Treasury and Trade Solutions Dealing with Trapped Cash: The 'Other Side' of Liquidity Management Break Out Group Facilitator: Ron Chakravarti, Global Head Client Solutions & Treasury Advisory Liquidity Management Services November 2013 | Armonk, New York Advisors: Carolina Juan, Latin America Sales Head Corporate and Public Sector Treasury and Trade Solutions Mark Tweedie, EMEA Sales Head Corporate and Public Sector Treasury and Trade Solutions
Transcript
Treasury and Trade Solutions
Dealing with Trapped Cash: The 'Other Side' of Liquidity Management
Break Out Group
Facilitator: Ron Chakravarti, Global Head
Client Solutions & Treasury Advisory
Liquidity Management Services
November 2013 | Armonk, New York
Advisors: Carolina Juan, Latin America Sales Head
Corporate and Public Sector
Treasury and Trade Solutions
Mark Tweedie, EMEA Sales Head
Corporate and Public Sector
Treasury and Trade Solutions
Backdrop
2
3
50%
23%
14%
5%
0%
10%
20%
30%
40%
50%
60%
0-10% 10-20% 20-30% >30%
Trapped Cash: CAB Survey Results
Approximately what % of your cash would you say is trapped?
91%
50%
36%
45%
36%
Stay up to date with the latest local regulatory changes and tools available in all key markets
Use an efficient global cash forecasting program to maintain tight control on local
subsidiary funding and repatriation
Deploy best available local liquidity structures to optimize onshore cash usage before moving in
liquidity from offshore
Whenever local funding is needed, actively evaluate all available options to use "least
costs" tools
Mitigate trapped cash through reorganization of third-party and intercompany flows
What are you doing to leverage trapped cash? Please check all that apply.
4
What are the Sources of Trapped Cash?
Broadly speaking, companies have two types of cross-border transactions, commercial and financial.
Regulatory restrictions in certain markets on outgoing financial flows result in trapped cash.
Intercompany Transactions
3rd Party Transactions
Commercial Flows (Current Account)
Equity
Debt
Financial Flows (Capital Account)
“Restrictions”
5
What Do Companies Do? Here’s What We See:
Liquidity
Management
A/c
Structure
Interest
Optimization
CF
Forecasting
Local
Pooling
Sub. Funding &
Repatriation
Dividend
Repatriation
Intercompany
Funding
Working Capital
Management
Process
Centralization DSO/DPO Opt. Netting Center
Trading
Model
Liq
uid
ity &
Fundin
g S
trate
gie
s
Str
uctu
ral S
tra
teg
ies
Co
mm
erc
ial F
low
s
Re-invoicing
Center
Special
Vehicles
Renting
Liquidity
Procurement
Center
Mgmt Fee &
Royalties
Fin
an
cia
l F
low
s
Liquidity & Funding Strategies
7
Decision Tree to Optimize Liquidity / Funding Approaches
A decision tree framework helps bucket different markets depending upon the levels of restrictions.
Q1: LCY
convertible
offshore?
Q2: Allow FCY
cross-border
Intercompany
lending?
Q3: Possible to
open FCY
offshore AC for
resident entity?
Trapped cash
Q2: Allow LCY
cross-border
Intercompany
lending?
Q3: Possible to
open FCY
offshore AC for
resident entity?
FCY
Sweep /
Cash Pool
FCY offshore
A/C
LCY
Sweep / Cash Pool
Use offshore
FCY AC to
fund LCY
Trapped cash
e.g. Nigeria(1) e.g. Iraq
e.g. Malaysia
(1) Cross-border intercompany lending and opening of FCY offshore A/c are allowed, but impractical due to cumbersome regulatory restrictions.
8
Keeping Up With Regulation
Citi uses tools such as its client market guides and regulatory grids to structure solutions.
Local
Currency NR R
LCYLCY
Onshore
LCY
OffshoreLCY FCY LCY FCY LCY -> FCY
LCY Debit
Tax
Argentina ARS 1 5 4 4 4 4 5 N
Bahamas BSD 2 4 1 1 1 1 2 N
Barbados BBD 1 5 1 1 1 1 2 N
Brazil BRL 5 5 4 5 4 5 5 Y
Chile CLP 4 5 5 2 2 2 2 N
Colombia COP 1 5 1 1 1 5 2 Y
Costa Rica CRC 1 1 1 1 1 1 1 N
Dominican Republic DOP 1 1 1 1 1 1 1 N
Ecuador USD 1 1 1 1 1 1 1 N
El Salvador USD 2 1 1 1 1 1 1 N
Guatemala GTQ 2 5 1 1 1 1 1 N
Haiti HTG 1 1 1 1 1 1 1 N
Honduras HNL 2 5 1 1 5 1 2 N
Jamaica JMD 1 5 1 2 2 2 1 N
Mexico MXN 2 1 2 2 2 2 1 N
Panama USD 1 1 1 1 1 1 1 N
Paraguay PYG 1 1 1 1 1 1 1 N
Peru PEN 2 1 1 1 1 1 1 Y
Puerto Rico USD 1 1 1 1 1 1 1 N
Trinidad and Tobago TTD 1 1 1 1 1 1 1 N
Uruguay UYU 1 1 1 1 1 1 1 N
Venezuela VEF 1 5 1 5 1 5 5 N
N.B. 1 - Allowed, No Material Restrictions
2 - Allowed, Straightforward regulations, approval, or license
3 - Allowed, Challenging regulatory approval or license
4 - Allowed, subject to a complex set of rules
5 - Disallowed, Strictly prohibited
Operating Account Intercompany Lending FX Control
R -> NR NR -> R
Market Guides for Treasury provide clients with
regulatory overview of key markets
Regulatory grids are used in our liquidity
solution structuring processes
Structural Strategies
10
Netting Center (“NC”)
Netting Centers to settle intercompany transactions also allow the ability to lag payments into manufacturing
subsidiaries and lead receipts out of sales subsidiaries in restricted markets, thus reducing trapped cash.
