Quarterly Spring 2014

Transcription

1 Treasury Advisory Quarterly Spring 2014 Liquidity Management Services Treasury and Trade Solutions

2 2 Treasury and Trade Solutions Credits Authors: Fabio Della Malva Americas Head Treasury Advisory Group Citi Liquidity Management Services Treasury and Trade Solutions Stuart Roberts Global Trade Sales Head Treasury and Trade Solutions In this edition, we report on five key themes in evolving global treasury practices; examine how China s regulatory reforms have fundamentally changed the landscape for liquidity and risk management; and, explore how companies could improve returns on otherwise uneconomic local trapped cash. Please contact your Citi representative for more information on any of these topics. The editors invite your comments and feedback, including what you would like to see in future editions of this quarterly. Rachel Wang Greater China Advisor Treasury Advisory Group Citi Liquidity Management Services Treasury and Trade Solutions rachel.r.wang@citi.com Acknowledgments: We thank all our clients and our colleagues who shared the insights without which this would not have been possible; Elyse Weiner, Delcan McGivern, Gourang Shah for their advice and comments; and John Henson and Robert Russell for their excellent analytical and editorial support. Editors: Ron Chakravarti ron.chakravarti@citi.com Jennifer Sariano jennifer.sariano@citi.com

3 Treasury Advisory Quarterly Spring 2014 Edition 3 Table of Contents Treasury in Focus: Trends in an Evolving Landscape 4 Renting Liquidity 9 Integrating China into Your Global Treasury Structures 12 Must Read 20

4 4 Treasury and Trade Solutions Treasury in Focus: Trends in an Evolving Landscape By Fabio Della Malva In recent years, corporate treasury has experienced a unique period of transformation. While the function continues to be shaped in part by the lingering effects of the financial crisis, drivers at a macro level broadening geographic footprints, changing regulations, advancements in technology are the evolutionary forces most impacting treasury management as of late. At the same time, the bar is constantly rising today s treasurer must respond to the fundamental challenge of doing more with less. Navigating this new landscape requires that corporate treasurers leverage meaningful intelligence to improve performance and enhance results. The following are trends and themes from Citi Treasury Diagnostics (CTD), a benchmarking tool designed to help companies assess treasury and working capital management practices and identify opportunities for treasury departments to deliver more value to their firms. Results from CTD provide clear indicators as to what is most important to treasury practitioners across the globe as well as insights into both emerging and existing themes within the treasury management space. The need for speed: real-time treasury management Today s treasurer must cope with the challenges of supporting the business in a dynamic environment of both growth and increasing complexity, while the pace of business continues to accelerate. In response, realtime treasury management has emerged as an important trend in recent years, with CTD results indicating that corporate treasury is keeping pace with the rapid drive to achieve access to immediate, complete, and actionable data. Findings suggest that treasurers are increasingly leveraging real-time information to make faster, more informed liquidity and risk management decisions for the business. Cash visibility: Visibility to both cash and short-term investments remains a major priority for companies of all sizes, with nearly all CTD respondents reporting daily visibility to least 75% of total cash balances and short-term investments. Cash forecasting: Corporate treasury departments are more frequently updating their cash forecasts, with results indicating a significant shift towards daily updates of cash forecasts, particularly among companies with revenues over $25 Billion, 33% of which now forecast daily. Cash concentration: The vast majority of survey participants (78%) reported daily concentration of cash into a central pool, which data also suggests is a practice more commonly used by larger companies. Technology is clearly playing an important supporting role in the pooling processes with over 77% of CTD respondents reporting either full or complete automation.

5 Treasury Advisory Quarterly Spring 2014 Edition 5 Today s treasurer must cope with the challenges of supporting the business in a dynamic environment of both growth and increasing complexity, while the pace of business continues to accelerate.

