A unique liquidity solution for a unique corporate structure
The challenge
Stora Enso operates a unique business model where it partners with local firms to operate via joint ventures (JVs) across China. The firm was providing working capital funds to its JVs by commercial bank loan and entrusted loans – a common funding method in China where one firm serves as the ultimate lender with banks acting as intermediaries.
As Stora Enso embarked on its expansion plans, the number of JVs increased and so did the number of loans it was servicing, which raised overall debt levels and compromised its liquidity position.
Stora Enso therefore needed an overhaul of its cash management structure to provide a more effective funding solution to its JVs while keeping its leverage ratio in check. “Risk and control measures needed to be introduced across all entities,” says Wei Li-Tuomela, VP, Treasurer China. “We also needed to increase cash visibility and cash efficiency so that we are ready to support business transformation in China.”
The solution
In partnership with J.P. Morgan, Stora Enso implemented a ground-breaking, first of its kind, innovative liquidity structure. Core to this solution is a single overdraft facility shared between Stora Enso as the pool header and its participating accounts (the JVs).
The overdraft facility makes use of a two-tier liquidity sweeping structure to automatically centralise or decentralise end-of-day balances depending on the group’s cash position. The structure reduces the number of bank accounts maintained, allowing the firm to optimise its use of net available cash across the group, before concentrating any excess funds or drawing down from the overdraft facility.
This is how it works:
- The bank’s sweep-as-required capability allows JVs to fund themselves by leveraging on excess cash within the group. When excess cash is used up, participating accounts can then automatically draw on the overdraft facility directly on a first-come-first-served basis.
- By the end of the day, if the group balance is positive, a debit-only sweep will automatically trigger any residual positive positions in the header or participating accounts to be centralised under a single account known as the concentration account.
- If the overall group balance is negative, the residual negative balances will remain at the participating accounts. Each account with a negative balance will draw individually from the overdraft facility.
In addition to the unique liquidity structure, Stora Enso set up a host-to-host channel to automate its payments, accounts receivable (AR) reconciliation and reporting.
Innovation and best practice
The innovative liquidity solution is a first in the market and tailored to Stora Enso’s need to manage both its cash positions and that of its JVs’ (which includes different minority shareholders) in China. The unique cash concentration structure allows entities under Stora Enso to leverage excess balances within the group before activating the overdraft facility, reducing the number of bank loans needed and lowers the firm’s overall financing cost. By centralising residual balances at the concentration account, the firm is also able to pool balances together to maximise yields on investments.