Without NC With NC
Subsidiaries receive or pay single transaction from / to the NC
NC helps centralization of cash & FX management and enhances visibility and control
NC helps to reduce trapped cash through ‘Lead or Lag Strategy’ on settlements (i.e., acceleration or deceleration of intercompany
payments)
Restricted Market
Manufacturing
Subsidiary (China)
Sales Subsidiary
(India)
Sales Subsidiary
(Japan)
Manufacturing
Subsidiary
(Hong Kong)
Goods $ Goods $ Goods
Manufacturing
Subsidiary (China)
Sales Subsidiary
(India)
Sales Subsidiary
(Japan)
Manufacturing
Subsidiary
(Hong Kong)
Netting Center
(Singapore) Goods
$ $
$ $
“Lead
Strategy”
“Lag
Strategy”
11
Procurement Center (“PC”)
Setting procurement centers for purchasing economies of scale in freer markets allow leading
payments out of manufacturing subsidiaries in restricted markets, thus reducing trapped cash.
Without PC With PC
PCs typically located in lower tax and non-regulated jurisdictions
PC negotiates purchasing contract with suppliers and makes purchases of goods to resell to the manufacturers
PC helps to reduce trapped cash through ‘Lead Strategy’ on settlements (i.e., acceleration of intercompany settlements)
3rd Party
Supplier
Manufacturing
Subsidiary
3rd Party
Supplier
Sales
Subsidiary
$
Invoice Invoice
$
Invoice $
Goods
Restricted Market
3rd Party
Supplier
Manufacturing
Subsidiary
3rd Party
Supplier
Sales
Subsidiary
$
Invoice Invoice
$
Invoice $
Procurement
Center
Goods
Invoice $
12
Re-invoicing Center (“RIC”) Setting re-invoicing centers as an intermediary for intercompany transactions in freer markets allow
lagging payments into manufacturing subsidiaries and leading receipts out of sales subsidiaries in
restricted markets, thus reducing trapped cash.
Sales
Subsidiary
$
Invoice Invoice
$ Goods
Manufacturing
Subsidiary
Manufacturing
Subsidiary
Manufacturing
Subsidiary
Sales Subsidiary
(Korea)
Manufacturing
Subsidiary
$
Invoice Invoice
$
Goods
Invoice USD
“Lag Strategy”
“Lead Strategy”
Without RIC With RIC
RICs typically located in lower tax and non-regulated jurisdictions
RIC bears market, inventory, price, FX, and volume risks
RIC helps to reduce trapped cash through ‘Lead or Lag Strategy’ on settlements (i.e. Acceleration or deceleration of intercompany
payments)
Restricted Market
Re-invoicing
Center
(Singapore)
13
Special Vehicles Setting up an offshore fund for purchasing receivables originated by subsidiaries in freer markets,
and enabling subsidiaries in restricted markets to buy shares issued by the fund, would put at work
liquidity that would otherwise be trapped.
$
Cash Collection
Instructions
Quotes $
Receivables $
Investment on
Fixed-Income
Market Bonds.
Offshore Fund
Borrowing
Subsidiaries
Investors(1)
Drawee
(Third party
debtor )
$
Relationship that originated
the credit rights
Cash-generating subsidiary subscribe for the Offshore Fund shares
Borrowing subsidiaries transfer the receivables for the Offshore Fund
The Offshore Fund pays for the receivable discounted by a defined discount rate described on the By-law of the fund
The Drawees pay for each receivable at the due date
Cash not used on the receivables acquisition is invested on fixed income or marked bonds (T-Bills or T-Bonds)
(1) Subsidiaries limited by jurisdiction restrictions.
