Peter Matza describes how RWE is funded and discusses the challenges of managing banking relationships with members of its syndicate.

How is the RWE treasury organised?

RWE Group Treasury has a number of different departments, located in the corporate headquarters in Germany, and service centres abroad. Functions undertaken at the corporate centre include:

• One team is responsible for the management of the group’s c. €12 billion financial assets.
• Another team is responsible for project finance, the administration of the inter-company funding policy and managing international financial exposure within the group.
• The back office team includes risk control and responsibility for the Treasury Management System.
• Finally, there is a corporate treasury function. This is responsible for the full range of treasury activities, including money markets, foreign exchange and interest rate transactions and debt capital market activity. This team also manages the German domestic cash management services. In addition, there are some treasury people in other locations – at Thames Water in the UK, responsible for the UK businesses; at American Water looking after cash management and local funding; and in the Czech Republic.

All these functions are under the head of Group Treasury, who is responsible to the Group CFO. Treasury is centralised as much as possible and in total, there are over twenty people working in the central treasury function. The department sits within the central finance team which also includes functions such as accounting, tax and controlling.

I am a member of the corporate treasury team, with direct responsibility for debt capital markets. I manage all our public and private bond market activity and our syndicated credit facility. I am also responsible for any related debt market activity, such as managing relationships with our fixed income investors along with my Investor Relations colleagues. I report to both the head of the corporate treasury function and to the head of Group Treasury.

How do you arrange funding?

We use the full range of private and public instruments from commercial paper through to thirty year debt issuance. We have a $5 billion Global CP programme, a €20 billion Euro MTN programme and a €4 billion syndicated loan facility. Most funding is arranged centrally and then dispersed to the operating companies through inter-company loans. We have a Dutch finance BV through which our public market bonds are issued.

Funding is arranged locally only when there is a specific regulatory or territorial advantage to do so. In these circumstances, the operating company will only be allowed to borrow locally if they have made a clear case to us first. For example, as a utility company, we may be able to access funding on a reduced tax basis in some US locations.

How do you decide which programme to tap?

It is an element of timing and circumstance. In 2001/02, RWE went through a substantial acquisitive phase. Because of the scale of the funding requirement, the available liquid resources within RWE needed to be complemented by borrowings in the public bond market, the private MTN market and in the short-term CP market.

Over the last year to eighteen months, we have been reducing both our net and gross debt. We have not issued in the private MTN market for over a year. We have also not issued any plain vanilla, straight for cash, public bonds in the last year.

We continue to issue off our Global CP programme, in both continental Europe and in New York. At the moment, in the US, we maintain minimum balances with our three US dealers, with about $1.3 billion outstanding. This is part of a prudent approach to daily liquidity management, with the proceeds used to meet our day-to-day working capital requirements. On average our CP outstandings range between €1.5 – 2 billion.

Do you actively manage your credit rating?

Yes, we do. One of my colleagues is specifically responsible for maintaining relationships with the rating agencies. We take the relationships very seriously and work very hard to maintain them. As part of this, we are very proactive in providing them with information about the business, especially before, during and after acquisitions or disposals.

Although our rating has changed over the years, reflecting our indebtedness, we are on record as saying we are comfortable with attaining and retaining a strong A rating. However, this cannot be an explicit goal, because the agencies may change their criteria for a particular rating. For the same reason, we do not target a particular set of financial ratios. Instead, we maintain continual communication with the agencies. We are rated by both Standard and Poor’s and Moody’s. We also talk with some of the other agencies on an informal basis.

How do you manage cash?

We look to pool cash in each currency as long as there is sufficient scale to do so efficiently. For example, we have Sterling, Euro and Czech Koruna cash pools. Our view is that this centralises control and provides a much more efficient liquidity management structure.

How do you manage financial risk?

On currency risk, we hedge equity positions and cash flows when they become apparent. We manage our balance sheet with a view to matching assets and liabilities by currency. It is interesting to note that 55%+ of our liabilities are Sterlingdenominated. We hedge out into Euros or the relevant currency for a particular commodity. We do not take speculative positions in foreign exchange. On the transactions side, we manage the exposure of our commodity trading activity (RWE Trading is a separate entity responsible for managing commodity risk).

We undertake position analysis on all our counterparties, where an ISDA credit support agreement or its German domestic equivalent is in place. We also monitor deposits, foreign exchange positions and other transactions from an internal risk management perspective.

