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Global Capital Markets

Wal-Mart Stores Inc., the world’s biggest retailer, sold the first samurai bonds from a U.S. borrower since Lehman Brothers Holdings Inc. defaulted on its yen debt in September. The Bentonville, Arkansas-based company sold 83.1 billion ($881 million) yen in five-year, 1.49 percent bonds priced to yield 55 basis points more than the yen swap rate, and 16.9 billion yen in five-year floating-rate notes priced to yield 60 basis points more than the six-month London interbank offered rate for yen.

HCA Inc., the hospital chain purchased in a $33 billion leveraged buyout, sold $1.25 billion of 10.5-year notes in its third offering this year. The 7.875 percent senior secured first-lien notes priced to yield 8.125 percent

U.S. Treasuries

Treasuries gained, with 10-year yields falling for a fourth day, after a government report showing consumer spending contracted eased concern that inflation will accelerate as the economic contraction slows.

The highest inflation-adjusted yields in 15 years are helping provide the Treasury with record demand at auctions as the U.S. sells $115 billion of notes this week. Treasuries are the cheapest relative to inflation since 1994 after consumer prices fell 1.4 percent in June from a year earlier. The real yield or the difference between rates on government securities and inflation, for 10-year notes was 5.10 percent today, compared with an average of 2.74 percent over the past 20 years.

Commercial Paper Market

The U.S. CP market shrank by $27.6 billion this week, according to data released by the Federal Reserve Board Thursday.

The CP market is now at its lowest point recorded since the central bank began tracking these data in 2001. It is now $1.066 trillion in size, down substantially from its peak of $2.2 trillion in July 2007. Last week, it shrank by $3.3 billion.

The asset-backed CP grew by $900 million this week on a seasonally adjusted basis, after shrinking by $4.6 billion last week.

The Fed’s net portfolio holdings in connection with its commercial-paper funding facility fell $42.55 billion in the latest week to $67.30 billion Wednesday. The program peaked at $350 billion in January.

LIBOR

The Libor-OIS spread, a gauge of banks’ reluctance to lend, dropped below 30 basis points for the first time in 18 months, adding to evidence that the two-year freeze in credit markets is thawing. The spread dropped half a basis point to 29 basis points, the least since January 2008, taking this year’s decline to more than 90 basis points. It soared to 364 basis points Oct. 10 after Lehman Brothers Holdings Inc. collapsed in September.

The London interbank offered rate, or Libor, that banks say they charge each other to borrow in dollars for three months, fell 1 basis point to 0.48 percent the British Bankers’ Association said. The overnight rate was little changed at 0.23 percent.

Bankruptcy

Stant Corp., a 111-year-old maker of automotive fuel systems, fuel and radiator caps and thermostats, filed for bankruptcy protection.

Station Casinos Inc., taken private by Colony Capital LLC and management in 2007, filed for Chapter 11 bankruptcy after failing to reach agreement with unsecured creditors on a plan for a prepackaged court restructuring.

Credit Ratings

Ambac Financial Group Inc. ratings were cut by Moody’s Investors Service after its bond insurance unit increased loss reserves and credit-charge estimates.

Moody’s cut New York-based Ambac Financial’s senior unsecured debt rating to Ca, from Caa1. The insurance financial strength rating on bond insurer Ambac Assurance Corp. and Ambac Assurance UK Ltd. was downgraded to Caa2 from Ba3, the ratings company said in a statement.

Swap Spreads

The gap between different maturity swap spreads narrowed as the Treasury yield curve flattened for a third straight day on easing inflation expectations.

The yield curve, as represented by the difference between yields for 2- and 10-year notes, narrowed five basis points to 2.45 percentage points. It reached a record 2.81 percentage points on June 5.

Credit Default Swaps

The cost to protect against defaults on U.S. corporate bonds using a benchmark credit-default swaps index fell to the lowest in more than 13 months and headed for its fifth monthly decline.

FED

Nomura Securities International Inc. was named a primary dealer by the Federal Reserve Bank of New York, the third brokerage this year to join the network of securities firms that underwrite the U.S. government’s debt.

A reduction in primary dealers to 16 firms this year, the lowest since the network was formalized in 1960, had led to wider bid-ask spreads, reduced liquidity and removed bidders as some auctions have doubled in size. The dealer network is now the largest since Sept. 30, before the Fed deleted Bear Stearns Cos. from the list after its acquisition by JPMorgan Chase & Co.

Banking

Security Bank Corp.’s six Georgia subsidiaries and Waterford Village Bank in New York were seized by regulators last week, pushing this year’s toll of failed U.S. lenders to 64, the most since 1992.

