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Treasury and Trade SolutionsNovember 2013 Armonk, New YorkDealing with Trapped Cash:The 'Other Side' of Liquidity ManagementBreak Out GroupFacilitator:Advisors:Ron Chakravarti, Global HeadClient Solutions & Treasury AdvisoryLiquidity Management ServicesCarolina Juan, Latin America Sales HeadCorporate and Public SectorTreasury and Trade SolutionsMark Tweedie, EMEA Sales HeadCorporate and Public SectorTreasury and Trade Solutions
Backdrop
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Trapped Cash: CAB Survey ResultsApproximately what % of your cash would you say is 20-30% 30%What are you doing to leverage trapped cash? Please check all that apply.Mitigate trapped cash through reorganization ofthird-party and intercompany flows36%Whenever local funding is needed, activelyevaluate all available options to use "leastcosts" toolsDeploy best available local liquidity structures tooptimize onshore cash usage before moving inliquidity from offshoreUse an efficient global cash forecastingprogram to maintain tight control on localsubsidiary funding and repatriationStay up to date with the latest local regulatorychanges and tools available in all key markets345%36%50%91%
What are the Sources of Trapped Cash?Broadly speaking, companies have two types of cross-border transactions, commercial and financial.Regulatory restrictions in certain markets on outgoing financial flows result in trapped cash.“Restrictions”DebtFinancial Flows(Capital Account)Equity3rd Party TransactionsCommercial Flows(Current Account)Intercompany Transactions4
CFForecastingA/cStructureLocalPoolingSub. Funding ngDividendRepatriationWorking CapitalManagementCommercial FlowsProcessCentralization5DSO/DPO Opt.Netting CenterTradingModelMgmt Fee &RoyaltiesLiquidity & Funding tural StrategiesFinancial FlowsWhat Do Companies Do? Here’s What We See:
Liquidity & Funding Strategies
Decision Tree to Optimize Liquidity / Funding ApproachesA decision tree framework helps bucket different markets depending upon the levels of restrictions.Q1: LCYconvertibleoffshore?Q2: Allow LCYcross-borderIntercompanylending?LCYSweep / Cash PoolQ2: Allow FCYcross-borderIntercompanylending?Q3: Possible toopen FCYoffshore AC forresident entity?Q3: Possible toopen FCYoffshore AC forresident entity?FCYSweep /Cash Poole.g. MalaysiaUse offshoreFCY AC tofund LCYTrapped cashFCY offshoreA/CTrapped cashe.g. Iraqe.g. Nigeria(1)(1) Cross-border intercompany lending and opening of FCY offshore A/c are allowed, but impractical due to cumbersome regulatory restrictions.7
Keeping Up With RegulationCiti uses tools such as its client market guides and regulatory grids to structure solutions.Market Guides for Treasury provide clients withregulatory overview of key marketsRegulatory grids are used in our liquiditysolution structuring processesLocalCurrencyOperating AccountNRRLCYLCYOnshore sta RicaDominican RepublicEcuadorEl araguayPeruPuerto RicoTrinidad and ercompany LendingR - NRFX ControlNR - RLCYFCYLCYFCYLCY - 1112111111115- Allowed, No Material Restrictions- Allowed, Straightforward regulations, approval, or license- Allowed, Challenging regulatory approval or license- Allowed, subject to a complex set of rulesLCY DebitTaxNNNYNYNNNNNNNNNNNYNNNN
Structural Strategies
Netting Center (“NC”)Netting Centers to settle intercompany transactions also allow the ability to lag payments into manufacturingsubsidiaries and lead receipts out of sales subsidiaries in restricted markets, thus reducing trapped cash.Without NCWith NCManufacturingSubsidiary (China)Sales Subsidiary(India)ManufacturingSubsidiary (China)Sales Subsidiary(India) Goods Goods Goods“LagStrategy” Sales Subsidiary(Japan)ManufacturingSubsidiary(Hong Kong)Sales Subsidiary(Japan) Netting Center(Singapore)“LeadStrategy” ManufacturingSubsidiary(Hong Kong) Subsidiaries receive or pay single transaction from / to the NC NC helps centralization of cash & FX management and enhances visibility and control NC helps to reduce trapped cash through ‘Lead or Lag Strategy’ on settlements (i.e., acceleration or deceleration of intercompanypayments)Restricted Market10Goods
