Global Cash Management: the Challenges of Multicurrency Operations

By Michaela Klosterman, Treasury Manager, Adient plc

One of the S&P 500 companies proudly presented its new cash pooling structure at the treasurer’s conference in Miami in 2012. At the end of the presentation, the speaker added: “We have a USD cash pool, but we still don’t know how to deal with multiple currencies we use across the globe.”  My boss and I looked at each other and said simultaneously: “Should we tell them about BMG?” Only then we realised how sophisticated our cash management structure at Johnson Controls Inc. was.

Bank accounts as building blocks

Do you remember when you were a child and creatively built structures from Lego, with multilevels and different colours? Well, besides the fancy words that people outside the  finance world don’t understand, global cash management isn’t very different. 

So let’s cover the basic building blocks first.  Effective cash management consists of liquidity management and efficient use of cash. Liquidity management means that the company maintains sufficient funds, at the right time, place and in the right currency to be able to pay its obligations.  Efficient use of cash means minimising the cost of short-term debt and maximising  the return on short-term investments. 

 Cash pooling is a cash management technique. It allows companies to combine their credit and debit positions in various accounts into one account. This is done automatically by a bank. 

Local and global cash management

An organisation that has business units in one country only or in a few countries in the same region and using the same currency, can use a fairly simple structure for cash optimisation. 

Most corporate banks offer today a zero balance cash pooling. In a ZBA structure the operational bank accounts of business units sweep their balances at the end of the day to the master account, or in the case of a negative balance they receive funds from the top master account.   This can be done within one country or even across borders within the same bank.  Some banks also offer the option to move the funds on the master account to a third-party bank automatically, through the use of SWIFT messages. 

The master account is generally connected to an overdraft line, to facilitate the liquidity function of cash management. This structure together with cash forecasting, is often sufficient for smaller local companies, operating in one currency. 

But what about a global company like Johnson Controls Inc, registered on the New York Stock Exchange, operating in several time zones, five continents and using 30 plus currencies? 

From Johnson Controls to Adient

Johnson Controls Inc., a corporation with 37bn  USD net annual income, recently completed a spin-off of its automotive division.  Adient plc came into existence  in October 2016, with a 17bn USD turnover, and is the largest global player in automotive seating. 

Both Johnson Controls Inc. and Adient plchave a single currency cash pool in almost every country where they are present and where cash pooling  is allowed under local regulations. The cash of Adient plc is managed from three treasury centres: Asia – Hong Kong, Europe – Belgium and the Americas region out of Mexico. 

The company has implemented a global e-banking platform TRAX, a SWIFT-based solution provided by our partner FIS (formerly SunGard). We receive daily statements to TRAX platform, from all the banks globally, which helps the regional cash managers quickly asses the cash position in each country. Based on the cash position on the master accounts,  a decision is made as to whether the country needs funding or has excess cash that can serve the group’s needs.  

 

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Fig 1 – A global cash pool

 

Global cash concentration

Here our strategic banking partner comes into play – Bank Mendes Gans (BMG). BMG is based in Netherlands and specialises in multicurrency notional pooling and netting services. 

The difference between a zero balance cash pool and a notional cash pool is that in a ZBA structure the cash physically moves to the master account, while in a notional  pool the amounts in the operational accounts are virtually combined together without real cash movement.  

The speciality of a multicurrency notional pool is that the amounts in various currencies are first virtually converted to a main currency (for example USD) and then virtually combined into one amount. To avoid any doubt, there no real foreign exchange transaction takes place. The conversion only happens ‘as if’, using the current market exchange rates. 

The cash manager transfers the balance of each country to BMG or obtains funding from BMG to the local country’s master account.  We use the TRAX platform to execute same-time urgent wires in MT101 (SWIFT) format.  As the business day starts in Asia, this region completes all its transfers to BMG. Then comes Europe and the same exercise is carried out for the EMEA region. Finally the Americas complete their funding. The question at the end of the day is what to do with the global balance in BMG?

Funding the global cash pool

At the end of the day, the global virtual USD position of the BMG cash pool is either positive or negative. If it is positive, the company can pay off short-term debts and if more funds are still available  they can be invested according to the approved risk strategy of the company. However, if the position is negative it needs to be funded on the same-day basis to finish at zero. The Americas region is responsible for funding  the overall cash position. 

While everything described so far is more or less the same for both Johnson Controls Inc. and Adient plc, at this juncture their paths diverge. Johnson Controls Inc. is according to the rating an investment grade company and as such has access to financing through the commercial paper (CP) market. The newly formed Adient plc is rated BB+, which is standard in the automotive industry, but as we are slightly below investment grade we don’t have access to the CP market. 

CP as a source of funding

Commercial paper is an unsecured, short-term loan issued by a corporation. It is bought by investors through a bank - a dealer who connects the two sides, for a fee. Commercial paper can be issued for as short a period as overnight, or for several months if there is enough demand and offer in the market. The benefit of overnight O/N funding is the ability to repay the debt on a daily basis as soon as cash is collected globally, which is in line with  the  cash management goal of  using cash efficiently.

 In the US market, the cost of the O/N funding has in recent years around been 0.30% or even close to zero. This is not a LIBOR plus margin type of rate, but an all-in rate. As such it is much cheaper than the normal overdraft rates offered by banks. 

CP programmes are available in Asia and  Europe as well as in the US. About 40% of investors in CP are asset managers, about 20% are   insurance companies and the rest are hedge funds, corporations, banks and governments.

Because the investment in CP is not secured, it is available only to top-rated corporations. For the investors’ comfort, the programme needs to be backed by a syndicated revolving line. Johnson Controls Inc. never had to draw on this line and was always able to pays its debt on time.  

New challenges for Adient

For years, we were used to the cheap source of funding from CP.  However, as  this programme is currently not available to us,  we have new challenges to manage the cash even more efficiently, improve cash forecasting and look for other sources of short-term funding.  We look forward to the time when we will be able to improve our rating to be able tap back into this convenient and cheap source of funding.   

 

Michaela Klosterman Treasury Manager, Adient plc  Michaela Klosterman is a Treasury Manager for Adient plc, an automotive spin-off from Johnson Controls Inc. Michaela joined JCI Treasury in 2011 in the headquarters located in Milwaukee, US and three years later moved to the regional headquarters in Belgium.  She previously gained experience as a relationship manager in the corporate banking at OTP Bank Slovakia and VUB Bank Slovakia. She has a Master of Science degree in Finance from the University of Economics in Bratislava, Slovakia.   Michaela  has a Master Practitioner degree from  the NLP University of California and  occasionally organises public workshops in NLP (Neuro Linguistic Programming).