In moving from banking to the corporate sector, Dimitris Papathanasiou was looking for more excitement and variety. As Financial Risk Manager at Coca-Cola HBC, where there are many more things to do and fewer resources, he has certainly found what he was looking for.
Financial Risk Manager
Dimitris Papathanasiou, Coca-Cola HBC’s Financial Risk Manager, has a wealth of experience in the banking, investment and finance fields enabling him to deliver a unique approach to foreign exchange (FX) and commodity price risk management – which recently earned him a ‘Highly Commended’ in the Best Risk Management Solution category of the 2013 Treasury Today Adam Smith Awards.
Coca-Cola HBC is licensed to produce, sell and distribute a range of beverages including Fanta, Sprite and the global mega-brand, Coca-Cola. It is the largest bottler and vendor of The Coca-Cola Company’s products in Europe and one of the largest in the world. As a result, it has some heavy-duty currency and commodity needs.
Understanding corporate financial risk is so much more than crunching numbers for Dimitris Papathanasiou, Financial Risk Manager for Coca-Cola HBC. With a wealth of experience in banking, portfolio and risk management, Athens-based Papathanasiou believes in the value of creating an intelligently structured group-wide view that considers all aspects of financial risk and which benchmarks its expectations.
To facilitate this approach, since arriving in his current role in 2010, Papathanasiou set about forming what he describes as “a holistic and centralised financial risk framework”, allowing team members to flourish within their individual specialisations whilst creating stability where it matters: at the P&L level.
His early career saw him work with a number of financial organisations – as a junior dealer in treasury and as an analyst in a securities house – before taking the helm as Treasury Auditor for Emporiki Bank in Athens. From here he took up the role of Senior Risk Auditor for Royal Bank of Scotland (RBS) and then onwards as Risk Manager at New Bond Street Asset Management. A move into portfolio management at the London office of Iceland’s Kaupthing Bank followed, proving to be a defining moment in his career.
As Europe’s banking and financial crisis unravelled towards the end of 2008, Kaupthing was taken into the custodianship of the Icelandic government, reducing a team of 37 to just two. Papathanasiou – a Chartered Financial Analyst (CFA), with an MSc in Finance and Investments from Brunel University in the UK – survived the cull, but with Kaputhing looking decidedly unstable and despite an offer to continue working with another investment bank, he took two major decisions by returning to Athens and moving into corporate treasury. “I could foresee that the banking sector would sustain a major hit because of all the regulations being imposed, but I also thought that my diverse background would pay off in the corporate treasury area,” he explains.
His experience of the banking and investment world has indeed been “extremely helpful” in preparation for a career in treasury and risk, not least because Papathanasiou feels that traditional treasury training does not necessarily expose candidates to associated functions such as internal control, risk management, and portfolio management. In addition, Papathanasiou considered that treasury would be a “more interesting area” where he could “add much more value and be more appreciated”. He was not wrong.
As the largest corporate in Greece, Coca-Cola HBC was keen to offer Papathanasiou a trial, starting in October 2009, as Senior Treasury Dealer. He focused on interest rate management, currency and commodity hedging, before being promoted to his current position as Financial Risk Manager in March 2010. With hindsight, he says it was “a very good move” adding that, true to expectation, it has been “much more challenging”. “When you work in a bank you tend to worry only about the markets. In a corporate world you worry about more markets in bigger amounts and on top of that there are also a number of tasks that you have to deliver as well. It is essential to continue improving your processes.”
Having received a ‘Highly Commended’ in the Best Risk Management Solution category of the 2013 Treasury Today Adam Smith Awards, Papathanasiou clearly practices what he preaches, commenting that his team could have submitted a number of innovations for consideration. “Maybe next year,” he adds.
Treasury and risk structure
With Coca-Cola HBC operations spread across 28 countries, its Athens-based group treasury is divided into two main functions: front office and cash management, with a segregated back office; and accounting. There is also a person responsible for the systems and projects. Heading up the front office function, Papathanasiou reports to the Group Treasurer, who in turn reports to the Group CFO.
