Environment, Social and Governance (ESG) is now sitting as one of the top four priorities for Treasurers around the globe, with Europe leading the way. Nearly all industries are coming under increased scrutiny from customers, suppliers, funders, investors, and regulatory bodies.
Organisations need to recognise sustainability issues
The team at Bancorp Group have put together some insights into the Treasury and Debt markets of Australasia as we head into quarter two of 2023.
Our corporate finance team has been busy closing a number of corporate funding/refinancing deals, covering both bank and non-bank solutions and working across both sides of the Tasman. Bank pricing dynamics remain extremely variable, and with little consistency in terms of which banks are ‘hungry’ on a particular transaction. In a general sense, margins have stabilised, after trending higher through the back half of last year, but global banking woes could see a tightening of credit conditions – something US policymakers are certainly already warning about.
A trend we have seen from some banks is a focus on facility utilisation and sizing. Alongside this we have seen instances where a bank has sought to change the definition of its pricing, from what is typically referred to in New Zealand as a line fee, to a commitment fee. Whilst defined differently, the cost outcome for the borrower is equivalent if the weighting of the fee on the undrawn or facility limit to the all-in pricing is proportionally equivalent. In practice, however, we have seen the bank seek to change the weighting as part of changing the definition, with the net result being a materially higher cost to the borrower.
The key message here being that any assessment of pricing needs to look at the effective cost to the borrower and there may be facility structures or other avenues that can be considered to meet both borrower and bank needs.
Providing end-to-end support across the funding tender / negotiation / documentation process, our funding experts are attuned to these banking sector trends and individual counterparty nuances. In a rapidly changing funding market, a little advice can go a long way to ensuring you get the best overall funding package – not just the ‘lowest’ price.
Whilst the Australasian market is dominated by bank funding, over recent years there has been a growing number of credit funds established. With now over 100 different funds active in the Australasian market there are opportunities for borrowers to establish funding arrangements that may better align with their needs and strategic objectives than are ordinarily offered through traditional banking arrangements. Each fund has a ‘sweet spot’ meaning the approach to market can be tailored to suit the situation.
By way of example we have completed transactions in recent months ranging in size from $6m to $135m, with these undertaken in different ways – from highly targeted approaches, where in one case only two funds were approached, with both delivering funding offers, through to broadly canvassed approaches, where in one transaction 43 different funders were approached in order to deliver a bespoke solution that best matched the client’s unique situation and growth aspirations.
For those looking for something a little different, talk to our funding experts.
Global banking sector stresses have provided a timely reminder that not all banks are created equal. While a good treasury policy will typically restrict treasury activities to highly rated counterparties (often A+ or above), provide for counterparty diversification, and regular counterparty exposure monitoring/reporting, those entities requiring an offshore banking presence can sometimes face limited choice and a banking environment unable to meet such sound banking partner thresholds. This can open up a weak link in treasury operations and one which can come back to bite if not carefully monitored and appropriate controls and governance processes established.
While credit ratings can be easily monitored (the RBNZ maintains a useful bank credit rating summary) and remains the most practical way of assessing bank health, the fact that Silicon Valley Bank was rated BBB (i.e. investment grade) just prior to collapse highlights that these ratings aren’t failproof. Few realise that a BBB rating approximates a 1 in 30 probability of default over five years (versus a 1 in 300 probability for a AA rated entity). While the lessons of the GFC have undoubtedly faded over time, the return of capital should always trump the return on capital.
Current events should be a prompt to all businesses to ensure they are appropriately managing their counterparty risks and have good visibility and internal governance around where the cash sits.
Financial market turbulence has returned with a vengeance, particularly to interest rate markets. The New Zealand 2-year swap for example, has fluctuated between 4.65% and 5.55% over recent weeks (including a 30bp fall in one day), as central bank hiking expectations got doused by global banking sector risks. For those tasked with managing interest rate risks, recent moves highlight the importance of adopting a continuous approach to (interest rate) risk management, via regular dialogue and proactive strategy setting and review.
After more than 35 years in the treasury advisory space, we’ve found that short/sharp monthly updates provide a useful prompt to reassess hedging strategies, also acknowledging the myriad of competing demands on staff time. While all decisions should be made with the best available information to hand, the forward looking nature of the decision inputs invariably means hedging strategies need to be responsive to ever changing dynamics – both internally (business exposures) and financial market driven (pricing). In the case of interest rate hedging, decisions made today can have implications for many years to come.
Be sure your finance team has the expert support to make those decisions when opportunities present.
The planned May transition from ‘business day’ to 365 day banking in New Zealand has the potential to disrupt settlement and cash management processes for some, with impacts likely across direct debit and payment timetables, cash balance optimisation, interest calculations and sweep arrangements.
