Cash Pooling in Asia A case study 2013 CLSA Limited The content of this document is subject to and should be read in conjunction with the disclaimer and CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which may be obtained on request from CLSA Publications or CLSA Compliance Group, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.
Topics to Cover Brief introduction to CLSA The Challenges of Cross Border Pooling in Asia Notional vs Physical Pooling evaluating the different options Securing Business buy in/project Plan Measuring the benefits Page 2
Brief Introduction to CLSA Brief facts: Global headquarters: Hong Kong Represented in 15 countries, 11 in Asia-Pacific 21 office locations worldwide, 14 in Asia-Pacific Global client coverage of more than 26,000 contacts across 1,800 institutions globally Number of permanent staff: 1,500 Commenced operations in 1986 Page 3
CLSA s integrated financial services platform Asia s leading independent brokerage and investment group RESEARCH No.1 Most Independent Research in Asia¹ Corporate Sector Strategy Economics Technical Quant Small Caps Clean & Green Themes CLSA U EQUITY BROKING CORPORATE FINANCE ASSET MANAGEMENT SPECIALISED SERVICES No.1 Equity Brokerage in Research, Sales and Sales-trading² Cash equity trading Portfolio trading Electronic sales and trading Listed derivatives Synthetic equity and Delta 1 products Block trading Execution services consultancy ETF trading CSAs ECM footprint includes Australia, France, Greater China, India, Italy, Indonesia, Korea, Malaysia, Philippines, Russia, Singapore, Thailand, Vietnam and the USA. Acting as bookrunner on 159 deals in 11 markets from 2007 to 2013 M&A/Financial advisory US$2.6bn funds under management through a range of Asia-based funds ARIA Investment Partners Fudo Capital Sunrise Capital Pacific Transportation Clean Resources Asia Growth MezzAsia Capital Semeru Asia Equity High Yield SetClear: Middle- and backoffice clearing and settlement 1 Asiamoney Brokers Poll 2002-04, 2006-13 2 Greenwich Associates Surveys 2010-13 for European Equity Investors in Asian Equities; Greenwich Associates Surveys 2009 & 2012 for US Equity Investors in Asian Equities. Page 4
Award-winning sales & research teams Asia-Pacific: research and sales Beijing, Shanghai, Shenzhen 3 Research analysts 1 Sales trader Mumbai 10 Research analysts 4 Sales 6 Sales traders Bangkok 5 Research analysts 2 Sales 4 Sales traders Tokyo 17 Research analysts 8 Sales 10 Sales traders Seoul 6 Research analysts 7 Sales 8 Sales traders Taipei * 6 Research analysts 4 Sales 3 Sales traders * Crédit Agricole Securities (Taiwan) Company Limited is an exclusive Taiwan research provider to CLSA Hong Kong 31 Research analysts 20 Sales 28 Sales traders Kuala Lumpur 7 Research analysts 3 Sales 2 Sales traders Manila 6 Research analysts 2 Sales 2 Sales traders Singapore 7 Research analysts 12 Sales 9 Sales traders Jakarta 5 Research analysts 4 Sales 2 Sales traders Sydney 20 Research analysts 8 Sales 3 Sales traders Note: Research headcount does not include associates and assistants Page 5
Award-winning sales & research teams (continued) USA: US research; Asia-Pacific and US-domestic sales UK and Europe: Asia-Pacific sales London 23 Sales 6 Sales traders Boston 2 Research analysts 3 Sales 2 Sales traders San Francisco 2 Research analysts 2 Sales 2 Sales traders New York 20 Research analysts 28 Sales 23 Sales traders Chicago 2 Sales Note: Research headcount does not include associates or assistants. Page 6
CLSA polls and awards Asiamoney Brokers Poll 2013 No.1 Best Overall Brokerage in Asia (ex-australia and Japan) for Combined Research and Sales in 2007-13 (except 2011) No.1 Best Overall Combined Research & Sales for Japan No.2 Best Overall Combined Research & Sales for Australia No.1 Most Independent Research in Asia (ex-australia and Japan), 2002-04, 2006-13 AsianInvestor Survey of buy-side traders of Asian Equities 2013 Which firm is best at finding liquidity - CLSA Which firm do you trust the most - CLSA Which is the best agency-only provider - CLSA Which firm has the most reliable commitment to the business - CLSA Which firm is best for sales trading - CLSA Institutional Investor s All-India Research Team No.1 in Institutional Investor s All-India Research Team survey 2012 No.1 in Institutional Investor s inaugural All-India Research Team survey 2011 Greenwich Share Leader 2012 CLSA earned a Greenwich Quality Leader designation in: Asian Equity Sales Quality Asian Equity Trading Quality Asian Equity Research and Analyst Service Quality Page 7
