Treasury and Trade Solutions Treasury Americas How Latin American Corporates Are Leveraging Inter-Regional Flows with the United States
> Contents 1. 2. 4. 6. 8. Treasury Americas U.S. Dollar Accounts Domiciled in the U.S. Trade Finance to Help Drive Working Capital Optimizing Global Liquidity Integrating North America Treasury Management Capabilities
Treasury Americas 2016 1 > Treasury Americas How Latin American Corporates Are Leveraging Inter-Regional Flows with the United States For treasury, doing business between Latin America and the U.S. today is a lot like dancing the Tango fancy foot is definitely required. In 2016, the economic landscape is expected to continue to be challenging for corporations across the region. Peter Langshaw Global and Latin America Sector Sales Head, Treasury and Trade Solutions Saulo Ferraz Latin America Desk Head, Global Subsidiaries Group Timanto Marima Solution Sales - North America Inflows Head, Treasury and Trade Solutions Treasurers will be coping with the trials and tribulations of supporting their organizations in a challenging economic environment, with heightened risks, divergent growth and complex tax and regulatory changes. Adding to this challenge, the banking landscape has also been changing significantly. Several current trends are top of mind for treasurers in this current environment. While the U.S. continues to be an economic powerhouse with gross domestic product (GDP) growth projected at around 2% for the year, Latin America s GDP is expected to experience further decline. As growth slows with devaluation happening in most countries, companies in Latin America are finding efficiency benefits derived from their inter-regional flows, such as having an increased focus on exports to the U.S. and the rest of the world. As these flows are mostly U.S. dollar-driven, companies are actively configuring resident/non-resident U.S. dollar accounts, liquidity structures and trade finance solutions to release internal liquidity and mitigate risks. Importantly, these benefits may be realized by all companies even if they do not have a presence in the U.S. A simple framework depicting these potential synergies is given in Figure 1. Figure 1: Treasury Americas A Framework U.S. Dollar Accounts Domiciled in the U.S. Companies with Presence in the U.S. Increase returns and mitigate risk Streamline payments and collections Trade Finance to Help Drive Working Capital Improved working capital ratios Unlocking internal liquidity Optimizing Global Liquidity Improved account structures Efficient global cash concentration and FX Companies without Presence in the U.S. Integrating North America Treasury Management Capabilities Single regional technology platform and operating model
2 A new array of structured deposits and strategic investments has evolved. > U.S. Dollar Accounts Domiciled in the U.S. Faced with significant currency devaluations across Latin America, many treasurers are responding by holding more liquidity and leveraging operating accounts offshore in U.S. Dollars. At the same time, Basel III is also reshaping how banks are managing their liabilities and the solutions offered. In this regard, a new array of structured deposits and strategic investments has evolved. Banks are combining and tailoring these different liquidity solutions to help maximize returns. Some of these key structures and potential benefits are summarized in Table 1. Table 1: Combining Solutions to Optimize Yield While Offering Liquidity, Capital Preservation and Diversification Solutions Objective How it works Earnings Credit Rate (ECR) Enhances yield by offsetting with an attractive implicit rate. Offers daily liquidity. Relevant when bank fees are material. Automatically offsets bank fees by applying an attractive implicit rate to average balance levels in the accounts. Interest-Bearing Accounts with Brackets Money Market Time Deposits (MMTD) Sweeps and Core Deposit Sweeps (CDS) Time Deposits Money Market Funds Standard operating accounts with interest rates based on average balance levels. Brackets allow dynamic balance-based pricing. Better return for medium-short term investable surplus. Regular overnight sweep. CDS rewards stable balances with premium rates. Offers daily liquidity. Enhances yield for term deposits. Term Liquidity. Diversifies Risk with a portfolio of high-quality, short-term fixed income debt securities. Offers daily liquidity. Pays interest based on average balance. When use with brackets, interest is defined daily by the end-of-day balance. Time Deposit with maturity date is defined by giving notice. Balances are swept end-of-day and return to the account the next morning. Premium rates are paid on CDS balances committed with stability. Maturities from overnight to five years. Competitive yields. Investments into numerous Domestic and International Funds, with automated account settlement.
Banks are combining and tailoring these different liquidity solutions to help maximize returns.
4 With the increased focus on exports to the U.S., pre-export financing has been an area of focus to help provide valuable funding for the exporters. > Trade Finance to Help Drive Working Capital Trade flows are also on the radar of treasurers. Presently, there are approximately $3 trillion 1 balances in trade flows for goods and services throughout the Americas regionally. With the increased focus on exports to the U.S., pre-export financing has been an area of focus to help provide valuable funding for the exporters. Similarly, import financing helps protect importers from exchange rate volatility and serves as a source of funding at a time when traditional financing sources are becoming challenged. We are seeing trade finance programs support the supply chain in Latin America and the U.S. through cross-border solutions. This is important because this has given rise to new sources of funding and has helped increase returns for the whole supply chain. New supply finance programs such as Dynamic Discounting are becoming more frequently adopted in the U.S. and are now starting to migrate to other regions. (Figure 2 provides more details about Dynamic Discounting.) What is important is that these techniques are in many cases able to be integrated into the company s enterprise resource planning (ERP) system. Having a global bank that offers a single technology platform for both regions can be equally important. 1 Source: World Trade Organization (WTO) International Trade Statistics
Treasury Americas 2016 5 Figure 2: Dynamic Discounting A Paradigm Shift Day 0-5 Day 5 Day 6 Buyer 1. Purchase Order 2. Goods/Service 3. Invoice 4. Approved Invoices Buyer 6b. Discount offered 5. Communicate Receivables 6a. Discount offered Buyer 7a. Attractive offers accepted 7b. Settlement minus discount Dynamic Discounting Supplier Dynamic Discounting Supplier Dynamic Discounting Supplier What are the Potential Benefits? Potential Benefits to the Buyer Maximize return on cash via unique Price Discovery marketplace-based approach Increase gross margin and EBITDA by reducing COGS Reduce supply chain risk No licensing fees and relatively fast implementation Fully integrated solution to complement Supplier Finance Potential Benefits to the Supplier Improve cash flow / Reduced DSO Relatively lost cost source of financing Access early-payment on demand; no paperwork or contracts No fees for suppliers to participate; Easy enrollment process Improved visibility into invoice status
In Mexico, pooling liquidity in the U.S. or in London is available and some global banks are providing automatic concentration solutions.