6 6 Treasury and Trade Solutions Expanding Scope of Treasury Corporate Finance & Capital Markets Cash Operations/Liquidity Management 100% Collateral Management Bank Relationship Management 75% Credit/Counterparty Risk Management Short-term Borrowing/Financing 50% 25% Supplier early payment discount management Cash Forecasting/Planning Customer Receivables Treasury Controls & Accounting Supplier Payments Investing Commercial letters of credit issuance Trade/Bank Guarantee Issuance Intercompany Loan Administration/In-house Banking Scope of Treasury Embedding treasury: growth in importance and scope Corporate treasury s role continues to progress as a strategic advisor and valued partner charged with the responsibilities of funding and raising liquidity, understanding and managing risks, and supporting business units as successfully as possible. Scope expansion: CTD data highlights the broadening of the core activities and functions of corporate treasurers. From intercompany loan administration and counterparty risk management, to supplier payments and financial guarantee management, many functions and processes once allocated elsewhere in the business are now firmly under the remit of corporate treasurers. Treasury policy: In the financial risk management space, CTD data reveals that there is consistently high coverage with regard to FX, liquidity, counterparty/credit, and interest rate risk management in treasury policy. Increasing Control: Survey results indicate that today s treasurer has more control than ever before. Not only does data reveal a significant increase in the volume, value, and type of balances under the purview of treasury organizations, it also shows that treasurers are increasingly gaining more autonomy over company-wide bank accounts (e.g., treasury and operating accounts). Working capital management: The majority of CTD respondents reported direct treasury involvement in the coordination and oversight of working capital management, which increased 18% over the past 4 years, suggesting a greater focus on corporate treasury and its remit among executive management and the Board. Treasury is also increasingly leveraging working capital flows/products to drive efficiencies, with treasurers reporting a 12% surge in supplier financing programs between 2009 and Continued centralization: efficiency and control As companies continue to expand their markets and operations abroad, treasurers have been faced with the challenge of developing a treasury infrastructure capable of supporting the needs of a business that is constantly evolving and developing. And, while the question of how to optimally structure corporate treasury is not new, survey results indicate that centralization remains at the forefront of

7 Treasury Advisory Quarterly Spring 2014 Edition 7 priorities for corporate treasurers, who are hoping to continue realizing the benefits of improved efficiency, transparency, and controls offered through centralized treasury activities. Level of cash pooling / mobilization: The global mobilization of cash is a trend consistent across all revenue buckets, however, it is most favored by larger companies (40% for companies over $25 Billion in revenue). Shared service centers (SSC), in-house banks, and intercompany netting: Over 60% of respondents reported implementing either global and/or regional shared services centers. Similarly, the use of In-House Banks and Netting Centers can be seen across all revenue bands. Performance management: increasing accountability Across the wider economy, demand is growing for greater transparency and accountability. As a result, corporate treasury has experienced substantive changes in practices and behaviors relating to both internal and external accountability. In particular, CTD results indicate that there is an appetite for stronger standards and increased oversight within corporate treasury, with a particular emphasis on performance management. Measuring treasury performance: Performance measurement, as a proxy measure for accountability, has increased 66% over the last 4 years, with 76% of 2013 respondents reporting either complete or partial measurement of treasury through quantifiable KPIs, compared to just 10% in Documentation of treasury objectives and annual plans: Results point towards greater emphasis on documenting treasury objectives and plans, which increased 74% between 2009 (18%) and 2013 (92%). Reviewing bank performance: Nearly 60% of all survey participants reported conducting formal performance reviews of their banking partners at least on an annual basis. Risk management: still in the spotlight While risk management practices often adapt to meet the requirements of an evolving regulatory framework, CTD results indicate that treasurers have increasingly adopted a more comprehensive approach to risk management as more corporate treasuries foster a risk-aware culture. Managing counterparty risk: Survey results indicate the emergence of a risk-centric treasury organization, with the number of respondents employing methodologies to set, monitor and calculate the usage of counterparty risk increasing 11% from 2009 (56%) to 2013 (67%). Role in Working Capital Management Is Treasury directly involved in working capital management? 26% (2013) 74% (2013) Yes 56% (2009) Risk assessment and monitoring: Data shows that treasurers are more diligently monitoring and assessing various financial risks. The vast majority of CTD participants reported assessing both interest rate risk and liquidity/funding risk, 79% and 80%, respectively. Settlement risk has also received increased attention from corporate treasury in recent years, most particularly among larger companies, rising to 50% in 2013 from 28% in 2009, a 22% increase over four years. Business continuity: Given treasury s renewed focus on comprehensive risk management, it is not surprising that nearly three-quarters (72%) of CTD participants reported having a business continuity plan. Large firms were the most likely to establish a formal business continuity plan over the last four years companies with revenue greater than $25 billion reporting a business continuity plan increased 40% between 2009 (43%) and 2013 (83%). Conclusion The transformation of corporate treasury in recent years is demonstrative of its evolutionary nature. We expect these themes the result of a quantitative review of treasury practices to continue and further shape the role of treasury in the years to come. Being mindful of these key themes as practitioners plan, build, and refine their teams and activities will help treasurers improve performance and act as a catalyst for the success of the wider organization. No To read the full white paper Treasury by the Numbers: A Closer Look, please click here.

