Related: Interview with a Treasury Analyst

What is Corporate Treasury?

Treasury is the cash management function of the bank – it is responsible for cash inflows and cash outflows. Ideally, the treasury maximizes the cash inflows while minimizing the cash outflows via a variety of risk management solutions and opportune financing. Treasury focuses on managing cash-on-hand, debt, risk management/hedging solutions and is the overall steward of the company’s long-term capital structure goals.

Treasury is a very broad area that means different things in different organizations. Large organizations will have a dedicated team to do each of cash management, foreign exchange, transfer pricing, budgeting. A good example would be any of the large banks – they will have vast corporate treasury teams that can take up several floors, with separate treasuries at overseas subsidiaries.

Conversely, a small company may have a finance division that encompasses treasury, strategy, corporate development (an internal mergers & acquisitions team), tax, budgeting and financial planning & analysis (FP&A).

In North America, especially at smaller corporates, treasury is not necessarily seen as a prestigious position within a corporate, nor is it seen as a function that can add substantial value to the bottom line. In these companies, treasury is a need to have back office function not unlike legal or accounting for reporting purposes and will usually hire CPA/CA’s without any sort of retraining for treasury.

However, in the UK and at multinationals, treasury’s function is taken much more seriously, with an emphasis on training treasury staff from a solid corporate finance perspective. There is a treasury designation and accredited treasury is a challenging set of exams (CTP). Treasuries are expected to shave basis points off of the cost lines by minimizing the firm’s cost of funds, whether by issuing the lowest cost of debt or looking at equity or other risk management solutions.

Treasury and Investment Bankers

When investment bankers discuss M&A or higher level strategic mandates, this conversation is with the CEO and executed alongside the corporate development division of the client.

When it comes to matters of financing, possibly in relation to M&A via acquisition financing, but more often for debt issuance and hedging solutions whether interest rates, foreign exchange or commodity prices.

The higher the complexity of an organization’s operations, the more sophisticated their treasury must be. As such, the more international a company is and the more it taps into capital markets, the more exposure the treasury will have with the investment bank, corporate bank and trading floor.

Investment Banking and Corporate Banking Products Used by Treasury

At the simplest level at a domestic firm that has primarily domestic costs, they will require loans from the corporate or commercial bank. However, while loans may or may not be required, liquidity is very important in the form of revolvers that can be drawn in order to meet the ebbs and flows of working capital – without a revolver, a treasury must keep large cash reserves, which is inefficient.

Accordingly, the treasurer and occasionally the CFO will be in charge of overseeing corporate revolver conversations with the investment bank. The expectation, although not legally allowed, is that the credit extended via the revolvers will result in pro-rata distribution of any capital markets activity where the bank can make money.

At the simplest companies, which tend to have better returns for banks due to the safety (as a result of collateral) and revenue (higher interest margins), banks will generally try to get the treasury to use their proprietary cash management system. This can be cumbersome as sometimes treasuries have to switch to a less user-friendly cash management system as a result of a new credit lead. Citi, Bank of America and RBC are known to have outstanding cash management platforms.

Once a company gets larger and begins to tap into debt capital markets, their teams will start to receive advice from debt capital markets bankers on what sort of appetite there is for their debt and what effective interest rate they can expect to price at – which is illustrated as a credit spread above the benchmark risk-free government bond based on the tenor or term of the prospective bonds.

DCM will also be treasury’s go-to for refinancing upcoming maturities, ideas around building out a new curve, and for general corporate updates. DCM will give indications as to where bonds will price based on the creditworthiness relative to peers. For example, if a company has leverage (Debt/EBITDA) or coverage (EBITDA/Interest) metrics in line with a BBB company in their industry, DCM will provide intelligence on where these peers priced.

Treasury will also deal with rating agencies and familiarize with ratings metrics relevant to the corporate’s industry in order to ascertain the range in which they can expect to price in. Treasurers are expected to have correspondence with their rating agencies – the more transparent they are, the more leeway they will get in terms of rating.

Trading Products Used by Treasury

Once a company issues enough debt, DCM will bring on trading product professionals from the interest rate derivatives team that will allow corporates to swap for opportunistically low cost of debt.

For instance, if a tractor company has all of its operations in Canada, it makes sense for it to have Canadian fixed rate debt (so payments are known). However, it is cheaper to issue Japanese floating interest rate debt and swap it back via a cross-currency float-to-fixed swap, so it does that and saves a few basis points off of its interest payments.

Once a company starts to have international operations, and the reality is that given that most purchases will have components from other countries even if all sales and operations are domestic, it may be prudent for the treasury to hedge away FX risk – another piece of business with the trading floor.

Similarly, if a company sells a commodity – such as an oil and gas producer – or has a commodity as an input – such as an airline – the treasury is responsible for hedging out commodity price risk. That said, not hedging is also a decision, a good treasurer has to weigh the costs and benefits of each and what structure is appropriate.

If a treasurer feels hedging is expensive, they can remain unhedged (naked). If there is no room for variability, they can hedge out all of their known cash flows via a forward contract with the bank. If they are willing to see some movement and pay less of an upfront cost, collars are very popular. Ultimately, the hedging strategy is to be affirmed with the corporate’s board of directors and the treasurer will be responsible for communicating the strategy and why.

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