Cash Management: Dealing With Trapped Cash

Nothing is perhaps more frustrating for corporations than having inaccessible cash piles around the world. 

One of the more persistent stories of 2011 has been the back and forth over whether the US should enact another 2004-style Homeland Investment Act to allow corporations to bring home overseas profits at a lower tax rate – the elusive HIA 2.0. But while many companies yearn for lower taxes in the US (and a territorial tax regime like many of their global competitors) they know the truth about some of that cash: it ain’t ever coming home. That’s because for one reason or another it’s trapped.

But this is not just a US MNC problem. It’s also a quandary faced by many companies around the world who do business in a difficult places. At a recent NeuGroup European Treasurers’ Peer Group (EuroTPG) meeting, members discussed the challenge of what to do with trapped cash. A bank sponsor of the meeting outlined some of those challenges, starting with the types of “traps” that exist. To start, there are four basic categories:

1. No visibility: treasury knows there is cash belonging to various business units across the world but it does not have visibility into where and how much on any given day; no visibility, no ability to access or manage it. 
2. Accessible but at a cost or with delay: for those who do have visibility, the question is: can the cash be accessed? For them, it’s often a case of profit build-up that would be subject to onerous (often US) tax rates if repatriated to the parent level. US companies have an estimated at least $600bn sitting overseas. The previous HIA repatriation tax holiday saw about $360bn brought back to the US.
3. Restricted due to regulations: some companies have “trapped” cash in countries because they don’t not have enough distributable reserves to declare a dividend, according to local regulations. 
4. Really trapped, as in cash sitting in “impossible” countries from which to exit cash: this refers to countries like Venezuela where access to legal FX transactions is so limited that companies, if profitable, build up sizeable cash balances. Priority import categories and capex investments get CADIVI (the Venezuelan agency that controls FX) approval for USD purchases while service fees, royalties and dividends languish in the queue with no end in sight. The other market, the SITME (Venezuela’s Transaction System for Foreign Currency Denominated Securities), is both (a) off limits for entities that have had CADIVI approvals in the past 90 days, and (b) so limited in the daily/monthly/annual allocations that it makes little difference for companies with millions of excess cash. Nevertheless, some companies set up multiple entities in Venezuela with different purposes, e.g., imports in one (CADIVI-eligible) and services in another (SITME). It is important, however, to do a cost-benefit analysis of the cost and hassle of operating multiple entities vs. the additional amounts a company can extract via these entities.

What can be done? So, what to do? While the cash is sitting in one place, how can companies best use or invest it? Several companies in the NeuGroup universe use BMG (Bank Mendes Gans), a netting and pooling expert and ING subsidiary, for notional pooling. There are also interest-optimization plans available in cases where companies don’t necessarily need to offset negative with positive balances in different accounts or locations.

In certain countries, notably the US, banks can offer credits for interest earned which can be used to cover fees. In low-interest environments, this ECR (earning credit ratio) may be more advantageous than investing balances and paying separately for bank fees. When interest rates rise, the reverse is true. A possible problem with this is that the subsidiary’s management might get used to getting the credit (cost reduction on the fee side) and may resist having this cost come back when treasury says so. But, it depends on how their performance is measured: above or below the line and with our without certain adjustments.

Beyond interest optimization and notional pooling schemes, banks are increasingly looking at ways of helping companies access liquidity in countries into which they don’t want to inject capital (because of the difficulty in later getting it out) while making use of cash balances in “trapped” countries.

If only…
One other option – perhaps annoyingly late for some companies – is to prevent trapped cash in the first place. Obviously in many cases it can be hard to reverse a problem resulting from excess cash building up in countries from where it’s hard to get it out. But if a company is entering a new country, it pays to consider how the sub should be financed and how soon it will become cash-flow positive before actually setting it up and financing it. If it can be supported with local loans and minimal capital injections (to prevent hard-to-access cash build-ups later), so much the better. “Prevention is better than the cure.” However, local regs like thin-cap rules may stand in the way of such optimization.