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Treasury Management SOP

Section
Board
To be read in conjunction with

Treasury Management Policy

Approval Date
3 August 2018
Approved By
Chair: OP Board
Next Review
1 July 2019
Responsibility
OP Board
Purpose

Otago Polytechnic Limited (Ltd) is a risk averse organisation and therefore seeks to minimise risk arising from its treasury activities. It recognises that the appropriate management of treasury matters within a defined framework will both benefit and protect the organisation.

Treasury activity that may be construed as speculative in nature is expressly forbidden.

Procedure

RESPONSIBILITES

Deputy Chief Executive: Corporate Services

  • In conjunction with the Executive Leadership Team (ELT), develop the annual financial budget and long-term financial strategy/plans.
  • Manage the long-term financial position as outlined in the financial plan/strategy.
  • Ensure policy limits, management procedures and policies are implemented and complied with in accordance with the Policy.
  • Primary responsibility for managing bank relationships. Negotiation of bank funding and financial market dealing facilities if/when applicable.
  • Recommend changes to the Policy to the FAC.
  • Refinancing of existing bank loan/facilities upon obtaining Board approval.
  • Approve borrowing, interest rate risk management and cash management strategies within approved risk control limits and delegated authority limits.
  • Approve any allowable foreign exchange hedging within approved risk control limits and delegated authority limits.
  • Sources external advice in regard to foreign exchange transactions greater than $100,000.
  • Propose new counterparties and counterparty limits to Board.
  • Conduct an annual review of the Policy, treasury procedures and counterparty limits.
  • Approve all amendments to the Polytechnic’s records arising from checks to external bank counterparty confirmations.
  • Responsible for providing timely, high quality information on key financial and treasury activities of the Polytechnic to FAC and the Board (detailed in Appendix D).

 

Deputy Chief Executive: Business Services - Responsibilities include:

  • Reporting to the DCE: Corporate Services on treasury matters. Advise the CE and DCE: Corporate Services of significant treasury events.
  • Executing borrowing, interest rate risk management, cash management and foreign exchange risk management transactions in accordance with approved risk control limits and delegated authority.
  • Primary responsibility for monitoring risk positions within approved risk control limits.
  • Propose new borrowing requirements and strategies to the DCE: Corporate Services for consideration and approval.
  • Approving borrowing, interest rate risk management, cash management and foreign exchange risk management transactions in accordance with approved risk control limits and delegated authority.
  • Review treasury reporting from the FA and provide regular reporting to the DCE: Corporate Services.
  • Monitor and review the performance of the treasury function in terms of achieving its objectives.
  • Provide reports detailing appropriate forecast cash flows during the month and comparing actuals to those budgeted.
  • Ensure efficient cash management through improvement to accurate forecasting using appropriate modelling.
  • To take into account any financial considerations relevant to any new subsidiary/associate entities added to the Otago Polytechnic Limited Group.
  • Review and make recommendations on all aspects of the Policy to the DCE: Corporate Services, including dealing limits, approved instruments, counterparties, and general guidelines for the use of approved financial instruments.

 

Senior Financial Analyst (FA) - Responsibilities include:

  • Monitor treasury exposures on a regular basis, including current and forecast cash position, cash and investment portfolio, interest rate risk profile and foreign exchange rate exposures.
  • Design and recommend borrowing, liquidity, cash management and risk management strategies.
  • Monitor credit ratings and credit exposure amount of approved counterparties.
  • Complete the short and medium-term cash flow forecasts.
  • Account for all treasury transactions in accordance with legislation and generally accepted accounting principles.
  • Generate treasury reports.
  • Check compliance against policy limits and prepare treasury reports.
  • Ensure internal communication channels and systems for identifying, notifying, and recognising treasury exposures are efficient, accurate and working.
  • Arranging pricing and deal details with banks for treasury investments or interest rate instruments as requested by the DCE: CORPORATE SERVICES
  • Executing day-to-day cash management, interest rate and foreign exchange transactions with the Polytechnic’s bankers in accordance with approved risk control limits and delegated authority of the FA. In the event that the daily limit exceeds the FA delegated authority, authority must be granted by the DCE: Corporate Services or CE, respectively.
  • Execute treasury transactions (borrowing, interest rate risk management and cash management transactions in accordance with set limits and authorities).

 

Accounts Officer (AO) - Responsibilities include:

  • Settlement of investment, foreign exchange, and interest rate management transactions.
  • Check all treasury deal confirmations received from bank counterparties against internal deal documentation and report any irregularities immediately to the DCE: CORPORATE SERVICES. Where the irregularity relates to a DCE: Corporate Services approved transaction, report to the CE directly.

