AFP Blogs

Corporate practitioners are invited to attend a Corporate Finance Virtual Roundtable, October 14, 3:30 p.m. ET, and address common challenges and share best practices on this critical issue. Brian Kalish, AFP’s Director, Finance Practice Lead, will facilitate the discussion, which is limited to corporate practitioners.

The Corporate Finance Virtual Roundtable is part of the Corporate Finance Virtual Series.

If you have any questions regarding the virtual series, or have ideas for future series topics, please contact Brian Kalish.

With little margin for error in Q3 and beyond, it’s easy to see how the EPS impact of FX volatility could have a big impact on earnings forecasts for multinational companies.

That’s the thinking from Wolfgang Koester, CEO of FiREapps. “In the case of foreign exchange, corporate treasury needs to clearly define the company’s risk in terms that are meaningful to the CEO, CFO and stakeholders,” Koester writes in the latest issue of AFP Exchange. “That means taking a close look at all the potential economic impacts of FX volatility, including revenue, net operating income, net income and earnings per share.”

Corporate treasury should ask:
- What resources are required for the company to make timely decisions to manage FX risks?
- What are the current costs of hedging?
- What are the associated costs with hedging additional currencies?
- Is there any potential to actually benefit from interest rate income by hedging certain exposures?

Read more of Koester’s article in AFP Exchange.

Global Capital Markets

Companies have issued more than $2.7 trillion of debt this year in dollars, euros, pounds and yen, the fastest pace on record and up 24 percent from 2008.

In the U.S., issuers have sold $99.1 billion of junk bonds this year, a 63 percent increase over the same period in 2008

High-yield, high-risk loan sales picked up as bank debt rallied to a one-year high in the secondary market after dropping to record lows.

Covered bond sales surged to the highest in two years this week as banks from France to Holland took advantage of investor demand for debt that yields more than the German notes that dominate the market.

U.S. Treasuries

Treasuries headed for a weekly advance. Benchmark 10-year yields, little changed, were near the lowest level in a week.

LIBOR

The cost of borrowing between banks fell. The British Bankers’ Association said the rate on three-month loans in dollars — the London Interbank Offered Rate, or Libor — declined to 0.28 percent from 0.29 percent

Banking

Irwin Financial Corp.’s bank units in Kentucky and Indiana, with $2.5 billion in deposits and offices in nine states, were closed by regulators, pushing the tally of failed U.S. lenders this year to 94.

M&A

Dell Inc. agreed to buy Perot Systems Corp. for $3.9 billion, undertaking its biggest purchase to compete with International Business Machines Corp. and Hewlett-Packard Co. in computer services.

Unilever agreed to buy Sara Lee Corp.’s personal-care and European detergent unit for 1.28 billion euros ($1.88 billion), in its biggest purchase in nine years.

Credit Ratings

Brazil’s credit rating was raised to investment grade by Moody’s Investors Service after Latin America’s largest economy built record foreign reserves and averted a prolonged recession amid the global financial crisis.

Banco Santander SA had 623 million euros ($920 million) of bonds backed by consumer loans downgraded as much as 10 steps as rising defaults depleted funds used to protect senior creditors against losses.

CDS

Traders in the U.S. credit-default swaps market are paying the least in more than 16 months to protect corporate bonds from default as signs of an improving economy and almost-zero interest rates boosts demand for higher- yielding assets.

Munis

Benchmark borrowing costs for highly rated state and local governments dropped to the lowest levels since the Young Rascal’s “Groovin’” was the number one song in America. This 42-year low was caused as the pace of new municipal-bond issues slowed and cash flowing into mutual funds accelerated to a record.

Money Markets

More than $260 billion has flowed out of money-market funds this year, as yields fell to almost zero.

Credit Rating Agencies

Moody’s Investors Service plans to attend a hearing held by state insurance commissioners after New York’s regulator suggested scaling back the rating firm’s authorization to grade bond holdings if it skipped the session.

Currencies

The dollar traded within a cent of a one-year low against the euro on speculation the global economic recovery is gathering strength, encouraging investors to buy higher-yielding assets.

Larry Harding, founder and president of High Street Partners, says transfer pricing documentation varies by country, but typically includes:

• An overview of the business
• An analysis of legal and economic factors affecting the transfer pricing method selected
• A description of the company’s organizational structure
• A description of the transfer pricing method selected
• Reasons why the method was selected (a “best method” analysis)
• A description of alternative methods, and why they were not selected
• A description of all controlled transactions
• Any internal data used to analyze controlled transactions
• A description of comparables used, how comparability was evaluated, and any adjustments
• An explanation of the economic analysis and projections used to develop the pricing method
• Any material data discovered after the close of the tax year but before filing the tax return
• A general index of the principal and background documents
• A description of the record-keeping system.

