We continue our popular series of interviews with senior figures in the world of treasury and finance, this month talking to Kim Holdsworth, Group Treasurer, BAA.

BAA has a series of very long term investments in infrastructure, which is one side of the business. The other side of the business is cash generation via the retail side at the airports. How do you deal with those cash surpluses?

Overall we are net borrowers, with debt of approx £2 billion. However we are in a seasonal business and we do fund ourselves opportunistically, hence we have about £330m within treasury that we are managing at the moment. The bank accounts in the UK sweep to one of two main bank accounts, one at Barclays and another at NatWest. I have, a cash manager and a dealer who look at the cash position each morning, concentrate the funds into one bank account and then invest the balance.

We are a very prudent company and we have strict board-approved mandates. We invest surplus cash in money market deposits with investment grade banks for up to one year, AAA rated money funds or commercial paper. We were one of the early users in the UK of Sterling money funds, having seen them work effectively in the US. The majority of our investments are in commercial paper rated A1/P1. We do not invest in equities or bonds.

The Group’s cash flow forecasts are not detailed on a week-by-week basis or even month-by-month. As a significant amount of our cash outflow is capital expenditure related, it proves difficult to accurately predict the level of payments on a weekly basis. Within treasury we look at the budget each year and identify what is budgeted for the annual net debt movement. We get a feel for how long our cash will last, taking into account the cyclical flow of cash throughout the year and the knowledge we have of the group’s payment history. We tend to invest out to known requirement dates – to cover dividend payments, to cover bond payments. When we have covered all those dates, we are looking for yield pick up.

What are you looking for from your banking relationships?

A couple of years ago we formalised internally our relationships with our banks. Every year the board is asked to confirm the group’s core banks based on my recommendations. At the moment, we have six core banks, which serve all our requirements – capital markets, day-to-day clearing business, the credit card business, advisory work. We also have a second tier of banks that have committed funds to BAA under a syndicated bank facility.

When we have new business, we look at the banks that have been prepared to put up their balance sheet for BAA. As the banks are now under pressure to make higher returns on their assets, we look to give our business to our six core banks, provided they have the required core competencies. Thereafter we will give business to those banks that have committed funds to us on our syndication.

We want banks that actually understand our business. As a company, BAA is quite unique. I don’t mind which sector a bank puts us in – eg transport, retail or utility – as long as they understand the business and we don’t waste each other’s time.

Do you evaluate your bank relationships from scratch?

It isn’t that formal. I did think about going through an official audit process, but I decided not to. The evaluation of a bank’s performance is based more on my own personal fee the views of the rest of the Treasury team and the level of service our subsidiaries are receiving from the banks.

There has been a lot of merger activity within the banking sector. How has that affected your view?

With the global merger activity, some banks have changed their own focus. Some banks have moved towards investment banking and are not prepared now to do some of the day-to-day business such as letters of credit. Banks will be quite blatant in that they require rates of return. Unless we give them business, they cannot give us services. This change has meant our core group of banks has needed to be strengthened. Last year we added a sixth bank to the core group in anticipation of refinancing requirements.

I see you have a CP programme. How does it work?

We have two. We have a Sterling CP programme that has been dormant since1996, when we started to raise funds opportunistically in the bond market. Although we haven’t used this programme in a while, we have a large funding requirement in the next five years and I anticipate reactivating this programme.

We also have a USCP programme that was set up in 1997 and is active. There is only about $200m outstanding and that is used to hedge the Group’s dollar assets. When we acquired World Duty Free America, we hedged that investment using US dollar debt. When our US subsidiaries need to raise capital, group treasury raises the debt centrally via the USCP market.

We have looked at setting up an ECP programme and we will probably replace the Sterling CP with an ECP programme, when we come to refinance our backup facility at the end of next year. At the moment, our facility cannot be used as backup for an ECP programme because the notice period for non-sterling draw downs is four days.

Have you started to talk to people about arranging that?

No – that will be next year. Our first project this financial year will be to set up an EMTN programme.

When did you start doing that?

The invites for an arranger were sent out last month. We held presentations over two days and appointed an arranger for our EMTN programme shortly after. The plan is that the documentation will be finalised by the end of July, with the hope that we will be posting opportunistic funding rates in the autumn.

How many invites have you sent out?

We sent out six.

Are those your core group of six banks?

Yes. The core group has the competencies. That’s what are core group is about. Our bankers need to be able to fulfil our needs now but also our needs in perhaps two or three years time.

On risk management, you don’t appear to have too much in the way of currency risk.

Hardly any whatsoever. The majority of the business is Sterling based. We invoice in Sterling and we get paid Sterling, although there are exceptions. Occasionally we buy products, which tend to be for capital expenditure, in Euro or dollars. If the exposures are material, we would hedge them by buying currency forward. When we occasionally invest overseas, we hedge by borrowing in the same currency in which the asset is denominated.

So the main risk that you have to manage is interest rate risk. I see that you have a target of between 60% and 80% fixed rate debt. How do you go about achieving that?

