Managing treasury in an era of disruptionBank of America Merrill Lynch

April 24, 2018

Bridget Bredemann, VP

Global Rates and Currencies Origination

Chicago, IL

bridget.bredemann@baml.com

+1 312 234 3300

Amy Kang, VP

International Treasury Sales Officer

Chicago, IL

amy.kang@baml.com

+1 312 992 6106

2

Global disruptors

3

2017 Global Study: Top findings

4

2017 Global Study: Top findings

5

2017 Global Study: Top findings

66

Transformative trends

TECHNOLOGY

GLOBALIZATIONDEMOGRAPHICS

DIGITAL COMMERCE

MOBILE & SOFTWARE

ARTIFICIAL INTELLIGENCE

BLOCKCHAIN

APIs

Game changersThe global operating

market is changing.

Three major trends are

transforming business

models.

Recent Trends in Risk Management

8

Changes to Hedge Accounting

Extending Hedge Tenor and Increasing Hedge Ratio

Synthetic Local Currency Funding

2

3

4

Tax Reform – Planning for Repatriations and a Territorial Tax System; Capital Structure Consideration around Interest Limitations

Trends in Corporate FX Risk Management

1

9

Tax Reform Impact by Sector

3

Capex Expensing

____________________Source: UBS Equity Strategy research report dated 1/16/2018 and Moody’s U.S. Tax Law teleconference from 1/10/2018.Note: All charts represent % of income impact.

Total Earnings Impact – Tax Plan Aggregate Income Impact

Consumer Discretionary and Telecom are projected to see the largest benefit from tax reform

Companies with the highest tax rates and greatest domestic exposure

Lower personal taxes will likely boost discretionary consumer spending

Limits on interest deductibility will leave highly-levered companies with higher tax liabilities

Immediate expensing of capex could boost earnings, especially for industries and companies with higher capex requirements

17.4%

10.8% 10.0%8.8%

7.3% 6.6% 6.3%

3.5% 3.0% 2.7%0.8%

7.2%

0.0%

5.0%

10.0%

15.0%

20.0%

10.9%

6.0%

4.3%

2.6%1.7% 1.6% 1.2% 0.7% 0.5% 0.5% 0.4%

1.5%

0.0%

4.0%

8.0%

12.0%

Observations

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Tax Reform – Risk Management Considerations

Tax reform will create significant changes for how corporate treasury manages financial risk, organizes its capital structure domestically and internationally, and how it will manage liquidity including short-term uses of trapped cash

Repatriation Considerations

1

Capital Structure Considerations

2

FX and Rates Hedging Programs Going Forward

3

Amount to be repatriated

Timing of cash repatriation

Capital allocation with the use of repatriated funds

FX risk from repatriations denominated in local currency

Impact to net investment capacity and existing hedges from repatriation

Withholding taxes considerations from anticipated repatriations

Debt currency mix

Location of debt (e.g. parent vs. sub)

Impact from 30% rule

Hedging earnings translation and net investment hedge program as a result of territorial tax system

Hedging of withholding taxes

Fix / floating mix and interest rate hedging as a result of 30% rule

11

Tax Reform - Stronger USD & Deemed Repatriation

In 2005, as a result of HIA, companies repatriated $300 billion of foreign earnings, of which we estimate ~33% was held in non-USD assets

Only year from 2002 – 2008 in which the USD rallied was in 2005, when the USD appreciated 12.8%

At the end of 2016, accumulated amount of undistributed foreign earnings of U.S. Corporates had reached $3.5 trillion (including $2 trillion in cash)

We estimate 20-40% of foreign earnings are held in local currencies, which could potentially be converted to USD

Additionally, even though a company may hold USD at a foreign entity, much of the USD is actually hedged into the local currencybecause of accounting – and therefore will not show up on financials

As such, USD is expected to appreciate from:

Cash conversation from local currency to USD as companies repatriate

– Some corporates may also borrow at the foreign subsidiary to maximize repatriation and restructure currency debt mix

