What are the main changes influencing treasury’s added value within corporates?

Laurens Tijdhof (LT): “Business models are changing. In the decades since the introduction of the internet, ‘digital natives’ - new multinational companies such as Uber and Google - have emerged to disrupt all industry sectors. These companies have less legacy than traditional multinationals. Treasury plays an important role in that digital native environment, for example with payment innovation in ecommerce. Traditional multinationals are typically dealing with a lot of legacy because of mergers and acquisitions throughout their history. For them, the change is more transformational in nature, as they are doing something different than they have done in the past decades or even in the past century. This is one of the elements where treasury can add significant value; to understand from a financial point of view where the business is in the current cycle and to see what things need to be changed, updated or optimized to add value.”

Ron Chakravarti (RC): “Firstly, the pace of change in commerce has picked up, driven by new technologies and new ways of doing business. These are shifting the timing, value, and volume of cash flows and, of course, that impacts treasury. Secondly, while treasury always has to manage regulations and the cash flow impact of changes in global taxation, the pace of change in these have also picked up. Finally, geopolitical uncertainty has created additional considerations at this point in time. Corporate treasurers, therefore, need to ensure their teams are increasingly nimble to deal with all of these issues. The good news is that the availability of new technologies, data and artificial intelligence have the potential to change how treasury works and to create added value.”

At which point are companies ready for new technology?

LT: “Before a company can enter the next stage of treasury maturity, it first needs to get the basics right. This means having a focus on centralization, standardization and automation, typically using traditional technology like a TMS or an ERP system. And if you have these systems in place, be sure you’re using and benefiting them optimally from that environment first. Once you have the basics right, you can go to the next stage of a smart treasury, using the new digital or exponential technologies. Then you can benefit from the good basis and use more of the data in analytical ways, with algorithms or newer technologies like robotic process automation (RPA) or artificial intelligence (AI).”

RC: “I completely agree that getting the basics right, by completing the journey to an efficient treasury comes first. Treasury is on an evolution path of becoming first efficient, then smart, and finally integrated. Getting to efficient means that you must standardize, centralize, and automate. Even among multinational companies, not all have mature, centralized treasury models. Getting to a best in class model is key. In most industries that includes a functionally centralized regionally distributed treasury model, with operational treasury on a common infrastructure and processes. Once you are substantially there, you can work on the next step change, in making the move to a smart treasury. And ultimately to an integrated treasury.”

How should a treasurer deal with the continuous change driven by these exponential technologies?

RC: “Well, an issue is that – as The Future of Treasury whitepaper indicates - only 14 percent of corporates have a digital strategy at the treasury level. Why is this so low? One reason is the availability of the right resources. While treasurers have previously adapted to technology change, this change is all happening a lot faster now - for treasury and the broader business. Ultimately, treasury is all about information. Today, more than ever, the treasury function needs to include people who are technologically savvy. People who are able to comprehend what is changing and how to best deploy technology. That will become increasingly important to create value for the business. Treasury teams recognize that they need to have a digital strategy, but many of them are not fully equipped to define one. They are looking for help from industry leaders with a treasury framework to define their digital treasury strategy. That is one of the reasons for this collaboration between Citi and Zanders; in many cases we recognize that we can better do it together, creating added value for our mutual clients.”

LT: “If you compare the current situation to ten years ago, a treasurer would only buy new technology if there was a real requirement. Today, there’s new technology that many treasurers do not fully understand – in terms of what problems it could potentially solve for the company. What you often see now is that treasurers start with small projects, proofs of concepts, to test some innovative ideas. You can compare it with the iPhone; when Steve Jobs invented it, it took some time before people really understood what to do with it, what value it would add in their life. First you need to see what it is, what it can do for you, whether it can solve a real problem. That’s the exiting stage in which we are now. Some treasurers are trail blazers, others are more followers that first want to learn from others about how it has brought them forward.”

Where can these latest technologies really improve treasury? Are there any issues they cannot solve?

LT: “Treasury is all about information and data. There’s a lot of information available in a treasury environment and you sometimes need new technologies and standardized processes to unlock the value out of these data. Treasury covers a large amount of structured data in all kinds of systems. If you want to translate that data insight into valuable conclusions, then technology is probably the right enabler to help; with data analytics and visualization, for example. But, if you don’t have your data centrally available in a data warehouse or data lake, then that’s the first part you should work on; you first need to have your data centrally available to be able to do something with it. Unfortunately, many large multinational companies are still in that stage, they still have data that’s very fragmented and decentralized. For those companies, you could say that the newest technologies have come too early.”

