2017 06 - International Treasury

Philippe TESTIER 1
EDHEC – June 2017
TREASURY IN A MULTI-NATIONAL
ENVIRONMENT
1. Liquidity Management
2. Interest Rates Risks
3. Foreign Exchange Risks
4. Other Risks
5. Accounting and Taxes Perspectives
2
TREASURY IN A MULTI-NATIONAL ENVIRONMENT
1. 1 Forecasts
- Accuracy of forecasts
- Frequency of forecasts
- Information gathering is key to precision
- Thus, everything relies on relationships between

local units and group central treasury
3
1. 1 Forecasts – Exemple : Top-Down Approach
- Multi-Annual Budgets
- Once a year
- Input forecasts for each business unit

(Investments, Dividends, Working Capital,…)
4
- Monthly Reportings
- Input forecasts adjustments for each business

unit (Investments, Dividends, Working
Capital,…), for the next three months
- Enables to explain differences between yearly

forecasts and realization
- Adjustments to budget enable to alter, if any,

financing needs
5
- Monthly Reporting for a « lambda » business unit

6
- Daily Reportings
- Real cash flows from subsidiaries, for next 3

days are reported daily…
- … which enables treasury department to raise

or lend short term funds
7
1. 2 Organizing Refinancement – LONG TERM NEEDS
- Forward view for all future flows
Financial Ressources taken into account :
+ Bonds Issuances
+ Term Loans
+ Leasings
+ Commercial Papers
8
- Forward view for all future flows
Financial Needs taken into account
- Bonds and CPs redemptions

- Term loans reimbursements
- Investment flows
- Free cash flow
- Working capital variation
- Safety Margin…
9

Forward view for all future flows
10
TOOLS
- Bonds Issuances
o Public issuances (EMTN,…)
o Private Placements
Goals
x Diversify financing sources
. Institutional investors instead of banks
. Geographical diversification
x Diversify maturities
11
1. 2 Organizing Refinancement – PRICING A BOND
12
1. 2 Organizing Refinancement – PRICING A BOND - Termsheet
Issuer AUCHAN HOLDING Base fees to Bookrunners 0.20%
Trade Date 31 January 2017 Discretionary fees to bookrunners 0.05%
Rating BBB+ (stable) by S&P All-in Price 99.721%
Issue Type Fixed Net Proceeds €598,326,000
Status Senior Unsecured Listing Luxembourg
Issue Size €600,000,000 ISIN Code FR0013236312
Bookrunners (actives) Banca IMI, BNPP, CA-CIB, Commerzbank, Documentation EMTN Programme
Deutsche Bank, Santander
Use of Proceeds General Corporate Purposes
Settlement Date 7 February 2017
Denomination €100,000 + €100,000
Maturity Date 7 February 2022
Deutsche Ban
Mid-swap rate 0.201% Change of control Applicable (with step up grid as per existing bonds)
Reoffer spread vs mid-swap rate 43 bp

Benchmark Bund (2% 01/2022) 111.57% / -0.328% (BUND DE0001135465) Make whole call Yes @ BUND DE0001135465+ 15 bp
Spread vs. Benchmark 95.9 bp Clean-Up Call Yes (80%)
Coupon 0.625% Residual Maturity Call Option Yes, 3 month prior to maturity
Interest payment date annually, each 7 February Governing Law French
Reoffer Yield 0.631% Paying Agent BNP Paribas Securities Services
Reoffer Price 99.971%

Day Count Fraction Act/Act
Business Day Convention Following
Interest Amount Unadjusted
13
1. 2 Organizing Refinancement – LONG TERM NEEDS - BOND CURVES
14
1. 2 Organizing Refinancement – LONG TERM NEEDS AUCHAN BOND CURVE
15
TOOLS
- Banking Facilities
o Overdraft facilities
o Committed facilities
o Revolving Credit Facilities
Drawbacks : covenants, documentation
- Leasings
16
1. 2 Organizing Refinancement – MEDIUM TERM NEEDS
Using previous curves enables to adapt to medium term

forecasts, coming from subsidiaries
TOOLS
- Commercial Papers
- Term Loans
17
1. 2 Organizing Refinancement – MEDIUM TERM NEEDS
French Commercial Papers (BT = Billets de Trésorerie)
18
1. 2 Organizing Refinancement – SHORT TERM

