Cash & Liquidity Management

Methodical approach still king when it comes to cash

Published: Jul 2021

Low interest rates and uncertainty around inflation may present a challenging operating environment for corporate treasurers, but this doesn’t mean they need to get funky when it comes to liquidity management.

Stacked coins with chess pieces on top

Earlier this year, State Street Global Advisors published the results of an international survey of senior executives with cash management responsibilities. Most of the report’s findings were fairly predictable, such as the fact that the majority of corporates had increased their overall allocations to cash. However, the authors also suggested that corporates would adopt a more active approach to liquidity management in 2021.

Francois Masquelier, former Senior Vice President & Head of Treasury and Enterprise Risk Management at RTL Group and CEO of Simply Treasury, agrees that the value destruction caused by persistent low or even negative interest rates requires consideration of options with longer tenors and potentially higher return expectations, but also the prospect of increased volatility.

“However, treasurers need to strike a balance between products with and without qualification as ‘cash and cash equivalent’ to make sure they offset the gross debt on a consolidated basis,” he explains. “They also need to understand the characteristics and inherent risks of emerging products.”

Masquelier warns that this might prove to be a lot of work for a few basis points of additional return and observes that treasurers are not incentivised on the returns they generate on excess liquidity placements.

“Why should they take unconsidered or unreasonable risks if it does not pay off in terms of bonuses?” he continues. “Treasurers should determine the corporate’s risk appetite and tolerance and adopt products to achieve the objectives in terms of return within the agreed parameters.”

What are the main challenges faced by treasurers looking to integrate ESG principles into their cash investments?

Treasurers need to take into account not only the risk/return profile, but also the qualitative aspects of the ESG strategies and projects of corporates they are investing in according to Alexandra Wentzinger, Product Manager Deposits at BNP Paribas Cash Management.

“Integrating extra-financial analysis (defined as systematic assessment of corporate governance, environmental and social responsibility) into the valuation process is important but challenging given the variety of inputs and large range of activities and objectives set by the UN’s sustainable development goals, for example,” she says.

However, issuers have gradually adapted their internal procedures and processes to fulfil ESG requirements while providing regular feedback and reports to investors.

In October 2020, Citi launched green deposits. Stephen Randall, the bank’s Global Head of Liquidity Management Services, says this and other initiatives reflect the fact that sustainable investing is entering the mainstream.

“Sustainability is becoming the responsibility of the entire organisation – including treasury – which is impacting treasury investment strategies,” he says, adding that treasurers are uniquely positioned to link corporates’ liquidity requirements to sustainability goals.

They first need to do due diligence on the various cash investment options in the market and align them with the firm’s broader ESG goals. “Then they need to look at the liquidity characteristics of these options – some products may have the right characteristics from an ESG perspective, but treasurers need to know how easy it is to access the liquidity as and when required and how the products fit into their investment policies,” says Randall.

Nicolas Cailly, Head of Marketing for Payments & Cash Management, Global Transaction Banking at Societe Generale, refers to a strong link between ESG, external perceptions of the corporate, and fundamental treasury responsibilities.

“On the cash investments side, there are plenty of solutions that incorporate an ESG dimension,” he says. “The challenge for treasurers is to understand and classify the existing ESG offer and to find investment products that also meet the corporate’s liquidity and return constraints. Integration of ESG investments into treasurers’ allocation choices will take time and they will need more support from their banking partners.”

Of course, the focus for treasury should always be on optimising the available cash for working capital and strategic purposes – especially when the company needs access to cash on a regular basis to fund expansion, as is the case at NewCold Advanced Cold Logistics in the Netherlands.

“The treasury mandate set out by the board sets the boundaries and this can be more aggressive, but not so much that it endangers business continuity,” says Richard Blokland, NewCold’s Corporate Treasurer. “When we have surplus cash available to invest externally, our favoured products include money market funds and bonds.”

According to Ole Matthiessen, Head of Cash Management at Deutsche Bank, treasury policy should operate independently of the interest rate environment.

“Nevertheless, the onset of inflation could result in treasurers exploring options such as considering a floating rate strategy or a strategy that increases tenor, but keeps the interest rate reset period to a short tenor,” he says. “Beyond this (and in particular when anticipating a potential change in rates) treasurers should consider the possibility to match the investment interest period against the borrowing interest period.”

In cases where treasurers struggle with the accuracy of their data within cash flow modelling and forecasting, it is prudent to ensure a credit facility is in place on an overnight or short term basis to ensure spikes or unexpected cash requirements can be managed without disrupting the overall liquidity strategy.

Implementing transformational practices such as in-house banks is another option for treasurers looking to ensure optimal levels of liquidity for day-to-day needs while thinking strategically about appropriate avenues for surpluses.