CITICS: Access to China with an unrivalled partner Shared vision with CITICS CITICS shares CLSA s vision of becoming a dominant force in global broking and investment banking, driven by a culture of excellence, innovation, integrity and independence. Having CITICS as a shareholder allows CLSA to broaden its product offering and global expertise while maintaining its unique and successful position as a content-driven independent agency broker. CITICS interest in CLSA is testament to CLSA s strong global client base, and award-winning research, sales and broking teams. In July 2013, CITIC Securities International Company Limited, a wholly-owned subsidiary of CITIC Securities ( CITICS ) successfully purchased the remaining equity stake in CLSA from Crédit Agricole Corporate & Investment Bank ( CA CIB ) to become the controlling shareholder of CLSA. CLSA continues to receive the relevant support from CA CIB, extending beyond the completion of the transaction (31 July 2013) for a further 24 months to facilitate smooth and seamless migration of ownership and ensure it remains business as usual for CLSA clients and staff. CLSA continues to operate independently according to its usual business practice and retains its management independence and continues to operate as an unconflicted provider of global brokerage services. Page 8
Challenges of Cross Border Pooling in Asia Why cash pool in the first place? Make better use of facilities Maximize the availability of internal capital Cut the interest bill reduce interest spread Have more centralized control over cash management Prepare for & help facilitate strategic changes in the business Moving from a business backed by a bank to one backed by a broker Strategic change in ownership can have an impact on counterparties Need to stand more on own two feet for funding solutions Page 9
Challenges of Cross Border Pooling in Asia What are the challenges that you face? Non Homogeneous currencies unlike Europe A wide variety of FX regimes Exchange controls in many markets Notional pooling not prevalent and in some markets restricted in use Accounting implications for balance sheet if offset of debit and credit positions is not allowed Page 10
Challenges of Cross Border Pooling in Asia Asia Pacific Currency FX regime Exchange controls Notional Pooling Allowed? Comment Australia AUD Free Float None YES Bangladesh BDT Free Float Yes NO China CNY Managed Float Yes YES - Restricted Resident/Non resident pooling under the same legal entity Hong Kong HKD Managed Free Float None YES India INR Floating Yes NO Indonesia IDR Free Float Yes YES Restricted Non residents not permitted to borrow funds in Indonesia Japan JPY Free Float Limited YES Korea, South KRW Free Float Yes NO Malaysia MYR Managed Float Yes YES - Restricted Notional pooling not permitted between multiple legal entities Philippines PHP Floating Yes NO Singapore SGD Floating None YES Sri Lanka LKR Free Float Yes NO Thailand THB Floating Yes NO Vietnam VND Stabilized arrangement Yes NO Page 11
Challenges of Cross Border Pooling in Asia Japan Australia Singapore Hong Kong Low regulation Indonesia Malaysia Taiwan Philippines India China South Korea Sri Lanka Bangladesh High Regulation Page 12
Challenges of Cross Border Pooling in Asia Cross Guarantees Most banks need them to prove the right of offset. Often embedded directly into the cash pool documentation Not easily enforceable cross border Can be restricted to the value of any credit balances held Page 13
Challenges of cross border pooling in Asia Thin Capital Rules Witholding tax Tax regime maturity Tax Transfer pricing Deemed Dividends Interest Deductibility Page 14
Challenges of cross border pooling in Asia Documentation Representations & Warranties No restrictions prior liens on balances Agent/Lead company One company/pool Manager. Other companies bound by it s actions Interest calculation/payment how apportioned, how interest is charged/paid Right of offset Pay and apply wording Board Resolutions provided as evidence as authority for completion of documentation. Page 15
