times on the FX markets as previously stablecurrency pairs began to swing wildly.

This new part o the crisis demanded drastic action romtreasurers, CFOs and CEOs on multiple ronts, including

unding, FX, commodities and working capital. Thechallenges were heightened by the inability o the nancialmarkets to determine a air value or the nancialinstruments that had long been used to manage such risks.

Against the background o this turmoil, the objective o thissurvey is to analyse what treasurers as a pro ession got rightin advance, what were their reactions to the crisis and, mostimportantly o all, what are the long-term lessons to be learnt?

Part 2 The economic crisis

Figure 2: Normalised price evolutions since 1 January 2006

0

50

100

150

200

250

0 3 / 0 1 / 2 0 0 6

0 3 / 0 3 / 2 0 0 6

0 3 / 0 5 / 2 0 0 6

0 3 / 0 7 / 2 0 0 6

0 3 / 0 9 / 2 0 0 6

0 3 / 1 1 / 2 0 0 6

0 3 / 0 1 / 2 0 0 7

0 3 / 0 3 / 2 0 0 7

0 3 / 0 5 / 2 0 0 7

0 3 / 0 7 / 2 0 0 7

0 3 / 0 9 / 2 0 0 7

0 3 / 1 1 / 2 0 0 7

0 3 / 0 1 / 2 0 0 8

0 3 / 0 3 / 2 0 0 8

0 3 / 0 5 / 2 0 0 8

0 3 / 0 7 / 2 0 0 8

0 3 / 0 9 / 2 0 0 8

0 3 / 1 1 / 2 0 0 8

0 3 / 0 1 / 2 0 0 9

0 3 / 0 3 / 2 0 0 9

0 3 / 0 5 / 2 0 0 9

0 3 / 0 7 / 2 0 0 9

0 3 / 0 9 / 2 0 0 9

0 3 / 1 1 / 2 0 0 9

0 3 / 0 1 / 2 0 1 0

0 3 / 0 3 / 2 0 1 0

0 3 / 0 5 / 2 0 1 0

0 3 / 0 7 / 2 0 1 0

0 3 / 0 9 / 2 0 1 0

0 3 / 1 1 / 2 0 1 0

N o r m a

l i s e

d p r i c e s

Time

S&P Commodity Index

Euribor 3mUSD -EUR

GBP -EUR

After crisisDuring crisis

Economic crisis

Before crisis

Liquidity crisis



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Treasury: An overview


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Resources, demands

and degree o centralisation

Heightened risk and tighter regulationspurs greater centralisation andspecialisation.

The survey sample brought together a representative crosssection o treasury unction sizes. It is interesting to note that62% o the treasuries come rom geographically dispersedbusinesses (covering ten or more countries) and hence arelikely to be dealing with complex cross-border liquidity,currency and counterparty issues (see Figure 1).

Figure 1: Activities in number o countries (%)

22

37

25

16

Less than 3

3 to 10

11 to 50

More than 50

Figure 2: Total annual cost o treasury operations (%)

34

21

11

13

21

Less than 500.000

Between 500.000 and

1 million

Between 1 million

and 2.5 million

Between 2.5 million

and 5 million

5 million or more

However, despite the cross-border complexity, only 45% otreasuries are operating with a budget o more than 1m per

annum (see Figure 2). Resource pressure is there ore a keychallenge in the management o such a highly sophisticateddepartment.

Despite the risks involved, mosttreasuries need to manage on a budget oless than 1m.



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Figure 3: Deployment o treasury sta

0

5

10

15

20

25

30

35

40

zero 1 to 4

2

3635

1821

69

5 6

32

9 8 85

5 to 8 9 to 12 13 to 20 21 to 50 above 50

40%

30

20

10

0

At corporate treasury At the business units/local entities

Survey participants operate with an average head o cetreasury work orce o around ve people. However, as Figure3 shows, around 30% o respondents operate with morethan ten people, and indeed 15 treasuries had over 50people in head o ce treasury alone.

Such high sta ng levels at head o ce refect the growingcentralisation and specialisation seen as being needed tomanage the complexity o risks and regulations aced bytodays treasury. This is borne out by the act that the

average headcount in the business is only two. Figure 3shows that 35% have no headcount at all remaining withinthe business, with a urther 18% only having one to ourpeople to cover the large geographical spread outlinedearlier.

Given the expense o maintaining quality sta (which arebecoming more and more scarce in todays market), alongwith the cost o IT systems, banking charges and theprojects necessary to keep up with the latest business and

nancial demands, the limited budget must be used wisely.

The crisis highlighted the di culties aced by many under-resourced treasuries in managing liquidity, counterparty,commodity risk and more, which actually led to muchgreater costs to stay afoat and, in some cases, led tobankruptcy. It will be interesting to see how treasurers canuse the current ocus on their work to increase their budgets.



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Figure 4: Turnover and number o operating countries byparticipant country

0

10

20

30

40

50

Belgium

4.117.89

29

37

23 22

39 40

49

3.80 2.855.27

7.769.86

50

40

30

20

10

0Germany Italy Spain Switzerland UK US

Average annual turnover (bn) Average number of countries

Figure 4 shows that the US- and UK-based companiesoperate over the most number o countries (averagingbetween 40 and 50). Along with Germany, the UK andUS-based participants are also the largest companies withaverage turnovers o between 7.8 10bn. It is not surprisingthat these countries also have large numbers o treasury staand average budgets between 2.5m and 3.2m.

Under-resourced treasuries had di cultymanaging all risks adequately.

Figure 5: Deployment o treasury sta by country

0

5

10

15

20

25

30

35

40

Belgium

5

1316 15

9 87 7

98 7 8

16

3740

30

20

10

0Germany Italy Spain Switzerland UK USA

Treasury staff per company: At corporate treasuryTreasury staff per company: At the business units/local entities

It is interesting to note that despite having the broadest rangeo operating territories to cover, treasury teams within the USand UK-based companies are also the most centralised (seeFigure 5). Perhaps it is because o their economic andgeographical scale that they have needed to build up largercentralised teams and hence it is more cost-e cient toconcentrate treasury tasks at the HQ rather than across thebusiness. Belgium is the opposite, perhaps refecting thehigher volume o pure treasury operations in this tax-e cientterritory, while the HQ might be located elsewhere. Treasuryteams operating out o Belgium can concentrate on pure

unding and risk management activities rather than the morelabour-intensive payments processing etc.



