Consistent with the top priorities of treasurers in The NeuGroup’s other T30 groups, T30-3 members are working on projects to improve tactical operations within their companies. Many are also going through technology transitions when it comes to their treasury management systems.
When looking across the priorities facing treasurers today, one finds a pressing mix of important tactical projects and urgent strategic issues. Many members are engaged in a variety of process improvements with treasury management system implementations and global cash forecasting efficiencies. Strategic initiatives include optimizing capital structure and aligning treasury across the globe. Here are some further highlights from the meeting:
1) It’s getting a little louder. As corporate cash balances grow to historic levels and investment returns remain historically low, shareholders are becoming more vocal about their concerns over how cash is being managed. Establishing a consistent capital and investment framework that defines strategic ratios and payout strategies that include shareholder dividend and stock buyback are seen as necessary ways to communicate to shareholders that excess cash balances are being evaluated and addressed appropriately.
2) Crystallizing global visibility. Global cash forecasting continues to be a high priority for members as they roll out systems and strategies to gain better visibility to all cash balances irrespective of their global location. The accuracy of these global cash forecasting efforts is becoming more important as treasurers continue to look for ways to put idle or trapped cash to work as effectively as possible, as quickly as possible.
3) Next generation of common global structures. Members have had SSCs and/or RTCs in place for many years, and although these structures are not new, the evolution of activities that are being placed in these locations continues to expand and is seen as a way to further alleviate corporate treasury from having to spend too much time on tactical operations. The trend among global MNCs is to further refine the activities being managed at the RTC or SSC locations to expand on the level of strategic activities managed away from the corporate headquarters.
4) The fast boat to China. The internationalization of the RMB is moving forward at a record pace and promises to offer exciting opportunities for more open, efficient management of what was previously believed to be trapped cash in China. Recent regulatory changes are aimed at making cross-border RMB transactions easier for corporates to execute and will likely expand the depth of the RMB market very rapidly.
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Activists Get More Vocal
According to the Fed, the percentage of liquid assets to short-term liabilities has grown over the past ten years to approximately 45 percent. With growing levels of corporate cash and historically low interest rates, shareholder activism has become much more lively, as witnessed by the increase in shareholder suits to challenge corporations that are holding vast amounts of cash and other liquid assets. One member led the discussion with a summary of the capital and investment framework used at her company to define and manage the payout strategies for both stock buyback and shareholder dividends.
KEY TAKEAWAYS
1) Can we have more, please? Members agreed that the capital allocation framework must be clearly defined and requires a good deal of discipline despite what shareholders say. Most agreed that shareholders will always want more buyback and/or dividend allocations, so it is important to “stand strong” with the guidelines outlined and agreed upon by the board.
2) Maximum equilibrium. As the level of corporate cash continues to rise toward record levels, members are challenged with finding the maximum equilibrium between cash held on the balance sheet and that which is returned to shareholders. One member commented that treasurers “never get rewarded for having too much cash,” and as part of her presentation for this session, she highlighted her company’s strategy for deployment of excess cash with dividends being a number-one priority. New business development was identified as a number-two priority and share buyback was documented as the third priority. Each company will have their own breakout of strategies depending on the individual risk tolerances and other business-related goals and objectives within their organization. Just ensure you have outlined your strategies and that you have validated them with an appropriate peer group to confirm competitiveness.
3) Did you get the message? Another important component of a robust capital and investment framework is to ensure the correct message is sent to the market. What does your shareholder base expect? Is your cash deployment consistent with those expectations? Some members discussed hiring consultants to help look at their investor dynamic and in some cases they did a catch-up dividend that changed the profile of the investor base as a one-time transaction.
4) Share repurchase strategies vary. The group discussed open market purchases vs. structured formats like ASRs as strategies for buying back shares. Many use ASR structures as a complement to open market activity with careful review to ensure you’re not caught in a tough spot as the ASR executes buyback transactions you might otherwise choose not to execute.
OUTLOOK
The deployment of excess cash promises to be an important topic as balance sheets continue to swell to record levels. Investors are becoming more vocal in their preferences as to how cash is allocated and members are constantly weighing this against their documented capital and investment deployment strategies to ensure maximum equilibrium.
