Effective Counterparty Risk Management with Chick-fil-A

Announcer  00:04

Welcome to the Treasury Update Podcast presented by Strategic Treasurer, your source for interesting treasury news, analysis, and insights in your car, at the gym or wherever you decide to tune in.

 

Craig Jeffery  00:17

Welcome to the Treasury Update Podcast. This is Craig Jeffery, your host today for episode titled counterparty risk management. This is a really key topic. And I’m really excited to be here talking with Steven Peterson from Chick fil A welcome to the Treasury Update Podcast.

 

Steven Peterson  00:33

Glad to be here, Craig.

 

Craig Jeffery  00:35

And we’re live. We’re sitting across the table, we got lights on us even though it’s just a podcast, but it feels professional that we’re doing that. Let me just give a quick overview before we get into the topic with FDIC actions against several large banks in the US. This really created that short lived scare in the markets no depositor lost money. From what we’re seeing, as we analyze in ask companies, only about 30% of companies, these are commercial clients, large corporations are formally monitoring counterparty risk on a regular and consistent basis. And I must say that’s, that’s concerning to me. I think it’s troubling in any environment, but particularly after something’s happened, the formality of that should shouldn’t be different. But that’s just my view, my opinion. So I’m really excited to talk to you about this, Steven. So maybe we can begin, you could give a bit of an overview about how you’re looking at operational and investment exposures, perhaps focusing on the shorter end. So cash short term investments, as opposed to long term asset management, or are other parts of the balance sheet, but focus on the shorter end of cash and investments?

 

Steven Peterson  01:44

That’s a great question, Craig, and, again, appreciate you for having me here today. Yeah, from a historical perspective, in the banking industry has always been perceived as very safe and reliable. What happened earlier in earlier in the year with SVB, First Republic, and Signature Bank was a wake up call the Treasury teams, there are teams that you know, today that don’t have people who weren’t here during the 07, 08 financial crisis, in the remember, the number of banks have failed, in that the negative impact it had not only in businesses and consumers, it personally impacted me because I had invested in a small local bank here before the 07, 08 period, and that bank eventually went insolvent. And I lost my entire investment. So as a lesson learned, and one that I’ll never forget. But from our perspective, we evaluate banks from both a cash management and a short term investment standpoint, we look at our banks are banks in the camp of too big to fail? Or is there a risk that an event that could cause them to be insolvent and not be able to, for us not to be able to pay, you know, our vendors and suppliers or even make payroll, that is business contingency 101, and why you just don’t have one banking partner, you have to have kind of insurance policy, because you can’t open a bank account overnight. As we both know, it takes a long time. So you have to have that insurance policy, you have to be able to monitor your banks, the risk and their financial health.

 

Craig Jeffery  03:08

You know, from a diversification standpoint, back around 2008, 2009, many organizations had a primary secondary, sometimes at a tertiary bank, that would handle operational activity, and everyone sort of has moved to let’s be more efficient, and consolidate, which is, is a risk. And so what you’re talking about is getting back to the basics of diversification there. You know, when you say too big to fail, this is the I know we’re gonna talk about systemically important banks, but the systemically important bank is sometimes there’s a view that central banks aren’t going to let those go under. And so there’s a sense of additional safety, which I don’t know if you have any comments about that, but but certainly that’s playing out in the market where money move when things happen with SVB  First Republic, and others, there was a movement towards larger banks and to banks that had didn’t have a huge amount of uninsured deposits. But But yeah, let’s get back to it. That was That was some good history, too.

 

Steven Peterson  04:09

Yeah, no, thank you. From our perspective, you know, when things happened in March, we took a really deep dive into, you know, both our larger banks, and even our regional banks to ensure, you know, their financial health was was was stable, and that we, you know, from an investment perspective, we continue to invest deposits and invest in money, government money market funds with these banks. I’m glad to say we felt comfortable with all of our banking partners, and kind of go back to, you know, on this short term investment side, you know, we need to be cognizant of the FDIC, you know, $250,000 insurance, but, you know, as, you know, corporations, it’s hard to, you know, to have only $250,000 in, in bank accounts for major corporations, and you’d have to open up a lot of bank accounts. And right now, you know, treasuries, treasuries very resources are very constrained in You just don’t have the capacity to manage a lot of bank accounts. And for myself, I would not want to do a lot of all that KYC paperwork either to manage all those accounts. So, so very important for us to make sure the financial health of our banks are stable, and are, you know, are in line with what we expect, given where our investments are.

