Corporate Risk Management Advisory Services FX and interest rate solutions for clients

Corporate Risk Management Advisory Services FX and interest rate solutions for clients

Risk Management: The UBS Warburg approach UBS Warburg has built an outstanding reputation in the management of foreign exchange and interest rate risk. We offer our clients a full range of professional advice, allowing you to benefit from a service precisely tailored to your needs. The basis of our approach is very simple. We develop an in-depth understanding of our customer s business and risk profile. We concentrate on analysing and solving problems before thinking about selling products. We strive for excellence and innovation through investing in the best people and the best technology. We can advise on every aspect of risk management design and implementation. Our advisors work in three teams in order to meet our clients risk management goals. FX Market Risk Advisory: financial price risk management, exotic options, statistical analysis, derivative training and education. Corporate Risk Advisory: analysis of foreign exchange and interest rate strategic risks, and development of risk management policies. Interest Rate Risk Advisory: interest rate risk management and portfolio analysis using proprietary technology. For the company which is developing formal foreign exchange or interest rate management policies, we can advise on every aspect of design and implementation. For companies with established, highly organised risk management frameworks, we can provide a useful periodic assessment. The following pages highlight the services of our Corporate Risk Advisory team. 1

Corporate Risk Advisory Currency risk We advise corporations and public enterprises on the management of currency risk, debt and excess liquidity. Identifying currency risk: pulling it all together We believe it is very important for a client to understand the entirety of its exposure how risks arise, why they are significant and how they interact. Transaction risks: those that result from known or accounted for currency cash flows: purchases, sales, financing transactions, intra-group dividend payments. Economic risks: those that result from anticipated or forecast currency cash flows: purchases, sales, financing transactions, intra-group dividend payments. Translation risks: those that arise from the translation of overseas assets, liabilities and earnings into domestic currency for accounting purposes. Strategic risks: those arising from competitors pricing behaviour or from exposures affecting customers or suppliers. Contingent risks: those that arise through bidding on contracts or merger and acquisition plans. Measuring currency risk: total information Once the sources of risk have been identified, we assess their importance to our client s business. Measurement issues include: The impact of foreign currency liabilities on debt ratios and interest rate cover. The appropriate horizon of time over which currency risk should be recognised. For example, can sourcing of suppliers be changed, can prices be raised and what is the length of the product cycle? The extent to which input prices, even when denominated in one currency, are related to other currencies. UBS Warburg has developed a variety of spreadsheet-based tools for analysing its clients foreign exchange exposure portfolios and quantifying the impact of portfolio decisions and hedging strategies. These tools incorporate market parameter simulations and calculate the impact of a wide range of possible hedges. One main objective of this analysis is to ascertain how the consolidation of a company s currency flows and currency assets increases or reduces the profile of risk and how they may most efficiently be managed. Managing financial risk Before recommending a risk management strategy, our approach focuses on gaining a full understanding of our client s exposures and its management philosophy. We would investigate: How can financial risk be defined and quantified for a particular company? What are the strengths and weaknesses of the company s approach to managing these risks? How do the hedging instruments used by the company match its hedging objectives and its specific risk profile? Managing foreign exchange, interest rate and if applicable, commodity risk are closely interrelated tasks. Each client will have different priorities, but our work would usually incorporate the following key steps: Identify the various types of financial risk: currency risk, interest rate risk and commodity risk. Measure the various types of currency exposure. Measure interest and commodity exposures. Define corporate policy on the control and management of these exposures. Compare the result of alternative hedging strategies. Execute hedging transactions efficiently, often in volatile markets. team has a diverse client base, both in terms of geographical location and advisory requirements. We work with clients in Europe, North America and Australia; we advise corporations and public enterprises on the management of debt and excess liquidity, as well as on the management of currency flows arising from business transactions. Our focus: how risks arise why they are significant how they interact 2 3

Defining corporate risk policy Interest rate management Keeping in control For every client, it is extremely important to establish policy guidelines on how risks can be controlled or managed, how far ahead they should be covered, and the benchmark against which performance is measured. For example, the introduction of FAS 133 raises a number of policy issues for US-based companies. Finding the right mix of currencies and debt structure. We help clients find answers to the following questions: How concerned should a company be about the effect of currency fluctuations on its earnings and net worth? How can the company ensure that those risks which are not managed or controlled do not become a threat? How active should the hedging policy be? What instruments should be allowed? How should the performance of foreign exchange management and the profitability of operations be measured? To what extent do in-house information systems enable the company to measure internal and external currency flows accurately? What are the benefits and drawbacks of centralisation versus decentralisation of foreign exchange management? How efficient are existing procedures for internal hedging and the use of offsets? How will a hedging programme be accounted for? Putting it in perspective The impact of interest rate movements on earnings varies from one company to another. For some companies, interest costs are unrelated to operating earnings and their results are fully exposed to interest rate volatility. Other companies, particularly financial institutions, operate in interest rate sensitive businesses and their exposure to interest rate movements is therefore more complicated to assess. We offer assistance in: Identifying and measuring interest rate risk: exposure to risk will depend on the interest sensitivity of operating earnings, the structure of the existing debt, and the extent of mismatch between interest rate sensitive assets and liabilities. Defining corporate policies on both liquidity and debt management: articulating guidelines against the background of budget, cash and covenant constraints, choosing a performance benchmark for single or multicurrency cash pools or debt, agreeing on the degree of active management. For every client, it is extremely important to establish policy guidelines on how risks can be controlled and managed. 4 5

