A World of Opportunity for the Transportation, Aviation and Logistics (TAL) Sector Treasuries
By Ziad Kabbara, Global Sector Head, Transportation, Aviation and Logistics, Global Liquidity and Cash Management, HSBC
The Transportation, Aviation and Logistic (TAL) sector is currently undergoing various substantive changes. Collectively, these changes are providing opportunities for TAL company boardrooms and their corporate treasuries alike. Ziad Kabbara, Global Sector Head, Transportation, Aviation and Logistics, Global Liquidity and Cash Management at HSBC, outlines some of the ways of seizing and capitalising on these opportunities.
M&A activity, cost base reduction, unfamiliar markets and new technology are just a few of hurdles facing TAL sector treasuries today. Nevertheless, any treasury that surmounts them is also opening the door to multiple opportunities and beneﬁts. Collectively, these hurdles require considerable focus in terms of both cost and available resources, so many TAL treasuries make use of some external assistance to meet their operational workload. This makes a TAL treasury’s choice of partner bank critical to its success in supporting the business with efficient ﬁnancial processes and adequate working capital, as well as seizing the associated opportunities.
M&A activity: implications
M&A activity in the TAL sector has been increasing recently and very substantially in some TAL sub-sectors. For instance, global transportation and logistics saw 284 deals in 2017, representing an increase in volume over 2016 of 18%1. Excess capacity in the transportation (shipping) sub-sector coupled with weak demand and the resulting consolidation were important drivers of this increased M&A activity, with the largest deal during Q2 2017 being for USD6.3bn. The aviation sub-sector (including aerospace and defence) had a record USD72 billion year for M&A deal value in 2017, surpassing the previous record of USD67 billion established in 20152.
M&A activity represents opportunity for the business as a whole, as well as treasury. In the short term it causes an increase in workload for corporate treasury. In some cases, literally hundreds of bank accounts have to be opened and closed, data from ERP and treasury systems have to be consolidated/normalised, numerous authorised signatories have to be changed, liquidity structures need to be revised, all in a short time scale. However, a successfully managed integration process can also deliver numerous longer term benefits, such as streamlined processes and an enhanced working capital position.
In common with treasuries in many other sectors, TAL treasuries are typically small teams, yet handle a myriad of tasks. Treasury may have been allocated some extra budget to handle M&A integration, but treasury personnel usually have to on board/dispose of an acquisition/disposal in addition to their existing day to day workload.
M&A activity: reducing the workload
This is a scenario where the right bank can have a large beneficial impact by assuming some of the workload. A suitable bank for this situation will have dedicated teams capable of working up and implementing detailed project plans, while being able to minimise any business disruption during the transition. They should also be able to accommodate the globally diverse nature of the TAL sector in the context of technology migration. This involves providing in-country local language specialists who are formally qualified in major ERP and treasury systems and SWIFT, as well as having experience in migrating legacy technology.
The wide geographical footprint of many TAL M&A deals today also makes the breadth and depth of a bank’s network a key success factor. An appreciable proportion of TAL M&A activity is taking place in jurisdictions that may be unfamiliar to the acquirer and this trend is likely to continue given current macroeconomic factors (see “The economic and political environment: new opportunities” below). Therefore, TAL treasuries may find that they need to integrate assets in unfamiliar locations in remote time zones. This is considerably easier to do if supported by a bank with the necessary network footprint and global co-ordination skills to support this type of remote integration. Better still, if the bank can focus all this expertise down to a single point of contact in the same location as the treasury, then the treasury team will not have to waste valuable time calling bank offices in remote locations to check/chase progress.
A final important element in the M&A puzzle for treasury is time, or rather the lack of it. Acquisitions are often funded by capital markets or bridging finance, which makes it imperative to release as much internal liquidity as possible as quickly as possible from a new acquisition in order to minimise funding costs. A bank with a strong intercompany loan management solution can materially assist here, because this will streamline the incorporation of new entities and save time, as well as reducing the risk of accidentally falling foul of thin capitalisation rules.
Another area where a bank can help in meeting tight timelines is with the quality of its internal co-ordination. This especially pertinent if the same bank is providing funding and/or advisory for an M&A deal3. If this is the case, much time can be saved by a well organised internal handover, since a faster start can be made on integration planning, thereby also reducing the time required to access internal liquidity from the acquired entity.
Costs, cash and liquidity
While the impact of increasing M&A activity affects all three TAL sub-sectors to a similar extent, there are other issues that affect some more than others. Costs and cash availability are generic themes for treasurers in all business sectors, but at present they are particularly germane for the transport sector. Despite lower oil prices, industry overcapacity is still squeezing profitability, so the pressure is on to cut costs across the board, including with financial processes. The good news is that with the right banking partner, this is relatively easy to achieve.
For example, the transport sector has historically tended to make extensive use of international (and costly) wire payments. A growing number of transport treasuries are looking to reduce this cost and increase efficiency by asking their banks for better alternatives. A bank with a sufficiently extensive network and local clearing memberships can deliver this by receiving a single payment file from the client which is then automatically split by country. Then each set of payments for each country is routed internally within the bank to the appropriate local in-country office, where they are executed as low cost local payments. The irony here is that a growing number of countries are implementing low cost immediate payment systems, so the speed of payment may actually be as fast as a conventional wire payment, while costing perhaps only a sixth of the price or less.
The TAL sector – but especially the transport sub-sector – has become increasingly focused on cash. Many transport companies previously took a fairly relaxed view of cash positioning, with reporting conducted perhaps monthly. As cash has become tighter, this has changed, so that it is commonplace for these companies to report cash weekly or even daily. This has in turn driven increasing focus on real-time treasury and the technology required delivering that.
At first glance this doesn’t appear easy, because with margins tight, obtaining investment for new treasury technology isn’t straightforward. However, with ERP and treasury management systems now available on software as a service basis, major capital investment is no longer necessary. Some treasuries are leveraging this new form of software delivery, but there still remains the task of implementing the new technology so that corporate cash globally is immediately visible centrally. The good news is that this is an area where a bank with the right network and technical expertise can make a considerable difference by helping to pull together all the necessary connectivity and information.
Transport companies tend to have a different approach to liquidity management from aviation and logistics companies. While the latter two sub-sectors are inclined to have relatively tight centralised control of corporate liquidity, transport companies have often been content to grant their local operations considerable autonomy with their liquidity. It
may be that this variation is due to differences in ownership structure: while major logistics and aviation companies are usually publicly listed and so subject to extensive scrutiny, this is less true of even large transport companies, which are often privately owned.
3 Subject to appropriate observance of Chinese walls and related governance procedures