Potential eu breakout v.0.7


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Potential eu breakout v.0.7

  1. 1. CFO Roundtable Navigating uncertainty in the EurozoneStrictly Privateand ConfidentialMarch 2013
  2. 2. Table of ContentsSection Overview Page1 Introduction 12 What are other companies doing? 53 Regulatory pressure and challenges 13
  3. 3. Section 1IntroductionCFO Roundtable • Navigating uncertainty in the Eurozone March 2013PwC 1
  4. 4. Section 1 – Introduction Where we will end up?CFO Roundtable • Navigating uncertainty in the Eurozone March 2013PwC 2
  5. 5. Section 1 – IntroductionBusinesses are taking action to prepare for a potential Eurozone fall-out Formerly profitable regions have Minimising country exposure become unviable through cash management “Carrefour pulls out of Greece” “Vodafone sweeps all spare cash out of Greece every evening” FT, 15 June 2012 Bloomberg, 9 February 2012 Limiting supply chain exposure Redesigning products to suit new customer needs “ArcelorMittal announced the “Unilever looks to sell goods in permanent closure of its blast cheaper, smaller packages furnaces in France” in Europe” Economist, 6 October 2012 Fox Business, 27 August 2012CFO Roundtable • Navigating uncertainty in the Eurozone March 2013PwC 3
  6. 6. Section 1 – IntroductionNo industry is safe as uncertainty continues Industrial/ Siemens opened account with the European Central Bank seeks to protect €12B in Auto cash Ford has configured its computer systems to be able to immediately handle a new Greek currency Banking Credit Agricole transfers all Greek balances to Paris nightly, looking to sell its Greek banks for €1 JPMorgan has created new accounts that are reserved for a new drachma or whatever currency might succeed the euro in Greece and other countries. Consumer Pepsico also sweeping cash out of southern Europe daily Goods Dixon has contingency plans for its 69 owned and 29 franchised Greek storesPharma Pharma companies worried about supply chain and receipts from European health servicesCFO Roundtable • Navigating uncertainty in the Eurozone March 2013PwC 4
  7. 7. Section 2What are other companies doing?CFO Roundtable • Navigating uncertainty in the Eurozone March 2013PwC 5
  8. 8. Section 2 – What are other companies doing?Consider the following (real-life) example  US Company  Majority of revenues in Euro  Company recorded ~$ 65mio loss related to Greek government bond holdings  Accounts receivable in Southern Europe totals ~$ 900mio  $ 350mio are past due more than 120 days  Critical suppliers based in Eurozone scenario Board questions to CFO - Should we be concerned? - How are we impacted if “something bad” happens? -How can/should we protect ourselves against adverse scenarios?CFO Roundtable • Navigating uncertainty in the Eurozone March 2013PwC 6
  9. 9. Section 2 – What are other companies doing?Approach Objective: identify and assess the potential risks as a result of the Eurozone crisis and develop contingency plans to proactively mitigate this risk. Situation • Look at European business operations and financial assets and liabilities – assess the Assess exposures and risks on a country-by-country basis from a strategic, operational and financial perspective. • How much exposure does we have? Where are the concentrations? How much can we bear? Scenarios • Define potential Eurozone outcomes – include several different scenarios, from optimistic to Define worst-case scenarios, looking at the short-term and long-term. • Quantify how we would be impacted by each scenario. • Determine which risks are acceptable and which need to be mitigated. • For the risks that need to be mitigated, come up with a contingency plan including financial Execute and operational mechanisms to reduce risk exposure. • Assign ownership for plans and monitor effectiveness of mitigation plans over time. • Revisit scenarios as conditions change and make adjustments to the risk mitigation plan if necessary.CFO Roundtable • Navigating uncertainty in the Eurozone March 2013PwC 7
  10. 10. Section 2 – What are other companies doing?Considering scenarios for how the Eurozone could evolve… Main Scenario: Successive phase of monetary and fiscal action hold the Eurozone together • Eurozone leaders act to save the euro • Policy support to inflate the economy Greek Exit: Greece exits the Eurozone and a firewall is built around other economies • Greek exit of the Eurozone • Currency union remains intact but causes an 18 month contraction in Eurozone • The Greek economy would enter a severe recession New ‘euro’: A new currency union is formed by the stronger economies • An unravelling of the Eurozone starting with Greece’s exit • New currency union of the ‘core’ economies is formed by Germany and France • Capital flight to ‘new euro’ supports output growth in the medium term • Exiting countries have high inflation and low outputCFO Roundtable • Navigating uncertainty in the Eurozone March 2013PwC 8
