Published: April 01, 2010
In the first article of this series, Peter van Rood, Group Treasurer of AkzoNobel, introduced the treasury transformation project that he has pioneered since joining the company in September 2007. Every aspect of treasury has seen radical change and enhancement, including banking infrustructure, policies and processes, treasury skills, IT and internal business relationships. In this edition, Peter talks to Helen Sanders, Editor about the role of its revised treasury policies, both for the treasury transformation and for the ongoing financial risk management of AkzoNobel.
We started with the revision of our treasury policies during the middle of 2008. At that stage, we were in the middle of the integration with ICI, with a large number of new entities and people who needed to be brought up to speed with how we conduct our treasury activities at AkzoNobel. We recognised the need for an integrated approach towards the merger of the treasury functions as well as to the transformation of treasury. This required us to look at each of the building blocks of treasury at the same time. These building blocks comprised our IT infrastructure, bank relations and global bank account design, organisational set-up and policies and procedures. The last of these brought all of our aspirations together. The treasury policies were for us the tool both to communicate how we expect treasury activities to be executed across the group and to support the migration towards a new way of working. We therefore reviewed the policies with the intention of offering maximum on-boarding support to new AkzoNobel staff, to implement best practice treasury policies and to facilitate treasury change management.
We used our treasury policies also as a means of managing treasury change globally, not only within the central treasury function.
The original policies were actually well-constructed and formed a useful basis for our revised documentation. The AkzoNobel treasury policies comprise two documents: the Treasury Statute, which covers the treasury function, and the Treasury Policies, which covers the execution of treasury related activities in the businesses. We adjusted these documents in three distinct areas:
Firstly, we refined the governance structure of treasury, which resulted in changes to the Treasury Statute. Treasury is governed by a Corporate Finance and Treasury Committee. This committee meets at least quarterly and oversees the management of financial risks by treasury. It comprises participants from treasury, taxation, controlling and legal. The committee is chaired by Keith Nichols, our CFO. A Corporate Finance Coordination Team supports this committee. This team has the same functional composition as the Corporate Finance and Treasury Committee and deals in particular with the group’s internal funding. This set-up supports the financing activities of the group on a global basis, and the management of our financial risk infrastructure. Our Treasury Statute has been updated to reflect this new way of working.
Secondly, we made alterations to our policies to support change management of new processes. As we were redesigning our processes to increase our automation and efficiency, we needed to reflect these developments in our documentation. We used our treasury policies also as a means of managing treasury change globally, not only within the central treasury function. For example, the policies can support a shift from a decentralised to a more centralised and standardised approach. Processes that are designed and operated centrally are easier to describe in detail than the processes that are subject to variation at a local level. Consequently, the policies became more explicit in terms of what was expected from staff in the businesses, and in some areas more detailed.
Thirdly, we embedded the compliance monitoring structure in our policies, using a combination of self assessment tools and the annual Letter of Representation process.
As I mentioned, we have two documents that make up our treasury policies: the Treasury Statute, which defines treasury operations at AkzoNobel; and the Treasury Policies, which forms part of our broader financial manual, outlining the boundaries for our businesses. The Treasury Statute outlines the following:
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The Treasury Policies document is split over six sections: a general section and sections for each of the five key financial risks we manage in treasury: interest rate; foreign exchange; credit, capital and liquidity. These sections cover:
Essentially, the Treasury Policies document provides an overall framework for communication between central treasury and business units, which is then supplemented by training, advice and consultancy.
Back row (l to r): Johan van der Westhuizen; Gerrit Willem Gramser; Harry Blok; Lex Mulder.
Front row (l to r): Peter van Rood; Jan van Trigt; Brune Singh
Clearly, defining policies is not enough, there also needs to be a mechanism to ensure compliance. We do this in a variety of ways. Firstly, we seek proximity to the business units in an advisory capacity so we understand their business requirements. When business units raise proposals for funding, therefore, we have a good idea already of their compliance. Secondly, business unit controllers are obliged to complete an annual Letter of Representation, which includes explicit statements on compliance with and identified exceptions of the treasury policies.
Finally we implemented a regular dialogue with internal audit. Using the self-assessment questionnaire as a common tool for both treasury and audit ensures that the most important treasury areas are prioritised when engaging with the business units.
