Managing cash in “trapped cash” locales requires a comprehensive approach.
Keeping up to date with rapidly changing local regulations and capital controls is always crucial, therefore optimal liquidity/funding strategies for regulated markets require a holistic approach. This means proactively working across the organization on business models and legal vehicle utilization as well as looking at more tactical approaches in treasury processes and local structures. At the fall Assistant Treasurers’ Peer Group meeting, members were presented with several strategies for freeing up trapped cash, or for better utilizing cash that is trapped in highly regulated markets.
Follows are a few of the takeaways.
Assessing your trap status. It was suggested that members ask themselves just how trapped their cash is. Is it truly trapped due to local government restrictions or is it simply left in local markets to avoid the high US tax rate? There is also a significant difference between financial flows, which are generally more restricted, and commercial flows, which are generally less restricted.
Openings for financial flows. Even though they are more restricted, financial flows have some regulatory openings for outflow in some countries. For instance, there are opportunities in China, Korea, Thailand, Indonesia and Malaysia. In assessing that cash, treasurers were encouraged to create a decision-tree approach to identifying which liquidity/funding approaches might work in various controlled markets.
Structural strategies that can help. In addition to utilizing regulatory openings, members were shown several different structural approaches that can better utilize cash. Following is brief description of each:
- Netting center. 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.
- Procurement center. Setting up procurement centers for purchasing economies of scale in freer markets allows for leading payments out of manufacturing subsidiaries in restricted markets, thus reducing trapped cash.
- Re-invoicing center. Setting up re-invoicing centers as an intermediary for intercompany transactions in freer markets allows for lagging payments into manufacturing subsidiaries and leading receipts out of sales subsidiaries in restricted markets, thus reducing trapped cash.
- 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 to work liquidity that would otherwise be trapped.
- 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.