Adding value to corporate cash

Published: Jul 2010

As regulators seek to clamp down on bank liquidity, corporates are similarly reviewing their own intraday flows and forecasting processes. In this Product Profile we look at Lloyds Banking Group’s combined product and relationship approach to effective cash management in today’s challenging environment. We also examine how a portfolio approach to investment can balance the need for liquidity with security and yield.

Tough times

The banking landscape has changed. As a result of the global financial crisis, the basic banking model of lending money out and receiving it back with interest is no longer practicable. Regulations such as the UK Financial Services Authority’s (FSA) new Individual Liquidity Adequacy Standards (ILAS) are forcing banks to look again at the balance between lending and funding, with an emphasis on holding sufficient liquidity to manage funds outflow risk, or to cope with any repeat of the recent crisis.

This revised approach to liquidity is designed to promote self-sufficiency and a holistic liquidity management philosophy. Rather than a focus on strict ratios, the new ILAS requirements are intended to encourage banks to revisit the way they approach liquidity and look at (potentially) changing internal processes accordingly. But what lessons can corporates learn from this new, best practice legislation?

Portrait of Gary Ormond
Gary Ormond

According to ILAS requirements, banks need to ensure that there is funding available for all transactions, extending the scope to include current and predicted future outgoings. The message to corporates is to improve cash visibility and improve cash flow forecasting capabilities to ensure a strategic approach to cash management. According to Gary Ormond, Relationship Director, Lloyds Banking Group, “Visibility includes knowing not only where cash is but also where it is idle and could be invested to add value.”

Portrait of John Ramage
John Ramage

We spoke to John Ramage, Director, Head of LIBOR Liabilities, Lloyds Banking Group about the product suite the bank is offering to reflect the changing market landscape. “To provide investment options for a variety of cash flow scenarios, Lloyds has a range of viable alternatives,” comments Ramage.

Solutions for effective cash management

According to Ramage, “Our corporate customers can often be hesitant when investing surplus cash – they feel that they need instant access at all times, in case the unexpected happens. Realistically, this means that surplus cash is not properly invested and sits in accounts earning little or no interest.

We advise our customers to take a portfolio approach to investment, with a balanced allocation of operational cash in highly liquid vanilla products and longer term surplus in structured deposits. This allows the investor to enhance yield whilst maintaining a core liquidity buffer during turbulent times.”

The product suite that Lloyds offers covers the three layers of cash that a corporate holds: day-to-day, core and strategic. The graph opposite illustrates the peaks and troughs in cash supplies as a company calls upon its day-to-day cash to meet regular demands.

Figure 1: Cash Balance
Figure 1: Cash balance

In a volatile market, core cash may be needed to help prop up daily operating obligations when, for example, business performance takes an unexpected downward turn. Lloyds offers a range of solutions, which can assist in minimising the volatility in cash flows, whilst allowing for yield to be maximised.

Day-to-day (0-3 month time horizon)

Many treasurers will manage their day-to-day cash on exactly that basis, ie investing in instant access accounts. “I would argue that this is because it takes the worry out of the decision making process,” says Ramage. “It means that corporates do not need to have such accurate cash flow forecasts in place as there are always reserves available. However, that is not necessarily the best solution for getting the most value out of your cash.” In addition, the forthcoming regulations, such as ILAS, will also require bank customers to have a degree of cash flow flexibility, analysis, knowledge, insight and foresight. These requirements are not necessarily met by solely using instant access accounts.

A simple solution to improve yield and yet permit accessibility of funds is a vanilla fixed-term deposit, which is LIBOR linked. While a traditional fixed-term deposit may seem inflexible because it locks the cash in for a specific time period, Lloyds has devised a revolving fixed-term deposit programme which can stagger cash flows to tie in with a company’s regular need for funds.

Case study

Lloyd’s solution to day-to-day cash management

A property management agent has £8m of funds with potential client call need for funds on a fortnightly basis.

The challenge

The company had historic cash calls of up to 20% of funds under management on a monthly basis. Whilst looking to maximise interest return potential and to have the ability to place money on deposit for up to three months duration, the client also needed to access funds every two weeks to meet projected cash flow requirements.

The solution

Lloyds’ relationship team, which supported the customer on a day-to-day basis, discussed fixed-term deposit options with them. The matter was also referred to experts in Lloyds’ Financial Markets Sales team to consider alternative structures, which could add value, looking at LIBOR curves vs. accessibility.

A staggered time deposit portfolio was built from initial deposit through to a rolling programme of three month maturities.

