New cash pooling solution in Korea
The challenge
In Korea, Atlas Copco’s four entities experience different cash flows depending on the products and customer sectors. The company’s days sales outstanding (DSO) and cash conversion cycle (CCC) metrics are not as good as some of their peers, so to manage the mismatch between DSO and days payables outstanding (DPO) the company relies heavily on inter-company loans as well as external loans from its banks.
Youngeun Kim, Treasury Manager explains, “Reducing our interest expense through a liquidity management solution which leverages other related entities surpluses was our main requirement. The other was to find a way to repatriate surplus USD with HQ to reduce interest expense of USD funding in the overseas markets.”
The solution
Deutsche Bank proposed a domestic cash pooling and cross-border cash pooling structure to maximise the utilisation of the surplus cash of the related entities (Atlas Copco Korea, Edwards Korea, CSK, and Leybold Korea) with tax efficiency. The structure established for domestic cash pooling involved Atlas Copco Korea Co, Ltd as the header and others as participants. Priority was set for domestic cash pooling where entities were set up in order to cover the funds for the header account. For the efficiency and transparency of liquidity and balance management, cover and reverse were set up so that Atlas Copco Group could optimise most of the liquidity utilisation among its entities in Korea with minimal interest expense associated with cash pooling.
For the centralised management, all accounts were attached to a single internet banking domain. All transactions toward each entity were controlled and transaction information was made available under this single domain structure.
For USD surplus, utilising FX regulation, called Consolidated Management of Funds (CMF), the automatic cross-border cash pooling was also implemented for the Atlas Copco Group in Korea. Under this framework, Edwards Korea, one of Atlas’ subsidiaries in Korea, shares its USD surplus cash with Atlas Copco entities overseas within a pre-approved cap amount by the Central Bank. Deutsche Bank’s intelligent system automatically monitors the outstanding balance of inter-company loan under the CMF regulation and proactively manages its cross-border transaction to/from HQ within the approved cap and prevents entities from breaching the regulation.
Best practice and innovation
Domestic and cross-border cash pooling is not commonly used in Korea due to rare reference cases and complicated regulatory and tax implications.
Priority based pooling and ‘Cover and Reverse’ are the innovative components to clearly handle those regulatory and tax issues, and these were seamlessly implemented.
