Similarly, low oil prices have slowed infrastructure development and expansion in resource-driven economies in the Middle East and parts of Africa while resulting in increased consumption in oil-consuming countries. In addition, while the Middle East and North Africa continue to see security and political risk, Europe has seen its share of political turmoil whether in Ukraine or in the challenges posed by a potential Greek or even British exit from the European Union (EU).
However, global corporates continue to expand operations in search of growth. This raises new opportunities but also new challenges. For treasurers, top of the list would be the potential issue of “trapped” or “inaccessible” cash. While the traditional challenges around trapped cash remain pertinent – or in some cases have become more so, depending on the market – newer issues have surfaced to impact the accessibility of liquidity around the world. The issue of trapped cash has resulted in increased focus from treasurers and chief financial officers (CFOs) on both the impact (ultimately on enterprise value) of trapped cash, the implications of “releasing” this liquidity and solutions for doing so.
Drivers of Trapped Cash
Before discussing potential solutions to release trapped cash, it would be worthwhile to reiterate the issues that result in trapped liquidity. These include:
- Regulation that limit or prohibit cross-border movements, including foreign exchange (FX) controls, capital controls, foreign investment laws, restrictions on intercompany lending, corporate finance considerations and regulatory approvals among others.
- Geopolitical risk changing a country from liberal to restricted, such as Ukraine, Cyprus, and Egypt. Moreover, greater geopolitical risk has triggered an increased focus on cash in certain markets; ironically some of those markets may be the most challenging to repatriate cash from.
- Other risk considerations include mitigating fraud, especially in economically-challenged regions.
- Tax implications – whether corporate tax rates (especially in the US), withholding taxes on dividends (a common tool to repatriate cash), or capital gains taxes in certain jurisdictions.
- Strategic considerations may also require cash remaining in certain countries, to drive future growth and investment requirements.
- Sub-optimal liquidity structures, typically decentralised or not fully-centralised arrangements where fragmented positions exist in multiple countries. Other parameters may be multibank set-ups or inefficient payment structures requiring locally-held liquidity for the processing of transactions.
Trapped cash therefore represents an asset that is underutilised and raises issues of opportunity cost, working capital efficiencies and risk considerations. That makes it imperative, where appropriate, to explore solutions to repatriate or utilise this cash and deploy into more lucrative investment opportunities.
- Structural, or more strategic approaches, can include the deployment of legal vehicles that allow companies to stretch trade payables and shorten trade receivables. One solution is to pay early on any payables out of a restricted jurisdiction (releasing trapped cash) and pay late on receivables into that country (delaying trapped cash). For this solution, local regulatory and tax oversight, as well as market FX movements, must be taken into account.
- Some companies use an internal company located in a free market to buy from restricted jurisdictions and sell to the rest of the world. This will create intercompany loans of the underlying trades. Arm’s length basis and trade terms will need to be set in a way to avoid possible characterization of receivables as loans. Some of the frequently used structures include: procurement centre; re-invoicing centre; and netting centre.
- Cross currency: Cross-order interest optimisation structures that allow banks with a presence in these countries to compensate the clients globally with minimum implementation hassle. This is a popular solution and one of the major drivers for the single Bank strategy that many clients select for their global cash management arrangements. Balances are treated favourably when held with the same Bank even if they are in different countries.
- Optimisation of global liquidity through an efficient cash management structure: Corporates frequently find themselves with scattered balances as a result of sub-optimal multi-bank set ups. In such situations, clients do not take advantage of true end-of-day concentration solutions, or they even lose days of value for their balances managed in different time zones. However there are options in the market that, if leveraged, can minimise or even eliminate these fragmented positions and generate working capital and cost efficiencies for their users.
- Cross-border pooling solution for markets that become liberalised: A good example is China renminbi (RMB), with the country’s fast evolving regulatory reforms. Companies started to enter into pilot RMB cross-border pooling programmes in 2013. Today, RMB can not only be part of a cross-border structure but can also participate in notional pooling products; thereby maximising the liquidity value of the currency.
- Repatriation: Ensuring timely regular capital and dividend repatriation within the limits allowed by each jurisdiction. For example, in South Africa, due to exchange control restrictions rand (ZAR) balances cannot be pooled cross-border in liquidity structures and South African companies are not allowed to hold ZAR offshore without special approval from the Reserve Bank. Companies would seek the advice of banks in order to accurately prepare the documentation required prior to repatriation. For dividends, a board resolution is required, along with the latest audited financial statements of the local subsidiary. Sufficient retained earnings must be available in the local subsidiary.
It is important to note that these solutions do not result in complete and comprehensive repatriation of all trapped liquidity. However, to the extent that cash is released, it does offer mitigation of the risk issues as well as allowing corporates to more efficiently deploy this cash. Moreover, there may be some instances where it is more effective to leave cash in certain countries for further growth.
There are numerous drivers that result in situations that cause trapped cash. However, corporates, in conjunction with trusted advisors and the appropriate banking partner, have structured innovative solutions to repatriate liquidity where feasible and to deploy it more productively in line with internal finance and investment policies as well as external regulations.
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