When he joined the front office team, it was staffed by three people and the traders were required to carry out many administrative duties. For Papathanasiou, the balance “did not seem right”. His reaction was to secure resources for administration with the continuous support of his boss, freeing up time to enable the creation of a team of specialists. Today, Papathanasiou looks after all risk strategy. One trader now manages all the currency risk including trade execution, and another handles all the commodity execution. There is a considerable research requirement of the traders as Papathanasiou wants them to fully understand the markets (as he does), and any associated aspects, in which they operate – from execution of traditional processes to helping with internal pricing between the various entities.
As each business unit has a responsibility to report financial exposures to group treasury, the team also now has a front office representative acting as the conduit for all country operations, enabling a centralised approach by aligning best practice on exposure reporting across the group. In addition, a reporting and compliance specialist (also an Excel expert) has been brought in as the de facto middle office, controlling all processes.
The importance of benchmarking
As well as identifying that the correct trades have been executed before and after the balance sheet hedging process, the middle office incumbent is also closely involved in Coca-Cola HBC’s benchmarking activities. The risk team’s benchmarks are created in a “very impressive” Excel file by comparing a hypothetical portfolio based on the policy using real market data with the actual trades, explains Papathanasiou. He sees benchmarking as a vital part of treasury as it defines precisely how well his active strategy has performed against a static hedging approach.
The benchmark is also a means of ensuring compliance which restrains the placing of very big trades on the back of mere opinion regarding the direction of markets. “What I realised when I moved to corporate treasury is that people make vast asset management decisions that can have considerable impact but they are not then monitoring what they have done,” he says. “The benchmark is helping me to understand how much value I create when I decide to deviate from the policy. The fact that I have beaten the benchmark four years in a row makes me feel particularly good.”
The market impact
Coca-Cola HBC is a diverse business in terms of its geographic reach. “Our portfolio of countries was a double-whammy for us,” says Papathanasiou. “We had a negative impact in 2008 and 2009 from the emerging markets (EMs), but we had also a hit from countries such as Greece, Italy and Ireland during the sovereign European crisis.” Although the company has benefitted from the decrease in interest rates, the group felt some currency pain on the business. According to the Purchase Power Parity model, countries with high inflation in the long term will have a currency depreciation against the currencies of countries with low inflation. “So the benefits of the high growth rate of increased pricing of our products is partially offset by the currency weakness.”
To manage the currencies of EM countries is not an easy task as the company faces “very high hedging costs”. Although this afflicts all other companies that operate in such an environment, Papathanasiou asserts that the team “has to be very aware of how the markets and our currencies are behaving, constantly adjusting our hedging strategy accordingly and reporting to management to explain what is happening.”
In general, the transactional foreign exchange (FX) risk for Coca-Cola HBC can be quite difficult to handle, says Papathanasiou. Transactional risk can arise in the time between confirming and settling a contract, simply because two exchange rates can fluctuate in that period. This requires Coca-Cola HBC to closely monitor market activity and its hedging costs. It does this in a number of ways, using research from the banks, communication with market analysts and by adapting in-house tools for valuing and measuring cost paid in premiums and interest rate differentials. “Because countries such as Ukraine and Nigeria are extremely expensive to hedge, we have developed tools to monitor what is happening there with the central banks that want their currency stable,” he explains. “We try to be proactive, seeing if we can use other methods, such as pre-payment, in order to mitigate risk without financial tools. Back-testing shows that a constant hedging strategy in those areas would be very unprofitable.”
He notes a sharp difference sometimes in efficacy of risk management tools between the banking and corporate sectors and advises users to treat these models with caution. “When I arrived at Coca-Cola HBC the first thing I looked at was value-at-risk (VaR),” he recalls. “But looking at the results again, I asked how this number really applied to the company. This is when I realised that I needed to make significant adjustments to my thinking and look at risk from a corporate treasury point of view.” Companies are not so much concentrated on values rather than cash flows. In addition the time horizon could not be one or ten days like the banks, as there is a very different approach to the holding period.
