Marc Gallet describes the role of the treasury department in an expanding business. He explains how the company accessed the US private placement market and illustrates some of the challenges arising from the transition to reporting to International Accounting Standards.

What are you responsible for and how is the treasury organised?

I am responsible for five separate areas, of which three are core treasury activities:

• Treasury operations (interest rate and currency risk management and cash management).
• Treasury finance.
• Treasury reporting, systems and project management.

The other two areas are risk management and pensions.

The central treasury is based in two locations, both linked to the corporate headquarters. Of the thirteen people in the department, nine are focussed primarily on treasury activities.

Within the treasury, we have three main responsibilities:

1. To support the business strategy by funding organic growth and growth by acquisition and managing cash flow.
2. To manage the company’s debt capacity, to keep the cost of debt to a minimum and to ensure access to the debt markets.
3. To manage the risks attached to the interest rate and currency volatility.

In addition to the central treasury, there are people with treasury responsibilities in many of the different countries in which Interbrew operates. As a company, Interbrew markets itself as The World’s Local Brewer^©. This local perspective is reflected in the way that the businesses in each country operate merely locally.

Some treasury activities are performed at the local level and our three point cash management structure illustrates how we work. In every country, we have a local cash management structure in a local currency operated by a local bank. We then have a euro cash pool for the eurozone. Finally, we have an overlay structure with an international cash management bank. This is used for treasury operations and also to collect payments in nonlocal currencies. In Canada, for example, payments in Canadian dollars are collected by the local cash management bank, whilst payments in US dollars are routed through the overlay bank to the central treasury.

How are you held accountable?

I report to the CFO. We meet at least once a week. In addition, we sit together on a number of internal company committees covering a range of activities such as risk management and pensions.

The treasury department is not a profit centre. Interbrew is in the beer business, not the cash business. Our role is to support the business by, for example, accessing the most efficient form of financing. It is an optimisation and risk management centre. If the management of the company wants to make an acquisition, our role is to find, in coordination with other departments such as tax and legal, a structure which will allow them to do so. We have to continually adapt our practice to meet the needs of the business.

We work with the Controlling and Accounting department to ensure we have effective controls in place.

Apart from Corporate departments, we also cooperate with our in-country people to develop the most effective local balance sheet structures, which work for the company as a whole.

The company has also entered into a number of joint ventures. In these cases, funding is arranged locally, although we will provide help and advice. For example, when Sun Interbrew, our subsidiary in Russia and the Ukraine, issued a Rouble bond last year, we provided them with advice although the local people were and are responsible for taking the final decision. As a company, we entered the Rouble bond quite soon after the market was open. We have been very pleased in the way it has worked. Indeed, it has performed above our expectations.

What challenges do acquisitions pose to the treasury?

There are three main responsibilities. We participate in the due diligence process. We have to evaluate any financial instruments and loans the target company has. We also have to identify and measure any currency and interest rate risks it is exposed to.

Secondly, we work with the Interbrew tax department to set up the optimal structure for the newly acquired company. This is a more complicated task as every acquisition is different. In every case, a number of different local rules will apply. A range of issues need to be considered such as the level of debt where tax deductibility is at a maximum; thin capitalisation rules; whether withholding taxes apply and how the flow of funds is affected. They all need to be understood before we can set up the optimal structure. The most appropriate structure will also depend on whether we are seeking to purchase 100% of the company, a controlling stake, or to buy a minority interest. Structures are set up from a longterm perspective.

Finally, the most important responsibility for treasury is to finance the acquisition. In most cases, debt financing is arranged at the headquarters level, although joint ventures and a few other exceptions raise funds themselves.

How difficult is it to obtain accurate information on the local rules and issues?

During an acquisition, we have both an investment bank and our tax partners advising us. It is important for us to be able to choose the right advisors, those with a detailed understanding of the target market. To make sure we do, we spend a lot of time maintaining contacts in those markets to see which banks are active in each location.

We also talk with the target company to develop a good understanding of the cash flows, what the company is currently doing and what it did in the past. The key to success though is good cooperation between the different departments in Interbrew to make sure we share all the relevant information.