Challenges of cross border pooling in Asia Legacy issues Cash not seen as a corporate asset No cash central management/investment policy Impact on other bank relationships Bank relationship skills may not be experts in cash pooling Page 16
Notional versus physical pooling Notional Pooling Advantages Long/Short positions offset reduce spread between borrowing and lending Improve the balance sheet by eliminating gross positions (subject to accounting treatment) Reducing counterparty credit exposure and restricting it to banks approved by Treasury Reduce the overall usage of credit facilities No lost availability or transfer costs Page 17
Notional versus physical pooling Notional Pooling Disadvantages Accounting standards may require gross position to be accounted for. Lessened accountability locally for collecting/managing cash Transfer pricing issues and cross guarantees Need to maintain credit facilities locally and centrally outside of the pool Legal fees for set up & bank set up and ongoing fees interest benefit needs to outweigh this. Page 18
Notional versus physical pooling Physical Pooling Advantages Allows centralized managements of funds by Group or Regional Treasury One central facility needed at Group/Header level. Sub accounts still need intraday facilities. Deficits financed by cheaper source than local overdrafts No need for cross guarantees as physical transfer of funds has occurred via intercompany loans. Page 19
Notional versus physical pooling Physical Pooling Disadvantages Intercompany loans are created May be transfer pricing and thin capitalization issues Withholding tax may be levied on the intercompany loan interest Bank fees for cash concentration (especially cross border) may be high Impact on local banking relationships Page 20
Notional versus physical pooling Decision for CLSA : Notional Pooling Did not want large amounts of intercompany transactions. A large portion of balances once pooled would be relatively stable Did not want to pay bank fees associated with cross border concentration Did not have a Treasury Management System capable of dealing with Physical Pooling Largest members of the pool in friendly jurisdictions Allowed the accounting treatment to eliminate gross positions. Page 21
Notional versus physical Pooling Which of the 4 basic notional pooling structures to consider? Notional Pooling Structures Single currency, onecountry pooling Single currency, cross-border pooling Multi-currency, one country pooling Multi currency, cross border pooling Comment Most common type of pooling Less common. Bank balance sheet/ratio requirements Common for regional treasury centres Most complex and difficult to achieve CLSA Yes Yes For CLSA a mixture of structures was the answer. Page 22
Notional versus physical Pooling Which of the 2 basic interest compensations to consider? Start with deriving the pooling benefit: Bank O/N offer rate Bank O/N Standard Bid rate Margin Pooling Margin 1.91% 1.71% 0.70% 0.20% Calculate balances in Base currency Orig. Bal Exchange Rate Base CCY Equiv. Entity 1-100 1-100 Entity 2 50 1 50 Entity 3 50 1 50 Net Position in Base CCY 0 Calculate the covered balances Orig. Bal Coverage percentage Covered balance Entity 1-100 100% -100 Entity 2 50 100% 50 Entity 3 50 100% 50 Debit Coverage 100.00% Credit Coverage 100.00% Page 23
Notional versus physical Pooling Then decide how that benefit is allocated: Charges Without Pool Orig. Bal Rate applied Interest (charged)/paid p.a. Entity 1-100 2.61% -2.61 Entity 2 50 1.01% 0.5 Entity 3 50 1.01% 0.5 Total -1.6 Charges with pool Orig. Bal Rate applied Interest (charged)/paid p.a. Entity 1-100 2.11% -2.1 Entity 2 50 1.51% 0.8 Entity 3 50 1.51% 0.8 Total -0.6 Pooling Benefit 1 Distribute pooling benefit Fair Share Entity 1 0 Entity 2 0.5 Entity 3 0.5 Total 1 Absolute Balance Entity 1 0.5 Entity 2 0.25 Entity 3 0.25 Total 1 Page 24