RC: “What will improve treasury? We should first consider what treasurers are seeking to do. Today, we are seeing an increasing appetite from corporate treasurers for integrated decision support tools going beyond what treasury management systems can provide. To that end, we at Citi are running a number of experiments, collaborating with our clients and fintechs, and enabling our clients’ journey towards smart treasury. This is about moving beyond descriptive analytics to decision support and decision automation, and offering opportunity to realize the full automation of operational treasury. What won’t be solved? Well, we won’t get there in 2020 but we will certainly soon start seeing the foundational steps in this transition to a fully automated operational treasury and that’s what is so exciting.”

Traditionally the company insures events that can lead to huge losses, such as natural disasters. Two years ago, this reinsurer decided to further strengthen its payment processes. Swiss Re has engaged the support of Zanders, in several areas, since 2012. At first, this was mainly related to Group Treasury’s balance sheet management and risk reporting processes. Among others, a new liquidity risk measurement and reporting system was put in place using a combination of an in-house built data warehouse, a vendor risk management system and modern business intelligence (BI) technology.

Connectivity ‘on par’

At the time, account manager Jeroen van der Heide was already Group Treasury’s main point of contact. “Since 2017, we’ve also been helping Swiss Re to improve their operational treasury processes,” Van der Heide says. In early 2017, the reinsurer organized several workshops on bank connectivity. “We participated in those workshops and provided our point of view assessment on their as-is. Swiss Re’s connectivity demonstrated to be ‘on par’ with the market standard. However, our other feedback during those workshops strengthened their resolve to work towards a new central financial messaging hub in the medium term. We were chosen to support them in the realization of that ambition.”

Single source of truth

A central financial messaging hub is a considerable undertaking, given that the company has at least a dozen different systems from which payments are initiated and where bank statements are consumed. Like many big financial multinationals, Swiss Re has grown substantially over the years, partially through acquisitions. One of Zanders’ first tasks was to analyze the presence of bank account information in the various systems – and the consistencies and inconsistencies between them. This analysis then served as the basis for a blueprint of the 'to be' data model.

It’s crucial to designate a single source of truth for different types of master data, simply because that avoids getting stuck in master data reconciliation, it really is the starting point for any move towards operational excellence.

Nicolas Andres, head of Group Finance Transformation at Swiss Re

SWIFT network

In the fall of 2017, the focus shifted to connectivity with the SWIFT network. Zanders made sure that compliance with the Customer Security Programme (CSP) was achieved without problems and, with an eye on improving business continuity, an initial analysis was carried out on the SWIFT Alliance Lifeline program. Then it was time to support the switchover to a new SWIFT Service Bureau (SSB). Zanders provided both the project management and subject matter expertise to support the requirements analysis, drafted the RfP document and guided the selection process towards choosing a new SSB. Throughout this process, special consideration was given to complementary services, which a new hub could benefit from. Andres explains: “As the single exit point towards the wider financial system, the hub is naturally well-suited for complementary controls, for example to detect payment fraud.”

Feasibility study

On this topic, Zanders was asked to assess the benefit of leveraging modern machine learning techniques on the traffic to and from the SSB gateway. “Nowadays, advances in machine learning and artificial intelligence receive attention nearly on a daily basis,” says Van der Heide. “Vendors have been quick to take advantage of this development, and they promise a lot.” Andres continues: “We were curious to what extent these techniques would actually bring us forward. We know Zanders prefers to segregate hype from benefit. Plus they’re well acquainted with our infrastructure and have relevant experience from their risk advisory practice, so they were the natural partner to ask this question.”

Zanders' advice on what to do next, and particularly on what not to do, was totally appropriate.

Nicolas Andres, head of Group Finance Transformation at Swiss Re

Electronic banking tools

Meanwhile, as the SSB selection project slowly drew to a conclusion, an analysis was made of the various electronic banking tools that had worked their way into the organization over the years. “The analysis was an important step in the preparation process for the financial messaging hub. It turned out there were quite a few more tools in use than expected.” concedes Andres. “The vast majority are actually only used to collect statements from individual banking partners. That confirmed our viewpoint that proper bank statement distribution would be an important feature of the new 'to be' solution.”

Webservice-centric approach

At the start of 2019, the implementation of the new financial messaging hub finally kicked off. “An important benefit of the 'to be' solution is that we move from a batch-centric approach to a webservice-centric approach. This means that upstream systems can basically deliver their messages whenever they want,” says Andres. The first step of the project includes implementing the switchover to the new SSB, finding an adequate compliance-filtering solution, rationalizing the Bank Identifier Codes (BICs), implementing the SWIFT Alliance Lifeline and putting the first REST APIs in place. Two years later, Zanders is still involved, coordinating progress surrounding the six workflows and ensuring that all stakeholders are adequately involved.

Trust

When asked what makes the collaboration work, Andres says: “I believe in resourceful and intelligent junior consultants, supported by pragmatic experts where needed. Zanders offers both.” Jeroen feels the relationship is largely built on trust – and that is something that works both ways. “Nicolas trusts me on the quality we provide. That is something I am proud of and we are pulling out all the stops to ensure we continue to justify that.” Andres summarizes: “It is the engagement and skill shown to get the job done after the initial Powerpoints that convinces.”

