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Top Treasury Tasks: Handling Debt and Capital Markets

  • By Andrew Deichler
  • Published: 3/19/2018

The following is an excerpt from the latest Treasury in Practice Guide, Navigating the Top Tasks in Treasury, underwritten by GTreasury. Download the full guide

As treasury’s role has become more strategic, functions such as debt issuance and conducting capital markets activities, which traditionally are under the purview of the CFO, have now fallen to treasury, according to the Strategic Role of Treasury Survey. These tasks tend to be the responsibility of the assistant treasurer.

For Jim Gilligan, CTP, FP&A, assistant treasurer for Great Plains Energy/Kansas City Power & Light Company, handling debt and capital markets comprises at least half of his duties. “We’re very capital intensive as a utility; we’re in the capital markets, usually, multiple times a year,” he said. “So for us, capital markets activity consists of debt issuances, redemptions, new common stock, preferred stock and buybacks.”

Great Plains’ treasury team’s capital market issuance needs are typically identified in one of two ways.  First, the utility may have a debt maturity that it needs to refinance. Second, the utility may need to raise new capital to fund capital expenditures or other cash needs. The company uses a corporate model to project cash flows and finance needs up to five years in the future. Gilligan noted that the latter is an inexact science, as projections can only be so accurate the further out they go. But that model is Great Plains’ primary planning vehicle for capital markets activity, and from it, treasury knows whether it needs to issue stock or debt.

“Then when we get closer to a financing on the debt side, we’ll pick underwriters and decide on the tenor and those sorts of things closer to the actual issuance date, depending on market conditions—maybe 30 to 45 days out,” he said.

That process is fairly pedestrian and straightforward; the hard part, according to Gilligan, is doing all of the projections and planning in advance. “Doing a financing requires board approval and regulatory approval, and anything else in our world that needs to be done ahead of time—selecting attorneys, filing with the SEC, etc. All of that can typically take months, so we need to be looking ahead throughout the year.”

For Volkswagen Group of America, medium to long-term debt issuances are executed in collaboration with its parent company in Germany. “We each have our roles within the debt issuance process,” said Per Larry Tolep, CTP, treasurer, who served as the assistant treasurer until 2015.

By centralizing much of its debt and capital markets activity in Wolfsburg, Germany, Volkswagen is able to better understand spreads and movements to support a comprehensive funding strategy for the Group. “You just don’t want too many different entities engaging the market at different levels and then leaving so much interpretation as to the overall cost of funds for the Group,” said Jason Prosniewski, assistant treasurer and head of operations. “The capital markets team does a good job of working with the banks as well as using standard capital markets practices to make sure that both the pricing and terms and conditions of the debt instrument being issued is in-line and understood.”

Tolep emphasized the importance of collaborating with the parent company.  “My team would deal with lawyers, contact the rating agencies, and other similar activities as it is a coordinated effort,” he said. “We are routinely engaged in conversations with headquarters and providing our perspective based on information and analysis we collect in North America.”

Fast food retailer Dunkin’ Brands has a whole business securitization debt structure, which means that the company is heavily focused on cash collections from its franchisees, which form the collateral for supporting its debt. “On a weekly basis, we need to identify all cash that comes in from each of the assets supporting the debt,” said Gina Powers, assistant treasurer. “Once identified, this cash flows through what in the industry is referred to as a waterfall. Through this process, we first pay securitization administrative expenses and principal and interest on the debt. Any cash that is remaining, we use for operational needs.”

So every day, Dunkin’s treasury team has to identify the different types of cash coming into its bank account and then consolidates that into a weekly certificate. “Then every week, when we send the money to a trustee, we tell her how much to put in for that weekly portion of principal and interest,” Powers said. “Then, at the end of the quarter, she pays it out to each of the noteholders on our behalf.”

Dunkin’s debt structure is less restrictive than a credit facility, but there are still covenants that the company needs to comply with and annual audits that need to be conducted. To aid in this process, treasury keeps two debt compliance spreadsheets. One tracks all of the various reporting requirements that it has to do on a weekly, monthly, quarterly and annual basis.

“We have a spreadsheet that indicates what the provision is, what section of the document it can be found in, who is responsible for the reporting or compliance requirement, the due date, and a place to confirm completion,” Powers said. “It helps when we get audited; we can just hand this to the auditors and say, ‘Here’s additional proof that we met our requirements under the credit documents.’”

For more insights on debt and capital markets, as well as other key treasury responsibilities, download Navigating the Top Tasks in Treasury.

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