 

Craig Jeffery  05:20

Tying back to the operational side, you know, you talked about payroll, Silicon Valley Bank, 42 billion moved out of it on Thursday, people wired, and they would have wired up more if they could, right, they didn’t have access. That weekend was really disconcerting weekend for many people. If you’re at the bank, of course, the displacement that you had of your, your job was your employer was going to be impacted, you’re going to be acquired by someone else. And there’s been some positive things after that in terms of what’s going on, but it certainly displaced a lot of people. But the number of companies that were like, how am I going to make payroll? How am I gonna make payroll that week? Not only how am I going to pay my vendors that I owe, and so that was a pretty, pretty exciting weekend. And that points to the need of what you’re saying. And before I get back into, like, how are you managing your monitoring banks? You know, formally, maybe you just give us a quick overview of, of Chick fil A, you know, I know we have, we have four Chick fil A stores in our town, so I know about them. But there’s people that are in geographies and may not have them and not understand and then maybe just go over your role at Chick fil A,

 

Steven Peterson  06:27

Yeah, no, everybody loves Chick fil A around here, Craig, you know, we’re in kind of the hot spot of Chick fil A our, our corporate office is close. It’s just south of Atlanta near the airport. So particularly as a family owned, you know, privately held and your restaurant company was founded in 1967. By Truett Cathy, we are known for our signature hospitality, and our freshly prepared food. I might be a little biased, but I think that our chicken sandwich is number one, and tastes the best out of everybodys. Again, I’m a little biased.

 

Craig Jeffery  06:56

What do you do at Chick fil A?

 

Steven Peterson  06:57

So yeah, so at Chick fil A, my role is I lead the Treasury Department. And I’ve been working for the company for 10 years now and all in treasury. And I’ve been Treasury my whole career. previously worked at two, four fortune 500 companies here based here in Atlanta, very thrilled to be at Chick fil A a lot of exciting growth. We expanded internationally a couple years ago, and to Canada. We’re also have stores in Puerto Rico and just a lot of growth domestically. For Chick fil A. So again, you know, really blessed to be at the company at this point in time.

 

Craig Jeffery  07:31

Well, thanks for that background, Steven on Chick fil A and what you do there? But, you know, back to our topic about counterparty risk management. So how, how are you managing monitoring the banks? You talked a little bit about that extra hard look like everyone was doing back in the March timeframe. So how are you? How are you monitoring banks? What are you doing?

 

Steven Peterson  07:50

Yeah, so Craig, today, we’re first of all, we’re monitoring news sources and news channels. You know, we live in a social media society where news hit hits the wires pretty quickly. So we, we have some things tailored to say, hey, if one of our if something comes up in the newswire about one of our banks, we’re taking a look at it, whether it’s good or bad. So that’s first what we’re doing on a daily basis. Secondly, we’re regularly looking at credit default spreads of our banks to ensure we don’t see it any significant movements in their levels. You know, I feel like this is a really good indicator on how the market evaluates the risk of a certain bank. You know, this was definitely something that people monitored back in 07, 08 crisis. And it was a really good leading indicator, if a bank was perceived to be in financial trouble

 

Craig Jeffery  08:35

Early, like, very soon to the trouble. Right, right. Not months ahead of time. But yeah, at the end, right, it was the it was the water, it was almost the water cooler talk.  So you’re looking at the change in the spreads? Are you also looking at the volume of trade activity there?

 

Steven Peterson  08:51

We do. Yeah, we also monitor that as well. We also do on a quarterly basis, a bank risk dashboard, and very excited about and when we put this together, and this was actually put together before what happened in March. So I like to think we were ahead of the game here. Because again, you know, I was in the Treasury Department at another corporation during 07, 08. And this would been very valuable information then. So when I came to Chick fil A, I was like, hey, we need to evaluate and monitor the bank’s financial health. So in this dashboard, we have a couple of things going on. Now we first look at the credit any movement in long term credit ratings by any of the major rating agencies. Now we look for who’s been put on watch or who has been downgraded. We also monitored a tier one leverage ratio, which looks at tier one capital over assets. And you know, tier one capital refers to those assets that can be easily liquidated if the bank needed the capital in event of a crisis. You know, the higher the tier one ratio, the higher the likelihood of bank could withstand a negative shock of its balance sheet. So we feel that ratio for us is is really important. It’s like, what’s the what’s the what’s the level currently and what has been the trend? Now we also measure non performing assets, you know, we evaluate to see if there’s been a negative trend, you know, quarter over quarter year over year of this of these non performing assets, you know, and there could be different different reasons that these non performing assets are increasing could be bad loan decision decisions being made by the lender, or it could just be the economic environment. People could be defaulting on their loans, or late on their payments just because of the economic environment.

 

Craig Jeffery  10:37

Are you looking at differences between like, if it’s coming from, you know, commercial real estate, for example, or, or defaults on consumer cards, or you’re just looking across the board?

 

Steven Peterson  10:48

We’re just looking across the board, we just look at the at the number itself, I mean, if we really want to dig down deep, if we saw a number that was very concerning, we would probably dig a little bit deeper, but we really haven’t seen one, you know, lately with it within our bank group. So we we really haven’t dug a little deeper.