The six units of Macon-based Security Bank, with total assets of $2.8 billion and deposits of $2.4 billion, were closed by the Georgia Department of Banking and Finance, and the Federal Deposit Insurance Corp. was named receiver, the FDIC said.

Bank failures this year have cost the U.S. deposit insurance fund more than $13.5 billion, including $812.6 million from last week’s seizures, straining the FDIC reserves amid the steepest recession since the Great Depression. The FDIC has imposed an emergency fee aimed at raising $5.6 billion to replenish the fund, which fell to $13 billion, the lowest since 1993, at the end of the first quarter.

Waterford Village Bank of Clarence, New York, with $61.4 million in assets and $58 million in deposits, was closed by the state’s Banking Department, and the FDIC was named receiver.

Munis

State and local government borrowers led by Indianapolis’s water department sold $5.8 billion of fixed-rate bonds this week, on par with last week’s total.

Fixed-rate municipal sales are poised to complete their slowest July in three years, with about $25 billion, the least since the $20.6 billion sold in 2006

IPOs

PennyMac Mortgage Investment Trust, the real-estate firm that will buy home loans and bonds, fell in its first day of trading after cutting the size of its initial public offering by 20 percent.

Underwriters for Calabasas, California-based PennyMac priced 16 million shares at $20 each, raising $335 million including a private placement, according to a company statement. The IPO had already been reduced from $750 million on July 16.

Commodities

Aluminum rose for an 11th day, the longest advance in at least 22 years, on signs demand from manufacturers is recovering. Copper gained in London and New York to near the highest in nine months.

Aluminum has jumped 18 percent since July 13 on speculation automobile manufacturers will need more of the metal. Japan’s shipments of aluminum rolled products fell at the slowest pace in seven months in June as demand from can and automakers rose, the Japan Aluminum Association said in a statement today.

AFP members participated in a 90-minute conference call about credit card interchange fees with the U.S. Government Accountability Office on July 30, reports AFP Public Policy Coordinator Michael Griffith.

AFP members told GAO officials how the increase in interchange fees affects their businesses, and they stressed the importance of accepting credit cards and the disadvantageous position they find themselves in when negotiating with banks and card companies. (more…)

Technology is advancing at a dizzying pace and plays a critical role in every treasury department. This year’s conference features over 15 sessions that highlight the innovative leveraging of technology to increase the strategic value of the treasury function. Sessions include:

Randall Durling, Director of International Finance for Boeing, will share practical tips and lessons learned from his experiences implementing technology models. Hear how to increase efficiency, reduce procurement and maintenance costs, and best practices to adopt when evaluating and implementing technological tools for your treasury department. (“Deploying Today’s Technology Models in a Treasury Environment” – session # 51 – Treasury Operations track)

Attendees will learn about the potential of cutting-edge cloud technology to advance payments capabilities from Gary Hagmueller, Chief Financial Officer of Zuora, Inc. He will discuss existing uses of cloud technology in payments, and outline possible benefits to come including payment tagging, payment status tracking, and links from payments to remittance information. (“Payments: Are They Ready for the Cloud?” – session #120 – Payments track)

Vorapong Sutanont and Jeremy Dane from PricewaterhouseCoopers will educate their audience in the use of Transaction Risk Identification and Analysis to prevent and detect fraud. They will provide an overview of common vulnerabilities, outline data-mining strategies that can be employed to identify the potential for or existence of fraud, and discuss how corporates can address weaknesses in various areas of their operations. (“Emerging Trends and Techniques to Combat and Detect Fraud Risk with Today’s Technology” – session #101 – Risk Management track)

Copyright © 2009 | Association for Financial Professionals, Inc. |  All rights reserved.

Recently on an AFP discussion list several treasury professionals addressed the challenge of vendor risk. Simply put, what do you do when your vendor is at risk of going under? You can read what your peers said by joining AFP’s discussion lists or by reading the upcoming issue of Payments newsletter. For now, we asked two experts.

“If the issue is the fiduciary responsibility of the processor, they should be bonded, the funds could be escrowed, and/or covered by business fraud liability insurance,” says Marshall Maglothin, MHA MBA, President, Blue Oak Consulting, LLC. “If the issue is fluctuation of the energy markets, oil options could be purchased. The original intent of the options markets was to hedge/insure against significant loss due to market volatility. Concerning the options, if the expense is hedged with options, but they are not needed and expire, the cost of the options is then simply considered as the cost of that ‘insurance.’”

