In our regular interview with senior figures in the world of treasury and finance, this month we talk to Frederic Coutant, Central Treasurer, Alcatel.

Based in France, Alcatel is a global leader in the provision of telecom equipment. It designs, develops and builds global communications networks and solutions that are sold around the world. In 2001, Alcatel was active in 130 countries, employing 99,000 people and generating sales worth €25.3 billion. Globally, it is the leading provider of broadband access and optical networking equipment. Its main market is Europe, which contributes 51% of sales; its other significant markets are the USA (19%) and Asia (13%).

As a company, it is organised into four main divisions: Carrier networking (fixed-line and mobile networking products, sold to telecom carriers) – 45% of the group’s sales; Optics (including optical fibres and lasers) – 29%; e-business (includes technology for developing local area networks) – 14%; Space and components (satellite technology and Alcatel’s battery subsidiary) – 12%.

How is the Alcatel treasury function structured?

Treasury within Alcatel is highly centralised. Risk management – foreign exchange, interest rate, financing and bank relationships – is fully centralised worldwide. The main operating units, those in Europe and North America, can only transact with one counterparty, Alcatel Central Treasury, for cash, debt and foreign exchange. They are not allowed to deal with external banks.

For tax and regulatory reasons, the operating units in some countries cannot transact in this way with Central Treasury. For these countries, Central Treasury takes the risk management decisions, which are then implemented locally.

This level of concentration in Central Treasury is consistent with the Alcatel culture as other functions – such as tax, equity and project finance – are highly centralised too. Alcatel changed fundamentally after the appointment of Serge Tchuruk as Chairman and CEO in 1995. Until then, Alcatel had been very decentralised, with the centre acting as a holding company. Since 1995, decision-making has been concentrated at the centre. The development of Central Treasury was part of this process and took eight months in 1995-96.

How is Central Treasury structured?

There are three departments here within Central Treasury.

1. International treasury

   – provides advice to all the 130 subsidiaries around the world.

2. Dealing room.

   We have seven members of staff who are fully dedicated to transacting in the financial markets.

3. Risk control.

   This department reports to me, but is fully independent of the two other departments. It is responsible for developing benchmarking concepts and for controlling systems. In addition, this department runs our treasury reporting system. This is also highly centralised, as no other department is allowed to issue its own report.

These three departments, including my assistant and myself, employ twenty-one people. In addition, we have a back office team of eight and a dedicated Information Systems team of six; these are both located in Central Treasury in Paris.

Outside Central Treasury, but reporting directly to me, there are a further fifteen to twenty key treasury people. In the main operating countries in Europe and North America, we have an incountry treasury professional; in the other areas, there are treasurers with a regional responsibility. Finally, within the operating units, there are also treasuries that are important in their own organisations.

So within the treasury network, there are about sixty people. We are in contact with all of them on a regular basis. I have to ensure that they are deployed in the best way for the company. We also provide them with training to enhance their career development within treasury. We also hold a treasury convention once a year for the whole treasury network.

What are the risks that you face and how do you manage them?

The first risk is foreign exchange risk, which is very complex. The risks arise from bids that our operating units make for contracts, usually in US Dollars. The contingent risk is very difficult to manage – the company is at risk, having put in a bid, however the operating unit will not know for six to twelve months whether it has won the contract.

Until we centralised treasury, the approach to this risk was different from business unit to business unit. Some units used currency options; some argued that because they didn’t understand the risk, then they would do nothing to manage it; and others took a budgetary approach and tried to manage a proportion of the risk.

As a result, we have developed a global solution for Alcatel. Every time a business unit bids for a contract, it comes to Central Treasury with its foreign exchange requirement. We will give them a guaranteed fixed price, which then eliminates the currency risk for the business unit and transfers it to us. If the business unit loses the contract, this guarantee is simply not taken up. If it does win the contract, the business unit will then come back to us and we will provide them with the currency at the guaranteed rate.

Our responsibility is to optimise the foreign exchange position across Alcatel. We are subject to limits that are set by the treasury committee and we monitor our position daily to ensure that we stay compliant with these rules.

Secondly, on debt and liquidity management, we have a global approach to finance such that all bond issues and commercial paper programmes are in the name of the parent company. Central Treasury finances the subsidiaries directly, which means that our subsidiaries in Europe and North America don’t go directly to the market.

The business units are not allowed to manage interest rate risk. Central Treasury manages interest rate risk on a per currency and a per yield curve basis. This management is benchmarked and Central Treasury is obliged to manage interest rate risk within the limits set down by the treasury committee.

Finally, our objective is to optimise our relationships with the banks. We want to leverage the Alcatel position with respect to Central Treasury. We have a group of core banks to Alcatel, which we use both to help finance the company and also to finance our customers. Our customers sometimes ask for financing. We want to avoid keeping that financing on our balance sheet, so we help them to structure their financing and we have a dedicated project finance team which is responsible for managing that and the relationships with banks.

On the Corporate level, Central Treasury will then allocate bank lines within the group. We use a mixture of our core global banks and local niche players. It means that our approach is coordinated and also that the local units do not have to find financing on their own. The key point is that it optimises and leverages our bank relationships.

We need banks that can help us on a range of issues. In our core group we want banks with a good network that can demonstrate a strong willingness to support Alcatel.

How are you held accountable?

I have a formal meeting with the CFO at least once a week. In addition, the treasury committee (the General Manager, the CFO and I) meets every two weeks to discuss treasury and financing together.

