Corporate cash piles are growing around the world; how do you manage it in Brazil?
Companies over the past several years have been building cash piles overseas to the tune of about $1.5tn. Some have been putting it to work with acquisitions – Bloomberg reports that through the first seven months of 2011, there was about $174bn in US M&A deals offshore, close to the total for all of 2010.
However, Brazil has been a different story, particularly for members of the NeuGroup’s Latin American Treasury Managers’ Peer Group, which discussed the topic at its meeting in June. For them, cash is building and they approach it in a variety of ways.
Tax issues. One obstacle for managing cash in the region is that the Brazilian tax framework remains complex. The financial transactions tax (IOF) remains a constant irritant for companies operating in Brazil as it puts a damper on efficient use of cash and adds to the cost of hedge transactions as well.
The IOF also comes into play when investing short-term excess cash, and because of the sliding scale of its application, options are limited within 30 days’ tenor. The IOF tax-break-even point is about ten days for shorter investments right now, but uncertainty in forecasting may prevent companies from locking in termed-out investments.
A guest at the LATMPG noted that his company invests in LCAs (agriculture credit bills) or CDIs (money market instruments). Because of the difference in how the IOF tax is applied (it is not applied to LCAs), the company invests in LCAs up to ten days and CDIs for longer tenors.
One banker whose firm sponsored the meeting, said his institution offers a kind of loyalty program in Brazil, which is similar to an earnings credit in the US; it also offers time deposits, and soon will be the first global bank to offer “sweep time deposits,” a zero-balancing product. The banker also pointed out that for those who use boletos for payments – a financial document that is similar to pro forma invoice issued by a bank – ordinarily one pays the bank on day zero (D) and the payee gets the money on D+1. However, this bank offers an “investment” option whereby it will still pay the payee on D+1 but let the company keep the float (pay interest) instead of keeping it itself. As an aside, members wanted to know how to streamline the boleto process or, ideally, eliminate them.
Let it sit, spread it around. Of course, another option for companies with excess cash in Brazil is to just let it sit. For the most part, this is what many conservative companies do, although many cash-rich companies tend to spread it around in banks locally so as not to run up against any counterparty limits.
Several companies take a bare-bones approach to local investments in the region because they try to only keep as much cash there as they need for operations or, as one LATMPG member explained, “We have one pool of investments centrally managed (from the US) so we don’t have any portfolios in the region.”