Engineering Solutions... Delivering Results TEXPO 2011 CBI’s Approach to Managing its Global...

Engineering Solutions . . . Delivering Results

TEXPO 2011CBI’s Approach to Managing its Global Liquidity

CBI Bank Mendes GansMr. Joe Christaldi Mrs. Greet van der Steen

Director, Global Cash Management Managing Director, Sales & Account Management


CB&I at a glance: 2010 snapshot

Financial Statistics (millions)• Revenue: $3,642• Net Income: $204 • Operating Cash Flow: $288 • ROE: 21%

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Operational Overview• CB&I (NYSE: CBI) is one of the world’s leading engineering, procurement and

construction companies and a major process technology licensor• CB&I conducts business in over 20 countries worldwide• Global footprint with projects in Africa, Asia, Australia, Canada, Central & South

America, Europe, Middle East, Russia, Southeast Asia and the United States of America

• Executes more than 600 projects a year• New Awards: $3.4 billion


CB&I’s treasury principles

• Cash is a corporate assetProtect this asset; risk avoidanceEnhance shareholder value

• Centralized control; decentralized executionStrategic direction from corporate treasury; tactical

• Execution via regional treasury centersMacro level overview of responsibilitiesSound control environment governing all cash movementsOptimizing cash resources

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CB&I’s pillars of operational success

Visibility & Transparency• Daily cash reporting• Working capital needs• Daily cash flow forecasting (pool participants)

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Centralized Liquidity Management• Global cash pooling• In-Country target balances• Global settlements

• Global funding

Sound Control Structure• Effective & standardized global

policies and proceduresConsistent administration & executionProcedures always in place before

execution• Sarbanes Oxley compliant• Annual internal audit reviews

Information Technology• Eliminate redundancies• Real-time activity reporting

• Consistent application of controls• Increased productivity• Transcends time zones• Internet based portal

Account opening/closingSelf service portal

Decentralizedexecution

Centralizedcontrol


Efficient liquidity management - Challenges

• Our challenges

Create a global account structure keeping local banking infrastructure in tact

Consider credit relationships and geographical expertise

Obtain centralized visibility and control to access global cash to fund business

growth

Eliminate Inter-company loans and FX transactions to manage liquidity

Improve returns on overnight deposits / reduce costs on borrowings

Establish global reporting capabilities of all global bank accounts

Adopt a solution that complies with internal standards and security requirements

Manage overall cash pool position via a single currency

Eliminate all in-country borrowing facilities, where applicable

Integrate solution with current netting systems

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• Solution: Implement a cross currency notional cash pool solution

No!Global cash pool keeps local infrastructure in tact but has the flexibility to

enable changes as dictated by business needs

Currency is freely convertible Legal entity is permitted by their central bank to open an account (local and / or

foreign currency) offshore

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• Would current local banking structure be impacted?

• What is the criteria for participation?

Achieving centralized liquidity management


CB&I’s global cash pool strategies

• Utilization of cash pool for long term funding Eliminate inter-company loans Eliminate in-country credit lines

• Tax considerations Easier to prove arms length interest rates with a third party bank than with inter-

company loans

• Accounting “Buy-in” from all disciplines to assure the cash pool did not create accounting entry

complications Replacing inter-company loans with deposits / overdrafts within cash pool simplified

accounting entries (its just another bank account) Assure “net” accounting

• Local group company buy-in Education and communication with local group companies to assure compliance with

the new structure Trade-off, no inter-company loans

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CB&I’s global cash pool strategies (cont’d)

• Establishing automated two-way sweeps Detailed process required assistance from local group company, local bank

in conjunction with BMG and corporate treasury Tweaking targets / triggers to assure minimal liquidity remains in-country

• Diversify investments and reduced safety margins: Excess funds no longer remain in-country and cash pool provides full off-set

• Use cash pool to hedge currency exposures via plain vanilla FX spot deals Can lock in rates for known currency exposures No freeing up liquidity for spot conversions in pool

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CB&I’s global cash pool overview

• Began operations in November 2009

CB&I Global Treasury, The Woodlands, Texas

Current number of cash pool participants: 46

Countries: 11

Pending cash pool participants: +/- 20

Pooled currencies: 6

Integrated with existing multilateral netting (netting since 1983)

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Strategies achieved with global cash pool

• Inter-company loans eliminated No need to hedge these positions – saved several million dollars in forward points

• Automated sweeping and funding of local accounts Built in efficiencies reduced finance headcount and assured adequate funding at pool

entity

• Optimize interest income yields Pool participants earn true market rates for balances in each currency

Important if holding high yielding currencies such as AUD CBI earned 10 times the return had we repatriated funds and invested the funds in

USD Short currencies only “pay” the market rate as long as overall pool is positive

• Centralized cash from all regions of the globe and tapped into 10s of millions of

additional liquidity Cash used for acquisitions, capex, etc.

• Local entities are very positive Automates funding Accounting is simple as it just another bank account Tax issues are lessened as arms length easier to prove Local entities have access to cash through their BMG account Foreign currency accounts now earn interest for local entity10


Strategies achieved with global cash pool (cont’d)

• IT Browser based access enables

Funds pooled from entities from one platform

Allows global visibility and control of all cash pool and third party account

balances and transactions

Entity funding initiated from one platform

Signatory flexibility

All transactions uploaded to one platform from one file

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CB&I’s netting overview

• Started the multilateral netting in 1983

The netting includes 112 participants

And includes countries such as US, Canada, Australia, Malaysia, Thailand,

UK etc.