Procurement Center (“PC”)Setting procurement centers for purchasing economies of scale in freer markets allow leadingpayments out of manufacturing subsidiaries in restricted markets, thus reducing trapped cash.With PCWithout PC3rd PartySupplier3rd PartySupplier3rd PartySupplier3rd PartySupplier Invoice nufacturingSubsidiaryInvoice ManufacturingSubsidiaryInvoice InvoiceSalesSubsidiary SalesSubsidiary PCs typically located in lower tax and non-regulated jurisdictions PC negotiates purchasing contract with suppliers and makes purchases of goods to resell to the manufacturers PC helps to reduce trapped cash through ‘Lead Strategy’ on settlements (i.e., acceleration of intercompany settlements)Restricted Market11
Re-invoicing Center (“RIC”)Setting re-invoicing centers as an intermediary for intercompany transactions in freer markets allowlagging payments into manufacturing subsidiaries and leading receipts out of sales subsidiaries inrestricted markets, thus reducing trapped cash.Without RICWith anufacturingSubsidiaryManufacturingSubsidiary Invoice Goods “Lag e)“Lead Sales Subsidiary(Korea) RICs typically located in lower tax and non-regulated jurisdictions RIC bears market, inventory, price, FX, and volume risks RIC helps to reduce trapped cash through ‘Lead or Lag Strategy’ on settlements (i.e. Acceleration or deceleration of intercompanypayments)Restricted Market12
Special VehiclesSetting 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 at workliquidity that would otherwise be trapped.Cash CollectionInstructions Offshore FundInvestors(1)Quotes Investment onFixed-IncomeMarket Bonds. Receivables BorrowingSubsidiariesRelationship that originatedthe credit rightsCash-generating subsidiary subscribe for the Offshore Fund sharesBorrowing subsidiaries transfer the receivables for the Offshore FundThe Offshore Fund pays for the receivable discounted by a defined discount rate described on the By-law of the fundThe Drawees pay for each receivable at the due dateCash not used on the receivables acquisition is invested on fixed income or marked bonds (T-Bills or T-Bonds)(1) Subsidiaries limited by jurisdiction restrictions.13Drawee(Third partydebtor )
“Renting” LiquidityWhen other options are exhausted and there still remains trapped cash, efforts can focus on P&Lbenefits - “renting” liquidity in exchange for lower procurement costs and/or higher sales12Shortening DPOShortening Days PayableOutstanding (DPO) in exchange for areduced procurement cost is aneffective way to reduce COGS COGS Procurement Cost SalesBenefitBenefitLiquidityRiskExtending Days Sales Outstanding(DSO) is an effective way to increasesales revenue RevenueOtherP&LBenefitsDPO 30SupplierExtending DSOCompanyDPO 60CreditRiskDSO 60BuyerDSO 30Original DPO/DSOAdjusted DPO/DSORisk profile changes as liquidity risk emergesdue to shortening DPOs. A bank solution can bestructured in a way to neutralize the contingentexposure through a back-stop facilityBankSupportRisk profile changes as credit risk emerges whileextending receivables maturity dates. A banksolution can be structured in a way to neutralizethe contingent exposure through receivablefinancing for the additional days grantedcompared with initial scenario{P&L Benefits – cost to neutralize additional risks} Any possible alternative14
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Without NC With NC Subsidiaries receive or pay single transaction from / to the NC NC helps centralization of cash & FX management and enhances visibility and control NC helps to reduce trapped cash through 'Lead or Lag Strategy' on settlements (i.e., acceleration or deceleration of intercompany payments) Restricted Market