Figure 2: Growth of staggered time deposits
Figure 2: Growth of staggered time deposits

This practical solution means that the customer has £8m on deposit, but in tranches, so that a deposit matures every two weeks to match the predicted cash requirements. The company is therefore receiving three month rates, as opposed to poor returns on instant access accounts, while the treasurer has cash that is regularly available.

Core (3-12 month time horizon)

The main function of the core layer of cash is to cope with the large bills that a company is expecting. “The idea is to maximise the company’s deposit period to coincide with the days that those bills need to be paid. It’s all about cash flow analysis,” explains Ramage. “A company might have deposits on for one month, three months, six months and 12 months, but their bills fall due four months and three days in. So what do they do? Place the cash on for three months or six months? In reality, they place it on for three months.”

However, there is another option, says Ramage. A company could place the funds on for four months and three days and explore beyond the standard terms that are offered for ease of pricing. “By individually bespoking a term deposit option, the company can increase yield and flexibility. Lloyds is a great proponent of this bespoke approach because it gives corporates flexibility and yield.”

Dual currency deposits (DCDs) are another interesting option in the core cash layer. These fixed deposit instruments allow high returns and have variable terms on the currency of payment. For instance, deposits may be made in sterling, but withdrawals at maturity may be made in sterling or another, pre-agreed currency, such as euro.

“If a company has pools of cash reserves in several currencies and does not have a preference for the currency they are holding, dependent on pre-set target exchange rate, a dual currency deposit (DCD) can be a versatile investment,” explains Ramage. “It is a very simple option, too, that can be used to retain yield whilst maintaining cash flow control. However, advice should be sought from a qualified financial advisor.”

This solution has become increasingly popular over the last 24 months since it offers a higher yield than a straightforward deposit, due to poor market levels. While DCDs are often used over the three to 12 month time horizon, they may also offer good returns for day-to-day cash.

Strategic (12 months+ time horizon)

“Corporates can continue to take out deposits with durations of over a year, but to improve yield, investing into equities is sometimes a consideration,” says Ramage. Clients can invest directly into stocks and shares via a stockbroker, or they can employ an asset manager to look after a portfolio on their behalf. However, the risk is that markets will go down and capital will be lost. A safer alternative is the market linked deposit.

At Lloyds Banking Group, market linked deposits are driven by an investment strategy and the risks are managed first, to protect capital. This means that corporates can participate in the potential upside, but have none of the downside. Derivative techniques are used to optimise the potential for growth, as illustrated below:

Figure 3: Growth potential of market-linked deposits
Figure 3: Growth potential of market-linked deposits

“A good example of a market linked deposit would be a three year FTSE 100 linked bond,” Ramage explains. “If, in three years time, the FTSE 100 is at the same level or higher, the client receives a percentage return. In today’s market 15% would be an approximate average return. If the FTSE is not the same or more, the client will receive the original capital back.” The risks therefore are that the FTSE grows more than 15% and the client has capped their potential upside; or that the capital needs to be withdrawn before three years. In the latter case, all the capital may not be returned as it is only protected if the product is held until maturity.

Market-linked deposits are a useful instrument for treasurers to consider as strategic cash investments as they offer 100% capital protection at maturity, and the potential upside of the yield, without significant downside risks.

Today’s challenges

While these investment products are readily available to facilitate corporate cash management, there are a number of industry-wide challenges that are slowing treasurers’ progress in optimising cash management.

Lack of visibility over cash positions

One of the major challenges is poor cash flow forecasting. Without adequate cash flow analysis, it is extremely difficult to improve yield. Gone are the days of leaving cash on instant access and achieving an acceptable return.

“If inflation runs higher than real money rates over the next few years,” says Ramage, “yield is going to be key. And to achieve that yield, clients are going to need good cash flow analysis.” According to Ramage, the minimum forecast visibility a treasurer should be aiming for is 0-3 months. At the three-month milestone, companies can really start to put their cash to work.

Regulatory crackdown

Portrait of Robert Hare
Robert Hare

“There is no doubt that the new ILAS requirements will necessitate a change in the way banks manage their relationships with customers and value the types of deposits corporates make,” says Robert Hare, Head of Specialist Banking, Lloyds Banking Group. There are certain corporates and firms which will be most heavily affected. There is little doubt that in a post-ILAS world, greater returns will be received on longer terms with little value being placed on call monies by banks. The challenge for some corporates will be to ensure that they have access to the right level of funds as and when required, yet strive to maintain a healthy return on a core business asset, ie cash.

