In a recent ‘Finger on the Pulse’ poll on Treasury Today, the majority (61%) of respondents chose foreign exchange (FX) as their biggest cash and risk management concern when operating in emerging markets (EM), followed by cash flow forecasting and visibility and then regulatory complexity. Mark Tweedie, Head of Sales EMEA, Corporates, Treasury and Trade Solutions and Joakim Lidbark, Global Head CitiFX Corporate Solutions, Foreign Exchange, outline Citi’s strategy for helping clients navigate liquidity management challenges in the EM.
Around 70% of world growth over the next few years will come from emerging markets (EM), with China and India accounting for 40% of that growth. In 2005, less than 10% of the global Fortune 500 was headquartered in the emerging markets; last year, that proportion had grown to over 25%. Today multinational corporations (MNCs) are eagerly looking to enter or expand their business operations in these dynamic markets.
As the EM increases in importance within a corporate’s overall growth strategy, treasurers are being called upon to improve visibility and control over the company’s cash within these countries, which in turn is driving the desire for increased treasury centralisation. In order to use liquidity efficiently and rely less on external funding, a treasurer needs to know where the company’s cash is, how much is in each locality and whether there are restrictions on its flows. However, this level of oversight can prove to be quite challenging. Given this importance, Citi has created an EM resource centre which is a single source of information on regulations required and its transactional services.
In addition, as corporates move from a distributor-led G3 currency (US dollar (USD), euro (EUR) and Japanese yen (JPY)) model to a full-fledged permanent local presence, they need to develop a strategy for modifying their working capital practices. Many of these companies are now looking to invoice in local currencies, as a result of becoming more responsive to the end customers’ buying behaviour, funding currency and need to reduce FX volatility.
FX risk management
FX risk management in the EM is a hot topic, as shown by Treasury Today’s ‘Finger on the Pulse’ poll. As a result many treasurers are looking to evolve their policies around currency hedging and the management of local currency positions. In doing so a common realisation is that existing G10 currency1 hedging policies, which may be more than ten years old and written at a time when the corporate was G10-specific only, is not fit for purpose in the EM.
Depending on the sector, a typical corporate would use a hedging tenor of one to two years for its G10 FX exposures. However, as sales and revenue streams alike shift to EM, simply applying a G10 centric hedging policy may not suffice. This is mainly because of the cost of hedging EM currencies, but also in some circumstances due to liquidity and regulatory constraints. As a consequence, we believe that corporates with a global foot print should consider benefits of applying two separate approaches: one pursuing a long-term hedging policy in the G10 currencies; and the other with a much shorter hedging tenor, eg less than one year in the EM.
Before setting up a hedging policy, or rewriting one, corporates should first understand why they are hedging. For those corporates predominately managing G10 currencies, a common objective is to smooth out the peaks and troughs of year-on-year volatility. To achieve this goal, a corporate will need relatively long-term hedges in place such as provided by a layered hedging framework, where hedge ratios are built up gradually over time. However, in the EM smoothing volatility is not as straight forward due to factors such as the absence of mean-reversion, jump-risk and hedging cost; instead many use hedging as a means to lock in margins or achieve a budget rate over a specific period.
Citi helps corporates quantify risk, and then determines which types of derivatives can be used to mitigate the exposure. This advice is not limited to the type of derivative, but also to implementation method. Once a hedging policy is defined it’s important to effectively track exposures and make sure it’s accurately followed. For example, Citi’s FX Pulse product allows subsidiaries to enter their exposures which feed up to central treasury in real time. Treasury can readily access a breakdown of cash flow and balance sheet exposures alongside their existing hedges, and in turn receive a clear instruction on how much more or less to hedge at any time to stay on target. A netted risk view allows users to see total risk in a given currency pair, or indeed single currency, across all subsidiaries, exposures and value dates so that risk on aggregating positions across opposite functional and exposure currencies are quickly highlighted.
Luxottica Group S.p.A
Luxottica Group is a premium, luxury and sports eyewear company with manufacturing, retail and wholesale operations that span 130 countries worldwide. The company has adopted a regionalised treasury structure with each treasury centre responsible for cash and FX risk management in its own region.