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Treasurys responseto the crisis

In this section, we examine the overallapproach to risk during the crisis and thenanalyse in detail how the crisis a ected eacho the undamental risk areas being managedwithin treasury.

Treasury approach 18

Bank relationships and liquiditymanagement 18

Bank relationships:What has changed? 20

Cash management 21

Long-term funding 22Working capital management 24

Risk management 26

A: Commodity risk 26

B: Foreign currency risk 28

C: Interest rate risk 30

D: Counterparty risk 31 Accounting: Help, hindrance

or cause? 33Tax implications 35


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Bank relationships and

liquidity managementNearly 80% o participants now believe that bankrelationship management is a high priority compared to only56% prior to the crisis (see Figure 1). Although notsurprising, these gures point to a undamental shi t.

Figure 1: Importance o bank relationship management

0 20 40 60 100%

78 19 3

84 14 2

56 37 7

80

Before crisis

During crisis

After crisis

HighMediumLow

Companies are now conscious o their vulnerability to boththeir banks strengths and their weaknesses, and these pullthem in opposing directions:

a) Counterparty risk

The thought o one o their banks going bankrupt hadbeen pretty unthinkable or most treasurers. O ten weheard they are huge in comparison to us or they take abigger risk on us than us on them. This may have beentrue, but the act that their risk was bigger does notremove yours.

It goes without saying that the crisis put paid to suchnotions. Recent developments tend to indicate that theconcept o too big to ail is no longer valid. As such,quality o counterparty risk management and thediversi cation o that risk will be a key element in the newbank relationship model.

b) Access to unding

As banks own liquidity was squeezed, the impact waspassed on to their clients. Most banks have restricted theextension o credit lines to their existing key corporaterelationships (so-called Tier 1 clients), reduced wherepossible credit lines with Tier 2 clients, and re used anycredit access to new relationships, even including thosewith high credit ratings.

The crisis has stressed one thing perhaps

more than any other: the importance ogood bank relationships.

Treasury approach

Value-added approach gains ground ascost centre approach is shown to beinsu cient to deal with market turbulence.

As Figure 1 highlights, prior to the crisis a clear majority oparticipants had already adopted a value-added approach totreasury. By this we mean working to actively reduce theoverall risk exposures aced by the business. This involvesusing the skills, experience and judgement o the treasury todecide what, when and how to hedge in order to give the

best advice and assistance to the business.It is surprising to see that prior to the crisis almost a third otreasuries still considered themselves as a cost centre.Under our de nition, this means simply capturing theexposures o their businesses and passing these on to themarket in a back-to-back ashion, without looking or internalimprovements or netting opportunities. However, o thesecost centre treasuries, a signi cant proportion realisedduring the crisis that this mechanical approach was notsu cient to cope with the fuctuations and uncertaintiesthrown up by the prevailing market turmoil.

It is interesting to note that even the pro t centre treasuries

(those who may increase the exposure o the companydepending on their judgement) also retreated slightly duringthe crisis. Even they, it seemed, did not have a clear viewabout where the markets were heading and how to pro t

rom it.

Figure 1: Model o treasury unction

25 68 7

0 20 40 60 100%

27 67 6

32 60 8

80

Before crisis

During crisis

After crisis

Cost centre Value-added centreProfit centre



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This raises the question o whether you are seen as Tier 1 byyour core banks. An improbably large 61% o participantsbelieve they are (see Figure 2). Surely this cannot be true andthe proportions would not be the same i answered candidlyby the banking community when asked how many o yourclients are Tier 1?.

Figure 2: Client category with their core banks (%)

11

24

4

61

Tier 1

Tier 2

Tier 3

Dont know

This raises two urther interesting questions:

Does your bank view your relationship as positively as youa)think it does?

and i not, or i you are already aware that you are notb)Tier 1, how can you join it, and hence gain access to thescarce liquidity reserved or the privileged ew?

One obvious answer is to slice your banking pie into largerportions, avouring a smaller number o core banks. Indeed,in companies with a high number o bank relationships thesize o the banking panel did drop. The average number obank relationships or a company in the category more thanten bank relationships was 25 be ore the crisis, decreasingto 24 during the crisis, and is expected to reach the muchlower level o 21 a ter the crisis (see Figure 3a). This couldstem rom the act that some o the banks that wereconsidered as core banks be ore the crisis have not beenable to meet the companys requirements ( nancing,minimum rating or counterparty risk, etc.) and are no longerconsidered as core. Alternatively, companies view that theywere Tier 1 was not shared by their bank and hence theywere dropped by their bankers.

Figure 3a: Number o core cash management banks

19

20

21

22

23

24

25

26

Before crisis

24

25

21

26

25

24

23

19

20

21

22

Average number of banks with more than10 bank relationships before crisis

During crisis After crisis

With individual banks giving less credit per client, somecompanies have been pushed in the opposite direction bydeciding to deal with more banks to satis y their ull liquidityrequirement. This trend is also highlighted in Figure 3b. Morethan a quarter o the participants that had a small number ocore bank relationships (1- 3 banks) be ore the crisis expectthis number to increase a ter the crisis.

Figure 3b: Number o core cash management banks

34

23

43 27

73

More than 10

1-3Currently 1-3 banks and expecting to increase4-10Less than 3 banks but increasing

Figure 4: Number o core cash management banks by country

0

3

6

9

12

15

Belgium

15

12

9

6

3

0Germany Italy Spain Switzerland UK US

Number core banks for cash management: Before crisisNumber core banks for cash management: During crisisNumber core banks for cash management: After crisis

Despite on average being the largest participants and havingthe broadest geographical coverage, the US and UKcompanies do not have the largest number o core banks.This is higher in Spain and Germany. This can perhaps beexplained by the act that there is a tendency to have morelocal cash management banks in Spain and Germany and bythe act that the large US and UK multinationals have beenmoving towards larger global or regional banks to satis ytheir banking needs.