“Regulated businesses such as stockbrokers, solicitors and insolvency practitioners, who hold multiple accounts for their clients will also need to be mindful of a crackdown by the regulators on how money is segregated within the company,” adds Hare. In early June, the FSA fined divisions of two stockbrokers for failing to segregate client money from the firm’s funds, only days after the securities arm of a large investment bank was handed a record fine of £33.3m for a problem surrounding the protection of client money. According to the FSA’s Enforcement Director, Margaret Cole, “Firms should be in no doubt that if they fail to get their house in order in this regard, we will take action against them.”

The importance of proper housekeeping is certainly a lesson that can be applied to efficient treasury and cash management.

Tackling inefficiency: keep your house in order

Technology has a key role to play in improved treasury processes and control. Online banking and cash management portals can assist in giving corporates real-time visibility of account data, 24/7. This data can in turn be fed direct into company systems, such as TMS and ERP systems, helping the treasury to achieve automation and straight through processing, together with immediate visibility over current cash flows.

MarketsLink FX and MM trading is a multi-asset class electronic trading solution from Lloyds Banking Group which gives customers the ability to trade Foreign Exchange and Money Market products in a real-time, secure and easy to use online environment. This electronic trading solution seeks to provide corporates with the tools they need to maximise the return on their cash by providing access to the expertise of the bank’s global trading centres and the ability to leverage Lloyds Banking Group’s liquidity, power and size in the global markets. MarketsLink FX and MM trading helps to manage cash more effectively by reducing administrative pressures and trade execution times and also complements the range of cash management solutions from Lloyds Banking Group.


Lloyds Banking Group’s specialist client banking offering, iSite, is an internet-based portal which not only allows instant account enquiry but also has a number of audit and reporting features built in. “iSite offers highly secure, intelligent technology that allows clients to keep up-to-date with live transactions, offering seamless integration with back office processes, combined with the latest reporting tools in a low-cost environment,” explains Hare. An additional functionality included in the offering is the ability to open and administer bank accounts online, helping corporates to ‘clean up’ their in-house processes.

“Clients are also supported by a team of technical specialists,” explains Hare. “Relationships are at the core of Lloyds’ philosophy.”

Facing the music

To ensure consistency in the delivery of its solutions and services, Lloyds operates using a centralised relationship model which places the relationship director at the heart of the client proposition. “Our approach is absolutely centred on the client and not the product,” says Ormond. “In order to better understand the opportunities as well as the challenges that our customers encounter, relationship directors are frequently travelling to meet clients face-to-face. We pride ourselves on the expertise of our personnel. After all, it is those experts who make the solutions that we offer come to life.”

With its trusted advisory approach, Lloyds aims to become not just a banking partner, but a business partner to its customers. Understanding how a business operates is crucial in pinpointing areas of inefficiency, and indeed opportunity, which can – and in numerous occasions does – make a real difference to a company’s profitability. By working in tandem with its customers, a good Relationship Director is well positioned to offer advice and introduce product experts to provide bespoke solutions that not only meet corporates’ needs but also address the rapidly changing regulatory requirements and evolving industry landscapes.

Lloyds TSB Corporate Markets

Lloyds Banking Group was formed on the 19th January 2009 and has over 30m customers. Lloyds TSB Corporate Markets sits within Lloyds’ Wholesale division and has approximately 26,000 corporate customers. In addition to core banking, Lloyds Banking Group provides specialist products and services including asset based lending, structured finance, acquisition finance, capital markets, international trade finance and risk management solutions for interest rates, inflation, foreign exchange and commodities.

Lloyds TSB Corporate Markets relationship teams are based out of 24 local offices throughout the UK, reflecting a commitment to put relationships first and ensure that corporates receive the face to face support and advice they need. Relationship Directors, with their in-depth customer knowledge, engage with product or solution specialists to provide expert advice and a seamless interface with customers.

Lloyds is proud that their relationship approach has been recognised by the market. Lloyds TSB Corporate Markets was named ‘Bank of the Year’ for the sixth consecutive year at the Real Business/CBI Finance Directors’ Excellence Awards in May 2010. Voted for by Britain’s Financial Directors, the award was given in recognition of the support the bank has given business customers through the downturn.

Contact details:
Gary Ormond
Relationship Director
0781 0055848
Robert Hare
Head of Specialist Banking
0131 658 4600
John Ramage
Director, Head of LIBOR Liabilities
020 7929 4051

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