Alcatel-Lucent is one of the world’s leading telecommunication equipment and network solution providers following the December 2006 merger of European company Alcatel and US-based Lucent Technology. With revenues of €17.8 billion in 2007 and 75,000 employees in 130 countries, the company aims to transform the way the world communicates by implementing a variety of services for those at home, at work and on the move. This month we talk to Baudouin Courau, Director of Corporate Finance and Treasury, about liquidity management, FX transactions and more.

Baudouin Courau has been Alcatel-Lucent’s Director Corporate Finance and Treasury since the merger in December 2006, and was previously holding the same position at Alcatel.

His previous positions in the Alcatel Group were Group Treasurer, CFO for Malaysia, Treasurer of the main French subsidiary, and a member of the team which created Alcatel’s Central Treasury from 1995, as Director Risk Control. Prior to his time in the Alcatel Group he worked for several years in financial markets as an analyst, arbitrager and then head of asset management.

Baudouin graduated from the French Civil Engineering Academy (École Nationale des Ponts et Chaussées) in 1984. He is married with three children.

What are Alcatel-Lucent’s main activities and where do you operate?

We are one of the biggest telecom equipment and network solutions providers, mainly for telecom carriers but also for enterprise, government and non-carrier customers. Our sales are split roughly equally between Europe, North America and the rest of the world – of which half are in Asia Pacific. We are headquartered in Paris, but we have sales everywhere.

Can you give me an overview of your role?

I am in charge of Corporate Finance and Treasury. My role is to ensure that the group has enough cash and credit lines to operate its business worldwide, and to ensure financial risk is adequately identified, managed and mitigated.

How is the treasury structured?

We have a strong central treasury, which is the sole interface between Alcatel-Lucent and the markets, and which trades on behalf of the whole Group (except for some currencies which are restricted and can be traded only locally). As such we have a strong capacity to be in the market and to get good prices on market transactions – in particular foreign exchange. The team in HQ numbers approximately 25 people, including Systems and Operations.

Central Treasury is the sole counterparty for most units and acts as an in-house bank. We run the global cash pooling, accept deposits, grant loans and provide the necessary transactions to hedge the foreign exchange exposure. In a nutshell, the parent company acts as a pivot entity for funding and hedging. We have local treasury teams in charge of running the local operations within a framework of policies and guidelines defined centrally.

Alcatel-Lucent – the listed, parent company – is the sole entity of the group to issue equity and new public debt. We still have outstanding debt (bonds and convertible bonds) which was issued by Lucent Technology, but we would issue new bonds from the Alcatel-Lucent parent company.

In relation to liquidity management, what challenges do you face?

The main challenge comes from the fact that we are a non-investment grade company. As such, under the current credit crisis, getting external funding would either be considered unreasonably expensive or would incur terms and conditions that we are not ready to accept in terms of documentation and covenants. Consequently, if we need funding these days, we have to find the solution by ourselves, within our own balance sheet, and in particular monetise assets in the most cost-efficient way.

Fortunately, we have a very significant liquidity position, so there is no major concern. In the current crisis environment, cash concentration with the parent, maintaining adequate levels of liquidity, managing and funding working capital are vital issues! Hence the importance of accurate forecasting.

In terms of liquidity management structure, we operate a global cash pooling for major currencies, meaning that all units, including central treasury, have the main accounts open with the same banks, currency by currency, to concentrate cash and keep costs at a minimal level.

Can you tell me more about the global cash pooling operation? A lot of currencies must be involved.

Due to our international presence, we indeed have accounts in quite a number of currencies. We do not pool each and every currency, of course, but only the currencies where we have a sufficient number of accounts. It wouldn’t, for example, make sense to have international cash pooling in Malaysian ringgit because only Malaysian companies have accounts in ringgit. That’s not the case in major currencies where most units in the group have US dollar, euro, pound and yen accounts in addition to their account in their domestic currency.

Do you then combine all of those pools?

Yes – we have ultimate concentration accounts. Any dollar, euro, yen or pound which is collected by any of the units participating to cash pooling is ultimately swept into this master account same value date.

What other liquidity management activities do you have?

A little over a year ago, we rolled out a single bank communication system based on SWIFTNet, which allows us to retrieve most bank statements in one single format – MT940 – and send single payments in one single format as well – MT101.

The advantage of this lies in the fact that, irrespective of which banks we are carrying out transactions with and irrespective of the country, we have one single channel, one single tool and one single database. What is also important for us is not to have to rely on banks’ proprietary software. In terms of cash management we have relationships with over 30 banks and what we want is to be able to communicate with them through one single channel.