Read more about transfer pricing rules here.

Read more about transfer pricing at Asia Pacific Forum.

A new trade settlement program could make it easier to trade RMB, observers say. Under the pilot program qualifying firms in Shanghai, Guangzhou, Shenzhen, Zhuhai and Dongguan can use RMB settlement for cross-border trade with foreign companies.

“This is very significant in that it pushes the RMB to a fully-convertible currency,” said Zening Ge, president of SSA & Co.’s Asia division. “Yes, it will relax RMB regulations to some degree, but only for the current account, namely the trade-related areas. For capital accounts, there is still a long way to go. Therefore, the off-shore RMB settlement won’t change the nature of RMB to a closed currency.

“The big picture for the government to do this is to bring the RMB to the status of a regional currency,” Ge continued. “Of course, the ultimate goal is to challenge the status of the U.S. dollar. For multinationals that need to import into, and export from, China, this could much simplify their transactions by maintaining only one RMB account, and they can also get RMB-based trade financing, which could be settled later with RMB.”

Read more about this development at Asia Pacific Forum.

The Heritage Foundation was experiencing rapid growth and wanted to improve its manual A/P process without increasing overhead. In 2008 it determined that its best solution was to outsource A/P to a third party, in this case API Outsourcing, Inc. As a result, the Heritage Foundation experienced a 29 percent increase in A/P volume over the prior year.

Mark J. Schreiber, Chief Accountant at the Heritage Foundation, offers the following advice to improve your A/P processes:
• Do your research
• Project five to 10 years down the road to account for growth and change in your organization
• Determine how this project relates to your organization’s overall needs both now and into the future
• When looking to renovate or improve upon an internal process, don’t be afraid to think of solutions outside your organization, and for the opportunity to reconstruct a process from the foundation up.

Read more of this “Problem Solved” case study in the next issue of Payments.

Smart supply chain management includes vendor management. AFP’s upcoming webinar, “Managing Your Vendors: Minimizing Risk and Maximizing Dollars,” on September 23 at 3:30 p.m. ET, tackles this critical topic.

Part of AFP’s Risk Management Virtual Series, “Managing Your Vendors” will be led by Karen McIsaac, founder and Managing Director of Project Managers, Inc., which helps organizations manage strategic business change. “Select your vendor as if the vendor funding was coming from your personal bank account,” said McIssac, who will present at AFP’s 2009 Annual Conference in San Francisco.

Participants will learn:

• How poor vendor management impacts the success of their project and puts their career at risk
• How to identify and mitigate non-performing vendors, including when to terminate
• How to identify and manage the vendor contract to ensure project and personal success.

“If you don’t define what you want, you won’t get what you want,” said McIssac.

This webinar has been approved for CTP/CCM and CPE credits. For more information on requirements for obtaining CE credits through AFP webinars, please click here.

The AFP Education Marketplace announces a new virtual series—a quarterly virtual roundtable and webinar tackling the most relevant issues in risk management.

The virtual roundtable is restricted to corporate practitioners and centers on risk management topics that have dominated AFP discussion lists as well as the to-do list of many corporate practitioners. Webinars will round out the analysis by including the expertise of banks, consultants or service providers.

Participants in both the virtual roundtable and webinar will earn 2 CTP/CCM recertification credits.

• Risk Management Series Virtual Roundtable, September 16, 3:30 – 4:30 p.m. ET. This virtual roundtable offers corporate practitioners the opportunity to share best practices in risk management. Brian Kalish, Director, Finance Practice Lead, AFP, will moderate this discussion.

• Risk Management Series Webinar, Managing Your Vendors: Minimizing Risk and Maximizing Dollars, September 23, 3:30 – 4:30 p.m. ET. This webinar will explore ways to minimize risk and manage dollars as vendors represent financial, performance, schedule and overall risk to the business. Speaker: Karen McIsaac, Founder and Managing Director, Project Managers, Inc.

If you have any questions regarding virtual series or have ideas for future series topics, please contact Brian Kalish at BKalish@AFPonline.org.

Global Capital Markets

U.S. corporate bond sales hit a four month high this week as companies took advantage of the tightest yields relative to benchmark rates in more than a year.

Borrowers sold at least $39 billion of debt, a 34 percent increase from $29 billion last week. Financial issuance of at least $9.6 billion without government backing also was the highest in four months. Citigroup offered $7 billion of bonds split between a U.S.-backed offering and a non-guaranteed sale, and Morgan Stanley sold $3 billion of debt without a federal guarantee.

Including high-yield, high-risk, or junk, debt, companies have borrowed at least $932 billion in bonds this year, a 37 percent increase from 2008.