Interest rate risk is handled quite conservatively. At the moment, some eighty per cent of our borrowings are at a fixed rate although we considerably increased the floating share. This is primarily a function of our increase in indebtedness following acquisition activity. We also have to understand our interest rate liability management within a broader context of the group’s exposure. For example, we have to make provisions on our balance sheet under IAS 39 for our nuclear power activities and for mining reclamation – these are both based on discounted interest rates. Secondly, as a German company, we have unfunded pension funds, which also have to be provisioned for and managed on a similar basis.

When we had an active private MTN issuance programme, we issued in a range of currencies including Yen, Norwegian Krone, Singapore Dollars and US Dollars. Having issued the bonds, I then swapped the proceeds using cross-currency swaps. This needed to be done within the broader context of the group’s portfolio.

How do you manage bank relationships in the context of the syndicated loan?

We have a couple of dozen banks in our syndicate. Our message is clear. In general, the banks which will be offered the opportunity to bid for treasury and related corporate finance activity will be drawn from the list of banks participating in the syndicate. The one exception is if a specific circumstance, such as regulatory or territorial factor, demands expertise from another party. The one rider is that the executive board remains the ultimate decision-making body.

We have tried very hard to share out our business among the syndicate. For example, since entering the public bond market, fifteen different banks have had roles as joint or cobook runners. We try to broaden this as much as possible, but we cannot please all the banks all the time. It is also true to say that some banks have been more successful than others. There are also circumstances, particularly in merger and acquisitions, where one bank has had a territorial or industrial advantage over the others.

How did you decide which banks to approach to participate in the syndicate?

When we started to plan our first syndication a couple of years ago, we held a number of internal discussions amongst ourselves and with the CFO to identify which banks to approach. We were already doing some business with about three-quarters of the banks who participated in our first syndication. We invited more banks than finally agreed to participate and we ended up with a couple of dozen banks.

When renegotiating the facility, we asked the same group of banks who participated in the first deal. In addition, we asked some other banks which had bought into the syndicate and also those which, for various reasons, had become more RWE-orientated.

Do you assess the relationship with the banks?

All of us understand the nature of the relationships we have with individual banks, which is why we meet to discuss them with the CFO. We also maintain a list of all the bond mandate fees which have been paid to each bank. These fees are the largest revenue generators which are transparent for the banks. It is much more difficult to put a value on, for example, an interest rate swap or to assess by volume of business the value for the bank. Interestingly, only two of our two dozen banks keep a similar list and share their results with us.

In terms of coverage in the developed banking markets, we do not have any domestic Australian, Canadian or Italian banks in the syndicate. At present, this is not an issue as our target markets are Germany, the UK, the US and Central Eastern Europe. In any case, we have enough international banks in our syndicate to provide services in other countries were this to change.

How do you use technology?

We have implemented Trema’s FinanceKIT over the last couple of years. We also have Bloomberg and Reuters screens and the electronic dealing platform, 360T, as well as the various electronic banking systems. Implementing new systems takes time, but we will soon have a very efficient set of linked systems.

How are you held accountable?

Over the last three or four years, the group has started to roll out an assessment system based on the Hay grading system for managers. Within the corporate centre, an objective setting process has also become increasingly important. Put simply, after the business planning process has been completed, individuals meet as soon as possible with their line managers to agree objectives for the next year. These are based partly on the development of the business and partly on individual improvement. These tend to be focussed more on whether a task has been completed and also, increasingly, on service levels.

I have never been a supporter of having fixed numeric targets as a measurement of performance within treasury. Companies and markets change, which can make meeting targets either impossible or ridiculously easy. Numeric targets tend to focus on treasury as a functional activity, although we have to be more service-orientated. The other problem is that these targets are always backward-looking.

As a company, we are also moving towards 360 reviews for senior managers. Because we interact with people outside the company, it may make sense, for example, to issue those reviews to our relationship managers in the banks. We are looking for a more objective view of achievement, with some assessment of the quality of service provided.

What do you see as your next challenges over the next few months?

Within the department, one of the key challenges is to make sure our expensive investment in new technology can be made to pay by improving the quality of our information management.

There are always challenges in running a business. For us, maintaining our bank relationships will be harder, particularly because we are not issuing bonds, the size of our wallet has shrunk. We need to make sure the department is rounded enough in terms of our technical and skills base to run the operational side effectively and efficiently. Finally, we need to continually look to see how we can do things better.