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Treasury Management

Section
Board
To be read in conjunction with

Treasury Management SOP 

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

The purpose of the Treasury Management Policy is to outline approved policies and procedures in respect of all treasury activity to be undertaken by Otago Polytechnic Limited (Ltd) to promote prudent, effective, and efficient financial management and to set out the treasury function, framework and related policy guidelines within which liquidity risk, cash and investments are managed by the Polytechnic.

 

All staff must understand their responsibilities and adhere to the terms of this Policy.

Compliance

The Polytechnic is required to comply with all relevant legislation including:

Policy

1.         Full compliance to the policy should be achieved within six months of the policy approval date.

 

2.         SCOPE

2.1.        The Policy applies to all Otago Polytechnic Ltd Board Members, Staff and Contractors.

2.2.        Treasury management activities and treasury risks are defined as:

2.2.1.  Borrowing

2.2.2.  Cash management

2.2.3.  Interest rate risk management

2.2.4.  Foreign exchange risk management

2.2.5.  Short term investment.

 

3.         OBJECTIVES

3.1.        The objective of this Policy is to control and manage costs and treasury investment returns and safeguard financial resources.

3.2.        The Polytechnic will:

3.2.1.  Minimise costs and risks in the management of its borrowing.

3.2.2.  Monitor and report on borrowing financial covenants and ratios under the obligations of lending arrangements, and Tertiary Education Commission (“TEC”) requirements.

3.2.3.  Ensure compliance with TEC and external borrowing approval requirements.

3.2.4.  Minimise exposure to adverse wholesale interest rate movements.

3.2.5.  Proactively manage interest rate risks.

3.2.6.  Arrange and structure long-term funding at the lowest achievable interest margin from debt lenders.

3.2.7.  Optimise flexibility and spread of debt maturity.

3.2.8.  Invest, borrow, and transact interest rate risk management instruments within an environment of control and compliance.

3.2.9.  Monitor, evaluate and report on treasury compliance and performance in an accurate and timely manner to the Chief Executive, Finance and Audit Committee and the Board.

3.2.10.              Minimise exposure to counterparty credit risk by dealing with and investing in credit worthy counterparties.

3.2.11.              Ensure that all statutory requirements of a financial nature are adhered to.

3.2.12.              Ensure adequate internal controls exist to protect the Polytechnics’ financial assets, prevent unauthorised transactions, and project a professional image of financial and management control.

 

4.         BORROWING ACTIVITY: the following borrowing criteria apply:

4.1.        All facilities and borrowing limits are to be approved by the Otago Polytechnic Limited Board (“Board”) as part of the annual budgeting process or by resolution of Board before the borrowing is implemented.

4.2.        The Board approved borrowing amount will form the threshold limit of borrowings for management while drawdown amounts must be in line with delegated authority limits, the exact timing and amount of drawdowns will be at the discretion of management.

4.3.        All legal documentation in respect to borrowing, investment and financial instruments will be approved by the Polytechnic’s solicitors prior to execution.

4.4.        The Polytechnic will not enter into any borrowings denominated in a foreign currency.

4.5.        The Polytechnic will comply with TEC, statutory and banking covenant requirements for borrowing.

 

5.         RESPONSIBILITIES

5.1.        Board reviews this policy and the annual financial budget (including borrowing).

5.2.        Board has ultimate responsibility for ensuring that there is an effective framework for the management of treasury risks and will determine the level and nature of risks that are acceptable, given the underlying objectives of the Polytechnic.

5.3.        Board delegates overall responsibility for treasury management to the Chief Executive (CE) in line with policy Delegations from Board to the Chief Executive.

5.4.        The CE delegates management responsibility to the DCE: Corporate Services in line with policy Authorities and Delegations from Chief Executive.

5.5.        The DCE: Corporate Services is responsible for the overall management of treasury within the Polytechnic. For listed responsibilities see the SOP. The DCE: CORPORATE SERVICES delegates day-to- day operations to the DCE: Business Services/DCE: Corporate Services).

