Treasury strategies for a changing region: roundtable

At a SunGard roundtable, leading regional treasurers and CFOs discuss their strategies and challenges in a fast changing economic environment.

The global financial crisis has put treasuries in the spotlight as never before, with many firms requiring far greater visibility over working capital, liquidity and risk exposure. We put together eight treasury professionals around two roundtables in Hong Kong and Singapore to discuss this changed economic landscape, and find out what exactly the new issues are and how treasurers are tackling them.

Given the varying types of businesses around this table, how are your treasuries structured? Are they fully centralised or do they use more of a hybrid model?

Damian Glendinning: Lenovo is highly centralised, and though we have relationships with quite a few banks, all our cash management needs are handled by just one bank. For obvious reasons connected to exchange controls, China has to be managed separately, but even in China things are very highly centralised: everything is swept into Beijing on a daily basis, and all payments are initiated out of Beijing even if they are made by different legal entities. Outside China, all cash gets centralised into Singapore on a daily basis, except for countries where exchange controls make it a little more difficult.

Manuel Vazquez: Nestlé’s business model is completely different to Damian’s. We are also very centralised and regionalised, and have five regional treasury centres around the world. When it comes to payments and receipts, we do have control over accounts and payments in Singapore, but we have a bit of a hybrid system. Payments are triggered by our shared service centre in Manila while funds are released from the treasury centre in Singapore.

Koo Nguang Siah: That’s very interesting, because we used to have quite decentralised treasury operations about ten years ago. But we started to see many more cross-border transactions in Asia, so in the interest of cost savings and economies of scale, we set up a treasury centre to see if we could extract value from this system. At the point of setting up the treasury function, we came to an agreement with all local business heads allowing them to focus on their business, while all treasury and finance decisions would come from treasury.

As a result it is much easier for us to work with them. So if they want to make an acquisition, it is up to treasury to decide what kind of legal and tax structure and where the financing will be from, and they will focus on profits and return on assets. If not, then local business leaders will come up with some pretty complex models which can be difficult to unwind later. I think they have now accepted that from a cost perspective, a centralised process can drive better prices and so the set-up makes sense.

Tan Lee Thong: We also have more of a hybrid treasury operation. In terms of consolidation of cash we are pretty much centralised. We have a global cash pool set up in Singapore for our 150 entities globally set up in more than 70 countries, and we have just implemented a global netting solution in Singapore. We have a highly centralised cash management system, whereby all our 27 alarm centres are linked by a central database which is further linked to a centralised billing system. In terms of payments, we are more decentralised currently, but our two shared service centres are in the process of centralising payments within the next 12 months. Where we are not able to pool as freely as we would want in some countries because of restrictions, we have to apply more traditional methods such as dividends.

Stephen Hogan: We operate in 220 countries, with four core divisions and about 1,200 legal entities and our global department is about 60 strong. Given that we are in many countries with many entities, and often business is locally-focused, our divisions need local finance centres and people supported in some cases by shared service centres to handle the local payments and collections process. Whilst we operate cash pools and an in-house bank structure and thus have overall responsibility to manage subsidiary risk and liquidity, our team does not take responsibility for local finance operations.

Can you identify some of the major issues you face on a day-to-day basis?

Vazquez: In my view, international banks have lost their focus a little bit on the way they service clients. They should act more like partners and tailor solutions in order to build a business together. In many respects local banks can be a bit more grounded to local idiosyncrasies and complexities than global banks. Sometimes, especially for a company like Nestlé which deals with local farmers and local distributors, the large international banks will not look at this kind of microcredit as it doesn’t fit their risk profile. But it is precisely this kind of business that builds partnerships. For Nestlé, this is very important as we have the concept of creating shared value with societies in which we operate.

Glendinning: I agree with Manuel. Banks are good at providing technology to manage complexity. But often the solution itself becomes part of the complex structure, when in many cases the better solution for the business is to ask why we are doing this in the first place.

A lot of problems we face in cash pooling in Asia, for example, are caused by regulations. Many Asian countries have invested in sophisticated payments systems - but they have left in place regulations which make it extremely difficult and expensive to get effective cash management and cash pooling if you have a lot of local subsidiaries generating surpluses and deficits. One solution is to set up notional pooling arrangements, but these look much better on the surface than in practice. They appear to solve the regulatory issues, but only create another set - this time, for the banks. The real solution is to structure your business so that these needs don’t arise.

We hear a lot about a dearth of treasury talent, so is finding qualified staff a problem?

