Historically low rates and the threat of regs that could potentially reshape cash management prompted attendees to explore the ins and outs of possible solutions.
“Drawing kudos” was one member’s description of his company’s intercompany funding process and its system to rate subsidiaries’ creditworthiness. That rating is a necessity most MNCs will face under the Treasury Department’s recently approved Section 385 rule. The agency finalized the rule in mid-October, significantly narrowing the original proposal’s scope, although careful scrutiny will be necessary to ensure compliance. Members also presented detailed strategies for keeping bank accounts and signatories under control, a pervasive and costly problem after years of M&A, and discussed specific tactics for optimizing cash-management returns in a negative interest-rate environment. A banker from sponsor HSBC joined a panel to discuss the ins and outs of new faster payment services coming on line.
1) Intercompany Funding and the 385 Reprieve. Cash-pooling’s more feared impacts were eased in the final rule, but rating subsidiaries’ creditworthiness still a must.
2) The Conundrum of Persistently Low and Even Negative Rates. Cash management has never been more challenging; aggressively pitting banks against one another can bear fruit.
3) The Changing Payment Landscape. Payment rails are moving closer to real-time, but most corporates are out of the loop.
Intercompany Funding Process Unveiled
One member described his company’s process to assess subsidiaries’ credit standing and to document rate-setting decisions.
BEPS requires setting up intercompany loans to mimic the process and pricing at which the entity could borrow locally from a bank (at arm’s length). This is also a requirement for the recently approved Section 385 rule for long-term I/C loans. Companies must be able to analyze subsidiaries’ credit standing and be prepared to review and document the rating-setting decisions.
The member showcased the company’s arm’s-length intercompany funding process and its efforts to improve it as an example of how to execute such a function, impressing members.
1) There’s always room for improvement. The member company enhanced its long-time process to document I/C transactions with the objectives: to have true arm’s-length rates on intercompany loans; to evaluate the creditworthiness of each entity; and to approach funding entities more proactively.
2) Help is there. The member leveraged a core bank to help develop a model based on Moody’s methodology to rate its subsidiaries.
3) Go cross-functional. Tax, legal and business-unit expertise are crucial to develop a funding strategy.
4) To capitalize or to lend, that is the question. This process not only supports intercompany lending decisions but is also used to decide the capital structure of each entity. There are many factors that are included in the decision, and this process provides a systematic way to approach it from a global perspective.
Treasury Structures Varied Significantly in Terms of Size and Responsibilities
Members complained about being understaffed. After presentations they remarked on what impressed them most:
- Cross-training of the global cash management team, so they can easily take over each other’s duties if necessary.
- Placing financial risk inside of treasury.
- IT people either inside treasury or dedicated to treasury.
- Restricting treasury-to-treasury functions and avoiding the inclusion of ancillary activities.
- One member described her company’s unusual experiment: US and European treasurers traded places, giving the US executive more exposure to foreign exchange and the European a better understanding of corporate functions.
Managing Cash in an Environment of Persistently Low or Negative Interest Rates
A majority of members reported actively managing cash balances to minimize the effects of interest rates, and most expect negative rates to persist for at least another year and possibly as long as three years, while US rates remain low if not negative. Tough times for cash managers. One company shared its approach to low rates, sparking a productive discussion.
Key Takeaways
1) Pay up, buddy. Searching globally for the highest returns on overnight deposits can pay off. One bank told a member it could pay more for deposits in Singapore, 45 bps, and then the member told competitor banks they had to beat that rate. Now it has four banks offering 65 bps, one holding the cash in the US and two in Singapore; one of the Singapore banks is Australia’s ANZ. Another is offering 70 bps, although there’s a limit on withdrawals.
2) What enables such largesse? Despite banks’ complaints about Basel III’s impact on their capital and ability to take deposits, what they’re looking for is a handshake agreement that corporates will provide significant balances.
3) Seems counterintuitive. Basel III capital requirements are more forgiving of overnight deposits, which are viewed as stickier than term deposits, because when term deposits mature, the funds are typically removed and devoted to purposes elsewhere. Corporates will instead park overnight deposits indefinitely.
