New York Cash Exchange: 2015 Session #7

Transcription

1 New York Cash Exchange: 2015 Essential Learning for CTP Candidates Session #7: Thursday Afternoon (5/28) ETM4-Chapter 6: Capital Markets ETM4-Chapter 12: Long-Term and Capital Instruments ETM4-Chapter 10: Collections, Concentration & Disbursements Essentials of Treasury Management, 4th Ed. (ETM4) is published by the AFP which holds the copyright and all rights to the related materials. As a prep course for the CTP exam, significant portions of these lectures are based on materials from the Essentials text. 1 Overview of Chapter 6 Topics Introduction Overview of Capital Markets Debt Market Equity(Stock) Securities 2 Introduction The movement toward global markets is being driven by: Major source of funding and investment for many types of organizations Organizations seek to raise capital on a global basis in order to overcome local market imperfections or inefficiencies and to lower costs of funds Investors look to increase their returns Advances in data processing/telecommunications Fewer restrictions on cross-border capital flows Deregulation of domestic capital markets Greater competition among global markets 3 1

2 Group Exercise Working in your groups, answer the following questions: What are Fixed-Income securities? What are some of the key differences between fixed income investments and equity investments? Which group is harder to manage? 4 More on Capital Markets Two Basic Capital Market Segments Debt: Fixed income capital Equity: Shares of common or preferred stock Markets and exchanges are managed by various regulatory bodies Capital markets play an important role in the valuation of securities Valuation is built on theories of the time value of money and the analysis of cash flows 5 Overview of Capital Markets The Basics of Capital Markets Money versus Capital Markets Debt versus Equity Markets Key Participants Issuers of Securities Investors Broker-Dealers(Investment Banking & Brokerage Firms) Regulators Other Participants 6 2

3 More on Market Participants Issuers of Securities Governments & Central Banks (Debt) Corporations (Debt & Equity) State-Owned Enterprises SOE (Debt) Sub-Sovereign Entities/Municipalities (Debt) Mutual Fund Companies (Debt & Equity) Investors (Retail vs. Institutional) Investment Banking and Brokerage Firms Investment bankers Origination desks Securities traders 7 Different Capital Markets Division of Capital Markets Primary markets Secondary markets Private markets Security Exchanges and OTC Markets Facilitate the buying and selling of securities Major exchanges in most developed nations OTC markets tend to be more decentralized Financial markets in developing countries or emerging markets are often run on an OTC basis until volumes increase 8 Benefits of Organized Exchanges Provide a market system where the competitive forces of supply and demand determine securities prices Sustain a market where frequent trading minimizes price volatility between individual trades Maintain a market large enough to enable issuers to raise large amounts of capital through securities offerings Furnish a regulated environment to help ensure fairness for exchange participants 9 3

4 Debt Market Medium- and Long-Term Borrowing Term Loan Medium- or Intermediate-Term Notes Long-term Bonds Mortgage Bonds Unsecured Bonds (Debentures) Convertible Bonds Sovereign Bonds Sub-Sovereign Bonds (Munis) Eurobonds Zero-Coupon Bonds High-Yield Bonds 10 Other Types of Bonds Income Bonds Collateral Trust Bonds Equipment Trust Certificates Index Bonds Economic Development Bonds Tax Increment Financing (TIF) Bonds Tender Option Bonds International Bonds Foreign bonds Global bonds Multicurrency bonds 11 Other Forms of Debt Capital Floating (Adjustable) Rate Debt Project Financing Securitization Off-Balance-Sheet Financing 12 4

5 Debt Contract Provisions Debt(Bonds and Term Loan) indentures and covenants Representations and warranties Events of default Material Adverse Change (MAC) clause Call and Put provision Sinking funds Refinancing Defeasance of debt Promissory note Collateral Liens 13 Group Exercise Working in your groups, answer the following questions: What is the role of credit enhancements and guarantees in the world of debt securities? What is meant by the term maturity matching when using debt as a source of capital? 14 Other Factors in Using Debt as a Source of Capital Credit Enhancements Guarantees Full, Specific Project, Guarantee of Payment or Collection, Comfort Letter, Performance, Personal Bond/Credit Ratings Maturity Matching Effects of Interest Rate Levels and Forecasts Availability of Collateral 15 5