  11. 11. Section 2 – What are other companies doing?Assess business impact and exposures across all functions...Revenue • Assess revenue breaking point and strategize to maximize revenue under different scenarios • Prepare for lost revenue due to customer insolvencyLegal • Contract review, renegotiation and amendments.Procurement • Review third party relationships (e.g. supply and procurement contracts, lease contracts)and Supply • Change internal operations (e.g. documentation, pricing arrangements, customer payment mechanisms)Contracts • Review procurement options in the event of key supplier insolvencyIT • IT changes, e.g. systems configuration, payment and billing systems changes, master data, transaction data migration, package applications and support arrangements.Finance • Changes to statutory and management reporting; • Changes to planning, budgeting and forecasting e.g. contingencies, restatement of historical data, costs to implement the Eurozone restructuring; and • Presenting finance and accounting data in new formats, e.g. conversion of balances, fixed asset valuation restatements, changes in consolidation processes.HR/ People • Review compensation and benefits, payroll arrangements and implications • Manage communications to shareholders, stakeholders (including Works Council/ Trade Union), customers and suppliers regarding organisational impact and arrangementsTax • Tax implications on new and existing contractsCFO Roundtable • Navigating uncertainty in the Eurozone March 2013PwC 9
  12. 12. Section 2 – What are other companies doing?Focus on Treasury Problem Statement • Banking reaction to Eurozone results in (further) credit squeeze; • Which scenarios will cause covenants to be triggered, cash to be trapped?; • Possible capital and foreign exchange controls invoked at short notice; • Have parameters been set for exchange rate appetite if volatility increases and new currencies are created?; • Euro hedging strategies may need to be disaggregated by country, with aspects no longer effective as ‘new’ currencies are created; and • Working capital strain as customers take longer to pay + suppliers weakened looking for prompt payment. Critical Questions • Is there an appropriate forum for discussing working capital and cash forecasting? • How is credit risk currently monitored? Should changes be made to better predict and/or react to declining credit? Have counterparty risk policies and credit scoring processes been reviewed? • What cash can be moved to neutralise euro exposures, surplus repatriated? • Ability of weak zone euro banks to provide local funding, match debt location to assets? • What will become of local deposits if banks are no longer functioning? • Implication of bank accounts no longer functioning & impact on cash pooling arrangements? • Ability to redirect /collect customer proceeds outside high risk countries? • How might increasing currency volatility impact FX hedging programs? • Do intercompany loan agreements need to be amended? Actions / Remediation • Develop contingency plan for cash management, funding and risk management; • Assess funding sources and ability to access them in Euro jurisdictions at risk; • Develop investment strategies to enable surplus funds to be held in investments and jurisdictions aligned with the organization’s risk appetite; • Maintain dialogue with key banks and consider impact on banks with significant direct or indirect exposure to Eurozone countries at risk; • Consider the impact of redenomination risk by legal jurisdiction / category of contract. This should include ISDA & inter-company agreements; • Develop strategies and policies to allow hedging strategies to be amended or implemented with relevant CTP’s; • Identify and quantify significant AR and AP exposures; • Consider creating centralised payment hubs to enable local payments to continue to be paid in the event of local disruptions; and • Design and build effective stress test models that cover extreme but feasible scenarios.CFO Roundtable • Navigating uncertainty in the Eurozone March 2013PwC 10
  13. 13. Section 2 – What are other companies doing?Some companies have already taking action Organizations are proactively taking steps to mitigate the risk of the crisis:1. De-risking foreign currency holdings – moving cash out of Eurozone into “safer” currencies 2. Managing supplier exposure in the Eurozone – no long term contracts 3. Mitigating refinancing risks – setting cash aside for upcoming bond repayment / refinancing 4. Performing assessment of net Euro exposure by country 5. Increasing cash reserves by controlling non-essential expenditures 6. Preparing for volatility in the exchange market by reassessing hedging strategies 7. Analyzing impact of new currency introduction in procurement and sales contracts as well as IT support systemsCFO Roundtable • Navigating uncertainty in the Eurozone March 2013PwC 11
  14. 14. Section 2 – What are other companies doing?Summary Approach and Methodology – Pulling it togetherCFO Roundtable • Navigating uncertainty in the Eurozone March 2013PwC 12
  15. 15. Section 3Regulatory pressure and challengesCFO Roundtable • Navigating uncertainty in the Eurozone March 2013PwC 13
  16. 16. Section 3 – Regulatory pressure and challengesRegulatory challenges for Corporates Corporates demonstrate varying degrees of preparedness for the forthcoming regulation - from wait and see to fully initiated projects and budgets set to implement changes required. Dodd- “…when one compares Dodd- EMIR Frank IFRS Frank to the Sarbanes-Oxley Act of 2002, SOX seems FTT FATCA almost quaint: Dodd-Frank is more than 10 times longer, and mandates more than ten times the rulemakings and SEPA studies that SOX required.” SEC Commissioner Kathleen L. Casey Are you prepared? While many new rules are geared toward financial firms, there will be significant impacts to non-financial companiesCFO Roundtable • Navigating uncertainty in the Eurozone March 2013PwC 14
  17. 17. Contact Hans Candries Director – Consulting Treasury Tel: +32 3 259 32 46 Mob: +32 493 240 525 hans.candries@pwc.be March 2013PwC