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Cash Management Structures: Why in-House Banking and Netting are a Must for Today's Global Treasury

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In-house banking (IHB) programs are growing in popularity as a means to more easily move funds and reduce exposures. During our webinar we will discuss how your organization can gain visibility into the company’s net exposures by combining cash pool activity, intercompany invoices and structured lending agreements. We will also go over the internal and natural hedges that are more easily identified through the use of an IHB, leading to more effective management of the net exposures at an enterprise level as opposed to managing regionally.

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Cash Management Structures: Why in-House Banking and Netting are a Must for Today's Global Treasury

  1. 1. January 5, 2017 Cash Management Structures: Why In-House Banking and Netting Are a Must for Today's Global Treasury
  2. 2. © 2016 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 2 Today’s Presenters Jason Dobbs Manager Greg Person, CTP Vice President, Global Presales
  3. 3. © 2016 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 3 Discussion Framework Goals of IHB Structures Explore IHB Elements Internal Collaboration & Design Intercomany Netting Considerations & Benefits Role of Technology
  4. 4. © 2016 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 4  Do I have visibility into my corporate liquidity, and can I access it?  Do my global subsidiaries have the liquidity they need to be successful?  Do specific subsidiaries hold too much local cash, and what is the associated cost and risk?  Are my intercompany invoices settled in accordance with internal payment terms?  Are my intercompany lending agreements in compliance with US and local tax / legal requirements?  Do I have the technology infrastructure to support the business and balance my employees’ time? How do I answer….
  5. 5. Goals of In-house Bank Structure
  6. 6. © 2016 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 6 Control & Access - Cash –Aggregate funds –Increase investment & reduce external borrowings Efficiency – Payments – Simplify settlements – Centralize lending Enhance – Working Capital Management –Efficient use of auxiliary currencies –Natural hedging created Typical Goals of IHB Structures
  7. 7. © 2016 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 7 IHB – Structure and Progression
  8. 8. In-house Banking Elements From Sweeps to FX
  9. 9. © 2016 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 9 FinCo as Sweep Aggregator Sub Account Functions  Receive funds  Process payments  May aggregate cash from other subs Sub Account Functions  Cross Border to FinCo or Pool  Bank or TMS initiated  Surplus – send funds to FinCo EOD  Cash need – Fund overdraft to target limit or zero (requires credit agreement)
  10. 10. © 2016 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 10 Pooling
  11. 11. © 2016 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 11 Sweep to IHB Notional Account
  12. 12. © 2016 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 12  Aggregated funds increase short term investable cash  Streamlined portfolio management  Benefit to banking relationship models Investing
  13. 13. © 2016 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 13  Centralization of Interco financing to FinCo(s)  “Cash” held at FinCo for settlements or repayments  Progression to Hub & Spoke model for Interco agreements Lending
  14. 14. © 2016 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 14  IHB Holds multiple currencies  Book deals to IHB for natural hedging  Easily facilitated for IHB Participants  Non-participant trading? FX Trading
  15. 15. © 2016 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 15  Address Kyriba Singapore liquidity deficit with Kyriba Canada surplus  Reduce SGD external expense, achieve higher consolidated investment balance In-house Bank Liquidity Example Kyriba Finance Co (FinCo IHB Entity) Kyriba Canada Kyriba Singapore External Bank External Bank Deposits USD 50M Sell USD 10M Buy SGD 15M Invests USD 40M Borrows SGD15M (USD 10M)
  16. 16. Internal Collaboration & Design
  17. 17. © 2016 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 17 Accounting – Necessary to develop and manage entries associated with Interco’s to and within FinCo for various activities FinOps – Interco AP/AR integrations for auxiliary systems; build of programs in TMS ERP Team – Additional IHB programs to support TMS processing of funds Corporate & International Tax – Structure and tax regulations; who can and can’t participate; terms and rates (with Treasury) Legal – Drafts of agreements, terms and conditions, and ongoing documentation requirements Banks and BAM team – Changes in account structure, bank sweeps, and credit agreements Treasury – Funding, investing, FX execution (internal & external); monitoring and compliance; technology Key Players
  18. 18. © 2016 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 18 Regulatory Considerations
  19. 19. © 2016 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 19 Final Reg385 (Oct 2016) broadly exempts debt issued by CFCs and foreign corporation Regulation revived scrutiny of intercompany pooling –Documentation –Demand facility agreements –Treasury service agreements –Borrowing terms & interest spreads –Default consequences –Repayments Regulation Section 385
  20. 20. Multi-lateral Netting
  21. 21. © 2016 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 21  Intercompany ‘due to’ and ‘due from’ balances are created through natural course of business  Intercompany balances must be settled in timely fashion in accordance with intercompany payment terms and/or services agreements  Examples of intercompany balances & positions that must be settled: – Trade payables – Cost shares – Compensating adjustments – Service agreements – Intercompany loan, interest – Dividends, capital contributions, etc. Intercompany Balance & Multi-lateral Netting Foundation