 

Craig Jeffery  11:05

So this bank risk dashboard that you run this, as I know, you guys are big with business intelligence tools and running these things is run and supported by the Treasury group, or the is there a lot of automated input into this as well as some manual feeds? Or what?

 

Steven Peterson  11:19

Yeah, great question. Yeah, we produced the dashboard in Tableau, and we aggregate information from different sources. Some of them are financial software, some of them were, you know, looking on the internet, some of them were looking through financial statements. And a couple other things that we have included on the bankers dashboard is, we also look at the short interest as a percentage of the bank’s equity float, you know, this is also good indicator, if the if the mark is pessimistic about a particular bank, or industry, and then we also just monitor the stock price. Because again, I mean, if you want a real time evaluation of what the market’s perception on, on on a bank or any particular industry, look at their stock price, so we’re looking at those trends and making sure, you know, we haven’t seen anything. You know, that’s, that’s concerning to us. So, so that’s kind of you know, what our treasury dashboard looks, I mean, some of it, we again, we can monitor real time, some of it is just quarterly or annual information that we receive.

 

Craig Jeffery  12:15

So you’re looking at, you’re looking at stock price, stock trading volume, and that’s those are those are examples of it creates some kind of flag that you then dig deeper if need be. They’re just potential ways to get an earlier look at.

 

Steven Peterson  12:27

Yeah, it’s almost like an early warning system. It’s like, okay, yeah, there’s something going on there. Let’s check underneath the hood, and dig a little deeper. And then, you know, too, again, with, with our relationships with our banks, we can always go back and ask them and say, Hey, we’re looking at these numbers, kind of help help talk us through these, you know, what are we seeing?  You know, do you feel like, Hey, this is just a season for you guys, and you’re gonna pull out of this? So again, having a good relationship with the banks with your relationship manager really helps.

 

Craig Jeffery  12:55

So, you know, back at back in March, one of the big items that people were looking at was the level of uninsured deposits. And that’s not something that’s available moment by moment. So is that is that something you monitor on a quarterly basis is just one of the many factors or maybe the better question is, you talked about tier one capital over assets as a key factor that you look at? What are the what are the measurements that you prioritize over others? Maybe that’s a simpler way to ask that.

 

Steven Peterson  13:24

Yeah, I mean, we look at them all. And to be honest, I mean, we really don’t prioritize any one over the other, I think every one of those indicators tells us something different. But if I had to pick one, it probably be the tier one capital over assets because that really is something that the Fed is also, you know, looking at, in reviewing, and it’s really important to the banks, you know, when we talk to them, it’s like something they’re focused on, I mean, stock prices, you know, the moving stock price could be, you know, related to the just the movement of the overall market could not be something that’s particular to the industry or to that bank, but it could just be a function of of a down market. So we really think like, you know, the tier one capital over assets, and non performing loans are really the key indicators for us to, again, if we’ve seen, you know, a concern there to dig a little deeper.

 

Craig Jeffery  14:14

So you’re looking for things that are outside the norm, and outside perhaps, certain parameters of falls outside of range, you want to be digging into it, maybe you make a move, or if it falls, you know, the markets down 7%, but this one banks down 20%, that’s outside the range. And so you you dig into those more?

 

Steven Peterson  14:35

Yeah.  We look at absolute numbers, we also look at trends, because I mean, really, you know, anybody can have a bad quarter, you know, a bad number. But we really are focused on the trends. Is this. Is this a trend that we feel is very concerning, or do we feel like hey, it’s something they can climb out of? So again, yeah, we’re focused both on the absolute number and the trend.

 

Craig Jeffery  14:57

One of the questions I had that I was going to ask you before, you sort of covered it in the beginning, or you did cover it earlier, maybe there’s something you want to add, it’s, you know, we talked about systemically important banks or banks that are too big to fail, because their systemic impact across the overall economy, they’re not gonna let it fail because of the cascading effect. How is that impacting any practices? Is there anything else? Where there’s an impact beyond what you’d said, you know, at the beginning of the discussion?

 

Steven Peterson  15:25

Yeah, for us, we definitely feel a bit more comfortable if our banks are implied to be too big to fail, because we feel like hopefully, you know, the FDIC came in in March and, and guaranteed 100% of the deposits at SVP. So we feel like, hey, you know, if one of our banks that was systematically important or too big to fail, were to have a an event that the FDIC would come in and help ensure, you know, those deposits were at work were covered. But that was that was in March, we both know that, you know, it’s nothing is guaranteed.