Due to our credit ratings, we tend to fund ourselves where it is most efficient, which tends to be the bond market. Historically we haven’t overlaid many swaps onto this fixed rate debt. This practice means that we have a high level of fixed rate debt. We have transacted a number of plain vanilla swaps to try to reduce the fixed rate debt. As it stands today, we are above the preferred maximum limit, with about 83% fixed rate debt.

Historically, we have also borrowed fixed debt from the European Investment Bank, who have lent to us over many years. However the last two drawings were taken as floating. Once we have set up the EMTN programme, there will be opportunities when we will take floating rate debt.

Generally, we borrow fixed as we don’t want to borrow 30 year floating money to fund our long-term assets. We can then overlay the short end with a swap to turn it into floating.

How is your treasury structured? Who does what?

There are four of us in a young team. We communicate well professionally and it helps that we personally get on extremely well too.

The junior member of the department is mainly concerned with dealing and monitoring the department’s accounting and budgeting. That is not the control side of treasury transactions – we’ll touch on that later.

The cash manager is responsible for l the daily cash management of the UK group and overseeing the cash managing in overseas subsidiaries. She monitors both the UK and the overseas accounts. She is also responsible for getting our dealing systems as high tech as possible and she is installing a new treasury management system at the moment.

My other treasury manager works on funding, foreign exchange and derivatives. He has other responsibilities as well – he will work on the EMTN documentation with me. He has also been preparing recommendations to hedge the Group’s exposure to employee share options.

I oversee the department and concentrate on the strategic management of the debt portfolio. I have to network and get out into the business and make sure that my internal customers are happy with the service they are receiving from Treasury. We have separated out the back office. Two people within the finance department are part-time treasury accountants. The deal matching and controls – eg the bank reconciliation – are performed outside treasury. The treasury accountants report daily into the group financial controller, with the reports copied to me. They are not under my control, but if there were any problems, I would know straight away. They also do the monthly accounting for the department.

Segregation of duties is important within BAA. For example, the structure of any derivative transaction has to be agreed in advance by the group finance director. Once he has approved the structure, either myself or my treasury Manager would agree and close the deal. When the EMTN programme is set up, we will have to revisit the delegated authorities.

Do you think that six is a good number to send out or did you send out six because you have six core banks?

Time management was a factor. I wanted to have the presentations in one day. I think five or six is the right number to ensure that you complete a fair and proper tendering process and you see enough competition. Any more and you get too much information. It is possible that six is too high and it should have been four. However I want to be fair and I want our core banks to know that they are getting a fair chance for the business that BAA has to offer.

How are you measured and controlled over a longer period?

We are a cost centre, rather than a profit centre. I have my own department’s budget and I am responsible for the group’s interest charge. Each month the executive committee reviews the Group’s management accounts, of which treasury provides two pages. In these pages, we explain any differences in the interest cost to budget, any movement in net debt for the group and any movements in committed facilities. That is the formal reporting. I also have meetings with the group finance director at least twice a month.

How are you looking to use technology?

There are a number of areas. First of all we are upgrading our treasury management system – the old one we have is not satisfactory. We want to eliminate as far as possible the need to rekey data. We want to get as much information into the database of the new system so that reports can be produced automatically. We also want the system to be able to interface into the Oracle accounting system that the group uses. We wanted a treasury management system that is able to upload bank information, so that we can do bank reconciliation online. We want confirmation matching and our bank payment systems to interface as well.

We also want to make sure that the system that we have chosen has audit trails we require and will allow us to build in the controls that we want – eg segregation of duties

Moving onto bank systems, at the moment we take bank statements from three different systems – Barclays, NatWest and Bankers Trust in America [now part of Deutsche Bank]. We have been keen to move onto the next versions of these systems as soon as possible. We are now using Bankers Trust’s web-based system to look up our outstanding CP. We are looking to move onto the web system to make payments and to review bank statements. Initially, I was very nervous about web systems, but one of the reasons why I am keen to move towards this technology is that I know this is the way that the banks are moving and it will be cheaper to upgrade. Also, it will make it easier to relocate the Treasury department should we need to work in a disaster recovery situation. The web technology should mean that treasury can choose to be more mobile. For example, although cash management is done in London, recently whilst I was down in Heathrow, I could log on and authorise deals online.

What other issues do you see as important?

Banks seem to be emphasising more and more the importance of relationships. This is coinciding with the consolidation in the banking market. I would be interested to learn how other corporates are responding to this stance. BAA has responded by choosing six core banks, that can deal with most of our day-to-day requirements.

Secondly I wonder how bank lending will develop. The implications of Basel will be important for us, particularly because BAA has a split rating – we have AA- with S&P and A1 with Moody’s.

Finally It’s a challenge for us to ensure that we are satisfying our banks in allowing them to make adequate returns. We are a Group whose Treasury activities primarily focus on sterling cash management, a little FX and a large debt portfolio that is going to be growing significantly with our published capital expenditure programme.