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.”

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…”

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.”

Do you want to know more about risk management for corporations? If so, contact us.

As the country’s ‘Quadruple Player’, Türk Telekom offers a complete range of mobile, fixed voice, broadband, and TV services. With the vision of introducing new technologies and accelerating Turkey’s transformation into a true ‘knowledge society’, it offers services to over 38 million subscribers. Türk Telekom provides the information technologies that drive sustainable economic growth and community development. By investing heavily in fiber and mobile networks, Türk Telecom provides people with access to knowledge that, due to economic, social or physical reasons, may otherwise not be a part of this community. As such, Türk Telekom is truly a leading company in Turkey. Türk Telecom split its ownership after its privatization in 2005 and initial public offering in 2008: 15% free float on the Borsa İstanbul, 55% owned by Oger Telecom, and 30% owned by Turkish Government.

The challenge

Türk Telekom is exposed to material foreign exchange exposures due to its sizeable long-term foreign currency funding portfolio, denominated primarily in EUR and USD. Due to insufficient long-term Turkish lira liquidity in the domestic debt market and the high Turkish lira interest cost, access to foreign currency denominated funding is essential for the company. However, this simultaneously exposes the company to foreign currency risk because adverse foreign currency movements inflate Türk Telekom’s debt position and interest expenses significantly. In turn, this detrimentally effects the company’s overall financial position, credit profile, and ability to raise future liquidity to fund its large CAPEX program. “Türk Telekom had established a number of internal mechanisms to manage foreign currency risk, but a formalized risk management policy was still missing,” says Salih Fatih Güneş, Director of Treasury, Türk Telekom.

This was the starting point to define the scope and objectives of the Financial Risk Management Transformation Project in collaboration with the Enterprise Risk Management department.

The project

Türk Telekom decided to embark on a FRM Transformation Project, with the ambitious goal to create an ‘integrated’ and ‘holistic’ solution across the various risk relevant categories: market risk, credit risk towards financial counterparties, and overall company liquidity risk.

Given the complexity and involvement of multiple stakeholders, Türk Telekom required a multistage approach, each with distinct pre-defined deliverables. Türk Telekom invited a limited number of consulting firms to respond to their request for proposal. Salih Fatih Güneş:” We specifically wanted to work with a consulting boutique specialized in treasury and risk management.” Zanders translated Türk Telekom’s requirements into the following tailored project approach.

Best practices and innovation

Türk Telekom Treasury received an Adam Smith Award as a highly commended winner in the Best Foreign Exchange Solution category. The award recognized the following best practices and innovations:

• A holistic approach towards risk management incorporating different risk categories
• Use of a sophisticated, state-of-the-art risk quantification tool
• The incorporation of a risk decision-support tool in which long-term funding/rating criteria are the main drivers
• Joint effort between Treasury function and the Enterprise Risk Management function
• Adoption of a Monte Carlo simulation model

The solution

Zanders delivered a state-of-the-art risk quantification tool, tailor made to capture Türk Telekom’s ‘risk bearing capacity’ in relation to its financial profile. The tool captures financial position data, relevant market risk variables (FX, interest), and appropriate risk models, and incorporates further customized stress, scenario, and simulation tests, including an at risk methodology that uses Monte Carlo simulation. It provides Türk Telekom with 5-year, forward-looking management information, which Türk Telekom uses to decode signals of adverse events at an early stage through key risk indicators and management consults to proactively steer the company’s credit profile. Türk Telecom based the tool on the overall financial strength and risk bearing capacity of the company as the central metrics to set risk limits and bandwidths linked to the outcome of the calculated financial risks.

In addition, Türk Telekom drafted a new Group Financial Risk Management Policy. This policy incorporates strategic and operational guidelines for Türk Telekom’s Financial Risk Management activities and clearly describes the key FRM principles and objectives, steering both strategic and operational decision-making. The new policy clearly states primary and secondary risk management objectives, with liquidity risk the key risk that other risk categories align to and resulting actions derive from.

Developing a state-of-the-art holistic risk quantification model along with new treasury policies, procedures, strategy, and governance is quite unique. In theory, it may sound straightforward, but in practice it is quite difficult to deal with multiple interlinked financial risks in a holistic manner.

Salih Fatih Güneş, Director of Treasury, Türk Telekom.

Next to the industry recognition and Adam Smith Award, the project also improved internal visibility and recognition of treasury’s added value by senior management and other corporate functions. Salih Fatih Güneş concludes: “We have achieved this project in close cooperation with our consulting partner Zanders. It added value with its outside-in views, knowledge of best practice and especially with its pragmatic approach to delivering a concept into a practical, tailor-made solution.”