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Enhanced Global Liquidity through Notional Pooling and Payment Netting

| 21-12-2020 | Vincenzo Masile | treasuryXL |

Liquidity management is one of the core roles of treasury and maintaining the right level of liquidity to guard against risks is of key importance. Liquidity needs are affected by many factors both internal and external, some of which lie outside the treasurer control and some of which are extremely subjective and difficult to forecast. Liquidity, after all, is not an exact science

The level of liquidity held varies hugely, even between companies in similar industries and similar market positions, while due to complex account structures a “safety net” of cash holdings may be inaccessible when most needed. Effective liquidity management requires an account structure that facilitates fast decisions and simplifies transfers between the company accounts.

A global cash pool is a balance netting cash concentration solution providing with access to group liquidity through a real-time, cross-border, multi-currency cash pooling structure. The cash pool is topped by an off-balance multi-currency master account, holding the cash pool net balance in the currency of the treasurer choice. One on-balance top account per currency holds the pooled net balance in the respective currency. A global cash pool replaces multiple local cash pools and offers significant advantages to the group liquidity management.

What is Netting?

A process which reduces transfers of funds between subsidiaries or separate companies to one net amount.

What are the benefits of Netting?

  • Consolidates and off-sets payables against receivables between multiple group companies on a global and multicurrency basis
  • Reduces the number of inter-company funds transfers
  • Minimizes costs of associated foreign exchange
  • Avoids the need for group companies to make multiple transfers and execute opposite foreign exchange transactions

The Netting Cycle

Customer:                                                                                                                                                    Netting provider:

day X-4                Company “A”  participants                  Invoices to be paid >                          processing & checking

day X-2               Company “A”  participants                <  Preliminary/Final Results                calculations

day X                   Company “A”  participants                 <  Payments from participants         settlements

Payments to participants >

Why Implement Netting?

  • Less administrative workload
    – Netting center can be viewed as corporate treasury back-office
  • Continuity of operational tasks
    – Funds will be paid/collected with proper/same value date
    – Settlement over existing local bank accounts; no accounts at netting bank are required
  • Increased visibility and control
    – All netting input and output stored in one database
  • Centralization of FX
    – Consolidates FX positions
    – Improves FX spread
    – Ability to include FX hedge transactions
  • Flexibility
    – Settlement can be in any currency required by affiliate
    – Additional run on an ad-hoc basis; quarter end, year end

Global Multi-Currency Notional Cash Pool

Notional Cash Pooling

  • Group companies open bank accounts in their own name in local currency at the pooling center
  • No inter-company loans are created
  • Group companies with credit balances at BMG are deemed bank deposits and group companies with debit balances at BMG are deemed bank overdrafts
  • All account balances – both credit and debit – are treated on a net basis
  • Interest is bank interest
  • Interest rates applied are based on the net position per currency in the cash pool (not traditional bank BID/ASK spreads)
  • Treasury can choose interest margins to create revenues for Finance company/Treasury

Zero Balance Cash Pooling

  • The Finance company (or other group company) opens accounts in their name at pooling center
  •  Group companies can put cash on deposit with the finance company or borrow from the finance company
  •  Inter-company loans are created
  •  Inter-company loans need to be administered
  • Interest is inter-company interest

True Multi-Currency Multi-Entity Notional Pool

  • Enables multiple group companies in numerous geographical regions to retain local accounts at local banks; “overlay”
  • Consolidation is achieved by transferring local balances (both debit and credit) to accounts held by the individual group companies at the pooling center. There is no change of ownership of funds, and no question of intercompany loans
  •  Offset is accomplished without physical concentration/conversion (FX)

Also:

  • One interest rate per currency (no spread between overdrafts and deposits)
  • Permits not only concentration of excess cash, but allows overdrafts within the pool
  • Full offset capabilities (risk and accounting) for both client and bank
  • Operational in multiple time-zones

Notional Cash Pool & Key Tax Points

Bank Pledge versus Cross Guarantee

  • Notional Cash Pool is based on Pledging of Balances to the bank. Normally cash pools are based on Cross Guarantees which is an unlimited joint resulting in liabilities between related group companies

