TCM Guide : The Bigger Picture



Corporate treasurers are fully reviewing all of their liquidity structures and relationships to ensure maximum efficiency, best access to credit and best returns on excess cash.



Rossi: We have seen a number of our large corporate clients begin to reevaluate their concentration structures.

With credit being ever harder to find, liquidity management has become a growing concern for corporates of all sizes and in every industry. Curiously, while there is not substantially less liquidity in today’s market, liquidity is being stockpiled and is not flowing as freely as in the past. As a result, managing existing and future liquidity—be that an excess or a lack of liquidity—is essential for treasurers.

Part of the issue stems from the balancing act that treasurers have had to perform over the past few years. Those firms that have found themselves with excess cash on their balance sheets have had to decide how to manage it. The desire, naturally, was to keep it liquid while still maximizing interest income and keeping the balance of business between different banking partners. The strong global economy and the need to make the most of their excess cash led some treasuries, tempted by high returns, to invest in less-than-gold-standard funds.

Now, however, treasurers are once again cautious in their investing, focusing on safer investments—sovereign funds and the like—with the goal of diversification to reduce counterparty risk. There has also been a move by some to bank deposits and other more traditional low-risk options.

Lisa Rossi, managing director and head of liquidity management and investments for global transaction banking at Deutsche Bank, notes: “We are fielding more questions on investment yield or short-term cash positions. Treasurers are evaluating whether they are maximizing their long positions against their long- and short-term debt positions.”

On the credit side, simple access to liquidity is the prime concern for many treasurers. As one banker says: “When a credit facility is up for review, there are banks out there that are pulling back from the new facility. More and more clients are coming and asking for larger participation because they have been dropped by some other banks.”

“We see a higher utilization of overdraft facilities with our clients,” says Erik Seifert, head of cash management, Sweden, at SEB. “When I worked on the corporate treasury side, we always regarded overdrafts as an expensive source of financing. However, in today’s tight credit market that is not the case anymore, and many corporates are now tapping into relatively cheap funding via their overdraft facilities.”

In addition to access, many treasurers are reviewing the liquidity structures they have in place to maximize efficiency. “In the last four or five months,” notes Rossi, “we have seen a number of our large corporate clients begin to re-evaluate their concentration structures. We are getting more and more client requests to realign their concentration structures or review intercompany loan structures. It appears that clients are looking across their businesses to see how they can optimize every account to fund their positions.”



Jegher: Banks must let their clients know that assets are secured and that liquidity is there if it is needed.

Clearly, corporates are taking a hard look at all of their liquidity structures globally. For example, in Asia many firms are increasingly evaluating how and when to consolidate their regional balance sheet where it provides the largest tax advantage. Singapore is increasingly a hub for regional balance sheets.

While some corporate treasurers are handling this review themselves, others are turning to their banking partners for help. The banks are able to help the businesses develop current account structures and relationships for all their accounts and to prepare scenarios that would optimize positions—and the financial impact such changes could have. At the same time, some corporates are also rationalizing bank relationships where possible as it allows them to become more effective with cash concentration structures.

It is not just the large-cap firms that are concerned with increasing efficiency, Seifert says. “More and more of our mid-cap clients are starting to ask for the sophisticated cross-border and cross-currency cash management solutions that were previously only used by the largest customers,” he says. “While it is not surprising that state-of-the-art cash management techniques are becoming more widespread, I think this development is accelerated by the tight credit market, which forces corporates toward more efficient liquidity management.”

Treasurers are focused on cash-flow management as they attempt to gain greater clarity into their cash flows to better manage working capital and reduce volatility in incoming and outgoing flows. Because of the effects of tighter credit along with the downturns in the global economy and increased commodity prices, working capital is affected more than ever.

In addition, businesses are paying higher prices for goods, which is causing them to look at cash flows and to re-evaluate their business in a downturn economy. “Cash flows are integral to liquidity management and working capital,” notes Rossi, “so there is a full-scale review of cash structures and payment flows happening across many corporate entities.”

Banks Devise Integrated Solutions
Seifert says there is an increased focus on the entire area of working capital management as a result of the slowing business cycle and tight credit conditions. “This includes receivables and payables management as well as liquidity management and cash-flow forecasting,” he explains. “As a merchant bank active across the spectrum of products, we take this as a catalyst to build offerings that are based on a holistic view of the customer’s working capital process and integrate seamlessly across product areas.”

Finally, as the flow of credit tightens, banking relationships become more important, and corporates look to strengthen the good ties and sever the bad ones. They are evaluating who is best at straight-through processing, who can concentrate their funds in the most efficient way, and so on.

As credit has tightened, companies have also become more strategic in how they manage the credit-to-collateral business link. “Two years ago corporates were in the driver’s seat,” says one banker. “I am not so sure they are in the driver’s seat anymore. When credit became tighter, banks began saying, Do we have a solid relationship both ways? There are certainly ebbs and flows in any relationships. This is certainly a time when that flow has changed a bit, and banks want to ensure they are getting that collateral business in exchange for credit.”

At the same time, the banking community globally is facing its own demons as corporates have begun to analyze their banks’ financial positions in a way they might not have a year ago. Jacob Jegher, an analyst at consultancy Celent, says that the big concern, particularly for large corporates, is whether the banks they are using may present any risk. “People are taking a step back and asking, Are we putting ourselves in any type of risky situation?” Jegher says. “The biggest message banks have to send out is that even though they may be in the midst of a pretty heavy storm, this is what they are doing to secure your assets.”

This is particularly important given the current environment. Jegher advises: “Banks must let their clients know that assets are secured and that liquidity is there if it is needed.”


Denise Bedell