Mike Richardson describes how the treasury’s inter-company clearing system and in-house bank allows the company to raise funding centrally and then disperse it to the business units. This structure also allows group treasury to manage risk centrally.

What are you responsible for as Group Treasurer?

I would divide my responsibilities into five main areas:

1. Financial strategy.

   I prepare a financial strategy that sets out our approach to the broad financial issues such as capital structure and ratings policy. This is agreed by both the CFO and the board. The key point is that the financial strategy must be aligned with the business strategy.

2. Group liquidity.

   Firstly, we arrange external liquidity through a combination of bank and public debt. Secondly, we provide internal liquidity by means of our in-house banking system. External funding is arranged centrally.

3. Risk management.

   We manage the traditional areas (interest rate, foreign exchange and credit risk) centrally. We also hedge share options and, occasionally, fuel.

4. Advisory role.

   As treasurer, I am also asked for my input to the company’s investment process, when we are, for example, making an acquisition.

5. Insurance.

   Recently, the insurance department started to report to me. We negotiate the group-wide insurance policies, although we have certain local policies, such as fleet insurance, in place as well. We also co-ordinate insurance activities across the divisions – we aim to minimise the total cost of risk, whether from the purchase of insurance policies or from the cost of something going wrong.There is a philosophical similarity in the approach that both the treasury and insurance departments take to risk. Both identify the risks and then determine how to manage them. This is usually a choice between taking actions to reduce the underlying risk, accepting the risk or laying it off in the market. Over time, traditional insurance has become more complex and expensive to arrange. Just as for the treasurer, the traditional role of the insurance manager is evolving, to look at risk more widely.

How is the treasury organised?

We are a centralised treasury, based in the company’s head office near Amsterdam.

• We have a dealing room of three people.
• We have two people in a corporate finance capacity – one is responsible for external corporate finance, in other words relations with the capital markets and rating agencies; the other is responsible for internal corporate finance, acting mainly as a consultant to the operating units.
• Finally, I have an assistant treasurer, who has overall. responsibility for the dealing room, for risk management and cash management. He deputises for me when I am away.

There is also a treasury accounting and control group, responsible for bookkeeping, financial reporting and control, and some of the analysis. It carries out the bank reconciliations and confirmations, and runs the intercompany clearing system. Soon after joining TPG, I transferred the primary reporting line of this group to the central accounting group, away from me. I think it is important to maintain a clear segregation of duties and ensure that the treasury controller cannot be coerced by the treasurer, as a result of his reporting line. Of course, on a day-to-day basis, we all work together as a team. We also have staff with cash management responsibilities embedded in business units, working under group cash management policies.

How are you held accountable?

Treasury is not a profit centre – our objective is to manage the funding and risk profile of the group, within policies. As appropriate, we update these policies, with board consent. I report to the CFO, with whom I have regular meetings. I also make a formal quarterly report to the board. This covers the full range of our activities, but it is designed to be read by non-treasury specialists.

We are not tasked to minimise interest charges per se – rather we seek the right balance between cost and risk. It is very easy to reduce the interest expense by coming down the yield curve, but this might not result in the appropriate risk profile. So, at the beginning of every year, a budget is set, against which we manage the cost of borrowings.

How do you arrange financing for the group?

We have a mixture of public and bank debt. Our core funding is a $1 billion Eurobond, which matures in 2008. This was our first ever public bond and, I think, the first in the sector. There were some difficulties – we had originally planned the issue for September 2001 but the WTC attacks happened. We actually launched the bond, very successfully, in November 2001.

Our general rule is to borrow from the central financing company or from the main holding company. There are some exceptions. These might include when we are involved in joint ventures, when we need to manage country risk in a particular way, and in recognition of the tax structure of the group.

What made the Eurobond launch such a success?

I think there were two factors. Firstly, we put in a lot of effort into the road-show to introduce debt investors to TPG and explain our financial strategy. Three of us (the finance director, the head of investor relations and me) visited the key cities – London, Amsterdam, Zurich, Paris and others.

Secondly, and perhaps more importantly, debt investors seem to like the TPG story. We have a strong credit rating, with an attractive business mix, which includes the Mail, Express and Logistics divisions.

We recently signed a $600m syndicated revolving credit facility, which is for backstop finance and currently remains undrawn. The syndication went well and was over-subscribed.

How do you use the funds you have raised?

