“The biggest challenge in the area of cash management is, and will remain, obtaining good information about the expected cash flows to make the best possible liquidity forecasts in the short and long term,” reveals Marcel. “The current trend is that banks can do their payments and bookings 24/7 – even at weekends. Thanks to instant payments, bank payments from private individuals are debited and credited within a few seconds. That will also happen in business. For Achmea this acceleration means that the claims of insured parties can be paid even quicker. From a cash management and treasury perspective, you have to make sure that enough money is available to make these payments, but at the same time you don't want to be holding too much cash, as it actually costs money to have too much of a credit balance. The biggest challenge is establishing an optimal forecast of the incoming and outgoing cash flows, and of the balances of our accounts, so that we can do our payments at any moment.”

The market has become increasingly volatile, with new developments quickly following one another. How do you achieve accurate cash flow forecasting in the medium term?

“We receive forecasts from all the business units every month – for instance of Zilveren Kruis health insurances, FBTO health insurances, and Achmea’s Non-life, Pension and Life insurances. For every type of flow - premium, value transfers, benefits, proxies, costs etc. - monthly forecasts are made 18 months in advance. All flows are linked to specific bank accounts that also provide insight into the expected bank stocks for the next 18 months. The forecasts are entered into our cash management system, Cash & Liquidity Management from Serrela (CLM), the first two months on a daily basis and the remaining 16 months on a monthly basis. In addition to the forecasts of the business, our treasury management system, SAP TRM, also includes the expected cash flows from the treasury activities in CLM. Together with the actual banking positions, our Treasury can always look ahead for 18 months to the expected banking positions and look back at the actual stocks. During a month, the forecasts are regularly adjusted for the coming days of the month in cooperation with the business. The business itself has permission to look in CLM at both the actual cash flows and the expected cash flows. After each month, a post calculation is made by the cash manager, in which the forecasts are compared with the actual cash flows. In case of large differences, the business must issue a statement for this and, if necessary, adjust the upcoming forecasts. It’s therefore about continuous alignment with the business.”

Achmea started implementing a new TMS some six years ago. What changes did this herald for Achmea’s cash-management activities and cash position?

“We use SAP TRM for all treasury activities and Serrala CLM for cash management. Since the implementation of both systems, a lot of work has become simpler and more efficient and we can more easily extract information from both systems.”

To what extent do legislation and regulations influence cash management at Achmea?

“We take the regulations of the banks into account, such as Basel III and the Payment Services Directive 2 (PSD2). Under Basel III, for example, the debit and credit positions in a cash pool cannot be settled with each other. As a result, the debit positions are seen as lending and banks therefore have to keep more equity on their balance sheets. The extra costs for this will be charged by the banks to customers who make use of this pooling technique. This affects all major legal entities of Achmea. In this context, cash management will regularly top off high credit balances and replenish high debit balances of accounts in a cash pool. The introduction of PSD2 brings changes in the area of ​​access to the payment account. To this end, the banks are following an open banking strategy whereby they develop new services in combination with the opening obligation of customer information. For this purpose, an API (Application Programming Interface) can be used, which makes it possible for us to retrieve information from the banking systems. Instead of the SWIFT MT940/MT942 electronic account statements, we are now investigating whether we can harvest the necessary information differently, using APIs.”

And what exactly are the advantages of APIs?

“They allow us to obtain information from our banks quicker and more accurately, which in turn enables us to determine a more up-to-date cash position for cash management. We also investigated whether an API can retrieve all past statement transactions distributed over a day and replace the complete daily statement the next morning. This way, the financial administrations can handle all mutations and spread a day’s workload more efficiently.”

What is your own prognosis for the future of insurers?

“Thanks to new technology it’s possible to obtain far more information much quicker than before. IT systems within the financial sector are more open to sharing information and communicating externally. Processes can thus be arranged more efficiently. Insurers can use this information to better serve customers and to develop new products and services.”

As MuniFin has been growing fast in recent years, the bank is now under the supervision of the European Central Bank (ECB). This means complying with the corresponding regulations, particularly in the field of asset and liability management (ALM). How does the organization deal with the new ALM challenges?

MuniFin, the shortened name for Municipality Finance Plc, aims to promote welfare in Finland through the financing of municipal projects related to basic infrastructure, healthcare, education and the environment. Therefore, a significant portion of its lending is used for socially responsible projects such as building hospitals, healthcare centers, schools, day care centers and homes for the elderly. Finland’s local government sector is characterized by a high degree of autonomy over financial matters and strong credit quality, which is reflected in the high quality of MuniFin’s loan portfolio.

We do 200 to 300 transactions in the funding market, in almost 20 different currencies. This results in quite a bit of complexity.

Pyry Happonen, head of ALM at MuniFin

International player

MuniFin operates domestically, but is an international player, says Pyry Happonen, head of ALM at MuniFin: “We do all of our lending in Finland, but we fund our operations through international capital markets. Traditionally we have been very flexible in terms of funding. Each year we do 200 to 300 transactions in the funding market, in almost 20 different currencies. This results in quite a bit of complexity.”

In the meantime, MuniFin’s balance sheet has grown significantly in the last few years, to approximately EUR 35 billion. Simultaneously, the number of people working at MuniFin has increased to 149. As a result, the bank moved from domestic supervision to European supervision. Together with many developments in the financial markets, this has brought new challenges for MuniFin. European supervision raises the bar continuously regarding risk management.

“We therefore need to stay on top of things”, says Pasi Heikkilä, head of Treasury at MuniFin. “Not just by checking the boxes and fulfilling the requirements. To maintain our profitability and reduce risks, we need to improve the way we work too.”

External requirements and internal goals

According to Heikkilä, the changes bring both challenges and opportunities. “We’ve been directly regulated by the ECB since 2016 and our focus has been very much on complying with all ratios and liquidity requirements. We also want to put more focus on the long-term profitability side. The external requirements and our internal goals can strengthen one another. Both encourage us to look at ALM in different ways and to manage our balance sheet more efficiently.”

In terms of interest rate risk management, MuniFin is compliant. “We can manage our economic value of equity (EVE) and our net interest income (NII),” Happonen explains. “But we also wanted to dive a bit deeper than ticking the boxes and to find an optimal way to manage this risk. We wanted to enhance the capabilities and at the same time, we were looking for a third party to share and discuss our thoughts on our interest rate risk strategy. We therefore engaged with Zanders; to review the strategy and to ensure that we are optimally managing our profitability with regards to interest rate risk. Furthermore, we want to ensure we are fully leveraging the increased data and modeling capabilities.”

Iterative process

Ensuring compliance and simultaneously striving for improved internal risk management has influenced MuniFin’s strategy, says Heikkilä: “It’s an iterative process, a constant development which happens in cycles. For a relatively small company like ours, additional support is welcome. We continuously have active dialogues with our peers. But not all information is open; market participants cannot always share all information. So, in some cases we consult experts like Zanders, to help us with gap analyses so that we can figure out what to further improve on.”

Better quality data

In the current regulatory environment, managing a balance sheet efficiently is not a trivial task, Heikkilä explains. “Balance sheet profitability and risk need to be managed and optimized while considering multiple metrics, like the liquidity coverage ratio (LCR), the net stable funding ratio (NSFR) and the leverage ratio. To ensure liquidity is priced correctly and to have a sustainable profit margin, a robust funds transfer pricing (FTP) framework is required. At the same time, this needs to be done in a cost-efficient manner and with good data and systems.”

To meet these requirements, MuniFin is significantly improving its data and modeling capabilities too, to provide the company with reliable information on a daily basis.

“To ensure liquidity is priced correctly and to have a sustainable profit margin, a robust funds transfer pricing (FTP) framework is required”

Pasi Heikkilä, head of Treasury at MuniFin

“Latency is decreasing”, says Happonen. “We can do analyses and calculations more frequently. In Finland the big banks are investing hundreds of millions in their IT and systems. They are getting rid of legacy systems and bringing in new software, in order to improve quality of data and modeling capabilities to enable good decision-making. This is key in going forward in ALM; subpar data and Excel files no longer cut it. We are also proactive on this front, investing in our data collection and modeling capabilities for better analyses on a more frequent basis, with up-to-date data. And of course, technology helps us to make better strategic choices too, concerning managing interest rate risk, net interest income and so on.”

Green finance

In terms of the future strategy, green finance is a very important topic in MuniFin’s plans. The bank offers green financing, funded by green bonds, for projects that promote the transition to low-carbon and climate resilient growth. Sustainability initiatives and climate change ambitions are increasingly key in financing, according to Happonen.