“Is this simply a processor or broker/aggregate,” asks Matt Caston, former Global VP of Business Governance, Computer Associates. “If it’s the latter, then I assume they are using the prepayment from multiple clients to purchase in bulk, thereby securing lower rates and making money from the spread between what they pay and what you pay. While I would ordinarily agree escrow is the best option, that might not work in this case; unless the processor can secure credit against the escrowed funds.

“That being said, credibility and credit rating of the vendor and insurance/insurability are all going to determine your mitigation strategy. Depending on your market, you might also consider going with more than one vendor. While your unit prices might be higher—because you’re buying less from each vendor—you will be mitigating the risk of default/loss by any one vendor, as well as lowering premiums on any insurance you might want to carry per the prior posters comments.”

Donald Hollingsworth, CTP, Assistant Treasurer of Ameren Corp. and a member of AFP’s Payments Advisory Group, frequently lectures on the subject of preventing payments fraud. He’s written an article for a future issue of Payments, but for now Hollingsworth lists three new scams treasury professionals need to be wary of:

Use of current events to encourage clicking on a hyperlink, which opens intrusive software to access confidential information. Fraudsters always know what will cause interest, like something about President Obama or American Idol. Employee education should reduce this risk.

A secret shopper scam, where people are offered “secret shopper” jobs. Although promised future assignments shopping at large retail establishments, your employees’ first job may be testing money wiring services. The check they receive for their working capital and “salary” just may be a bogus check with your company’s MICR. Positive pay helps prevent loss.

Calling one of your customers and claiming to represent your company. The fraudster tells your customers their bill is in arrears and they must give a credit or debit card number to stay in good graces. Customer education is critical here.

Read the 2009 AFP Payments Fraud Survey here.

Security Bank Corp.’s six Georgia subsidiaries and Waterford Village Bank in New York were seized by regulators last week, pushing this year’s toll of failed U.S. lenders to 64, the most since 1992.

The six units of Macon-based Security Bank, with total assets of $2.8 billion and deposits of $2.4 billion, were closed by the Georgia Department of Banking and Finance, and the Federal Deposit Insurance Corp. was named receiver, the FDIC said.

Bank failures this year have cost the U.S. deposit insurance fund more than $13.5 billion, including $812.6 million from last week’s seizures, straining the FDIC reserves amid the steepest recession since the Great Depression. The FDIC has imposed an emergency fee aimed at raising $5.6 billion to replenish the fund, which fell to $13 billion, the lowest since 1993, at the end of the first quarter.

Waterford Village Bank of Clarence, New York, with $61.4 million in assets and $58 million in deposits, was closed by the state’s Banking Department, and the FDIC was named receiver.

It’s time for the latest installment of Payments’ occasional series We Asked, You Responded:

Today’s question: What are you doing to improve cash forecasting without adding systems or head count?

Patrick Spargur, Corp. Credit & Collections Manager, CICP-Bally Technologies: “We are managing our disputed invoices separately and we do not include them in our projections until we know payment is in process.”

David Ottenstein, IT Manager at Ark Technologies: “Just use a simple Excel spreadsheet. Plot your historical cash-in, by week and by customer, over your historical cash-out, by week by vendor. Under that plot your payroll, financing charges, interest income, etc. Put your starting cash balance on the top, and your ending on the bottom. After putting in your formula, cash-in minus cash-out, minus the sum of all other, it should equal your ending balance. If not, double-check your numbers/formula. The ending balance for one week becomes the starting balance for the next week. Follow the formula to the end and double check ending balances.

“For the forecasting portion enter by week your sales forecasts going out 13 weeks (1 fiscal quarter) and fill in the forecast of payments by vendor, payroll, etc. Follow that formula out and you’ll have a decent forecast of cash flow.

“Every week update the actual over the forecasted and plot the difference. Then add one more week of forecast. It’s both a good tool for cash flow forecasting and for determining vendors ripe for development and identifying other issues.

Ottenstein adds: “To ease the strain of putting it together I use Crystal Reports to export the information from our ERP to the spreadsheet, and then use some simple macros to import properly. Knowing that there’s a simple, relatively easy way to do it might make people more inclined to maintain a rolling cash flow model.”

Got a question you want answered, or a good piece of treasury-related advice? Email me.
For more cash forecasting tips, check out Payments.

The upcoming August issue of Payments has a story about SWIFT Alliance Lite. Here are four tips to get the most out of this new product from SWIFT:

Try before you buy. “Alliance Lite is not expensive to use so it didn’t hurt to try it out while we maintained our interface with the bank,” said ShinYoung Park, manager of treasury operations with healthcare distributor Henry Schein Inc.

