Optimising Cash and Liquidity Management in Europe

Published: August 01, 2013

Optimising Cash and Liquidity Management in Europe
Terry Haynes
Director of Treasury, Linamar Corporation

by Terry Haynes, Director of Treasury, Linamar Corporation

Canadian-headquartered component manufacturer Linamar has grown substantially in recent years, extending its business operations from North America into Europe and Asia. Linamar has a publicly stated objective to become a $10bn company through double digit annual sales growth by continuing to build on its significant growth over recent years. This expansion has led to greater complexity in its cash and treasury management operations. Consequently Linamar’s Group Treasury, based in Canada, is taking a three-tiered approach to enhancing visibility and control over cash, maximising liquidity and optimising investment decision.

Treasury organisation

Although Linamar is not a large corporation compared with many of those featured in the treasury media, the complexity of our cash, treasury and risk management requirements is comparable. Furthermore, smaller organisations are often challenged even further in that they lack the access to resources and technology that larger corporations may enjoy.

Treasury management at Linamar is conducted at a group level, based at our Canadian headquarters. Most of our corporate focus has traditionally been in North America, with 30 of our 40 manufacturing plants located in US, Canada and Mexico. In addition, however, we now have substantial and growing operations in Europe (including France, Germany and Hungary) and in China. In the latter case, local finance managers manage the associated treasury management implications, such as bank account management. In Europe, the scale of our cash management requirements has now reached the stage that we needed to centralise and optimise our liquidity.

We have a three-tiered approach to our cash and liquidity management:

The first step is to ensure that our transaction banking is as efficient as possible, ideally through a single banking partner in each region. The aim of this is to improve visibility over cash through a single platform, leverage economies of scale and reduce fees.

The second step is to optimise liquidity by centralising cash, whilst taking into account the tax and legal implications in each country.

The final step, having centralised funds, is to align our investment strategy with our corporate objectives, namely to preserve principal and ensure access to liquidity so that we can leverage funds across the group.

Figure 1

Addressing transaction banking and liquidity in Europe

In Europe, we had a fragmented approach to transaction banking and liquidity management, with multiple banking relationships. This made it difficult to achieve visibility over funds or mobilise cash effectively, and resulted in higher costs. We therefore made the decision to address the first two steps of our liquidity management approach concurrently by appointing a pan-European transaction banking partner with whom we would set up a cash pool. We had a variety of aims:

Firstly, we wanted to make better use of our cash in Europe, leveraging positive cash balances in better-established businesses to fund newer operations. Secondly, we sought to establish a cash management framework into which new entities, such as acquired businesses, could easily be integrated in the future. Thirdly, we aimed to repatriate surplus cash more easily to reduce the need for borrowing at a group level. Finally, by achieving greater economies of scale with one cash management bank, we would be able to both enhance visibility and control over cash whilst reducing our transaction costs.[[[PAGE]]]

Appointing a pan-European bank

Having made this decision, we reviewed the geographic reach and cash management capabilities of each of the nine banks that make up our credit syndicate. Of these, only two were global banks, one of which was BNP Paribas. Following a detailed review, we appointed them as our pan-European cash management bank. In addition to being one of our financing banks, there were a variety of reasons for this appointment. For example, BNP Paribas’ geographic footprint matched our own, so we could work with the bank across our European businesses. In addition, we were impressed by the quality of the bank’s solutions and services.

Project progress and success to date

We are now in the process of opening accounts and completing documentation, which we expect to complete by early July. As the project involves replacing local bank relationships, and sweeping cash out of business unit accounts, it was important that local finance teams were positive about the change. We explained the rationale behind the decision to appoint BNP Paribas and implement a pan-European cash pool for which we received broad support. We also took the time to ask each business unit to detail any particular concerns or local challenges and made sure that these were addressed as part of the project planning. This support was further cemented by local workshops that were conducted by the in-country teams from BNP Paribas. This was very valuable in building local relationships and ensuring that the needs of each business unit were incorporated into the project.

We are implementing BNP Paribas’ electronic banking solution, Connexis, which provides real-time balance and transaction reporting across all of our accounts. Our users in Canada have administration rights and visibility across all accounts, while our local users’ access rights enable visibility and control over the accounts relevant to their business, so the full spectrum of needs are supported.

Project context and future plans

Once we have completed our European cash pool, we will be able to move to the final stage of optimising investments, and also focus on other treasury priorities within the Linamar group. For example, we have two plants in China, one of which is fully operational while the other is still at an earlier stage. As yet, therefore, although we do not have significant scale in the country, this is changing rapidly. The cash and treasury landscape in China is quite different to other parts of the world, so we may need to adapt our approach. Over time, our objective is to increase our financial efficiency and leverage cash surpluses in more mature operations in China to finance the start-up of new plants. To do this, we may need to consider entrust loan structures or similar techniques, but the pace of deregulation is very rapid, which may facilitate an alternative solution in the future.

Another key treasury priority is to find ways to reduce our financing costs. We recently renewed our five-year revolving credit facility but we are also planning to implement alternative forms of capital raising, such as receivables securitisation. In addition, as our international reach and therefore currency risk expands, we are enhancing our information flows and policies for managing FX risk.

Treasury has an important role to play in achieving our growth ambitions by optimising both operational and financial efficiency. Rationalising our European bank relationships with BNP Paribas and optimising liquidity management in Europe is a major step forward in achieving this. As our business strategy develops, both within North America and internationally, we will continue to adapt our treasury priorities to meet our evolving needs and realise our ambitions.

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Article Last Updated: May 07, 2024

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