The Hidden Treasurer

If anyone is aware how important a treasurer is to a company’s fortunes, especially in an economic crisis, it’s Sarah-Jane Chilver-Stainer – senior vice president and group treasurer of pharmaceutical giant GlaxoSmithKline (GSK). She is responsible for the centralised treasury risk management for the business and manages a range of financial risks including: liquidity and refinancing risk, counter-party credit risk, investment exposures, foreign exchange exposures and interest rate risk exposures.

In a company the size of GSK (market cap £62 billion) the treasury function is both extremely important for the long-term success of the business, and very busy: 18,800 deals went through treasury in 2007 with a foreign exchange volume of £300 billion and 16,000 settlements. All this dealt with by eight people, out of a department of 19 in the treasury at GSK (the remainder are more focused on corporate finance and the overseas operating units), of which three are located in the US, with the rest in London.

Like many other treasurers, for the last year or so Chilver- Stainer has been dealing with the challenges presented by the current financial crisis, and in her case doing so against the backdrop of a £12 billion share buyback programme GSK announced in July 2007. At the time of the share buyback announcement GSK could not have known how severe global financial problems were going to become, especially as it needed to be active in the debt capital markets in euros, sterling and dollars, in order to finance that programme.

Funding the business

Fortunately, a combination of cash generation, a prudent approach to financial risk management and financing the business has enabled GSK to proceed with the share buyback and weather the financial storms relatively well.

‘On a global basis we try to spread the risk as much as possible on refinancing, paying close attention to our maturity ladder,’ says Chilver-Stainer. ‘Not having a large amount of bonds, or the facilities, maturing in any one year is an overriding objective. Any large amount of debt maturing in any one year builds up issues for the future. We have been fortunate to be able to do several long-term bond issues in euros, sterling and dollars and spread the maturities of those bonds into different years.’

It is a sensible approach but not straightforward to implement. In 2001, for example, GSK issued a 32-year sterling issue for £1 billion. A couple of years later and the company was looking to another long-dated sterling issue, but conscious that a 30-year issue would mean both longterm issues maturing in the same time bracket.

‘You have to be aware of the differences in the markets,’ says Chilver-Stainer. ‘The dollar market is very traditional; fives, tens and 30s, or threes, tens and 30s is the typical structure for a US issue. It is a lot more rigid than sterling or euros where you can flex the dates.’

And, when raising a large amount of debt, adds Chilver- Stainer, you do not want any one tranche to be particularly large, because that also creates a maturity ladder issue.

Fortunately for GSK it got a €3.5 billion issue away in December 2007, a £0.7 billion issue in March 2008 and a $9 billion issue in May 2008. Great timing as it turned out.

‘It was well before Lehman went bust, and there was a market upsurge at that point,’ says Chilver-Stainer. ‘For a six-week period after Lehman filed for Chapter 11, the debt market was effectively closed. November was a big month for corporate issuance, at dramatically wider margins payable over government debt. In December, with the fall in government yields, deals are pricing at more attractive all-in levels.’

GSK has debt programmes: a euro medium-term note programme (EMTN) of £10 billion in Europe, as well as a US shelf registration – enabling it to issue debt to US investors.

‘Maintaining ready access to capital markets is important. If the company decided to do something on a more strategic level, we would have those debt programmes set up already,’ says Chilver-Stainer. ‘That’s on top of the existing facilities and bond issues we have.’

And the company has a commercial paper programme in the US. As Chilver-Stainer notes, a number of companies have been unable to issue commercial paper during the credit crisis and have had to draw down on their backup facilities.

GSK used the commercial paper programme until May 2008, when it did a large dollar transaction, and was obtaining attractive rates. It has not had to issue commercial paper since, although as a A1 issuer, the issuance of commercial paper is likely to be less of a challenge for GSK than for many other companies.

Well established banking facilities provide back up.

‘Up to this point we have had nine global relationship banks,’ says Chilver-Stainer. ‘Each provides a bank facility to GSK to back up the commercial paper programme. It’s a committed facility with the amount varying on what is happening that year. It has a one year term-out option as well, so that you can draw it down on the 364th day for another year. So it’s fairly flexible.’

Investing wisely

Another of Chilver-Stainer’s responsibilities is to make sure that excess liquidity not earmarked for operations is utilised appropriately.

GSK operates stringent investment criteria, with the board looking not just at the short-term credit rating, but also the underlying, long-term rating, requiring a minimum credit rating of AA. Limiting the potential investment pool like this means GSK is extremely conservative from the point of view of managing its investment portfolio.

‘Traditionally, we’ve invested in AAA money market funds in the US,’ says Chilver-Stainer. ‘But in late 2007, as it is not very easy to see exactly what the underlying investments are at any one time, we switched into treasury and repo-only money market funds.’

This decision, like similar investment decisions, was debated at one of the monthly treasury management group meetings Chilver-Stainer attends. She also receives a report on the liquidity position on a daily basis. Companies investing in, or returning to AAA money market funds need to make sure that they look straight through to the underlying assets.

‘AAA money market funds invest in a range of assets, including structured investment vehicles, and other investments that are not immediately transparent,’ says Chilver-Stainer.

‘During the credit crisis, companies are taking a very close look each month at their investment portfolios, particularly as one fund "broke the buck" during September. As an investor, you cannot control a money market fund down to the individual name level, and in recent times that lack of control can be an issue.’

Like many large companies GSK operates cash pooling. ‘In sterling, it is just a notional cash pool and in dollars we physically call the money out of the receivables bank and put it into the concentration bank,’ says Chilver-Stainer.

However, in a multinational corporation like GSK, cash pooling can be a challenge.

‘We have over 300 operating entities in over 90 countries,’ says Chilver-Stainer. ‘In many countries foreign exchange regulations preclude pooling the cash back with the centrally managed treasury department in the UK. So in a country like Morocco, which can’t deposit cash back to the UK, we must ensure we don’t give them too much cash to begin with. Otherwise we end up with cash trapped in local deposits in a country with perhaps not many 100% foreign-owned banks, which leaves you with a credit exposure.’

The inability to pool cash from all the regional operations also means paying close attention to their investment activities.

‘We spend a significant amount of time in treasury monitoring the activities in the overseas operating units. You must have clear guidelines as to what they’re allowed to invest in locally, what banks they’re allowed to use, and then monitor that they are complying with the policies set. We want to know, at the end of every month, if not more frequently, where their investments are.’

A prudent and efficient approach to treasury management and financial management means that GSK is extremely well positioned to cope with the challenges of financing the business during the credit crisis. While other companies frantically work out whether they can renew their bank facilities or not, GSK is focusing on managing its portfolio of liquid cash and investments.

‘The must-dos for me are monitoring the credit exposures on the investment portfolio, and staying in close touch with the business to ensure that we can be ready early, when they need funding either locally or centrally,’ says Chilver-Stainer. It is at times like these, that the treasurers in a business really earn their keep.