“On the global bond market many investors are craving for green bonds”

Pyry Happonen, head of ALM at MuniFin

“Green finance is a very big thing for us. We are lending to a lot of domestic green projects, like public transportation. And we report the impact of the green financing we’ve done. On the global bond market many investors are craving for green bonds. The better our ALM strategy, the more optimal our profitability and risk return profile are and the more we can contribute to sustainability too. It means that we need to be sustainable in all senses, so both financially and environmentally.”

Sustainable balance sheet management: Running a sustainable business model requires maintaining a sustainable balance sheet. A stable profit margin and a risk profile that is in line with the risk appetite is essential. Finding the balance between risk and profitability can be a challenging task that requires continuous monitoring and steering. On the one hand, long lending with short funding results in high margins and therefore great profitability, in the short run. However, such a position yields significant risks in the longer run. As interest rates increase, more expensive funding is required, potentially resulting in a negative margin. Only by making the right trade-off between risk and profitability, and therefore between the short-term view and the long-term view, can a sustainable balance sheet be maintained.

Dutch company AkzoNobel is known worldwide for its coatings and specialty chemicals for both industry and consumers. As part of a new strategy to accelerate growth and value creation, the multinational decided to spin off its chemicals division. The challenge was to do this in just eight months. How did AkzoNobel’s treasury manage to split its activities into two?

With activities in more than 80 countries and 46,000 employees, AkzoNobel has a turnover of around EUR 14 billion. In April 2017, the company decided to change its strategy and transform itself into two high-performing businesses focused on coatings and specialty chemicals. “We needed to embark on a new strategy to build two strong independent companies”, says Gerrit Willem Gramser, head of treasury at AkzoNobel. “This plan had been on our mind some for some time, but was accelerated by market forces.”

Apart from timelines, the challenge in this project was to set up the new environment technically, with the right master data.

Laura Koekkoek, Partner Treasury Advisory Group

Rules of engagement

The announcement to split up the company went out on April 1st, 2017. “We almost immediately started having discussions for treasury on how to digest this”, says Gramser. “In Q1 of 2018 we wanted the company to be completely separated. So, as treasury, we started to do our math backwards. And we realized, given the timelines, it was probably something we couldn’t fully execute ourselves. When you realize that, all other decisions fall into place.”

AkzoNobel’s treasury department had already gone through a bank rationalization and had a fit-for-purpose treasury management system (TMS), in the form of SAP Treasury. “The system was complex, but it fit our needs very well”, says Joshua Watts, treasury infrastructure and project manager during the internal spin-off activities. “With the tight timelines, the first thing we decided as a treasury team, was to determine our so-called ‘rules of engagement’. We needed full focus on replication, duplication, cleansing – and not transformation. The treasury management structure we had was a strong solution. We’re going to continue working as one team and apply strict strategic discipline to meet our deadlines. That was our starting point.”

Treasury setting the scene

To achieve its aims, AkzoNobel required more resources than were available internally. “We were cautious about the deadlines”, says Watts. “The infrastructure we had was built, to a large extent, with the continued support of Zanders. We already had a long-running partnership, so we said: this is where we want to go – can you support us? By the end of June we had started and according to the planning, which was aligned between AkzoNobel and Zanders, we should have the system up and running by the first of January 2018.”

AkzoNobel also built up a cross-business project management office (PMO) to manage the separation from a group level, for all functions. The governance for the project consisted of the central PMO and expert-separation teams for treasury, tax, HR, commercial, accounting and other functions. “Beneath that we had local separation teams to deal with the local issues”, says Gramser. “We aligned ourselves as treasury in that expert-separation team in which the separation of our cash management and treasury technology were our primary deliverables. It was a layer of projects with a portfolio management on top of it. In the end, that structure worked very well. We started very early, so instead of watching how the rest of the company would approach the separation, we immediately formulated a plan. Quite deliberately we made choices in the beginning of the process – from a timeline and resources perspective – and that was crucial.”

From a systems point of view, the SAP Treasury system was cloned and the set-up was adjusted to fit the new bank account landscape. Watts says: “The system was already built for purpose and, as such, we had a good starting point for both companies.”

Integrated complexity

During the project, the main challenge was to align the cash management stream and technology stream. The idea to clone the system and not to build a new environment and cash management structure was therefore an important decision, says Zanders consultant Laura Koekkoek. “Apart from timelines, the challenge in this project was to set up the new environment technically, with the right master data.”

Decisions needed to be made regarding which entities belong to the coatings business and which to the chemicals business. Some entities needed to be split and it took time to arrange these new legal entities. For the integration at the end and to test the new solution, the bank accounts also needed to be ready, as well as the banking infrastructure. Koekkoek adds: “But at the end, all bank accounts were open, with all legal documentation in place.”

That was an achievement, according to Watts. “Everything is so integrated; you can’t start on one area without knowing the status of the other. The complexity is that – apart from all of the individual legal entity or bank account issues – there are so many interdependencies. You can’t approach the TMS separately from your global cash management activities. At a certain point we put a lot of energy into the so-called long tail of the separation. Small entities or small branches, that have a small impact on the overall figures, were consuming a significant amount of project resource time. So at a certain stage we changed the priorities to the bigger impact issues.”

We needed full focus on replication, duplication, cleansing – and not transformation

Joshua Watts, AkzoNobel

Team effort

Across AkzoNobel, the vast majority of the teams were already allocated to the specific business units, so fully separated. Both parts are and remain active in the current global markets. Gramser notes: “The two separated businesses are both good businesses, but they have different futures. And that will be the same for the treasury environment. But starting from now, the businesses can run very well on what we’ve given them.”

In March 2018, AkzoNobel announced the sale of its specialty chemicals part to The Carlyle Group and GIC. “Irrespective of the new owner’s system, our function was to be ready, no matter what scenario. That has been successful, with treasury being an early mover, having a clear plan and sticking to these rules of engagement. We’ve been quite brutal in protecting our own boundaries and guidance. The ‘as-is principle’ was leading: this is what you get. Treasury is an integrated, global operational function.”

According to Watts, the project’s success was a real team effort: “The interaction was great, on all levels. Compared to the more generic technology consultants, Zanders is much more strategic in its advice. We understand each other’s language and our teams were quite impressed by the efficiency of the work. There was good integration, good communication. It was on time, on budget – we’re very pleased.”

Endemol Shine Group (ESG), a private equity-owned, Dutch-based media company with global operations, is the world’s largest independent producer and traveler of formats. The company has grown mainly through acquisitions, resulting in a treasury organization that was largely decentralized. In 2017, the new treasury team opted for a full treasury transformation project, to unlock the available potential and to support the business’s growth ambitions.

With activities in more than 80 countries and 46,000 employees, AkzoNobel has a turnover of around EUR 14 billion. In April 2017, the company decided to change its strategy and transform itself into two high-performing businesses focused on coatings and specialty chemicals. “We needed to embark on a new strategy to build two strong independent companies”, says Gerrit Willem Gramser, head of treasury at AkzoNobel. “This plan had been on our mind some for some time, but was accelerated by market forces.”

Moving to more scripted productions has led to significantly longer cash conversion cycles, which increased working capital needs

Albert Hollema, Treasury Director at Endemol Shine Group

In 2017, Endemol Shine Group created over 800 productions in 78 territories, airing on more than 275 channels around the world. The group’s turnover is around 2 billion euros. Global hits include many non-scripted formats such as MasterChef, Big Brother, Your Face Sounds Familiar, Fear Factor and Hunted. The company's scripted business focuses on scripts for films and television series with a longer life cycle, such as the drama blockbusters Black Mirror, Humans, Peaky Blinders and Broadchurch. These series were each sold in at least a hundred regions. Another example is Sweden’s critically acclaimed hit Bron/The Bridge, which has been successfully adapted for different local regions.

As the group has mainly been growing through small acquisitions and the merger of the Endemol and Shine business, the decentralized treasury organization lacked full visibility at a central level. Consequently, treasury head office wasn't aware on a daily basis of the cash movements and other activities of thousands of bank accounts at more than 40 banks, resulting in high amounts of trapped cash. Besides, the company is highly leveraged with limited additional borrowing opportunities. Although a treasury management system was in place, it was mainly used to maintain intercompany accounts only.

Time for change

In early 2017, the treasury team underwent some changes and was slightly expanded. In the meanwhile, the demand for scripted business started to grow quickly. “For these scripted productions we need to invest more, and the broadcaster pays ESG later due to the longer production time”, Albert Hollema, treasury director at Endemol Shine Group, explains. “So, due to the longer life cycle of these productions, our opcos (operational companies) were increasingly demanding more working capital. For us there is no real credit risk – we always have signed contracts before we start to produce, so we know that the client is going to pay – but we need to bridge the gap between producing and getting paid. The cash conversion cycle is important for us. Moving to more scripted productions has led to significantly longer cash conversion cycles, which increased working capital needs. The non-scripted productions, like The Wall and Deal Or No Deal, have shorter cash conversion cycles and are therefore important for financing our business.”