USD positioning by institutional investors in anticipation of repatriation activity by Corporates

Given movement to a territorial tax system, companies who, in the past, held cash overseas will now be incentivized to repatriate on a continuous basis, adding further pressure to USD

Companies will be incentivized to repatriate local currency faster because local currency cash is often earning negative or very low rates

US Dollar Index (DXY)(2)Repatriation Flows(1) Available Funds to be Repatriated(3)

____________________(1) Source: Bureau of Economic Analysis(2) Source: Bloomberg, BofAML(3) Source: Bureau of Economic Analysis

12

Tax Reform Impact by Sector

Capex Expensing

____________________Source: UBS Equity Strategy research report dated 1/16/2018 and Moody’s U.S. Tax Law teleconference from 1/10/2018.Note: All charts represent % of income impact.

Total Earnings Impact – Tax Plan Aggregate Income Impact

Consumer Discretionary and Telecom are projected to see the largest benefit from tax reform

Companies with the highest tax rates and greatest domestic exposure

Lower personal taxes will likely boost discretionary consumer spending

Limits on interest deductibility will leave highly-levered companies with higher tax liabilities

Immediate expensing of capex could boost earnings, especially for industries and companies with higher capex requirements

17.4%

10.8% 10.0%8.8%

7.3% 6.6% 6.3%

3.5% 3.0% 2.7%0.8%

7.2%

0.0%

5.0%

10.0%

15.0%

20.0%

10.9%

6.0%

4.3%

2.6%1.7% 1.6% 1.2% 0.7% 0.5% 0.5% 0.4%

1.5%

0.0%

4.0%

8.0%

12.0%

Observations

13

Bank of America Merrill Lynch vs. ACT / Barclays Risk Management Survey Results ComparisonEuropean multinationals tend to be more active in net investment and earnings translation hedges than U.S. multinationals

given they regularly repatriate foreign earnings back to the parent since they operate in territorial tax systems

Tax Reform - Territorial Tax System

16%

48%

18%

36%

BAML ACT / Barclays

Net Investment Hedges Earnings Translation

North America79%

Europe12%

Asia Pacific8%

Latin America1%

BAML

North America9%

Europe79%

Asia Pacific12%

ACT / Barclays

Survey Participants by Location

FX Exposures Being Hedged

Worldwide Tax System

Territorial Tax System

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Changes to Hedge Accounting under US GAAP

Requires the entire change in fair value of a hedging instrument to be presented in the same income statement line as the hedged item.

For users of options where the time value cost of the option has been excluded from the hedge relationship, the impact from the change in the option’s time value will now be presented “above the line” rather than “below the line”

Negative Game changer

PositiveGame changers

Permits entities to hedge contractually specified components in cash flow hedges of forecasted purchases and sales of nonfinancial items (e.g. commodity risks)

Permits entities to hedge contractually specified interest rates in cash flow hedges of interest rate risk of a variable-rate financial instrument

Permits partial term fair value hedges of interest rate risk (swap debt to floating interest rate)

Spot/Forward election for net investment hedging is no longer a one-time irrevocable election

Impact from excluded components would be amortized to earnings

Much simpler hedge effectiveness requirements

Eliminates measurement of hedge ineffectiveness

On Aug 28th, 2017, the Financial Accounting Standards Board (FASB) released its long-awaited update to hedge accounting standards, Hedge Accounting Standards Update (ASU) 2017-12

Mandatory effective date beginning January 2019 => early adoption will be permitted in any quarterly or annual period

Timing and Adoption

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Extending Tenor Is Attractive Given Positive Forward Points

Increasing Hedge Ratio and Tenor

Current EURUSD forward points are at all-time highs

– 1Y: 2.3% (98th percentile)

– 2Y: 5.0% (99th percentile)

– 3Y: 7.6% (99th percentile)

– 4Y: 10.1% (99th percentile)

