Published: October 01, 2012
MWV global operations are supported by three treasury hubs located in the United States, Brazil and more recently, Switzerland. Initially, the European treasury operation was a relatively small business function, as most treasury activities were managed from the United States. In 2008, the company made the decision to optimise cash management and placed a European Treasury Director in Switzerland. This article explores the background of the cash management optimisation project, the achievements so far, and plans for the future.
Although MWV had mature cash management processes in Brazil and the United States, there were limited streamlined or centralised activities in the European treasury location. Cash was managed locally, with over 130 bank accounts with 31 banks. Account balances were obtained through 19 various electronic banking systems, recorded by the business unit financial controllers and reported to treasury who would consolidate pan-European information into a global cash position report. The process often took several days with considerable opportunity for errors or omissions.
At that time, many activities were conducted manually in the European treasury, which was labour-intensive. For example, we had a significant number of intercompany loans in place to fund both working capital and long term investment, which took substantial effort to manage.
MWV recognised that a fragmented cash management structure compromised our objective to demonstrate industry best practices in everything that we do. Our fragmented cash management structure limited our ability to leverage economies of scale with key banking partners, resulting in additional cost, and to achieve visibility and control over cash balances and group liquidity, resulting in higher borrowing costs.
The 2007-8 financial crises also emphasised the importance of managing counterparty risk proactively. With large balances typically held on local current accounts at any one time, we were subject to both opportunity cost and counterparty risk. We therefore identified the following objectives:
In addition to optimising our European cash management, we had a series of parallel projects under way. Although these projects placed additional strain on our internal resources, they were also complementary and increased our incentive to enhance our cash management. For example, we have established a European Headquarters (EHQ) to improve business processes, work more effectively across all of our businesses and, as a result, make better and timelier decisions for MWV, our customers and our shareholders. While the EHQ model positions our business for more effective regional management, it also represented additional complexity from a cash management perspective with the substantial increase in the number of legal entities created and therefore bank accounts required in each country. This greatly added to the business case for rationalising our banking partners and automating our cash management processes.[[[PAGE]]]
We made the decision to replace our existing banking partners with a single house bank with whom we would work in as many countries as possible. After reviewing our existing cash management banks, we eliminated those that were not part of our loan syndicate, which amounted to around 80% of our banks. We reviewed our remaining banks against criteria such as pan-European coverage, solution quality and breadth, technology innovation and the quality of the relationship. In all of these areas, ING was a clear frontrunner, and we were delighted to award ING with our European cash management business. Of particular note, ING’s geographic footprint exactly matched that of our business, with local support in each country, which was not matched by other potential banks. Furthermore, we wanted to leverage the liquidity management solutions provided by ING’s subsidiary BMG (Bank Mendes Gans) as described later. We recognised that the combination of ING and BMG would be a closely integrated and streamlined solution, which was critical to our objectives.
We are now well under way in migrating our existing European accounts with legacy banks to ING, a process that has been greatly facilitated by our contacts at ING. Opening new accounts in around 15 countries can be very labour-intensive considering the diverse compliance and ‘know your customer’ (KYC) requirements that exist across Europe. ING has been very proactive in accelerating and simplifying the account opening process, and shortening communication lines by providing a single point of contact.
Migrating our bank accounts to ING has also enabled us to rationalise our electronic banking systems and become more bank-agnostic. We are now in a far better position to achieve economies of scale, reduce technology costs and associated risks, streamline communication, and increase visibility and control over our European cash.
One of the reasons we selected ING as our European partner bank was the liquidity management solutions provided by ING’s subsidiary, BMG. In particular, BMG’s multicurrency cash pool solution would enable us to centralise and optimise liquidity in Europe and beyond, without impacting our business units’ ability to manage their financial affairs. Over the past two years, 85% of pan-European entities have opened mirror accounts at BMG. Local accounts held with ING are zero-balanced each day to/from their corresponding mirror accounts with BMG. An umbrella credit facility provides daylight credit to help facilitate the sweeps. Subsidiaries therefore no longer need to make their own funding decisions and the process of intercompany lending was consequently reduced.
Rationalising our bank accounts with a single cash management provider is proving extremely positive for MWV. We have a very strong relationship with ING and by leveraging their skills, solutions and technology, we have successfully achieved our initial objectives. Although some of our business unit financial controllers were apprehensive about changing banks, due to established local banking relationships, ING’s combination of pan-European solutions and technology, combined with local support was instrumental in encouraging support and enthusiasm amongst business units. Consequently, we enjoy excellent collaboration and teamwork both at treasury and business unit level with our peers at ING. In addition, we are making it easier for business units by setting up central power of attorney as back-up for our business unit finance teams. This means that we can authorise transactions on ING accounts where necessary, making it easier for business units to observe cut-off times and enabling us to transfer funds when required.[[[PAGE]]]
The process of centralising liquidity in Europe is also now far more efficient and less labour intensive, as we have immediate access to reliable cash information across our European business. We have reduced the amount of cash held in bank accounts by about 85% and we anticipate further increasing this percentage in the coming months. This cash is now available to be used more productively. We can also manage cash responsibly by mitigating our counterparty risk whilst maintaining appropriate access to liquidity. We achieve this by using a semi-automated sweep of surplus cash from BMG to a government liquidity fund denominated in USD. We have reduced the number of intercompany loans that we manage by 75%, the majority of which are now long-term, as opposed to short-term working capital loans. The former are straightforward to administer given one year tenors. By reducing the number of intercompany loans we maintain, we have also been able to minimise the volume of FX swaps that we transact, which cuts back substantially on administration requirements as well as the associated costs.
In the future, we anticipate using a simple treasury management system (TMS) that will increase automation and the quality of reporting that we provide. We are also enhancing our processes in other ways. For example, we currently operate an intercompany netting process using a third party tool, with a US-based netting centre which we intend to rationalise in the future. We are considering the BMG netting module to achieve this, which will eliminate all cross-border netting related transfers and the associated costs. While today a netting settlement between Germany and Spain requires transfers between Germany and the UK, then UK and Spain, the new solution will require a simple book transfer between respective cash pool accounts with no liquidity effect on the pool balance. There are also further improvements that we intend to make in areas such as FX risk management, which will again leverage the new cash management infrastructure that we have developed.
Working with the combination of ING for pan-European cash management and BMG for liquidity management continues to add substantial value to our business; we now have a more efficient, automated and robust cash and liquidity infrastructure in Europe. In addition to the value of implementing each solution individually, there are considerable advantages to working with ING and BMG together, as we benefit from a cohesive, integrated approach to cash and liquidity management, and the communication process is streamlined. Furthermore we have achieved considerable cost-effectiveness as well as more strategic benefits to an optimised cash and liquidity management structure. We now have about 85% of our regional cash balances included in the cash pool, and the same percentage of European countries now bank with ING, and we are continuing to expand our relationship with ING both functionally and geographically. Based on the success of our European cash management project, we also anticipate extending the scope of our liquidity and risk management strategy further to include countries in Asia.
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