5.6.        The DCE: Corporate Services is responsible for the day-to-day management of treasury-related risks. For listed responsibilities see the SOP.

5.7.        The Senior Financial Analyst (FA) assists the DCE: Corporate Services with execution of hedging decisions and the day-to-day monitoring of the Polytechnic’s borrowing, liquidity, foreign exchange, and investment positions relative to the Board-approved policy limits and management’s delegated authorities. For listed responsibilities see the SOP.

5.8.        The Accounts Officer (AO) is responsible for the checking and transactional processing of interest rate / foreign exchange hedging, investment, and cash management transactions to separate the line of responsibilities and achieve segregation of duties away from the FA and DCE: Corporate Services.  For listed responsibilities see the SOP.

 

6.         DELEGATION OF AUTHORITY AND AUTHORITY LINES

6.1.      All delegated authorities and signatories must be reviewed at least annually to ensure that they are still appropriate and current.

6.2.      A comprehensive letter must be sent to all bank counterparties at least annually to confirm details of all relevant current delegated authorities empowered to bind the Polytechnic.

6.3.      Whenever a person with delegated authority on any account or facility leaves the Polytechnic, all relevant banks and other counterparties must be advised in writing in a timely manner to ensure that no unauthorised instructions are to be accepted from such persons.

6.4.      Delegated authority limits are specified in the SOP.

 

7.         DEBT MANAGEMENT

7.1.        Borrowing Objectives - The Polytechnic’s borrowing objectives, while complying with bank lenders financial ratios and limits, are to balance:

7.1.1.  Providing ongoing liquidity and funding support to enable the Polytechnic to achieve its education objectives and financial strategy.

7.1.2.  Minimising costs and risks in the management of borrowing.

7.1.3.  Arranging and structuring long-term borrowing at the lowest achievable interest margins and fees.

7.1.4.  Optimising flexibility and spread of debt maturities.

7.1.5.  Minimising funding risk.

7.2.        Liquidity / Funding risk - control limits are as follows:

7.2.1.  Sufficient liquid funds (cash and cash equivalents) and/or undrawn committed borrowing facilities are available for at least 108% of the 12-month forecast peak net funding requirement. Approved cash/treasury investments are set out in the SOP.

7.2.2.  Funds from related parties should not be included within the liquidity measure unless formal documentation of a committed debt facility/loan is executed between the parties.

7.2.3.  The maturity profile of the total committed funding in respect to all external borrowing, bank loans, term debt and committed bank facilities, is to be controlled by the following system and applies when external core debt exceeds $10 million:

 

Debt Tenor

Minimum (% of total debt)

Maximum (% of total debt)

0 to 2 years

0%

60%

2 to 5 years

20%

60%*

5 to 10 years

0%

40%*


*This limit can increase to 100% where facilities are flexible, with ability to

repay with less than 30 days’ notice without penalty (i.e. zero-cost right to

terminate / repay).

 

7.2.4.  The amount and expiry date of all bank loans, committed bank facilities and term debt will not exceed the maximum amount and term of the Consent to Borrow or Ministerial Determination of Exempt Borrowing (whichever is applicable).

7.2.5.  Approved borrowing instruments are set out in the SOP.

7.2.6.  The maximum borrowing term is 10-years.

7.2.7.  A maturity schedule outside these limits will require specific Board approval.

7.3.        Financial Arrangements

7.3.1.  Financial arrangements between the Polytechnic and a third party, including hire purchase and any leasing transactions, may not be entered unless approved by the DCE: CORPORATE SERVICES.

7.3.2.  The Polytechnic has entered into a Multi Option Credit Line (MOCL) agreement with its bank (Westpac New Zealand Limited) in order to ensure that funds are available to meet debt obligations.