For some currency pairs, increasing tenor has become very attractive

Long-term forward points as a percent of spot are close to all-time highs for some currencies

EUR Forward Points as a % of Spot

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0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60

Dec

-01

Oct

-02

Au

g-0

3

Jun

-04

Ap

r-0

5

Feb

-06

Dec

-06

Oct

-07

Au

g-0

8

Jun

-09

Ap

r-1

0

Feb

-11

Dec

-11

Oct

-12

Au

g-1

3

Jun

-14

Ap

r-1

5

Feb

-16

Dec

-16

EUR

USD

Unhedged 12M Layered 24M Layered 36M Layered

Extending Tenor Helps Reduce Year-over-Year Volatility

Increasing Hedge Ratio and Tenor

Some companies experienced significant year-over-year changes in their hedge rate as a result of the rapid USD appreciation in the last couple of years

– These companies had hedging programs with tenors of 12-month or under

– They also experienced margin compression given they were not able to adjust prices to fully offset the adverse currency movements

As a result, some companies increased their hedging tenors from 12 months to 18 to 24 months out using a layered approach

Backtesting Results of Hedging EURUSD Year-over-Year Volatility

Source: Bloomberg

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* Assumes credit spread of 125bps

** Assumes 5-year 3M LIBOR vs.3M EURIBOR cross currency swap. Excludes credit charges. Current 3M LIBOR 1.31722%; Current 3M EURIBOR -0.329%

Synthetic Local Currency Funding

Given favorable dynamics in the cross currency basis and interest rate differentials, corporations are swapping USD to lock in interest savings

Cost of Funds – Three Approaches Currently, interest rates in Europe are negative and at historical lows

Companies can borrow directly in EUR from their credit facility, but most agreements have a 0% floor

– The chart on the right shows the effective cost of funding therefore is simply the company’s credit spread

However, synthetic funding through Cross Currency Swap can unlock the value of negative interest rates

In addition to not having a 0% floor, cross currency swaps monetize a supply/demand imbalance for US dollars known as the cross currency basis

– As demand for US dollar funding has increased, the cross currency basis swap rate has fallen sharply and has become strongly negative

– The elevated cross currency basis has created opportunities for interest savings through synthetic funding and only exist in derivative market

2.57%

1.25%

0.49%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

USD Revolver Draw EUR Revolver Draw USD Swapped to EUR

Treasury best practices

1919

What strategies are you pursuing?

payables & receivables

optimization

global account rationalization

centralization & outsourcing

acquisition, divestiture, JV

cash conversion cycle analysis

liquidity structures

risk management

organizational restructuring

trapped cash

bank relationship management

Whether your goals are process, people or technology focused, consider leveraging best practices across industries.

technology selection

paper-to-electronic

cash forecasting & optimization

consumer & retail

financial institutions

energy & power

government & public sector

highereducation

tech, media & telecomm

insurancehealthcare real estate

straight-through processing

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Standardized Payments

Single Provider

Streamlined Collections

Streamlined Treasury Management

Consistent Protocols

Rationalized Account

Structure

2121

4

5

Risk ManagementAssess financial, operational, credit & system risks as well as other activities such as tax and business continuity. Identify the level of exposure to interest rates, foreign exchange & commodity exposure. Monitor counterparty risk across bank group.

Review Internal PoliciesReview the existing treasury policy to ensure it takes into account new technology, improved techniques and changing business, geopolitical and market environments.

Five Practical Steps

2

3

1Strategic PlanningImprove visibility, security and control over banking structure. Create efficiencies through automation. Develop more sophisticated cash flow models. Plan for potential geopolitical events.

Executive SponsorshipCreate executive steering committee for top down support.

Culture Shift Mobilize treasury from an in-country to regional-hub and global function which allow greater levels of control over risk. Educate stakeholders proactively so treasury can respond faster to changing business environment.

How to Prepare Your Company For Era of Disruption

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