Across all regions it is clear there was a move towardshaving ewer, but perhaps better, core banking relationships.

When you have agreed on your optimal number o corebanking relationships, the question is then what kind orelationship should this be?



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Bank relationships: What has

changed?

Participants believe there has been aundamental shi t in the way banks

approach their relationship, a developmentthat is o ten at odds with the approachthey would want.

A majority o participants (73%) believe that the way theylook at their bank relationships will be more ocused onlong-term relationships rather than a pure transactional

ocus. On the other hand, a majority (60%) believe that theirbanks are moving to a model where each product should bepro table on its own as opposed to a port olio/cross-subsidisation approach (see Figure 1).

Is it possible to have both? With this in mind, smartcompanies will be looking or increasing transparency romtheir banks about the global relationship and the pro ts itgenerates. Indeed, many will adopt an approach o trust butveri y, calculating their own understanding o what is the splito their banking business to ensure the core remain satis ed.

Likewise, some banks have come to reject the old treasuryadage that providing unding only gives you a ticket to the

dance. It does not mean Ill dance with you! Indeed, sometreasurers have ound themselves in the position where theloan agreement entitles the bank to a considerable amounto the borrowers additional banking business.

These developments add weight to the need or balancedscorecards (quantitative and qualitative) that enablecompanies to gauge how much revenue and pro t are beinggenerated or each o their banks through the overallrelationship. This will provide valuable ammunition ordiscussions with banks that are looking to ollow thetransactional approach rather than considering the value othe relationship as a whole. It will also help to match chargeswith the service and support required and received, which

continue to evolve (see Figure 2).Figure 1: Pulling in di erent directions: the relationshiptreasurers want/The approach they believe banks would pre er

0 20 40 60 100%

27 7327 67 6

60 40

80

The bankrelationship

treasurers want

The approachtreasurers believe

banks would prefer

More transactionalMore long-term/portfolio

Although unding support was always seen by treasurers as theticket to the dance, during the crisis its importance hasincreased signi cantly. This trend is especially noticeable incases where companies enter into a request or proposal (RFP)

or cash management services. Typically, be ore the crisis,pricing and quality o the relationship together were the mostimportant elements during a RFP process (52% o theresponses be ore the crisis, only 35% a ter). Today, no RFP willgo out in the market without requiring strong credit line support.

As a result, the best cash management banks could miss outi they cannot also support the nancing needs o the client.It also means that certain companies may be orced to settle

or less e cient cash management partners/structures,pre erring the bene t o more secure bank nancing support.

Figure 2: Pricing applied by the banks during the crisis

0 20 40 60 100%

6 29 7 48 5 5

9 24 5 52 4 6

15 36 7 35 5 2

80

Before crisis

During crisis

After crisis

Banking fees

Overall quality of service receivedGeographical coverage of service receivedParticipation in the core financing of the groupCustomer service supportOther, please specify

Figure 3: Company pre erence and pricing applied by the banksduring the crisis by country

0.0

0.2

0.4

0.6

0.8

1.0

0 Belgium Germany Italy Spain Switzerland UK US

Corporate desire for long-term relationshipBanks pricing on portfolio basis

82

6368

29 2939

4847 35

52

68 67 71

8680

100

60

40

20

0

The di erence between the relationship companies want andwhat they believe banks would avour appears to be mostpronounced in Belgium and Germany, but is less so in the

US and UK and especially in Spain. This may be due to theact that the big US and UK banks were seen as ocusingtheir lending on domestic clients and hence their local clients

elt the change in relationship less. Similarly, given the closebonds Spanish companies have with their local banks, thistoo may have endured better during the crisis.



25/52


Cash management

With liquidity scarce, visibility and controlover cash have become critical.

The survey shows that liquidity structures, which centraliseavailable cash, will tend to be more global a ter the crisis(41% a ter versus 28% be ore), highlighting the need orvisibility and control (see Figure 1).

This trend is evident across the spectrum:

While only 32% o participants with an annual turnoverbelow 1bn had a regional or global cash poolingstructure in place be ore the crisis, the proportion is set toincrease to 49% in the a termath.

The proportion o companies present in more than 50countries with a regional or global cash pooling structurewas 73% be ore the crisis, but is expected to rise to 85%a ter the crisis.

Cross-currency notional pooling (CCNP) shows the mostremarkable increase (21% o the participants present inmore than 50 countries would like to have such a pool

ollowing the crisis). While CCNP has been available or along time, only a hand ul o banks o ered it andtransparency was limited. Now, it is available rom thebulk o global and regional banks, and the way CCNP

ees and spreads are computed has become much moretransparent.

Finally, we see banks developing a greater understanding othe value-add they could provide to companies by proposingalternative sources o nancing linked to working capitaloptimisation. Indeed, working capital is an area where thesurvey also saw a signi cant increase in importance andsophistication during the crisis, as we will see in the

ollowing sections.

Figure 1: Liquidity structure in place

0 20 40 60 100%

21 20 24 22 13

14 17 24 28 16

13 15 24 30 1980

Before crisis

During crisis

After crisis

Global cash pooling(s) with a cross-currencynotional pooling on topGlobal single currency cash pooling(s)Regional cash pooling

In-country cash poolingNone

Figure 2: Liquidity structure in place by country

1.0

1.5

2.5

3.0

Belgium

2.0

Liquidity structures in place across the group before crisisLiquidity structures in place across the group during crisisLiquidity structures in place across the group after crisis

Germany Italy Spain Switzerland UK US

Figure 2 sets out the sophistication o liquidity structures inplace by country*. From this analysis, it would appear thatthe US and UK, despite using ewer banks, are certainly nomore sophisticated than their Spanish counterparts and arein act less sophisticated than their German peers and lessthan the Belgians. This may be explained by the act that theBelgian treasuries are perhaps more specialised and ocusedon core treasury issues, or it may simply be the act that dueto their global presence regulation prevents the large US andUK rms rom adopting these techniques across the board.In all cases, there has been a move towards using ewerbanks and more sophisticated liquidity managementstructures as a way o making best use o existing cashwhen liquidity is in short supply in the market and alsokeeping core relationship banks on board.