Our expertise in practice A major automobile manufacturer The company was dramatically increasing its foreign sourcing from the Far East and Europe while simultaneously becoming increasingly dependent on sales in the domestic US market for its revenues. Our assignment was not merely to consider ways of hedging the exposure during times of US dollar weakness and to establish a decision-making and implementation structure, but also to assess the extent to which the company was indeed exposed on an economic basis. This involved completing an indepth analysis of the company s commercial environment and identifying foreign exchange influences and other potential economic offsets which might not have been initially apparent. We made a series of recommendations regarding the horizon of exposure management. Policy guidelines and board resolutions were drafted. This framework defined the acceptable bounds for hedging decision-making. A commodity trading company in the United States team was asked to review the company s policies in measuring the results of its foreign operations and its approach to managing translation exposure. We reviewed the currency structure of the various business lines, and recommended changes in functional currencies. New methods for the setting of performance targets to managers and the reporting of results against budgets were also advised, and their implementation was highly successful. An international airline team was retained to advise a well known international airline on all aspects of treasury management. We worked with the airline on implementing a centralised cash management system, thereby realising significant savings in transaction and interest costs. We advised on the development of cash flow forecasts, the measurement of sensitivity of results to exchange rate fluctuations and structuring of aircraft financings. A steel company team was retained to identify and quantify the company s principal economic exposures arising from competition with producers inside and outside the EU and the pricing behaviour of its raw materials. We developed a sensitivity model for use in hedging decisions. team also reviewed the management of export transactions and recommended the centralisation of foreign exchange management. We worked with the client to implement these recommendations successfully. A large diversified Australasian company For this diversified company we reviewed the company s policies concerning balance sheet exposures resulting from the translation of foreign currency debt and assets back into its local currency. We also evaluated the company s policies towards the management of its debt. Although it managed its liabilities actively, the framework within which interest rate exposures were measured and decisions were taken and implemented was acknowledged to be ad hoc. We suggested an alternative approach which had as its key features the measurement of debt at market values, the use of the concept of duration to measure the effect of changes in interest rates on the value of the debt and the monitoring of results against a pre-set benchmark. A Swiss precision company and a UK consumer goods company In both instances, the Corporate Risk Advisory team was retained to confirm and quantify these companies principal currency exposures and to recommend appropriate hedging policies. Both companies operations engender a complex matrix of cross-border flows, with exposures in all three of the worlds major currency areas. Our recommendations were accepted and we are advising these companies on a continuing basis on all aspects of risk management, including the consolidation of cash-flow forecasts, the design of hedging benchmarks and the timing and structure of hedges. A Scandinavian state-owned utility Since the mid-1980 s, the Corporate Risk Advisory team has been retained by an important Scandinavian utility company to provide advice on liability management. We have worked with the client to develop guidelines for managing the currency distribution of the portfolio and its maturity profile. As a state-owned entity, the company s risk preferences are naturally subject to political sensitivities. We identify market opportunities which are appropriate to the company s particular circumstances, and our expertise is especially helpful in managing exposures denominated in currencies outside the Euro area. We have also been instrumental in the company adopting a more active approach to managing the mix of fixed and floating rate debt in the portfolio. Against a shortterm local currency benchmark, the company has been able consistently to reduce its effective borrowing cost significantly. An Australian mining company The company has widespread commodity interests in Australia, Canada and the United States. The Corporate Risk Advisory team s initial project focused on analysing the company s long-term economic exposure. Although its revenue was denominated in U.S. dollars, the underlying relationship between a basket of major world currencies and real prices of key commodities argued for managing a portion of the company s debt on a currency portfolio basis. We assisted the company in drafting a Board policy for this area and in making debt management decisions on this basis thereafter. team also advised the company on the timing of conversion of future U.S. dollar receipts into Australian dollars. This involved managing a complex portfolio of forwards and purchased and written options. team was involved at all stages of the process and continues to advise the company on a regular basis, providing analysis of changing exposures and devising appropriate hedging strategies. 6 7

UBS Warburg: World class investment banking UBS Warburg is committed to providing a world class investment banking service to corporate, institutional and sovereign clients worldwide. We have the product breadth, the people and the capital strength to deliver matchless service across corporate finance, equity and debt capital markets, derivatives, risk management and trading. The philosophy which drives our entire business is the pursuit of unequalled global client service. The ability to understand, anticipate and meet client needs everywhere in the world is the focus behind everything that we do. Union Bank of Switzerland merged with Swiss Bank Corporation in June 1998 to create the new UBS AG, one of the largest financial services companies in the world. Warburg Dillon Read was established as the investment banking division of UBS AG. Following a reorganisation of our group structure in May 2000, the business of Warburg Dillon Read became known as UBS Warburg, a financial services group of UBS AG. This combined heritage has created a powerful emphasis on client relationships. We view our global product delivery, technology leadership and innovative approach simply as the means to provide the very best solutions to clients individual requirements. Across the board and across the world, this is our objective. Our solutions are backed by the strength and security of UBS AG s strong capital base and top credit ratings AAA /AA+ /Aa1 (IBCA, Standard & Poor s and Moody s respectively). 8 9

UBS Warburg 1 Finsbury Avenue London EC2M 2PP Tel: +44-020-7567 8000 Fax: +44-020-7568 4800 www.ubswarburg.com