In our regular interview with senior figures in the world of treasury and finance, this month we talk to Johann Friedl, Head of Treasury, Connect Austria.

How is the treasury structured?

There are nine members of the treasury department, including me. The department is organised into two groups of four:

• Treasury.

  This group is concerned with the core central treasury functions – cash management, liquidity management, derivatives trading and the financing of Connect Austria.

• Credit check.

  This is responsible for providing a rating of new customers. It is important that we, as a mobile telephone company, only provide services to customers with a good credit rating. It is necessary for us to have our own credit check department because there are legal restrictions as to who has access to financial data in Austria.

For what are you responsible?

We have a treasury constitution, in which our main task is to secure the overall liquidity for the company so that the company can meet its financial responsibilities.

How are you held accountable?

There are three members of the management board of Connect Austria – the CEO, the CFO and the CCO (Chief Commercial Officer). The CFO is responsible for business support, which includes, among others, treasury, procurement, logistics and billing, and so I am accountable to him.

What risks do you face and how do you manage them?

The main risk we face is interest rate risk. We do not have any foreign exchange risk – all our funding, collections and payments are in Euros.

The interest rate risk mainly arises from a €690m project finance facility that we arranged in October 2001. This was arranged on a floating basis and so the interest rate risk needs to be managed. When managing the interest rate risk we follow the risk management strategy that we have in place. This is overseen by a risk management committee, which consists of the CFO, the head of controlling and me. We manage the risks on a case by case basis as they arise. If the risk is beneath a certain limit, we decide on which course of action to take to manage risk within the treasury department. For larger transactions, the action is decided by the risk management committee. The main focus of our strategy is to hedge our exposures. Although we use a range of derivative instruments to manage our exposures, we do not speculate and we do not seek to make a profit from our transactions.

We also have to manage the liquidity of the company. We have a liquidity management system in place where we monitor both short and medium-term liquidity. The short-term liquidity management system has a focus of four weeks, which we monitor on a weekly basis. In addition, we check the cash position on a daily basis. The medium-term liquidity management system has a focus of six months, which we monitor on a monthly basis.

Our next step is to implement a company-wide risk management system. Our approach is to identify any risks that could have an impact on the company and, in particular, on the liquidity of the company. We try to give any risk that we identify, whether it is financial or operational, a monetary value. We then multiply this value by the likelihood of the event occurring. This figure is the maximum liquidity we would need to put right any loss from the event occurring. As it is strongly uneconomic to keep such liquidity reserve in place, a certain percentage of this maximum liquidity is considered as minimum liquidity reserve which has to be in place. The minimum liquidity reserve can be secured by cash, short term investments or open credit lines.

For example, as a mobile telephone company in Austria there is a risk that an avalanche could knock out part of our network. Clearly in such an event, we have to repair the network as soon as possible. To be able to do this, we need sufficient liquidity to be available at short notice, which is why we hold a liquidity reserve.

Although we don’t have a risk management system in place at the moment, our intention is to implement one over the summer.

How did you arrange the project finance facility?

In the current environment, a €690m facility was difficult to place. Because of the high cost of mobile licences in the UK and Germany, a number of banks had a high exposure to the telecoms sector on their balance sheets and they were cautious about further exposure. In this context, we regard the fact that we were able to place what was the biggest ever project finance facility negotiated in Austria as a significant success.

There were three steps to our approach:

1. Firstly, we sent out a Request for Proposal to about twenty banks in December 2000.
2. The banks that responded were then invited to a ‘beauty contest’ that was held in the Düsseldorf offices of our main shareholder (E.ON) in March 2001. At the end of this, we appointed three lead banks – Dresdner Kleinwort Wasserstein, JP Morgan Chase and WestLB. WestLB were also appointed as the facility and security agent.
3. The €690m facility was finally agreed and signed off in October 2001. A total of eleven banks signed up to the facility.

As a relatively young company, this sort of project financing remains our main opportunity to raise capital from international banks. It is a bit too early for us to arrange a bond issue, although the high yield bond market would be open for us. However, such a high yield bond issue would probably be too expensive for us, compared with the cost of the project financing.

How do you manage the company’s cash? How do you collect it? What do you do with it once you have collected it?

On the collections side, we acquired a new billing system last year. Our customers are billed on a monthly basis. There are several bill runs (customer groups) spread throughout the month, so we have regular and relatively even collections of cash. About seventy per cent of our customers pay by direct debit; our revenue collection department can tell us when these payments will be received. This cash is collected into our main account, which is currently held at Creditanstalt.

At the moment, we make payments to our suppliers twice a week (Tuesdays and Thursdays), although we are planning to reduce this to once a week. It is the responsibility of the short-term liquidity management system to ensure that the cash is available to make these payments.