ADJUSTMENTS
Short term forecasts from business units
=> treasury adustments
TOOLS
- Short Term Bank Deposits
- Commercial Papers Purchase
- Mutual Funds
- Short Term Banking Overdrafts
- Short Term Commercial Papers Issuances

19
AUCHAN REFINANCING (by maturity)
1 400 Bonds Auchan-Holding
Banking Facilities Auchan-Holding

1 200
Banking Facilities Oney Bank

1 000
800
600
Millions €
400
200
-
2017 H1 2017 H2 2018 H1 2018 H2 2019 H1 2019 H2 2020 H1 2020 H2 2021 H1 2021 H2 2022 H1 2022 H2 2023 H1 2023 H2 2024 H1 2024 H2
20
1. 3 Central Treasury Organization
Once external refinancing is settled, Group Treasury, acting

as a bank for the subsidiaries, has to organize funding for
each one.
Why centralization of treasury ?
- Netting of flows
- Control of flows
- Secured processes and tools
- Optimizing costs
- Centralizing know-how
21
- CASH-POOLING
- Netting short term positions, for each different subsidiary

- The difference between rates paid for cash-in and rates invoiced for
cash-out remains inside the Group
- Security of flows is performed by using transfer systems such as
SWIFT
- Difficulty for currencies that are not (or hardly) transferrable

(RUB,…)
Solution : organize a local cash-pool with frequent adjustment to
group treasury (monthly,…)
22
- INTERNAL LENDING
- Structural Loans granted to subsidiaries, related to their long term

needs
- Short Term Adjustments, dpending on their treasury cycle

o Credit Lines
o Short Term Loans
23
1.3 Central Treasury Organization
INTERNAL LENDING - Illustration
0
-25
-50
-75
M€
-100
-125
-150
-175
-200
DEC JAN FEV MAR AVR MAI JUN JUI AOU SEPT OCT NOV DEC
2014 (realized) 2015 (budget) 2015 (y-t-d) Forecasts
Structural needs Max. Indebtness

24
- INTERNAL LENDING
Transfer Price Policy
Principle : Prices / Rates proposed to subsidiaries must be

« fair » or comparable to what they could find locally.
SOME KEYS TO FIND SOLUTIONS…

25
2.1 When the risk appears…
From section 1, we have issued fixed rates bonds.
As a retailer, we prefer to have floating rate indebtness.
Why ?
- We thus stick to economical cycles.
- Historical data show that it is costless to remain with

floating rates rather than fixed ones.
(roll-down largely compensates interests rates moves)
26
We then enter into a swap, where :
we receive fixed rate (that of bond)

we pay floating rate (usually Euribor 3 Mths)
INTEREST RATE RISK : If rates increase, financial expenses

will increase as much.
27
As we finance subsidiaries in their own local currencies,

interest rates exposures also exist in these currencies.
Exemple :
- Treasury centre finances Polish unit for 1 year (quarterly payments in

PLN, on a WIBOR basis)
- Treasury Group quarterly finances from outside at Euribor 3Mths
- Then, we exchange this EUR debt into a PLN debt (using an FX swap,
that we will study later)
- At Group level we thus obtain a synthetic floating rate debt in PLN.
28
2.2 How to cope with it ?
• First of all, assess interest rates exposure in each currency
• Then, according to limits and targets devoted to treasury by

top management, hedge the risks.
Limits depend on :
- How sensitive the Group accepts to be.
- Where the Group thinks the rates might go
Treasury forecasts must be very accurate as well, for that they will
help and determine the split between all currencies you deal with.
29
• Choice of tenors and tools.
- Maturities will depend on the company global activity
- Hedging instruments :
- IRS (Interest Rates Swaps)

. Fixed vs Floating
. Floating vs Floating (basis)
. Amortizing
30

- FRAs (FUTURE RATE AGREEMENT) ;