Hollema explains: “We are a highly leveraged company and have a credit rating of CCC+, so for additional financing we can’t simply go to a bank to invest in working capital. Also, our two shareholders – Apollo and Fox – were not really looking to put more money into the business.” The increase in working capital thus had to come from the company’s existing resources. Hollema says: “There was a lot of cash in the organization, spread over all different bank accounts and in different entities on different locations. If we could unlock that amount of trapped cash, we would find our source of finance. That’s why we started a treasury transformation project: to make our treasury activities more efficient and to use the cash within our company to finance our growth. Because by developing the business, we generate higher profits and a higher cash flow which will help to reduce our debts and get out of the highly-leveraged situation.”

To a better category

The group’s treasury transformation included improved use of a treasury management system (TMS), bank connectivity and new treasury processes. Hollema adds: “We needed our TMS supplier to be a business partner, providing us with a solution that would really help us in today’s markets. We reached out to several providers and at the same time we had contact with Zanders, who was already supporting us on some treasury matters. They told us about their new offering, the Treasury Continuity Service, consisting of a certain number of consultancy days per month on which they support treasury, with provision of a high-end TMS and including access to their knowledge database. The service looked very helpful and was a good fit for our needs. We are a relatively small business and had just experienced a lack of interest from system providers, but due to the support of Zanders we moved to a better category on the system vendors’ lists. So, we got a state-of-the-art system that we normally wouldn’t have bought. Another important thing for us was that it offered us a software as a service (SAAS) solution, which basically needs no internal IT support. Updates are done on a regular basis and keeps our system up to date all the time. Overall, the combination of supporting elements was attractive for us.”

During the EuroFinance conference, the audience was impressed by what we had achieved in such a short time frame

Albert Hollema, Treasury Director at Endemol Shine Group

The award winning show

According to Dave van der Zwan, deputy treasurer at Endemol Shine, the implementation process went quick and smoothly: “As a team we worked closely together and within four months we were live on FIS Integrity SaaS.” At the same time, the company decided to set up new bank connectivity via Swift to receive the bank statements and access liquidity through the TMS in an efficient way. “We have a lot of opcos and learned that as a group we held over 1,000 bank accounts – and the information on these accounts was previously only available by the end of the month and a subsequent week for major opcos after the cash flow forecasting was submitted. With the managed bank connectivity solution from FIS’s Swift Service Bureau, we managed to get connected to all our banks directly to pick up all balances from all the opcos on a daily basis. Now we can see exactly how much money an individual opco holds and how much money can be extracted from it. That’s very helpful. During the implementation we opted for active pulling of balances as well – giving ourselves authority to move funds in and out of the opco accounts.”

The innovative system solution won two awards. Global Finance awarded the group for the ‘Best Treasury Management Systems Program’ and Treasury Today gave an Adam Smith Award in the ‘Highly Commended – One to Watch’ category. Hollema notes: “During the EuroFinance conference in October 2017, we presented our case and the audience was impressed by what we had achieved in such a short time frame; the solution, approach, and project management together with the scrum approach, cutting the process into small pieces.”

Bridging the gap

So what exactly made this project so successful? Van der Zwan says: “Our aim was to unlock funds for our investments in working capital. By freeing up that liquidity we were able to keep funding the business according to plan and without any need to postpone certain productions. The business case was easily made from a treasury perspective, it pays for itself quickly, but it also unlocks the liquidity we need in order to be able to grow the business. During the process, there was a snowball effect by which we’re moving from one improvement to the next. Also, the opcos realized what we were trying to achieve and proposed their own initiatives, which fitted perfectly in our overall strategy. A lot of elements came together and were unlocked in this transformation process by a small and high-quality team of Endemol Shine and Zanders people.”

Hollema adds: “From the investment point of view the treasury transformation project was a real success. By unlocking trapped cash for the company, the whole business case is basically paid out of the savings achieved in the first six months. Remember our financing costs are high given our CCC+ rating. We started to build in mid-2017 and by the end of the year the investment in the transformation was repaid, from that perspective.”

To be continued

It was the first time that the company’s head office was centralizing some activities. Van der Zwan says: “If we had taken a ‘big bang’ bank rationalization approach and required opcos to change their invoicing details, electronic banking, etc., we would have seen strong resistance. But instead we said: you can stay with your bank, things will remain as they are, we only want visibility and access. We wanted the transformation to disrupt as little as possible but on the other hand we knew exactly what our end goal was. Step-by-step, with support from the opcos, we will move to that end goal. Once you take the first step, the next step is obvious, and that response was exactly what we saw from our opcos. The support we received from both management and opcos was a big help during implementation.” Zanders consultant Adela Kozelova adds: “Endemol Shine’s treasury acted quickly, while doing things step-by-step, to get as many people on board as possible – a good example for many companies.”

With greater visibility of the company’s cash, the treasury team will be able to better evaluate which businesses are performing well and where to allocate capital. Hollema concludes: “We now pick up information via the bank statements, which doesn't require additional reporting from the opcos, but is very useful for us as a group and can even be seen as an early warning indicator on how our businesses are performing. The next steps involve the creation of cash P&Ls and cash flow overviews from this info, eliminating more manual processes by integrating the local ERPs with the FIS Integrity Solution to help improve real-time cash forecasting. Better control over FX and simplification of the IC settlement process by optimizing the in-house bank (IHB) module are also high on the priority list. The banks and bank accounts will need to be further rationalized to help the opcos. They do a lot of things that can better be centralized so they can focus on doing business. We are a business partner to our opcos, we take care of the whole financial logistics. Zanders and FIS are our sparring partners and we use them to discuss what to do in the next phase.”

According to Constant Thoolen, global head of financial risk at ING, the Accelerating Think Forward strategy, an updated version of the Think Forward strategy that they just call ATF, comprises several different elements.

"Standardization is a very important one. And from standardization comes scalability and comparability. To facilitate this standardization within the financial risk management team, and thus achieve the required level of efficiency, as a bank we first had to make substantial investments so we could reap greater cost savings further down the road."

And how exactly did ING translate this into financial risk management?

Thoolen: "Obviously, there are different facets to that risk, which permeates through all business lines. The interest rate risk in the banking book, or IRRBB, is a very important part of this. Alongside the interest rate risk in trading activities, the IRRBB represents an important risk for all business lines. Given the importance of this type of risk, and the changing regulatory complexion, we decided to start up an internal IRRBB program."

So the challenge facing the bank was how to develop a consistent framework in benchmarking and reporting the interest rate risk?

"The ATF strategy has set requirements for the consistency and standardization of tooling," explains Gilbert van Iersel, head of financial risk analysis. "On the one hand, our in-house QRM program ties in with this. We are currently rolling out a central system for our ALM activities, such as analyses and risk measurements—not only from a risk perspective but from a finance one too. Within the context of the IRRBB program, we also started to apply this level of standardization and consistency throughout the risk-management framework and the policy around it. We’re doing so by tackling standardization in terms of definitions, such as: what do we understand by interest rate risk, and what do benchmarks like earnings-at-risk or NII-at-risk actually mean? It’s all about how we measure and what assumptions we should make."

What role did international regulations play in all this?

Van Iersel: "An important one. The whole thing was strengthened by new IRRBB guidelines published by the EBA in 2015. It reconciled the ATF strategy with external guidelines, which prompted us to start up the IRRBB program."

So regulations served as a catalyst?

Thoolen: "Yes indeed. But in addition to serving as a foothold, the regulations, along with many changes and additional requirements in this area, also posed a challenge. Above all, it remains in a state of flux, thanks to Basel, the EBA, and supervision by the ECB. On the one hand, it’s true that we had expected the changes, because IRRBB discussions had been going on for some time. On the other hand, developments in the regulatory landscape surrounding IRRBB followed one another quite quickly. This is also different from the implementation of Basel II or III, which typically require a preparation and phasing-in period of a few years. That doesn’t apply here because we have to quickly comply with the new guidelines."

Did the European regulations help deliver the standardization that ING sought as an international bank?

Thoolen: "The shift from local to European supervision probably increased our need for standardization and consistency. We had national supervisors in the relevant countries, each supervising in their own way, with their own requirements and methodologies. The ECB checked out all these methodologies and created best practices on what they found. Now we have to deal with regulations that take in all Eurozone countries, which are also countries in which ING is active. Consequently, we are perfectly capable of making comparisons between the implementation of the ALM policy in the different countries. Above all, the associated risks are high on the agenda of policymakers and supervisors."

Van Iersel: "We have also used these standards in setting up a central treasury organization, for example, which is also complementary to the consistency and standardization process."