Tan: It can be. I have found building up my treasury team has been quite challenging. Many treasurers are very focused on treasury, and don’t appreciate the accounting component as much as we would like them to be. But everything you do in treasury does have an impact on accounting. So finding a candidate who understands treasury, accounting and what the business actually needs has been difficult.

Risk management is a major concern for most firms after the global financial crisis. How do you all manage risk? Do you take a global view?

Sue Yeung: I guess our global market view on risk is fairly restricted to the Hong Kong dollar because it is pegged to the US dollar. Our company’s major currency is US dollars, we purchase satellites in US dollars and we receive cash from customers in US dollars. So we have a natural hedge. The only anomaly is renminbi, but everyone expects it to appreciate. So to us the risk is really the Hong Kong dollar’s peg to the US dollar, because some banks say they see it breaking in a few years. So should we buy forward hedges? This is a tough one to resolve since in terms of operations we are naturally hedged.

Clement Chan: I don’t worry about foreign exchange (FX) because 80% of my revenue is in renminbi, and 70% of waste paper is imported for which we pay US dollars and euro. So if renminbi appreciates against the US dollar and euro I will be over the moon. On the capital side, over 95% of our net debt of about HK$7 billion is denominated in HK dollars. So if renminbi appreciates then this will work in our favour as well. We don’t need to speculate as we can always pass on costs to the customers as we are much bigger than the downstream converters, so there is no need for hedging of raw materials. We would, of course, be worried if the renminbi turned the other way, but if it keeps appreciating this will help us.

Tan: Our business is unique and extremely cross-border in nature. We have 27 alarm centres across the world, and just arranged 225 commercial bookings to evacuate clients from Japan following the earthquake, and chartered an A330 to relocate students to Hong Kong. With 9,200 clients around the world, we collect payments globally from various countries and in all kinds of currencies. But when events happen, they can happen anywhere and anytime. Therefore our cash inflow and outflow in terms of location, FX and quantum, are totally unknown. What we do know is where we are going to collect and in what currency.

That is the liquidity and FX challenge we face. About 18 months ago we tried to unlock some of this liquidity, because at the moment countries have to keep some of the cash due to time zone differences whereby corporate treasury will not always be there to fund them when they need urgent funding to operate. Consequently a lot of cash is “trapped” in-country. Therefore we have put in a Singapore-based multi-currency notional pool so there is no physical movement of cash. Any excess cash a country has can be put it into this pooling account. It is in their own name, but it is with a Singapore-based bank and they can keep it in their currency. This is the biggest advantage because it avoids creation of intercompany loans, and we are able to change one currency with a surplus into another with a deficit, which allows us to manage FX better.

Moe Yamin Tun: As the business grows we have significant exposure to different financial institutions. The ACE global treasury team monitors and manages counterparty exposure with the 2008 global financial crisis emphasising the importance of how we manage these exposures. So there is a business need to upgrade our systems to ensure that we are on a consistent platform globally which will help us access information more efficiently. We are a global insurance company with a mandate of minimising operating cash and maximising investments returns, so we also need accurate cash flow forecasting.

Glendinning: Technology in risk management is very important. To manage your counterparty and FX risk you need first to know what the risk is, so good reporting is a must. We are very centralised, and because the way we do things is based on goods flows, that becomes the automatic vehicle for managing FX risk. FX risk is managed out of Singapore with some out of Hong Kong, but it is all the same team. All our cash is in a very small number of places - this makes managing counterparty risk easier. Once you have everything centralised you can also manage liquidity risk.

Vazquez: We have a centralised function for risk management through which we monitor all types of risk, not just FX risk but interest rate, counterparty risk, liquidity risk, settlement risk and systemic risk. All risks are first collected from country to group level, where we assess on a monthly basis the impact on the business and the correct strategy to manage them. But as we all know, FX exposure management is not only about hedging FX risk for the sake of it, but to create a competitive advantage, as you can influence the price of your product by having a good hedging strategy. Since we can’t pass rising prices to consumers, this is especially important for food companies like Nestlé.

Hogan: We aim to centralise FX and commodity risk to the Group centre as much as possible, so that all risk is centralised away from our subsidiaries. We try to keep it simple for our local finance teams and we don’t enter into complex contracts with them. Using our in-house bank system, we have created a very simple hedging process: we simply have the subsidiary manage their in-house bank balances in different currencies to pass the risk to us. If they have an account receivable in US dollars then they create a natural hedge by having an account payable (overdraft) in US dollars in their in-house bank account.

