A cash management solution from Citi enabled InterContinental Hotels Group to implement a cross-border notional pooling structure helping its subsidiaries to maintain optimal levels of working capital.

IHG operates hotels in three ways: as a franchisor, a manager, and on an owned and leased basis. Franchising is the largest part of IHG’s business with 3,886 hotels under such agreement. Worldwide it manages 646 hotels and owns ten.

Problem…

A few years back, IHG sold most of its hotels to enable it to adopt a new franchise model. In Europe, this heralded an RFP for cash management, which included two cash pools – one in euro, one in US dollar. Previously, ad hoc transfers were only being sent on a weekly basis and there was a keen sense that IHG’s cash was not working as hard as it could. Group treasury, based in Burton-on-Trent, did not have access to the whole value, just the cash sent by each subsidiary, and liquidity management could not be overseen centrally.

…Solved

With Citi (which already had IHG’s AR business) winning the deal, the new structure fell into place, enabling IHG to rationalise bank accounts and increase its subsidiaries’ access to liquidity throughout Europe. “From this point on, the two single notional currency pools expanded”, says Bert Heirbaut, Treasury Manager at IHG. “The next step for us was to include the Asia Pacific entities.”

IHG then decided to implement a multicurrency cross-border notional pooling structure with a two-way same-value automated sweep. Both bank and client reviewed the Citibank pooling functionality against the IHG requirements until an efficient solution was created. Initially it covered 24 IHG subsidiaries in ten jurisdictions, with 36 bank accounts spread all over the world.

In practice, during the working day, local IHG finance teams included in the pooling have a credit bank balance available in their local in-country accounts for accounts payable and payroll purposes. If appropriate, local accounts also collect management and franchise fees from local hotel owners.

At the end of each day, any surplus currency balances are swept into mirror accounts in London. These currency balances – in Australian, Hong Kong, Singapore and US dollars, Swiss franc, Czech krone, euro, Polish zloty, and Hungarian forint – are converted into a notional US dollar balance. In time for the next working day, each local currency is swept back out to the respective local banks. “It’s all around the timing,” explains Bert, IHG adopting an “against the sun” automated sweep model where funds are collected and returned according to time zone. He reports no issues with Citi’s timing.

From a subsidiary perspective, the structure means cash flow requests are now less frequent and they have more optimum levels of working capital in their local bank accounts. In the US, where the bulk of IHG’s franchise estate resides, significant cash volume is paid in daily which is currently invested in cash funds locally. The notional cash pool enables IHG to consider centralising all liquidity management within group treasury.

The project, delivered at a one off cost of $20,000, also currently enables more than 80% of the management fees and franchise fees collected in EMEA, across 16 subsidiaries, to be made available to group treasury by the end of the same day, allowing it to repay bank debt saving around $50,000 per year in bank interest charges. By amalgamating two pools into one for IHG, Citi has also saved its client annual bank charges of $100,000 a year. In addition, the $5m of idle cash sitting in the subsidiaries’ local bank accounts has been reduced to zero: “There is no idle cash at all in IHG’s subsidiaries partaking in the notional pool,” states Bert.

In purely practical terms, group treasury has not only improved working capital at group level but can now also view cash globally on a daily basis, providing its subsidiaries with more flexibility by allowing higher cash balances in their local currencies during the working day.

But IHG and Citi’s work is not done yet. There are more subsidiaries to add: whilst Canadian dollar and Mexican peso accounts have already been added as a one-way manual sweep into London, others will remain manual contributors until cash levels reach a value that warrants inclusion in the sweeping mechanism. Saving the best until last, Bert says IHG is working with Citi on an option to include RMB. Currently, Chinese hotels pay management fees in RMB into Hong Kong. Whilst volumes are modest, the expectation is that by 2025 China’s hotel market will be the same size as the US, bringing considerably more volume – IHG wants daily access to those funds. This, says Bert, is all part of IHG’s financial “future-proofing plan”.