Thoolen: "But we’d already set the further integration of the various business units in motion, before the new regulations came into force. What’s more, we still have to deal with local legislation in the countries in which we operate outside Europe, such as Australia, Singapore, and the US. Our ideal world would be one in which we have one standard for our calculations everywhere."

What changed in the bank’s risk appetite as a result of this changing environment and the new strategy?

Van Iersel: "Based on newly defined benchmarks, we’ve redefined and shaped our risk appetite as a component part of the strategic program. In the risk appetite process we’ve clarified the difference between how ING wants to manage the IRRBB internally and how the regulator views the type of risk. As a bank, you have to comply with the so-called standard outlier test when it comes to the IRRBB. The benchmark commonly employed for this is the economic value of equity, which is value-based. Within the IRRBB, you can look at the interest rate risk from a value or an income perspective. Both are important, but they occasionally work against one another too. As a bank, we’ve made a choice between them. For us, a constant stream of income was the most important benchmark in defining our interest rate risk strategy, because that’s what is translated to the bottom line of the results that we post. Alongside our internal decision to focus more closely on income and stabilize it, the regulator opted to take a mainly value-based approach. We have explicitly incorporated this distinction in our risk appetite statements. It’s all based on our new strategy; in other words, what we are striving for as a bank and what will be the repercussions for our interest rate risk management. It’s from there that we define the different risk benchmarks."

Which other types of risk does the bank look at and how do they relate to the interest rate risk?

Van Iersel: “From the financial risk perspective, you also have to take into account aspects like credit spreads, changes in the creditworthiness of counterparties, as well as market-related risks in share prices and foreign exchange rates. Given that all these collectively influence our profitability and solvency position, they are also reflected in the Core Tier I ratio. There is a clear link to be seen there between the risk appetite for IRRBB and the overall risk appetite that we as a bank have defined. IRRBB is a component part of the whole, so there’s a certain amount of interaction between them to be considered; in other words, how does the interest rate risk measure up to the credit risk? On top of that, you have to decide where to deploy your valuable capacity. All this has been made clearer in this program.”

Does this mean that every change in the market can be accommodated by adjusting the risk appetite?

Thoolen: “Changing behavior can indeed influence risks and change the risk appetite, although not necessarily. But it can certainly lead to a different use of risk. Moreover, IFRS 9 has changed the accounting standards. Because the Core Tier 1 ratio is based on the accounting standard, these IFRS 9 changes determine the available capital too. If IFRS 9 changes the playing field, it also exerts an influence on certain risk benchmarks.”

In addition to setting up a consistent framework, the standardization of the models used by the different parts of ING was also important. How does ING approach the selection and development of these models?

Thoolen: “With this in mind, we’ve set up a structure with the various business units that we collaborate with from a financial risk perspective. We pay close attention to whether a model is applicable in the environment in which it’s used. In other words, is it a good fit with what’s happening in the market, does it cover all the risks as you see them, and does it have the necessary harmony with the ALM system? In this way, we want to establish optimum modeling for savings or the repayment risk of mortgages, for example.”

But does that also work for an international bank with substantial portfolios in very different countries?

Thoolen: “While there is model standardization, there is no market standardization. Different countries have their own product combinations and, outside the context of IRRBB, have to comply with regulations that differ from other countries. A savings product in the Netherlands will differ from a savings product in Belgium, for example. It’s difficult to define a one-size-fits-all model because the working of one market can be much more specific than another—particularly when it comes to regulations governing retail and wholesale. This sometimes makes standardization more difficult to apply. The challenge lies in the fact that every country and every market is specific, and the differences have to be reconciled in the model.”

Van Iersel: “The model was designed to measure risks as well as possible and to support the business to make good decisions. Having a consistent risk appetite framework can also make certain differences between countries or activities more visible. In Australia, for example, many more floating-rate mortgages are sold than here in the Netherlands, and this alters the sensitivity of the bank’s net interest income when the interest rate changes. Risk appetite statements must facilitate such differences.”

To what extent does the use of machine learning models lead to validation issues?

“Seventy to eighty percent of what we model and validate within the bank is bound by regulation – you can't apply machine learning to that. The kind of machine learning that is emerging now is much more on the business side – how do you find better customers, how do you get cross-selling? You need a framework for that; if you have a new machine learning model, what risks do you see in it and what can you do about it? How do you make sure your model follows the rules? For example, there is a rule that you can't refuse mortgages based on someone's zip code, and in the traditional models that’s well in sight. However, with machine learning, you don't really see what's going on ‘under the hood’. That's a new risk type that we need to include in our frameworks. Another application is that we use our own machine learning models as challenger models for those we get delivered from modeling. This way we can see whether it results in the same or other drivers, or we get more information from the data than the modelers can extract.”

Thoolen: “But opting for a single ALM system imposes this model standardization on you and ensures that, once it’s integrated, it will immediately comply with many conditions. The process is still ongoing, but it’s a good fit with the standardization and consistency that we’re aiming for.”

In conjunction with the changing regulatory environment, the Accelerating Think Forward Strategy formed the backdrop for a major collaboration with Zanders: the IRRBB project. In the context of this project, Zanders researched the extent to which the bank’s interest rate risk framework complied with the changing regulations. The framework also assessed ING’s new interest rate risk benchmarks and best practices. Based on the choices made by the bank, Zanders helped improve and implement the new framework and standardized models in a central risk management system.

JCI is the global leader and largest manufacturer of automotive batteries, powering nearly every type of passenger vehicle, heavy-duty and light commercial trucks, motorcycles, golf cars, lawn and garden tractors, and marine applications, and a leading provider of building technology, products, and solutions (building automation & controls, HVAC, refrigeration, fire, security, and integrated solutions). The multinational has USD 30 billion in sales and employs 120,000 employees spread over 2,000 locations on six continents. Building automation & controls, HVAC, refrigeration, fire, security, and integrated solutions are part of the Building Technologies & Security (BT&S) division and represent the majority of sales: USD 23 billion. The Power Solutions division has sales of USD 7 billion. One in three cars around the world is powered by a Johnson Controls battery. There are over one billion cars in circulation globally, and with a production of 150 million batteries a year, JCI is a world leader in this field.

Increasingly less automotive

Three years ago, JCI had a very different company profile. Its activities were divided into four divisions, including a very large Automotive division mainly focused on the interior of the vehicle. This division consisted of two parts: Automotive Seating, which manufactured car seats, and Automotive Interiors for the production of dashboards, floor and overhead consoles, and door panels. A fourth division, called Global Workplace Solutions, provided facility management services for third-party buildings. “We first divested Global Workplace Solutions by selling it to CB Richard Ellis. We subsequently contributed our Automotive Interiors division into a joint venture with Yanfeng, one of the largest automotive suppliers in China. Then the company decided to dispose of the entire Automotive division – including the stake in the Yanfeng joint venture – in a spin-off,” says Jean-Philippe De Waele, VP & Treasurer EMEA, responsible for the treasury activities in the EMEA region. “This division eventually became an autonomous publicly listed company called Adient.” But prior to completing the spin-off, JCI merged with Tyco, where JCI’s building automation & controls, HVAC, and refrigeration activities were combined with Tyco’s fire and security activities.

Automotive represented more than half of JCI’s revenue when the spin-off of Adient was announced in July 2015. The operational spin-off had to be realized in a very short time frame, with Adient becoming a fully independent unit under the JCI umbrella by July 1, 2016. All the teething problems had to be identified in a dry run period of several months in order to properly and efficiently execute the legal spin-off on October 31, 2016. After all, the entire Automotive division had to be completely disconnected in terms of processes, systems, and employees.

Systems and people

In a very short period of eight months, a brand new treasury department had to be set up from scratch to support Adient, a global organization with revenue of USD 17.5 billion. In the fall of 2015, JCI was looking for external consultants to assist with the treasury spin-off project. Jean-Philippe De Waele explains: “Because we knew we could never accomplish this without external help, I visited EuroFinance in Copenhagen looking to secure the right consultants. A large part of the treasury spin-off consisted of implementing a treasury management system for Adient. Given the time constraints, we therefore decided to copy JCI’s current treasury systems and processes to Adient. As Zanders successfully assisted JCI in 2010 with the initial implementation of our treasury management system, Quantum, it was a logical choice to reach out to Zanders for this part of the spin-off work as they were already familiar with the system, processes, and people.”

JCI first upgraded its current system from version 4.6 to 6.2 and then cloned it for Adient. Jean-Philippe De Waele: “It was a very intense project as we had to go live on July 1. As part of our global liquidity management and inter-company netting processes, we use a cross-currency notional cash pool at Bank Mendes Gans (BMG). A similar structure was set up for Adient, and Zanders assisted with its implementation.”