If it is something you are working through and want to check reasoning/logic, or have other ‘pain-points’ across the transactional banking, merchant services or cash and liquidity spectrum, talk to one of our transactional banking experts.
Magma Capital
Our local presence in both NZ and Australia has grown via the formalisation of our strategic partnership with Magma Capital. Magma brings over 30 years of experience in debt funding and arranging and being based in Australia, offers our clients further access to funder relationships ‘in market’ and from the principals’ time working with, and in, offshore markets.
Castlerock has recently announced its fifth investment, with Brooklands Pet Products set to join Majestic Horse Floats LP, Hell Pizza, Vivo Hair Salon & Skin Clinic and The Tile Depot in Castlerock’s portfolio.
Castlerock is an open-ended income oriented private equity fund that invests for the long term and is backed and managed by Bancorp. With hands-on exposure to running a set of diversified NZ businesses, is it any wonder we have a reputation for providing clear and practical advice and for being well attuned to the relevant business issues of the day?
For advice or assistance, talk to the Bancorp’s experienced treasury and corporate finance teams. Call us on +64 9 309 8270 or fill out our contact form here.
As business models shift because of COVID-19, there is a strong sense that innovations which have become mainstream because of the pandemic will reshape consumer and organisational behaviour for many years to come.
Payments NZ’s recently released 2021 Environmental Scan Report notes that globally there has been a clear change in consumer behaviour over the past 18 months due to living in different stages of lockdowns and this rapid shift is unlikely to reverse now that it is becoming second nature. As businesses adjust to this new world there has been a requirement to quickly scale up digital innovation and to use e-commerce for maintaining existing and growing new business. McKinsey & Company, global management consultants, concluded that ten years of digital innovation occurred in approximately three months in 2020 and, that internationally, e-commerce increased by two to five times pre-pandemic levels.
The pandemic has caused a sharp pivot from physical to digital in nearly every aspect of society. Working from home or remotely has become commonplace, home delivery and click-and-collect has replaced in-store shopping, and online exercising and wellness have become the new norm.
Unsurprisingly then, the way we make and receive payments is now evolving rapidly as a result. We have seen an acceleration of non-cash transaction methods, a greater reliance on new digital solutions to improve the customer experience, and a need to integrate payments into those digital solutions. Payments will need to be made anytime, from anywhere and across borders to support a more diverse and rapidly evolving set of use cases.
In New Zealand, COVID-19 increased the adoption of contactless payments, accounting for 39% of total card use in 2020, a 62% increase since 2018. It also saw the use of contactless enabled terminals increase from 36% in January 2020, to 52% in December 2020 indicating the upward momentum of contactless transactions will continue. Additionally, the pandemic saw the first widespread mainstream deployment of QR codes as part the NZ COVID Tracer app, and the soon to be released vaccination passport. This deployment has the potential to pave the way for other uses of QR codes in New Zealand, including in retail payment settings which has become common practice in many Asian and African countries.
New Zealand and Australia, while not at the forefront of these digital transformations, are close followers in terms of their respective rollouts of new technology and payment infrastructure. Digital and mobile wallets are becoming more mainstream, and the uptake has been particularly strong in younger generations. There is also a clear shift from credit to debit over recent years as well as the rise in ‘buy now pay later’ alternatives to credit.
The time is ripe for innovation in the local financial service sector considering the moves by respective Governments to progress with ‘open banking’ initiatives. The New Zealand Government recently announced proposed legislation for a Consumer Data Right. In short it will give consumers the right to own, manage and request the transfer of their data between interested parties. While this all sounds fairly boring and irrelevant, this announcement is part of a much bigger and fundamental change to the services we receive, and the prices paid for these services.
Open banking, while slow to get going due to many reasons — regulators slow to introduce change, banks slow to develop the APIs (software integration services) required for innovation, and international disruptors prioritising other countries over expansion into New Zealand — is on the cusp of providing consumers greater choice of digital services and at lower prices. Many of the ways of banking we have all become used to such as using bank account numbers and accepting ‘high’ merchant fees could soon be a thing of the past.
BlinkPay is a local fintech that is wanting to be one of the first to make use of the opportunities that open banking can provide. It’s initial products to market are ‘Blink PayNow’ and ‘Blink AutoPay’ which enable one-off and recurring payments to be made via BNZ’s secure, Payment NZ specified APIs. The payment products appear to offer easy, fast, secure and low-cost alternatives for businesses and consumers, and we will be watching its progress closely.