In China, Luxottica has two manufacturing facilities plus retail and wholesale operations. The Chinese subsidiaries import and export raw materials and finished products to and from various group entities, the invoice currency primarily in USD, EUR and AUD. In addition, various group entities have trade flows with third-party suppliers in China where the invoice currency is in EUR or USD.
In 2010, the treasury team reviewed its FX flows worldwide with the objective of simplifying the invoicing process to minimise the FX risk in particular regions and concentrate it in Europe, where the company’s main manufacturing facility and HQ are based, and its exports worldwide account for a significant percentage of the groups’ FX exposure.
The internationalisation of the RMB was gaining momentum at the time so Luxottica assessed this in relation to flows with Chinese entities and decided that all inter-company flows with China would be re-invoiced in renminbi (RMB). As part of the review and transition to the new invoicing process, Luxottica mapped out all the relevant flows that would be affected by this change and worked with Citi on solutions to support the initiatives.
This involved its fiscal and tax departments, with a particular emphasis on transfer pricing; the IT department, charged with amending accounting systems and billing/logistics systems; and the treasury team, which co-ordinated with all relevant departments, including local finance teams. In the process, the treasury team in Europe opened a number of offshore RMB accounts with Citi to collect and pay RMB, and manage the FX risk using spot and forward deliverable RMB contracts. The whole project was completed in just six months.
Adopting the RMB has brought significant efficiencies to Luxottica: simplified invoicing for China and reduced currency pairs managed from AUD, EUR and USD to RMB; simplified hedging process, removing FX risk from China and concentrating FX risk in Europe; a greater natural hedge than it had before; lower transactional and operating costs.
With the increased liberalisation of the RMB, Luxottica is considering integrating the RMB into a global cash-pooling solution (such as multi-currency notional pooling) to concentrate its cash.
Cash management and cross-currency payments
As large multinational corporates (MNCs) move a greater proportion of their business and density of sales into the EM, they are looking at ways to repatriate surplus cash from financing and debt redemption. Corporates are increasingly using inter-company control, netting and sweeping (to the extent that currencies are fungible, or without capital or currency control restrictions).
Corporates need to stay abreast of new developments in global liquidity management, as the EM economies evolve. The most prominent example is the People’s Bank of China (PBoC) and State Administration of Foreign Exchange’s (SAFE) recent relaxation of RMB currency controls. Citi is participating in a pilot programme that includes just a handful of banks and corporates. In January, the bank completed its first cross-border lending transaction in RMB, conducted on behalf of a European consumer company. The money was lent to the company’s regional treasury centre (RTC) in Singapore, in order to leverage its China operation’s surplus cash and achieve greater efficiency in its global fund usage and allocation.
As they expand deeper into the EM, corporates are switching from foreign currency to local currency invoicing and searching for a single solution for cross-border payments. Citi’s WorldLink product has continued to evolve for the past 30 years and now supports 2700 clients, processing 36 million payments per year. WorldLink is a multicurrency cross-border payments solution enabling clients to have a single funding currency while making payments in over 130 currencies.
Corporates, in particular those setting up joint ventures (JVs) to support their growth in EM, are using WorldLink as part of a ‘banking lite’ operating model and payment architecture. Common in the oil and gas industry, JVs are usually set up for finite timescales, such as for production and exploration projects. These JVs don’t necessarily have the natural offset between accounts receivable (AR) and payable (AP), as crude oil is denominated in USD and shipped through commodity traders, whereas payments to tax authorities, suppliers, insurers, employees etc are in local currency. In this situation, often companies don’t want to put a lot of expensive plumbing in place, or go down the laborious road of joint signing authorities, account openings and complex liquidity structures, with a new JV partner. Instead they want to fund the JV on an as-needed basis and make their proportionate share of disbursement from a treasury account.
As part of managing end-to-end financial flows, Citi supports corporates’ employee expense management and business-to-business (B2B) purchase cards programmes. Companies usually want to drive more spend through cards to increase their control and leverage (from a procurement standpoint). Citi issues local currency commercial cards in over 65 countries, which means that the cardholder doesn’t suffer from the local currency fluctuations and the corporate gets the benefit of the entire global spend, not just in the US and Western Europe where most issuers have acceptance capabilities. This holistic coverage means that procurement can negotiate with its suppliers based on the company’s global spend and that card holders have a common experience irrespective of territory. To this end, Citi has become the only international bank offering this service in China.
