Cash & Liquidity Management

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Strategies in a New Financial Climate Prompted by the credit crisis, Panalpina adjusted its treasury approach in the light in market trends. This included responding to increased FX volatility and reviewing investment policy on counterparties and instrument tenors, and hedging exposure to interest rate differentials between CHF and EUR/USD.

The article summarises the actions taken by the company, both immediate and longer-term, once it had reviewed its financial activities. Panalpina also created a new cash management vision, which anticipates implementing a single global TMS to consolidate its transactions, analysis and reporting onto a single platform to be integrated with its ERP.

Strategies in a New Financial Climate

by Marcel Kellerhals, Group Treasurer, Panalpina

This article is based on a presentation that Marcel Kellerhals delivered at the BNP Paribas Cash Management University in October 2009.

Our treasury function is centred on three key areas: cash management, corporate finance and risk management. In each one of these, we have set long-term strategic objectives. Although Panalpina has a largely centralised business model, we have a separate accounts receivable function, with receivables representing the largest asset on our balance sheet.

Higher levels of FX volatility also created opportunities, particularly for a firm with expertise in FX management.

We have a global cash management model, organised regionally. In Europe, we have implemented a payments factory and centralised cash flow using physical cash pooling techniques. In Asia Pacific, we centralise our cash notionally, although not for all countries at this stage. We are now seeking to bring together cash management for North America and Latin America, although this is not easy to achieve in practice, which will also include cash centralisation. In Africa and the Middle East, it is also difficult to organise cash on a regional basis, so we are currently implementing solutions in the Black and Caspian Sea countries, and we are in the process of issuing or reviewing requests for proposal (RFP) for cash management in Sub-Saharan Africa and the Arabian belt.

In the eye of the storm

Much has been said during the crisis about the need to adopt a ‘back to basics’ approach in treasury, but this has different implications for each company. At Panalpina, we adjusted our treasury approach in the light of the market trends that we witnessed, as outlined below.

Firstly, looking at FX, we saw higher levels of volatility in the FX markets, and a flight to CHF. This resulted in an overall increase in the number of FX transactions we undertook. To manage our risk more effectively, we focused more on monitoring exposures at a local level, and boosted our hedging levels. Higher levels of FX volatility also created opportunities, particularly for a firm with expertise in FX management, so we were able to take positions and sell options. In many cases, we make the decision to leave our translation risk unhedged but instead put in place overlay hedges at group level.

In terms of interest rate management, we have been fortunate in that our low debt levels limit our exposure to liquidity and counterparty risk. Consequently, our primary exposure to interest rate risk is in the area of investments. During the crisis, we reviewed our investment policy on authorised counterparties and instrument tenors. In consequence, we made the decision to invest cash for a shorter term, and focused more on credit default swap (CDS) prices as a measure of counterparty risk.

Another risk to which Panalpina is exposed is the interest rate differential between CHF and EUR/USD. Although the business is denominated in CHF, many of our intercompany loans are in EUR or USD, which creates a major exposure which we need to hedge. To create a known position, we made the decision to lock in rates for the next two to five years.

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