4) Competitive bids yield more. One member said his company had long collected rates from all of its banks to compare yields. In 2016, it started placing time deposits in a competitive bid process using the Bloomberg platform, and yields jumped. Whereas 30-day time deposits in Brazil might have paid 14%, after asking banks to compete, yields are now closer to 14.5%.
Outlook
Don’t listen to your banks’ excuses for offering low returns. Rates are expected to remain historically low and in some cases negative potentially for years, so ramping up competition between them is key. Plus, keep an eye on forward rates when deciding where to keep cash.
Brexit is Still a Ways Off, but Precautionary Steps are Warranted
Brexit will be a years-long process, given the European Union doesn’t appear to have contemplated previously a country wanting to leave. Brexit should be viewed in the big picture of what the tax planning department is already dealing with, such as the OECD’s BEPS initiative and the EU’s recent state aid action against Apple Inc. Corporates should be considering how their banks are set up in Europe from a tax and legal perspective, and how that structure will work once the UK leaves.
Dynamic Discounting Catching On
A handful of members said their firms are considering supply chain finance and dynamic discounting solutions, and a few had recently started or recently completed implementations. Six months ago a member presentation at a T30 meeting revealed that most were unfamiliar with dynamic discounting, which gives corporates more flexibility in choosing how and when to pay suppliers in return for discounts. So the service may be catching on.
The Changing Payment Landscape
Several trends are transforming the global payment landscape: Digital or cashless payments gaining the upper hand; Fintech firms seeking more efficient ways to replace legacy payment systems, using technology ranging from email to blockchain-inspired distributed ledgers; and banks investing heavily to keep their lead in the payments space. Experts from HSBC, Kyriba and SWIFT updated the status of current services, processes and business models, and the strategic and/or pipeline changes being planned to address the advances arriving in batch and cross-border payment processing.
Key Takeaways
1) Payment rails to change dramatically. The Federal Reserve’s Faster Payments Task Force is facilitating numerous faster-payment initiatives among private institutions, a few of which are well underway. Only three NeuGroup members are engaging financial technology (fintech) firms to explore new payment solutions. Meanwhile, 57% said fintechs may improve the payments industry, and 71% said they would likely stay with a bank payment solution over a fintech’s.
2) What’s new? The Fed’s task force has reviewed upwards of 20 faster-payment proposals and will provide the first of two assessments in early 2017. It will let the market decide which systems to pursue. US initiatives currently underway include: Nacha’s same-day ACH, launched in September without a hitch; The Clearing House’s (TCH) real-time payment initiative, starting a pilot in early 2017 and bringing most banks onboard by 2018; and SWIFT’s upgrade of its current system.
3) Faster is even better for receivables. Faster payments provide another tool to help manage free cash flow, working capital, liquidity and other key factors. But the bigger benefit may be on the receivable side, since the additional information sent along with each payment will enable accounting to clear receivables faster and more efficiently.
4) Don’t freak out over operational details; think big picture. Faster payment options are coming quickly and will require major technology and systems changes, but corporates can mostly leave that to their banks. The first real-time payment solution appropriate for corporate payments will be TCH’s, and while its initial limit will be a measly $25,000, so was the UK’s, and it was soon increased by a multiple of 10. Corporates need to track faster-payment developments to understand which solutions will be most appropriate, considering speed and cost, for specific types of payments.
5) Real-time apathy. Members looked back on the session about the changing payment landscape with a mix of concern about how faster payments could impact their companies and apathy about the next steps to take. The consensus was to talk to their banking partners.
Outlook
The Federal Reserve’s task force initiative will almost certainly result in multiple faster-payment solutions from different sources, including banks, financial infrastructure firms, and fintechs.
Their banking partners will likely provide them with choices, but corporates should monitor how solutions develop, to match up payment types with the most effective “rails.”
Cyber-fraud Schemes Escalate
Members report incidents of cyber-fraud attempts jumping over the past half year. Fraudsters are seeking information by phone, email, social media and other means, often looking for executives’ personal information, and they’re getting better at targeting companies’ weaknesses. For example, perpetrators understand how digesting acquired companies and the resulting systems changes can provide cracks in the merging companies’ defenses, and they seek to exploit them
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