*We have given a score depending on the sophistication o the model and thentaken the average. The scores were: 1 or In-country cash poo ling, 2 or regionalcash pooling, 3 or single currency global cash pooling(s), 4 or cross currencyglobal cash pooling(s) and 0 or none.

Companies are clearly becoming moresophisticated in their demands or globalliquidity solutions.



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Long-term unding

Reduced availability o unding has orcedcompanies to diversi y sources and look toalternative opportunities, notably in thebond market.

As banks own long-term unding dried up and their riskappetite declined, many withdrew rom non-core sectors,countries and clients. For most companies unding becamemore di cult, or some impossible (see Figure 1). Only a ewinstitutions have had more money to lend, notablygovernment-backed savings banks, which saw an infux o

cash seeking sa e havens, though they then aced theproblem o where to invest this new ound liquidity.

Figure 1: Availability o unding during the crisis (%)

30

63

5 2

Easier to obtainRemained the sameMore difficult to obtain funding

Impossible at any price

Figure 2: Funding management

0 20 40 60 100%

28 22 19 9 16 5

1

26 21 18 10 19 4

2

31 21 16 12 13 6

1

80

Before crisis

During crisis

After crisis

Spreading across several funding counterpartiesSpreading of refinancing maturities over timeSpreading types of fundingShort-term rollingHolding excess cashN/AOther

As Figure 2 highlights, the pressure on the availability ounding has orced many participants to ocus more on

diversi ying their sources o nance. This trend is expectedto continue post-crisis.

We can see that there has been an increased ocus onspreading both the types o unding and indeed the maturitydates o unding programmes. Some had previously seen itas more e cient to und the bulk o their long-term debt inone shot to achieve critical mass. However, many have nowrealised that this presents an unacceptable concentrationrisk i you then need to re nance at the wrong time or eitheryou or your nancial counterparties.

As Figure 3 reveals, there has been a de nite move awayrom bank acilities towards bonds, though this is happening

gradually.

Figure 3: Sources o unding

0

5

10

15

20

25

30

35

40

Commercialpaper

40

30

10

20

0

Before crisisDuring crisisAfter crisis

Bankloan

Bonds Committedcredit facility

Uncommittedcredit facility

Other

Many companies now hold surplus cash to help easeunding risks (see Figure 4). Some 40% o participants

increased the amount o excess cash they held. Despite thepressure on cash fows during the downturn, only 25% letthis bu er decrease. While holding surplus cash o ten runscounter to optimal capital structures, we believe that when

unding is under pressure this can be the ultimate backstopacility.

It was also noted during the last recession that those holdingexcess cash ared better emerging rom the crisis. This isperhaps due to their ability to snap up weaker competitorsor to provide the working capital needed or growth morequickly. However, holding a large amount o cash gives riseto the problem o where to put it at a time when counterpartyexposure has come to the ore.



27/52


Figure 4: Evolution o excess cash during the crisis

40

35

25

IncreasedRemained approximately the sameDecreased

PwC commentWhile many companies have considered applying or arating to increase their access to unding, we believe thatit is important that they weigh up the costs against theavailability o new unding sources, including theinternational bond markets. They should also considerwhat kind o rating they may receive at this time,especially as it may be lower than the implicit rating underwhich they currently borrow.

Covenants are now more important, with some bankshaving used the small print as a pretext to reduce someo their riskier lending and some borrowers nding thattheir loan terms were ar more onerous than they hadpreviously assumed. Future best practice will there ore

ocus much more closely on the detailed design ocovenants. This includes, where possible, the negotiationo a single set o covenants across lenders and betterreporting on compliance and orecasted compliance, e.g.under scenarios o extreme market or companyturbulence.



28/52


Working capital managementFigure 1: Importance o working capital management

0 20 40 60 100%

71 24 5

72 22 6

35 49 16

80

Before crisis

During crisis

After crisis

HighMediumLow

The survey con rms that during the crisis the importance oworking capital rose signi cantly, with the proportion rating itas a high priority doubling to some 72% (see Figure 1). Evenpost-crisis, more than 70% o the respondents expect theimportance o working capital management to remain high.

As outlined earlier, the growing ocus refects both thepressure on external unding and the banks own pre erence

or o ering working capital-type unding when their balancesheets can no longer support traditional lending. The actthat this ocus is set to continue indicates that the impact o

the crisis on liquidity within many companies has yet to beully addressed.

This survey highlights two urther interesting developmentsin relation to working capital. First, it shows that workingcapital management is coming more to the ore in manycompanies. A ew years ago, managing working capital wasa key area o ocus or private equity rms or those withinthe retail sector, but not many others. Now, all sectors havebeen orced to raise working capital management up theiragendas. Secondly, an analysis o responses by sectorreveals that participants rom the manu acturing, industrialproduct and consumer product sectors have rated theimportance o working capital management the highest a ter

the crisis. These sectors are typically the most workingcapital intensive and clearly recognise that urtheropportunity exists in this area.

Responsibility or working capitalmanagement has largely remained in thesame hands, with treasury carrying theprimary responsibility in just 20% o cases.