We took care to benchmark our new policies with other companies so that we could demonstrate that these covered industry best practice. The drafts that emerged from this exercise were circulated to the business units. This process ensured that the final policies were pragmatic, supported and functional, pre-requisites for good policies. After all, it is better to have policies that are stretching but achievable, than to end up with policies that are detached from reality. Once familiar with the new policies, businesses were generally appreciative of the changes made. [[[PAGE]]]
A good example of the application of our central treasury policies can be found by looking at the recent refinancing of AkzoNobel debt. AkzoNobel had 60% (over €2bn) of its debt maturing between November 2008 and May 2009, in the middle of the credit crisis. Consequently, we found ourselves exposed to a number of financial risks that we seek to cover in our policies. Let me share with you some of the experiences we had during our refinancing effort.
It is better to have policies that are stretching but achievable, than to end up with policies that are detached from reality.
Our initial aspiration was to manage capital and liquidity risks by refinancing well before the maturity of our debt. Hence, we selected a syndicate during the summer, through a meticulous tender process that took into account professional standing and financial strength of the bank, conditions and pricing, as well as historic balance sheet support. Once the syndicate members’ documentation was prepared, we engaged with the credit rating agencies to prepare for the debt rating. We undertook these activities well in advance in order to manage credit rating risk effectively. This was no small matter since AkzoNobel had acquired ICI in January 2008 and was still engulfed in the resulting integration activities. Rating agencies wanted to see a couple of quarters of consolidated results before confirming the existing rating but this was not achievable within our timescales. By communicating clearly the characteristics of the new company and our conservative financial strategy and policies, the rating agencies confirmed their support of our existing rating.
This allowed us to go on a non-deal specific road show during the first two weeks of September 2008. By the time we had completed the road show, the economic climate had worsened considerably and when Lehman Brothers collapsed on the 15th of September the market closed all together. AkzoNobel found itself shut off from the funding markets, not just in the bond market, but the CP market too. This situation lasted till the end of November, with more crisis information being released every week. During this period, we investigated all options open to us, including issuing bonds in currencies other than the EUR, private placements, bank loans, etc. Naturally if you issue in a currency other than the functional currency of the entity, the currency risk needs to be considered. Over that period in particular, the swap prices for longer-term cash flows were exceptionally expensive. The first bond matured and was paid for with available cash, freed up through the seasonal reduction in working capital. However, it was clear that this cash would not be sufficient to finance the second bond that was due to mature in December 2008. The liquidity restriction that the lack of market access imposed on AkzoNobel was real, as it was for many other companies. Add to this distress news about car manufacturers in the USA, banks that reported write off numbers that were unthinkable prior to 2008, a global outlook with rapidly slowing demand that could best be described as being ‘uncharted territory’, and you will appreciate that at that time the prospects looked very bleak.
In November 2008, we first saw a window in the GBP market for issuing but decided that, despite the conditions in the market, the pricing was unacceptable. Early in December, the EUR market started to open up again for companies of AkzoNobel’s credit quality. We took the opportunity to issue our first of five capital market transactions, a 5-year €1.0bn bond, issued at a coupon of 7.75%. This secured our base load of funding and reduced the likelihood of being caught up in a downward spiral of downgrades, further reduced market access, and more downgrades with eventually ending up in default. Although it sounds unthinkable now, the odds were different during those days. For us, the interest rate risk decision to issue at what was indeed a very high coupon had to be seen in the context of our capital and liquidity risks. The bond was placed successfully and, when we went again into the market during late Q1 2009, the situation was already starting to improve.
Our initial issuance was followed by a closed period until late February 2009, when we issued bonds in both EUR and GBP, with a small private placement during the second quarter of 2009. By that time the markets had changed profoundly, with credit spreads reduced by some 300bps from the 475bps at the peak of the crisis.
The experiences gained over this period have supported considerable refinements to our policies. For example, we recognised the importance of a debt book with adequate average duration and with maturity dates that are well spread over time, reducing point-in-time risk. In addition, the importance of maintaining a target level of central liquidity headroom was confirmed as part of our liquidity policy. Our currency policies regarding FX transaction and translation exposure management were relevant in the context of the decision whether or not to issue in another currency than the EUR. Finally the decision whether to keep our interest rates fixed or swap these to floating was considered in the context of our interest rate policy.
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