7.4.        Borrowing ratios and limits

7.4.1.  Borrowing will be managed within the financial ratios and limits required by bank lenders and the TEC. Financial ratios and limits are outlined in the SOP.

7.4.2.  The FA ensures that these requirements are complied with at all times.

7.4.3.  Where these limits are likely to be exceeded, notification to FAC, Board, TEC and bank lenders is necessary.

7.5.        Security arrangements

7.5.1.  Subject to clause 7.5.3 the Polytechnic’s borrowing, interest-rate and foreign exchange risk management activities will be unsecured by way of a Deed of Negative Pledge.

7.5.2.  Financial covenants may include ratios related to gearing and interest coverage.

7.5.3.  The Polytechnic does not offer security by way of a charge over land and buildings. Physical assets may be secured where:

  • There is a direct relationship between the borrowing and the purchase or construction of the asset, which it funds, and
  • The Polytechnic considers a charge over physical assets to be appropriate, and.
  • Any pledging of physical assets must comply with all Treasury Management Policy, statutory and regulatory requirements and
  • Bank lending may dictate a maximum percentage of specific assets (as a percentage of total assets) that specific security may be given e.g., 15% and
  • Approved by Board.

 

8.         SHORT TERM INVESTMENT

8.1.        General Framework

8.1.1.  The Polytechnic will utilise its treasury investment portfolio to meet operational funding requirements. Investment funds are sourced from operating cash surpluses arising from normal operations. The portfolio is short-term in nature given the need to fund the operational and capital spending requirements.

8.1.2.  Section 203(4) of the Education Act 1989 provides that the Polytechnic must invest funds in accordance with s65I (1) and (2) of the Public Finance Act 1989.

8.1.3.  The intention that the Polytechnic will exercise its power to invest in a manner that is conservative and risk averse.

8.1.4.  The Polytechnic recognises that all investments held, should be low risk which generally means lower returns.

8.2.        Investment objectives - Treasury investments are arranged to provide sufficient liquid funds for planned expenditures and allow for the payment of obligations as they fall due.

8.3.        Related entities and subsidiaries - Under the Public Finance Act, s65I (1), the Polytechnic is permitted to provide funding to related entities and subsidiaries for purposes that are not for monetary gain, i.e., educational. If the purpose is for monetary gain, Ministerial approval is required.

8.4.        Treasury investment maturity limits

8.4.1.  The Polytechnic will hold at least $50,000 NZD in the current account, with surplus cash automatically swept/offset to an interest-bearing overnight call account. Alternatively, the Polytechnic will arrange with its bankers for the call account interest rate to be paid on all current and call bank accounts.

8.4.2.  $500,000 NZD should always be available within 30 days.

8.4.3.  To ensure the matching of treasury investments to expenditure, investment terms are no more than 12 months. The control limits are as follows:

 

Period

Minimum

Maximum

0 to 3 months

50%

100%

3 to 12 months

0%

50%

 

9.         RISK RECOGNITION / IDENTIFICATION / MANAGEMENT:

9.1.        Interest rate risk recognition

9.1.1.  Interest rate risk is the risk that borrowing costs (due to adverse movements in market interest rates) will materially exceed planned/budgeted projections, adversely impacting cost control and capital investment decisions, returns and feasibilities.

9.1.2.  The primary objective of interest rate risk management is to reduce uncertainty relating to interest rate movements through fixing of borrowing costs. High levels of certainty around borrowing costs over multiple years are to be achieved through the pro-active management of underlying interest rate exposures.