6 Equity(Stock) Securities Common Stock Preferred Stock Hybrid Securities ary Receipts (DRs) 16 Common Stock Represents ownership in a company Balance Sheet Accounts and Definitions Par value Retained earnings Additional Paid-in-Capital (APIC) Book value per share Market value per share Treasury stock Types of Common Stock Multiple Classes Tracking Stock 17 Preferred Stock Major Provisions or Preferred Stock Issues Priority claim on earnings and assets Typically fixed as a percentage of par value Cumulative dividends in arrears Voting rights/seat on board May be convertible Evaluation of Preferred Stock Users of Preferred Stock Financial institutions are heavy issuers Young/high-growth/financial distressed firms Adjustable-rate preferred stock Convertible preferred shares in mergers 18 6

7 Overview of Chapter 12 Topics Introduction Managing Capital Market Investments Valuation of Long- Term Securities 19 Objectives of Capital Market Investments Goals should be expressed in terms of risk and return and should conform to the organization s investment policies Capital preservation is not necessarily the primary goal for capital investments Guidelines to consider: Risk preferences for the portfolio Return objectives Liquidity needs Time horizons or future needs for funds Tax issues Legal or regulatory factors (especially for pension funds) Asset Allocation Decision 20 L-T, Fixed Income Portfolio Mgmt. Many of the issues are similar to those covered in Chap 11 (Money Markets) Concept of Duration Primary measure of risk for a bond portfolio Weighted average maturity of investment Measure of sensitivity of the investment to changes in underlying interest rates Bond prices move inversely to interest rates Interest Rate Risk Longer term bonds will fluctuate more in price for a given change in interest rates than shorter term bonds 21 7

8 Other Issues in Debt Portfolio Mgmt. Fixed/Floating Ratio Usually expressed in terms of a target ratio May be too narrow to be used on its own Foreign Currency Denominated Investments FX derivatives may be used to manage risk Using Derivatives in a Long-Term Debt Portfolio Use of credit default swaps, in addition to futures forwards and options Asset-Liability Management Especially a problem when S-T funds are borrowed to fund L-T investments 22 Equity (Stock) Portfolio Mgmt. Defining and Measuring Investment Risk Expected return and standard deviation Use of covariance in portfolio management Benefits of Diversification Reduces the overall riskiness of a portfolio Capital Asset Pricing Model (CAPM) Beta is a measure of relative market risk In a diversified portfolio, Beta is the only relevant measure to an investor CAPM Model Relationship r r (r r ) E RF M RF i Where: r Required rate of return on stockholder's equity E r Expected rate of return on the risk-free asset RF r Expected rate of return on the market portfolio M Beta value for stock i i 23 CAPM Calculation Example Assume a risk-free rate (T-bill) of 2.0%, a market rate of return of 8.0%, and historic Beta for Apple Computer of 1.5: re r RF (rm r RF) i r 0.02 ( )(1.5) % E Assume the same information as above, but for H.J. Heinz with a Beta of 0.60: re r RF (rm r RF) i r 0.02 ( )(0.6) % E Source: ETM4 - AFP 24 8

9 Determining Portfolio Risk & Return One of the biggest benefits of using CAPM and Beta is the ability to determine a portfolios average return and overall riskiness as a function of simple weighted averages Using the stocks from the previous slide with weights of Apple(A) = 70% and Heinz(H) = 30% Portfolio β = (% of A-Stock β A ) + (% of H-Stock β H ) = ( ) + ( ) = 1.23 Port. Return = (% of A-Stock r A ) + (% of H-Stock r H ) = ( %) + ( %) = 9.38% re r RF (rm r RF ) Portfolio =.02 + (.08.02)(1.23)= or 9.38% 25 Bond or Fixed Income Valuation Valuation of bonds or any fixed income security is generally fairly easy Concept of Yield to Maturity (YTM) Some bonds have call provisions (YTC) Concept of Yield to Worst (YTW) Can also be used with other types of bonds to determine the impact of all potentially negative provisions (pre-payments, sinking funds, etc.) 26 Valuation of Long-Term Securities Publicly traded corporate securities are valued by financial markets The value is based on the cash flow stream expected by the investor as well as the relevant discount rate: CF CF CF CF PV... n t 1 2 n 0 t 1 2 n t 1(1 k) i (1 k) i (1 k) i (1 k) i Where: PV 0 = Current value of the asset CF t = Cash flow in period t k i = Opportunity cost for asset i 27 9

10 Overview of Chapter 10 Topics Introduction Disbursements Collections Concentration of Funds Payments Fraud 28 Disbursements Disbursement Management Products Electronic Disbursement Products Card Payments Outsourced Accounts Payable(A/P) Services Managing Disbursement Information 29 Disbursement Management Products Zero Balance Accounts(ZBAs) Positive Pay Controlled Disbursement Multiple-Drawee Checks Imprest Accounts 30 10

