Multipronged, Strategic Financial Risk Initiative Delivers Big Value for BMS

A second key dimension of BMS’s financial risk management initiative revolved around better mitigating the company’s counterparty credit risk. BMS has always been conservative about diversifying its counterparty risk, and when Silicon Valley Bank and Credit Suisse failed in the spring of 2023, senior management began requesting daily updates on corporate-level exposures to different banks. The treasury group used Microsoft Excel to aggregate data across a range of software systems to capture derivatives, deposits, and investments with each counterparty.

“A lot of healthcare companies, including some of our acquisitions, used Silicon Valley Bank,” Ramos-Alves says. “Our exposure was small, but we saw the need to revamp our processes so that we could easily view companywide counterparty risk at the press of a button, should the question come up from our CFO or the board.”

The treasury team had already begun to pull data on counterparty exposures into a dashboard, but the Silicon Valley Bank meltdown accelerated that process. “The external environment prompted us to improve that dashboard and integrate it with more systems so that we could come up with one number for the entire company—including both the cash side and the derivative side—in real time,” Ramos-Alves says.

Information about cash deposits flows from BMS’s banking partners into FIS Quantum, and from there into a data lake. Mark-to-market information flows from BMS’s Reval system into the data lake. And the counterparty risk dashboard taps into that data lake. “So, when we look at counterparty exposures, we are looking at the mark to market on our derivatives as well as our cash,” Ramos-Alves says. “If management wants an update on our exposure to a particular banking counterparty, we can pull up current information right away.”

The third area of financial risk that BMS tackled within this initiative involved its non-qualified deferred compensation (NQDC) plan, a benefit provided to certain high-earning employees. “Because the IRS has annual limits on how much individuals can defer to their 401(k), BMS established the NQDC so that participants can defer and invest a higher portion of their salaries toward retirement,” said Ashish Saraogi, senior director of benefit investments and international treasury. “At the start of the year, they designate a percentage of their salaries to defer, and they can choose among 12 different funds for their NQDC ‘investments.’”

BMS withholds the specified percentage from each participant’s salary throughout the year, and when the employee leaves the company, BMS owes them the deferred salary plus the amount that their chosen funds have earned over time. However, Saraogi explains, “unlike a 401(k), the NQDC investments are only notional—there are no assets behind them. So, if we retained $100 million in deferred compensation within the NQDC and plan investments achieved 25 percent growth through the years, then when those employees retired, BMS would be on the hook for the original $100 million plus an additional $25 million. That’s a significant exposure we needed to manage.”

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BMS treasury considered a few options for mitigating this risk. One option was to buy assets, as a 401(k) plan does. “But that was not cash-efficient, and there were some tax implications and other nuances which made that approach less attractive,” Saraogi says. “After ruling out that option, we went down the road of looking for a solution that would not completely de-risk the transaction—because you can’t do that unless you’re directly investing in the assets—but would smooth out the impact of changes in the funds’ value.”

The team settled on implementing a total return swap, or TRS. “It is an equity derivative contract where we pay our bank counterparty a financing charge of SOFR plus a spread based on the NQDC balance, and the bank settles with us on the appreciation or depreciation of our basket of assets,” Saraogi says. “We told banks we needed the returns on the 12 funds our employees choose among, so at the end of the month, either they pay us the funds’ gains less the financing charge or we pay them the funds’ losses plus the financing charge. In this way, our TRS mimics the movement of the NQDC plan ‘investments’ and we reset or rebalance our swap notional monthly to match the plan investments.”

The treasury team opened the TRS to competitive bids from multiple banks and selected a counterparty. “Ultimately, the returns on the swap offset the changes in what we owe the NQDC plan participants, and gains or losses on the swap are tax-deferred until we make the distributions to participants,” Saraogi explains. “We still have exposure to the equity returns from the fund perspective, but the amount we receive from the bank—whether it’s a gain or a loss—will cancel out the change in our liability, so we are ultimately left with only the financing charge. This makes the cost of the NQDC plan easier to forecast and significantly less volatile, so we can eliminate some of the noise on our P&L from quarter to quarter.”

All aspects of BMS’s financial risk management initiative were complex and time-consuming. “Implementing these new systems and processes took a lot of effort,” Saraogi says. “But every project that we completed freed up more of our time, so the investment was worthwhile. We are a leaner team than we were a few years ago, due to not replacing some staff members who left, and yet we are getting more done than we used to.”

Adds Gaub: “This creates more time for strategic work, such as looking at the portfolio’s mark to markets and seeing whether there are restructuring opportunities, or reconsidering more broadly how we layer our future FX trades. Rather than being limited to exclusively hedging the exposures, we can step back and say, ‘Are the hedges we have optimal? Should we be doing things differently?’ As a group of treasury professionals, we can focus on analyzing and challenging the way we work to deliver maximum value for the enterprise.”

“What we found in this initiative is that the changes we enacted enabled people to continue to develop, learn, and grow professionally,” Ramos-Alves concludes. “We have done a lot, but we are not finished. We have completed a part of the journey, even as we continue to look for innovative ideas and new ways to simplify, automate, and deliver value.”