8 8 Treasury and Trade Solutions Until options improve for the repatriation, or distribution of trapped liquidity, here are some thoughts on how to improve the enterprise-wide return on these assets.

9 Treasury Advisory Quarterly Spring 2014 Edition 9 Renting Liquidity By Stuart Roberts Due to a variety of factors ranging from global tax rate differentials, imbalances in manufacturing and sourcing centers versus key sales markets, companies have often found themselves with pools of trapped liquidity in key markets. There are limited options for the deployment of trapped liquidity and so balances continue to grow, creating an increasingly large uneconomic asset that cannot offset cash shortages in other parts of the world. Therefore until options improve for the repatriation, or distribution of this trapped liquidity, here are some thoughts on how to improve the enterprise-wide return on these assets. 1. Pay suppliers faster in return for larger cash discounts: While US and large global multinationals may be extremely liquid in markets where cash is trapped, many of the local suppliers are not in such an enviably liquid position. We have seen liquidity and access to credit diminish in the last three quarters across Asia, LATAM and the Middle East for local middle-market companies. An arbitrage exists between the lack of options for the cash on your balance sheet with the desire from your local suppliers to be paid faster. A 1% discount off the cost of goods sold to pay within ten days instead of on day 30 represents an annualized return of 18%. Citi works with two companies in the dynamic discount space who take two different approaches to the concept of dynamic discounting. One takes the route of straight-line dynamic discounting; the other attempts to create a dynamic marketplace for excess cash through weekly auctions to suppliers on discounts. 2. Use excess cash to support longer collection times: Just as indigenous suppliers may be willing to pay in the form of lower cost of goods sold for liquidity, so local buyers may be willing to offer up higher market share for extended payment terms. The downside to extended terms is that will increase commercial credit risk. This can be offset to some extent through risk mitigants such as commercial credit insurance. The risk mitigants do carry a cost, and that cost can be offset from the gross margin of the incremental sales achieved from the extension of payment terms. Additionally, depending on the accounting standards for your firm, you could potentially use your excess offshore cash as an equity tranche investment in a first loss portfolio of your buyer risks that Citi funds. You would receive a return on that investment equal to an equity or quasi-equity type rate of return, the cost of which would be blended into the total cost of the program, which is in turn paid for by the gross sales margin of the incremental sales, or by arbitraging any cash discounts that you previously offered buyers. The benefit of the first loss is that it caps the maximum loss exposure from a credit standpoint that your enterprise would bear.