11 Electronic Disbursement Products Direct (ACH) Payments Tax Payments Wire Transfers 31 Outsourced A/P Services Freight payments Payroll services Integrated or comprehensive A/P Payment factories Managing Disbursement Information Balance Reporting Svcs Interface with A/P Account reconciliation program (ARP) Image technology 32 Collections Key Issues in Collection Systems Speed of Collection Security of Payment Availability of Remittance Information Cost of Collection 33 11

12 Collection System Source: ETM3 - AFP 34 Typical Collection Process Invoice Sent to Customer Customer Sends Payment and Remittance Advice Vendor Receives and Processes Payment Funds ed Cash Application 35 Domestic Collection Products Armored Carriers and Virtual Vaults Merchant Services Remote Capture(RDC) Check Conversion Mail Payments Lockbox Electronic Fund Transfer(EFT) with Remittance Information Electronic Bill Presentment and Payment(EBPP) and Electronic Invoice Presentment and Payment(EIPP) Consolidated Remittance Processing(CRP) Imaging Technology 36 12

13 Collection Float Components Mail Float Mail Time Processing Float Preparation Time Impact of Remote Capture (RDC) Availability Float Check Clearing Time Measurement of Float Dollar-Days 37 Lockbox Processing Systems Collection tool in which an FI or 3 rd party vendor receives payments at specified post office box addresses, then processes the remittances and credits the payments into a payee s account. Advantages of Lockbox Systems Reduced mail & processing float Improved access to remittance information Reduced risk and improved security (pmts no longer received internally) Control and record keeping capabilities Uninterrupted service Scalability Proper segregation of duties 38 Different Types of Lockboxes Wholesale Used to process low-volume, large-dollar B2B payments with detailed remittance information Focus is on float reduction Often manual and/or semi-automated Usually highly customized Retail Used to process high-volume, small-dollar consumer remittances (C2B) Checks are accompanied by standardized, machinescannable remittance documents Highly automated Focus is on reducing processing cost Hybrid Combine features of both 39 13

14 Cross-Border Collections and Trade Management Products Open Account Documentary Collection Letter of Credit Banker s Acceptance (BA) Trade Acceptance Other Trade Payment Methods Barter Countertrade Trading Companies 40 Cash Concentration Systems Source: ETM3 - AFP 41 Cash Concentration & Pooling Systems Global Concentration of Funds Notional pooling Physical pooling Bank overlay structure Cash Concentration Systems (U.S.) Over-the-counter/Field deposit systems Remote deposit capture (RDC) Virtual vault services Cash concentration system configuration Size and geographic distribution of collection system Transfer alternatives to concentrating bank Branch footprint of banking network 42 14

15 Notional Pooling Balances are offset notionally, preserving integrity of accounts No concentration No commingling Interest on the net pool balance is debited or credited to master account 43 Notional Pooling Example Assume one country, single currency Three subsidiaries (A, B, C) Standard O/D banking accounts Credit (+) balances earn 5%, Debit ( )balances pay 10% Subsidiary Average Balance Interest (+/ ) A B C Summary But If notional pooling is allowed: Company earns net interest of + 5 on master account An improvement of + 20 from the non-pooling arrangement Source: ETM3 - AFP 44 Bank Overlay Structure Primary Bank Concentration Account In Home Country Notional Pooling and/or Physical Funds Transfer Primary Bank Branch Overlay Account In Country A Primary Bank Branch Overlay Account In Country B Primary Bank Branch Overlay Account In Country C Account #1 Account #2 Account #3 In-country transfers made via best available method depends on local transfer options Inside Country A Account #4 Account #5 Account #6 In-country transfers made via best available method depends on local transfer options Inside Country B Account #7 Account #8 Account #9 In-country transfers made via best available method depends on local transfer options Inside Country C Source: ETM4 - AFP 45 15

16 Payments Fraud A major concern for all organizations Many use positive pay, ACH filters and blocks, and daily reconciliations to help detect and control payments fraud Some best practices Check stock with security features Segregation of duties Dual authentication for EFT transactions Reduction/elimination of non-repetitive wires Separate accounts for receipts & disbursements Dedicated computer for all on-line EFT transactions Card payment fraud is becoming a bigger issue 46 Session Wrap-up Session 7: Capital Markets & Cash Management What did we learn in this session? What topics do we need to learn more about? 47 New York Cash Exchange: 2015 Essential Learning for CTP Candidates End of This Session We will reconvene after Lunch. The topic will be: More Key Concepts Cash Forecasting Risk Management 48 16