Treasury Americas 2016 7 > Optimizing Global Liquidity Treasurers are increasingly taking steps to improve their liquidity management dynamically. Aside from unlocking liquidity from trade flows, companies have been focusing on establishing more efficient treasury structures between Latin America and the U.S. Due to varying regulations and practices across these markets, treasurers have to take specialized considerations into account when consolidating Latin American and North American liquidity structures. Indeed, there is a growing trend toward offshore pooling for liberal and semirestricted markets. For instance, in Mexico, which has a liberal regulatory structure that allows free cross-border sweeps and dollar accounts, pooling liquidity in the U.S. or in London is available and some global banks are providing automatic concentration solutions. Other solutions have been developed to maximize interest in the more restricted countries. Figure 3 gives a summary of how to leverage and effectively combine the two regions from a liquidity standpoint. Figure 3: Integrating Liquidity Management Across Americas Solutions vary by market complexity. A combination of global (or regional) and local execution is commonplace. Often, is managed centrally and integrated with global funding and investments. Concentration Center (e.g. New York) Manual or Automated Investments Non-res Non-res In-Country Structures Manual or Automated Investments Manual Investments Manual or Automated Investments Manual or Automated Investments Header a/c Manual FX Header a/c Header a/c Manual FX Header a/c Header a/c Interest Optimize Liberal Semi-restricted Restricted Liberal: Possible structure for countries where both and are freely transferable (e.g. Mexico) Semi-restricted: Possible structure for countries where is restricted, but is transferable with differing restrictions (e.g. Colombia) Restricted: Possible structure for countries that restrict transferability of both and (e.g. Argentina) (Note: This information is being provided for general awareness, and does not constitute legal or tax advice.)
8 All in all, today s smart treasury organizations are finding better ways to dance the Tango and more effectively do business between Latin America and the U.S., even in the face of existing challenges. > Integrating North America Treasury Management Capabilities Latin American companies have been rapidly expanding their businesses in North America over the last decades. Not only as an exporter to the United States, but with strong and effective local operations. Latin American companies are now focused on bringing efficiencies from U.S. banking market capabilities to help improve the day-to-day financial management, integrating its local operations in North America with existing regional or parent-level treasury centers. As a result, the most appropriate approach may be a combination of local support in North America with a Global platform which understands the efficiencies and characteristics of each market. Partnering for Success Latin America Treasurers are closely evaluating whether or not they have the right banking partner in place. This is particularly important in light of the fact that the banking environment has been in flux. More recently, a number of global banks have been scaling back or withdrawing their corporate banking presence due to high infrastructure costs and regulatory requirements across Latin America. Making things even more challenging, many regional banks are unable to provide an integrated, holistic solution to support working capital goals throughout the Americas, resulting in fragmented approaches that make it difficult to achieve cost reductions and achieve proper controls. It is little wonder that treasurers in the region may be dealing with inconsistencies in treasury management processes, disjointed cash visibility, fragmented connectivity, and face higher costs of doing business from having multiple, complex banking partnerships. Thus, it is important to choose the right banking partner that can provide fully integrated solutions across the Americas. All in all, today s smart treasury organizations are finding better ways to dance the Tango and more effectively do business between Latin America and the U.S., even in the face of existing challenges.
Treasury Americas 2016 9 Treasury Americas Key Citi Contacts: Latin America Desk in New York Saulo Ferraz, Latin America Desk Head, Global Subsidiaries Group Email: saulo.ferraz@citi.com Phone: +1 (212) 816-8372 North America Omar Hafeez, Regional Head, Global Subsidiaries Group Email: omar.hafeez@citi.com Phone: +1 (212) 816-3838 Kevin Tissot, Regional Sales Head, Treasury and Trade Solutions Email: kevin.tissot@citi.com Phone: +1 (212) 816-5956 Timanto Marima, Solution Sales, North America Inflows Head, Treasury and Trade Solutions Email: timanto.marima@citi.com Phone:+1 (212) 816-5627 Latin America Oscar Mazza, Regional Sales Head, Treasury and Trade Solutions Email: oscar.a.mazza@citi.com Phone: +1 (305) 347-1336 Peter Langshaw, Global and Latin America EPC and Industrials Sector Sales Head, Treasury and Trade Solutions Email: peter.langshaw@citi.com Phone: +1 (305) 420-4268 Gabriel Kirestian, TMT and BC&H Sector Sales Head, Treasury and Trade Solutions Email: gabriel.kirestian@citi.com Phone: +1 (305) 679-5160
These materials are provided for educational and illustrative purposes only and not as a solicitation by Citi for any particular product or service. Furthermore, although the information contained herein is believed to be reliable, it does not constitute legal, investment or accounting advice and Citi makes no representation or warranty as to the accuracy or completeness of any information contained herein or otherwise provided by it. 2016 Citibank, N.A. All rights reserved. Citi and Arc Design is a registered service mark of Citigroup Inc. 1425179 4/16