Emerging-market borrowing costs fell to levels not seen since before the collapse of Lehman as a global economic recovery fueled demand for higher- yielding assets. The extra yield investors demand to own developing-nations’ bonds instead of U.S. Treasuries narrowed 15 basis points to 3.28 percentage points. The spread is below the 3.34 percentage-point level on Sept. 12, 2008, the last trading day before Lehman filed for the world’s biggest bankruptcy.

Bank of America raised 750 million pounds ($1.2 billion) from its first benchmark sale of bonds in the U.K. currency in more than a year.

HSBC sold 119.4 billion yen ($1.3 billion) of Samurai bonds, the biggest sale of such securities without a government guarantee since Lehman collapsed a year ago.

Russian bonds extended their longest winning streak since August 2007 as higher commodity prices and an improved economic outlook lifted developing-nation stocks, bonds and currencies.

U.S. Treasuries

Treasury 10-year notes headed for their first weekly loss since the start of August after reports on retail sales, manufacturing and housing starts showed the U.S. economic recovery is gaining momentum. Treasuries declined this week just as the U.S. prepared to sell a record $112 billion in two-, five- and seven-year notes next week.

LIBOR

The cost of three-month loans in dollars between banks was little changed, according to the British Bankers’ Association. The London interbank offered rate, or Libor, for such loans declined to 0.292 percent.

The Libor-OIS spread, a gauge of bank reluctance to lend, was at 11 basis points.

This is the average level in the five years before the credit crisis began after central banks and governments acted to limit the damage sparked by the failure of Lehman Brothers.  It soared to a record 364 basis points on Oct. 10.

Banking

Lenders in Illinois, Iowa, Minnesota and Washington State collapsed, pushing the number of bank failures to 92 this year amid continuing fallout from the worst economic slump since the Great Depression. Regulators are shutting U.S. banks at the fastest pace in 17 years. A total of 416 are on the FDIC’s “problem bank” list after failing tests for asset quality, liquidity and earnings in the second quarter, the most since June 1994.

M&A

Adobe Systems Inc., the world’s biggest maker of graphic-design software, agreed to buy Omniture Inc. for $1.8 billion, expanding into programs that track the performance of Web sites and online advertising campaigns.

Intuit Inc., the world’s biggest maker of tax-preparation software, agreed to buy Mint.com for $170 million, gaining a free Internet-based service that helps consumers track financial transactions.

Credit Ratings

S&P may downgrade $578 billion of securities linked to corporate debt after adding tests into its ratings methods to reflect how the issues would perform in severe economic slumps. 

Hong Kong Mortgage Corp. had its credit ratings cut by Moody’s Investors Service because the government’s ability to provide support during crises is constrained by its own debt.

The ratings company lowered to Aa2 HKMC’s Aaa long-term local and foreign currency senior unsecured bonds, the Aa1 long- term foreign currency issuer rating, and the Aaa long-term local currency issuer rating. Hong Kong’s government also has a rating of Aa2, which is Moody’s third-highest grade.

CDS

The cost of protecting corporate bonds in the U.S. from default fell to the lowest level in 16 months as investor confidence in an economic recovery increased.

An index of credit-default swaps tied to U.S. investment- grade bonds fell below 100 basis points for the first time since May 20, 2008.

Munis

Utah sold $491.8 million of Build America Bonds, obtaining the lowest relative interest cost for 10-year securities since the subsidy program was created.

Renowned economist Edward Yardeni, Ph.D., told an audience yesterday that the U.S. economy is on the upswing but worried about the prospect of another asset bubble similar to one earlier this decade.

Speaking at the AFP webinar “The Current State of Global Credit Markets: Investment & Financing Opportunities,” Yardeni acknowledged the U.S. government’s efforts to fight off a depression with a massive financial stimulus and securing the assets of many insolvent financial institutions had worked. But those measures are leading to “asset inflation,” he said, and that could lead to another bubble.

“The bottom line: We’re looking at a Fed Funds rate of zero for the next six to 12 months,” Yardeni said. “We’ll see better growth, and inflation won’t be problem. Subpar growth of two-percent earnings will make a comeback, and the business cycle is still there.”

Dani Hughes, president of Divine Capital, co-presented at the webinar and cited the growth in number of IPOs in 2009 as a sign the economy is on the rebound. She added that the paradigm shift of American consumers saving more money than they had in years could slow economic growth. That prompted Yardeni to joke that he didn’t want to talk about it. “It’s too depressing,” he added. “I don’t think consumers want to hunker down. What’s the point of saving? You’re earning nothing right now.”

The discussion hosted by Yardeni and Hughes was one in a series of risk management webinars. Next up: “Managing Your Vendors: Minimizing Risk and Maximizing Dollars,” September 23, 3:30 p.m. ET., hosted by Karen McIsaac, founder and managing director of Project Managers Inc.