Perspectives

View from the Top: Alan Royle, Amersham plc

Published: Jan 2002

Continuing our popular series of interviews with senior figures in the world of treasury and finance, this month talking to Alan Royle, Director of Treasury, Amersham plc. Alan Royle retired as Director of Treasury at the end of December 2001.

Alan Royle

Director of Treasury

Amersham plc has an annual turnover of £1.4 billion and is listed on the London, New York and Oslo stock exchanges. It consists of two businesses – Amersham Health and Amersham Biosciences. Amersham Health is a research-based pharmaceutical company that develops diagnostic imaging products for health-care professionals. Amersham Biosciences provides biotechnology products and services used in the discovery and development of drugs. The company’s main manufacturing activities are in the UK, the USA, Sweden and Norway.

As Amersham International, the company was the first major privatisation by the Thatcher government in 1982. In 1997, Amersham International merged its life sciences division with Pharmacia Biotech (the life sciences division of Pharmacia & Upjohn). Three weeks later, Amersham International merged with the Norwegian company, Nycomed. The group was known as Nycomed Amersham until it was rebranded as Amersham plc in October 2001.

How is the group treasury organised?

The treasury function within Amersham plc is highly centralised. Apart from here (corporate HQ), there is a limited treasury presence within the group.

We operate as the classic in-house bank and finance all of our businesses throughout the world from here. There are some very minor exceptions, such as China for example, where we have some local funding. However, even this local funding is done under our auspices.

Within group treasury, there is a group of seven people. I have two treasurers reporting to me:

  1. Treasurer. International – responsible for all the financial risk management (foreign exchange and interest rate), dealing and international cash management.
  2. Treasurer, Banking and Operations – works directly with me on the group financing and relationship management side of the business. In addition he is responsible for the installation and maintenance of the systems and operations we rely on to run this business.

Each of these people has two people reporting to them. The Treasurer, International has an international cash manager and a dealer. The Treasurer, Banking and Operations has a financial analyst and an administrator performing support functions including inputting to the computer systems. The back office function (dealing with confirmations/deal administration) is largely performed outside treasury by the accounting department. I also have insurance reporting to me.

How are you held accountable?

This is a fairly classic cost centre. We have rigid controls in terms of our dealing activities, with all our authority levels sanctioned by the board of directors, and we report formally to the board on a monthly basis.

Group treasury is centralised and the company has operations in a number of locations. How do you structure your liquidity management operations?

In most countries, we have integrated our companies into our global cash management operation, which we operate through JPMorgan Chase. Typically, each subsidiary has an account with JPMorgan Chase in their country, even if it is not its principal operating bank account. Global treasury also has an account in that country. These accounts zero balance everyday. So, for example, in the US, we have a number of different accounts denominated in dollars for different companies plus the umbrella account held by Amersham plc.

Every company can draw on its JPMorgan Chase account to fund itself (or should it find itself with a cash surplus, that is soaked up centrally via the JPMorgan Chase account every day). This financing is done on an arm’s length basis at market interest rates – we have loan agreements with all our subsidiaries. This structure means that if a subsidiary has to pay a bill, it can do so electronically, knowing that its account will automatically be zero balanced at the end of the day (with the global treasury account being debited). Generally speaking, it works very well.

Are there any locations where it doesn’t work so well?

We have significant banking requirements in Scandinavia, due to our activities in Norway, Sweden and Denmark. Because JPMorgan Chase does not have a major physical presence in Scandinavia, we are in the process of putting in place a pan-Scandinavian cash management system using a Scandinavian bank. This regional cash pool will be an exception to the rule, although it will link into the main JPMorgan Chase cash pool.

What do you do with any cash surpluses that are generated?

Traditionally they have been used to pay down borrowings. At the moment, we have effectively no short-term borrowings so we are using them to fund the activities of either the parent company or a company that does have a requirement. Typically we are channelling funds through Amersham plc using, for example, cash from Amersham Health (which generates a lot of cash) to fund Amersham Biosciences.

When we do have short-term cash to invest through Amersham plc, we often use the bank’s liquidity (money) funds. These are very flexible, generating a good return whilst being able to take the money out at any time and at very short notice.

What are your risk management responsibilities?

In treasury, I have the responsibility for the management of two kinds of risk – financial risk (foreign exchange and interest rate risks) and the risk of our physical assets, i.e. insurance.

We self-insure to a reasonable extent through our captive insurance operations that are principally in Ireland.

How do you measure and manage the key financial risks (foreign exchange and interest rate)?

We have board-approved policies for both foreign exchange and interest rate risk management.

Our main foreign exchange exposures are, on one side, our receipts of US dollars, Japanese Yen and Euros and, on the other side, the exposure to Swedish Krona and Norwegian Krone.

In transactional terms, we have both tactical and strategic components to our hedging programme, both of which are very firmly prescribed giving us virtually no discretion over what to hedge and what not to hedge. From a tactical standpoint, we are always hedged six months out for our key transactional currencies. In addition, we have a strategic component whereby we will be hedged in certain circumstances (based on purchasing power parity) up to three years out in our key currencies.