This process disposes of most of the cash that we collect. We clear our accounts on a daily basis and invest the surplus either overnight or for a few days on the Austrian money markets. We invest in the Austrian markets because cross-border investments could under certain circumstances be subject to withholding tax. In addition, we would face value date problems. When we have funds to invest, we will call a small group of relationship banks and give the business to the bank that provides the best quote.

How do you use technology within the treasury?

Since the company was started, we have been using Creditanstalt’s electronic banking system, Business Line.

Our cash management system is Richmond’s Millennium, which we began using a year after the start-up. We find this useful in a number of respects:

• The creation of derivatives reports.
• It helps us to administer all our loans including shareholder loans. The project finance facility is broken down into two tranches – one is long-term and the other is a revolving facility. The system helps us to handle the revolving facility correctly, which is obviously very important.

As a young company there are some features of the Millennium system that we don’t need to use yet. However as we develop as a company we will use more of them.

We also have a Reuters screen at the moment. Reuters is a very comprehensive system and therefore a relatively expensive product. It provides a lot of information, much of which we don’t currently need. We are therefore looking for cheaper alternatives which might be able to provide us with similar information. Of course, this information will not be as comprehensive as that provided by Reuters, but it would be sufficient for our requirements. We have yet to make a decision in this area, although I expect to do so by the end of the summer.

How do you manage your banking relationships?

Our main cash management account is held with Creditanstalt. From a cash management perspective, they helped us set up the business. They also acted as the arranger bank when we first needed capital for our business.

In terms of other banks, the main business that we have – despite the project finance facility – is to meet our requirement to deposit and/or borrow on the Austrian money market. We are relatively open to conducting business with any of the Austrian banks. Because we are one of the big players in the Austrian market, we tend to receive visits from the key account managers from all of the banks, who are seeking to build business. From our perspective, money market lines are relatively easier to establish than long term credit lines. This doesn’t mean that we will necessarily use such money market lines because, as I said earlier, our money market decisions are driven on price. If we have not concluded transactions with a bank over several weeks, this bank will approach us and ask for the reasons. This allows us then to explain our position and may lead to the bank offering us more competitive quotes.

Finally, we have to interact with our project finance banking syndicate (our core banking relationship group). We inform our banking group of all activities we do as a company. At least once a year we meet with our relationship banks and present the latest developments of the company. We also try to invite the members of our banking group to social events and establish contacts beyond the pure daily working business. I think the management of the core relationship banking group is one of our main tasks in the treasury department of ONE.

Your company is a private company owned by some major shareholders, who will have to consolidate your accounts with theirs. How does your relationship with your shareholders work?

We are relatively independent and we have freedom on how to arrange our financing. Of course, we are happy to get the support of our shareholders, as we did when we arranged the project financing I described earlier. We can also use the expertise and knowledge within our shareholders’ treasury teams. An informal treasury committee consisting of treasury people of all four shareholders has been set up. This committee meets infrequently, always when there is a need from the treasury’s perspective. The discussions are open, decisions are made quickly and we receive very good advice. I have to say that we have a very open and good working relationship with our shareholders.

Let me give you an example. Let us assume that we were planning to implement a new financing instrument. We would organise a treasury committee and state what we want to do. We would have to provide the treasurers with the reasons and rationale for the plan. In addition, we would state the banks that we want to approach as possible arrangers/advisers/lead banks, etc. The shareholder’s treasury team would then evaluate our proposal. It might then offer advice on our proposal before giving us their support. It is useful to say that all decisions in the treasury committee are, of course, subject to the approvals of all relevant committees of the company (i.e. management board, supervisory board, general assembly, etc.). We could do the implementation of the new financing instrument independently but would inform the treasurer shareholders regularly about the progress of the transaction.

The next area of development seems to be the introduction of mobile commerce technology. What role do you in the treasury department play in this development?

As a mobile business, the development of mobile commerce is very important to us. We are not talking about the ability to download information from the Internet to a mobile phone yet, but rather the ability to make payments for goods using the mobile telephone. Because it is a new means of making payments, we are strongly involved in the development. The treasury department provides two areas of expertise:

• The first area is credit checking. The use of the mobile telephone to make payments will increase the credit that we will be extending to our customers.
• The second area is the payment system. Because mobile commerce obviously involves both the collection and distribution of payments, our knowledge is important here as well.

Other departments within the company are also involved, including, for example, the marketing, revenue collection and the systems (information technology) departments.

I expect that a product dealing with mobile payments will be launched by the end of this year. However, first payments by using a mobile phone of ONE can be done already. So, it is possible to buy a Coca-Cola from a vending machine, using a ONE mobile phone. The customer sends an SMS to the machine and receives back a coke. The customer will be billed with the price of this coca-cola on his regular monthly bill and pay it when it is due. ‘SMS me coke’ is a very exciting development which has a broad acceptance in Austria. We are very optimistic to continue the development of new products with respect to m-payment and remain the ‘innovative’ mobile phone operator in Austria.