Having raised the external finance, we then fund the business units using our in-house banking system. I should explain our two inter-company systems:

1. The inter-company clearing (ICC) system.

   The great majority of inter-company invoices are routed through the ICC. There are several thousand of these a month, all of which are submitted by the business units in their operating currencies. We process these invoices at the centre in the ICC. The incoming invoices are then sent out in the operating currency of the purchaser. We then net all the balances, identify the foreign exchange exposures and hedge them from the centre. We have had this system in place for many years, although we have recently upgraded it to make it webenabled, eliminating re-keying of data.

2. The second aspect is the in-house bank (IHB)

   – which acts more as a long-term financing or deposit account for the business units. We have several hundred IHB accounts with our business units. Balances from the ICC are transferred to the IHB monthly.

How do you determine the balance between debt and equity?

Balance is exactly the right word. We seek a balance between financial flexibility, which the TPG board sees as very important, and the weighted average cost of capital (WACC). Financial flexibility is measured in terms of credit ratings. We have a target of a single A rating, which restricts the level of debt we can issue. However, we do maintain a modest amount of gearing to manage our WACC, thus keeping our shareholders happy. At the moment, we believe the balance between debt and equity is about right. To manage this position, we are in regular dialogue with the rating agencies and we report internally every quarter on our gearing and rating key performance indicators.

How do you collect cash throughout the group?

Our cash management systems and policies are designed to repatriate cash to the centre as efficiently as possible. To achieve this, we aim for one cash pool per country, although, for regulatory or operational reasons, this is not always possible. Our European, in-country cash management structures are over-laid with a regional cash pool. In other regions, such structures may not be available due to the lack of the appropriate legal and banking framework. In these cases, businesses will operate a stand-alone account with the requirement to remit excess cash to Amsterdam, according to policy rules.

We manage our banking relationships as tightly and scientifically as we can. The relationship group and banking policies are determined at the centre. Individual business units are responsible for in-country, day-to-day relationships with their banks, but accounts are operated in accordance with group policies.

How do you manage your exposure to risk?

We manage our interest rate exposure according to a maturity profile. TPG is at predominantly fixed rates in the short- to medium-term, with a greater floating proportion at longer-dated maturities. We use interest rate swaps, where appropriate, to modify the fixed/floating profile.

Foreign exchange risk is managed from the centre based on the ICC and IHB. Foreign exchange transactions are netted across the group and then hedged in the financial markets by the treasury. We use straightforward instruments – spot, forwards and swaps – so to do.

We have a system for monitoring our credit risk. We determine the level of tolerable exposure, as a proportion of share capital, which we are prepared to accept. We then have individual limits with each bank, which are risk weighted both for the type of instrument and the rating of the bank. From this, we calculate the probable exposure for the portfolio of instruments we have. This probable exposure has to be within the tolerable exposure.

From time to time, we will hedge our fuel exposure. This decision is taken in collaboration with our Express division. We also hedge our share option liability – we buy shares representing a proportion of the liability.

How do you use technology?

We have just web-enabled the ICC. This major upgrade allows us to continue to cope with growing volumes of data without needing to increase headcount. We use more automation now in bank reconciliations. We use the eFX trading platform, Currenex. We continue to assess its merits relative to the other platforms available. We know that we are not using it to its full potential as, for example, we have not yet integrated it into our treasury system.

We have IT2 as our front office treasury management system. We also have a corporate general ledger and bookkeeping system. Overall, we know there is scope to gain more from technology.

What are your next challenges?

With the launch of the Eurobond and our syndicated backstop facility, we completed our external funding programme. We have also improved the control and reporting mechanisms since I joined. However, there are some important remaining challenges over the next few years.

1. I would like to make further efficiencies through the use of technology, as I stated earlier. We need to improve the integration between our various systems – front office, back office and foreign exchange. We should also strive for greater efficiency from our cash management structures.
2. Working capital remains our cheapest source of finance. As treasurer, I need to ensure we maintain the momentum within the group to achieve a more efficient use of working capital.
3. Thirdly, we need to plan for the implementation of IAS 39. This is complex and wide-ranging. For example, not only do we have to understand the treatment of derivative instruments used within the treasury, but we also have to understand the embedded derivatives used outside the treasury.
4. Lastly, and very importantly, we need to decide how to move forward with our insurance and operational risk management strategies. We are considering a holistic approach called Enterprise Risk Management, which focuses on the total cost of risk, not just the expenditure on insurance premiums.

Of course, as in most treasuries, there are also the challenges we don’t yet know about. The key to success is always to maintain flexibility and have a great team!