Established products like physical cash concentration and notional pooling introduce automation of cash movement where, when and in the currency needed, explains Lori Schwartz, Global Head of Liquidity Solutions, Account Services and Escrow at J.P. Morgan.

“Combined with digital-first solutions such as virtual accounts, treasuries can create efficiency in their inter-company models and optimise use of working capital,” she says. “When treasuries centralise it is possible to materially reduce cash on deposit accounts and consider alternate uses such as investing it in the business.”

Since the outbreak of the pandemic we have seen the emergence of ultra-short fixed income funds in the institutional space as part of the quest for yield. Corporate treasurers are also putting money into products including ETFs that invest in very short-dated debt such as treasury bills.

“Money market funds are still a hugely important element in the overnight funding toolkit for corporate treasurers, but it is safe to say that they are now being complemented with a range of other investment options that are giving treasurers a little more discretion and control over their cash management,” says George Maganas, Head of Liquidity & Segregation at BNY Mellon.

Lauren Oakes, Global Co-head of the liquidity solutions client business within Goldman Sachs Asset Management, agrees that treasurers do not (and should not) change their risk appetite for liquidity due to macro factors in isolation.

One area in which she has seen renewed interest from treasurers in light of the prolonged low/negative rate environment is balance sheet cash segmentation. Once the operational (or ‘primary’) cash requirements are accounted for in accessible deposits and short term money market funds, treasurers are exploring options for investing their strategic cash.

“The ultimate liquidity solution can include a range of strategies from ultra-short duration on the more conservative end to multi-asset class/longer duration strategies on the higher risk end of spectrum,” adds Oakes.

UniCredit advises clients to cluster company liquidity into three different levels: operational liquidity, buffer liquidity, and structural liquidity. It sees sight deposits (a bank deposit that can be withdrawn immediately without notice or penalty) as remaining the optimal solution for operational liquidity, which has a time horizon of only a few days.

Capital protection, positive yields and an acceptable issuer quality are now possible only with tenors which are longer than maturities consistent with the strategic and commercial plan of most corporates.

For this reason, UniCredit advises clients to manage their liquidity through either assets under management or assets under custody instruments observes Sergio Ravich Calafell, the bank’s Global Head of Corporate Treasury Sales.

“The former is a portfolio of mutual funds chosen to fit the client’s requirements in terms of time horizon, mark-to-market volatility, asset allocation, issuers rating and target yield,” he explains. “The latter is a portfolio of securities bought on primary and secondary markets with short tenor and a yield that is linked to the performance of a specific underlying or a basket of underlyings.”

Treasurers focused on return ‘of’ capital rather than return ‘on’ capital should focus on optimising existing structures according to Karen Ly, head of global liquidity specialists at Bank of America global transaction services.

“The strategies treasures could contemplate in this environment include using deposits to minimise bank fees and reducing operating risks and interest expense associated with overdrafts,” she says. “We recommend that treasurers centralise their liquidity positions on a daily basis where permitted by local regulations to minimise idle cash and allow them to pay down external debt to reduce interest charges.”

Ly also recommends defining sweep parameters that fund local operations and extracting surplus cash on a ‘just-in-time’ basis across entities, countries and currencies. “Dollar functional businesses should regularly review their repatriation strategies to capitalise on global reinvestment or redeployment opportunities,” she adds.

Case Study

li auto logo

Li Auto is a market leader in the design, development, manufacturing and sale of premium electric vehicles in China. It recorded revenues of US$546m in the first quarter of this year and forecasts revenues of US$609-652m for Q221.

“The most important elements of our liquidity management strategy are efficiency, accessibility and optimisation and we have implemented domestic and cross border cash pooling to achieve these goals,” explains the company’s Treasury Director, Hugh Hu, who says he is sanguine about low interest rates and predictions of higher inflation.

“As an advanced technology company, we need to invest a lot in development so low interest rates are beneficial as we can leverage investment funding at a low cost,” he says. “However, uncertainty around global inflation has increased pressure on treasury due to rising costs. A liquidity management solution that can provide certainty of funding access whenever required is the most important tool we can rely on to mitigate the related liquidity risks.”

At the beginning of the pandemic, Li Auto leveraged RMB cross-border pooling to get offshore funding to support the challenging operating environment in China.

The RMB cross-border cash pooling structure – provided by Citi – is the main artery for processing inter-company flows between the China domestic business and the offshore business.

“This has saved us significant financing costs on an annual basis,” says Hu. “Based on the initial development of this liquidity management programme, Citi helped us get approval from our regulator to add the variable interest entities of the group into this arrangement.”

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