The challenge:

With a presence in 17 Asia Pacific markets, the ideal operational liquidity solution for AIA was a unique groupwide facility that minimised funding cost, had similar debt covenants in each country, offered flexibility to the parent and the local entities, and met local regulatory obligations.

With each market having its own regulations, cross-border transaction rules and tax regimes, it was extremely inefficient to manage operational liquidity within the company. The traditional method would set up a credit line separately in each market and would require its own contract negotiation, resulting in duplicating legal costs and banking fees, and would have consumed a significant amount of bank credit appetite. More importantly, this method would not benefit from the credit quality of the total group.

The solution:

To meet the challenge, AIA partnered with Standard Chartered Bank to structure and set up a backstop facility which offered a group-wide credit envelope for AIA.

Scott Engle, Group Treasurer, AIA, explains: “Having the parent and local entities entered into one umbrella facility with Standard Chartered, each credit decision is made as part of this overall credit envelope, ensuring consistent and minimised pricing across the group. Because it is considered as a single facility at Standard Chartered, AIA avoided duplication of local facilities and therefore further minimised bank fees. Moreover, the facility was structured to have local agreements to include similar commercial and legal terms, tailored with local regulation specificities only”.

This allowed the group to manage its debt covenants in a more consistent manner and centrally manage some of its undertakings.

Importantly, each local facility is available under the most standardised local facility format and in local currency so that all local regulations are met. Such a facility was a challenge operationally as it requires strong coordination between the bank’s local entities, making sure that the aggregated usage of all local lines does not exceed the facility size, as well as centralising the foreign exchange fluctuation in their risk position. Although straightforward, such a solution was unique especially for insurance companies, as it relieved AIA from all the intercompany lending operations, while providing operational liquidity lines directly to each local market. This solution required strong legal coordination and operational adjustments for Standard Chartered to ensure they have the functionalities to manage consolidated credit risks raised from multiple countries at the level that the facility required.

Best practice and innovation:

AIA entities now benefit from liquidity facilities that will support its cash forecasts while keeping cash at a minimal level. Through the solution, AIA entities not only benefitted from larger facilities than if negotiated on a standalone basis, but also spent approximately a quarter of what they would have on fees, had they arranged separate facilities in each local country.