Figure 2: Primary responsibilityor working capital management

0 20 40 60 100%

9 58 20 527

13 5915 336

7 55 20 55 8

80

Before crisis

During crisis

After crisis

Board of directorsFinance / CFOTreasuryPerson specifically responsiblefor working capital managementNoneOther, please specify

While working capital management is largely an operationalconcern in normal times, during the crisis it has risen up the

corporate hierarchy, with increasing involvement andresponsibility o the board in overseeing liquidity levels andworking capital usage (see Figure 2). As Figure 2 urtherhighlights, very ew participants operate without clearresponsibility or working capital management. The surveyalso shows that having a person speci cally responsible orworking capital is increasing, albeit rom a low base. Thissuggests that many companies have an interest in makinglong-term, structural trans ormations to the way theymanage working capital and are ormalising responsibilities.

As be ore the crisis, the primary responsibility or managingworking capital largely lies with the CFO and, to a lesserextent, the treasurer.

There is a signi cant jump in theimportance o working capital to over 70%during and a ter the crisis.



29/52


Figure 3: Actions taken to improve working capital

0 20 40 60 100%

24 28 14 25 9

24 26 13 20 17

23 25 14 29 9

18 23 19 24 16

17 20 14 40 9

14 16 21 35 14

13 17 17 43 10

7 15 22 43 13

80

Inventory: reductions ofstock in hand and lead times

Payables: renegotiatepayment terms

Inventory: improvementsin forecasting accuracy

Payables: stretchingof payments

Inventory: reduction of slowmoving and obsolete stock

Receivables: reduction incustomer payment terms

Receivables: accelerationof billing process

Payables: reductionin payment frequency

Receivables: offer cashsettlement discounts

High effectMedium effectLow effect

This action has not been takenI don't know if this action has been taken

The survey reveals a patchwork oapproaches to optimising working capitalas many rms were orced into re-

ghting mode.

When asked what activities they have implemented toreduce working capital usage, there were some interestinganswers. The initiative seen as having the biggest overalle ect on reducing net working capital has been thereduction o stock on hand and the lead times o materials(see Figure 3). The sector analysis shows that this has beenespecially true or companies in the automotive (71%) andmanu acturing (58%) sectors. However, nearly 40% orespondents have not made, or are not aware o , a reductionin their slow moving and obsolete stock.

Payables initiatives are among the top three items. This isprobably due to the relative ease o implementing change,along with the perceived degree o control. Unsurprisingly,many companies have renegotiated payment terms withtheir suppliers. The scale o the resulting impact leads us to

believe that many larger companies have not su cientlyleveraged their relative market power during negotiations inthe past.

Perhaps surprisingly, receivables management has notattracted much attention. While this is o ten the rst area o

ocus, more than 40% o participants indicate thatreductions in customer payment terms have not been carriedout or they are not aware that they have been implemented.

These answers suggest that the crisis has been the triggeror launching di erent activities to optimise liquidity, resulting

in a ragmented patchwork o measures. Given the urgency,it appears that the issues were largely managed on a re- ghting basis, rather than through an integratedapproach.

The redesign o internal processes is seenas the main oundation or improvede ciency.

Figure 4: Further improvement areas or working capitalmanagement

0 20 40 60 100%80

In redesigning and optimising internal processesIn compliance with already existing internal processesOther

The quick-win initiatives initiated during the crisis have nowbeen largely implemented and most participants are nowmoving on to a more integrated and enduring assessmentand redesign o internal processes (see Figure 4). Amongparticipants rom larger companies, process improvement is

even more important (66% or companies with revenues over10bn). The need or harmonisation tends to be morepressing in such entities, as many have been ormed througha succession o mergers, creating an accumulation o o tenincompatible systems and processes.

PwC commentThe survey results indicate that most treasurers are aware that best practice working capital management comes rom

oresight, planning and robust management processes. Given the cross- unctional nature o working capital management,only a holistic assessment covering all areas will uncover ine ciencies in the underlying processes. As the urgency o thecrisis eases, now is the time to critically re-assess these, and drive improvements with one ully integrated approach.



30/52


Risk management

A: Commodity riskB: Foreign currency riskC: Interest rate riskD: Counterparty risk

As highlighted at the beginning o the report, the crisisperiod was not only characterised by an unexpectedconstriction in the availability o liquidity, but also byunprecedented volatility in FX rates and commodity prices.These market movements have kept treasurers and thewider nancial community guessing as to where indices aregoing next. This section looks at how treasurers have copedwith the resulting challenges.

A: Commodity risk management

Standardised hedging techniques insu cient tocope with the unprecedented market turbulence.

As Figure 1 highlights, a signi cant majority o participants(80%) recognise that they have some orm o commodityexposure. The most common exposures relate to energy (oiland electricity), closely ollowed by metals, areas whereprice volatility has escalated in the wake o the crisis.

Figure 1: Commodity exposure

0 20 40 60 100%80

OilElectricity

MetalGas

AgricultureOther

PaperNone

Although most participants are exposed to commodity risk,less than a quarter considered the management o theseexposures as particularly important prior to the crisis. However,as volatility in commodity prices increased, especially duringthe second phase o the crisis, the ocus grew accordingly andis expected to remain or many, even when the worst o the

nancial and economic instability is over (see Figure 2).

Figure 2: Importance o commodity risk management

0 20 40 60 100%

30 20 50

24 22 54

80

Before crisis

During crisis

After crisis

High Medium Low

It would appear that many low-margin businesses have nowrealised that higher-than-usual commodity prices andincreased volatility have the potential to signi cantly reduceor completely wipe out their margins. They have there orebegun to manage this risk in the same way as other marketrisks such as FX or interest rates.

Figure 3: Approach to commodity risk management

0 20 40 60 100%

31 34 27 62

35 34 24 1 6

80

Before crisis

During crisis

After crisis

Not managedStandardised

Active AggressiveDon't know

As Figure 3 shows, many companies are moving rom arelatively standardised approach towards more activemanagement. This refects growing recognition o thepotential or illiquidity in these markets and/or the structural

supply and demand imbalances, which can make amechanical hedging approach unworkable. As a result,treasurers have had to develop a better understanding o themany actors infuencing commodity markets and makein ormed judgements about how prices might move as aresult o speci c market dynamics.

Perhaps more than other nancial risks, the hedging ocommodity risks needs to be co-ordinated with the businessto incorporate the e ects on the physical supply chain andultimate supply and demand dynamics.