10 10 Treasury and Trade Solutions Renting Liquidity the Last Resort When other options are exhausted and there still remains trapped cash, efforts can focus on P&L benefits renting liquidity in exchange for lower procurement costs and/or higher sales. 1 Shortening DPO 2 Shortening Days Payable Outstanding (DPO) in exchange for a reduced procurement cost is an effective way to reduce COGS COGS Revenue Extending DSO Extending Days Sales Outstanding (DSO) is an effective way to increase sales revenue Procurement Cost Other P&L Benefits Sales Liquidity Risk Credit Risk Supplier DPO = 30 DSO = 60 Company Buyer DPO = 60 DSO = 30 Original DPO/DSO Adjusted DPO/DSO Risk profile changes as liquidity risk emerges due to shortening DPOs. A bank solution can be structured in a way to neutralize the contingent exposure through a back-stop facility Bank Support Risk profile changes as credit risk emerges while extending receivables maturity dates. A bank solution can be structured in a way to neutralize the contingent exposure through receivable financing for the additional days granted compared with initial scenario

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12 12 Treasury and Trade Solutions Integrating China into Your Global Treasury Structures By Rachel Wang China has been a crucial driver of the global economy for the past decade, and despite the recent slowdown in economic growth, it is certain to be a major growth market for many of the world s leading multinationals in the coming years. Historically, however, China has been considered difficult from a treasury management perspective by many multinationals because of complex regulations and the existence of currency controls. In particular, China s regulatory requirements have made centralization of foreign exchange risk management, liquidity management and cash management at regional- or global-level core treasury objectives problematic. Instead, these important treasury functions may have been conducted at country- or even entity-level, leading to possible inefficiencies and limited visibility and control: cash trapped in China operations can be a common headache for treasurers. While the perception of China as a restrictive market from a regulatory perspective remains, the reality has changed dramatically in recent years. A series of regulatory reforms affecting the use of both foreign currency and the renminbi including the gradual internationalization of China s currency have fundamentally altered what multinationals may achieve in China in terms of liquidity and management. Companies now have the opportunity to improve risk management and lower funding costs. There are now pilot programs for cross-border foreign currency pooling, while the approval requirement for crossborder renminbi lending has been removed. Moreover, innovative treasury structures, such as netting and Payment On Behalf Of (POBO) and Receivables On Behalf Of (ROBO) are now possible for the first time in China.

13 Treasury Advisory Quarterly Spring 2014 Edition 13 The regulatory changes in China associated with FX, liquidity management and globally optimized treasury structures are truly historic.

14 14 Treasury and Trade Solutions Centralized FX Management China If applicable Third Party Supplier Third Party Customer Pay in RMB Receive in RMB Benefits Eliminate/ Reduce FX Exposure Centralize FX risk management to RTC / IHB Chinese Sub. Net FX conversion of RMB 0.5MM IHB / Treasury Center Overseas Affiliate A Overseas Affiliate B Pay RMB 1.0MM Receive RMB 1.5MM Risk management FX risk management is a core treasury function that, in order to be conducted efficiently, should be concentrated at a level where appropriate skills and tools are available. Ideally, exposure from multiple entities should be netted. However, historically it has not been possible to use such structures in China, as regulations required that renminbi be used for domestic settlement (with foreign currency settlement permitted for companies in bonded areas) while foreign currencies had to be used for cross-border settlement. Since July 2009, when the Chinese government launched a pilot scheme to allow cross-border settlement using renminbi, use of the renminbi internationally has been steadily expanded. In August 2011, renminbi cross-border settlement expanded to all the provinces and cities in mainland China, while in July 2013, renminbi settlement for exports was extended to all of China. The inability to freely move renminbi, and restrictions on passing on FX gains and losses, meant that FX risk management strategies such as netting at a regional or global level were not possible in the past. Instead, FX risk management was conducted at an individual entity level, which is a time-consuming and cumbersome process typically requiring a dedicated treasury manager to telephone a local bank to ascertain prices for hedging, for example. With the advent of renminbi cross-border settlement, companies can potentially reduce their FX exposure and improve risk management if they can convince their suppliers and customers to use the currency. At the least, China affiliates can pass their FX exposures to affiliates abroad in the supply chain, which can then further centralize risk management to regional treasury centers or in-house banks, which are best placed to manage hedging activities and improve efficiency, visibility and control.

