Cash Pooling Techniques in Europe

Transcription

1 Cash Pooling Techniques in Europe By Tony de Caux, Chief Executive BRC Consulting Services Ltd, United Kingdom Introduction It is fair to say that the development of the payment systems, such as TARGET, EBA for moving Euro across border on a same day value basis, have made treasurer s long term goals of being able to truly manage liquidity in the region on a same day a lot more realisable. There are still a number of impediments that mean that corporates have to put in place some fixes or fudges, but now, with the right systems and approach, and co-operative banks, most companies can put in place a fairly efficient system. The impediments will come out during my discussion of the various options. The options require four main elements: - an efficient account structure, - an innovative approach on the part of the corporates and the banks, - co-operation from the banks used, and finally, - appropriate systems and infrastructure The other areas to bear in mind when looking at cash pooling are the local rules, regulations and laws which all mitigate against efficient pan-european liquidity management. When cash pooling first started to develop in Europe there were two main types in theory to consider true pooling which is purely notional (sometimes called interest or balance off-set pooling) and cash concentration, (sometimes called zero balancing or sweeping) which involves the physical movement of funds. The reason these two types where looked at for cross-border liquidity management was because these were the only two types available at a national level. However, in many countries notional pooling is either prohibited, or once the central bank reserve asset requirements are fulfilled and the cost passed onto the corporate by the commercial bank, it does not make sense. So generally, until recently, the only option available everywhere has been cash concentration and this was the basis of the classic overlay structure designed by the US in Europe in the late 1980s.If we look at some of the latest advances, we can see a number of structures that involve elements of both a concentration and notional. I call these hybrids. There are also some derivative structures, that include virtual sweeps or virtual notional pooling.

2 Structural Type 1 Cash Concentration Euro Concentration Account In-Country Overlay A/Cs Country 1 (Deficit) Country 2 () Country 3 () Local Subsidiaries Accounts Local receipts payments In this structure the corporate has accounts used by the local subsidiaries for operating purposes. These may be held with a different local bank in each country. In some countries where the company s chosen pan- European bank (PEB) has sufficient in-country capability, the accounts may instead be held with this bank as well. In this structure the funds are physically moved (zero balanced). Where there is only one local sub account, this might be a direct transfer to the central Euro concentration account as long as the local bank does not charge too high a fee, or deduct a lifting charge (as some banks still do for a resident to non-resident transfers). The Euro concentration account will probably be located in a country where withholding tax on interest is not deducted at source, or where there are tax treaties in place to ameliorate such deductions. To minimise costly cross border money movements, where there are a number of local bank accounts these can be zeroed to an overlay account in each country. In this structure these accounts would be held with a branch of the PEB. To avoid local lifting fees the account could be held in the name of one of the local subsidiaries so that all movements of funds could be resident to resident. Once inside the PEB structure, the movement to the concentration account would be an accounting entry. Central bank reporting would be necessary on this movement and the PEB would not charge a lifting fee (just a flat fee agreed as part of the pooling scheme)

3 The central account could be interest bearing, and/ or could be used as the base account to be debited to place surplus funds in the money markets, or could be the account to which borrowed funds are credited in the case of the pool being in deficit. Some companies link this account to a money market fund so that surpluses are automatically invested. Care needs to be exercised here as usually the cut-off times for same day investment into money funds are earlier than the time of the crossborder sweeping. As funds move through this structure the corporate has to be aware of the implications for inter company accounting. This structure could produce inter-company loans on both movements. This may not present a problem, but bearing in mind that the concentration account has co-mingled the funds, it means that the bank cannot calculate, apportion and pay interest to the participating companies. Only the corporate treasury can do this. In effect this structure means that interest is paid company to company. The rules and tax implications of corporate to corporate interest payments are often different to those of bank to corporate. In some locations interest paid by a sub to a parent may be deemed to be a dividend and taxed as such. These issues need to be studied based on the entities involved before embarking on this structure. Structure 2 Concentration to a notional cash pool Dummy Account Notional Cash Pool Country 4 In country overlay A/Cs Country 1 (Deficit) Country 2 () Country 3 () Operating Accounts Local Receipts and Payments

4 The local element of the structure can be as structure 1. Ideally, if there is only one legal entity per country the overlay accounts (where needed) and the top account sitting in the cash pool could be in the name of the same legal entity.this would mean that this structure would not create any inter- company loans, neither would it co-mingle funds. In such a case the bank could carry out the interest calculation and apportionment, and all interest paid/received would bank to corporate, thus avoiding any corporate to corporate tax problems. The treasury dummy account sitting in the notional pool would be used to invest the aggregate surpluses from the pool or this would be the account that borrowed funds would be credited to if the pool were in a net deficit. Although at first sight this seems a big improvement on structure 1 there are a couple of downsides. Firstly, banks providing this type of structure will generally expect all entities in the notional pool to cross-guarantee each other. In some countries (UK and Denmark) this will be a Central Bank requirement. This presents a legal problem for entities that are domiciled in certain countries, for example France and Italy, where they are either not allowed to guarantee other group entities, or where such guarantees are not legally enforceable. Also remember that all cross border and resident to non-resident movements will need to be reported to the appropriate Central Banks and that companies need to take care that they do not incur lifting charges. So while many companies use this structure, they have to handle difficult countries in a slightly different way. One way is to use the structure given below in Structure 2a Structure 2A Concentration to a notional cash pool using re accounts Re- Dummy Account Re- Notional Cash Pool Country 4 Re- In-country overlay accounts Country 1 (Deficit) Country 2 () Country 3 () Operating Accounts Local Receipts and Payments

