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COVID playbook for treasurers: it boils down to 4 key areas

Keeping it all going under these conditions requires corporate treasurers to keep more plates spinning in the air. CT spoke with some of the region's leading bankers about what treasurers need to focus on

COVID playbook for treasurers: it boils down to 4 key areas

The COVID-19 pandemic has put unprecedented financial pressures on businesses, compelling CFOs and corporate treasurers to re-evaluate their approach to risk as they seek to secure adequate funding and liquidity to ensure business and operational continuity.

Gourang Shah and Varoon Mandhana from J.P. Morgan’s Wholesale Payments Solutions team in Asia Pacific spoke to CT about their views on four key areas that treasurers should be focusing on to navigate the current crisis.

Liquidity, liquidity, liquidity

Ensuring sufficient liquidity is critical during black swan events where revenues may be compromised but expenses still need to be paid. A treasurer’s approach to liquidity management in such scenarios should be in three key areas: analyze key liquidity drivers, build liquidity stress scenarios and have a dynamic action plan in place.

“Liquidity drivers differ according to a company’s business models, working capital requirements, external funding capacity, growth plans and commitment to shareholders,” said Gourang Shah, head of Wholesale Payments Solutions for Asia Pacific at J.P. Morgan.

“The best way to analyze this is to go back to your cash flow statement and looking at every line or sub-line item for opportunities to release or generate cash.”

It is not yet known how long the Covid-19 pandemic will last and it is therefore prudent for treasurers to draw up multiple stress scenarios as they plan their liquidity needs over an extended period of time.

This will help them create a more dynamic action plan.

“We are advising clients to keep five action points in mind as they work through their liquidity plans: reduce, release, secure, defer and identify,” he said.

“Reduce discretionary spend like travel or entertainment at all times, while identifying fixed-cost optimization opportunities like moving to cloud infrastructure. Release internal cash trapped in supply chains or sitting idle in different parts of the business; trade finance solutions and techniques to centralise liquidity like cash pooling can help companies access and mobilize internal cash more effectively,” Shah said.

Treasurers should also look to secure access to liquidity from external sources like banks and capital markets whenever available.

“Finally, look to defer capital spending, share buybacks or dividend distributions, or align them with liquidity positions, as well as identify non-core assets that can be liquidated to generate emergency funding,” said Varoon Mandhana, senior advisor for Wholesale Payments Solutions, Asia Pacific.

Execution is key

Strong operational discipline and coordination between the treasury’s front, middle and back office teams are essential to effective execution, and this is even more critical in the current environment when people are working remotely and exception management is dominating day-to-day activities.

Traders in the front office covering foreign exchange exposures and liquidity positions should stick with bank counterparties with strong credit rating and execution track record.

They should also prioritize liquidity over pricing.

“Traders should not wait too long to achieve a specific pricing in the market at the cost of losing liquidity in these critical times. For example, if you need to swap local currencies to U.S. dollars to repay maturing debt and the FX spreads are very wide due of market volatility, you should not sit on this position for too long and risk debt default,” Mandhana said.

Middle office teams should keep an ongoing dialogue with businesses to ensure the submission of accurate cash forecasts and revisions at all times. Cash managers may also consider reducing investment and swap durations to build more flexibility into liquidity plans.

Back office teams should rigorously test backup banking infrastructure for both payments and balance reporting capabilities.

“They should prepare facility drawdown paperwork in advance as much as possible and ensure the signatory lists are updated with all key bank relationships to avoid last minute surprises,” Shah said.

Finally, cybersecurity should be prioritized now more than ever with threat actors looking for weaknesses in systems with large numbers of staff accessing their work systems from home.

“The number of cyberattacks in relation to COVID-19 has increased over the last two months and it’s paramount that companies increase their risk monitoring against cyber threats,” he said.

Dealing with losses

Governments around the world have responded to the COVID-19 pandemic with a variety of policies restricting movement, including country-wide lockdowns in some cases. Depending on the extent of the measures, treasurers should be prepared for the prospect of the loss of site, loss of staff or loss of systems.

In the event of loss of site, treasury should be ready with a clear communications plan for key stakeholders on its recovery strategy to either resume operations remotely or from alternate work locations.

“In cases where treasury is set up across the region, key operational processes should be distributed across markets to ensure continuity.  Common work flows like single ERP or TMS platforms are of immense value in times like these, as they provide visibility to global liquidity, funding and FX positions, and are helpful for regional treasuries in to hand over the book to each other seamlessly,” Shah said.

Loss of staff refers to situations where staff within the treasury function are unable to perform their roles due to medical, infrastructure or social distancing measures. “It might be worth identifying staff that are able to cover other functions should the need arise. For example, the banking administration team can cover trade confirmations and settlements in middle office where feasible,” he said.

Corporates should also plan for the potential loss of treasury systems or bank connectivity, and look towards defining alternate channels to instruct payments and access banking services, while utilising fax or email indemnities and e-signatures wherever feasible.

Remember to communicate

Timely communications is critical in dealing with any crisis, and it is no different for treasuries in the current environment.

“The treasury should keep the company’s board and management fully informed of the company’s liquidity status and its action plans at all times. This also provides an opportunity to influence critical decisions,” Mandhana said.

To manage action by rating agencies, treasurers should keep them informed of company plans around dealing with the crisis. Finally, close communication and coordination with banking partners is a must for treasuries to ensure sufficient funding and transaction support.

“While COVID-19 has caused widespread disruption to businesses in short term, it has highlighted the need for greater treasury digitization and centralization within organizations.  J.P. Morgan continues to invest heavily in this area and we are seeing an increased adoption of digital banking solutions by a large number of clients,” Shah said.

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