- Short term OTC product ;
- Refers to indices such as Euribor, Libor
- Divided in two periods
. Intermediary period, from dealing date
until the beginning of the guarantee
. Guarantee period of the FRA
At the end of the 1st period, agreement is settled, by
paying or receiving the differential of rates.
31

- FRAs (FUTURE RATE AGREEMENT) ;
-------------------------------------------------------------------------------------------------------------------------------
Rates Trend RATES INCREASE RATES DROP

Situation
--------------------------------------------------------------------------------------------------------------
FRA Purchaser Receives differential Pays differential
--------------------------------------------------------------------------------------------------------------
FRA Seller Pays differential Receives differential
--------------------------------------------------------------------------------------------------------------
32

- Cross-Currencies Swaps
. Fixed rate in Ccy1 vs Floating rate in Ccy2

. Floating rate in Ccy1 into Floating rate in Ccy2
=> enables to transform a rate exposure for one

currency into another kind of rate exposure in a
second currency.
=> with or without exchange of funds
=> hedging device between interest rates products and

foreign exchange ones.
33

Interest Rates Options Reminder
Buying an option gives the right (not compulsary) to buy (lend) or sell
(borrow) any financial asset (underlying asset) at a determined price (strike)
for a fixed period of time.
This right implies a premium payment.
This premium is function of strike, risk-free rate, tenor of the option and
underlying volatility.
Option purchaser limits his own risk to premium disbursement, and has the
opportunity of « unlimited » gains.
Option seller limits his gain to the perceived premium, counterparty of an
« unlimited » risk.
34

Interest Rates Options Reminder : Basic Strategies
Long Call Long Put
20.0000 20
15.0000 15
10.0000 10
P&L
P&L
5.0000 5
0.0000 0
80 85 90 95 100 105 110 115 120 80 85 90 95 100 105 110 115 120
-5.0000 -5
Underlying Price Underlying Value
35

- Usual Hedging Instruments :
- Swaptions
. Underlying : interest rate swap
. Vanilla
. Barriers (KO, KI)
- Caps
. Underlying : caplets
. Vanilla
. Barriers (KO, KI)
- Collars : compounding a cap and a floor

36
2.3 Negative Interest Rates : a new challenge for Treasurers
- Context
- Apart from rare technical cases in the 70s or 80s, no major

central bank had yet sent its base rates towards negative
territory
- Danish, Swiss, Japanese and now European CBs have since

last year enterered this « terra incognita »
37
- ECB example
- Repo rate is now at 0% (the rate at which ECB lends
to Euro Zone banks, against assets collateralization
- ECB deposit rate for the same banks is now – 0.40%
- ECB has also started a Quantitative Easing (QE)
program since 2015, increasing « de facto » an extra
pressure on EUR rates along the whole interest rates
curve
38

EUR SWAP CURVE
1Y - 50Y
YC; EUR3MIRS; Default; Realtime; 50Y; 1.335; YC; EUR3MIRS; Default; Historical(20/06/2016); 50Y; 0.863 Yield
1.400
1.335
1.300
June 2017 1.200
1.100
1.000
0.900
0.863
June 2016 0.800
0.700
0.600
0.500
0.400
0.300
0.200
0.100
0.000
-0.100
-0.200
-0.300
.123
1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 15Y 16Y 17Y 18Y 19Y 20Y 25Y 30Y 40Y 50Y
39
3. Foreign Exchange (FX) Risks
3.1 FX Exposure to Assets held abroad
Dilemna : hedging foreign net-assets ?
In countries where devaluation risk is a main concern, leaving

assets unhedged can lead to FX differentials :
- Financial prospective : if the subsidiary is sold, any

drop in the currency rate will affect th Group account
- Accounting perspective : any FX differential on foreign
assets is driven towards equity, … until unit is sold, when
it then impacts Group’s results.
40
3.1 FX Exposure to Assets held abroad
Dilemna : hedging foreign net-assets ?
Main questions to address :
- How long does the company want to stay in a country ?