5 The basic account structure here is exactly the same at that given in 2 above, the only difference is the ownership of the accounts in the notional pool. In this case the accounts are owned by the treasury. Most banks would advise that such a structure creates inter company loans between the subs and the treasury. However, there is a school of thought, back up by a legal view that if the correct agency agreement documentation was put in place the funds in each account could belong to the individual subs and in effect the treasury is acting as the agent for the subs and managing them on the subs behalf. In truth this is a very grey area. As all the accounts are owned by the treasury there will be no need for cross guarantees to the providing bank. The million dollar question then is Does the movement of funds into the Re accounts constitute an inter-company loan from the sub to the treasury? Generally, if the agency agreement is set up properly the answer can be NO. This is a major improvement. However, I have to point out that although I have put many structures in place like this for multi-nationals, not all banks, tax and legal advisers agree on this interpretation, and as yet none of my clients have been challenged by the tax authorities. Structure 3- Notional pooling of all accounts held at one centre. This structure has been used for many years prior to EMU and can often be the basis for cross-currency pooling. Here the company keeps either its treasury accounts, or a mixture of treasury and operating accounts at one centre, and these account are notionally pooled. These accounts will often all be in the name of the treasury and these therefore there are usually no legal difficulties vis a vis the bank, which will probably what no more than a legal right of set-off between the accounts. If the pool contains different currencies then the agreement with the bank will include the basis on which the pooling is calculated and the interest rates to be used in each case. In most cases cross-currency pooling is in fact no more than interest spread sharing between the providing bank and the customer. These arrangements need careful study prior to being entered into. Many banks dislike this approach, and from experience, I have rarely found a situation where they add value over and above a more traditional approach. The biggest downside is the need to move funds cross-border in and out of the pool. Such movements can be costly and subject to central bank reporting and the possibility of lifting fees being deducted. If several banks are channelling funds into the central structure the funds transfer costs and value dating aspects also need to be considered. Can all the movements be done for same day value? Again if accounts are to be held in the pool for different entities, the need for cross guarantees must also be considered.

6 Structure 4 Cross border notional pooling (Version 1 through a network bank) Memo accounts Notional Cash Pool Notional Concentration Resident Overlay A/Cs (same legal entity Zero Balance Zero Balance Zero Balance Zero Balance Deficit Resident Accounts Local Banks This is the type of service is available from a few network banks. It is fair to say that most network banks prefer to concentrate funds into one centre using one of the earlier structures, (1 or 2) and although some of the network banks could, and do, provide this structure, it is not something that they would necessarily offer to all companies. Generally, it involves sweeping funds from local banks to a set of overlay accounts with the PEB. Normal inter-company rules as discussed above apply. The overlay accounts are then notionally swept to a set of memo accounts held by the PEB. In practice there is no funds movement. The memo accounts are then notionally pooled. If the structure is set up properly there will be no inter company loans, the bank will be able to calculate and pay the interest, and there should be no central bank reporting (as there are no movements of funds). Again as the accounts in the central location are not real, there is no need for cross- guarantees, therefore this can be set up with minimal documentation. The only grey area is whether the PEB has a legal right to set off the balances held in the different legal jurisdictions. The answer, in most cases, will be no, and therefore banks will be very careful in offering a solution of this nature, and it will generally only be made available to undoubted clients. Some banks may ask for a parent guarantee for this.

7 Structure 4 Cross border notional pooling (Version 2 through a non-network bank provider Memo accounts Notional Cash Pool Notional Sweep Bank X Re Bank Y Re Bank W Re Bank Z Re Interest bearing Nostro Accounts Bank Re Internal ZBA A/C (at Bank X) Deficit A/C (at Bank Y) A/C (at Bank W) A/C (at Bank Z) Resident Account at Local Banks This structure is almost identical, but as the service is made available from a bank with no overseas branches it differs in one major respect. The overlay accounts are bank Nostro accounts. Typically these will either be held at a bank which is in the same banking club as the provider bank (IBOS, TES, Connector) or the provider bank may open accounts specially at the same banks that the client uses. This latter idea means that the end of day transfer of funds into the bank s Nostro account is just a bookkeeping entry. This is very cheap and efficient to do. Like the former version, the providing bank runs a set of memo accounts to reflect the positions and it notionally pools these. Funds remain in the Nostro accounts (normally) and these will be interest bearing. Again, in effect the client is sharing the interest margin with the providing bank. Again, little documentation is needed, but as the Nostro account will be held in the name of the providing bank, as long as its underlying agreement covers it, there may be a right of set-off available vis a vis the providing bank and the corporate client.

8 Summary and conclusions These are the main structures seen in Europe today, although there are many hybrids that I use for specific situations. The rule is to mix and match to achieve the desired result. Tony de Caux Sept 2003 tdecaux@brcconsulting.co.uk