Liquidity & Treasury Management Conference. Reporting to the Board Writing a Winning Treasury Report

Transcription

1 Liquidity & Treasury Management Conference Reporting to the Board Writing a Winning Treasury Report Martin Watts Head of Treasury, L&Q mwatts@lqgroup.org.uk

2 Introduction Post TSA abolishment, the role of Self Governance has never been more important. The role of the Treasurer is to protect the organisation from Global Risk. Messages conveyed by the Treasurer must be in a language that everyone understands.

3 Objective of Plenary Session 1. How to incorporate information from other parts of your organisation. 2. Implementing effective compliance monitoring and regular reporting processes. 3. Providing risk-based reports showing the current position compared with limits. 4. Using the report to help drive high performance.

4 Section 1 COLLABORATIVE WORKING WITHIN YOUR BUSINESS

5 Treasury in Context Political & Social Regulatory Environment Sources of Risk Risk Appetite Corporate Plan Business Objective Corporate Strategy Treasury Strategy Governanc e Framework Liquidity Management Interest Rate Management Financial Policy Risk Management

6 L&Q s Treasury Link to our Corporate Strategy Business Objective Without Financial Strength and Resident Satisfaction there is no Capacity Corporate Strategy Without Capacity there is no Responsible Growth Corporate Governance Without Responsible Growth there is no Liquidity Treasury Strategy Without Liquidity and sound Treasury Management there is no Financial Strength

7 Section 2 EFFECTIVE COMPLIANCE

8 Why We Need Effective Compliance Responsibilities are delegated to Directors whose prime duty is to act in the best interests of the company. Powers given to Senior Managers should be monitored via strict controls. Board is ultimately responsible. Effective Governance requires robust organisational structures for managing risk with clearly defined roles and responsibilities. The Risk Policy must be drawn up in response to risk management objectives that consider corporate goals, sources of risk and risk appetite. Compliance is essential to safeguard assets and investor confidence.

9 Treasury Governance: Using a Structured Framework Tier 1: Treasury Framework Delegated Authority per Group Rules Board approved Banking and Dealing Mandates Tier 2: Treasury Policy Must reflect Corporate Strategy, Source of Risk and Risk Appetite Tier 3: Treasury Process Maps Identify Risk & Controls for Corporate Risk Map Design Procedures and Systems that fit Policy Testing and Proof of Compliance Structured Reporting Corporate Assurance

10 Compliance Reporting Cycle Group Risk Map AML & Fraud Assessment Audit & Risk Group Board Corporate Strategy Treasury Strategy Framework and Policy Required Approvals Treasury Committe e Executive Group Liquidity and Interest Risk Treasury Exposures

11 Section 3 RISK BASED REPORTS

12 Treasury Strategy Objective 1 RISK CATEGORY LIQUIDITY RISK CONTROL OBJECTIVE Ensure sufficient liquidity to cover Operating and Development cash flows by determining future borrowing requirements

13 Understanding Risk Appetite: Liquidity Risk Business Objective Source of Risk Risk Appetite Capacity to deliver Mission Statement Planning and decision making vs. Corporate Strategy Cash to pay Stakeholders Impact of Comprehensive Spending Review Operating Performance Covenant headroom Availability and Cost of Finance i.e. Credit Crunch Type and duration of debt Contingency against loan covenants /credit rating impact Accounting Implications Diversification of lending relationships

14 Reporting to the Board: Liquidity Risk Treasury Policy Available Liquidity Capacity Parameters Matching Corporate Strategy Gearing & Asset Cover Compliance Reporting Headroom: Cash + Lending Facilities How quickly can we get hold of it Weighted Duration, Re-finance Risk Current Position Monitoring Risk Business Plan Forecast + Scenarios Fund in advance? Availability of Funding Forecast Headroom vs. Covenants

15 Example of Reporting Liquidity Position Key Messages 1.9bn of Loan Facilities. Headroom of 325m available within 48hrs. Weighted duration of debt: 18.2 years. Over 9,000 properties available f Net Gearing is at 55% v 80% covenant. Peak at 63% year 4. Lending

16 Debt Profile In line with Treasury Strategy: Limited Re-Finance Risk Gross Debt ( m) Capital Repayment ( m) G r o s s D e b t 2,000 1,800 1,600 1,400 1,200 1, C a p i t a l R e p a y m e n t

17 Expected Financing Requirement in Year 4 using base case scenario Available Liquidity Cash Net Debt Borrowing Facilities 2,500 2,000 millions 1,500 1, Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov-10 F 31/3/11 F 31/3/13 F 31/3/15

18 Treasury Strategy Objective 2 RISK CATEGORY INTEREST RATE RISK CONTROL OBJECTIVE Minimise the impact of interest rate movements on Financial Results