9.2.        Borrowing interest rate limits

9.2.1.  The following risk control limits will only apply where 12 month forecast core external debt exceeds $10 million. Exposure to interest rate risk is managed and mitigated through the risk control limits below. The Polytechnic’s core external debt should be within the following fixed/floating interest rate risk control limits (forecast debt amounts have been added to illustrate position):

 


Debt Interest Rate Policy Parameters (calculated on rolling monthly basis)

Debt Period Ending

Debt Amount

(NZDm)

Minimum Fixed

Maximum Fixed

Actual Fixed

Compliant (Y/N)

Current

15.9

45%

85%

 

 

Year 1

18.8

40%

80%

 

 

Year 2

22.4

35%

80%

 

 

Year 3

28.2

30%

70%

 

 

Year 4

32.1

20%

70%

 

 

Year 5

34.8

0%

65%

 

 

Year 6

25.6

0%

65%

 

 

Year 7

16.5

0%

60%

 

 

Year 8

6.9

0%

60%

 

 

Year 9

0

0%

55%

 

 

Year 10

0

0%

50%

 

 

 

9.2.2.  The resulting interest rate risk profile limits based on the existing forecast debt profile is represented as follows:

 

 
 

  • “Fixed Rate” is defined as an interest rate repricing date beyond 12 months forward on a continuous rolling basis.
  • “Floating Rate” is defined as an interest rate repricing within 12 months.
  • “Core debt” is defined as drawn debt not expected to be repaid within the next 12 months (i.e., excluding working capital).
  • The percentages are calculated on the rolling 12 month forecast core debt amount calculated by management (signed off by the DCE: CORPORATE SERVICES). This allows for pre-hedging in advance of projected physical drawdown of new/refinanced debt. When approved forecasts are changed, the amount of fixed rate/hedging in place may have to be adjusted to ensure compliance with Policy minimums and maximums.
  • Floating rate debt may be spread over any maturity out to 12 months. Approved financial instruments are listed in the SOP.

9.3.     Foreign exchange risk

9.3.1.   Foreign exchange exposures are recognised and managed when total monthly net payments or individual currency amount exceeds NZD 100,000. For details see the SOP.

9.4.         Counterparty credit risk

9.4.1.   Counterparties and limits can only be approved on the basis of long- term/equivalent credit ratings (Standard & Poor’s, Fitch, or Moody’s) being A+ (Crown Entities Act requirement) or above, or a short-term rating of A-1 or above.

9.4.2.   Counterparty credit limits have been determined by the following instrument weightings:

9.4.2.1.                  Investments (e.g., Bank Deposits) = Transaction Notional x Weighting 100%.

9.4.2.2.                  Interest Rate Risk Management (e.g., swaps, FRAs) = Transaction Notional x (Maturity (years) x 3%).

9.4.2.3.                  Foreign Exchange = Transactional face value amount x (the square root of the Maturity (years) x 15%).

9.4.3.   Approved counterparties are listed in the SOP.

9.4.4.   Credit ratings should be reviewed by the FA on an ongoing basis and in the event of a credit rating downgrade should be immediately reported to the DDCE: CORPORATE SERVICES and assessed against policy limits.

9.5.         Operational risk

9.5.1.   Operational risk is the risk of loss as a result of human error (or fraud), system failures and inadequate procedures and controls.

9.5.2.   Operational risk is minimised through the adoption of all requirements of this policy.

9.6.         Segregation of duties

9.6.1.   As there are a small number of people involved in the treasury function, adequate segregation of duties among the cash management, treasury investment, borrowing and risk management functions of deal execution, confirmation, settling and accounting/reporting is not strictly achievable.

9.6.2.   The risk will be minimised by the following process:

  • The Accounts Officer (AO) reports directly to the DCE: CORPORATE SERVICES on any treasury irregularities.
  • There is a documented approval process for cash management, borrowing, treasury investment and interest/foreign exchange rate activity.
  • The Accounts Officer (AO) reports immediately to the DCE: CORPORATE SERVICES if Policy limits are breached. Where the irregularity relates to a DCE: CORPORATE SERVICES approved transaction, report to the CEO directly.

9.7.         Legal risk

9.7.1.   Legal and regulatory risks relate to the unenforceability of a transaction due to an organisation not having the legal capacity or power to enter into the transaction usually because of prohibitions in legislation.