Liquidity and trade finance
Operating in the EM raises corporate risk levels and many are looking to mitigate risk with early settlement of their pending receivables. Citi has focused its activity in the trade finance space to help clients with their payment terms to free up liquidity early on in the process. Citi also has a Global Concentration Engine providing treasurers with seamless end of day cash mobilisation for an unlimited number of accounts in 25 countries (the bank is currently expanding this), thereby minimising idle cash and consolidating cash in treasury hub locations.
Citi is active in the letters of credit (LC) space, which effectively swaps corporate risk for bank risk. LCs continue to be a common approach when companies enter into agreements with new trading counterparties. They are looking for a single counterparty to help them with their export LCs – not just issuing LCs but also discounting where possible to accelerate the cash conversion cycle.
Therefore, as clients go into new markets, trade services are a highly valued area of the corporate and bank partnership. Citi understands that having teams on the ground, illustratively, in Lagos, Nairobi, Algiers and Dubai is of critical importance especially when aligned to the largest correspondent bank network in the business. Citi has further invested in expanding and mobilising its electronic bank platforms to handle LC issuance and confirmations. Furthermore, the trade processing hubs at Citi are essential tools for the treasurer when navigating new markets.
In addition, and especially common in manufacturing and energy / refining industries, corporates are also looking for import loans and financing to buy equipment, which are most often large dollar-denominated purchases. By linking the asset to a trade transaction banks are able to reduce the risk capital intensity given the low loss given default rates and therefore price such loans attractively for corporates. Citi has further seen a significant expansion of interest in extending its successful supply chain finance programmes for clients to cover EM suppliers. Fundamentally, corporates need banking partners to help them navigate environments successfully and de-risk it. Citi, for example, was one of the first banks to set up LC re-issuances for the Trade Bank of Iraq (TBI), effectively swapping out exposure on Iraq for risk on Citi in UAE.
Wipro, a global IT company, has over 130,000 employees, with clients located in 54 countries. The company has established a shared service centre (SSC) in Bangalore, India, and embarked on a project to automate payments processing, migrating from the use of cheques to electronic payments (e-payments) for payments both in India and in Europe from its enterprise resource planning (ERP) system. This project proved highly successful, with a significant number of payments made electronically within the first year, leveraging uniform standards.
Since then, Wipro has extended the reach of its SSC across nearly 35 countries, and continued to pursue an active acquisition programme, further increasing the scale and complexity of the SSC’s operations. Consequently, the company has worked closely with Citi to expand and enhance its activities to meet its changing business needs in 22 countries.
Wipro’s SSC now makes payments on behalf of branches and subsidiaries in nearly 35 countries using a full range of payment methods to support the company’s activities across eight countries in Central and Eastern Europe (CEE), Latin America and North America. When first establishing the SSC, Wipro used CitiDirect Online Banking for payments and account statements. More recently, the company has been working with Citi to migrate to a host-to-host connection with Wipro’s ERP, enabling full straight through processing within a secure environment.
Wipro had already implemented Citi’s Worldlink solution for making foreign currency payments from a single account. Most recently, the company has been expanded to the US for automating the production of cheques, and testing is in progress for the Canada region. In India, foreign currency payments can be complex because of the documentation requirements, which can make the process slow and labour-intensive. Wipro implemented Intralinks, which exchanges foreign currency payment information electronically with the bank, streamlining the process considerably, and ensuring that Wipro’s team has to deal only with exceptions.
As a company with an ambitious growth strategy, Wipro has made frequent acquisitions in recent years. In order to achieve full visibility and control over cash, both for accounts held with Citi and third-party banks, Wipro chose Citi’sTreasuryVision programme, in order to give visibility over accounts globally. Around 60% of accounts are now accessible through TreasuryVision, which is also increasing rapidly, so Wipro will have full visibility over its cash balances globally, which can be extended to new accounts as the company structure continues to change and expand.