 Interest

  • Interest is classified as bank interest (credit and debit). All Cash Pool balances are cash on deposit or a current account overdraft

Transfer pricing

  • The bank executes the daily investments and borrowings of the group companies and applies arm’s length interest rates. Tax can insert interest margins as needed

Interest withholding tax

  • BMG is domiciled in the Netherlands resulting in no WHT on credit interest paid. In some cases WHT is applicable on interest charged

Thin cap rules

  • The Cash Pool borrowings are deemed loans/overdrafts from the bank. Thin cap rules are sometimes more flexible regarding bank overdrafts

Conclusion

Companies who implement netting or cash pooling significantly boost the efficiency of their cash and FX management. Companies who implement both, effectively create an in-house bank. The final stage in the process of designing a new cash mobilization structure (or reviewing an existing one) is to assess all possible solutions against the group’s original objectives. Treasurers should bear in mind this to ensure an appropriate and cost-effective solution is chosen.

 

Vincenzo Masile

Treasury Expert/Credit Risk Manager

 

The Impact of COVID19 on the Dutch economy

| 29-05-2020 | Vincenzo Masile | treasuryXL |

Recently, it was determined that the Dutch GDP fell by -1.7% in the first quarter of 2020, suggesting that the economic impact of the corona-virus was mild, at least in international comparison. Although the second quarter is likely to be much worse, the ‘intelligent lock-down’ as dubbed by Prime Minister Mark Rutte, has economically paid off so far.


Given the Dutch economy’s high degree of openness and the fact that Dutch expenditure data for January and February was disappointing, the small GDP decline might be a bit surprising. What stands out as more important, however, is the relative mildness of the Dutch lock-down compared to many Europe. That said, the Dutch government has decided to extend economic support measures by three months until September. The emergency package 2.0 means 13 billion euros of additional fiscal support.

Economic and Financial support

The existing support measures were about to expire by June 1, 2020, but have now been extended until September 1, 2020. Some conditions for public support have been made stricter. For example, firms using the wage subsidy – the main instruments of the support package, will be temporarily (in 2020) forbidden to pay out any dividends or executive bonuses or execute share buy-backs.
The firm will also be obliged to encourage employees to train or retrain and prepare the workforce for future proof jobs. Income support for self-employed people will start to be conditional on the financial position of the partner. Some major restriction to the wage subsidy scheme will be lifted and conditions of the “emergency packages 2.0” are more tailor-made for specific industries. Firms will no longer have to pay a fine for firing workers due to economic reasons, although they will still have to pay back the subsidy. Furthermore, season-sensitive industries will be able to benefit from tweaks to the reference period of their wage bill. The scheme has also been made more generous with respect to the size of the subsidy – 140% of wages instead of 130% (of which they get 90% proportional to turnover losses), in light of the fact that some firms not only have social security to pay on top of wages but also have high non-wage fixed cost.

Apart from the effect of a falling tax base (i.e. automatic stabilization), the direct costs of the extension of the emergency packages have been estimated by the government at 13 billion euro (1.6% of GDP in 2019) for 2020, excluding support for air carrier Air-France – KLM. This comes on top of an existing package of about 14% of GDP (estimates based on government figures), of which 2.2% GDP involved direct net additional expenditures such as gifts, 4.2% GDP in loans and tax deferrals, 1.8% GDP in guarantee and insurance budgets and 5.6% GDP in automatic stabilization for 2020. The bulk of the cost of the extension comes from the direct cost of the wage subsidy scheme and benefits assistance scheme for the self-employed, which mostly qualify as gifts, bringing the total direct net additional expenditures for 2020 to 3.9% of 2019 GDP.

Forward

In line with the earlier announcement, the lock-down will be lifted gradually, allowing for the start of partial economic recovery from the low production levels of April and May. Bars, restaurants, cinemas and theaters will be allowed to reopen on 1 June, generally starting with a maximum of 30 guests at 1.5 meters distance. In the first week of June, all schools including secondary and tertiary will reopen too.