Effectively that means we absorb all FX risk at a Deutsche Post AG level and can then manage that consolidated risk with the external market in the appropriate manner. Likewise for commodity risk, we do internal management commitments with our subsidiaries for a fixed price to centralise it at Deutsche Post AG level.

How fast are Asian treasury operations adapting to modern business requirements? What are the main drivers of this change?

Chan: I can’t speak on behalf of all Chinese firms, but I suppose it is hard for Chinese or even Asian companies to adopt the kind of sophisticated systems that their western counterparts have as so many of them are too small. For instance, I don’t need to know how much cash our subsidiary has on a particular day as a weekly report is fine. Having said that, personally I would love to have a treasury system in the office and have visibility over cash flows on a daily basis over every subsidiary. But I don’t know if that is necessary. When we become a lot bigger, then we might need to upgrade our treasury. I think that the resistance from many companies is not so much based on cost, but mentality. You need to convince the whole firm from top to bottom that the investment in treasury will help efficiency and the bottom line.

Yeung: I think the pressure to upgrade our treasury technology platform would grow if we had some debt, as you would need to monitor working capital to ensure you had enough cash to pay for interest, for example.

Yamin Tun: The insurance business is highly cash concentrated because we deal with the management of cash flows. The treasury operations in Asia-Pacific region are decentralised at the moment, though our counterparts in the US and Europe are ahead of us, but Asia-Pacific plans to adopt a similar platform in the near future. A new treasury system would result in the treasury role being more efficient. It will also make visibility much easier as we can access the treasury system to make better informed decisions, which is a competitive advantage.

But in other ways fundamentally there will not be much change because certain manual input remains. It takes time to implement a new system because you have to deal with numerous countries and entities and make sure you meet their requirements. This is especially the case in Asia, with its language, cultural and regulatory differences as well as its variety of currencies.

So do Asian treasury operations still lag behind global best practice, or is this view becoming outdated?

Koo: It is quite true that many Asian countries are still developing, so in terms of size it is difficult for firms, especially in the small and medium-sized enterprise segment, to have much of a specialised treasury function. It is also typical for firms in the region to look at sales and profits first before they look at other aspects of the business. Personally, I think that unless they have worked for multinational corporations, most treasurers will have their own less sophisticated notions about risk management and FX. If the chief executive doesn’t understand treasury and the general manager doesn’t understand treasury, it is difficult for a modern treasury system to emerge in a firm.

Glendinning: I agree with [Koo] Nguang Siah that a lot of disciplines required in treasury are relatively new to Asian companies, plus many Asian companies are typically run by the owner. There is an evolution taking place as these companies grow and go public, but you don’t necessarily have the talent pool - it takes time to develop that.

But from a technology point of view, in many ways Asia has an advantage. Firstly, more modern treasury solutions are available as Asian countries have leapfrogged many western countries in terms of their payments infrastructure. They don’t have to worry about making it backwards compatible. I would say that cash management and treasury are areas where Asia has a huge advantage. For instance, the best real-time settlement system in the world is in China. When I first started dealing in China in 1997, it took two weeks to clear a cheque between Shanghai and Beijing. Now a payment anywhere in China is cleared within 45 minutes. From a cash management point of view, Thailand has a very modern and efficient system; unfortunately they didn’t do away with the requirement for a physical receipt for VAT so it’s not used very much.

So the potential for using technology is huge, even if there are barriers to using it such as regulations or cultural obstacles which I think will disappear over time. The companies are also much younger and will tend to implement more modern solutions. People here are more open to technology change than elsewhere.

How have your roles as CFOs and treasurers changed since the global financial crisis?

Yamin Tun: After 2008 our role as treasurers has become much more demanding. Before the global financial crisis, I would have to invest about one day per week for treasury related functions; this has now doubled to at least two days. That’s how important it has become after 2008.

Yeung: The only thing that might have changed as a result of the global financial crisis is that major shareholders are more concerned with efficiency and added value. So if you want to invest in a new treasury system, you will need to justify this based on how much benefit this would bring to the bottom line, or how much more efficient it would make the company.

Chan: Before the crisis things were bullish as far as Lee and Man were concerned, but after the global financial crisis the volatility of waste paper prices and raw materials caused us some difficulties even though the demand for paper remained steady. We had 84% net gearing ratio back then and kept waste paper inventory for four months. But we have learned our lesson, and gearing is now down to 60% and waste paper inventory is only two months. The crisis changed our risk appetite so we are more mature, better managed in terms of risk management, and better able to weather any storm in the future.

This story was first published in the May 2011 issue of FinanceAsia magazine.

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