Then there are also the other problems of the ‘at-risk’ methodologies such as the correlations and the tail risk. Negative correlations would result in a reduction of the risk and thus a lower VaR. However, says Papathanasiou, the correlations can change in evolving economies. “During a crisis, correlations increase. All risk assets move in the same direction. This would dramatically change the risk profile and suddenly you realise that you are not that safe.”
In a portfolio of investments the current value usually deviates according to a fairly standard pattern up or down from a specific point. But there is a need to consider ‘tail risk’, says Papathanasiou. This is the probability of movement beyond that normal or standard deviation. In EMs, where the currency markets are relatively illiquid and present limited hedging opportunities (because of the cost), sharp long-term trending ‘corrections’ can occur every five or six years or so, creating awkward blips. “In Ukraine, if the currency changes it will not change by 1%-2%, as it does with other free-floating currencies, but will do so by 10% or 15%.”
The ‘at-risk’ methodologies are useful, he says, because they can provide the big picture of the risk profile. However, for limit purposes, if used, they have to be supplemented by other mechanisms such as sensitivity limits.
IT in risk
When it comes to technology, in the front office, 360T’s FX trading system is a staple for Papathanasiou’s team. Some banks, he notes, will argue that the rates achieved through a multi-bank portal such as this may not necessarily be the best because each institution will be picking up and passing on the cost of using the platform. “But in general it is a very effective tool to get an idea of the best pricing and instantly assess the differential.” Coca-Cola HBC has nine banks on its FX panel and typically goes with the best price offering.
Reval’s Treasury Risk Management (TRM) system is also a feature of Coca-Cola HBC’s risk infrastructure. This platform was instrumental in bringing the ‘Highly Commended’ in the Best Risk Management Solution category of the 2013 Treasury Today Adam Smith Awards. Papathanasiou explains that the project’s aim was to avoid significant P&L fluctuations on commodity prices by integrating (and thus centralising) commodities hedging activity into group treasury operations.
This was done by automating and managing the capture, analysis and mitigation of risk exposures arising from sugar, aluminium and oil prices and by aligning hedging activities and hedge accounting under the watchful eye of Coca-Cola HBC’s Financial Risk Management Committee.
At the technological heart of the company, and covering all 28 country operations, is a SAP enterprise resource planning (ERP) system, which also deploys the vendor’s TMS platform. Whilst Papathanasiou believes that the IT infrastructure within Coca-Cola HBC delivers the connectivity required for exposure reporting across the group, he is also of the view that there is no system that can cover everything a treasury needs. “I believe you need to be pragmatic and realistic about what you want,” he comments. Pragmatism means that compromise is inevitable.
The next challenge
The next task in Papathanasiou’s sights is to find a way of hedging the cost of plastics, a commodity that Coca-Cola HBC uses in abundance. But finding a transparent pricing mechanism that has some correlation to the markets (such as the price of oil) is no mean feat, as doing so can create basis risk – the risk between the price of oil, in this case, and the actual purchased product not creating the intended offset. This is a work in progress.
More generally, Papathanasiou is looking to continually improve the understanding of the risk team’s work throughout the business. In the wide open corporate world, the drivers and processes behind risk management are not always immediately obvious to colleagues. Papathanasiou acknowledges this difficulty and the fact that misunderstanding can undermine success. As such he has set out to improve communications with other parts of the business. “I try to put myself in their shoes and adjust my language because we do use a lot of jargon in treasury. I see this as a continual process of improvement for me. My vision is to make treasury fully transparent so that people clearly understand the financial risk/return profile of their operations and co-ordinate actions accordingly.”
By moving from banking to the corporate sector, Papathanasiou was looking for more excitement and variety. In Coca-Cola HBC he has found it. “It is more challenging than when I was working in banking because there are so many more things to do and fewer resources,” he notes. “It’s also hard to explain that when you’re operating in an emerging market you cannot simply replicate a G10 hedging strategy.” But Papathanasiou clearly relishes the responsibility and need for continual improvement that come with the job. The ultimate aim, he states, is to provide stability to the group. “But we also need to understand what is happening in the markets if we are to add value.”