The Dutch government is following other European governments in choosing a path of gradual resumption of economic activity combined with continued economic support. This should mitigate the economic consequences of the corona-virus at least to some extent. However, this won’t prevent the large decline in GDP in the second quarter, after the relatively “mild” decline in the first quarter. It is important to outline the on- going negotiations between EU countries regarding the so-called recovery fund (estimated amount Euro 500 bn.) and the impact on the EU economies.

If a reasonable compromise is reached this can boost the Q3 and Q4 outlook across all EU and the impact on the Dutch economy will be beneficial too.

 

Vincenzo Masile

Treasury Expert/Credit Risk Manager

 

Treasury Manager wanted for a fast growing services company

13-05-2020 | Treasurer Search | treasuryXL

Our partner Treasurer Search is looking for a Treasury Manager for a fast growing services company with a global and capital intense infrastructure.

Tasks Treasury Manager

The position is newly created. The Treasury Manager will be responsible for:

  • European cash management, liquidity and forecasting
  • Managing and optimizing banking structures
  • Give treasury advice to operating companies, liaise with other finance functions
  • Assist in aquisitions and funding activities
  • Develop risk strategies (FX, IR)
  • Managing regulatory compliance

Ideal Treasury Manager

The ideal Treasury Manager has a relevant University degree and at least 3 years experience in Treasury with operations as a main focus. Experience or expertise in funding and risk management is highly appreciated. Personality & mindset are at least as important as treasury knowledge and experience. As a person he/she is ambitious, adaptive and thrives in a dynamic environment. He/she is able not only to be the expert but also the result oriented project manager taking the organisation to the next level.

Our Client

Our client is a fast growing services company with a global and capital intense infrastructure. The company is innovative and the culture is Anglo-Saxon company culture. The company has a clear strategy, aims high and gets results through acquisitions and autonomous growth. Further investments are currently being done to bring the organisation to the next (professional) level, there is a willingness to invest.

Remuneration and Process

Our client offers a market level salary, the expected annual base salary will be about €70K. For candidates that obviously bring more, our client is willing to pay more. For interested candidates who qualify, a more elaborate job description is available. The Treasurer Test might be part of the recruitment process.

 

Location

South-West Netherlands

 

Contact person

 

T: (0850) 866 798
M: (06) 2467 9339




New Job Opening: Treasury Manager (m/f)

29-04-2020 | Treasurer Search | treasuryXL

Our partner Treasurer Search is looking for a Treasury Manager for a fast growing services company with a global and capital intense infrastructure.

Tasks Treasury Manager

The position is newly created. The Treasury Manager will be responsible for:

  • European cash management, liquidity and forecasting
  • Managing and optimizing banking structures
  • Give treasury advice to operating companies, liaise with other finance functions
  • Assist in aquisitions and funding activities
  • Develop risk strategies (FX, IR)
  • Managing regulatory compliance

Ideal Treasury Manager

The ideal Treasury Manager has a relevant University degree and at least 3 years experience in Treasury with operations as a main focus. Experience or expertise in funding and risk management is highly appreciated. Personality & mindset are at least as important as treasury knowledge and experience. As a person he/she is ambitious, adaptive and thrives in a dynamic environment. He/she is able not only to be the expert but also the result oriented project manager taking the organisation to the next level.

Our Client

Our client is a fast growing services company with a global and capital intense infrastructure. The company is innovative and the culture is Anglo-Saxon company culture. The company has a clear strategy, aims high and gets results through acquisitions and autonomous growth. Further investments are currently being done to bring the organisation to the next (professional) level, there is a willingness to invest.

Remuneration and Process

Our client offers a market level salary, the expected annual base salary will be about €70K. For candidates that obviously bring more, our client is willing to pay more. For interested candidates who qualify, a more elaborate job description is available. The Treasurer Test might be part of the recruitment process.

 

Location

South-West Netherlands

 

Contact person

 

T: (0850) 866 798
M: (06) 2467 9339