Treasurers Discuss Brexit Uncertainty, a Promise of Term SOFR, Allocating Capital and Global vs. Local Banks

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Treasurers Discuss Brexit Uncertainty, a Promise of Term SOFR, Allocating Capital and Global vs. Local Banks

 
Here are some highlights from the 2018 fall meeting of the Treasurers' Group of Thirty Large-Cap Edition in New York, sponsored and hosted by BNP Paribas. 
 
Brexit Deal or Not, Divorce Will Remain Uncertain. A Brexit deal must arrive soon, but it will still be tentative given that major political obstacles remain before the March 2019 deadline. Hedging the possibility of a no-deal outcome may be wise, as well as prepping account structures for the eventual breakup.
 
Takeaway: A deal is just the start. To reach a Brexit deal, the UK and European Union (EU) must agree on the border status between the UK’s Northern Ireland and the Republic of Ireland, which remains an EU member. They also must agree on a nonbinding political declaration—a statement of intent. Even when a deal is reached, it must be passed by the UK and EU parliaments.
 
Takeaway: Prep but don’t panic. BNP bankers recommended establishing “shadow accounts” in the EU, in order to later migrate cash-management structures efficiently.  
 
Term SOFR on the Table as Libor Replacement Gains Traction. As concerns about Libor deteriorating mount, the infrastructure for Libor replacements is developing quickly. 
 
• Takeaway: Term products on the drawing table. Regulators have resisted developing “term fixings” for SOFR, which settles overnight, to avoid challenges faced by Libor. However, term rates are favored by corporate borrowers managing cash. The Alternative Reference Rate Committee (ARRC), which developed SOFR, recently announced plans to publish three-month and six-month rates based on the Secured Overnight Funding Rate (SOFR), the US’s so-called risk-free benchmark rate.
 
Capital Allocation: No Easy Matter. In a session exploring optimal strategies for high-level capital deployment, members heard about allocating capital more effectively, ranging from theoretical ideas to specific efforts by peers.
 
• Takeaway: Business drives capital. The treasurer of a major retailer said that a wide-ranging analysis, including internal assessments, white papers and talking with peers, concluded that more emphasis should be put on producing growth. Best-in-class peers committed to targets including cash flow, working capital and cash balance-- not just dividend increases and share repurchases. 
 
• Takeaway: Buyback funding alternatives. A BNP Paribas client funded share repurchases with convertible debt, buying back the stock at spot through an accelerated share repurchase and selling the convertible bond at a significant premium to spot. A valuable call option lowered its rate significantly. 
 
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