August 19, 2009 Managing International Business

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  • 1. Managing International Business in Turbulent Times Association For Financial Professionals Of Atlanta Tod Gordon Managing Director, J.P.Morgan Liquidity Solutions Stephen Phelps Executive Director, J.P.Morgan Commercial Banking-International
  • 2. What we’ll discuss today
    • The business and economic environment
    • Client reactions to a changing climate
    • Five principles of liquidity management
  • 3. In 2008-Unprecedented Times on a Global Scale… Auction Rate Securities Remarketing Failures Bear Stearns acquired by JPMorgan Chase Some monoline insurers downgraded by Moody’s Crude oil soars to $147/bbl Mortgage lender IndyMac collapses Fed Funds Rate cut 125 bps during January to 3.00% Fed Funds Rate cut 75 bps to 2.25% Fed Funds Rate cut 25 bps to 2.00% Northern Rock nationalized by the UK July June May Apr Mar Aug Feb Jan
  • 4. …and Change Happening at an Unprecedented Pace Fannie Mae and Freddie Mac placed into conservatorship by U.S. Government Merrill Lynch agrees to be sold to Bank of America in an all stock deal for $29 a share Lehman Brothers files for protection under Chapter 11 of the U.S. Bankruptcy Code after losing 94% of its market value this year U.S. government seizes control of AIG Wells Fargo acquires Wachovia Citi receives protection on $306B of troubled assets National Bureau of Statistics announces U.S. has been in recession since Dec 2007 TARP funds extended to GM, Chrysler and Ford American Express converts to bank holding company The Fed announces that Goldman Sachs and Morgan Stanley are to become bank holding companies, marking the end of an era Reserve Primary Fund breaks the buck Putnam Investments LLC closes its institutional Prime Money Market Fund Lloyds TSB Group agrees to acquire HBOS Ireland guarantees deposits and bank debt U.S. Treasury to insure Money-Market Fund holdings The Fed in conjunction with other central banks quadruples the amount of dollars available to banks to $247B Iceland nationalizes 3 largest banks Singapore (MAS) guarantees deposits South Korea guarantees bank debt Australia guarantees bank senior debt China announces $586B stimulus program Washington Mutual banking business acquired by JPMorgan Chase Dec Nov Oct Sep
  • 5. In Search of Yield, Did Investors Go Too Far? Return Risk Traditional Money Market Investments High-Risk Money Market Investments Enhanced Money Market Funds (3c7) Variable Rate Demand Notes Auction Rate Securities Commercial Paper Asset-Backed Commercial Paper Money Market Funds (2a7) Money Market Deposit Account Deposit Account Repurchase Agreements SIV Paper
  • 6. Reaction to Market Events: A Rush to Low Risk Investing High-Risk Money Market Investments “ Low Risk” Money Market Investments Traditional Money Market Investments Auction Rate Securities U.S. Treasuries Asset-Backed Commercial Paper Enhanced Money Market Funds (3c7) Commercial Paper Money Market Funds (2a7) Variable Rate Demand Notes Money Market Deposit Account Deposit Account Repurchase Agreements Fed Funds Offshore Time Deposit Return Risk
  • 7. In 2009, clients are reevaluating liquidity management processes in complex times… Global Environment Credit Contraction Debt & Capital Market Access FX & Rate Market Volatility Low Interest Rates Economic Slowdown Investment Management Cash & Liquidity Management Balance Sheet Management Governance & Risk Management
  • 8. …reexamining liquidity management priorities… Investment Management Cash & Liquidity Management Balance Sheet Management Governance & Risk Management Global Environment Credit Contraction Debt & Capital Market Access FX & Rate Market Volatility Low Interest Rates Economic Slowdown Cash is ‘King’ Strength is an Asset Improve Financial Ratios Oversight & Control Counterparty Risk Systemic & Operating Risk Control & Visibility of Cash Optimize & Self-fund Consolidate & Integrate Capital Safety Amend Investment Criteria Investment Transparency
  • 9. …and talking to us about the evolution of liquidity management Investment Management Cash & Liquidity Management Balance Sheet Management Governance & Risk Management Cash is ‘King’ Strength is an Asset Improve Financial Ratios Oversight & Control Counterparty Risk Systemic & Operating Risk Control & Visibility of Cash Optimize & Self-fund Consolidate & Integrate Capital Safety Amend Investment Criteria Investment Transparency Global Environment Credit Contraction Debt & Capital Market Access FX & Rate Market Volatility Low Interest Rates Economic Slowdown Investment Management Cash & Liquidity Management Balance Sheet Management Governance & Risk Management Cash is ‘King’ Strength is an Asset Improve Financial Ratios Oversight & Control Counterparty Risk Systemic & Operating Risk Control & Visibility of Cash Optimize & Self-fund Consolidate & Integrate Capital Safety Amend Investment Criteria Investment Transparency Global Environment Credit Contraction Debt & Capital Market Access FX & Rate Market Volatility Low Interest Rates Economic Slowdown
