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Transcript of Treasury Management
Treasury solutions 1Strictly confidential | October 2013 |
Treasury Management
24 October 2013
Strictly confidential | October2013
Treasury solutionsStrictly confidential | October 2013 | 2
Agenda
Introduction and basic principles
Investment
Bank creditworthiness
Borrowing and interest rates
Sources of finance
Treasury solutionsStrictly confidential | October 2013 | 3
Introduction and basic principles
“The management of the organization’s cash flows, its banking, money market and capital market transactions; the effective control of the risks associated with those activities; and the pursuit of optimum performance consistent with those risks” (CIPFA)
Treasury solutionsStrictly confidential | October 2013 | 4
Decision making criteriaRisk protection
– Increased costs– Running out of funds– Loss on investments
Flexibility– Repay loans– Access funds
Cost– High interest payable– Low interest received
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Treasury management context
Current position
Business plan projections
Economy and interest rate outlook
Political and business outlook
Conditions in the financial markets
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Treasury risksLiquidity
Credit, market
Interest, inflation, refinancing
…
Exchange rate
Legal and regulatory
Fraud, error, corruption, contingencies
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Typical treasury trade-offs
Interest rate risk needs fixed rates, which increase inflation risk
Fixed rates provide certainty, but are inflexible
Committed facilities ensure liquidity, but have non-utilization fees
Risky investments have higher returns
Cash balances have a ‘cost of carry’
‘There’s no such thing as a free lunch’
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UncertaintyEconomists distinguish between uncertainty and risk
There has been unusually high uncertainty over the last few years– Economy : when will rates rise?– Political : elections, wars, US budget/debt ceiling– Natural disasters
Difficult to hedge against ‘unknown unknowns’
Trade off between certainty and flexibility
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InvestmentSound principles of investment
– Spread risks– Check counterparties’ creditworthiness– Ensure ability to access when required
Policies– Limit amount invested with each institution– Establish minimum credit criteria– Limit term of investments
Based on preparation of cash flows
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Cash management
Need to ensure sufficient cash available
Costs involved in holding cash
Cash flows can be difficult to predict
Minimum ‘safe’ balance is not likely to be nil
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Bank creditworthiness
Financial sector is still fragile following credit crunch
Economy is still smaller than before crisis
Unresolved structural problems within eurozone
Change in regulatory attitude
Major banks all suffering rating downgrades
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Rating agencies
Independent view of creditworthiness aimed at investors
Ratings paid for by company being rated
Criticized after sub-prime fiasco
Independence questioned
Can be slow to react
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How risky are the banks? – raters’ viewsWeekly Credit List: 18/10/2013
Long Term
Short Term
Viability
Support
Long Term
Short Term
FSRLong Term
Short Term
Barclays Bank plc A F1 a 1 A2 P-1 C- A A-1Clydesdale Bank A F1 bbb+ 1 Baa2 P-2 D+ BBB+ A-2Co-operative Bank Plc BB- B bb- 5 Caa1 NP E - -Credit Suisse International A F1 - 1 A1 P-1 - A A-1HSBC Bank plc AA- F1+ a+ 1 Aa3 P-1 C AA- A-1+MBNA Europe Bank A- F1 - 1 - - - - -Santander UK plc A F1 a 1 A2 P-1 C- A A-1Nationwide BS A F1 a 1 A2 P-1 C A A-1Newcastle BS BB+ B bb+ 5 - - - - -Yorkshire BS BBB+ F2 bbb+ 5 Baa2 P-2 C- - -Lloyds Banking Group plc A F1 bbb+ 1 A3 - - A- A-2Royal Bank of Scotland Group plc A F1 bbb 1 Baa1 P-2 - A- A-2
Yellow shading indicates rating is not 'stable'
Fitch Moody's S&P
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Implications
The credit risk will be included in the margin that banks pay
This cost is high and volatile
Hence lending margins have increased
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Credit default swaps
Market view of cost of ‘insurance’
More timely than ratings
Used for speculation as well as protection
Price affected by matters other than pure credit factors
Can be used to gauge the banks’ cost of funds
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The market view
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Borrowing and interest ratesSources
– Banks and building societies– Capital markets
Structures– Bullet and amortizing– Short and long-term– Capital holidays
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Underlying interest basesFloating (variable)
– LIBOR (London Interbank Offered Rate)– Base rate– Rate changes (quarterly, annually)
Fixed– Priced from interest rate swaps (plus spread)– Rate fixed for term of fix
Index-linked– Rate payable linked to RPI used for rents– Changes annually in April
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Variations on fixed ratesForward rates
– Start in the future– Rate calculated from today’s rates– Commits to drawdown
Cancellable fixed rates– Fixed rate with the lender’s option to break– If rates go up, fix is broken– Achieves lower rate for the borrower
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Other financial instruments
Caps– Sets a maximum interest rate payable
Collars– Sets both a maximum and minimum rate payable
Interest rate swap– Another way of fixing rates