In Australia, the New Payments Platform has enabled real-time transactions between accounts but to date has largely been used for peer-to-peer transfers and as an alternative for card transactions at small businesses during the pandemic. However, wider use cases are coming, with the new ‘PayTo’ overlay which will allow for authorised pull payments from bank accounts with various user cases including replacing the functionality of direct debits with a far more user-friendly alternative.
We understand that while some businesses want to be at the forefront of new technology and are happy to be involved in pilot projects, many businesses do not want to be the testers of new products – particularly in the payments space. From a consumer perspective, digital and mobile wallets are becoming more mainstream and the uptake has been particularly strong in younger generations. There is also a clear shift from credit to debit over recent years as well as the rise in ‘buy now pay later’ alternatives to credit.
As highly experienced and independent advisors in transactional banking we can guide businesses through the opportunities and pitfalls that we have seen others work through, as well as providing a rigorous examination of costs and benefits of these new opportunities.
A channel review by Bancorp analysts can explore how payment/receipting channels might be better aligned to consumer demand and help support governance, by addressing the key questions of:
How do you receive payment?
How do you make payments?
How do you manage money (account structure, sweeping and pooling, fees, etc)?
How do you fare against your peers?
For advice or assistance, or to undertake a quick transactional banking review, talk to the Bancorp’s experienced treasury team. Call Dean Sharrar on +64 9 912 7590.
Now, more than ever, organisations are focusing on putting cash to work in order to reduce their cost of debt, minimise bank fees and increase revenue. Analysts at Bancorp observe that businesses with a consistent focus on cash are less prone to severe cost cutting measures caused by the recent level 4 lockdown. These businesses will also be better placed to respond rapidly to an economic uptick. In successful organisations, a strong cash culture comes from the top and is instilled as a priority down the ranks.
Non-Executive Directors (NEDs) are facing fresh challenges as the businesses they are associated with grapple with ongoing impacts of COVID on cashflow, (re)forecasting, supply chain blockages and restrictions, skills shortages, and the appetite of banking partners to take on changing levels of risk.
Treasury may or may not be a specific area of focus for NEDs but an understanding of its impact on all parts of a business is critical. A request to management for a reporting framework for treasury activity is a pragmatic way to provide satisfaction to individual NEDs and to the Board as a whole that treasury is being managed appropriately and in compliance with regulations. NEDs should take care that this is not construed as trying to ‘take over’ a project or strategy.
While 2020 was an exceptional year, are there any learnings we can take to support businesses and the wider New Zealand and Australian economies into 2021 and beyond? At a macro level, the strategy and implementation of fiscal stimulus was unprecedented, and while it saved many businesses, from a financial market perspective, was 2020 really that exceptional?
Looking at it from an FX perspective, yes, there was above average volatility, but we have had some years when currency ranges were almost double what 2020 offered. Equity markets, and the sugar rush that was 2020, have so far continued into 2021 but how sustainable will this be?
With transactional banking appearing more commoditised than ever, it is easy to assume that ‘all banks are the same’ but a true partner in this space can create some significant advantages. In a recent survey (EY Future Consumer Index) the 57% fall in cash usage precipitated by COVID-19 has been accompanied by a proportionate rise in usage of online debit and credit cards and online tools. And this shift to cashless payments seems set only to increase over the coming few years.
Our last blog in the new ‘normal’ series, focused on negative interest rates – this time we take a look at the issues that could be presented by a negative Bank Bill Benchmark Rate (BKBM).
Firstly, it is important to distinguish between the different interest rates. The OCR is set by the Reserve Bank (currently 0.25%). This is the interest rate that commercial banks receive for holding surplus cash in their settlement accounts with the RBNZ. This strongly influences the supply and demand for Bank Bills, captured by the BKBM interest rate benchmark. The BKBM benchmark underpins most corporate loan documentation and interest rate hedging structures and is therefore most important to corporates.
In August 2019, the OCR was eased to 1.00% but the RBNZ was already signalling a willingness for further easing in order to counter rising growth headwinds. Less than a year later, we have an OCR at 0.25%, a global economy facing a swift and unprecedented downturn, and an RBNZ endorsing negative interest rates as an effective stimulatory tool. With recent events highlighting the enduring challenges of the new ‘normal’ in a COVID-19 world, the prospect of further monetary policy measures being rolled out appears high.
Verifying purchase and sales forecasts and monitoring actuals diligently is more important than ever to safely navigate our new business ‘normal’ of on-going disruption due to COVID-19. The potential impacts on a business extend well beyond the in-house position: how have suppliers been hit by COVID changes to their own supply chains? What changes are being witnessed through customer behaviour – and how has their ability to pay been affected?
