The Engineering and Construction Treasurers’ Peer Group (ECTPG) met on December 5-6 in Pasadena with Parsons as the meeting host and Bank of America Merrill Lynch (BAML) as the sponsor. The group covered several of the topics on everyone’s mind, including an update on the banking sector and debt capital markets in light of Basel III and Dodd-Frank, as well as the effect on FX markets of the resulting regulation, and an updated view of the Eurozone crisis. Members also discussed strategies for public bond issuance, optimizing shared service centers and the future of public/private partnerships. Some highlights of the meeting are below.
- Exercise caution with employee stock ownership. While employee stock ownership offers an incentive to employees to ensure their activities are making value-add contributions to the company, there is a risk if employees hold too much of the company stock in their retirement plans.
- “Regarding regulations, everything is uncertain.” This is how Bill MacDonald from BAML summed up the regulatory environment. He also assured the group that “banks’ capital will become more expensive,” even if it hasn’t yet.
- Banks are eager to lend and provide services. In spite of regulatory uncertainty, 2011 was in fact a record year for lending at BAML, but 2012 has been slower and 2013 is expected to be more like 2012 than 2011. Additionally, BAML expects future credit business to be more specialized, such as for M&A deals and term debt for capital expenditures rather than unfunded revolvers. Bank focus on ancillary business and broader profitability is real.
- Dodd-Frank and FX. ISDA protocol and “business conduct rules” seek to put documentation and standardization around current trading activity and allow for full automation. The protocol can be utilized even without using ISDAs. Also, counterparties technically will not be able to trade beyond spot transactions outside of the rules after January 2, 2013.
- When issuing bonds, a good sales pitch yields results. One member recorded an “electronic road show” a week prior to its bond offering, outlining the details of the offering and compelling reasons to invest. The result was an offering 4 times oversubscribed with $2 billion in commitments. The other factor investors liked was that the company was committed to a maximum limit for the issue, which signaled that the company would not respond to investor enthusiasm by adding to the issue and over-leveraging itself.
- Is single A the new triple A? The large too big to fail banks have lost their AAA ratings with some dropping into single A status. If this is characteristic of the industry then all financial counterparties are likely to be out of compliance with policies. Since there is no place to go for mitigation there is no option but to lower your hurdle.
- The SSC concept may need to be sold internally. Business units with a history of decentralized independence are often reluctant to give up control of any part of their operation. However, one member has had success in rolling out SSCs in multiple locations by giving BUs input and buy-in into the initiative. Consensus is that it is easier to start from scratch when opening an SSC, rather than leveraging existing operations.
- P3 projects need special treatment. Several members noted that their P3 activities are run in a separate organization, which are tasked with scrutinizing potential deals for returns and risk, and ensuring the counterparties are appropriate for the company. Designing and sticking to your deal parameters will improve the likelihood of better returns with lower risks.
- The worst eurozone fears are not materializing. With the peripheral credit crunch we can expect to see corporate lending rates remain elevated in the periphery for some time. These countries need to export their way out of debt, but they cannot become globally competitive overnight. However, the ECB is doing its best to contain euro-exit risk. Notably, the eurozone as a whole can actually afford the crisis. So we are unlikely to see any break-up in the near future provided the wealthier countries remain as such and are amenable to further support of the struggling countries.
A special thank you to Bank of America Merrill Lynch for sponsoring and Parsons for hosting.