Zanders helped us to audit, streamline, and improve the back-office processes.

Jean-Philippe De Waele, VP & Treasurer EMEA

Merger

In January 2016, employees learned that JCI – for the part that did not continue as Adient – was going to merge with Tyco, a company that provides fire and security systems. The merger with Tyco took place on September 1, 2016 – two months before the spin-off of Adient came into effect. As a consequence of the merger, JCI had a new footprint of treasury centers around the world. Jean-Philippe De Waele explains: “The US treasury center of Tyco was located in Princeton, New Jersey, while we were based in Milwaukee, Wisconsin. In Asia, they were in Singapore, and we had offices in Hong Kong and Shanghai. In Europe, they were in Switzerland, while we had an establishment in Brussels. And while we were in Brazil, Tyco did not have an active presence in Latin America. It was clear that there had to be a rationalization in treasury centers. In the US, the office in Princeton was closed; in Asia, everything was concentrated in Shanghai, and in Europe, it was decided to keep Tyco’s treasury center operating as a satellite of Brussels.”

With the merger of the treasury centers in Brussels and Zürich, it was necessary to determine which processes would be conducted where. “Because Tyco had an established and operating back office in Zürich and our back office in Brussels operated post spin-off with temporary workers and Zanders consultants, we decided to centralize our back-office activities in Zürich. Zanders helped us to audit, streamline, and improve the back-office processes, and then we transferred those operations from Brussels to Zürich.”

Trade finance

When the transfer of the back-office activities and other treasury integration work were successfully completed, a new internal project started at JCI: the implementation of a new trade finance system. This project was also a result of the merger with Tyco. Jean-Philippe De Waele: “We have a fairly extensive portfolio of bank guarantees and letters of credit. We have about 8,000 bank guarantees outstanding, amounting to approximately USD 1.2 billion. We also have a large portfolio of parent guarantees. At JCI, we did not have a system in place while an old trade finance system existed at Tyco. The integration activities triggered us to think about what should be done in this area. Move from no system to the Tyco system? Or would it be better to switch to a brand new system? Zanders analyzed the Tyco system and compared it with the current needs of JCI, where Swift connectivity is extremely important. The conclusion of this audit was that the cost of upgrading Tyco’s legacy system would be about as high as the implementation of a brand new system. That is why we decided to implement a new system, GTC (Global Trade Corporation), in which all communications with banks occur via Swift. Zanders is assisting with the implementation and the onboarding of the various banks on GTC and Swift.” The project started in mid-September, and the first bank will go live in February 2018.

Decommissioning

With the merger, whereby Ireland-based Tyco International Plc acquired the US-based Johnson Controls, Inc., the new parent company (Johnson Controls International Plc) was incorporated in Ireland. “As all our derivatives trading is done in the name of the parent company, a lot of work was done in transferring our hedging activities – FX and commodities – from the old (Johnson Controls, Inc.) to the new (Johnson Controls International Plc) dealing entity, and Zanders supported us with this transfer,” says Jean-Philippe De Waele. “Tyco operated a very large in-house bank which we decommissioned. In addition, we dismantled Tyco’s notional cash pool and integrated it into our BMG cash pool structure. We transferred all Tyco’s hedging activities from its treasury management system (IT2) to Quantum, and all Tyco banks were on boarded on our AvantGard Trax system (Global Payment Factory) and Swift.”

Awards

The list of projects gives an indication of the extensiveness of the treasury operations at both companies. After the spin-off of Adient, Johnson Controls was a company with USD 20 billion in sales. Tyco was a company with sales of USD 10 billion, bringing total group sales to approximately USD 30 billion. As Jean-Philippe De Waele notes, “During the merger of two such large companies, there are significant integration efforts at all levels, including the treasury level.”

Looking back at the projects, Jean-Philippe De Waele is very satisfied. “The work accomplished for the Adient treasury spin-off was impressive,” he says. “This is also recognized outside of JCI. We obtained two awards for the work that we have done in this regard. One from CFO Magazine as ‘Best finance team - best treasury practices’, and one from Treasury Management International Magazine, for ‘Best Treasury Transformation’. In addition, we received several requests to share our experiences concerning this project - including ATEB, the Belgian Association of Corporate Treasurers and at the EuroFinance conference. Our practices have become a showcase for many people on how to best handle a spin-off and carve-out of a business division.

Future

Under Jean-Philippe De Waele’s stewardship, there are still a number of ongoing integration activities relating to banking and cash management that will continue over the next 12 months. “Zanders will remain onboard until an initial group of countries have become active on the new trade-finance platform. Meanwhile, we have completed the recruitment of our additional analysts, who will be managing our BMG cash pools.” We are never sure what the future will bring, notes Jean-Philippe De Waele. “The company has been very active in M&A and divestments over the past three years and publicly stated that it is focused on creating long-term shareholder value in the remix of its business portfolio. For example, as we were integrating Tyco, the company decided to sell part of its business (Scott Safety) to 3M, a US company. So who knows…”

With more than 235 million customers worldwide spread across a diverse group of countries, VEON's business is complex in nature. As a consequence, the organization instigated a large-scale transformational program in 2016, in order to take its financial function to a higher level. This also meant a radical change process for treasury activities.

VEON consists of a large number of separate telecommunications companies (telcos). From its head office in Amsterdam, the multinational provides telecommunications and digital services, with different local trademarks, in countries that include Italy, Pakistan, Bangladesh, Algeria and various CIS countries, such as Russia, Ukraine, Uzbekistan and Kazakhstan. Shares in the company are traded on the Nasdaq in New York and Euronext in Amsterdam.

More than mobile

In recent years, VEON has taken over several telcos, but also sold off others. “We are focusing on a number of key markets, where we want to be number one or two,” says Maarten Michalides, director of corporate finance at VEON. “When, for example, we took over a large Egyptian company, GTH, we immediately divested various parts of it located in a number of more southern African countries.” As an example, VEON is the market leader in Pakistan. In addition, the company has a local banking license and, therefore, provides financial services as well. “In such countries, relatively few people have a bank account,” says Michalides. “Because, in terms of systems, the telecoms infrastructure is very similar to that of a bank (we also have customers' name and address data and account balances), and customers are paying with their mobile phones. It is therefore only logical that telcos have a competitive advantage with regard to financial services. We provide them in Pakistan, but also in countries such as Russia and Ukraine.”

In addition, VEON focuses on developments involving new digital opportunities and enables customers to access all kinds of services via the VEON app. This is an important growth strategy for the company, says Michalides. “The growing capabilities of telephones increasingly enable, not just local, but also international service providers to enter the market. Our aim is to progressively transform from a traditional telecom company to digital service provider.”

Transformational program

As a result of this strategic change, VEON faced a major challenge: the entire finance organization had to become more cost-efficient, more standardized and more business-focused. Part of this plan was the centralization of the operational finance activities in a number of shared service centers (SSCs), which had already started. “This was necessary not only for the sake of efficiency, but also from a quality and control perspective,” explains Michalides. Spread across various countries, more than 40,000 VEON employees were used to working with their own systems and according to their own procedures and processes. “This generally works well on a stand-alone basis, but in the end it is logical for a large international group to harmonize,” he adds. That is why in 2016, when the company was still called Vimpelcom, it launched a large-scale program to transform its finance function.

This broader project made it necessary for the treasury team to initiate a treasury transformation project in order to design a new Treasury Global Operating Model (TGOM), in which the treasury organization, processes, supporting systems and activities were redefined. In other words, the various treasury departments within VEON were to become uniform and harmonized on the basis of this TGOM.

Local presence

As a consequence, the entire company is currently undergoing a transformation phase, says Michalides. “We are moving towards more central purchasing, implementing a single ERP system that everyone in the organization will use, and we are setting up new SSCs in a number of places, merging overlapping operational activities. This is occurring one step at a time and cannot be done quickly, due to certain factors including regulations and the company’s history. Treasury cannot be left behind in this transformation. With about 150 people, our treasury organization seemed huge, but half of it was actually Accounts Receivable or involved in other financial-administrative services.”

VEON uses more than 100 banks and 1,000 bank accounts. Local bank accounts and relations are really necessary in many countries, notes Michalides. “In some countries, we have to set up the financing locally, as local approval by banks and governments is needed to get things done. Local legislation and status of the banking system therefore make it difficult to centralize. This also means that we cannot simply cut back from 75 to 10 treasurers, as would be possible for a telco operating in the West. We are going to reduce the number considerably, but it is more important that we have a grip on the operation, so we know exactly what happens, when and by whom. That is the primary goal in the treasury project that we are undertaking.”