- Does the company intend to keep the assets or sell them ?
(if yes, in which currency ?)
- Is interest rates differential important between the 2
currencies ?
41
3.2 FX Risk from foreign debt
1st option
- borrow EUR
- transform EUR into Currency
Advantage : in countries where rates are high, you only pay

low EUR interest rates
Drawback : when you re-imbourse the loan you will have to

convert back the foreign currency into EUR
RISK : If foreign currency has dropped, you lose money…

42
2nd option
- borrow EUR
- transform EUR into Currency … and sell back
simultaneously currency into EUR (on same spot basis)
Advantage : risk of currency drop is perfectly hedged
Drawback : synthetic interest rate is close to currency rates

(combine EUR rate and swap points or CCS)
43
3rd option
- borrow local currency
- pay-back of this loan through future flows in local currency
Advantage : no FX risk
Drawback : sometimes difficult to raise debt in some

currencies
44
3.3 FX Risk from commercial activities
* Company pays imports in foreign currencies
* Company sells goods in another country and gets EUR

(or a third currency)
RISK : If foreign currency appreciates, the firm will lose

money (or make less profit…)
Main difficulties : - Getting info as early as possible

- Assessing volumes and maturities
45
3.4 FX Hedging Tools

3.4.1 FX Spot
FX spot consists of an immediate conversion of a currency
into another one, with a determined rate, at market
conditions, with flows exchanged usually 2 business days
later, after negociation date.
Usually, quotations are « direct » style, which means for
instance that 1 EUR equals 1.1411 USD, in our below
example.
EUR = main currency
USD = secondary currency
46

3.4.1 FX Spot
47
3.4.2 – FX FORWARD
Concluding an FX Forward in the markets :
-The company immediatly knows FX rate of purchase (or sale) for currencies
it owes to suppliers (or receive from a client abroad), with a future maturity.
-Forward rate components are :
Spot (when deal is done)
+ Premium
or : - Discount
48
Premium and Discount consist of interest rates differentials, for

the two currencies, based on time decay from spot date to
maturity date.
-Premium is observed, when main currency rates are lower than

that of the secondary currency.
-Discount appears when the main currency rates are higher than
rates for the secondary currency.
49
3.4.2 – FX FORWARD through an example
Let’s suppose you will receive 1M USD in 6 months time (182 days).
EUR/USD : 1.3637 / 1.3628

6 Mths USD rates : 0.39/0.49
6 Mths EUR rates : 0.32/0.42
We borrow X USD at 0.49% over 6 months, so that :

X= 1 000 000 / (1+(0.49*182)/36000)= 997 528,90 USD
Spot sale for 997 528,90 USD against EUR :
Y= 997 528,90 / 1.3628= 731 970,14
50
3.4.2 – FX FORWARD through an example
Deposit of 731 970.14 EUR at 0.32%

X= 731 970.14 * (1+(0.32*182)/36000)= 733 154.31
We can thus calculate FX Forward :

F= 1 000 000 / 733 154.31= 1.3640
51

Advantages :
-Guarantee of an FX parity, without any treasury advance.
-FX Forward agreement can be unwinded or prolonged, through simultaneous
spot and forward operations (FX swaps) . Transaction costs remain limited.
Drawbacks :
- Fixing in advance an FX rate does not allow to take profit from any potential
improvement in the markets..
- Amounts to hedge and dates of future flows must be under control.
- FX forward do not allow to hedge conditional operations.
52

3.4.3 – From FX FORWARD to FX SWAPS
QUOTING FX SWAPS
An FX swap can be considered as a treasury exchange, between 2 currencies, for

a certain period of time, on a pre-defined spot, borrowing one currency while
lending the second one.
We can split an FX swap into two simultaneous FX operations. The 1st operation
is dealt spot. The 2nd operation is an FX Forward.
FX swap is quoted in FX points (not in % rates)

53

FX FORWARD CALCULATION
1+( ( iCcy2*t) / 36000)

Forward = S*
1 + ((iCcy1* t) / 36000)
with : S = Spot
iCcyn = Currency n interest rate
t = Number of days
NB : Interest Rates for some currencies such as GBP or PLN need to be computed on a 365 basis.
54

55

3.4.4 –FX OPTIONS
An FX Option is an agreement which gives its owner to buy (having paid a

premium) a right to sell (PUT) or buy (CALL) a currency against another one,
with a pre-determined strike price, for a certain period of time.
European style options can only be exercised on maturity.