 

DELEGATED AUTHORITY LIMITS

Activity

Delegated

authority

Parameters

Approving and reviewing Treasury Management

Policy

Board

Unlimited (subject to statutory limitations)

Approve borrowing programme

Board

Subject to statutory and TEC approvals/ limitations

Acquisition/disposition of assets (non-financial)

Board

Subject to statutory approvals/ limitations

Approval to charge assets as security

Board

Subject to statutory and TEC approvals/ limitations

Transfer/register security

Board

Subject to statutory and TEC approvals/ limitations

Approving transactions outside Policy

Board

Subject to statutory and TEC approvals/ limitations

Approve treasury counterparties

Board

N/A

Approve new borrowing and bank loans/facilities

Board

Per borrowing resolution

Re-financing existing borrowing and bank

loans/facilities

DCE: Corporate Services

In accordance with the Policy’s risk control limits

Authorising signature list

DCE: Corporate Services

N/A

Opening/closing bank accounts

DCE: Corporate Services

N/A

Overall day-to-day treasury management

CEO

In accordance with the Policy’s risk control limits

Approve borrowing and lending arrangements

from/to related entities

DCE: Corporate Services

Subject to statutory limitations

Approving financial arrangements between third

parties including hire purchase and lease transactions

DCE: Corporate Services

Subject to statutory limitations

Adjust debt interest rate position

DCE: Corporate Services

In accordance with the Policy’s risk control limits

Managing debt/investment maturity profile

DCE: Corporate Services

In accordance with the Policy’s risk control limits

Annual review of Policy

DCE: Corporate Services

N/A

Ensuring compliance with Policy

DCE: Corporate Services

N/A

Approval of short-term investment of funds (Daily limit)

CEO

DCE: Corporate Services

FA

Board – unlimited (subject to statutory limitations) CEO <$10m (12 months)

DCE: Corporate Services <$10m (12 months) <$7m (12 months)

Approval of term borrowings – Budgeted (Daily limit)

 

The limit excludes interest rate rollovers on new and existing drawn debt.

CEO

 

DCE: Corporate Services

Board – unlimited (subject to statutory limitations) CEO <$10m (up to 10-years)

DCE: Corporate Services <$5m (up to 10-years)

Approval of term borrowings – Not budgeted (Daily limit)

 

Although not budgeted still within approved facility limits

CEO

 

 

DCE: Corporate Services

Board – unlimited (subject to statutory limitations) CEO <$2.5m (up to 10-years)

DCE: Corporate Services <$1m (up to 10-years)

Approval of working capital borrowing (Daily limit)

 

The limit excludes interest rate rollovers on new and existing drawn debt.

CEO

 

DCE: Corporate Services

 

Board – unlimited (subject to statutory limitations) CEO <$5m (<90 days)

DCE: Corporate Services <$5m (<90 days) DCE: Business Services <$3m (<90 days)

Hedging of Interest Rate Risk (Daily limit)

The limit excludes interest rate rollovers on existing swap transactions.

CEO

 

DCE: Corporate Services

Board – unlimited (subject to statutory limitations) CEO <$10m (up to 10-years)

DCE: Corporate Services <$5m (up to 10-years)

Hedging of foreign exchange exposures (Daily limit)

CEO

 

DCE: Corporate Services

Board – unlimited (subject to statutory limitations) CEO <$0.5m (12 months)

DCE: Corporate Services <$0.25m (12 months)

 

APPROVED FINANCIAL INSTRUMENTS

Category

Instrument

Working capital and core borrowing

·       Bank overdraft

·       Committed bank cash advance/revolving facilities

·       Bank term loans and term loan facilities

·       Medium Term Notes (MTN) and Floating Rate Notes (FRN) (up to 5- years)

·       Related party borrowings (up to 12 months)

Cash and treasury investments (less than 12-month maturities)

·       Bank bills (up to 90 days)

·       Bank term/call deposits

·       Registered Certificates of Deposit (RCD)

Interest rate management (borrowing only)

Forward rate agreements (“FRAs”) on:

·       Bank bills

Interest rate swaps including:

·       Forward start swaps

·       Swap extensions and shortenings Interest rate options on:

·       Bank bills (purchased caps and one for one collars)

·       Interest rate swaptions (purchased swaptions and 1:1 collars only)

·       Floating and fixed rate bank loans

Foreign exchange management

·       Spot foreign exchange

·       Forward exchange contracts (including par forwards)

·       Foreign currency deposit account

·       Purchased options and collars (1:1 collar structures)

 

Any other financial instrument must be specifically approved by the Board on a case-by-case basis and only be applied to the one singular transaction being approved. Ministerial approval may also be required (e.g. finance leases).