15 Treasury Advisory Quarterly Spring 2014 Edition 15 FCY (SAFE pilot program) Global LM Header Account Overseas Funding Concentration Overseas China Overseas Funding Concentration Account (OFCA) China Cross Border Lending/Borrowing Cross Border Lending/Borrowing Quota Domestic Funding Concentration Account (DFCA) China FX Quota RMB Cash Pool EL Repayment via Sell RMB Buy FCY El Sub AC1 China El Sub AC2 China Current AC1 China Capital AC1 China Current AC2 China Capital AC2 China

16 16 Treasury and Trade Solutions RMB (nationwide excluding SFTZ) Onshore Lender Domestic Sub1 RMB General A/C Multi-Currency Notional Pool Lend Offshore Borrower RMB A/C Special A/C (XB Lending) RMB Special A/C Domestic Pool Header RMB General A/C Repay Domestic Sub2 RMB General A/C USDA A/C Overseas China Liquidity management Restrictions on the movement of cash have long hampered companies ability to incorporate China into efficient regional or global liquidity structures. In countries without exchange controls and other currency-related restrictions, companies mobilize cash from multiple locations in order to reduce debt, minimize their reliance on external financial markets and decrease the amount of cash on their books (in line with investors expectations). In China, it was possible for China entities to borrow in foreign currencies from overseas entities but the total was subject to the borrowing gap (the difference between the total investment and registered capital). In addition, approval from State Administration of Foreign Exchange (SAFE), which is responsible for managing foreign exchange, was required, which entailed complex documentation and a 20-day delay. These controls considerably reduced companies flexibility and the attractiveness of overseas borrowing. At the same time, while lending from China to foreign group entities was permitted, it was limited to corporates in a pilot in Shanghai s Pudong area and takeup was extremely limited. In recent years, a series of regulatory reforms by SAFE and the People s Bank of China (PBOC), which determines regulations related to the renminbi, has created new liquidity management opportunities for companies operating in China. The reforms introduced by SAFE and the PBOC mean that China is no longer excluded from multinationals global liquidity structures. SAFE has now permitted pilot programs for cross-border foreign currency pooling with offshore entities (based on a quota control that restricts overseas borrowing). Although borrowing remains based on the borrowing gap, it is now permitted to use the aggregated borrowing limit of all group participants and the lending quota is capped at 30% of net equity. Meanwhile, the PBOC has removed limits and the approval requirement for cross-border renminbi lending, allowing one-way lending without quota control. Within the Shanghai Free Trade Zone (SFTZ), qualified companies, which include regional headquarters, operating centers and international trade settlement centers, receive special treatment compared to those elsewhere in China. They can pool foreign currency with offshore entities with a larger quota control of 50% of aggregated group net equity (having filed with SAFE) and are allowed to conduct two-way renminbi pooling with offshore entities without quota control. Moreover, companies can apply to take part in programs outside of the SFTZ and rather than waiting for specific approval are allowed to go ahead if they do not hear from the authorities within 20 days.

17 Treasury Advisory Quarterly Spring 2014 Edition 17 Global optimized treasury structures Historically, just as with liquidity management, most cash management in China has taken place at an entity- or country-level. It was only possible to use netting in limited circumstances (such as with the contract company) while POBO was only permitted via a company providing financial services to group affiliates, and ROBO structures were not permitted in any circumstances. Consequently, it was impossible to integrate China into global optimized treasury structures such as payment factories. RMB cross-border liquidity solution in SFTZ HK London Offshore Company SG Now renminbi and foreign currency netting is permitted under PBOC and SAFE pilot schemes. Pilot companies are allowed to net-off their payables and receivables under current account with an offshore netting center while renminbi can also be netted on a gross-in-and-out basis. Within the SFTZ, qualified companies simply have to file with SAFE to begin netting while they are allowed to do true renminbi netting under current account. Overseas RMB XB 2-way Pooling SFTZ Company Special Deposit Account Meanwhile, regulatory changes have facilitated the creation of POBO and ROBO structures. SAFE-approved pilot companies can establish an entity to make or collect foreign currency payments on behalf of other entities within the group. Within the SFTZ, qualified companies gain the advantage of not having to seek specific SAFE approval for POBO and ROBO; instead, they can simply file and then proceed after an appropriate delay. It remains to be clarified whether POBO and ROBO remain prohibited for domestic payments and collections in the SFTZ (as they are in the rest of China). Outside SFTZ in China Sub 1 Sub 2 Sub 3 While regulatory changes have clearly resulted in major advancements for POBO and ROBO structures in China, there remain a number of areas still to be addressed. Most notably, renminbi payments are not currently possible, which is problematic given that companies ideally want their China entities to pay using the local currency so that FX can be centralized at the regional level. In addition, existing regulations do not allow book transfer, so if a third party pays on behalf of another entity, the payment must ultimately be recovered, creating an unwelcome inefficiency.