In terms of reports, we produce a strong and detailed set of reports every two weeks. This is possible because treasury is centralised in Alcatel. We also have strong relationships with top management, who are very interested in financing and treasury. I am lucky as I have bosses who are interested in treasury, who challenge me and also brainstorm with me.

There have been some high profile difficulties in your industry. What role have you played in managing this from Alcatel’s perspective?

We have been very careful over the last year to send the message to the market that Alcatel has no liquidity crisis. We have managed this in three steps:

1. Last summer, we realised that a crisis was emerging in the telecoms sector. We understood that the market would be cautious about debt and our ability to pay back that debt. We had a strong commercial paper programme, which although it has been very efficient, would become a weak point if it couldn’t be renewed. As a result, at the beginning of September we arranged a €1.2 billion club deal with four banks. The objective was not to use it, but that if we had a problem we could borrow from these four banks. This deal was available for one year from when we signed the deal (in October) and until we issued a bond. The key message was that Alcatel would not face a liquidity crisis.
2. At the end of November and although it wasn’t obvious, we realised from talking to our banks that we had a slight window in which to issue a bond. We planned to issue a €500m, five-year bond. It was oversubscribed so we actually issued €1.2 billion. As a result, the club deal was immediately stopped because it was unnecessary.
3. The last step was finalised at the beginning of April this year. We have bonds maturing in 2003, 2004 and 2005 at the rate of €1 billion a year. Again, to reassure the market that Alcatel was looking to the longer term, we arranged a syndication of €2.075 billion in two tranches. The first is a one-year rollover, worth about one third of the syndication, and the other tranch is three years. Our objective is again not to have to use it, but it is available for us should we need it.

Overall our message to the market has been that we anticipate the future and we finance when we can. We don’t wait until the last minute, when problems might occur. When some telecom players are having difficulties, it is very important for us to make it clear to the market and to the ratings agencies that we have no problems with cash. In fact, we have around €5 billion in cash at the moment.

What do you do with this cash?

The key for me is liquidity. I keep it very short-term, in instruments up to six months such as commercial paper and bons du Trésor. In addition some is in the cash pooling system. I will not buy ten-year bonds. Our objective at the moment is to demonstrate that we don’t have a problem with liquidity, rather than trying to earn an extra ten basis points.

You mentioned a cash pooling system. How does that work?

We operate an international cash pooling system for our thirteen core currencies. All international cash is sent through to Central Treasury using zero-balancing accounts run by ABN Amro and Société Générale. For the main currencies (Euro, US Dollar, Sterling), this means that there is no cash held at the subsidiary level.

I notice from your annual report that your company is putting a lot of emphasis on working capital management. What role does Central Treasury play in managing working capital?

Each international treasury (IT) analyst, the IT Director and I probably spent more than 50% of our time last year looking at working capital and debt. In January 2001, we implemented a Unit Financing Committee, chaired by the CFO. This meets on a monthly basis and brings together people from the group, tax, financial control and Central Treasury. The committee looks at each of about 40 of the major business units and sets debt limits and quarterly targets to reduce that debt. This is followed up every month. Four times a year, we hold an asset focus meeting, with the area controllers and the main units CFOs, at which we look at the detail of the balance sheet of the units (for example, at inventory, at the number of overdues, at the receivables and at whether the capital expenditure is in line with the business unit as a whole) and we seek a full explanation of this detail.

Our objective here is to reduce the level of capital employed. Whilst it can be very painful, it is also very efficient. To indicate the success so far – at the end of July 2001, we had €5.7 billion of debt, which had reduced to €2.7 billion by the end of December 2001. Part of the reason for this was a result of the sale of some assets. However, the main part resulted from a reduction in working capital.

I am sure that we will continue to hold both the monthly committee meetings and the quarterly asset focus meetings. This will allow us to keep capital employed under control. The key thing is to remind the Alcatel staff of the importance of cash as sometimes the business units can become too focussed on operating profits – “cash is king”.

Central Treasury has been part of this process and this achievement. We have put a lot of pressure within the organisation to achieve this reduction in working capital and debt. We delivered in 2001 and we are on track to deliver in 2002.

It is a good discipline. When a business unit wants to exceed its targets, both the CEO and the CFO of that business has to sign a document requesting that. This document is assessed by the Unit Financing Committee and checked by Central Treasury. This double control makes the business units think very carefully before submitting a request.

How do you use technology?

Firstly, we use a dedicated risk management system called Murex. We have developed a very strong risk management strategy, but in order to do so we need to have the tools to put it into action. Murex is essentially a bank front office system. It is a strong tool for pricing, risk matrix, stress scenarios… Due to the range of products and the size of the portfolios, we need something that will give an integrated platform on which we can manage the interest rate and foreign exchange risks.

Secondly, our treasury management system is Cashflow (which was Diagram, but is now owned by Reuters), which runs our back office, cash management and payments. The bigger business units within Alcatel also have a light version of Cashflow. However we need to revisit this. At the moment, we are harmonising our ERP system throughout the group – we have SAP almost everywhere. We want to try to link the treasury management system to the ERP system.

We also have a treasury intranet, which we use to communicate with our subsidiaries. This is the means of reporting the ZBA cash flows, the foreign exchange and borrowing transactions. In addition, treasury is part of the whole Alcatel reporting system because I didn’t want to have a separate treasury reporting system. This is a database system which runs Carat and which is interrogated using Essbase.

The next step is to introduce an e-dealing system. At the moment, this is still very much a manual process. I want a straight-though link between the subsidiaries to the banks, through Central Treasury.