As Figure 4 reveals, there was no signi cant change in theinstruments used by participants to hedge their commodity

exposures nor in their hedge horizon (see Figure 5). Wethere ore assume that treasurers are ocusing more closelyon adapting the timing o their hedging activities to capturethe best value, rather than on modi ying the techniquesbeing employed.

Figure 4: Instruments used or commodity risk management

0 20 40 60 100%

31 19 23 27

30 19 23 28

80

Before crisis

During crisis

After crisis

OTCExchange tradedNatural hedgesNone



31/52


Figure 5: Time horizon or hedging commodity risk exposure

0 20 40 60 100%

15 49 36

15 47 38

80

Before crisis

During crisis

After crisis

Less than 3 months3-12 monthsMore than 12 months

In-depth knowledge o the market and in ormed judgementare required i companies are to bene t rom attractivemarket movements without moving the business beyond itsapproved risk appetite. This has spurred increasingpro essionalism in the quantitative techniques used tomanage commodity price risks.

Figure 6: Responsibility or managing commodity risk

0 20 40 60 100%

11 34 49 6

10 5233 5

80

Before crisis

During crisis

After crisis

Specific CRM departmentTreasury departmentPurchasing departmentSales department

As Figure 6 highlights, the increased recognition o the needor pro essional management o commodity price risks has

led to a progressive shi t in responsibility rom purchasingand sales departments to either treasury or more specialisedcommodity risk management (CRM) units. Participants maybe looking to bene t rom potential synergies with traditionaltreasury domains such as FX risk management, as well ascapitalising on treasury departments experience in the useo nancial instruments.

Figure 7: Commodity risk management systems in use (%)

57

16

3

24

Excel sheetsTreasury management systemsBest-of-breed applicationIn-house

However, it would appear that participants are nding itdi cult to realise synergies with other treasury systems tohelp manage their commodity exposures. The majority stillrely on Excel spreadsheets or commodity risk (57%), withonly 16% using their Treasury Management System (TMS)and only 3% a best-o -breed application.

It seems that the need or fexibility and speci c unctionalityin capturing commodity exposures are considered by manyto be beyond the capabilities o traditional TMS and thatcompanies consequently have to either develop their ownin-house system or simply rely on Excel sheets or themanagement o these risks. There could there ore be amarket opportunity or systems vendors.

Management o commodity risk movestowards treasury or pro essional CRMdepartment.

Figure 8: Sophistication o commodityrisk management by country

1.25

0

1.75

Belgium

2.00

1.75

1.25

1.50

1.00

Before crisis During crisis After crisis

Germany Italy Spain Switzerland UK US

We compared the sophistication o commodity riskmanagement in di erent countries by applying a score(1-Standardised, 2-Active, 3- Aggressive). There was anacross the board increase in sophistication, with the US, Italyand Switzerland adopting the highest levels (see Figure 8).This may be due to the large raw material producers based

in the US or which this is their core business,or thespecialist commodity trading operations or major corporateswhich are requently based in Switzerland.

PwC commentThe evolution in commodity risk management practicesdoes not appear to be keeping pace with the rapidescalation in price volatility and is still some way behindmore established treasury activities. The greatest bene tswill be realised by companies that are able to integratecommodity risk management with traditional nancial riskmanagement activities while staying close to the

business. This will pave the way or the realisation o keysynergies and would allow or e ective and fexiblehedging programmes to be put in place to appropriatelymanage the risks posed by volatile markets.



32/52


Figure 10: FX exposures included in hedging programme

0 20 40 60 100%

29 24 31 16

31 23 30 16

32 143123

80

Before crisis

During crisis

After crisis

On balance sheetCommitted ordersForecastsTranslation risk

Figure 11: Time horizon or hedging currency exposure

0 20 40 60 100%

13 49 23 15

15 47 21 17

16 192144

80

Before crisis

During crisis

After crisis

Less than 3 months3-12 monthsMore than 12 monthsDo not hedge

Although many participants may be hedging longer term,this is not necessarily refected in Figure 11 as there is also anet e ect here. In particular, some companies have taken anopportunistic approach by hedging urther out in currenciesthat have moved distinctly in their avour, while on the fipside some have reduced their hedging horizon due to

orecasting di culties in the crisis period. This was in turndue to adverse experiences in hedging di cult to orecast

underlying sales. These companies aced the potentialdouble blow o not only their FX hedges making a loss, butthese losses not being ully o set by corresponding gains onunderlying sales contracts, as the latter did not materialise. Iin addition hedge accounting was being used, some haveexperienced a triple blow in that the orecast could no longerbe classed as highly probable, meaning that all associatedhedging losses would go to directly to P&L. With companiesadopting longer term hedging, it would be interesting to seehow this strategy compares to their objectives o reducingearnings volatility.

Net e ect horizons increased with

opportunistic hedging in some currencies,however, others decreased horizons asbusiness orecasts became unstable.

B: Foreign currency risk management

Increased volatility is orcing manyparticipants to explore more active and/orlonger term hedging strategies.

Recent years have been marked by signi cant volatilityacross a large number o currency pairs. This has ledtreasurers to ocus additional attention on FX riskmanagement. However, unlike commodity risk management,FX risk management has always been an area o signi cantimportance or treasurers and hence the increase has notbeen as signi cant as or commodities (see Figure 9).

Figure 9: Importance o currency risk management

0 20 40 60 100%

58 23 19

50 2426

80

Before crisis

During crisis

After crisis

HighMediumLow

Nonetheless, it was interesting to note that the increaseduncertainty has given rise to longer term hedging strategies,aimed at providing better protection or smoothing o thevolatility caused by recent rate swings. Indeed the surveyreveals that companies are hedging more risks related too -balance sheet (unrecognised) exposures such ascommitted orders and orecasts.