Fast Boat to China
Given rapid Renminbi regulatory changes, Caroline Owen, Regional Head of RMB Solutions, Americas from Standard Chartered presented the group with some of the challenges and opportunities for improving cash and risk management through the evolution of the cross-border RMB. Sovereigns are signing RMB swap agreements, foreign MNCs are re-denominating trade and funding in the offshore RMB markets, and RMB hedging opportunities are greater than they have ever been. This is an exciting time for the internationalization of RMB and we discussed how members might best position themselves to take advantage of all the positive changes.
KEY TAKEAWAYS
- Breaking into the top ten. As a result of the recent changes, and as large global MNCs begin to adopt these new measures, there has been a significant increase in the use of RMB for payments, helping the RMB break into the top ten world payment currencies. Currently, the RMB stands at number eight.
- It’s not a market strategy. When the Chinese government sees the economy slowing, they use policy to accelerate growth, and this will move very quickly when all of the regulators are in agreement. If regulators don’t see enough RMB uptake through liberalization, they will call funds to try to convince them to use it. Chinese regulators are caring for 1.3 billion people, so while RMB liberalization has been a long time coming, it is in everybody’s interest to get it right during the current policy roll-out. However, it would be imprudent to think that the offshore RMB possibilities indicate a shift toward a US-style free-market environment.
- Loan out your “trapped” cash. In July of 2013, the People’s Bank of China (PBOC) released a new circular regarding the simplification of RMB cross-border business processes, which is aimed at making cross-border RMB transactions easier for corporates to use so as to increase their adoption for both current and capital account usage. Standard Chartered noted that as a result of these relaxed regulations, more and more companies are loaning out their trapped cash, with tenors ranging from one to five years and amounts increasing from only 100M in all of last year to 100M at a time. First Asian companies started lending, then European and now American companies; and now that RMB can be invested offshore there are strategies available with better rates and hedging options.
- Invoice in RMB. Some onshore companies that are RMB functional still pay in USD, creating resettlement and documentation headaches. Invoicing in RMB can alleviate this problem, in addition to speeding up payment and improving the working capital cycle. Additionally, Chinese suppliers have been asking for a long time to be invoiced in RMB. Jason noted that 3 to 5 percent of the sourcing price from Chinese suppliers is due to their factoring in USD/CNY conversion and timing, so early adopters of CNY invoicing are seeing better prices and more favorable negotiating environments.
- Pool your RMB. Since regulatory approval is no longer required to move RMB offshore, it can be pooled and moved from a pool header through one RMB special account, which has the same general opening process as a regular RMB account. Jason noted that while there are some nuances with local PBOC offices, these are mainly just to prevent corporates from removing all of their cash at once. Now individual banks themselves are responsible for granting permission to move cash offshore. Based on Standard Chartered statistics, Hong Kong remains the largest offshore RMB hub, at nearly 700B CNH deposits, with Singapore well behind at 100B CNH deposits.
- Let’s bond. Issuing bonds onshore is seen as a low cost way to enter a brand new market with issuances starting at about half of what it would otherwise cost to issue a bond onshore in China. The lower cost of funds combined with the broadening of your investor base makes for an overall good deal. Additionally, issuing in RMB will be favorably viewed by the regulators. McDonald’s, Caterpillar, Ford and Yum all did this in 2010-2011, and it is gaining popularity particularly with European companies.
- The expanded (RMB) menu. The outlook for business activity in RMB is very bright as regulations continue to change quickly and cross-border activity becomes more seamless. Based on Standard Chartered statistics, the number of clients who are actively transacting in RMB has doubled during the past twelve months resulting in a 250 percent increase in payment market share growth. This trend is expected to continue at an accelerated pace as treasurers begin to develop their Asian cash management strategies that will allow them to use regional cash more effectively. Many of the same types of financial market transactions available to us in the United States are now available in CNH.
OUTLOOK
The PBOC’s simplification of RMB cross-border business processing in 2013 will significantly change the way multinational corporations manage their Asian cash. These regulatory changes eventually will make cross-border RMB transactions easier for corporates to execute and will likely expand the depth of the RMB market very rapidly.
Conquering Global Cash Forecasting
Gaining greater visibility of global cash is becoming ever more important for corporate treasurers, and this roundtable session highlighted some of the challenges many face in trying to obtain real-time global visibility of cash and the various forecasting efforts required within their individual organizations.
