Treasury transformations at this level are demanding. Add in a seriously short timeframe and you have a challenge that only the best will meet.
The scale of ambition displayed by the treasury team at Pearson is extraordinary. It has revolutionised its treasury platform over the past year, displaying an exceptionally bold approach.
A key objective of this transformation is to ensure customer/consumer payment channels are in place for online, direct to customer distribution. The changes in the past year, revolutionising the company’s treasury infrastructure, are remarkable in scope.
Firstly, it formed an in-house bank, including all internal funding, netting and FX management. It also launched SWIFT for bank connectivity, designed a strategic FX policy, launched an innovative and deeply effective hedging strategy, bringing significant financial benefit to the company. Further, it managed a complete re-finance of its central revolving credit facility (RCF), reduced its bank providers and in doing so devised, created and launched the first ever sustainable lending facility linked to UN educational targets.
These achievements were rolled out by a treasury team with a number of new members in an unprecedented timescale. The combination of devising, designing and building a brand new in-house banking function alongside a new radical (and very successful) FX and funding solution would normally be projects of perhaps two or three years and were delivered within just one year.
A key challenge faced by treasury was that banking activities, including payments, FX, investments and borrowing, were largely done at an in-country level. Banking connectivity was proprietary between banks and local bank accounts, creating inefficiency and poor visibility into cash flow. Because treasury was highly decentralised and locally controlled, corporate treasury was at a disadvantage when it came to reducing costs and improving processes to meet the new vision for the company.
Pearson turned to its visionary Treasurer, James Kelly, who recognised that a more centralised treasury structure, with an in-house bank, was required. He relied on his like-minded team, led by Stephen Porter, VP Treasury and Insurance, Tori Jackson, Treasury Director, and Shawn DeMelo, Treasury Manager. The entire corporate treasury team embraced a tireless work ethic, driven by an unquenchable thirst for knowledge and relentless desire to solve the most intractable problems.
Working closely with banking partner, J.P. Morgan, Pearson’s corporate treasury team evaluated and implemented an all-encompassing in-house bank. The new entity, Pearson Strand Finance Limited, is now the primary treasury vehicle for centralised strategic FX and transactional FX activities, and serves as the company’s netting hub.
Pearson also completely overhauled its FX strategy, re-structuring and simplifying currency hedges, making risk management transparent and effective. For a part of its hedging programme, Pearson took advantage of option hedging, establishing a ‘cable collar’ – taking advantage of unprecedented market dynamics (namely the skew on sterling) to reduce the cost of currency carry. This was a rare move in the market but typical of the team’s boldness and insight.
It then launched a unique loan facility. It successfully refinanced its bank facility, with a new US$1.19bn RCF. This saw the margin linked to the company’s commitment to extend its vocational educational reach internationally in support of the UN sustainability goals, particularly Goal 4 on education (SDG4). The transaction is Pearson’s debut ESG-linked loan, and is believed to be the first syndicated loan transaction globally with targets linked to education.
But treasury also worked hard to improve efficiency as part of a company-wide mandate to reduce operational costs, combining the insurance and treasury teams and reducing staff numbers from 13 to eight. The aspirations of the team in the insurance space were equally ambitious, with the newly configured team undertaking a full risk-review, and marketing exercise for its insurance policies resulting in the implementation of a designated cyber-insurance policy, one of the first in the industry.
Made for success
Treasury’s innovative approach involved using targets with the company’s treasury workstation to trigger automatic sweeps of funds up to Pearson Strand Finance, enabling the corporate treasury team to manage both currency positions and investments in a much more cost-effective way – rather than relying on dispersed bank funding.
At the same time, the treasury team transitioned from proprietary bank connections to SWIFT – for treasury wire payments and accounts payable payments, driving further efficiencies for the organisation.
Of course, the success or failure of any treasury team is measured by how well it supports the company’s core business objectives. In the case of Pearson, the corporate treasury team has taken a highly decentralised treasury operation and transformed it into a centralised one, using an in-house bank to efficiently manage payments, FX, investments, and borrowing. The result has been enormous cost savings for the business, with even greater savings to come in the future.
Success in numbers
To encourage success, the benefits the team looked to achieve were detailed to ensure objectives were clear. To cover the costs of the initiative and ensure Pearson had a vested interest in accomplishment, treasury tendered two €500m bonds in January 2018 (due 2021 and 2025), with a cap at redeeming a total of €450m across the two issues.
Pearson was able to satisfy about €200m of the tender using centrally held cash, with the remainder satisfied by centralising cash on a sustainable basis, which the in-house bank project was designed to achieve.
The team achieved its goal of reducing locally held cash (outside the US and UK) to the equivalent of about 14-days turnover and as a result of using the cash centralised to repay debt was able to generate a net interest saving of £7.7m. Following the debt repayments and a further €55m redeemed in March, Pearson saw its credit rating improve from Baa2 negative outlook with Moody’s to Baa2 stable, with the conservative balance sheet approach and debt repayments being cited as a major contributory factor. S&P’s followed suit, moving the company from BBB negative outlook to BBB stable.
Meaningful improvements were also achieved in the area of FX. Treasury restructured Pearson’s FX portfolio, securing more near-term cash flow protection with no additional cost using cross-currency swaps and forwards are used and achieving savings of around £2m on part of the portfolio through using collars.
The newly combined treasury and insurance team also delivered meaningful results in insurance with near 20% savings achieved on a like-for-like basis on its insurance policies.
The coordination, collaboration and innovative thinking behind this corporate treasury transformation is a stellar example of what a top treasury team can accomplish, in a short period of time, when in pursuit of singular, aspirational objectives.
Pearson’s commitment to its principles of corporate culture, a steadfast belief in the ability to apply treasury best practices to deliver exceptional service and the strategic application of technology have established critical building blocks in this transformation story. It is a truly worthy recipient of the Adam Smith Awards 2019 Highly Commended accolade for Top Treasury Team.