Strategies in a New Financial Climate

by Marcel Kellerhals, Group Treasurer, Panalpina

This article is based on a presentation that Marcel Kellerhals delivered at the BNP Paribas Cash Management University in October 2009.

Our treasury function is centred on three key areas: cash management, corporate finance and risk management. In each one of these, we have set long-term strategic objectives. Although Panalpina has a largely centralised business model, we have a separate accounts receivable function, with receivables representing the largest asset on our balance sheet.

Higher levels of FX volatility also created opportunities, particularly for a firm with expertise in FX management.

We have a global cash management model, organised regionally. In Europe, we have implemented a payments factory and centralised cash flow using physical cash pooling techniques. In Asia Pacific, we centralise our cash notionally, although not for all countries at this stage. We are now seeking to bring together cash management for North America and Latin America, although this is not easy to achieve in practice, which will also include cash centralisation. In Africa and the Middle East, it is also difficult to organise cash on a regional basis, so we are currently implementing solutions in the Black and Caspian Sea countries, and we are in the process of issuing or reviewing requests for proposal (RFP) for cash management in Sub-Saharan Africa and the Arabian belt.

In the eye of the storm

Much has been said during the crisis about the need to adopt a ‘back to basics’ approach in treasury, but this has different implications for each company. At Panalpina, we adjusted our treasury approach in the light of the market trends that we witnessed, as outlined below.

Firstly, looking at FX, we saw higher levels of volatility in the FX markets, and a flight to CHF. This resulted in an overall increase in the number of FX transactions we undertook. To manage our risk more effectively, we focused more on monitoring exposures at a local level, and boosted our hedging levels. Higher levels of FX volatility also created opportunities, particularly for a firm with expertise in FX management, so we were able to take positions and sell options. In many cases, we make the decision to leave our translation risk unhedged but instead put in place overlay hedges at group level.

In terms of interest rate management, we have been fortunate in that our low debt levels limit our exposure to liquidity and counterparty risk. Consequently, our primary exposure to interest rate risk is in the area of investments. During the crisis, we reviewed our investment policy on authorised counterparties and instrument tenors. In consequence, we made the decision to invest cash for a shorter term, and focused more on credit default swap (CDS) prices as a measure of counterparty risk.

Another risk to which Panalpina is exposed is the interest rate differential between CHF and EUR/USD. Although the business is denominated in CHF, many of our intercompany loans are in EUR or USD, which creates a major exposure which we need to hedge. To create a known position, we made the decision to lock in rates for the next two to five years.

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‘Back to basics’ in practice

For Panalpina, a ‘back to basics’ approach has meant focusing on three key areas:

Counterparty risk
As well as monitoring CDS prices as a means of assessing our financial counterparties, we have reviewed our counterparty exposure in a variety of ways. We have reviewed the level and maturity of cash held in cash instruments such as deposits, and similarly, monitored the value and tenor of open FX contracts. Finally, we have re-evaluated counterparty credit limits.

Financial instruments
Like many companies, we have moved away from complex financial products that may be difficult to explain to the board or where the full risk profile may be opaque. Instead, we have preferred to invest in simpler instruments such as deposits and short-dated bonds.

Own financials
With a 30% fall in operating volume during the crisis, we needed to re-evaluate our financial activities to ensure that we were making the best use of cash. For example, while it may generally appear logical to hedge currency risk, we needed to review whether it was cost-effective to do so for our smaller currencies. We also looked at how to restructure local balance sheets to reduce third party interest expense, and where we could reduce bank charges. This included both negotiating with our banks, but also reviewing more economic payment methods such as SEPA payments.

Taking action

Having reviewed our financial activities and identified opportunities for improvement, we took a series of actions. Our immediate focus was to:

• Adjust cash investment levels, in terms of both counterparty and tenor, in line with our revised investment policy;

• Reconfirm and increase credit lines where possible, to ensure ongoing access and security of liquidity;

• Implement a back-up solution for our payment factory in case our bank’s ability to provide payment services was restricted;

• Increase the level of reporting to the CFO to provide greater visibility to the board;

• Reduce our reliance on our primary banking partners by spreading our banking business across several core banks.

We also identified some longer-term actions which would help in ensuring a sustainable treasury strategy:

• Work towards bank-independence for our payments factory by implementing SWIFT Corporate Access;

• Develop a daily overview of our local cash positions globally to ensure greater visibility and control over cash. This is difficult to achieve today, particularly across balances in countries such as China;

• Produce rolling cash flow forecasts for each currency to anticipate our future liquidity requirements more accurately.

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Cash management vision

In addition to taking individual actions in response to the crisis, taking stock of our treasury activities has enabled us to create a new cash management vision for the future. We anticipate implementing a single global treasury management system to consolidate our transactions, analysis and reporting on a single platform, which will then be integrated with our ERP. This will bring benefits both to group treasury and to our local treasurers, who currently have fragmented IT solutions based on a combination of spreadsheets and bank workstations.

A second element of our cash management vision is to implement an in-house bank with a treasury vehicle. This will probably be located in the Netherlands or a similarly advantageous jurisdiction. At present, the in-house bank is owned by the Swiss holding company, which creates some limitations in that an in-house bank with over 20 participants is liable to withholding tax on intercompany transactions. Furthermore, from a risk perspective, it is not the purpose of the holding company to be transacting FX and other financial activities.

Although we have already made significant progress towards cash concentration, we intend to implement global cash pools per currency located in the respective clearing country in order to be as efficient as possible as well as facilitating our objective to achieve greater visibility and control over cash. Linked to this, we intend to expand our payment factory model, within a shared services environment, to incorporate both global payments and collections.

As with every other corporate treasury, the crisis has undoubtedly created challenges and necessitated change. Although we took rapid action to protect the company’s financial position and mitigate our risk during the crisis, it was important that the plans we put in place were sustainable; i.e., they both helped deal with the crisis and contributed to a robust, long-term treasury strategy.