19 Understanding Risk Appetite: Interest Rate Risk Business Objective Certainty v Flexibility Protection of Development Hurdle Rate Smoothing of Operating Surpluses Source of Risk Risk Appetite Supply and Demand Economic Outlook Inflation Mix and duration of Fixed and Floating Rate Debt Accounting Implications Ability to take advantage of market conditions? Risk v Interest Savings i.e. Structured Derivatives

20 Reporting to the Board: Interest Rate Risk Treasury Policy Parameters of Fixed v Floating Net Debt Stand Alone or Embedded Confidence Limits & Sensitivity Interest Cover Compliance Reporting Weighted Yield & Duration Fair Value Impact of 1 basis point move (DV01) Current Position Monitoring Risk Business Plan Forecast + Scenarios Impact on Cash flow and I&E What point are Cash Calls required Forecast Headroom vs. Covenants

21 Example of Reporting Interest Rate 100% Risk 80% 60% 40% 20% 0% Mar-07 Fixed Variable Key Messages 79% of the Group s debt is fixed. 53% Embedded, 26% Swaps. Within Policy Parameters. A 1% move in LIBOR moves our Cost of Debt by 0.21% or 3.7m. The Group has a negative Fair Value of 25.0m on 300m of Swaps. YTD - 0.9m posted to I&E. DV01impacts fair value by 650k of which 16k Mar-08 Mar-09 Mar-10 Today

22 Cost of Debt WACD v Hurdle Rate and Marginal Cost of Funding 7.50% 7.00% 6.50% 6.00% 5.50% 5.00% 4.50% Weighted Average Cost of Debt Scheme Hurdle Rate Cost of New Funding Dec Sep Jun- Mar Dec Sep Jun- Mar Dec Sep Jun- Mar Dec Sep Jun- Mar Key Messages What has been the movement in our Cost of Debt? What have been the main contributing factors? How does this compare to our Scheme Hurdle Rate? What is our view on future movements in interest rates and the yield curve? Should we consider raising more debt to prefund or use as an opportunity? How are macroeconomic

23 Treasury Strategy Objective 3 RISK CATEGORY CREDIT & COUNTERPARTY RISK CONTROL OBJECTIVE Security of principal sums invested; and considers this to rank above seeking to secure the highest possible revenue return

24 Understanding Risk Appetite: Credit & Counterparty Risk Business Objective Source of Risk Risk Appetite Preservation of capital to meet Corporate Strategy Achieve required rate of return above cost of capital Not to extend risk beyond stakeholder expectations Deterioration of own credit quality Credit risk of business partners i.e. LLP s Bank Settlement and replacement risk Banking counterpart default Counterparty Limits Spread of investment and hedging counterparties Identification of Worse Case Scenario Risk vs. Return

25 Reporting to the Board: Credit & Counterparty Risk Treasury Policy Reporting Monitoring Risk Approved Banks Status Relationship Approved Limits Investments + Fair Value of swaps Credit Ratings, CDS, Capital Ratios Type of Investment Return Return v Risk Free Rate Protection of our own Credit Rating Updates and Impacts Impact on Cost of Capital, Status

26 Example of Reporting Counterparty Risk Key Messages We are within counterparty limits. No action. We have increased our holdings in single A counterparties. Counterparty ratings have remained stable for a period of 3m. CDS levels have of 10%. of 10%. Our risk appetite remains unchanged.

27 Section 3 WRITING THAT WINNING REPORT

28 A Language We All Understand Common Board Quotes Treasury is complicated Treasury jargon is used Reports are too long Why are we doing this? I am not sure of the risk Is this the right deal? What is the cost? What assurance is there? How you can respond Educate Keep it simple and target Focus on results Link to Treasury Strategy Link to Risk Appetite Show alternatives Highlight scenarios Tiered Treasury Governance Structure

29 What Board want to know: Impact on Corporate Strategy Corporate Strategy Treasury Strategy Risk Appetite Impact Financial Strength Resident Satisfaction Capacity Responsible Growth Liquidity Management Interest Rate Management Credit & Counterparty Financing Requirement Hedging Activity Counterparty Limits Cash to pay Stakeholders Covenant Compliance Results on Bottom Line Scheme Hurdle Rate

30 Reporting Structure Introduction Executive Summary Why are you proposing? Corporate Strategy & Mitigating Source of Risk What are you are proposing? Treasury Activity in line with Risk Appetite What have you considered? Impact on Liquidity, Covenants, I&E What are the Risks and Alternatives? Scenario Analysis on drivers Are we Compliant? Link to Treasury Framework of Policy and Risk Map Approval of Recommendations

31 Section 5 CONCLUSIONS

32 Key Messages 1. Consider your Treasury Governance via a formal tiered structure. 2. Ensure that the Treasury Framework reflects Corporate Strategy and Risk Appetite. 3. Refer to the Treasury Framework to keep Treasury papers focused. 4. Use compliance monitoring and the reporting process to keep papers simple. 5. Applying the right risk-based reports will deliver Treasury and Business performance.

33 Martin Watts Head of Treasury, L&Q QUESTIONS