Open-heart surgery

When this project was identified, Michalides' department went in search of support. “We knew, for example, that our current treasury management system (TMS) was no longer going to help us and should be renewed. We knew that it was necessary to gain more control over the treasury activities of the entire company. We also knew that the rest of the company was working on a finance transformation. Working with the group treasurer, I proceeded to identify a consulting company that was completely dedicated to treasury – hence not distracted by other services such as accountancy, software and the like. Personally, I had good experiences with Zanders when working at Heineken and Corio. We made an appointment and received a convincing presentation, clearly showing how much experience they already had with regard to treasury transformation. We had known for a while that we had much to do and that it would be far-reaching. And, if you are undergoing open heart surgery and are vulnerable, it is nice to know that the surgeon can recognize what he is going to see and knows exactly what he is doing. It was therefore an easy choice for us.”

A new treasury system

A number of important steps were taken shortly afterwards, starting with a review and assessment of the current treasury organization, processes and systems in all relevant countries as well as at group treasury level. Then a preliminary treasury global operating model was defined and a fit-gap analysis was performed to assess the current state of treasury and what needed to be done to reach the target state. “We subsequently arrived at a blueprint and a roadmap of what the treasury function should look like between now and a few years hence,” explains Michalides. “This took place with proper consultation and a great deal of local involvement. Despite the fact that each country manages treasury in its own manner, the outcome has become a uniform plan that is supported and recognized by everyone.”

This plan indicates that the various treasury departments will have to operate more in accordance with shared principles, while taking into account the many local requirements and restrictions on currencies, tax and central bank rules. A crucial part of the TGOM is a crystal clear definition of the vision, the objectives and the scope of treasury within VEON, as well as clear policies and procedures, and the definition and assignment of roles and responsibilities at all levels within the treasury organization.

Michalides says: “In addition, the use of our treasury system turned out to be too non-committal, so we have defined a vision for a new single TMS; one system that can be managed centrally, communicates well with other systems and is therefore not without obligation. In the end, we want automatic payments and accounting, which means that control will also run faster and more effectively.”

“Viewed from a treasury perspective, the intended new system needs to support the entire process end-to-end,” Zanders consultant Job Wolters explains. “This means that, after logging in, you immediately see the current financial positions, and recognize the financial risks that exist. You can use it to analyze, provide support for decisions and execution, and to record your financial transactions – and then you have the link to accounting, the banks and reporting to senior management.”

Relevant streams

The selection of the new TMS is a very important cornerstone of the TGOM implementation project, Michalides emphasizes. “The organization and processes at the various SSCs must function in a more streamlined manner.” In addition, the team is busy setting up an in-house bank, an entity in Luxembourg that will act as the SSC for the corporate head office in Amsterdam, which operates more as the strategic function. The SSCs have the execution function, while Luxembourg has to play an exemplary role for the various local treasury departments. From Michalides’ young, international team, someone is involved in every project stream: the TGOM implementation, the TMS implementation, a bank rationalization and a cash flow forecasting project.

“The project is being undertaken by VEON and Zanders,” says Michalides. “It has been well thought out beforehand, allowing it to be executed in logical steps – an integral approach. For the overall project, we appointed an internal project manager, who provides support from VEON to Zanders, helping to find their way through the organization. This turned out to be a brilliant move, which is working very well. Since we are constantly being overtaken by the issues of the day, we ourselves cannot give the support that such an important and far-reaching project needs.”

Involving all countries

The role of treasury in the more general sense has recently changed within organizations, notes Michalides. “Especially with regard to systems and processes. More and more companies are centralizing the treasury function. This is also a logical move once you become more internationally active, an expansion that requires more centralization and therefore transformation as well. However, VEON is also a special company in this area; there are few Western companies with such a deep-rooted presence in complicated countries. Our offices have really grown out of their local environments.”

Looking back at recent developments, Michalides has some tips for other treasuries: “The success of a large complex project is mainly about good preparation. In addition, the involvement of the countries where you are established has proved to be very important. You must take your time for that, and remain well aware of their situation and processes. People appreciate it very much when they are involved in something so important.”

Would you like to know more about treasury transformation? Contact us today.

Gasunie, which is wholly owned by the Dutch government, transports natural gas through more than 15,500km of pipelines in the Netherlands and Germany. In addition to these pipeline systems, Gasunie’s assets comprise hundreds of installations, including one for liquefied natural gas (LNG), an LNG import terminal and facilities for underground gas storage. Every year, the company transports approximately 125 billion cubic meters of natural gas, equal to about a quarter of Europe’s total gas consumption. As a bona fide gas country, the Netherlands has become ‘Europe’s gas hub’, the central trading place for gas.

Terrific challenge

One of the government’s key objectives is to make the Netherlands one of the most sustainable countries in Europe by 2020. To limit climate change, the country is currently working on an energy transition: a switch to a CO2 free energy supply. This means that fossil fuels will increasingly be replaced by fully renewable energy sources, such as solar, wind and geothermal energy, and biogas. Due to this, natural gas, which is undisputedly the least polluting fossil fuel, has now been cast in a somewhat less-than-positive light. “You just have to mention energy transition and the level of uncertainty is very obvious,” says Janneke Hermes, manager of corporate finance & risk advisory at Gasunie. “And there are plenty of givens. But many people don’t have the right information – about the reliability of energy sources, their costs and what they can be used for. Solar panels on roofs have become symbolic of renewable energy, but even if they covered all the roofs in the Netherlands, they could only generate a limited percentage of the country’s energy requirements. So much more needs to be done. The role played by gas is, and will remain, crucial in the energy transition. This will increasingly be renewable forms of gas, such as gas from biomass, or hydrogen that can be obtained from wind energy. But natural gas also has a role to play, because it can reduce CO2 emissions significantly using it instead of coal in power stations. The big challenges we face are how to connect all the energy lines in the near future and how it should all be organized. It’ll take a lot of time and money and it constitutes a very substantial challenge for the Netherlands and the rest of Europe.

Hydrogen

Gasunie is already involved in a number of innovative projects. “Many impressive projects are already being carried out, by players big and small,” explains Hermes. “TenneT, for example, wants to harvest offshore wind energy on the North Sea, on a large scale, and our contribution can be to convert the excess electricity into hydrogen and transport it via existing gas pipelines to land, where it can be used as renewable fuel.” Adding CO2 to hydrogen produces methane, which can be introduced to the gas network as a gas. A further advantage of doing this is that hydrogen, or the gas that it helps to produce, can be stored as a buffer for subsequent energy generation or use. Many industries already use hydrogen in their production processes, continues Hermes. “Naturally, we are exploring how, with the existing infrastructure in our country, we can optimally exploit and facilitate this fact.”

Into Europe

In addition to its network in the Netherlands, Gasunie also has one in Germany, which also plays a key role in the security of supply of natural gas to the Netherlands. “Our number one strategic pillar is to remain the reliable, safe player in the Netherlands when it comes to gas infrastructure,” assures Hermes. “To this end our focus is very much on the storage of energy, during both the summer and winter and on a daily basis too. In other words, monitoring peaks during the day and deciding how to cope with them. Our second pillar is the facilitation of the gas markets elsewhere in Europe.”

While in the Netherlands gas has fallen out of favor – as a result of the earthquakes in Groningen, for example, and because it’s a fossil fuel – the opposite is true in the rest of Europe. Gasunie’s strategy looks beyond the Netherlands, Belgium and Germany. “We are looking further afield – the gas market is developing very strongly outside the North European area. The further you venture into Europe the more popular gas seems to be, to the extent that in some regions it’s akin to an emerging commodity. Thanks to our knowledge and expertise we can help, facilitate and invest in those markets. For example in the construction of new pipelines and networks, and new LNG terminals. I’m talking about countries in which we want to accumulate experience step-by-step, starting off by providing advice and service. Later this can be expanded into participation in a consortium in proportional stakes. We want to build up our presence incrementally.” According to Hermes, the third strategic pillar focuses on the afore-mentioned energy transition. “We are increasingly and emphatically demonstrating just how important a role we can play in all this. By supporting solar and wind energy, offering gas as a back-up, and making our own products more sustainable, or green. Green gas, by the way, is the same quality as natural gas. We are working on innovations that should lead to an increase in scale in the supply of green – so sustainable – natural gas.

Diversified supply

Alongside the transport of gas, Gasunie is also focusing on heating networks based on geothermal energy or residual heat. “Together with Eneco, the Port of Rotterdam Authority and Warmtebedrijf Zuid-Holland, the so-called Heat Alliance, we are trying to make optimum use of residual heat produced by the Port of Rotterdam for heating in the immediate region.

We are striving for open access in that market, with all customers and suppliers enjoying access to the infrastructure. Independence has always been a key aspect of what we do; we have no interest in the commodity. We make it possible for the various players – such as producers, customers, traders – to find one another. Our range of activities is currently very broad, from doing the right things today to exploring what’s possible in terms of tomorrow’s services and facilities and how we can contribute to their realization.”