9.7.2.   While legal risks are more relevant for banks, the Polytechnic may be exposed to such risks, in the event that they are unable to enforce its rights due to deficient or inaccurate documentation.

9.7.3.   The Polytechnic will seek to minimise this risk by:

  • Ensuring all Polytechnic authorities in regard to treasury transactions are approved as required by legislation.
  • The use of standard dealing and settlement instructions (including bank accounts, authorised persons, standard deal confirmations, contacts for disputed transactions) to be sent to counterparties.
  • The matching of third-party confirmations and the immediate follow-up of anomalies.
  • The use of expert advice.

9.8.         Agreements

9.8.1.   Funding arrangements, investments and financial instruments can only be entered into with banks that have an approved and executed legal agreement or ISDA Master Agreement.

9.9.         Financial and other obligations

9.9.1.   The Polytechnic must not enter into any transactions where it would cause a breach of financial covenants/ratios under existing contractual arrangements.

9.9.2.   The Polytechnic must comply with all obligations and reporting requirements under existing funding facilities and legislative requirements.

9.9.3.   Bank lending and TEC ratios and covenants are included within the SOP.

 

10.       CASH MANAGEMENT

10.1.    The FA is responsible for carrying out day-to-day cash management activities.

10.2.    All cash inflows and outflows pass through bank accounts controlled by the finance function.

10.2.1.       The FA will calculate and maintain rolling cash flow forecasts. These cash flow forecasts determine the Polytechnics’ borrowing requirements and surpluses for investment. Forecasts are linked to approved financial budgets and plans where relevant.

10.2.2.       On a daily basis the FA electronically downloads all bank account information.

10.2.3.       The FA, co-ordinates all daily cash inflows and outflows with the objective of managing the cash position within approved parameters.

10.2.4.       The FA, upon approval of the DCE: CORPORATE SERVICES/DDCE: CORPORATE SERVICES executes all cash management and treasury investment transactions.

10.2.5.       Sufficient liquid funds (cash and cash equivalents) and/or undrawn committed borrowing facilities are available for at least 108% of the 12-month forecast peak net funding requirement.

10.3.    To ensure an efficient and effective cash management function the FA:

10.3.1.             Matches future cash in/out flows to smooth the overall timeline profile.

10.3.2.             Minimises fees and bank charges by optimising bank account/facility structures.

10.3.3.             Maximises the return from available funds by ensuring significant payments are made within the creditor’s payment terms, but no earlier than required, unless there is a financial benefit from doing so.

10.3.4.             Reports detailed actual cash flows during the month compared with those budgeted.

10.3.5.             Maintains accurate cash flow forecasts.

 

11.      TREASURY REPORTING

11.1.      Treasury reporting must achieve coverage of the following major information/reporting objectives:

11.1.1. Risk exposure position: The Polytechnics’ current risk position and profile for all the financial market variables it is exposed to. The positions include underlying exposures, hedges in place and the actual net risk position against approved policy control limits.

11.1.2. Risk management performance: Actual performance achieved against agreed benchmark rates.

11.1.3. Counterparty risk position.

11.1.4. Policy compliance: Reports that confirm conformity to Policy risk control limits and report non-compliance of Policy by exception.

11.2.      Type of report, prepared by, and recipient are listed in the SOP.

 

12.      ESCALATION PROCESS

12.1.      All breaches of policy requires immediate notification to the CEO and the Chair of the FAC and reporting to Board at the next Board meeting.

12.2.      The reporting will include the cause of the breach and mitigating actions taken to correct.

References

Policies

  • Delegations from Board to the Chief Executive
  • Authorities and Delegations from Chief Executive

 

Other

  • Treasury Management SOP
  • Responsibilities
  • Delegated Authority Limits
  • Approved Financial Instruments
  • Bank and TEC Financial Ratios and Limits
  • Foreign Exchange Risks
  • Approved Counterparties
  • Treasury Report