What are the issues on interest rate risk?

At the moment, we have a very straightforward approach, which is based on fixed-floating percentages. However, we plan to put in place a more scientific approach using duration.

What instruments do you use to hedge the currency risk?

We do mainly plain vanilla forward deals and swaps and we also enter into some options.

How have you been affected by the FAS 133?

Because we have substantial US assets, we have had to do a lot of work over the last couple of years so that we could report under FAS133, which we are now doing.

Has it changed what you have been able to do at all?

No, it hasn’t. One of the concerns of the Technical Committee of the Association of Corporate Treasurers (on which I sit) has been that people would start to do dysfunctional things if the accounting treatment (either under FAS 133 or the UK equivalent) rather than economics were to determine action. Although we haven’t changed the way that we deal, we have had to both measure our exposures more carefully and make sure that what we are hedging is compatible with FAS 133

You also have responsibility for funding the activities of the group. How do you do that?

Traditionally this company has lived largely on bank financing. At the moment, we have two main sources of finance – we have some US dollar denominated private placements and the rest is bank financing. When this group was put together in 1997, a bank facility of £975m was put in place to facilitate the mergers. Because the company generates a substantial amount of positive cash flow and we have divested some business, we have brought down our borrowings fairly consistently so that we currently have net debt of only approximately £50m.

However, strategic initiatives mean that the debt position will probably not stay that way. When we need to raise money, we will look at the full range of potential sources of finance – it is quite possible that we will look to tap the public markets although at the moment we are not rated by the ratings agencies. We would probably use some measure of bank debt as we do today and we may, depending on the amount we need to raise , raise funds through equity or convertibles as well.

We are also just in the process of replacing our existing bank facility. We have finalised the evaluation of what we are going to put in place. Our existing facility (from 1997) has 26 banks in it. The new facility will have a much smaller number. The core of the banking strategy that feeds into the new facility is that we will slim down the number of relationships that we have to between ten and fifteen. We know that banks are thinking about their relationships differently now. They are not in the ‘do business at any cost’ mode any more and are concentrating on their return on these relationships. By having a smaller number of banks, there is an opportunity for each bank to make a reasonable return out of the relationship in return for putting up their money.

This process of renegotiating the new facility is already underway and should be in place soon.

How do you use technology?

The treasury management system (we currently use TRACTS from Simcorp and are in the process of migrating to IT/2) is used to manage our treasury and back office operations and is at the heart of everything that we do here. We also use the Chase Insight system for electronic funds transfer and gathering bank information. Atriax will be the principal example of where we use technology externally. And we have Bloomberg and Reuters for information purposes.

We are considering using the company’s Intranet to allow the subsidiaries to access the system to see, for example, what their balance with us is at any point in time and also to be able to input their data directly into the netting system which will remove a large element of manual interface.

You mentioned Atriax.

We have just completed our first trade using Atriax.

What attracted you to the idea of foreign exchange trading on the Internet and to Atriax in particular?

We do a lot of foreign exchange trading in terms of number of transactions, since we are dealing in respect of known merchandise flows and are updating our positions all the time. We have watched fairly closely the evolution of the systems like Atriax. Over time, we have got more comfortable with the concept, although whether it will be for all foreign exchange dealing or just for some remains to be seen.

Most of the banks that we deal with are in Atriax so that was the logical system for us, if we were going to try this approach. Our first foray into it seems to have worked very well, although it is still very early days.

You have mentioned some of the things that attracted you to the service, what were the issues that needed to be resolved before you went ahead?

Although this is stating the obvious in some senses, we needed something that was going to be secure. We didn’t want any input information to be open to the world. Typically we quote competitively for most of our deals, which means phoning around. The logic of, for example, Atriax is being able to replicate that without phoning around. We became comfortable with the fact that the banks said that the service was secure and that we would continue to get the competitive service that we were getting anyway (and perhaps an even more competitive service). We determine the banks that we are willing to have quote on a transaction (these are banks that we know and deal with anyway). We have tried it and so far the signs are good. That doesn’t mean that we will be doing all our deals that way – there are certain deals where we will still want to do the deal over the phone. I can see us trading using a mix of these two methods going forward.

As you look back what do you consider to be the biggest change that you have seen during your career in treasury?

Technology has obviously changed in leaps and bounds – our reliance on computers to perform our daily activities has grown dramatically over the last ten to fifteen years.

However, within the treasury business one thing that has changed and gained momentum in the last few years is bank consolidation. Some of the banks that I have dealt with over the years and that were household names either no longer exist or have been absorbed within even larger organisations – think of Chemical Bank and Chase Manhattan in the US. The composition of the banking industry has changed in terms of what the banks actually do. The distinction between investment banks and commercial banks has become blurred – they all now provide a full array of products – enabling us to ‘one-stop shop’. This is probably the biggest change. And I think we will still see more consolidation.

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