We caught up recently with 1 of our connections Dillon who until quite recently, was working with an ASX Top 30 company. As this was more of a social catch-up and not a strict MMA interview, the format of this post differs from prior interviews; it is more direct without beating around the bush.
- Leveraging law degree: the hidden benefits
- Key activities within treasury
- Outlook for the future; a treasury man’s perspective
Quick context on where it all began
Dillon: ”I to be a lawyer while in high school. I got my law degree but then i decided it wasn’t for me when i went through my clerkship in a small practice. Basically i felt it was just a lot of documentation and point picking.
That said I’m still very glad of completing my law degree as:
- it taught me to look at both sides of a story i.e. there is no real right and wrong answer in anything. So for example when bankers push some guarantee clause on a new loan we are negotiating, i can see where they are coming from even though i don’t agree with it.
- the degree has transferable skills such as negotiation which i use when i review loan docs with bankers to ensure it works in our company’s favour
- its flexible. It allows me to jump into other industries – Mining, Banking, Property etc. Anyone who can frame an argument or an issue in a coherent way will be useful.
— The power of having good relationships —
MMA: Thanks for spiel Dillon. These are the interviews I like; i ask for background and I’m provided with enough information without any prompting.
So what did you do after that?
Dillon: I had a very eclectic experience after that. I joined a consultancy firm, did international sales and went on an overseas stint to London.
When i returned from London, I did consultancy in a Big 4 accounting firm and started on a part-time MBA. It was during an MBA advanced corporate finance elective that I realised how cool and versatile derivatives and options were.
MMA: Ahh, I was about to ask you where the connection was. So how did your most recent role in Treasury come up?
Dillon: I was recruited by a friend who left the big 4 and went to my last employer. I started in the Tax area and gradually asked to be moved into Treasury.
— All the Treasury stuff —
MMA: Good stuff. So now that you’ve taken us there, can we talk about your company and what you did within Treasury?
Dillon: Sure. I don’t really want to give the company away so I’ll describe it as being an ASX Top 30 company that has a low gearing ratio and a fairly hefty debt profile in the billions.
So what did I do? My accountability splits looked like this:
- 50% of my time is within Risk;
- 30% within funding;
- 20% spread out in cash management, projects and reporting.
— Treasury / Risk —
Dillon: So that big chunk of 50% was in risk being the interest rate hedger guy. From a day-to-day perspective this meant coming into work and checking the market conditions; our mark-to-market. Then I would perform a series of risk-based tests e.g. cash flow at risk, stress tests, scenario analysis etcetera. – to see if we need to amend an existing or implement a new trade
For simple vanilla trades, our group Treasurer needs to sign off prior to execution. For more complex ones, our CFO needs to approve. As you know, that’s just proper procedural controls we have as these are $000′s million notionals.
MMA: I would be shocked if you did NOT have that in place.
Dillon: That’s right, you want to make sure the process is air-tight.
Over the last few years, we eliminated our short volatility positions. We had sold these complex positions pre-GFC before my time, and we gradually traded our way out of these positions and eliminated potential payouts of hundreds of millions.
MMA: So that was your role in risk..
Dillon: ..Oh, there were other activities too. So for example as part of the daily monitoring process, I would also be part of creating strategies – determining optimal fixed hedging strategy for the group. So I’ll group these activities as strategy-work within risk.
I’ll expand a little on other day-to-day activities in risk.
Dillon: I run models. I deconstruct our complex trades into its elements. I price plain vanilla to complex interest rate and foreign exchange derivatives. Where I need to, I execute transactions subject to that sign-off I was talking about earlier.
MMA: Thanks for adding that on.
Dillon: I probably sound like a real nerd.
MMA: Dillon – your my kind of nerd.
— Treasury / Funding —
MMA: So can we touch on funding?
Dillon: Sure. So funding is all about how much, what,where and when. That’s dollar amounts, average maturity of x, whether long term borrowing is better than short term and where we source our funding, eg. local or overseas. And if overseas, which market? So with refinancing as you know, we pay a higher price for securing longer term funds so its just one of these trade-offs you have to accept if you are unwilling to ride short term volatility.
