Charles Van Der Welle speaks to us about the treasury set-up at Carlton Communications, and the approaches the company takes with regard to cash and risk managment.

Can I start by asking how you have structured your treasury?

We are going through substantial change at the moment. In March, we sold Technicolor, a video duplication and motion picture film processing and distribution business, to Thomson Multimedia. This finished off a long programme of disposals as Carlton becomes a very focused media business. The treasury operation in the USA is being scaled back as a result from a team of five to one or two people.

In the UK, I have got two people working for me – an assistant treasurer and a treasury dealer. Carlton is now primarily UK based after the sale of a number of peripheral businesses. The main business of the group is through its television franchises, which we added to recently after the industry consolidation processes last year. Another significant part of the business is our joint venture with Granada, the pay television platform ONdigital, which is to be rebranded ITVdigital.

What are the specific responsibilities of Carlton’s treasury and how are they allocated amongst the team?

The department is responsible for managing the group’s surplus cash, for funding the business in the short, medium and long terms and for managing the group’s interest rate and currency risks. In the USA the department is responsible for administering Delaware based companies, cash management and foreign exchange, and the 401K pension plan.

I’m responsible for managing the department as a whole and specifically funding, risk management and ad hoc projects. The treasury dealer and the assistant treasurer are responsible for the day-to-day cash management, foreign exchange and reporting.

One of the subjects we have been covering in the newsletter is the management of interest rate and currency risk. You have some significant interest rate risks – how do you firstly measure and secondly manage those risks?

As a group, we face both interest rate and currency risks. We need to measure those, although they are fairly easy to establish. On the interest rate side, the risks result from our debt and cash positions, and cashflow projections which are reasonably predictable.

Now that we have disposed of Technicolor, our currency positions are significantly reduced. Although we do have exposure to programming costs in USD (US Dollars) and CHF (Swiss Francs) and we do make film library sales abroad, we are mainly a UK business operating in a UK environment. Any level of currency risk that we are running on a year-to-year basis is quite easy to establish through discussion and reporting through our subsidiary operations.

The structure of risk management is defined through board authorities agreed by the main Carlton board of directors. There are basically three tiers of authority which each type of potential treasury activity are grouped under according to the perceived level of risk:

1. Long term risks that could have a significant effect on the group, including long term financing. These need to go in front of the main board for approval.
2. Medium term risks, including most interest rate and currency derivatives, need to be approved by a treasury committee. The Treasury Committee consists of the Chief Executive, the Finance Director and myself and it has to make unanimous decisions.
3. The third tier of risk is much shorter term and less risky and requires the approval of either the Finance Director or myself.

When taking risk management decisions, what are you looking for?

We operate as a cost centre but have a responsibility to manage interest rate and currency positions in a manner which reduces risk and cost. This is what I am primarily looking for. We are also very much of the view that doing nothing should be an active decision. I think that is important – it is just as much a decision as going out and actively covering a risk. We will not take a position simply because we like the look of an instrument. Rather it must have some relation to the underlying business and its exposures, which can be long term.

In terms of decision-making, it tends to be my job to analyse the financial risks that Carlton faces, discuss specific ideas with our bankers and then make appropriate recommendations either to the Finance Director, the Treasury Committee or the main board. The appropriate tier of management will discuss it and make a decision accordingly. If a decision is taken to go ahead and do something, then I will go out and cover those risks with our bankers.

How many banks would you approach once you have taken the decision to transact?

It depends on the product. If we are doing something relatively straightforward such as swapping a bond issue from fixed into floating, I would approach the banks that support us in our credit facility. I would expect to get quotes within one basis point for something plain vanilla like that.

For something more complicated, we would tend to work very closely with two or maybe three banks. For example, we do have some very long dated swaps on our books. These tend to take many weeks to put together, during which time we will examine all the angles – for example does it match the underlying risk? We also consider how we will account for it, which is an area that is becoming more rigorous. We will also do some what-if analysis, or get the bank to do it for us. We will always look at the worst-case scenario before entering into an agreement. We will only take the decision to go ahead on a very long-dated contract once we are sure we are entirely comfortable with the position we are establishing. Having taken this decision, we would execute fairly quickly.

Moving onto cash management, what are you looking for when you are investing your surplus cash?

We were one of the first corporates to adopt Money Market Funds, probably about four years ago. We like the funds because they are triple A rated, very easy to use, with high degrees of liquidity and safety, and give an acceptable rate of return on our cash.

