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I have spent the last few days looking at a client’s Excel spreadsheet. They are using it to manage all of their treasury positions – amounting to several hundred million dollars.
Don’t get me wrong – Excel is a wonderful tool, but under normal circumstances this is probably not the optimal choice to make. In their case there are some exceptional circumstances that means that this may be a reasonable (if short-term) solution but it prompts me to ask if anyone has a favourite MS Excel story.
My personal favourite is of a former employer of mine in London. They are a major investment bank that is also one of the largest commercial banks in their home country. In short, a huge operation with assets in the hundreds of billions of pounds.
When I joined them in the late 1990s, they had acquired many other banks and trading operations over several years, including the one that I was formerly employed by. The problem was that each of those entities had their own general ledger and the bank had not taken steps to integrate or eliminate them at all.
The problem should be obvious – there was no one place where the bank’s general ledger was kept. The solution adopted was a classic one. At the end of every month a full ledger dump was taken from each GL and integrated using Excel – with all of the problems of GL account mapping and consolidation to deal with. The time taken to close off the GLs, get the dump, process it and then put put the management reports out meant that, at best, it took until mid-month to get the numbers. Control was effectively impossible.
After a year of this, it was decided that a better solution was needed – besides which the 65,536 row limit was being breached and the speadsheets took hours to recalculate. The solution? MS Access. When I left that had eventually moved on to SQL Server – but it was still taking nearly the same amount of time to get everything done.
Internal audit always paid close attention, but the risks were always just huge. There was also no real way to verify any of the numbers other than tracing each one back to the host systems and that could take hours per number.
This whole Centro thing is looking interesting. The core problem is simply stated – they have a lot of debt that is maturing now and, given current conditions, they have not yet been able to refinance on anything like reasonable (for them) terms. The firm has also been highly geared, so refinancing in this market means that they will need to raise more funding through equity.
Listed property trusts are notorious for their complex structure, with individual shopping centres frequently having differing investors with the overall management (and an equity stake) being held by the listed entity (or entities) as at Centro. This makes sorting things out when they have problems very difficult.
The problem, as simply put above, raises a few questions – not least of which is “How did they let this happen?” There are likely to be more than one investigation of this over the coming months – and a lot more if they do fail as a company (which does not look likely at the moment), so any views here must be treated as uniformed conjecture.
At the moment, it looks like an old fashioned liquidity issue – the company has simply let too much of its debt mature at once and that maturity is happening at a bad time. I have said this before and I will say it again – it is bad policy to bet the house on being able to roll any debt facility at any time. A good treasury policy (like the one on CPA Australia’s website) will cover this risk like this:
The XYZs funding requirements and funding strategy, will be reviewed annually and set out in the Treasury
Funding and Risk Management strategy paper. The funding strategy detailed in the Treasury strategy
paper will be developed consistent with the following parameters.
1. [Determine the debt maturity profile. For example provide a information on how much debt will
mature over 1, 3 and 5 years. What is the maximum level of debt that is permitted to mature in next
2. [Does there need to a policy on whom debt can be borrowed from; does debt raising need
diversified in terms of counterparties, types, maturity and geography and do limits need to be set?]
3. [What is policy in terms of raising debt in foreign currency and management of the associated
This is not just a few things to fill in, but things to think carefully about. Getting all your funding in large blocks may be tempting, but it can be horrifically expensive – ask Centro.
Quite often, though, a liquidity issue is masking a deeper solvency issue. Banks will normally lend (if on occasionally difficult conditions) if they are satisfied they will get their capital back and interest in the interim. It looks like Centro has not been able to convince them this is a strong possibility – which is why they cannot roll the facilities.
If they have over-paid for the shopping centres in the US – a possibility since the economy there looks like it is slowing.
Another interesting point is the disclosures in the last full year report. They disclose only just less that $1.1 bn in total current liabilities (look at page 34). This figure is meant to include all debts maturing during the next 12 months – all of them, including any short term accounts, ordinary trade debts, etc. etc. as well as all major debt facilities. They are now trying to refinance $1.3bn in total facilities – so what are they doing refinancing in one hit $200m more than the total current debts of all types they had at 30 June? Something looks odd here. As I said, these entities have a convoluted structure, so it may be OK, but it does look odd.
My guess is that the audit team is currently being pulled off any other work they were on and are now starting to go back over the files. It should be an interesting period to the the auditors of Centro – and, possibly, a few other listed property trusts.