MMA: Basic risk-reward.
Dillon: Exactly. So that now takes me onto funding itself and I’ll start off with debt.
We issue and we buy back our bonds if the price is right.
MMA: I like how you started that..”we issue and we buy.” No-frills buy and sell.
Is this relegated to just the domestic market?
Dillon: No. We did an international buyback which also meant executing cross currency IR swap.
In addition, we also have private placements internationally. And when you do one of these, as with any debt, you will understand the meaning of administration pain i.e. due diligence.
MMA: Hahaha. I hope that’s the end of your pain!
Dillon: Uh-uh. We also have ISDAs to contend with.
MMA: When i was working for one of the banks, I sat across an ISDA team. A team whose sole job was to remove the pain.
Dillon: Well, good for the banks. We’re not a bank so we don’t have the luxury of an ISDA team. It was a bit epic when you come across issues like of cross-guarantees! But my law training did help.
MMA: Indeed. So what happens after you issue or buy?
Dillon: After? Then it’s all management and eventual settlements of debt. We issue low where we can, but you can never time the market. And just to tie this in with what I previously mentioned, we only buy back if the debt is cheap as it was just after post-GFC. That’s where the forecasting and pricing activities I mentioned come in. Like all companies, we have a target capital structure – gearing ratio, average duration of debt, WAC of debt, WACC in general etc.
And to tie this even further with another earlier point, funding also encompasses selecting the lead issuer. What their reach and expertise are in the specific market and so forth.
Then just to expand on monitoring-side, I also perform forecasts on our group’s liquidity position as well as our interest rate position.
— Treasury / All the other stuff —
MMA: Great stuff D-man – nicely tied together. So I guess now we’re hitting that final 20%.
Dillon: Yep. So we implemented a couple of Treasury management system at our company. We still do some work in Excel but bulk of modelling and monitoring is now within the new systems.
And as part of those, I was able to streamline the reporting process and create an automatic cash sweep process.
MMA: Some great wins there for your company.
Dillon: Yes, they were pretty chuffed about it.
And with reporting, that’s just:
- Annual basis – the standard Annual Reports, Investor preso’s,
- Monthly basis – board reports, risk papers,
- Daily/Weekly basis – market monitoring, newsletters and research.
MMA: A comprehensive summary.
Dillon: Thanks and no problem.
— Dillon’s outlook —
MMA: So before we conclude, can I quickly ask your opinion on where we are heading?
Dillon: I can’t predict the future – no one can – so I won’t even try. But all I can say is that the EU, US fiscal cliff, and seemingly China slowdown is creating a lot of uncertainties for corporate planning. If the EU have to write down debt and disintegrate, so be it. Likewise in the US, just tell us what you are going to do, good news or bad news. Once the world knows what’s going to happen, we can move on and plan accordingly.
The uncertainty has meant that while interest rates are low, credit risk remains high. So, the net effect is that overall cost of borrowing remains high. One thing for sure is that Corporates are not taking on risk in their books, so you’re not going to get them to sell options and the kitchen sink just to bring down the cost of funding 5bps or so. It’s all vanilla and long vols these days. It’s of course the right thing to do, but from a selfish point of view, it’s not that interesting for me now. Hahaha!
From my own personal perspective, I’d like to be involved more in managing international and commodities risk. I want to build on my interest rates risk management expertise. One should always be learning.
MMA: Short, sweet and to the point.
Hey I know we both have to jet but I really do appreciate your time breaking down what you. I’m sure a few readers out there will find something out of this.
Dillon: No problem at all and hope to catch you again soon.
And this concludes Treasury interview with Dillon. We wish him all the best in finding his next role and we have no doubt he will succeed where he lands.
Note that this interview uses real people working in the Australian market. Dillon’s name has been masked upon his request.
Care to comment? We would like to hear from you.