Published: March 01, 2008
We had to develop Yell’s head office functions from scratch, including treasury, when what was then Yell Group Limited was used as the vehicle for the leveraged buyout from BT in 2001. We aimed to keep these operations as small and efficient as possible, reflecting Yell’s general culture and philosophy. Consequently, we have one full time treasury professional, with many of the treasury tasks conducted by an effective ‘virtual’ treasury team. Various people across the divisional finance functions attend to treasury matters but they are not necessarily treasury specialists and do not report directly to the Group Treasurer. With treasury tasks performed outside a centralised treasury department, a priority for us has been to ensure that we maintain both operational controls and the appropriate level of transactional capability to support our treasury needs. We have tried to keep our treasury activities as straightforward as possible and we are risk and cost-averse, acting purely as a cost centre that services business requirements without speculating.
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Yell is unusual as a leveraged, publicly quoted company. We are rated a sub-investment grade BB by Standard & Poor’s and Ba3 by Moody’s. We are carrying debt of around 5x EBITDA and since the LBO, we have refinanced the business three times. Our risk management policy is pragmatic and because of our leverage, we primarily aim to defend our borrowing covenants. We elect to pay interest monthly on our debt, although it is more typical to pay quarterly, which given reasonably steady cash generation across the year minimises the cost of carry as cash builds up between interest payment dates. Our covenants are set with appropriate headroom above target earnings and we aim to keep this headroom for operational contingencies by managing our exposure to financial or market risk. Consequently, we use short-term interest rate swaps to hedge around 95% of our interest rate risk up to two years and 50% thereafter. We document and account for our hedges under IAS39, and take great care to ensure that the critical terms of our swaps match those of our underlying floating rate debt.
The acquisition of Yell Publicidad brought significant additional complexity and deal volumes.
Yell Group plc has little transactional FX risk and at the moment FX dealing volumes are minimal: our business units operate independently, with revenues and costs largely in the same currency. Where necessary, we enter into FX transactions in the UK and recharge the overseas entities through intercompany accounts.
We do face ‘accounting’ FX risk from translating euros and dollars into sterling for consolidation and reporting purposes. We manage this in part by borrowing in each currency in broadly the same multiple of our earnings in that currency so that we have a natural hedge. This means that the denominator and numerator in our covenanted ratios is again broadly insulated from exchange rate fluctuations.
In recent years, there have been a series of changes both within the company and across the market. Firstly, regulatory developments, particularly Sarbanes-Oxley, have led to more of a focus on controls, their visibility, and our ability to show that they are effective. As a result, there is now close scrutiny across the group of all our internal processes and support systems. Our aim is to identify operational risks and then to ensure that they are minimised. Secondly, the acquisition of TPI in Spain, now Yell Publicidad, in 2006 significantly increased the complexity of our group structure and consequently our treasury operations. We took on a substantial amount of additional debt across three currencies, adding Spain, as well as Chile, Argentina and Peru to our existing portfolio of UK and US directories businesses.
Internal audits of our treasury activities had always been positive, but it was apparent that the acquisition of Yell Publicidad also brought significant additional complexity and deal volumes and therefore additional operational risk. Increasingly, questions were raised about how treasury deal events and cash flows such as interest payments could be reliably managed and accounted for using manual processes, as opposed to a specialist treasury system.
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This combination of factors prompted a decision to review and acquire a TMS. Our primary requirement was to be able to prove that appropriate and secure controls, such as segregation of operational duties, were in place and operating effectively. We needed to be able to demonstrate an audit trail of activities and transparent transaction workflow across the ‘virtual’ treasury team. We thought that our technical requirements were very simple and that their ‘vanilla’ nature should allow them to be automated relatively easily.
At the outset, there was a process of educating colleagues and internal business partners, such as procurement, as to what a TMS really was and the functions it needed to perform. People well versed in monthly accrual based accounting and the associated debits and credits were less familiar with the disciplines needed to manage daily cash flows and treasury events or to identify and control cash, currency or interest rate positions.
Once we have the TMS bedded down in the UK, we hope to roll it out to Spain and the United States.
An initial review of external vendors was conducted, but just as important was educating and bringing the rest of the organisation with me to set realistic expectations about the cost and complexity of the selection and implementation process. We launched a formal procurement process which helped to ensure that procurement, information systems and the finance team had common goals and expectations. Yell uses SAP on an enterprise-wide basis and our UK policy is to consider it for any new software requirements before considering third party vendors. We were open to using the SAP treasury module; however, we discounted this fairly quickly given the huge amount of configuration and consultancy required. We felt that our operations were not sufficiently complex or rigid to justify any bespoke work, preferring instead to adapt our business processes to the system we selected.
Our initial review resulted in a shortlist of two well-respected vendors, both of whom offered appropriate levels of functionality and vendor support. The procurement coincided with a heightened emphasis within the organisation for business decisions to be much more clearly justified. This helped result in an elegant technical implementation, as well as high levels of individual personal commitment. We chose our system based on functionality, given its impressive ability to show workflow and process queues graphically, its full support for IAS 39 hedge analysis and accounting and finally overall cost to buy, implement and maintain. Following negotiations with our chosen vendor, we started implementing a new TMS in August 2007.
We are now live on most parts of the system, with some areas, such as accounting and hedge accounting still running in parallel with our existing processes. Our aim is that we will be live on this system functionality by 31 March 2008, the end of our financial year. The process of implementation proved useful in educating a broad sweep of people on how treasury operates, the risks that need to be managed and how individual tasks fit into the overall workflow. Furthermore, by putting in place more automated processes and reporting, there is less reliance on key individuals.
Currently, within our existing ‘virtual treasury’ function, we manage our cash separately with cash pools for each currency: £ is managed in the UK with surplus cash invested in a money market fund; € is managed in Madrid and $ by the US finance team. We are seeking to increase our cash concentration and repatriate our currency surpluses back to the UK more frequently. While we don’t carry a lot of cash, we want to be increasingly sophisticated in how we use it, and there is the potential to net off cash against short-term borrowings on our balance sheet and save interest costs by a significant amount. Apart from the UK, cash balances in other regions are managed using spreadsheets and banking software. Once we have the TMS bedded down in the UK, we hope to roll it out to Spain and the United States. We won’t impose this from the centre - rather, we hope that the local finance teams will see the benefits of using a common system. A single, group-wide system would improve the regional control environment, help to provide a global view of cash and improve our cashflow forecasting.
Finally, we are relieved to have implemented our TMS just in time to withstand the inevitable additional scrutiny that will arise at year end given the much publicised, basic control failures at Société Générale.
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