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.[[[PAGE]]]

Composite cash pooling

In order to achieve our cash centralisation needs whilst recognising the needs of the local businesses, we opted to implement notional pooling, except in France, where we use physical pooling.  It was important to us that we continued to work with our local relationship banks, as we felt it would be detrimental to disrupt these during the crisis. Therefore, notional pooling allowed us to balance our need for cash flow efficiency with our need to maintain positive relationships with our banks on whom we were reliant for credit.From a communication standpoint, we considered using SWIFT as a single channel for exchanging information with our banks, but decided it was too heavyweight a solution for our needs. As an alternative, we use ISABEL, which enables us to access MT 940 (bank statements) across Europe. This has proved an effective solution although it cannot be rolled out globally; as the majority of the Etex group is based in Europe, however, it meets our current needs. 

Our European cash centralisation project comprised five cash pools:

• UK - Full notional pool (see figure 1) including a local credit line;
• France - physical (zero balancing) cash pool with a local credit line (see figure 1);
• Luxembourg - notional cash pool linked to the centre;
• Netherlands – full notional cash pools linked to the centre;
• Belgium, Germany and Poland - notional, multi-currency interest enhancement cash pool which operates cross-border.

The latter was the most significant undertaking, as these were the most important countries from a cash flow perspective, and also amongst the most complex, although we were able to consolidate all our banking information through ISABEL. We could not achieve full capital offset on a cross-border basis, so interest enhancement proved more flexible, although it created difficulties with credit lines. As the capital is not fully offset, there is pressure on credit lines, particularly if a business unit uses a lot of cash. There is also the issue of credit risk to the bank. While this would not have been considered a major issue in the past, we reviewed this opinion in the light of the crisis. Ultimately, we decided that the risk was acceptable, but we aim to minimise pool balances as far as possible.

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Overcoming challenges

Inevitably a project of this scale and complexity brought some challenges. While we were ultimately successful in educating the local business units and obtaining their buy-in, this took time and energy to achieve. It also took time to obtain balance reporting across our accounts, but again, we have now been successful in this. We found that the success of a cash pooling arrangement is largely dependent on the partner bank’s geographic coverage: if the bank does not have coverage in the relevant countries, it may be necessary to adopt an alternative form of pooling. We use KBC as our primary bank, which is well-established in central Europe, complementing our cash management needs. Finally, like most treasuries, we have a small team, and it was difficult to manage the cash centralisation project in addition to conducting our normal day-to-day activities. Consequently, progress was inevitably slower than we had originally hoped.

Project outcomes

The project has achieved considerable success so far. We have pooled large cash balances across Europe at an acceptable cost, with notional pooling proving an economic way of achieving cash centralisation. It was important to ensure that group cash flow controls were not adversely impacted. Before implementing the project, business units operated in a largely independent way, and established their own cash flow controls. By centralising cash, this local control on expenditure was effectively removed, as business units have the potential ability to access larger cash amounts. 

To address this, we needed to put in place additional reporting from our ERP to enable us to see our cash positions and financial obligations across the business. While we use cash flow forecasting to a limited degree, we focus on managing our daily cash position using our treasury management system (TMS) including establishing an investment maturity ladder and use of uncommitted lines for daily funding, as opposed to relying on longer-term cash forecasting.

Future potentialIn the future, migration to SEPA is likely to encourage greater cash concentration; however, this needs to be balanced with the need to maintain a breadth of banking relationships. There is also the unknown factor of how banking business will be compensated if cross-border payment costs fall. We are likely to consider our banking relationships in the Far East as the business becomes more global in its reach, including the potential for a global approach to cash pooling with Bank Mendesgans, which would enable us to extend our cash pool across the rest of Europe and include balances from accounts in the Far East and other regions.