14
“Renting” Liquidity
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
Other P&L
Benefits
▼ COGS ▲ Revenue
Supplier Buyer Company
DPO = 60 DSO = 30
DSO = 60 DPO = 30
▲ Sales ▼ Procurement Cost
Liquidity
Risk
Credit
Risk
Ben
efi
t Ben
efit
2 1 Shortening DPO Extending DSO
Bank Support
Shortening Days Payable
Outstanding (DPO) in exchange for a
reduced procurement cost is an
effective way to reduce COGS
Extending Days Sales Outstanding
(DSO) is an effective way to increase
sales revenue
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
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
{P&L Benefits – cost to neutralize additional risks} > Any possible alternative
efficiency, renewable energy & mitigation
In January 2007, Citi released a Climate Change Position Statement, the first US financial institution to do so. As a sustainability leader in the financial sector, Citi has taken concrete steps to address this important
issue of climate change by: (a) targeting $50 billion over 10 years to address global climate change: includes significant increases in investment and financing of alternative energy, clean technology, and other carbon-
emission reduction activities; (b) committing to reduce GHG emissions of all Citi owned and leased properties around the world by 10% by 2011; (c) purchasing more than 52,000 MWh of green (carbon neutral) power
for our operations in 2006; (d) creating Sustainable Development Investments (SDI) that makes private equity investments in renewable energy and clean technologies; (e) providing lending and investing services to
clients for renewable energy development and projects; (f) producing equity research related to climate issues that helps to inform investors on risks and opportunities associated with the issue; and (g) engaging with
a broad range of stakeholders on the issue of climate change to help advance understanding and solutions.
Citi works with its clients in greenhouse gas intensive industries to evaluate emerging risks from climate change and, where appropriate, to mitigate those risks.
IRS Circular 230 Disclosure: Citigroup Inc. and its affiliates do not provide tax or legal advice. Any discussion of tax matters in these materials (i) is not intended or written to be used, and cannot be used or relied upon, by you for the purpose of avoiding any tax penalties and (ii) may have been written in connection with the "promotion or marketing" of any transaction contemplated hereby ("Transaction"). Accordingly, you should seek advice based on your particular circumstances from an independent tax advisor.
Any terms set forth herein are intended for discussion purposes only and are subject to the final terms as set forth in separate definitive written agreements. This presentation is not a commitment to lend, syndicate a financing, underwrite or purchase securities, or commit capital nor does it obligate us to enter into such a commitment, nor are we acting as a fiduciary to you. By accepting this presentation, subject to applicable law or regulation, you agree to keep confidential the information contained herein and the existence of and proposed terms for any Transaction.
Prior to entering into any Transaction, you should determine, without reliance upon us or our affiliates, the economic risks and merits (and independently determine that you are able to assume these risks) as well as the legal, tax and accounting characterizations and consequences of any such Transaction. In this regard, by accepting this presentation, you acknowledge that (a) we are not in the business of providing (and you are not relying on us for) legal, tax or accounting advice, (b) there may be legal, tax or accounting risks associated with any Transaction, (c) you should receive (and rely on) separate and qualified legal, tax and accounting advice and (d) you should apprise senior management in your organization as to such legal, tax and accounting advice (and any risks associated with any Transaction) and our disclaimer as to these matters. By acceptance of these materials, you and we hereby agree that from the commencement of discussions with respect to any Transaction, and notwithstanding any other provision in this presentation, we hereby confirm that no participant in any Transaction shall be limited from disclosing the U.S. tax treatment or U.S. tax structure of such Transaction.
We are required to obtain, verify and record certain information that identifies each entity that enters into a formal business relationship with us. We will ask for your complete name, street address, and taxpayer ID number. We may also request corporate formation documents, or other forms of identification, to verify information provided.
Any prices or levels contained herein are preliminary and indicative only and do not represent bids or offers. These indications are provided solely for your information and consideration, are subject to change at any time without notice and are not intended as a solicitation with respect to the purchase or sale of any instrument. The information contained in this presentation may include results of analyses from a quantitative model which represent potential future events that may or may not be realized, and is not a complete analysis of every material fact representing any product. Any estimates included herein constitute our judgment as of the date hereof and are subject to change without any notice. We and/or our affiliates may make a market in these instruments for our customers and for our own account. Accordingly, we may have a position in any such instrument at any time.
Although this material may contain publicly available information about Citi corporate bond research, fixed income strategy or economic and market analysis, Citi policy (i) prohibits employees from offering, directly or indirectly, a favorable or negative research opinion or offering to change an opinion as consideration or inducement for the receipt of business or for compensation; and (ii) prohibits analysts from being compensated for specific recommendations or views contained in research reports. So as to reduce the potential for conflicts of interest, as well as to reduce any appearance of conflicts of interest, Citi has enacted policies and procedures designed to limit communications between its investment banking and research personnel to specifically prescribed circumstances.
The material and information contained in this communication is for information purposes only and without regard to any particular user's objectives or financial situation. Information herein is gathered from various
sources (including public website, tax content provider, etc) on a reasonable effort basis and is not validated by Citigroup Inc. or its affiliates ("Citi"). Citi do not warrant its accuracy or completeness. Information
provided herein may be a summary or translation. Citi is not obligated to update the material in light of future events.
This communication does not constitute a recommendation to take any action and Citi is not providing investment, tax or legal advice. Citi accepts no liability for any loss whatsoever (whether direct, indirect or
consequential) for any use of this communication or any action taken or refraining from action based on or arising from the material contained herein. Citi and its employees are not in the business of providing tax or
legal advice to any taxpayer outside of Citi. This communication is not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties. Any such
taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.