 

Use of approved financial instruments (subject to statutory and TEC requirements):

  • Interest rate and foreign exchange options must not be sold outright.
  • 1:1 collar option structures are allowable, whereby the sold option is matched precisely by amount and maturity to the simultaneously purchased option. During the term of the option, only the sold side of  the collar can be closed out (i.e. repurchased) otherwise, both sides must be closed simultaneously. The sold option leg of the collar structure must not have a strike rate “in-the-money”.
  • Interest rate options with a maturity date beyond 12 months that have a strike rate higher than 2.00% above the appropriate swap rate, cannot be counted as part of the fixed rate/hedged percentage calculation.

 

BANK AND TEC FINANCIAL RATIOS AND LIMITS (per existing arrangements)

Measure

Limit

Total Debt to Total Debt plus Equity Ratio (total debt to total debt plus

total equity)

·       Ratio cannot exceed 35% at any point in time

Earnings to Funding Costs (consolidated net profit before funding

costs, income tax and extra ordinaries(1)/interest, charges and fees related to funding)

·       Earnings for each financial year are not less than 2.0x Otago Polytechnic Ltd’s Funding Costs for that

financial period

Measure

Limit

Current Maximum Term Borrowing Limits

·       1 January 2017 to 31-December 2017 NZD 20 million

·       1 January 2018 to 31-December 2018 NZD 20 million

·       1 January 2019 to 31-December 2019 NZD 20 million

·       1 January 2020 to 31-December 2020 NZD 17 million

·       1 January 2021 to 31-December 2021 NZD 14 million

·       1 January 2022 to 31-December 2022 NZD 10 million

·       1 January 2023 to 31-December 2023 NZD 6 million

·       1 January 2024 to 31-December 2024 NZD 3 million

·       1 January 2025 to 31-December 2025 NZD 0 million

Leverage Ratio (Net Debt/EBITDA(2)) (interest bearing liabilities

minus cash or cash equivalents/EBITDA)

·       No more than 3.5x during the period (January 2017 – 31

December 2025) the Consent is in place

Debt Equity Gearing Ratio (bank borrowing plus finance lease

borrowing/ bank borrowing plus finance lease borrowing plus equity)

Ratio of 20% or less during the period (January 2017 – 31

December 2025) the Consent is in place

Interest Cover Ratio (EBIT (3) before unusual and non-recurring items/

interest paid)

·       Not less than 3.0 x for each year the Consent remains in place

Net Surplus Ratio (net surplus before unusual and non-recurring

items to total revenue)

·       At least 2.5% in each year the Consent remains in place

Cash Flow from Operations Ratio (operating cash receipts/operating

cash payments)

·       Ratio of at least 111% each year the Consent remains in

place

Liquidity Ratio (cash and cash equivalents*; plus any undrawn committed borrowing facilities that would not result in a breach if

drawn down / cash outflow from operations)

·       At least 8.0% or higher (measured against the 12-month forecast peak net funding as long as the Consent remains

in place)

1 Extra ordinaries are items that are not expected to occur frequently and are distinct from your ordinary operations

2 Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA)

3 Earnings Before Interest and Tax (EBIT)

 

The above ratios will be measured against year-end audited financial results at the Otago Polytechnic Limited Consolidated Group level.

In addition to the above Financial Covenants, the TEC consent to borrow provides for Monitoring Covenants, which, when triggered by actual or forecast performance, The Polytechnic will supply a paper to FAC covering the issue. The Polytechnic will also supply TEC a copy of this paper and the minutes from the meeting indicating the FACs response.

*When referring to cash and cash equivalents, we would typically call these liquid funds, but for consistency with the TEC covenants, we will call these cash and cash equivalents.

Cash and cash equivalents are unencumbered assets defined as being:

  • Overnight Bank cash deposits
  • Wholesale/retail bank term deposits no greater than 30 days
  • Bank issued RCD’s less than 181 days.

 

Statutory requirements

The Polytechnic must comply with Section 200 of the Education Act 1989, which prescribes that:

  • The Council of an institution may establish, maintain, and operate bank accounts in the name of the institution at any registered bank or any registered building society with which a Crown entity may establish, maintain, or operate a bank account under section 158 of the Crown Entities Act 2004.
  • As soon as is practicable after receiving any money, the Council shall pay it into one or other of the institution's bank accounts.
  • The Council or delegated authority shall properly authorise every withdrawal and payment of money from any of the institution's bank accounts.

