18 JAN 11
In this Q&A, two treasury experts from Bank of America Merrill Lynch - Jennifer Boussuge and Ciaran Brady - discuss some of the risks subsidiaries face operating globally and in particular within the European emerging markets.
Q (gtnews): What are the biggest challenges facing multinationals’ subsidiaries operating in different regions across the globe?
A (Jennifer Boussuge, International Subsidiary Banking (ISB) treasury sales executive, Global Treasury Solutions, Europe, Middle East and Africa (EMEA), Bank of America Merrill Lynch): In response to what has happened over the few years since the banking crisis, chief financial officers (CFOs) are paying closer attention to how much cash they have, where it is located and invested and to which banks they are exposed. This has a direct impact on multinationals’ subsidiaries - they have faced challenges in sending detailed information to headquarters (HQ), producing accurate cashflow forecasts and creating structures to move liquidity back to HQ, which, in the past, they weren’t asked to do to such an extent. Those companies that haven’t implemented a global banking structure or treasury workstation tool have struggled with these demands, and a lack of control and visibility continue to be challenges.
A (Ciaran Brady, head of ISB, Global Corporate Banking EMEA, Bank of America Merrill Lynch): With the current levels of market uncertainty and disruption, many subsidiaries are faced with resourcing issues as a result of the small number of people on the ground in foreign regions. In many cases these companies have put in place ’business as usual’ transaction-focused shared services or centralised treasury structures. These companies are now faced with a turbulent economic environment that brings much uncertainty into the equation and requires new skill sets from their existing resources. HQ is heavily reliant on these resources to be its local eyes and ears.
A (Boussuge): I think that point is amplified as more companies move into emerging markets. They need to ensure that they have the appropriate information, language, cultural understanding, knowledge of local banking rules and regulations - and we see them looking to their banking providers to advise them and supply these resources and information.
Q (gtnews): What are the main risks facing subsidiaries in regional and local markets? Has this changed from two years ago?
A (Boussuge): Counterparty risk has come to the fore over the past two years. By counterparty risk, I mean two things: first, corporates’ banking partners in the various regions. This type of risk has never had as much attention as it has since the banking crisis. Corporates need to ask themselves whether they have the right banking partner from a risk profile perspective. The second counterparty risk relates to customers and suppliers. Will suppliers be able to continue delivering the goods? We have seen a reduction in open account trading and some suppliers are now requiring letters of credit (LCs) from longstanding customers, following a change in treasury policy usually issued at the HQ level. This can result in strained relations between the local subsidiaries and their suppliers.
A (Brady): In the past multinationals have made decisions around in which countries to locate their global facilities. Today, many of these countries - whether in western Europe or emerging economies - are undergoing significant economic pain. This might mean that some assumptions that the corporate made about that particular country, and the advantages of being located there, could face reassessment as these countries amend their economic policies. For example, will the EU seek to haromise taxation policy? Can Switzerland continue to maintain its low tax regime? How will eastern European economies evolve given the global economic situation?
Corporates are focused on their ability to move cash globally and upcoming opportunities to repatriate - this is certainly the case of US multinationals. There is also concern about market volatility around foreign exchange (FX) and interest rates. Today, we have a very low interest rate environment and therefore holding onto cash or investing it in traditional short term investment products isn’t giving companies much, if any, return. With increasing market risk and limited return possibilities, many companies are re-thinking their investment policies.
Finally, in terms of liquidity risk, which was high on the agenda at the beginning of the crisis, I think companies are now more used to the new environment and have changed their expectations of where they ought to be.
A (Boussuge): With regard to funding and liquidity, reduced levels of working capital have put greater strain on subsidiaries. In some cases, the regular funding from HQ that a subsidiary might have previously taken for granted has dried up as a result of HQ needing the money itself or giving it to a more ‘needy’ subsidiary elsewhere. Most companies have renegotiated their credit terms, requirements and lending with their banks, so much of the uncertainty with regard to funding has already been taken on and dealt with. On the liquidity side, we see companies holding onto their cash as a reaction to what they went through during the past few years. Although I agree with Ciaran that it is not as significant an issue - what I am hearing more is concerns around FX volatility, such as the future of the euro and fluctuations in the US dollar.
Q (gtnews): How important is payables and receivables management? Has the level of importance changed over the past two years?
