Landing a Cash Pool Solution at Eagle Ottawa

by Bob Carlo, Executive Vice President and Chief Financial Officer, Eagle Ottawa, LLC

The American company Eagle Ottawa, LLC is the world’s largest supplier of premium leather exclusively for the automotive industry. Approximately five years ago, as automotive manufacturing increasingly moved to Eastern Europe, Eagle Ottawa recognised that the company needed to have a more competitive manufacturing presence that was closer to its customers’ manufacturing plants. Consequently, the company made the decision to establish an operation in Hungary and to relocate their operations from the UK. Initially, the Hungarian operation was of a relatively small scale; however, the facility has grown rapidly and has now become the hub of European production.

Business challenges

Building substantial operations in Hungary brought a variety of opportunities, as well as a range of challenges that had to be overcome. Although Hungary is a member of the European Union, it is not EUR-based, which therefore posed issues in cash, treasury and FX management. In addition to the Hungarian operation, Eagle Ottawa also maintains sales offices in the UK and Germany. This footprint created exposures in HUF, GBP and EUR. In addition, a change in raw material sourcing further complicated the situation by adding exposures to USD.

Today Hungary generates revenues in EUR and incurs manufacturing costs in HUF. The operation also needed to fund sales offices in EUR and GBP, as well as paying for raw materials in USD. The company approached K&H Bank with a view towards implementing a cash pool solution across all four currencies to support its business in Europe.

Appointing a solution partner

There were a variety of reasons for making the decision to work with K&H Bank. US companies would ordinarily choose one of its US banking partners; however, there is a lack of presence in Hungary amongst the US banks, creating a need to look for a local banking partner. K&H is the largest bank in Hungary, which provided the confidence in terms of counterparty risk, particularly as the bank is part of the KBC group. Eagle Ottawa has had a relationship with the bank since it first set up an operation in Hungary. Although this relationship started on a small scale it has grown considerably as the business has expanded. K&H understands the business well and has always proved responsive and reliable.

Cash pooling in practice

K&H Bank recognised the business challenges and by working with other parts of the KBC group, the bank set up a cash pooling structure that supported the requirements (figure 1). This comprises domestic zero-balancing cash pools in each currency, and a EUR cross-border pool, with header accounts in Denmark where our European financial holding company is located. Each currency header account is then included in an aggregate balance. [[[PAGE]]]

Project outcomes

Having implemented the pool, Eagle Ottawa was able to view its European cash position from US headquarters. This marked the first time since the company was founded that this capability existed. To do this, the company utilised KBC’s W1se system, which was also used by the Hungarian subsidiary to view its own accounts. Some of the benefits achieved include:

• Implementing a single tool, that allows Eagle Ottawa to view accounts at KBC group banks, has added the ability to manage cash more effectively, and specifically, we have reduced our excess cash position by more than $10m.
• Cash located outside of the United States is considered ‘restricted’ due to difficulties in repatriating the cash back to headquarters. With the new cash pool Eagle Ottawa is now able to transfer surplus balances in the pool easily, therefore enabling cash to be managed on a global as opposed to regional basis.
• With improved visibility over foreign exchange exposures, the company is able to hedge more effectively based on more informed decision-making.
• Finally, in the past, the company had to make cash balances available before goods were landed in order to pay taxes and import duties. After initiating bank guarantees the company now can pay duties with normal payment terms, freeing up $2-3m for investment.

Looking ahead, we are attempting to further optimise our cash management in Europe, potentially operating on an imprest basis, which will involve establishing some local borrowing facilities.

Working with K&H Bank and other parts of the KBC Group has proved very successful and we look forward to continuing our partnership in the future.