In practice, we are also seeing an increasing number ocompanies starting to hedge translation risk, an area thathas been much debated among treasurers and CFOs.Reasons or the increase in the hedging o translation riskmay include e orts to limit consolidated equity volatility romthe translation o the nancial statements o oreignsubsidiaries or to lock in expected cash fows rom apotential disposal o a oreign operation. The exposures thathave been particularly a ected relate to the consolidation osubsidiaries a ected by sudden shi ts in once-stablecurrency pairs (e.g. /, /$).

It should be noted that the translation risk trend highlightedin Figure 10 is a net e ect, as we have also seen somecompanies moving away rom this practice. This has beenlargely due to the high cash fow impacts o these hedges onwhat is traditionally viewed as an accounting (non-cash fow)exposure.



33/52


Figure 12: Primary objective or hedging currency exposure (%)

30

20

16

34

Earnings volatility over several yearsShort-term cash flow impactMeet the budgetNot applicable

As Figure 12 highlights, the key objective or FX hedging orthe largest proportion o participants is to minimise theimpact on short-term cash fows. This would suggest astrategy o hedging balance sheet exposures to a minimum.Next in importance is hedging to remove earnings volatilityover several years, which would suggest a policy o hedgingat least on a rolling 12-month basis, probably combined withlayered hedging. Likewise, hedging o the budget can beachieved by a block o hedges close to the budget-settingperiod or up to one year, potentially combined with somelonger term hedges the value o which is used in setting thebudget rate.

As it was not clear whether the respondents were using theappropriate strategy to match their objectives, weinvestigated this point urther.

Figure 13: Primary objective or hedging currency exposure per

company turnover

0 20 40 60 100%

46 33 9 12

33 34 20 13

17 212735

80

More than10 billion

1 billion to10 billion

Less than1 billion

Earning volatility over several yearsShort-term cash flow impact

Meet the budgetNot applicable

Looking at the distribution o survey results per companysize in Figure 13, this con rms that large companies haveadopted a longer term approach to FX risk management byseeking to reduce earnings volatility over several years.

Figure 14 highlights the move away rom a mechanisticstandardised approach to more active and value-addingstrategies. Although the move towards a more activeapproach is less than that or commodities hedging (perhapsdue to the act that FX markets are more liquid), it is stillinteresting to note that treasurers believe there areopportunities or them to use their knowledge to lock insome competitive advantage.

Figure 14: Approach to currency risk management

0 20 40 60 100%

42 1240 3 3

45 37 2 313

46 33 2 316

80

Before crisis

During crisis

After crisis

Standardised Active AggressiveNot managed

Dont know

PwC comment

There is not always a right or wrong approach to FX hedging. In our view, what is important is to clearly identi y thehedging objective(s), then keep adapting the hedging strategy to ongoing changes in the business and to ensure that theparameters o the strategy (types o exposures to hedge, hedging horizon, types o hedging instruments, etc.) remain inline with the companys business model and evolving management objectives.

Larger companies ocus on reducingearnings volatility over several years.



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C: Interest rate risk management

Given current credit spreads manyparticipants are looking to derivativesrather than xed rate re nancing tomanage their interest rate exposures.

The survey shows that the importance o interest rate riskmanagement has increased slightly as a result o the crisis(see Figure 15). Like FX, interest rate risk management hasalways been and remains a key ocus or treasurers.

Figure 15: Importance o interest rate risk management

0 20 40 60 100%

36 33 31

36 33 31

31 33 3580

Before crisis

During crisis

After crisis

HighMediumLow

The impact o the crisis on interest rate risk has tended to bear more limited than on other nancial risks such as unding

or liquidity risks. This largely stems rom the recent lowinterest rate environment. With most participants being netborrowers, interest rates have been less problematic to dealwith than other exposures.

Figure 16: Average percentage o xed interest rates

2828

31

43

19

9

484949

99

1718

4140

0 302010 40 50 60%

More than10 years

N/A

Between 1 yearand 5 years

Between 5 and10 years

Below 1 year

After crisisDuring crisisBefore crisis

Figure 16 shows that the proportion o companies xinginterest rates between one and ve years, and between veand ten years has increased slightly, as market conditionsbecame more attractive. However, it seems that althoughrates are at historic lows, most are still taking a wait andsee approach be ore changing their interest rate pro le.

Figure 17: How interest rate exposure is xed (%)

28

72

Through refinancingThrough interest rate swaps

Those that did increase their xed portion have done soprimarily through derivatives rather than xed-ratere nancing. Presumably, this stems rom the act thatalthough base rates have been low, the credit spreads beingcharged or re nancing are still quite high. As a result,participants may have been looking to re nance or a shorterperiod and accepting the credit premium, with the intentiono re nancing or a longer period once the credit crunchrecedes and spreads tighten. The re nancing can be hedgedwith derivatives to lock in the lower base rates, not just or

the shorter term borrowing, but also across the longer termnancing plan.

Hedge accounting would, o course, still be possible orsuch transactions as long as the underlying borrowing canbe demonstrated to be a highly probable uture fow.

This activity is in line with best practice, which wouldsuggest separating the unding decision rom the interestrate hedging decision. However, this naturally begs thequestion o what companies will do in the coming monthsahead o potential increases in base rates.



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D: Counterparty risk management

As the ocus on counterparty riskincreases, many participants are lookingbeyond published credit ratings to earlierwarning signs such as credit de aultspreads.

Figure 18 highlights the marked rise in the importance ocounterparty risk management as the troubles in the bankingsector and underlying economic uncertainties brought suchrisks into sharp ocus.

Figure 18: Importance o counterparty risk management

0 20 40 60 100%

50 33 17

58 25 17

22 36 42

80

Before crisis

During crisis

After crisis

HighMediumLow

As Figure 19 highlights, an increasing number o participantsare looking beyond published credit ratings to more sensitiveearlier warning indicators such as bond yields, share valuesand credit de ault spreads. Worryingly, however, 16% oparticipants still do not monitor counterparty risk.