A (Boussuge): We always say cash is king but it has become much more so over the past few years as funding became more difficult and expensive to secure. A number of subsidiaries have transformed their organisations to become more efficient in the areas of payments and collections.
Days sales outstanding (DSO) has been a challenge for corporates to manage and many have seen this ratio increase. There has also been an increase in supplier clients moving to collection methods such as direct debits as a way of helping them control their collections process. But a lack of credit and the reluctance of some customers to use that method have made this approach challenging. Conversely, on the days payable outstanding (DPO) side, where possible, many corporates are renegotiating their payment terms. With the limited funding available and many subsidiaries fighting for funding from HQ, working capital management (WCM) and cashflow forecasting are significant ongoing challenges. Therefore in answer to the question - absolutely important and even more so in recent times.
A (Brady): We see a discernible trend where our clients are willing to - and see the benefits of - entering into a supply chain finance (SCF) programme, thereby opening up the internal workings of their organisation to a significant partner. They want to secure critical suppliers, and in the current environment many of the large US multinationals for example, are less affected by the credit crisis fallout than their key suppliers. The cost differential between credit for those suppliers and credit for the large multinational client is a very interesting SCF proposition for those companies. Has the level of importance changed? Yes, for the reasons already covered. The focus is there and is expected to remain in place for the foreseeable future.
A (Boussuge): Receivables management is a major challenge - not to say that payables are easy, but they are the easier part. Banks are heavily investing in the quality of data because it is incredibly helpful to clients to standardise data and provide automated reconciliation, in order to apply those receivables more quickly and free up credit lines. In the card arena, more customers are looking at credit card solutions to gain efficiencies and transparency. Corporate HQs are driving this forward, in terms of building policies around global travel and expense management.
Q (gtnews): How can subsidiaries improve their working capital?
A (Boussuge): Maximising liquidity is much more in focus since the crisis with credit tightening. WCM can be improved by maximising liquidity within the company at the subsidiary level with enhanced pooling structures, such as multicurrency notional pooling. Interest optimisation is something that we at Bank of America Merrill Lynch have been discussing with clients to address the whole issue of trapped cash. Subsidiaries with funds in different legal jurisdictions struggle with the ability to realise the value of those funds, as well as not being able to move funds from one region to another. With more and more cross-border activity, companies are beginning to understand the flexibility and cost savings that these solutions can offer. In addition, centralising liquidity by pulling funds from third party banks into a centralised pool can improve WCM.
A (Brady): Because of what happened with certain in-country banks, there is a desire for MNCs to move strategic business to key credit supporting banks - effectively a flight to quality. Corporates want cash centralised because it is more important than ever before, but likewise there is a concern over who exactly their banking partners are and a need to ensure that risk is minimised.
Q (gtnews): Do you see the trend towards centralisation and regional treasury hubs continuing? Why or why not?
A (Boussuge): I see the trend continuing, but maybe not at an accelerated rate. The main reasons are what we have previously discussed - the need for cutting costs, finding efficiencies and leveraging the enterprise resource planning (ERP) system investment. Many clients are still rolling out ERP systems - some that you would have assumed already had them - and so are only now looking at how they can create more centralisation, or regional hubs. Others are looking at creating centres of excellence and are coming to their banks for advice on location and structure.
A (Brady): In our meetings with subsidiaries regarding regional treasury hubs or shared service centres (SSCs), some are raising ‘pain points’ around the complexities of navigating their own organisation in terms of the number of bank accounts and dealing with the associated documentation. However, I think new technology coming down the pipeline will assist in removing those pain points, for example electronic bank account management. Therefore, more clients are looking at regional hubs and asking: “Are there alternative ways to organise? Is the world easier to navigate? Is it possible to develop simpler structures? Have I over-engineered my current solution? Does simplification lead to global centres of excellence, as compared to the current regional set-ups?” Although I don’t think this has developed into a trend yet, I do believe that many corporates are starting to ask these questions.
First published on www.gtnews.com
- Joy Macknight
- I am deputy editor at The Banker, a Financial Times publication. I joined the magazine in August 2015 as transaction banking and technology editor, which remain the beats I cover. Previously I was features editor at Profit & Loss, an FX and derivatives publication and events company. Before that I was editorial director of Treasury Today following a period as editor of gtnews.com. I also worked on Banking Technology, Computer Weekly, and IBM Computer Today. I have a BSc from the University of Victoria, Canada.