Now that we have realised cash from the disposal of Technicolor, I am beginning to look at alternatives to Money Market Funds. Some banks are establishing tailored Money Market Funds, which would be unique to the investing company and based upon pre-agreed risk parameters. For example the fund may invest in A1/P1 commercial paper and bank deposits, taken from an agreed list of counterparties, and the fund may have a longer permitted duration than a traditional Money Market Fund. With good management the bank should achieve a slightly higher yield – perhaps 25 basis points more than Money Market Funds pay at the moment – but at the expense of some element of liquidity and a very marginal increase in risk.

On the financing side, you have both ECP and EMTN programmes in place, neither of which you have drawn upon yet. Are you planning to draw upon those?

Not yet. We only signed off the EMTN programme in March so that’s very new. We haven’t issued anything under it yet, because the structure of the group has changed significantly and we are in the process of meeting with the ratings agencies at the moment – we are awaiting confirmation of our rating from them before we look to go ahead with anything.

Going forward we would look to use the EMTN programme in the two traditional ways that corporates utilise these programmes – as standard documentation for public bond issues (in £ and $ ) and also through the issuance of private placements which would open a new investor base for Carlton.

The company’s long-term strategy in financing is to fund through the capital markets, rather than through the banks. We tend to view the banks as providing bridging finance. We have a fairly small bank facility that we completed in April, a £300m credit facility from a syndicate of eleven banks, most of which have known us for many years. It is not the company’s intention to draw on that facility – it is very much a standby. We would use it to bridge a bolt-on acquisition for example.

The size of the facility is not large enough to support a major strategic initiative. If that happens then we would approach our bankers for a far larger facility that we would then use to make the acquisition with and then we would, within a reasonable time and subject to market conditions, look to refinance the majority of that bank facility through the capital markets, public issues and private placements and maybe reactivating the Euro Commercial Paper programme, which has remained dormant for a number of years, because we have either had cash or we have funded in lumps through bond issues.

How do you use technology? What treasury management system do you use?

We use Richmond. We selected that system a couple of years ago having conducted an extensive exercise of treasury system selection. It took us six months to select and then another three months to implement.

We have been very happy with Richmond. We also have the flexibility that if our treasury operations become more sophisticated, we have a system that can move with us. It is the basic things that we are most interested in – reporting positions, recording and generating reports for our accounting systems. Those were the key requirements of our system selection.

My hope is that this system will be appropriate for Carlton for a period of at least five years, but I can’t really see beyond that. Richmond tends to provide a good service for medium/large companies (eg) from 50^th in the FTSE 100 to 350 in the FTSE – that’s their market. And it’s good value for money.

How about your electronic banking system?

When we had more businesses, we spread our clearing banking business amongst three Clearers. We have just been through a tender process to select one bank that will bank all our businesses in the UK – HSBC won that business and technology was key in winning that. We felt that HSBC’s Hexagon system had the edge over the other banks’ systems – although it was really personal preference as functionality is similar.

We made our selection in February and we are in the process of implementation, which has given us the opportunity to ask pertinent questions of our subsidiaries. Not only have we negotiated a very good deal by combining our business together, it is also an opportunity to review processes – we can question whether we are doing things that we don’t really need to do and we can ensure that controls of the subsidiaries are standardised and appropriate.

Do you use the Internet at all?

Not at this stage. For example, we are not conducting our foreign exchange transactions by going into an Internet site and trading in that manner. We like day to day contact with our banks. I could see that the Internet is very useful if you have a high number of low value transactions – but we are not in that position. We are only involved in a handful of transactions every week and feel that the personal contact with the banks helps the relationship with those banks.

We have looked at the core treasury roles. What else do you have to do?

A lot of my job involves ad hoc projects. For example it was agreed that part of the Technicolor sale consideration from Thomson Multimedia would be in the form of loan notes with up to 4 years maturity when really Carlton wanted to receive cash. The board had little expectation of being able to monetise these. With the assistance of advisors I managed to negotiate with Thomson and their advisors that the notes contained terms that could facilitate their subsequent sale. It was interesting to be in the shoes of the lender rather than the borrower for a change, a case of poacher turned gamekeeper. Once the form of the notes was agreed I was able, with the help of advisors, to negotiate the sale of $300m of the notes to a bank at an acceptable price. The whole process took nearly 3 months of my time but was very rewarding as I felt that this added value to the group by improving liquidity and reducing risk. This is just one example but there frequent ad hoc projects that arise.

Working in a smaller treasury but in a FTSE 100 company, I find my job very interesting because I have to be involved in all areas. I am probably a much more ‘hands on’ treasurer than some, particularly those in the very large companies.