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CB&I’s netting objectives

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• Reduce the number of inter-company flows to reduce FX and transfer cost Just one monthly settlement per group company

• Reduce / avoid cut-off time and value dating issues Guaranteed settlement with proper value date

• Improve and simplify the monthly reconciliation process Web based access for file upload / download purposes

• Integrate netting with other cash management requirements Liquidity (investment / funding) management Hedge policy


CB&I’s netting benefits

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After processing CB&I’s inter-company data:

• Before netting:Gross payment volume between group companies; per annum USD 58M

• After netting: Net payment volume of inter-company payments between group companies;

per annum USD 4.1M

Reduction of 93%!

Reduction in actual payments:

• Number of payments before netting: Per annum: 737

• Number of payments after netting: Per annum: 70

Reduction of 90.4%!


Overall benefits

• The combined netting and pooling solution has allowed CBI to efficiently manage liquidity

• Centralized control of cash with decentralized accounts

• No Intercompany loans, no FX trades, no hedging costs

• Can settle Intercompany trade payables without freeing up the necessary liquidity

• Simplifies the International cash management process, but adds functionality

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The techniques used

Global liquidity management tools:

Notional cash pooling

&

Multilateral netting

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Notional cash pooling

A global cash pool enables companies to efficiently manage and control their cash in multiple currencies from a single

location without changing existing relationship banks

Multiple cash balances – both positive and negative – are treated on a net basis and interest is applied based on this

net pooled figure

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Engineering Solutions . . . Delivering Results18

Global cash pool solution

AUDUSD GBP CZK SAREUR


Notional cash pool – account structure

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Australia Germany UKAUD EUR GBPLo

cal g

rou

p co

mpa

nie

s

1. Account owner = group companies

2. Account is used “exclusively” for own cash

3. All transactions are registered as current account deposits and overdrafts vis-à-vis BMG

4. Interest is credited / charged by BMG

Cash pool account structure

GermanyEUR

UKGBP

AustraliaAUD


How does the Cash Pool work?

Entity 1local bank account

USD


EUR


GBP


EUR

Entity 1Pool bank account

The NetherlandsUSD


The NetherlandsEUR


The NetherlandsGBP


The NetherlandsEUR

Intraday sweeps

(5 m)USD

(1 m)GBP

4 mEUR

6 mEUR

(5 m) USD = (5.0 m) USD

4 m EUR = 5.4 m USD

(1 m) GBP = (1.5 m) USD

6 m EUR = 8.1 m USD

Total Pool Balance 7 m USD

Notional Pooling

7 m to: Reduce debt, Invest,

Strategic M&AStrategic Capex

Engineering Solutions . . . Delivering Results21

Interest, including inter-company margin is booked directly to entities account

Cash poolFor all accounts:

Step 2

AUD

GBP

Cash pool %Set by currencyposition

5%

1%

2%

AUD

5%

1%

Step 3

GBP

GBP AUD

GBP

GBP

5%

1%

1%

1.5%

Margin is booked to treasury account

0.5%

Notional cash pool: interest

Inter-company margin credit = minus 0 %debit = plus 0.5 %

Step 1 Step 4


Cash pool benefits

• Multiple currencies can be pooled daily from every region of the globe (37 currencies and 80 countries)

• Automated connectivity between cash pool accounts and local bank accounts

• All cash in excess of working capital no longer remains idle in-country

• Short-term funding vehicle for group companies

• Treasury can invest / borrow in currency of choice

• Eliminate onerous borrowing rates for in-country group companies (debit rate is tied to the overnight depository rates of the currency plus a x bps margin set by corporate treasury)

• No need to open local bank accounts

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Notional cash pool: matters of importance

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• Regulatory Law: Thin capitalization rules and stamp duty: may apply in case of inter-company

loans Transfer pricing: set cash pool margins at arms length and clearly document

to avoid penalties Notional pooling and full off-set is allowed in the Netherlands. No cross-

guarantees required under central banking regulations

• Tax: Withholding tax: could apply on interest charged. In Netherlands no WHT

imposed Tax authorities could view extended overdrafts on a cash pool account as a

disguised liability.

• Accounting: No inter-company loan administration and FX Swap contract administration Apply full off-setting on the balance sheet It’s just another bank account


Multilateral netting

Netting is a process designed to organize and simplify the settlement of inter-company and third-party payments and on

a fixed customized periodic schedule

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Global netting

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UK

AU

DE

SG

US

Vendor

Before

UK

AU

DE

SG

US

Vendor

After

Nettingcenter


Global netting transactions

• Sales Trade Vendor

• Financial Inter-company loans & interest Royalties & dividends Management & service-fees Internal FX hedging contracts External FX hedging contracts

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Global netting benefits

• Increased efficiency in managing inter-company trade balances and vendor flows

• Imposes standardization and discipline across the group

• Reduce payments between group companies

• Centralized versus decentralized FX

• Cost savings in: Transfer costs reduced based on reduction in the number of

settlements (approx.: 80% - 90%) FX cost reduced based on reduction in transactions (approx.: 80% -

90%) Elimination of value day loss

• No bank accounts need to be opened

　

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How the two techniques come together

• Settlement of netting results on cash pool accounts when possible Book transfers replace third party bank transfers Use cash pool to solve liquidity dips

• Incorporate external & internal FX hedges and settlements by setting up all FX counterparties in the netting

• Use cash pool for Money market hedges Integrate international third party vendors in the netting Have international customers pay directly to cash pool accounts

• Establish foreign currency accounts in the cash pool Utilize solution for global Multibank Reporting

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Questions

Joe Christaldi Greet van der Steen

CB&I Bank Mendes Gans, Amsterdam

tel: +1-832-513-1915 tel: +31 20 5235324

email: [email protected] email: [email protected]

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QUESTIONS ?

mailto:[email protected]

mailto:[email protected]

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