Adam Smith Awards 2018 Client Casebook

OVERALL WINNER Treasury Today’s Top Treasury Team Digital Realty has grown rapidly in recent years, both organically and as a result of the acquisition of US colocation, interconnection and cloud enablement firm Telx in 2015, eight data centres in Germany, the Netherlands and the UK from Equinix in 2016, and through the strategic merger with DuPont Fabros in 2017. Fast growth has presented many challenges, globally and regionally, which have been addressed swiftly and effectively in the past year. Global On the global stage, the firm has a treasury team of just six people (one in Asia, one in Europe, three in the US and a global head). Each individual is critical to the smooth functioning of treasury worldwide. The company needed to guarantee 24-hour coverage for all regions and ensure all obligations are met in the event of serious illness, cyber-attack, power outage or other problems that would put one region out of action. However, there was no centralised list of banking and internal department contacts for disaster recovery and/ or cross-training purposes. Furthermore, global revolving credit facility borrowing templates were not readily available, and it was also difficult to identify approved signers for global bank accounts. As part of the solution, a worldwide business continuity plan was agreed and developed, this being tested on a regular basis. Additionally, global staff are now trained on cash management platforms, processes and procedures for all regions. There are frequent team calls to ensure coordination and an annual global team ‘in-person’ meeting to strengthen key relationships and discuss key initiatives. And, on top of this, a rolling 30-day dashboard of global debt and other obligations has also been developed. Finally, a comprehensive worldwide contact list, specifying authorised signers for bank accounts, and easily accessible borrowing templates, have also been created as part of the disaster recovery plan. In addition, on a global basis the treasury team worked closely with its banking partners to establish and/or increase daylight overdraft limits on its accounts for increased protection and flexibility. Not content with tackling global issues, treasury knew that each region was also facing specific challenges. EMEA: pooling results In EMEA, Digital Realty has multiple properties, each with a different cash requirement and bank account. Largely due to tax and local restrictions, there was considerable trapped cash within some entities. As a result, it had to borrow to fund its capex requirements within EMEA. However, even when funds could be routed around the group, it was time-consuming to manage on a weekly/monthly/ quarterly basis, and complex to maintain or achieve tax-efficiencies. The company wanted to address this problem and to increase its long-term financing in local currency to hedge its balance sheet and income statement. Its solution was to develop a notional pooling structure for EUR (29 entities) and GBP (18 entities). In creating these, administrative time and effort spent moving funds to meet capex demand elsewhere in the group was eliminated. Today, Digital Realty looks at the gross pool positions and expenses for the following month and borrows as and when required. This greater visibility means that idle cash levels have been reduced by 80%, minimising costs associated with holding a negative yielding currency and accelerating working capital. The effective cash management solution has improved its available debt service coverage ratio (DSCR) in EUR and GBP, while simultaneously reducing its borrowing costs. The additional issuance of approximately US$1bn+ in long-term debt in EUR and GBP naturally hedges its balance sheet and income statement. In Europe, when Digital Realty acquired eight data centres in Germany, the Netherlands and the UK from Equinix in 2016, it inherited unique banking partners, systems and processes in each country. It was crucial to build trust with teams at the newly acquired assets where these had been acquired just a year earlier and had moved banks at that time: there was an understandable reluctance to put them through the same migration process again. However, Digital Realty’s immediate challenge was to ensure access and visibility into these country operations and their bank accounts to ensure continuity of transactions. The goal was to migrate the accounts to a single banking partner, and strengthen the liquidity structure already in place. By explaining the rationale for a move to a single banking partner and the benefits for the entire group, the teams at the newly acquired assets became an integral part of the migration process, gathering data and building knowledge across the group. The many hundreds of existing customers at the data centres in Germany, the Netherlands and the UK were seamlessly migrated to Citi. As well as migrating all transactional activity from inherited banks to Citi, Digital Realty took advantage of the opportunity to streamline various processes and procedures to improve efficiency. In addition, Digital Realty faced significant currency risk exposure, given its planned acquisition of Equinix assets in Europe in USD as the Brexit vote approached. Although polling (and the markets) indicated a ‘remain’ vote, Digital Realty believed there was a material risk of a ‘leave’ vote – and consequent depreciation of EUR and GBP against USD. It was right. The company hedged its net investment position with GBP forward contracts. Settlement of contracts in 2017 resulted in cash gains to the company of approximately US$65m. Previously, awareness of cybercrime within Digital Realty was concentrated within IT. However, the increasing threat made it critical to broaden knowledge across the organisation. Digital Realty developed a staff training programme to combat more sophisticated methods of attack. This programme was rolled out to all EMEA staff in 2017, with a special emphasis on finance staff to protect banking “With the knowledge that there were hundreds of nominations from highly talented world-class teams of professionals, winning the Adam Smith Award for Top Treasury Team is truly a tremendous honour . It firmly acknowledges the hard work and dedication of our team and the results we have been able to deliver for Digital Realty.” – Michael Brown, VP Treasury treasurytoday Adam Smith Awards © August 2018 | 5