Don’t forget your key. Alliance Lite uses a security token that plugs into a computer’s UBS drive. “You need to put the token in a safe place, like your company’s server room,” said Park.

Understand your current processes. “Understand where your current the loopholes exist, your exposures to fraud,” said Michael Bosacco, senior consultant with Treasury Strategies.

Look at SWIFT holistically. “Don’t consider it as a means to save dollars,” said Bosacco. “It will generate a return on investment, but that may not be nearly as important to the CFO. Look at it as a strategy to create a world-class treasury organization, to become more efficient, secure and reliable. Treasury can become more of a process throughout the organization instead of a processing engine. You might be able to reduce head count, and that’s fine. But it’s strategic; SWIFT is a capability, not a solution, until you recognize that strategy.”

Learn more about Payments here.

Global Capital Markets

U.S. corporate bond sales jumped the most in 12 weeks as companies led by Boeing Co. the world’s second-biggest commercial-jet maker, and Citigroup Inc. took advantage of resurgent demand for their debt. Issuance totaled at least $22.7 billion this week, up from $10.8 billion in the prior five-day period.

Boeing Co., the world’s second- biggest commercial plane maker, increased the size of its planned bond sale to $1.95 billion.

Citigroup Inc., in its biggest dollar-denominated sale without U.S. backing in almost a year, issued $2.5 billion of 30-year bonds. The 8.125 percent debt priced to yield 380 basis points more than similar-maturity Treasuries.

Fiat SpA, the Italian carmaker that acquired a stake in Chrysler LLC, is raising 1.25 billion euros ($1.8 billion) from a sale of three-year bonds in its first debt issue since 2007.

CIT, the 101-year-old commercial lender struggling to retire $1 billion of debt maturing next month, agreed to pay a 5 percent fee to creditors and annual interest of at least 13 percent for $2 billion in financing. On top of that, the New York-based company pledged assets worth more than five times the amount of the loan as collateral.

U.S. high-yield, high-risk bond sales fell below the weekly average for July as the fate of cash-starved CIT stoked investor concern that lower- rated companies won’t be able to access credit to survive the recession. Junk-rated borrowers issued $1.23 billion of notes this week, 42 percent less than the July weekly average of $2.1 billion since 2003.

For all the talk this year about the Chinese refusing to buy U.S. bonds, the real story is about the People’s Republic of China’s failure to find buyers for the equivalent of $1.7 billion of its debt because too many investors showed no interest at auctions that would be considered disastrous if their outcomes were repeated on Wall Street.

Other Asian countries face similar difficulties. India’s underwriters had to purchase 3.1 billion rupees ($64 million) of 25-year securities they were unable to sell at a July 10 auction. Vietnam and the Philippines abandoned offerings because investors demanded higher yields than the governments were willing to pay. China’s 11.9 billion yuan in unsold short-term debt represented 14.3 percent of the 83 billion yuan it offered in three sales this month.

U.S. Treasuries

Treasuries fell for a third day as the U.S. prepared to sell a record $115 billion in debt next week, raising speculation yields will have to rise to attract investors. Notes headed for a second weekly loss as investors sought higher yields available from company bonds and Asian stocks. The cost of protecting European corporate bonds from default fell, curtailing demand for the relative safety of government debt.

Next week’s sales are the second time the U.S. will sell three so-called coupon issues and an inflation-linked maturity in a single week since the U.S. started issuing debt regularly in 1976.

Commercial Paper Market

The U.S. CP market continued contracting in the latest week, eroded by the long-lasting economic downturn and effects of the global credit crisis, Federal Reserve data showed on Thursday.

For the week ended July 22, the size of the U.S. CP market fell by $3.3 billion to $1.093 trillion outstanding from $1.097 trillion the previous week. That’s the smallest since at least early 2001, when the U.S. central bank started compiling data in its current form.

The overall U.S. CP market has halved since peaking at about $2.2 trillion outstanding in August 2007 when the credit crisis broke out. U.S. asset-backed CP outstanding fell to $436.9 billion outstanding in the latest week from $441.4 billion the previous week. Unsecured financial issuance outstanding rose by $2.7 billion after falling by $12.8 billion the previous week.

LIBOR

The rate banks say they charge each other to borrow in dollars for three months in London was little changed for an 11th day near a record low as four months of declines petered out. The London interbank offered rate, or Libor, for such loans was at 0.502 percent today, the British Bankers Association said. The rate has fallen from a peak this year of 1.42 percent on Jan. 5. The Libor-OIS spread, a measure of the reluctance of banks to lend, narrowed to a record low of 30 basis points.