American style options can be exercised at any time during option life.
56

3.4.4 –FX OPTIONS
Premium amount is function of :
strike price in comparison to spot,
interest rates differential between the two currencies,
option length,
volatility for currency pair.

57

3.4.4 –FX OPTIONS : EUR/USD 3Mths Volatility (2Y range)
58

3.4.4 –FX OPTIONS : EUR/USD 3Mths Volatility (10Y range)
59

3.4.4 –FX OPTIONS
=> Advantages :
-Flexibility, should amounts change
-Taking advantage of any FX rate improvement
- Risk is limited to premium

60

3.4.4 –FX OPTIONS
=> Drawbacks :
- Cost of hedging (premium)
- Some difficulties to find quotations for (very) exotic

currencies
- Requires some « know-how »

61

3.4.4 –FX OPTIONS
Options use for exporters
Export company will buy a PUT on foreign currency.

According to valuations in the markets, it can :
- Sell the option and get back some premium, if option is not yet matured.
- Not exercise option and sell currencies directly in the markets if, on
maturity, market rate is more advantageous than that of the option.
- Exercise option at strike price if, on maturity, spot rate is less advantageous
than the option strike.
62

3.4.4 –FX OPTIONS
Options use for imports
Import company will buy a CALL on foreign currency.

According to valuations in the markets, it can :
- Sell the option and get back some premium, if option is not yet matured.
- Not exercise option and buy currencies directly in the markets if, on
maturity, market rate is more advantageous than that of the option.
- Exercise option at strike price if, on maturity, spot rate is less advantageous
than the option strike.
63
REUTERS EUR
OVERVIEW
64
4. Other Risks
• Commodities
• Wheat
• Corn
• Colza
•…
• Energy
• Oil
• Electricity
• Gas
• Transport => an example

65
STEP 1 : FUTURE CONTRACT SETTLEMENT
CORPORATE
(commodity SUPPLIER
purchaser)
DEPOSITARY
NOS
(compensation agent)
BROKER Compensation
Agreement MARKETS
DEAL Fishpool Looking for a

(market organizer) counterpart
66
STEP 2 : MARGIN CALLS
Depositary
CORPORATE agreement SUPPLIER
DEPOSITARY
()
Deposit + Margin Calls

Information
NOS
(compensation) Margin Calls
BROKER
Fishpool Index MARKETS
Fishpool
(Index Organization)
67
STEP 3 : FINAL EXCHANGES
Commodity purchase (spot value)

CORPORATE SUPPLIER
Final exchange
DEPOSITARY
Final exchange
Information
NOS
Final Exchange
(compensation)
BROKER
Fishpool Index MARKETS
Fishpool
(Broker)
68
4. Other Risks
• Counterparty Risks
Trading with banks involves risks that :
- agreements are not fullfilled (financing, derivatives)
- counterparties may default (Lehman collapse,…)

69
4. Other Risks
To cope with such risks, a corporate has to build a limits system, taking
into account :
- Counterparties’ratings (by major agencies)

- Maximum financing percentage by bank
70
4. Other Risks
TOOLS to monitor counterparty risks
- Credit Default Swaps

- Agencies ratings, and historical defaults
- Use of a standard documentation
(ISDA, CSA)
- Some new regulation may help (EMIR,…), despite their
complexity.
71
4. Other Risks
Credit Value Adjustment (CVA)

- To monitor and hedge couterparty risks
- Required in Basel III regulation (banks have to take into account
such risks, through equities)
- Can be computed unilaterally or bilaterally (DVA)
- Compounds default probability risks, recovery rates and time.
- IFRS 13 (accounting rule) now compells to input this value in
corporate accounts when dealing with derivatives .
72
4. Other Risks
• Counterparty Risks – Main Agencies Ratings
73
5. ACCOUNTING AND TAXES PERSPECTIVES
5.1 Accounting
Any decision and/or operation may have consequences in

accounts.
Pre-requisite : having a minimum knowledge of IFRS.
Classification for derivatives accounting :
- FVH : Fair Value Hedge

- Cash Flow-Hedge
- Net Investment Hedge
- Trading
74
5.1 Accounting
- FVH : Fair Value Hedge
Classified as hedge if efficiency tests are passed.

