Insight & Analysis

The inter-company cash conundrum

Published: Jun 2022

As inter-company borrowing becomes more commonplace, corporates need to ensure their systems are capable of handling the regulatory requirements of such transactions.

Person lending another person money

Inter-company loans are one of the most common ways to move funds in and out of markets, leveraging the excess cash from one entity to fund the borrowing needs of another, replacing bank loans and thus avoiding bank spreads and fees.

Yet a treasury survey conducted by Citi in late 2021 found that more than half of corporates had no formal inter-company lending policy in place.

When deciding whether to borrow inter-company, corporates need to consider the needs of the borrower and the lender’s availability of cash to lend as well as the tax efficiency of the transaction, the loan currency and FX exposure management, and the duration of the lending or borrowing explains Amy Eckhoff, APAC Head of Liquidity and Account Solutions Specialists at J.P. Morgan.

“Corporates should define the reasons to mobilise cash, what that cash will be used for (ie self-funding or investment) and agree repatriation or redeployment strategies by considering the underlying fund flow and the implications on tax, FX and accounting,” she says.

The popularity of inter-company financing has increased on the back of head offices having access to relationship lending at very competitive interest rates. But factors other than access to cheap financing have become more significant recently according to Marcus Thiel, Head of International Lending at Deutsche Bank.

“Corporates increasingly care about repatriation of capital to headquarters in light of potential regulatory constraints such as sudden capital controls,” he says. “In addition, foreign currency volatility has risen significantly with potential adverse effects on the value of an inter-company financing, which can be avoided by local financing in local currency.”

An uncertain global business environment (rising interest rates, volatile stock market valuations) creates a demanding debt funding environment which makes effective liquidity management increasingly important for reasons of stability and cost optimisation.

“Leveraging idle internal cash is one of the most cost-efficient sources of funding a company has and is preferable to short-term credit facilities, freeing up reserves to target growth strategies,” says Eckhoff. “We see a large number of corporates seeking to mobilise their internal cash to optimise debt cost and enhance returns.”

In the past, inter-company loans were usually in the currency of the central entity but transactions are increasingly done in local currency to reduce the FX exposure on the local entity.

Group treasury policies and governance often mean that group companies have limited options available to satisfy their funding needs. Such funding requirements are in many cases therefore satisfied by some form of inter-company loan, which could be of a short-term or structural nature.

On an independent basis, commercial needs are likely to drive the terms of the finance implemented – including (but not limited to) currency, maturity, repayment terms, security, covenants and negative pledges, explains Martin Rybak, Partner at EY.

“However, as these arrangements are connected party transactions, care should be taken to ensure the terms implemented reflect transfer pricing requirements and are consistent with arm’s length arrangements, as well as giving consideration to other potential regulatory, tax, accounting and legal complexities,” he says.

Rybak observes that LIBOR transition has meant inter-company financing arrangements with a LIBOR base rate have had to be revised to incorporate an applicable reference rate. “Typically this has been treated as a revision to an existing agreement as opposed to the creation of a new legal agreement,” he adds.

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