De-risk, demystify and simplify
Citi’s investment and commitment to the EM is absolutely core to its business strategy. Mike Corbat, Citigroup CEO, outlined the bank’s orientation in his 1Q13 speech on 5th March: “For Citi, global doesn’t mean packing up a suitcase and travelling to where a client needs to do a transaction. Global means we’re established in the countries where our clients need us to do business, both in developed and emerging markets. They can make payroll in Tanzania. They can purchase raw materials in Indonesia. They can hedge currency risk in Korea. And they can do so knowing that they’re dealing with a strong, well-regulated firm.”
The bank has deep knowledge and experience in the EM, with MNCs as well as EM champions. This means it is well-positioned to comment on evolving trends, such as prudent treasury practices during the impact of the Arab Spring. Citi also enables corporates with centralised treasuries to be guided by the bank’s relationship, sales and product teams as to what is happening from a regulatory change standpoint, whether that is Hungary’s financial transaction tax (FTT) or new depositor insurance regulation in Kenya or Nigeria or the relaxation of RMB currency controls. The bank is effectively configured as an “early warning system” for its clients, with the aim of de-risking, demystifying and simplifying the EM.
MNCs are engaging in a significant amount of capital raising activity in the EM, as indeed are EM companies, given the attractiveness and the low spreads on the high yield debt and some of the EM debt. Clearly what the companies do with that cash once they have raised it and how they manage that cash is of principle concern for the group treasurer, who will be working hand-in-glove with the M&A department and the business development function. In addition, Citi is investing in banking evolution – CitiDirect BE – and has launched a mobile version of its CitiDirect platform, CitiDirect BE Mobile, with an upgraded user experience and new functionality, such as access to Trade Advisor. This enhancement, along with other channel extensions that Citi currently has in the works, is geared towards giving treasurers control and oversight of transactional activity across their business.
Panalpina Latin America
The Panalpina Group, a multi-modal transportation company, has global operations in more than 80 countries. In Colombia, the company faced unique challenges in its efforts to maximise cost efficiency and improve supplier relationships. Because ground transportation is particularly costly in the region with shippers demanding that all costs be paid up front, Panalpina Latin America focused on improving cash flow and meeting working capital goals.
In order to improve the company’s working capital, it needed to renegotiate terms and conditions with ground transportation suppliers. With help from Citi the company implemented a supply chain finance (SCF) solution. After securing buy-in from the procurement team, treasury worked closely with the bank to put a customised Citi Supplier Finance programme in place. The programme offers suppliers the opportunity to turn their AR into immediate cash.
This innovative solution provides an electronic disbursement service with Citi acting as Panalpina Latin America’s paying agent, allowing the bank to pay suppliers on their respective due dates. At the same time, Citi offers suppliers the option of accelerating AR payments, either through a true sale or a discount structure.
To initiate a payment, Panalpina Latin America informs Citi via electronic straight through processing (STP). Citi Supplier Finance presents these payments, along with underlying remittance information such as invoices or purchase orders, to the suppliers, who gain critical visibility into future payments. Suppliers may choose to elect early payment on all or some of these payments, or simply be paid at normal maturity. On the AR due date, Citi takes the collection directly from Panalpina Latin America through its debit authority.
The technology put in place by Panalpina Latin America and Citi has delivered a highly efficient host-to-host payment system that achieves low operative costs and reduced manpower requirements. While initially only implemented in Colombia, the corporate treasury team has to come to recognise the value of this structure for the entire organisation and has rolled it out across Latin America.
Further benefits of the SCF programme include supporting suppliers’ working capital needs, which ensures continuity across supply chain sourcing. Suppliers’ AR can be converted into cash more rapidly; and they gain better access to alternative financing options and highly competitive funding rates which reduce their financing costs. By unifying supplier payments through Citi, Panalpina Latin America is also able to achieve greater negotiation control.
For the company, working capital ratios have increased through improved days payable outstanding (DPO), days sales outstanding (DSO), and days inventory outstanding (DIO). By increasing the efficiency of its working capital flows, Panalpina Latin America was able to improve its financial indicators by more than 100% in less than one year, becoming one of the first divisions in the region to achieve this milestone.
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