M/Market differentials go directly into results.
Example : Fixed bond issuance

+ Swap
75
5.1 Accounting
- Cash Flow Hedge
When a company needs to hedge future flows.
M/Market differentials go to equity

76
5.1 Accounting
- Net Investment Hedge
Enables to account market value differentials of hedging

foreign currencies assets.
Derivatives market value go to equity, until assets are really

sold.
77
5.1 Accounting
- Trading
Market value differentials go directly into results.

78
5. Taxes effects

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Philippe TESTIER 1

EDHEC – June 2017

- Information gathering is key to precision

- Thus, everything relies on relationships between

1. 1 Forecasts – Exemple : Top-Down Approach

- Input forecasts for each business unit

1. 1 Forecasts – Exemple : Top-Down Approach

- Input forecasts adjustments for each business

- Enables to explain differences between yearly

- Adjustments to budget enable to alter, if any,

1. 1 Forecasts – Exemple : Top-Down Approach

- Monthly Reporting for a « lambda » business unit

1. 1 Forecasts – Exemple : Top-Down Approach

- Real cash flows from subsidiaries, for next 3

- … which enables treasury department to raise

1. 2 Organizing Refinancement – LONG TERM NEEDS

- Forward view for all future flows

Financial Ressources taken into account :

1. 2 Organizing Refinancement – LONG TERM NEEDS

- Forward view for all future flows

Financial Needs taken into account

- Bonds and CPs redemptions

1. 2 Organizing Refinancement – LONG TERM NEEDS

1. 2 Organizing Refinancement – LONG TERM NEEDS

Reoffer spread vs mid-swap rate 43 bp

Spread vs. Benchmark 95.9 bp Clean-Up Call Yes (80%)

Interest payment date annually, each 7 February Governing Law French

Reoffer Yield 0.631% Paying Agent BNP Paribas Securities Services

Reoffer Price 99.971%

1. 2 Organizing Refinancement – LONG TERM NEEDS

Drawbacks : covenants, documentation

1. 2 Organizing Refinancement – MEDIUM TERM NEEDS

Using previous curves enables to adapt to medium term

1. 2 Organizing Refinancement – SHORT TERM

- Commercial Papers Purchase

- Short Term Banking Overdrafts

- Short Term Commercial Papers Issuances

1. 2 Organizing Refinancement – LONG TERM NEEDS

AUCHAN REFINANCING (by maturity)

1 400 Bonds Auchan-Holding

Banking Facilities Auchan-Holding

Banking Facilities Oney Bank

1. 3 Central Treasury Organization

Once external refinancing is settled, Group Treasury, acting

Why centralization of treasury ?

1. 3 Central Treasury Organization

- Netting short term positions, for each different subsidiary

- Difficulty for currencies that are not (or hardly) transferrable

1. 3 Central Treasury Organization

- Structural Loans granted to subsidiaries, related to their long term

- Short Term Adjustments, dpending on their treasury cycle

2014 (realized) 2015 (budget) 2015 (y-t-d) Forecasts

Structural needs Max. Indebtness

1. 3 Central Treasury Organization

Transfer Price Policy

Principle : Prices / Rates proposed to subsidiaries must be

SOME KEYS TO FIND SOLUTIONS…

2. Interest Rates Risks

2.1 When the risk appears…

From section 1, we have issued fixed rates bonds.

As a retailer, we prefer to have floating rate indebtness.

- We thus stick to economical cycles.

- Historical data show that it is costless to remain with

2. Interest Rates Risks