Bankruptcy

A hardware distributor in Alabama became the first company to blame the troubles of commercial lender CIT Group Inc. for its bankruptcy when it filed for protection from creditors. Moore-Handley Inc., which supplies tools and other items to hardware stores and home centers, said in court papers that it was forced into Chapter 11 because it had difficulty getting cash from CIT, its lender.

Credit Ratings Agencies

The Philippines’ debt rating was raised to the highest level in more than four years by Moody’s Investors Service, which cited the country’s resilient financial system, foreign reserves, and a stable peso. The rating on government debt was raised one level to Ba3 from B1, the rating company said in a statement today. That’s the first upgrade since 1997 and brings the measure to three levels below investment grade, the same as Indonesia’s and above Pakistan, Mongolia and Fiji.

Latin America’s monetary and fiscal policies have helped the region weather the global financial crisis, increasing the possibility of ratings upgrades, Moody’s Investors Service said. “Increased policy credibility, flexible exchange rates, deeper domestic capital markets, and solid banking systems are factors that explain why Latin America is facing fewer difficulties absorbing shocks, thus opening the door for improved sovereign ratings,” Moody’s said in the report.

Moody’s Corp., whose founder, John Moody, created credit ratings in 1909, fell the most in five months after Warren Buffet’s Berkshire Hathaway Inc. reduced its stake in the ratings firm by 17 percent. Buffett’s firm sold about 8 million shares of the ratings company this week

Credit Default Swaps

The cost to protect CIT Group Inc. bonds from default traded at a record high on speculation a $3 billion loan may not save the finance company from bankruptcy. Credit-default swaps protecting against a CIT default rose 1 percentage point to 50 percent upfront.

Credit-default swaps dealers met a deadline to expand a central registry for the derivatives amid demands from regulators to increase transparency in a market blamed for exacerbating last year’s financial crisis.

TLGP

General Electric Co.’s finance unit won approval for a plan to leave the Federal Deposit Insurance Corp.’s debt guarantee program, saying it has the financial strength to raise money without government help. GE Capital will no longer issue government-guaranteed commercial paper with maturities up to 270 days

Banking

Regulators have closed 57 U.S. banks this year, the most since 1992, when 181 lenders failed or entered government- assisted transactions. Bank failures, including 10 in Georgia, have drained more than $10 billion from the deposit insurance fund this year, led by $4.9 billion for Florida’s BankUnited Financial Corp., the largest bank to collapse this year. The 4 lenders closed last week had combined assets of $3.79 billion and deposits of $3.26 billion.

Banks have failed to make adequate provision for the losses on loans and securities they face before the end of next year, Moody’s Investors Service said. U.S. banks may incur about $470 billion of losses and write-downs by the end of 2010, which may cause the banks to be unprofitable in the period, the ratings company said

Munis

The Pennsylvania Turnpike Commission offered the largest municipal bond issue in a month as the oldest U.S. turnpike begins financing a $900 million statewide road and transit plan this fiscal year.

The market for municipal bonds whose interest rates reset daily, weekly or monthly exhibited “substantial strains” in the first half of 2009, in contrast with long-term municipal debt, according to a report to Congress by the Federal Reserve.

Michael Lewis thinks working on Wall Street during the Crash of ‘87 and the hurricanes he experienced as a child growing up in New Orleans have one thing in common:

They were fun.

“I thought the Crash was fun and I got kind of excited but this may be a peculiar personality trait,” Lewis told AFP in an exclusive podcast that you can download here. “I do feel like I’m watching this hurricane rip through town and all I really want to do is go and throw out my Frisbee in it, that it’s just kind of this exciting event. And so this probably reflects the slowness with which I empathize with people who were losing their fortune but I do find them really engaging.”

As a best-selling (not to mention peculiar) author and former bond trader, Michael Lewis is well-equipped to explain what went wrong on Wall Street and Main Street the past 18 months. His newest book, Panic: The Story of Modern Financial Insanity, dissects the financial booms and busts that have occurred since the Crash of 1987. Lewis is perhaps best known for his groundbreaking book on baseball, Moneyball. His book about football, The Blind Side, is being made into a movie.

Lewis will speak and autograph copies of his book at AFP’s Annual Conference, Oct 4-7, in San Francisco.

Download the Michael Lewis podcast here.

More AFP podcasts and videos here.