Capital Allocation Challenges, a Tool to Alleviate KYC Blues, and Sharing Tips on Dividing the Corporate Wallet

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Capital Allocation Challenges, a Tool to Alleviate KYC Blues, and Sharing Tips on Dividing the Corporate Wallet

Here are some of the key takeaways from the ATLG-2018 H2 meeting in Milwaukee hosted by Harley Davidson and sponsored by Bloomberg:

Capital Allocation Feedback and Cat’s Approach. Members shared insight into managing stock repurchase programs. Ed Scott, group leader and former Caterpillar treasurer, described the industrial company’s approach to allocating capital efficiently. 
 
• Takeaway: VWAP and gaming the system. Using VWAP to measure the effectiveness of a buyback program amounts to treasurers gaming the system, members agreed, since its value lies in measuring the short-term execution of buybacks, not determining return of capital to shareholders.
 
 • Takeaway: Allocating the Cat way. Ed walked members through Caterpillar’s journey to develop a process to allocate capital. The basic measurement, called Operating Profit After Capital Charge (OPACC), is calculated by multiplying a capital charge times the assets deployed in the business unit required to generate revenue and profit. The resulting capital charge on assets deployed is subtracted from operating profit to obtain OPACC. 
 
• Takeaway: OPACC has consequences. To generate increasing, positive OPACC, capital was generally allocated by “feeding” business units and product lines with increasing OPACC and “starving” those moving in the opposite direction.  
 
Bloomberg’s Solution to KYC Pain. Treasury, legal, tax and other departments are typically involved, and there’s a dearth of standardization. 
 
• Takeaway: Bloomberg’s Entity Exchange to the rescue. The web-based product encrypts pertinent documents at rest and in transit; enables treasury to organize corporate entities and maintain documents centrally; provides a single version of truth across the company; gives controlled access and user entitlements to a wider range of teams, including the banks; reduces KYC’s time and repetition by auto-matching documents and auto-filling forms; and provides a full audit trail. 
 
• Takeaway: Give banks what they need, not what they want. Members groused that inconsistencies in banks’ document requests can result in corporates providing important information that isn’t required by KYC. Entity Exchange’s document library should prevent that from happening, said Betty Marcus, KYC/AML product specialist at Bloomberg. 
 
 
Tricky Bankers: ATs Exchange Tips for Managing Syndications. An ATLG member explained the process her team follows to manage bank relationships, starting with identifying the services for which to measure fees. Then they develop a template for forecasting fees and recording actuals; compute optimal fees given the corporate’s wallet size; measure the gap to optimal fees; and converse regularly with banks about their needs.
 
• Takeaway: Lots of data but still many unknowns. Fees for programs such as credit cards are paid by other market participants, so estimating their benefit to the banks is difficult. 
 
• Takeaway: Who really syndicates the deal? When asked how many of them do most of the work on their revolving credits, most ATLG members raised their hands. “We spend nine months teeing it off, then bring in the [bank] joint-lead-arrangers to sign off on it,” one member said. 
 
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