 

Craig Jeffery  16:01

Right, just because a bank is identified as systemically important, that doesn’t mean that there won’t be some losses, if there’s some potential and I’m trying to be calm in all the discussions, but it’s, that’s really, that really is a factor in some of the discussions, certainly.  You know, we’ve spent more time talking about banks, you have a lot of suppliers, the discussion about supply chain resiliency was extremely heavy at the beginning of COVID, right, because there was disruptions.  Are you doing anything monitoring suppliers, for example? What are what are you doing with suppliers? Is that factoring into your counterparty risk management?

 

Steven Peterson  16:37

That’s a great question, Craig. So yeah, definitely, we are evaluating our vendors and suppliers, you know, their financial health, because it’s important at Chick fil A, I mean, it’s important, you know, we are able to ship waffle fries, were able to ship chicken to, you know, our operators. So just a few years ago, we put together a more formalized approach to kind of evaluating the financial health of our vendors and suppliers. You know, it’s more about enhancing our business continuity, you know, as no one likes to be surprised, you know, especially from a negative perspective, you know, during the pandemic, everybody was concerned about themselves, about their their liquidity position. But everybody was really very concerned about their suppliers and vendors and their financial health and their liquidity position, because they could have been impacted, you know, significantly different than, then, you know, our corporation at Chick fil A.  You know, when we look at valuing our vendors and suppliers, there’s a few criteria that are important to us.  Annual spend, you know, that scale, whether it’s, you know, we spend $10,000, with this with this vendor supplier per year, we spend, you know, 100 million, that matters to us. And number two, is the ability to replace a vendor if they enter financial distress. Now, how easy is it to replace this vendor? You know, is it a vendor that, you know, took us a year to source? Or was it a vendor that took us two weeks to source, so that really has to it has to be one of the factors in the decision. And number three, which I think is most important is, you know, critically and potentially, in their potential impact to our franchisees.  You know, I always use the examples, you know, you know, if you have toothpicks, and chicken, and the toothpick vendor, you know, goes bankrupt, we can go buy toothpicks somewhere else, there’s always Costco, Sam’s Walmart.  If a chicken vendor goes out of it goes bankrupt, you know, that’s, that’s a different story. That’s a material impact on our franchisees and our business. So when we look at, okay, what’s the potential impact to our franchisees? Is it is it material? Is it significant? You know, that is probably the driving factor along with those other two I mentioned that, you know, makes us look at and evaluate, you know, whether we do a full blown evaluation analysis, or we do kind of a quick, you know, quick credits check on our vendors and suppliers.

 

Craig Jeffery  18:56

Are you using the same monitoring dashboard just broken out differently? Or is that a different way of evaluating those type of counterparties?

 

Steven Peterson  19:04

Yeah, actually, it’s a different way. You know, we do leverage couple of different financial software tools to perform our analysis, we get audited financials, whether a company’s public it’s a little bit easier to get access to these financials. If they’re private, it’s a little bit more tedious. But we’re able to, you know, hopefully get that information in you know, run it through these tools. And then the tool kind of give provides us a overall credit health score that we use to inform our, our our departments or the partners we’re working with inside the company.

 

Craig Jeffery  19:37

As we wrap up this discussion on counterparty risk management, what what guidance would you give to others who, maybe they need to move away from being informal in this process, you know, responding to a headline, and perhaps being more diligent, more formal, in managing counterparty risk, what would you say?

 

Steven Peterson  19:56

Yeah, a couple things I’d say you know, counterparty risk is real. I would say don’t fall asleep on monitoring and evaluating the financial health of your banks, you know, it’s too important to ignore.  Your liquidity depends on it.  You know, the banks are doing their due diligence on on your company. So why don’t you do the due diligence on them as well? And don’t think you have to come out of the gate with elaborate process or system, you could really start small, you know, I talked about just looking at the news feeds, you know, see if there’s any headlines that come through about your bank, you click credit default spreads, you know, those are relatively easy to find, start small and just continue to expand your your monitoring and evaluation. But just at least do something. You know, and there might be some seasons where you have to do an evaluation or you’re monitoring on a daily basis. And there might be, like in March, but there might be some seasons where hey, a quarterly dashboard will work.

 

Craig Jeffery  20:50

Yeah, that makes sense. You know, we’re seeing we probably see more follow up I think we get we get contacted by our customers every week about different things. It’s more more of it’s on the it’s not on the financial supply chain, but on the the IT security. They’ll ask about the the networks are there. People are concerned about the financial health as well as the digital health of companies. And those are, I’d say that’s a little more mature in the process. It’s like you get automated mailings anytime there’s some event some CVE comes out. Do you have exposure to this here or there on the on the tech side? So it’s, it’s really good to hear you describe on the financial side and that formality is, is really important. So I’m, I’m so glad you talked about that and shared what you’re doing at Chick fil A. Thanks so much for coming in.

 

Steven Peterson  21:41

Yeah, appreciate the invite, Craig.

 

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