The system went live in October 2006. We have entered into a dozen SCORE/MA-CUG agreements and we are now retrieving bank statements and sending payments over several hundred accounts spread over nearly 60 countries (including China, Brazil, Eastern Europe), directly or through relay banks, through this single communication channel. We started with ‘high value’ payments (ie one message for each payment) and are live with more than 30 banks. We are now starting to send bulk payments (one message encapsulating several payments, through SWIFT’s FileAct) to some of our cash management banks. Bulk payments are usually more complicated because some banks only accept the country-specific format. In order not to have to maintain a great number of formats, country by country, we have decided that we would use only two: the XML SEPA format and the IDoc PEXR2002, which is an SAP standard.

The system also allows us to identify centrally the fees we are paying on all accounts for which we retrieve statements, whether they are domestic or international. As such it is a very significant source of savings.

We have also been a Swift Treasury Counterparty for several years: we confirm and reconcile over 95% of our transactions on the market through that channel, which allows a very efficient processing in our Operations department.

And beyond the bank communication project, we are currently rolling out a single treasury system that will manage, among others, cash management, funding and FX transactions, both internal and external. Things are moving fast, and we already have a number of units running live, including the global cash pooling organisation. Our Systems, Operations & Project team is extremely active these days, and is doing absolutely terrific work!

How have you been affected by the current credit crisis?

I remember a number of bankers and analysts asking us – in better times – why we were carrying so much cash on our balance sheet, and saying in an authoritative tone that we were definitely not managing our assets the best we could in the interest of our shareholders. In light of the current crisis, I don’t really think it was such a mistake!

The crisis is not currently having a materially negative impact on us, thanks to the fact that we have significant cash balances. We refinanced our backstop credit line – a €1.4 billion revolver – in the spring of 2007, before the credit crisis, with very good conditions, that offers some level of comfort.

In addition, we have always operated with a very conservative cash investment policy, and so have not been affected by issues regarding some (so-called) money market funds which turned out not to be as riskless as they were supposed to be.

What can you tell us about your FX exposures?

Our main traditional FX exposure, on the Alcatel side, was coming from USD-denominated export sales from euro-based units.

While we still have very significant USD/EUR exposure, we have seen the picture changing during the last few years: the merger has changed our global FX balance of course, but we also have more and more sourcing from low cost countries, and at the same time the decline in the US dollar has accelerated the move towards more purchases denominated in USD.

We have operations in a great number of countries and some customers in emerging countries increasingly require sales to be denominated in their own currency. Essentially, they do not wish to bear FX risk any more by buying in hard currencies. This means that we have to hedge exposure on some ‘restricted currencies’, be it in India, China or the Middle East, and to find the right instruments, or contractual structures, to mitigate this risk.

We are a very project driven company: we are not selling boxes and our sales are not made of statistics. They are made of contracts and projects.

Some companies have a policy of hedging only what is on the balance sheet; some others hedge what is on the off-balance sheet provided it is fairly identified, plus some forecast or budgets. We have to go beyond that: we have to hedge exposure that is not even on our off-balance sheet yet.

As the purpose of foreign exchange hedging is to secure the future operating profits of a project, we need to put in place a hedge at the very moment we commit on the price to a customer, even though we don’t know whether or not we will be awarded the project. This requires fairly sophisticated financial technology in order to ensure that we adequately hedge those risks.

What particular challenges are associated with hedging?

The main challenge is to ensure that we identify the underlying exposure correctly. This requires a good understanding of our business and good communication with our colleagues running the business on the field – from sales and tendering teams, to finance, to project managers – in order to correctly identify and assess the risk early enough in the business cycle.

And how do you ensure that it is assessed correctly?

First of all, we cross check information from our sales teams, our business divisions and our controlling organisation to ensure that we have a fair view of the risk we are exposed to. Then we keep this information updated, which requires a network of correspondents throughout the organisation, and a lot of communication.

Presumably hedge accounting is also a challenge?

Yes. We implemented hedge accounting when we moved to IFRS in 2004. The main objective was to reduce the volatility of the impact of foreign exchange fluctuations on our operating income – the indicator which is probably the most closely followed by analysts and investors, who are always asking for more visibility and guidance. Implementing hedge accounting requires significant work, but it’s the price you pay to reduce the volatility of operating income.

In practical terms, this means we have to identify the underlying exposures and document the hedge relationship between exposure and hedges. This essentially means earmarking a lot of items in the ERP and treasury systems, and following up actual versus forecasted cash flows, to ensure that the hedges are adequate, efficient and up to date.

Do you have any other projects forthcoming?

In the wake of the merger late 2006, there have been numerous changes in the organisation and the way we operate in order to define a business and operating model combining the best from the two merged companies. Treasury is of course contributing to these changes, in order to ensure that we are efficient and achieve synergies. Our global treasury system implementation, for example, is a major element of this strategy.