0 20 40 60 100%

51 4 22 57 11

42 10 6 24 12 6

45 9 6 23 11 6

80

Before crisis

During crisis

After crisis

Check published credit ratingsMonitor equity pricesMonitor bond yieldsMonitor CDS spread evolutionNot monitoredOther



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agreements have become more widespread. Diversi cationo exposures across banking counterparties has alsobecome more common once again, the corollary being areduction o limits per counterparty. However, the use ocredit de ault swaps, which was limited be ore the crisis, hasonly marginally increased since, probably as a result o the

requent need to hedge signi cant long-term creditexposures. Systemic risk related to the CDS markets,questionable levels o market liquidity, and the di culties

aced by AIG, which was an important counterparty in thesemarkets, appear to have been strong disincentives againststarting to use this type o hedging product during the crisis.

Figure 22: Allocation o unds

6766

7318

1514

0

77

4

00

0

1

1

2

45

4

23

11

1

0 302010 40 50 80%7060

Governmentbonds/notes

Corporatebonds

Other moreexotic investments

Commercialpaper

Other

Moneymarket funds

Other(mutual) funds

Bankdeposits

After crisisDuring crisisBefore crisis

Although many companies with surplus cash have begun atentative move away rom pure bank deposits, most havenot abandoned these, pre erring diversi cation instead (seeFigure 22). The reluctance to discard bank depositsaltogether may also refect the limited supply o alternativesand uncertainties about their varying risk pro les. Forexample, money market unds not only raise questions aboutliquidity, but have also been shown to have di erent types orisk/return pro les rather than being a relatively homogenousgroup as was o ten wrongly assumed. Regulatory andmarket initiatives are now underway to standardisede nitions and practices in the money market und space.


0 20 40 60 100%

41 1525 17

44 25 14 17

48 21 10 21

1

1

1

80

Before crisis

During crisis

After crisis

On nominal amount basisOn a fair value basisTake into account potential future exposure

Not applicableOther

The calculation o credit limits and their utilisation has alsobecome more sophisticated, with an increasing proportion oparticipants using air values and potential uture exposures

or nancial investments and derivatives, on top o nominalexposures (see Figure 20). We believe a combination o allthree methods is the best way to manage dealing activity innominal terms, while being alert to current and uture risks.

Figure 21: Evolution o counterparty risk mitigation tools

0 20 40 60 100%

8 6 6 3 2210 34 13 16

8 7 6 2 1 410 35 12 15

9 4 6 1 127 31 10 29

80

Before crisis

During crisis

After crisis

Credit insuranceRequire collateralfrom financial institutionsMargin callsCredit default swaps

Increased credit limits

DiversificationNetting agreementsCLSOtherNone

As Figure 21 outlines, a number o interesting developmentsin counterparty risk management practice have emerged

rom the crisis. The use o collateral, margin calls and netting

Despite the increased sophistication inmeasurement, traditional tools such asdiversi cation remain the most commonsolution.



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Accounting: Help, hindrance or

cause?The swings and uncertainties seen in various marketsduring the crisis have encouraged a gradually increasingnumber o participants to curtail the volatility in their

nancial statements through the use o hedge accounting(see Figure 1).

Figure 1: Hedge accounting applied

0 20 40 60 100%

66 34

64 36

62 38

80

Before crisis

During crisis

After crisis

YesNo

The survey indicates that the larger the company, the moreimportant hedge accounting becomes (see Figure 2). Morethan 80% o the participants with a turnover o more than10bn are applying hedge accounting as compared to justover 50% o the companies with a turnover o less than1bn. Nonetheless, the volatility has spurred a number osmaller and medium-size companies to apply hedgeaccounting or the rst time. Having previously seen theirexposures as immaterial or hedge accounting, the crisis hasintensi ed the spotlight on nancial risks and there oreprovided an extra incentive to use hedge accounting to helpavoid the potential shareholder unease caused by pureaccounting fuctuations in their income statement.

Figure 2: Hedge accounting applied by size o participant

Revenue size o company Applying hedge accountingMore than 10 billion 81%

1 billion 10 billion 69%Less than 1 billion 53%

Figure 3: Reasons or not applying hedge accounting

0 10 20 30 40 50 60

Too complex standards

Immaterial impact

No appropriatesystem in place

Too muchadministrative burden

Use of non plainvanilla derivatives

Use of dynamichedging strategies

Other

1st reason2nd reason3rd reason4th reason

5th reason6th reason7th reason8th reason

34 7 7 3 211

11 29 13 3

12 14 6 6 21

15 10 5 12

12

35

5 111

7 2 211

22 22 5

For the 40% not applying hedge accounting, the mainreasons were the remaining complexity o the accountingstandards and the weight o the administrative burden (seeFigure 3). This is a clear key message to the International

Accounting Standards Board (IASB) and US Financial Accounting Standards Board (FASB) to continue their e ortsto simpli y the hedge accounting rules. As a result o thecrisis, the IASB has accelerated its e orts to replace IAS 39with IFRS 9, which should provide a better basis or aligningaccounting with risk management economics. However, itremains to be seen i the new standards will indeed reducethe complexity and administrative burden currently posed bythe hedge accounting rules.

The survey results show that systems challenges also put oquite a ew companies rom adopting hedge accounting.Surprisingly, however, most systems used do have thecapability to deal with the majority o hedge accountingrequirements, which seems to demonstrate a lack ounderstanding and leaves room or improvement on the parto the system vendors.

Accounting standards are still seen as toocomplex or many - hedge accounting ismore widely used by larger corporates.



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Figure 4: Did accounting standards contribute to the crisis?

20

80

Yes

No

80% believe that accounting standards

were not to blame or the crisis, thoughsome o these respondents eel they didnot help.

80% o participants believe accounting standards did notactively contribute to the crisis, though around hal o these

eel they did not help and a urther 20% that they are partlyto blame (see Figure 4).

The accounting standards, and in particular the air valuerequirements, have been criticised or being too pro-cyclical,thereby rein orcing volatility and uncertainty. Today,

per ormance is largely measured on the basis o EPS(earnings per share). S

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