    • Client Themes
    • Risk Aversion, De-leverage
    • Liquidity Preservation
    • Collateral Upgrades
    • Active Risk Management
    • Client Themes
    • Review Counterparties
    • Review Investment Choice
    • Reset Investment Guidelines
    • Examine Operating Processes
    • Client Themes
    • Reduce Bank Providers
    • Simplify Cash Positions
    • Focus on Transparency
    • Increase Daily Control
    • Client Themes
    • Local Market Capabilities
    • Local Ccy & Bal. Sheet
    • Integrated Products
    • Focus on Credit Providers
  • 10. The Five Principles of Liquidity Management
    • 1. Forecast and segment cash needs
    • 2. Establish appropriate investment guidelines
    • 3. Select investments appropriate for cash segments
    • 4. Establish and verify diversified contingent funding sources
    • 5. Maximize liquidity transparency and efficiency across geographies and legal entities
  • 11. Principle 1 Forecast and Segment Liquidity Needs
    • Forecasting
    • Time bucket sources and uses of cash flows
      • By significant legal entity
      • By geography
      • Consider transfer limitations arising from currencies, time zones, local law, tax, regulatory and lending agreements
    • Time buckets progress from daily to weekly to monthly
    • Continually revise based on latest information
    • Stress assumptions for idiosyncratic and market risks
      • Identify key drivers and dependencies
      • Update periodically or more frequently as the environment changes
  • 12. Principle 1 Forecast and Segment Liquidity Needs
    • Forecasted excess balances
    • Cash is forecasted for a particular near-term purpose (e.g., business investment and stock repurchase)
    • Near-term liquidity is a secondary concern
    • Unsuitable for volatile cash flows/portfolio, temporary cash
    Segmenting Cash
    • Intended to fund daily operating needs which may be subject to unforeseen volatility
    • Local or regional investment decisions required on daily/ weekly basis
    Strategic Cash (Horizon—Longer-term) Stable Volatile Cash Cycle Operating Cash (Horizon—Daily) Reserve Cash (Horizon—Daily/Monthly) TIME BALANCES 70 40 60 90 0 10 50 80 20 30
    • Restricted Cash Pools
    • Balances trapped in regulated jurisdictions
    • Cash collateral
    • Adverse tax consequences
  • 13. Principle 2 Establish Appropriate Investment Guidelines
    • State objectives
    • Specify roles and responsibilities
    • List authorized investments
    • Balance flexibility and control
    • Identify risk tolerances (aggregate and individual)
      • Tenors
      • Counterparties
      • Complexity
    • Report investments and any guideline breaches
    • Incorporate into firm-wide risk framework
    • Update with evolution business model
    Safety & Availability Maturity/ Duration Authorized Investments Credit Quality Dealer/ Counterparty Concentration/ Diversification
  • 14. Principle 3 Select Investments for Each Cash Segment Total Balance Sheet Cash Potential Solutions Liquidity Need 1 US registered J.P. Morgan Money Market Funds are distributed by J.P. Morgan Distribution Services, Inc.(“JPMDS”), which is an affiliate of JPMorgan Chase & Co. Affiliates of JPMorgan Chase & Co. receive fees for providing various services to the Funds. Treasury & Security Services and JPMorgan Asset Management activity may be offered by J.P. Morgan Institutional Investments, Inc.(“JPMII”) member FINRA/SIPC. 2 Fixed income securities products are not FDIC-insured, are not deposits of or guaranteed by JPMorgan Chase Bank, N.A., or any affiliates, and are subject to investment risks, including the possible loss of the principal amount invested. Fixed income products are offered through J.P. Morgan Securities Inc. (“JPMSI”), member FINRA/SIPC, a separately incorporated subsidiary of JPMorgan Chase & Co. and an affiliate of JPMorgan Chase Bank, N.A. JPMSI and/or its affiliates may hold a position or act as market maker in the financial instruments mentioned herein (or related instruments) and may also act as underwriter, placement agent, advisor or lender to an issuer of such financial instruments. JPMSI and/or its affiliates may participate or be financially interested in a primary or secondary distribution in the instruments (or related instruments) purchased by you. Operating Cash
    • Demand deposit accounts
    • Demand deposit accounts with end-of-day sweeps
    • Interest bearing demand deposit accounts (non-U.S.)