The energy supply in the Netherlands is strongly dependent on gas. In 2016, a third of all energy in the Netherlands was supplied by natural gas. And due to the reduction of production from the Groningen field as a result of earthquakes in the province, its dependence on countries like Russia and Norway seems to have increased. This is why Gasunie wants the supply of gas to be as diversified as possible, says Hermes. “Customers find it important to have options; it prevents unilateral dependence. In this respect, southern Europe is gaining in importance because that’s where gas from the Middle East comes in. As a supplier of gas, Russia is still a very important partner for all of Europe, but this only strengthens the argument that LNG could be an excellent way of realizing the desired diversity.”

New Role

But just what do all these developments mean for the activities of Gasunie’s treasury? “Having made the necessary investments in the Netherlands’ existing gas infrastructure, we can now generate the kind of cash flow we expected,” insists Hermes. “Consequently, this will reduce the amount of debt we’ll need to take on. We have a reasonably diverse long-term loan portfolio and once that’s matured we’ll no longer need to refinance the full amount, which translates to a moderation of our financing needs. For our international activities, however, it’s not yet clear how much funding we’ll need. The same is true when it comes to green gas and supercritical water gasification projects. Relative to our assets, these all represent modest investments, but we don’t yet know how big they will become in future. Once their success has been proven, we’ll scale up projects like these. In terms of financing requirements, ours are indeed very diverse.”

That diversity has not escaped the attention of Gasunie’s treasury, while Hermes’ own role has also changed and become more diverse. “Suppose we’re talking about a benchmark loan of €500 million, it won’t be a problem because we’ve done something similar in the past. But if the discussion is about a new biogas hub with several farmers from Twente, for example, the dynamics become very different. We don’t yet have a contingency plan for something like that so we’ll need to be extremely flexible.” When financing these new, different types of projects, the sums involved are a lot lower, but the same cannot be said about the time the treasury has to invest. “That can sometimes be inversely proportional,” concedes Hermes. “But the contacts are also very different and this calls for a completely different skillset to what was needed before.” It also means that advice is asked more frequently from within the organization, she acknowledges. “Whereas we initially provided corporate financing, we now also extend loans to the business units themselves. This too calls for a different dynamic.”

Sustainable Cooperation

The first advisory role played by Zanders in Gasunie’s treasury activities dates all the way back to 2002, says Hermes. “So for me I’ve only known collaboration with Zanders. Back then it included SAP implementation, in which all kinds of instruments had to be configured. Since then we’ve been in constant contact; whenever the treasury needed support, we contacted Zanders. In May 2016, Lisette Overmars even took on the role of interim treasurer for several months. Our most recent collaboration was the adaptation of our treasury statute, which was necessary because we wanted our treasury policy to be aligned with our new objectives. In a broader context, Zanders has always proved an excellent sparring partner, one that asks us the right questions and provides the necessary structure for tackling the challenges our treasury faces. It’s what I’d define as an excellent and sustainable collaboration.”

If you would like to know more about treasury solutions in the energy sector, please contact our Partner Laura Koekkoek.

Since 1970, FMO has been investing in the private sector of developing countries and upcoming markets. It does this in sectors in which it believes the long-term impact will be the greatest: financial institutions, energy and agricultural sector. With regard to lending, FMO applies a number of criteria. Is the initiative bankable? Does it contribute to a better world? Is it dependent on FMO or can another bank do it as well?

IFRS 9 concerns a number of new accounting requirements for financial instruments and contains three pillars: classification and measurement of financial instruments, provision for possible credit losses on financial assets (impairment) and hedge accounting. The adjustments within the organization fall under the responsibility of the financial division, which is Buijze’s department. “As far as hedge accounting is concerned, the impact is not so relevant for us, but definitely for the other two,” says Buijze. For example, the rules require the bank to look at expected loan losses differently, including taking into account macroeconomic scenarios.

Auditable and executable

During the credit crunch, banks found that the value of assets or liabilities entered on the balance sheet were often too low. In addition, there was also a delay in adjusting the value in response to market developments. The idea that the value of assets or liabilities should reflect the market more closely only seems logical. The question, however, is whether this regulation will achieve this. “It probably will,” thinks Buijze. “But since it arose from a political discussion, it makes it that much more complex. In order to get a grasp on this complexity, we have appointed an external manager to this project. It affects every part of our organization and is a lot of work to not only process it through all the procedures, systems and reports, but also to make sure it is preserved.”

In 2015, FMO began to prepare at a relatively early stage. “That’s why we were able to take all the necessary steps in a constructive way,” explains Buijze. “That process started with the question: what exactly is IFRS 9 and what are we actually facing? After that we needed to verify which elements were already in place. The probability of default (PD), or the probability that a company will go bankrupt, was something we already had a good idea about. As well as the loss given default (LGD), which is loss through default. You need to build your entire framework on these basic elements. IFRS 9 requires a calculation of expected loss (EL) in the next 12 months. However, if the client’s creditworthiness deteriorates, you are responsible for the EL over the entire life cycle of that credit. But what does ‘deteriorate’ actually mean? Such things must be clear; it’s important that it’s auditable and executable.” That raises the question of how one determines the creditworthiness of a local bank in Zimbabwe, for example. No ratings exist for such a bank. Buijze says: “We do that with all the specialists here, through a ranking of the entire portfolio based on the estimated risks. So it’s a relative rating which we subsequently ‘map out’ from the well-known rating scores of Moody’s and Standard & Poor’s.”

Portfolio diversity

Compared with the Basel guidelines, IFRS 9 requires more a point in time, according to Martijn de Groot, director at Zanders. “We had to take a number of measures, especially when using the existing PDs as proof for IFRS 9. Nothing too major, but it must be well founded to obtain approval from the auditor and to be able to take part in the process.” Buijze nods in agreement, saying: “You have to thoroughly explain why certain decisions were made. A lot of banks have very specific problems. As a bank, we can’t do a lot of back testing because we have relatively few clients, and luckily we don’t lose many. To show the expected loss with only historical figures is difficult. You must also substantiate your findings theoretically.” FMO’s portfolio is much smaller but more diverse than that of the average bank. The balance sheet total exceeds €8 billion, with loans amounting to over €4 billion. However, this is distributed among approximately 700 clients in 80 countries.

“There are countries with a high-risk rating, where we’ve never lost a cent, although the expected loss is higher than zero,” explains Buijze. FMO’s expansive agriculture sector does have some consequences. De Groot says: “It means that you have to find a solution for everything for IFRS 9. Because the portfolio is so diverse, so are the effects. A life cycle or credit cycle needs to be modeled, but the FMO credit cycle, based on the total balance, is muted, less volatile, due to the diversity.”

Classification

In the world of FMO, modeling quickly results in highly theoretical levels, says Buijze. “There are no trustworthy figures from a lot of the countries in which we do business. How do you determine the credit cycle in Ukraine, for example? In any case, we try to find the balance: while complying with the standards of IFRS 9, we don’t want to fall into something which appears great in theory, but hardly relates to what’s happening in a country.” All financial instruments must be classified according to the IFRS 9 guidelines. On the liabilities side, there is no impact for FMO but there are implications for the bank’s financial assets. Buijze explains: “We have to separately determine the classification for each loan.” This classification means that loans are entered at cost price or at market value on the balance sheet. However, the market value decreases as the repayment capacity decreases. Because there is also an interest component, in addition to a credit component, the market value is more complex. “Luckily we haven’t needed to price that many loans at market value. We work with normal loans, mezzanine loans and private equity. And for the latter, very different rules apply.”

Fluctuations

One of the most miraculous things about IFRS 9, according to Buijze, is that you are obliged to make a choice for private equity investments. “Either everything goes through the balance sheet, so you never see anything in your profit and loss account (P&L), with the exception of paid dividends, even if you sell the investment at a nice profit, or everything goes through the P&L. That leads to some uncertainty, because valuations can fluctuate and are not always as accurate as possible. Consequently, you get huge fluctuations in your income statement. We finance
almost no listed companies, and should therefore, in valuation, mainly look at theoretical values based on what other companies are doing. If we finance a bank and all banks in that region are assessed at a lower value, then we will also asses the bank at a lower value. During the crisis, the large Dutch banks significantly decreased in value, while we were actually doing quite well. If FMO was valuated in the same way as ING at the time… Therefore, it is an approach, but it’s not spot-on. And that’s all because of your P&L.”

De Groot believes there’s something else involved: “The bulk of private equity isn’t in euros, which means that currency volatility also has an effect on the balance sheet value, which in turn is in euros. Previously, that result only went through selling by the P&L, meaning if it were actually realized. Under IFRS 9, it either never goes through the P&L, or every period your unrealized result also goes through the P&L.” In fact, this all means a higher volatility on the P&L.