As I mentioned in my last post, from an Australian perspective I feel the market reaction to the whole US sub-prime thing to be somewhat overblown. The total quantum of the losses is simply not large enough to warrant the market drops we saw last week and Friday’s adjustments in the US and today’s in Australia have restored some sense into the pricing of the underlying assets.
While I am normally a believer in semi-strong market efficiency there are times when sentiment can get ahead of sense and I feel that happened last week.
The reasons behind it I feel are clear – while there were some large losses where individual firms the market generally was not informed of where those losses were and, worse, some firms had previously issued wrong information to the market on their exposure. The result was that liquidity dried up as no-one really wanted to get into anything they could not really be sure of – which, with a fully integrated financial system, was not very much.
I feel there are several lessons from this:
- Firms trading in the riskier end of the market need good (or very good) internal information on the positions they are running. If you are running riskier positions that is fine – but you need to be able to get accurate and timely information out to the market in the event that the market turns down. Macquarie announcing they had no real issues and then later correcting this is a good example of the violation of this principle.
- Even for firms with safe assets you need to have robust treasury operations – Ram’s problems are particularly pertinent here. Borrowing with short term debt at floating rates to lend long and fixed is OK – provided the risks are managed well and you have enough capital to see you through the inevitable gaps. Good risk management here is to ensure that you have a wide variety of funding sources and that very little of your funding matures on any one day. As Rams found out it may just be the wrong day.
- As discussed elsewhere, relying on the Greenspan (or now Bernanke) put is a perilous thing. The US Fed could just as easily decided that this was a good correction, moving asset prices and credit spreads closer to sensible levels.
- If you keep sufficient liquidity hanging around for a rainy day you can make a pretty handsome buck doing some bottom feeding when things like this happen. Buying at the pit of the market (the ASX at least) on Thursday to sell today would have made a good trading profit for a few days’ tension.
Back to my favourite topic. If you are going to run risks you need to know what they are. Information is everything.
I am just winding up a job looking at the impact of regulated cashflows on a corporate treasury. In this case the corporate is regulated in such that the cashflows are give a fixed real return and a compensation for inflation – with the CPI compensator initially being forecast and then corrected in arrears.
As the market for inflation indexed debt in Australia is limited we have had to suggest other ways of compensating for this type of exposure through the use of shortened duration debt structuring – essentially getting the debt/interest rate duration to match the reset period.
Is anyone else out there aware of other approaches?
…that is the question.
Over the last few years many firms in Australia, and in particular the mining firms, have taken conscious decisions not to hedge. Note here I am not talking about hedge accounting, but economic hedging.
For the last few years this has been a very profitable strategy. Commodity prices have largely, and sometimes spectacularly, gone up. The Aussie dollar has been largely stable in the 70 to 75 cent (to the USD) range, and so anyone that did hedge has normally been losing money on the strategy.
The temptation, then, has been to decide not to hedge.
The problem is that the future is, as always, uncertain. If you know anyone who can be certain what will happen in the markets even 5 minutes from now then I suspect they are one of:
- A fool
- A liar
- Simply wrong or
One of the things I am commonly called on to do it to look at option valuations to see whether they are appropriate and likely to be correct. These are often prepared by an accounting firm or a consultancy. This is normally for a fee of around $1,500 to $2,000 – or even more in some cases.
These are often done for audit purposes, to ensure that the options are (materially) correctly valued for presentation in the financial accounts. Some good news here if you are looking at doing this – you can do it yourself and save (almost) all of the money. Read the rest of this entry »
Over the period since the introduction of AASB 139 in Australia (and FAS 133 in the US and IAS 39 everywhere else) one of the more profitable areas of business for the accounting profession has been helping clients achieve hedge accounting. This, for anything other than plain vanilla forwards or other such hedges is a difficult process, typically involving extensive modelling by high priced resources. Big tip – in most cases you should not do it. Read the rest of this entry »
When dealing with some of the less sophisticated treasury operations I occasionally come across some fairly, well, unconscionable behaviour by the banks. This is normally where the bank has given the client some heavily off-market rates for whatever business they are doing.
A good example might be forward foreign exchange deals. A normal forward is priced based on the spot rate current at the time of the deal, plus (or minus) the forward points, which are calculated based on the differential interest rates between the two currencies involved. The scope for going wildly off-market on these rates is limited – the forward points are published and easy to calculate, so any excess margin has to be easy to justify to the (bank’s) client. Read the rest of this entry »