The following must be paid into a Crown Bank Account:

  • All interest received from the investment; and
  • All money received from the redemption or maturity of the investment or the sale or conversion of the securities.

 

Under the Education and Training Act 2020, the Polytechnic is also required to target and maintain a number of financial metrics / ratios subject to the Tertiary Education Commission (TEC) definitions. The TEC’s reporting regime, the Tertiary Education Institution Financial Monitoring (TEIFM) return focuses on a range of financial targets, of which several are directly applicable to the management of treasury risks. The Polytechnics’ consent to borrow articulates the specific Financial and Monitoring Covenants which apply to the Consent granted.

 

FOREIGN EXCHANGE RISK

  • Foreign exchange risk is defined as the adverse impact on the NZD expenses and asset purchases (e.g. costs related to international learners, purchase of library supplies, IT equipment etc.) from foreign exchange rate movements.
  • Foreign exchange exposure based on continually updated forecast payments is recognised on the basis of:
  • Forecast payments, based on 12-month rolling payment forecasts for each currency, reviewed, and updated quarterly or as appropriate and incorporating materiality thresholds (total annual net foreign currency exposures greater than NZD 2.5million and individual net foreign currency exposures greater than NZD 100,000). Any foreign exchange receipts are netted against same currency payments.
  • Value in currency of payment.
  • Month or date of purchase.
  • Value expressed in NZD calculated at market exchange rates prevailing on the day of recognition.
  • Foreign exchange exposures are recognised and managed when total monthly net payments or individual currency amount exceeds NZD 100,000.

 

APPROVED COUNTERPARTIES

The counterparty must have received formal ministerial approval as required by the Crown Entities Act 2004 and meet the criteria set out in the section 158(1) of the Act. Approved counterparty credit limits are as follows:

 

Counterparty / Issuer

Minimum long term / short term credit rating

Investments maximum per counterparty ($m)

Risk management instrument maximum per

counterparty ($m)

Total maximum per counterparty ($m)*

Total maximum per counterparty (as % of equity - $98m)*

NZ Government

N/A

Unlimited

none

Unlimited

Unlimited

ANZ

AA-/ A-1

10.0

10.0

20.0

20%

ASB

AA-/ A-1

10.0

10.0

20.0

20%

BNZ

AA-/ A-1

10.0

10.0

20.0

20%

WPC

AA-/ A-1

10.0

10.0

20.0

20%

Kiwibank

A/A-1

5.0

5.0

10.0

10%

This summary list will be expanded on a counterparty named basis which will be authorised by the Board

 

See 9.4.2 for instrument weightings
The total weighted exposure is measured at month end reporting and includes the total weighted exposure of investments and current credit exposure amount for interest rate and foreign exchange derivatives for all bank counterparties.

*The total maximum per counterparty (either as $m or % of equity) that is lower should be used.

 

TREASURY REPORT

The DCE: Corporate Services is responsible for providing timely, high quality information on key financial and treasury activities of the Polytechnic to Management, the FAC and the Board. These reports will be prepared by the DDCE: CORPORATE SERVICES and FA. The following treasury management reports cover up to date information about:

  • Revenue, expenditure assets and liabilities performance against budget
  • Current and forecast cash flow position
  • Actual and forecast capital expenditure against budget
  • Invested funds
  • Current and projected borrowings and interest rates
  • Any hedging activity including external advice on the same
  • Bank governance and compliance with covenants
  • Any changes in the credit ratings of the Polytechnics’ bankers
  • Performance against financial criteria set by government agencies
  • Any Policy breaches and mitigating actions; and
  • Any other matters that may impact on the financial management, performance, or risks of the Polytechnic.

 

Report

Frequency

Prepared by

Recipient

Treasury Exceptions Report

As required

DCE: Business Services

DCE: Corporate Services

Treasury Report

 

Borrowing limits

Funding and Interest Position Funding facility/usage

New treasury transactions

Cash flow forecast report

Liquidity position/limit Foreign exchange Counterparty credit

Financial ratios (TEC and bank) Investment Schedule

Treasury Exceptions Report

Monthly

DCE: Business Services / FA

·       Executive Leadership Team- (CEO, DCE: Corporate Services)

·       Finance and Audit Committee

Treasury Report

Borrowing limits

Funding and Interest Position Funding facility/usage

New treasury transactions Cash flow forecast report Liquidity position

Foreign exchange Counterparty credit

Financial ratios (TEC and bank) Derivative valuations

Treasury performance Market/strategy commentary/update

Treasury Exceptions Report

Quarterly or relevant meeting date

DCE: Corporate Services / FA

·       Finance and Audit Committee

·       Board