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Interest rate environmentPeriod %
1 month 0.5503 months 0.6006 months 0.720
12 months 0.970
3 years 1.1865 years 1.7987 years 2.237
10 years 2.71615 years 3.14320 years 3.32025 years 3.38130 years 3.403
22/10/2013
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Fixed rates are higher than last year
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
%
Term
Interest rate swaps now, 1 and 12 months ago
22-Oct-13 1 Month ago 1 Year ago
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Still historically low
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
%
Interest rate swaps since 1998
30yr 25yr 15yr 10yr 5yr
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Economic forecastsQ/E4 2013 Q/E1 2014 Q/E2 2014 Q/E3 2014 Q/E4 2014 Q/E1 2015 Q/E2 2015 Q/E3 2015 Q/E4 2015
Bank RateCapital Economics 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%UBS 0.50% 0.50% 0.50% 0.50% 0.50% - - - -Capita 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
10-year giltCapital Economics 2.75% 2.75% 2.75% 2.75% 2.75% 2.75% 2.75% 2.75% 3.00%UBS 3.10% 3.20% 3.20% 3.30% 3.30% - - - -Capita 2.90% 2.90% 2.90% 3.00% 3.00% 3.10% 3.20% 3.30% 3.40%
Long-term giltCapital Economics 3.45% 3.45% 3.45% 3.45% 3.45% 3.45% 3.45% 3.45% 3.55%UBS 3.60% 3.70% 3.70% 3.80% 3.80% - - - -Capita 3.60% 3.60% 3.60% 3.70% 3.70% 3.80% 3.90% 4.00% 4.10%
Q/E4 2013 Q/E1 2014 Q/E2 2014 Q/E3 2014 Q/E4 2014 Q/E1 2015 Q/E2 2015 Q/E3 2015 Q/E4 2015CPICapital Economics 2.20% 1.70% 2.00% 1.70% 1.70% 1.70% 2.00% 2.10% 2.10%UBS 3.40% 3.20% 3.10% 3.00% - - - - -
RPICapital Economics 2.80% 2.60% 2.60% 2.50% 2.40% 2.40% 2.60% 2.70% 2.70%UBS 3.70% 3.70% 3.80% 3.70% - - - - -
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Market expectations for LIBOR
-
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00
Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15
Implied 3 month rates
22/10/2013 22/09/2013
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Sources of funding
Banks (now only short-term)– Bilateral– Syndicated
Financial institutions (capital markets)– Own name public issues (£100 million)– Private placements (£30 million)– Aggregated issues (£1 million)– Direct lending
Typical refinancing structure– Keep existing fixed rate debt– Short-term revolver– Long term from capital markets
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Public issue
Large issue size
Formal credit rating required
Listed on a stock exchange
Bought mainly by UK pension and life companies
Usually long-term bullet loan with no financial covenants
Some of the initial issue can be retained for future use
Subsequent amounts can be raised through a ‘tap’ issue
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Private placement
Smaller issue amount
Credit rating not a requirement (but it may help)
Not listed (and not designed to be traded)
Can involve US based investors
Can involve tranches of different maturities
Covenants may mirror required by the bank lenders
Further amounts can be raised
Quicker than a public issue
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Aggregated issue
The Housing Finance Corporation (usually)
Public issue on lent to associations
Can be for as little as £1 million
High level of asset cover (150%)
Income test on security
Cash reserve
Annual management fee
Long-term bullet loans
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US private placements
Several US institutions interested in investing in UK housing associations
Small number (about 6) investors in sterling direct– ‘Real’ GBP investors– Investor makes arrangements to convert sterling to US dollars
Amounts £50m to £100m (or more)
Issue under a Master Note Purchase Agreement (can use again)
Asset cover and covenants mirror borrower’s bank facilities
Make-whole provisions include currency swap
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US private placement processApproach to investors through Placement AgentMaster Note Purchase Agreement is governed by English lawPrivate Placement Memorandum circulated to investorsInvestors invited to bid:– Amount– Tenor– Rate– Revisions to termsObjective to ‘hit sweet spots’ reducing average cost of fundsResult is funding structure with different maturity tranchesRequires NAIC-1 designation (after the issue)
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Banks and advisers
Private placement– Investment bank acting as placing agent– Lawyers for borrower (UK and US)– Lawyers acting for investors– Valuers
Public issue– Investment bank acting as bookrunner– Lawyers for borrower– Lawyers for the bookrunners– Valuers– Auditors– Rating agency
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Regulatory information / Legal disclaimer
Capita Asset Services is a trading name of Sector Treasury Services Limited which is authorised and regulated by the Financial Conduct Authority only for conducting advisory and arranging activities in the UK as part of its Treasury Management Service.
Capita does not warrant, either expressly or impliedly, the accuracy, timeliness, or appropriateness of the information contained in this document. Capita disclaims any responsibility for content errors, omissions, or infringing material and disclaims any responsibility associated with relying on the information provided in this document. All materials, content and forms contained in this document are the intellectual property of Capita and may not be copied, reproduced, distributed or displayed without Capita’s express written permission. If you have not received this document from Capita you must not disseminate, copy or take any action in reliance on it and should notify Capita immediately.