Building the solution - IOF Hong Kong Pool Notional Pool (current) External banks Australia Multi currency Banks Japan Single Currency Hong Kong Singapore Single Currency + UK + Overseas Pool + Multi currency 1. Companies can deposit surplus cash into the pools. 2. Treasury will draw from the pools to invest or pay down short term debt - Page 25
Physical features Physical Pooling Notional Pool External banks Hong Kong Pool Multi currency Banks Single Currency Japan True end-of-day sweep + Overseas Pool + Multi currency + Single Currency - 1. Trade deficits/surpluses will be automatically swept from the physical pool to the notional pool at end of day. 2. Treasury will draw or repay one loan with an external bank to balance the notional pool. Page 26
Building the solution - IEF How it works: It is a notional method of enabling CLSA to improve the credit interest spread using balances in different currencies Convert balances notionally into a base currency (i.e. USD) Calculate total aggregate balance in base currency Determine applicable interest tier for all currency accounts Interest is settled at the local level and the extent of rate improvements are subject to local regulations. The preferential rates given are linked to market rates and any interest applied will be governed by local regulations. Page 27
Building the solution - IEF Example: Total Balance Tier in Base CCY CCY O/N Base Bid Rate Margin Enhanced rate 1 0-100m CCY1 1.00% 0.00% 1.00% CCY2 4.25% 0.40% 4.65% CCY3 2.27% 0.25% 2.52% 2 100m- 200m CCY1 1.00% 0.20% 1.20% CCY2 4.25% 0.80% 5.05% CCY3 2.27% 0.50% 2.77% 3 Above 200m CCY1 1.00% 0.40% 1.40% CCY2 4.25% 1.20% 5.45% CCY3 2.27% 0.75% 3.02% Page 28
The solution Notional Pooling IOF for material balances/physical features Enabled pooling of lowest hanging fruit first Currencies involved were least restrictive in the basket Targeted physical features Bank calculation and reporting of pooling balances reduced internal spend Interest Enhancement Facility (IEF) for balances that cannot be pooled Ensured that the Group could derive benefit from regional balances Is not an alternative to active investment management Some banks will offer across debit and credit balances but without offset Page 29
Securing business buy in Have a strong business plan in place Buy in from the top Identify the key stakeholders (CFO,COO, ALCO) Clearly articulate the current issues faced Lay out a range of solutions Be prepared to recommend a solution and defend it Detailed plan and implementation team Set out a detailed project plan with milestones Ensure your banking partner is assembling a well resourced team Engage key business partners early e.g. Tax, Compliance, Legal Get external advice for technical areas Page 30
Securing business buy in Work out the approach you will take: Big Bang or Gradual Approach Workshops and planning sessions with local controllers Listening to local concerns/issues Communications and FAQs Being ready to fix any issues quickly Monitor implementation very closely Page 31
Measuring the benefits Significant reduction in core funding need. Higher ROCE Better match of internal surpluses to internal funding needs External lines more able to deal with funding short term spikes Flexibility for entities to have quick return of capital without need for permanent reductions in capital Page 32
Measuring the benefits Significant reduction in external interest expense Not all from pooling, some effect from better borrowing techniques Cost savings offer significant operating leverage to the business Interest costs/funding spikes now more manageable Page 33
Measuring the benefits Decreased transactions Total Treasury transactions reduced by 60%. Better visibility of balances within pool Better cash management in tandem with Investment Policy Support of the business strategy at a critical point of change Page 34
Other Considerations What structures in place to support withdrawal? Maintain facilities at local and central level What size do you want to grow the pool to? Maintain sufficient lines to support a pool disruption Grow the pool to a size that is manageable Maintain funds outside of the pool Pooling solution normally via one bank Don t put all of your eggs in one basket Basel III impact on cash pooling Page 35
THANK YOU Page 36
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