Cash & Liquidity Management

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Etex's Approach to Cash Centralisation After 15 years of mergers and acquisitions, Etex recognised the need for cash centralisation while recognising the various needs of its local businesses. The company decided to use ISABEL, which enables it to access MT 940 across Europe, with five cash pools. The author describes the challenges in implementing the project posed to the small treasury team, and how they were overcome. The outcome has been very successful, and the company is likely to use greater cash concentration in the future, balanced with the need to maintain a breadth of banking relationships.

Etex’s Approach to Cash Centralisation

by John Holmes, Group Treasurer, Etex Group SA

Corporations typically adopt quite different approaches to cash management according to their business activities and the culture of the organisation. Over the past 15 years, Etex has engaged in a considerable number of mergers and acquisitions, resulting in a decentralised, ‘multi-domestic’ business; i.e., although the group operates in many countries, most subsidiaries are active in one country rather than conducting significant cross-border business. The traditions and business culture in each country can be quite different, so there have been advantages to adopting a local cash management approach. 

Our overall objective was to reduce the amount of cash management at a local level, including limiting local borrowings and investments.

Like many organisations, we recognised the benefits of centralising cash management into group treasury. In particular, we had substantial debt resulting from acquisitions which we wanted to pay down quickly, so we had to be able to access cash easily from across the group. The need for cash also meant that we had to reverse the arrangement whereby business units effectively decided how much cash they would pay to headquarters in the form of dividends or loans; instead, we wanted to upstream as much cash as possible in order to have cash available for fulfilling our obligations at group level.

An approach to cash centralisation

With a long history of decentralised business management, we needed to adopt a ‘soft’ approach to engaging with local finance teams to achieve greater cash centralisation and to ensure co-operation. However, as Etex’s revenues are closely aligned with economic cycles, the financial crisis was a major catalyst for transforming our cash management activities. Our overall objective was to reduce the amount of cash managed at a local level, including limiting local borrowings and investments. To achieve this, and limit any negative impact on our subsidiaries (including avoiding breach of downstream debt covenants) we needed to provide them with the assurance of a group policy confirming that they would be supported financially by the group for financing approved business plans.

We also needed to be sensitive to the need for certain exceptions to cash centralisation, such as in the case of local pooling restrictions (e.g., Chile and Peru), taxation (e.g., Austria, Poland, Portugal) or FX controls (e.g., Nigeria), or if business units were able to source funding more cheaply from local banks than we could at group level from international banks. For example, in France, our subsidiary company was able to source funding under attractive borrowing conditions from their local bank, encouraged by the French government which is actively promoting corporate lending. In South America, the local finance team has developed significant expertise in managing cash in the region, which we could not expect to replicate at a group level. In these situations, we needed to establish whether the cost of centralisation outweighed the benefits of doing so.

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