KEY TAKEAWAYS
1) Discipline is necessary. Many members agreed that along with the important mandate to improve liquidity management, the corporate global cash forecasting program must focus on cash flow discipline to help bring rigor and understanding to the importance of cash. Oftentimes, subsidiaries may not have a full understanding of how their forecast impacts the overall forecast for the organization and therefore they may use a dartboard approach to forecasting, which causes a snowball effect when rolled up to a corporate level. Subsidiary education was seen as an important aspect of a successful forecasting program.
2) Excel is King. All members agreed that Excel is the best tool for cash forecasting. It’s flexible, easy to use and is globally accepted. Although most TMS systems have a cash forecasting module, they are viewed as cumbersome, inflexible and difficult to use. However, most analysts know how to use Excel and can create their own automation within the spreadsheet. As long as the data of record is stored in a data warehouse, using Excel spreadsheets to collect and manipulate the data has typically been viewed as an acceptable practice by most audit firms.
3) Improve forecast accuracy. Members mentioned that there are more variances in the international forecasts and that they have taken various actions to try and reduce these variances. These actions include (1) stressing the importance of forecasting when visiting subs; (2) tying cash forecasting accuracy to variable compensation; (3) making it a global corporate initiative; (4) giving them a WIIFM (What’s in it for me); (5) name and shame; and (6) making it transparent with a competitive dynamic. Finally, members believe using the cloud allows the company to collect sales data faster and more accurately, but it does not improve the speed and accuracy of the cash forecast.
4) Forecast frequency and methodology. Most members prepare cash forecasts for twelve months. Some do it for twelve months as part of the annual planning process and others do it on a rolling twelve-month basis. Forecast frequency is generally daily in the US and either weekly or monthly internationally. Members typically prepare a bottom-up forecast for six weeks to three months and a topdown forecast for up to one year. Also, most felt the quality of the forecast is limited beyond three months.
OUTLOOK
Top priorities remain unchanged as members continue to find ways to enhance their forecasting accuracy and further automate their processes. It will be increasingly important for members to consider out-of-the-box ideas for ways to mitigate their growing cash balances and find ways to put idle (or trapped) cash to work.
Trends in Regional Treasury Centers vs. Global Treasury or Shared Service Centers
Although shared service centers have grown prolifically over the past several years, streamlining common activities like AP, AR and payroll, regional treasury centers can be seen as the second generation of process improvement, adding a treasury thought-partner regionally to help global treasury stay closer to the action to solve issues in real-time.
KEY TAKEAWAYS
1) Boots on the ground. As corporations struggle to manage global treasury needs from one location, regional treasury centers have become more prominent overlay structures, either as a stand-alone center or as part of a larger SSC. The journey toward centralization is an evolutionary process with the initial focus on transaction efficiencies. Once the basic structure is in place, treasurers are adding treasury staff that can assist with other value-added activities, including liquidity and risk management in accordance with headquarter policies.
2) Best to be bank-agnostic. One of the initial benefits of establishing an SSC or RTC is the consolidation of bank accounts to a fewer number of global banking partners to increase processing efficiencies. Although this profile allows for better management of credit and operational risk, there is the possibility that too much operational risk is placed with one major banking partner. One way to offset this risk is to implement bank-agnostic solutions like SWIFT to process payments and mitigate the operational risk from any one major global banking partner.
OUTLOOK
As globalization pushes multinationals toward offshore markets and technology enables more integrated remote access, shared service centers (SSCs) are re-surfacing as more than just back offices for the treasury. As automation continues to improve, members are making the decision to implement a “second generation” structure to put some of the treasury activity back at the regional level. With an ever-expanding global presence, many feel that SSCs can be used in a more enhanced role, as problem-solvers and thought-partners.
Conclusion & Next Steps
The year 2013 was a story of process efficiency and innovation, as members continue to be challenged with doing more work with fewer resources. Innovation continues as members consider out-of-the-box strategies to unlock working capital through a variety of strategies that include supply chain finance programs. Share repurchase and shareholder dividends will continue to be popular as members utilize these alternatives for peeling away their growing levels of cash on the balance sheet.
The spring meeting of the T30-3 will take place on June 4-5 in Atlanta, GA. Topics up for discussion are being finalized but include:
- Economic update on China
- Setting liquidity requirements
- The future of US interest rates