  22. 22. © 2016 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 22 Managing Intercompany Settlements without Netting Large payment volumes  Bank transaction fees  Settlement risk  FX payment costs Inefficient Use of Resources  High manual effort to enter and release payments  Time consuming GL posting  Error prone Tax and legal compliance  Intercompany invoices not settled within payment terms  Inadvertent intercompany lending  Deemed dividend / 956 income  FX payment costs  Inefficient GL posting
  23. 23. © 2016 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 23 Multi-lateral Netting Solution  Reduce physical payments, lower bank fees and eliminate settlement risk  Elimination of bank settlements and corresponding settlement risk  Reduce tax treatment risk; avoid US repatriation tax under Section 956  Improve internal and external audit compliance and transparency  Optimize intercompany GL posting and reconciliation  Consolidate and hedge FX exposures  Comply tax and legal requirements Integrated Treasury, Risk, Netting & Payment System
  24. 24. © 2016 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 24  Single legal entity reduces intercompany payments/receipts – Reduce 7 physical transactions to 1 IHB posting  Reduce FX trades across 4 currencies pairs  Consolidate FX position Netting Statement Example Netting Particpant Counterparty Invoice Currency Payable Amount Netting FX Rate Receivable Amount Settlement Currency Netting Settlement ACME-BV ACME-DE EUR 132,804.12 1.05 USD (139,975.54) ACME-BV ACME-UK GBP 980,902.44 1.22 USD (1,196,700.98) ACME-BV ACME-CA CAD 59,924.59 0.74 USD (44,344.20) ACME-BV ACME-CA CAD 0.74 1,248,930.43 USD 924,208.52 ACME-BV ACME-US USD 678,902.39 1.00 USD (678,902.39) ACME-BV ACME-US USD 1.00 138,942.45 USD 138,942.45 ACME-BV ACME-JP JPY 30,241,994.00 117.65 USD (257,050.52) ACME-BV USD (1,253,822.66)
  25. 25. © 2016 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 25 Accounting – Responsible for monitoring, entering and reconciling intercompany balances and payments FinOps & ERP Team – Interco payable integration to netting systems & ERP(s) Corporate & International Tax – Structure and tax regulations; who can and can’t participate in netting program; Legal – Drafts of netting agreements, terms and conditions, and ongoing documentation requirements Treasury – Managing netting cycle, executing settlements (internal and external), FX management and trade execution (internal & external); monitoring and compliance; technology Key Players for Netting
  26. 26. Technology
  27. 27. © 2016 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 27 Simple access for global users (accountants, controllers, etc)  Request funding / submit deposits to IHB  Enter intercompany payables  Access IHB & Netting statements  Manage against KPIs, target balances  Full audit & transparency  FX exposure management  Optimize global liquidity strategies  IHB balance limit compliance Single Global Technology Portal for IHB and Netting
  28. 28. © 2016 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 28  Standardize, simple netting process workflow to promote global adoption  On-demand statements to support month-end close  Historic intercompany reporting (tax inquiries) Single Global Technology Portal for IHB and Netting Entity Act Plan F (U) Acme CA 0.9 0.5 (0.40) Acme UK 1.6 1.0 (0.60) Acme JP 0.8 1.0 0.20 Acme DE 0.5 0.5 - Acme AU 1.1 1.0 (0.10) M ar 15 USD Equiv Cash Balance Scorecard
  29. 29. © 2016 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 29 Summary Treasurers are tasked with ensuring access to adequate liquidity to fund corporate operations, global business units and corporate strategy  Optimal liquidity at appropriate level of risk and cost  Executing corporate capital allocation strategy, share buyback, M&A, debt pay-down In-house Bank as low cost liquidity source  Internal cash is cheapest form of finance  Automation through bank pooling structures  Global deployment involving global entities, currencies and multiple bank relationships
  30. 30. © 2016 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 30 Summary cont’d Multilateral Netting to enhance productivity and controls  Settle intercompany invoices timely and efficiently  Reduce bank fees, FX costs and eliminate settlement risk  Ensure legal and tax compliance  Consolidate FX exposures  Provide transparency and automation to GL application Initial investment and due diligence  Collaboration with treasury, tax, local finance and legal  Loan documentation and arm’s length terms (reg 385)  Optimization through automated bank pooling  Technology investment and transparency
  31. 31. © 2016 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 31 Further Reading Success Story: Chalhoub Group Treasury establishes an active in-house bank function to automate their key cash and FX management functions Get the case study>> Blog post: Why Treasurers should adopt multilateral netting Check out the post>>
  32. 32. Questions? Greg Person CTP gperson@kyriba.com Jason M. Dobbs jdobbs@actualizeconsulting.com
  33. 33. © 2016 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 33 Thank You for Attending! Stay in touch with Kyriba: facebook.com/kyribacorp twitter.com/kyribacorp linkedin.com/company/kyriba-corporation youtube.com/kyribacorp slideshare.com/kyriba kyriba.com/blog
  • CalFryer

    Aug. 8, 2017
  • AshwaniSaini13

    Jul. 14, 2017

In-house banking (IHB) programs are growing in popularity as a means to more easily move funds and reduce exposures. During our webinar we will discuss how your organization can gain visibility into the company’s net exposures by combining cash pool activity, intercompany invoices and structured lending agreements. We will also go over the internal and natural hedges that are more easily identified through the use of an IHB, leading to more effective management of the net exposures at an enterprise level as opposed to managing regionally.

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