That will apply to a lot of banks, but with us, it’s even more extreme because we have a relatively large portfolio in private equity.

Paul Buijze of FMO

FMO has chosen to have put everything go through the P&L. “That was a difficult decision, but it involves almost a third of our activity;, so for reasons of transparency, this was too much not to include in the P&L.”

A glance at 2025

Finance is ultimately the most involved department in implementing the new reporting standards. “Zanders had the ‘spider-in-the-web’ job,” says Buijze. “They brought together collaborators within the organization and developed a tool to calculate the credit facilities and market values of loans. This tool also implemented shadow calculations to get a better sense of the choices made for IFRS 9. What does this mean for the periodic numbers? This provides better insight and we can intervene if necessary. We prefer to have the tool in the system itself, but the systems don’t offer this at the moment. In the next three years, the tool must at least have a sufficient level to make our P&L, and be signed off by the auditor. And after that, we hope that our source systems will have the capacity to do this themselves.”

In recent years, FMO has grown both in size and profitability. “Through the years, we’ve had a lot of up-swings,” says Buijze. “Because of the dollar, but fortunately, also because developments in a large part of the world we work in are going so well.”

In the first hundred years of its existence, Boskalis was purely a dredging company. In 2010 the company – to give it its full name Royal Boskalis Westminster NV- acquired a number of other companies and, as a result, evolved from a dredging to maritime service company offering various services to different markets. Over the course of a few years, Boskalis acquired haulage company SMIT Internationale, Fairmount, Dockwise and the dredging business of the German Strabag Wasserbau.

Evolved according to needs

Boskalis has a huge project organization; the company operates in more than 90 countries across 6 continents. As a result of this expansion, the complexity of treasury work increased as well, due to various currencies, local bank accounts, financial structures and different ERP systems. “At a certain time they all have to be in sync,” says Frank Rousseau, Boskalis’ Group Treasurer. Treasury plays a remarkable hybrid role in it all: on the one hand as a ‘holding-treasury’ – namely in the area of corporate finance and everything concerning take-overs – and on the other hand closely involved with projects, mainly financial risk management. Rousseau: “Advising the Board and at the same time being close to the business locally means we play a very central role.”

Rousseau also thinks that the treasury function at Boskalis is special. His department now has 16 people who work on cash management, corporate finance, project financing, bank guarantees and credit risk management. “Our people are often directly involved with projects. The treasury organization has evolved according to the needs of the company. There is a need for strong financial and operational risk management and support for the business units, such as identifying and covering currency risks, credit risks and fuel price risks. At the time a contract is signed, all such risks have to be covered; when the project is underway you can’t intervene. Getting the order book filled is easy, but filling it with revenue-generating work is a bit harder. There is no advantage in taking on work and then doing it badly. Risk management is therefore very important in our business.”

Quick involvement

Large projects involve the whole treasury department in one way or another. “For example, take the
construction of a new arm of the Suez canal, so that shipping can safely navigate in both directions. From 2014 onwards this has been a large project and we had to contend with local bank accounts; Egyptian pounds, which have a currency risk; and managing credit risks, financial securities, bank guarantee structures and fuel price risks. These sorts of things can lead to fluctuations in returns and costs and therefore Treasury is involved at many levels, which makes it really fascinating.”

Our people are often directly involved with projects. The treasury organization has evolved according to the needs of the company.

Frank Rousseau, Group Treasurer at Boskalis

1300 people in total work at Boskalis’ head office in Papendrecht, supporting the company’s large
international projects. The fleet, the pools with crew, the researchers and contractors are all managed centrally. Even the preparation and implementation of tenders is done centrally, by, amongst others,
Treasury, Legal and Tax. “We are involved from the moment potential work is on the horizon up to contract negotiations. But also when the order is under way, for example with payments, the management of cash”, Rousseau explains. Execution of such local projects has to be managed centrally. “We don’t have any local organizations that can develop the necessary competencies; when one project is finished the project organization moves on to the next one. After the Egyptian project, half of the people go on to the next project in, let’s say, Oman. It is, in a way, hit and run work. We only have locations in Amsterdam and Singapore that act as a permanent base for a region.”

Atradius cover

Rousseau’s treasury organization reports to the CFO. Besides administrative and secretarial support, there is a team of four who deal with the daily cash management. Five others handle credit risk management and bank guarantees. Another team of five handles corporate finance, project finance and project development. Customer finance falls under project finance. “Public-Private Co-operation (PPS) is quite labor-intensive: if you tender for a Dutch PPS, you have to do so with a complete financing package. There are international clients – those outside the OECD countries – who have a project, but lack the financing or don’t know exactly how to develop the project. For example, in Panama we had Punta Pacifica, where a client wanted to put two islands off the coast of Panama city. As the client had insufficient funding for this, Boskalis participated with local banks. We were therefore not only contractor/guarantor for the complete execution of the project as far as the financers were concerned, but we also financed a part of the contract value. Treasury tries to add value in order to bring in a project.”

Another example is arranging a loan for clients with Atradius cover. “We did that last year in Colombia,” Rousseau explains. “We arranged bank financing for the client where the bank received credit insurance from the Dutch Export Credit Agency, covered by the Ministry of Finance. Credit risk for the bank is effectively carried by to the Dutch government. This is only possible in combination with a Dutch export product. In this way we try to do more projects by contributing to the economic feasibility of a project. In addition, we are broadening our approach to project development: we are offering parties who have a project in mind the chance to develop this together with Boskalis and make a business plan that is then financeable.” Although this is not a typical Treasury activity at first sight, it fits in the strategic scope of Treasury’s role in Boskalis.

New direction for cash management

In 2014 RBS, an important international house bank to Boskalis, decided to stop offering cash management and trade finance services outside the UK. This forced Boskalis to change direction. Rousseau: “We had decided some time ago to take a close look at our cash management, but when RBS pulled out we were triggered into taking action. And we realized then, in spring 2015, that we needed external help.” That’s how the relationship with Zanders came about.

Zanders' added value was in visualizing solutions and thinking strategically about where we wanted to be as company. They helped us to make choices, and with the set up of the whole organization.

Frank Rousseau, Group Treasurer at Boskalis

An important step was selecting a new bank for cash management services. Boskalis and Zanders issued an RfP and, via a short list and various analyses, we finally chose BNP Paribas for international cash management and ABN AMRO for Dutch cash management. At the same time, the cash management structure and the payment process were improved by implementing a bank-independent, central payment hub, which provided more insight into our cash flows. Rousseau: “We can now send a report of our net financial position to the Board every day: where is our money? We have drastically reduced the approximately 700 bank accounts we had and we now have structures abroad to better centralize our cash. Furthermore: we previously had payments from all sorts of different electronic banking systems. That too is now centralized in a standard solution.”

Asian prize

Parallel to these changes, Zanders supported Boskalis with an upgrade and outsourcing of the treasury management system (TMS). “We had three balls in the air at the same time,” says Rousseau. “It was a big strategic project, certainly for our Treasury. It has improved our bank account structure, the payment process and the information flow. Every morning we now receive all balances for about 500 bank accounts electronically via MT940. Our TMS then generates a report which gives the CFO and me insight into our net financial position. In the UK we have just set up a cash pool and we are doing the same in Germany. In our central cash pool we have 19 currencies. Last year we took over VBMS, the former offshore wind company of Volker Wessels, and this component has also been included in the new structure. In these type of processes, Treasury used to be a follower, but now we are leading. We tell the business unit how its cash management should be structured.”

This year Boskalis won a prize from The Asset, a well known Asian trade journal, for ‘Best Cash Management Solution in Asia.’ Rousseau: “In Singapore, one of the few places where we have a permanent base, we have set up a structure with target balancing, so that every day a limited amount remains in the account whilst surplus funds are automatically transferred to the central cash pool in the Netherlands. This solution has won a nice prize and sector-wide recognition.”

Future expectations

Which plans and developments does Rousseau foresee in the future? “We obviously look at where
we can make more improvements, but we have made great inroads over the past two years. For Treasury, support for the business units - the wider role in project finance and project development – is most important. We have a new 3 year business plan for 2017-2019, in which we show that we want to grow in dredging activities and offshore energy, the new components which we have had for several years and in which we expect high growth. As far as credit risk is concerned, we are keeping an eye on the oil and gas sector.” The Board of Directors is close to the organization and to its projects. This means that all departments have a short communication line with them. “They have insight into all projects’ financial risks and how we can cover them,” Rousseau explains. “The people we have here are really good professionals, who can handle derivatives. If you see what we have set up for our cash management and with which people we meet new challenges, then we really are ready for the future.”

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