    Strategic Cash
    • Reserve Cash Solutions plus
    • Longer tenor customized separately managed accounts
    • Fixed income securities 2
    • Bond funds 2
    • Money market deposit account
    • AAA-rated domestic and international money market funds 1
    • Certificate/Time D e posits
    • Short tenor customized separately managed accounts
    Reserve Cash
    • Demand deposit accounts
    • Money market deposit account
    • Private placement vehicles
    • Customized separately managed accounts
    • Fixed income securities 2
    • AAA-rated offshore USD and foreign currency funds
    • Multi currency interest program
    Restricted Cash
  • 15. Principle 4 Establish and Diversify Contingent Funding Sources
    • View as a cost of business—similar to insurance
      • Arrange excess contingent funding sources
        • Secured and unsecured
        • Committed and advised (periodically verify)
      • Strive to avoid clauses and terms that restrict availability
      • Access/tap cash reserves before needed
      • Require counterparties to post collateral as necessary
  • 16. Principle 5 Maximize Liquidity Transparency and Efficiency
    • Centralize treasury management
      • Implement information reporting
        • better visibility and access to cash balances
        • multibank reporting for up-streaming or investing cash
      • Reduce administrative expenses
      • Improve ability to review banking partners
      • Establish contingency requirements
  • 17. Clients are Trending Towards a Global Cash Management Model
    • Strategic drivers:
      • Centralize the application of investment policy
      • Enhance visibility and control over internal sources of liquidity
      • Minimize FX risks by rationalizing non-strategic currencies
    Source: J.P. Morgan Asset Management Global Cash Management Survey 2008 2008 Global Corporate Survey Globally 29% Global Oversight/ Regional Autonomy 29% Regionally 19% Global Oversight/ Local Autonomy 12% Local Autonomy 11% Globally 45% Global Oversight/ Regional Autonomy 32% Regionally 13% Global Oversight/ Local Autonomy 7% Local Autonomy 3% Now Future
  • 18. Principle 5 Maximize Liquidity Transparency and Efficiency
    • Optimize cash position across geographies and legal entities
      • Streamline banking relationships
        • Rationalize banks—one banking partner per country
        • Rationalize accounts—one account per currency per legal entity
        • Transition non-native accounts to a “friendly” location
        • Reduce banking fees
        • Simplify account administration
      • Distribute business among credit banks
      • Take advantage of SEPA Credit Transfers (SCTs)
        • Cross-border EUR transfers
        • Domestic non-urgent EUR transfers
  • 19. Principle 5 Maximize Liquidity Transparency and Efficiency
    • Centralize liquidity management through a cash concentration structure
      • Reduce idle balances
        • Maximize funds available for investment/to pay down debt
        • Realize savings though self-funding—reduces overdrafts and/or external funding requirements
        • Enhance returns on concentrated cash—active investment of larger balances
      • Centralize FX management
        • Reduce FX spreads
        • Perform fewer, larger FX trades
      • Implement a centralized credit facility based on parent company credit standing
        • Reduce overall borrowing costs
        • Simplify overall process
      • Consider alternative tax effective structures
  • 20. “ The time to repair the roof is when the sun is shining.” John F. Kennedy