Finally, every time we have to finance an acquisition, we have to prepare a document for the audit and finance committee. This has people with great experience who will ask the right questions and make sure we have covered every angle.

How do you arrange your funding?

At least once a year we draw up a financial plan. When drafting it, we identify the overall liquidity and cash flows in the company. This includes assessing the maturity and currency of our existing debt. Only known facts and certainties are included in the financial plan. If the merger and acquisition agenda changes, we will revise the financial plan.

Our risk management policy is also important. On the liquidity side, we do not want any more than 20% of our debt maturing in the next year. On the currency side, we hedge all transactional exposures within one year. It is not our policy to hedge translational exposures. For interest rate exposures, we try to find the optimal balance between a fixed rate and maintaining short-term liquidity. Finally, when arranging hedging, we ensure that our counterparties are strongly rated.

You recently arranged a $850m private placement. How did you achieve this?

This was an important step for us. Until we arranged the private placement, most of our debt had been provided by banks. The placement helped us to diversify our funding sources and also to lengthen the maturity of our debt. We opted for the US private placement because that market offered better value for us than the Eurobond market at that moment.

The process of arranging the private placement was very labour-intensive. The first step was to select the agent bank through a ‘beauty contest’. The final decision was very difficult as there are a number of banks with a lot of experience and expertise in this area.

Once we had appointed a bank, they helped us draft a prospectus. We had to put on a road show to get our Company better known by investors. John Brock (Interbrew’s CEO) and I presented to potential investors in London and New York. I also did some other presentations on my own elsewhere.

Once the decision had been taken to enter the private placement market, we had to wait until the half-year results came out in September 2003 before we could go ahead. The deal was finalised in October 2003.

The private placement has been a great success. Although we originally planned to raise $250m, high investor interest allowed us to raise $850m. In the process, we have attracted some new investors with whom we hope to develop long-term relationships.

The private placement is not our only source of finance. We still have a five-year syndicated loan with a large bank group. One of the key challenges for the treasury department is to maintain relationships with these banks. Typically, banks are prepared to lend some of their balance sheet to us as long as they receive some transactional income from us in return. We have to divide this transactional income up between the banks in our syndicate. All the banks participate in some way, whether on the interest rate or foreign exchange side.

Our key challenge as the treasury is to arrange funding at a reasonable pricing level.

How do you manage your financial risks?

Upfront by the financial risk management policy. We track our hedges in our transactional treasury management system – Simcorp’s IT2. We are IAS compliant and we try to avoid situations where instruments purchased to hedge positions create either a huge profit or a huge loss in our accounts.

Did the adoption of IAS change the way you hedged exposures?

Yes it did. We now try to keep any hedging as simple as possible. Before we adopted IAS (before my time with the company), we used a number of more complex derivatives, such as zero cost collars. However, since the adoption, we only use the vanilla instruments.

How difficult was it to adopt IAS?

Interbrew was one of the first companies to move to IAS. Once we knew that we would have to adopt IAS, we set up meetings with our auditors and external consultants so that we could develop our understanding of what was required. We wanted to be as proactive as possible. We gradually built up our information on what we needed to do.

Even now that we have adopted IAS, it remains a challenge. In particular, there is a lot of paperwork to ensure that we accurately document any hedges in advance of any deal so that we qualify for hedge accounting. There are also different interpretations of the standard because of its complexity and the way the standard is still changing.

What do you do with any surplus cash you collect?

We try to avoid having any positive cash balances. Cash is collected through the overlay bank structure to us at the centre. We then use any surplus cash to repay debt on our existing revolving credit facility. This allows us to keep credit lines open and available should we need cash, for example to help fund an acquisition.

What are the next challenges for the Interbrew treasury?

We have to continue to make sure that the structures we have in place are the most effective for the company. For example, we have to avoid over-investing in some structures in some countries. It can be relatively easy to put cash into structures, but repatriating surplus funds later can be much more difficult. This means we have to anticipate the changing regulatory environment.

We have to be proactive. We have to make sure we are ready to support the business in any new initiatives, for example to fund any new mergers or acquisitions. To some extent, our job is to plan for the unexpected.