BOND ISSUANCE MANAGEMENT WITH SAP TRM Boston, April 2016
Introduction Corporations use bond (debt) issuances as one of its financing strategy for longterm financing in addition to other investment vehicles such as bank loans or equity issuances. On the other side, in the current low interest environment, investors are searching for higher yields and see a good opportunity for secure and profitable investments in highly rated corporates. As we see from the diagram below the bond issuance market is highly correlated with the stock market. Issuance volumes increase with the increase in equity markets (measured against the Dow Jones Industrial Average, DJIA, as a comparison). Last year (2015) we see an exception: US Corporate Bond Issuances exceed the 1,500 bn USD issuance volume the first time although the DJIA sank by about 2.3%. Between 2008 and 2015 the US corporate bond issuance market recovered in the aftermath of the financial crises by doubling its volume. Source: Issuance Data from SIFMA (Securities Industry and Financial Markets Association) DJIA Data from Google/Finance We see furthermore that about 2/3 of all bonds are issued as callable bonds. If we consider ratings listed in SIFMA data we can observe that over 80% are issued as investment grade, the rest as high yields. It can be presumed that only companies with a certain size have access to the corporate bond market. Corporations with the intent to issue bonds face various requirements which go beyond the requirements for bank loans: Published bond prospectus according to SEC requirements Official (and solid) credit rating System support especially for more complex issuances US GAAP compliant accounting and published financial statement The US GAAP accounting of bond issuance according FASB is mainly ruled by ASC 470 (Debt) and 835 (Interest) and here especially ASC 835-30 (Imputation of Interest). The codes require an amortization of discounts/premiums as well as of costs. Lately the FASB started an initiative to simplify the calculation and presentation of issuance costs. Today in practice discount/premium and each different issuance cost categories (such as underwrite fee, legal fee, etc.) may have different start and amortization Page 1
target dates. This leads to a complex amortization structure because each cost type defines its own amortization curve over the life of the debt. Significance for Practical Use When the general requirements mentioned above are broken down various accounting and system requirements can be extracted: Conditions in Master Data Management Bond issuances have a variety of different conditions beyond typical fix rate bonds and hence require a more comprehensive system support for a proper data management. Among others requested condition structures a system has to handle: Fix to Float and Float to Fix Sinking Fund Structures Embedded (Multiple) Call Options (Mandatory) Convertibles This requires a broad functionality in the financial mathematic. For instance, each coupon payment will need to be directly wired out of the system. That means the system generates the legally binding interest payment which will be verified by custody banks and investors. Mistakes in the calculation and cumbersome processes which lead to delayed payments will have an impact on how the market perceives the issuer. Transactions In order to correctly handle buy-backs and re-openings, lot accounting is requested according US GAAP. Furthermore mirror transactions for intercompany trades have to be supported. That means that a single security master file needs to be used as a debt and investment instrument simultaneously for different legal entities within the same corporation. Also, US GAAP requires complex long-term (more than one year) to current (less than one year) debt transfers to be applied. All debt positions which will be repaid within the next year plus all dependent components (such as amortizations, unamortized portions and fees) have to be transferred on a pro rata basis. Hedge Accounting As a specific accounting procedure hedge accounting for debt instruments is applied. In practice derivative instruments are used to mitigate risk exposures for scheduled issuances as well as for running debt positions. For interest rate hedges of running debt positions Interest Rate Swaps (IRS) are common (if needed also as (flat) compounding swaps) to link one or more swap positions to one issuance. Scheduled bond issuances in the future are hedged with forward starting swaps or swaptions. Actually this is a hedge of a forward transaction which is a derivative instrument by itself. Therefore systems which manage bond issuances also have to have the capability to handle derivatives and have to be able to provide hedge accounting functionality meeting US GAAP requirements. The complex amortization requirements, especially, together with the adjusted amortized cost curve under hedge accounting require a comprehensive system support to be compliant with US GAAP accounting guidelines. Page 2
Solution with SAP Treasury and Risk Management SAP TRM (Treasury and Risk Management) is SAP s software package to manage debts and investment position with a comprehensive functional scope. SAP TRM is a multi-asset and multi-gaap platform used by many major financial institutions and corporate companies world-wide. It comprises portfolio management functionality as well as several analytical reporting features, including risk management analysis. Furthermore it is fully integrated into SAP s general ledger and cash management applications for liquidity and bank communication management. For issuance management SAP TRM provides extensive functionality. All relevant instrument types can be used as debt and investment instruments. This enables corporates to manage their short-term debt programs with commercial papers and credit lines using SAP TRM. For the long-term bond issuance management master data as they are publically available plus internal indicative data can be enabled easily through configuration. Issue brochures and links to important web pages can be attached to the SMF in different file formats. SAP TRM supports the majority of the transactional and process requirements listed in the section above especially with COMPIRICUS features for an advanced issuance management approach. These features allow defining different amortization components for an independent amortization calculation with deviated amortization target dates. Each Amortization component will be treated separately and generates an own amortization schedule for future amortizations up to its respective amortization target date. Furthermore beyond SAP TRM s broad reporting possibilities COMPIRICUS added special reporting information for specific external requirements. For completion of the bond issuance management with SAP TRM COMPIRICUS offers an interface package with its Financial Adapter to load market data from Bloomberg and Reuters as well as imports transactional data such as for shortterm debt programs with commercial paper or further instrument classes. Page 3
About COMPIRICUS COMPIRICUS is a German US consulting company and software provider. We focus on asset, risk and treasury management topics, especially on corporate treasury, investment accounting, statutory reporting and investment controlling & forecast with SAP FAM (Financial Asset Management) or TRM (Treasury and Risk Management) respectively. Our team knows SAP s Treasury and Risk Management application from the very first line of code 25 years ago. We have supported many SAP TRM implementations around the globe, in the US also for NASDAQ and NYSE listed companies. COMPIRICUS is a SAP service partner and a SAP application development partner (for HANA and statutory reporting in the insurance industry). For information: www.compiricus.com Contact COMPIRICUS Inc. Jorg Pappert 470 Atlantic Avenue, 4th Floor Boston, MA 02210 Tel: +1 617 273 8045 URL: www.compiricus.com E-mail: jorg.pappert@compiricus.com Page 4