18 18 Treasury and Trade Solutions Operational Efficiency RMB Paperless Solutions RMB-XB Payment paperless flow 1 Input Payment order & BOP declaration data through EB 3 Payment Process Client/Payer 2 RMB-XB payment description form through CitiSFT Citi performs compliance check by using scanned copy, and effect the transaction 4 Automatic BOP Reporting RCPMIS reporting Beneficiary PBOC&SAFE RMB-XB Collection paperless flow 3 Collection Process 1 Payment Payer Client/ Beneficiary 2 RMB-XB Collection description form through CitiSFT 4 RCPMIS reporting PBOC&SAFE 5 Online BOP reporting

19 Treasury Advisory Quarterly Spring 2014 Edition 19 Embracing opportunities The regulatory changes in China associated with FX, liquidity management and globally optimized treasury structures are truly historic and offer enormous opportunities to improve efficiency and reduce risk for multinationals that are active in China. In addition, recent reforms have been beneficial to companies operating efficiency. For example, in the past if a company had a shared service center (SSC) it could only be used for domestic payment in renminbi (which do not require hard copy supporting documents). Foreign currency payments required supporting documents, which made it hard to centralize bank accounts to an international bank as they would not have sufficient coverage countrywide to take physical delivery of documents. Instead, local bank relationships were necessary. Now, regulatory changes allow renminbi to be used as a settlement currency. As renminbi payments do not require supporting documents (a scanned copy of either an invoice, contract or custom slip will suffice), bank relationships can be centralized. Moreover, only a scanned copy of just one of three possible supporting documents is now required for foreign currency payments. As a result of these changes, companies with SSCs can improve their efficiency using paperless solutions. Despite the advances in what can be achieved by multinationals in management of their FX and liquidity in China, it is important to note that the regulatory environment in China remains complex. Different regulations operate inside and outside of special zones such as the SFTZ. Moreover, regulations are subject to frequent change. To take full advantage of China s evolving treasury landscape, it is essential that corporates maintain a close dialogue with their banking partner. Companies need to ensure that they work with a bank that has up-to-date knowledge of regulatory developments (as well as the global capabilities to meet their needs). Citi is familiar with the pilot applications process and can simplify what can be a complex exercise through its expert insights and guidance. Equally, many applications involve a dialogue with the regulators rather than simply submission of a form, and Citi s strong relationship with all relevant regulators can make the difference in achieving a company s goals in China.

20 20 Treasury and Trade Solutions Must Read Please contact your Citi Representative for copies of the Treasury Priorities: Cautious Optimism White Paper as well as Strategic Transactions: Considerations for Corporate Treasury. Treasury Priorities: Cautious Optimism In this review of treasury priorities for 2014, we discuss how treasurers are coping with the challenges of supporting the business in an environment of both improving growth prospects and increasing complexity. Strategic Transactions: Considerations for Corporate Treasury Often, it is late in the merger or spinoff process, that post-transaction implications for treasury management are considered in detail. In our experience, given the considerations organizational, financial, and operational early planning provides payoffs. By taking action, Treasury can provide greater value to the transaction, as well as enhance and refine functions for the future.

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