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Engineering Solutions... Delivering Results TEXPO 2011 CBI’s Approach to Managing its Global Liquidity CBIB ank Mendes Gans Mr. Joe ChristaldiMrs. Greet.

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Presentation on theme: "Engineering Solutions... Delivering Results TEXPO 2011 CBI’s Approach to Managing its Global Liquidity CBIB ank Mendes Gans Mr. Joe ChristaldiMrs. Greet."— Presentation transcript:

1 Engineering Solutions... Delivering Results TEXPO 2011 CBI’s Approach to Managing its Global Liquidity CBIB ank Mendes Gans Mr. Joe ChristaldiMrs. Greet van der Steen Director, Global Cash Management Managing Director, Sales & Account Management

2 Engineering Solutions... Delivering Results CB&I at a glance: 2010 snapshot Financial Statistics (millions) Revenue: $3,642 Net Income: $204 Operating Cash Flow: $288 ROE: 21% 2 Operational Overview CB&I (NYSE: CBI) is one of the world’s leading engineering, procurement and construction companies and a major process technology licensor CB&I conducts business in over 20 countries worldwide Global footprint with projects in Africa, Asia, Australia, Canada, Central & South America, Europe, Middle East, Russia, Southeast Asia and the United States of America Executes more than 600 projects a year New Awards: $3.4 billion

3 Engineering Solutions... Delivering Results CB&I’s treasury principles Cash is a corporate asset  Protect this asset; risk avoidance  Enhance shareholder value Centralized control; decentralized execution  Strategic direction from corporate treasury; tactical Execution via regional treasury centers  Macro level overview of responsibilities  Sound control environment governing all cash movements  Optimizing cash resources 3

4 Engineering Solutions... Delivering Results CB&I’s pillars of operational success Visibility & Transparency Daily cash reporting Working capital needs Daily cash flow forecasting (pool participants) 4 Centralized Liquidity Management Global cash pooling In-Country target balances Global settlements Global funding Sound Control Structure Effective & standardized global policies and procedures  Consistent administration & execution  Procedures always in place before execution Sarbanes Oxley compliant Annual internal audit reviews Information Technology Eliminate redundancies Real-time activity reporting Consistent application of controls Increased productivity Transcends time zones Internet based portal  Account opening/closing  Self service portal Decentralized execution Centralized control

5 Engineering Solutions... Delivering Results Efficient liquidity management - Challenges Our challenges  Create a global account structure keeping local banking infrastructure in tact  Consider credit relationships and geographical expertise  Obtain centralized visibility and control to access global cash to fund business growth  Eliminate Inter-company loans and FX transactions to manage liquidity  Improve returns on overnight deposits / reduce costs on borrowings  Establish global reporting capabilities of all global bank accounts  Adopt a solution that complies with internal standards and security requirements  Manage overall cash pool position via a single currency  Eliminate all in-country borrowing facilities, where applicable  Integrate solution with current netting systems 5

6 Engineering Solutions... Delivering Results Solution:  Implement a cross currency notional cash pool solution  No!  Global cash pool keeps local infrastructure in tact but has the flexibility to enable changes as dictated by business needs  Currency is freely convertible  Legal entity is permitted by their central bank to open an account (local and / or foreign currency) offshore 6 Would current local banking structure be impacted? What is the criteria for participation? Achieving centralized liquidity management

7 Engineering Solutions... Delivering Results CB&I’s global cash pool strategies Utilization of cash pool for long term funding  Eliminate inter-company loans  Eliminate in-country credit lines Tax considerations  Easier to prove arms length interest rates with a third party bank than with inter- company loans Accounting  “Buy-in” from all disciplines to assure the cash pool did not create accounting entry complications  Replacing inter-company loans with deposits / overdrafts within cash pool simplified accounting entries (its just another bank account)  Assure “net” accounting Local group company buy-in  Education and communication with local group companies to assure compliance with the new structure  Trade-off, no inter-company loans 7

8 Engineering Solutions... Delivering Results CB&I’s global cash pool strategies (cont’d) Establishing automated two-way sweeps  Detailed process required assistance from local group company, local bank in conjunction with BMG and corporate treasury  Tweaking targets / triggers to assure minimal liquidity remains in-country Diversify investments and reduced safety margins: Excess funds no longer remain in-country and cash pool provides full off-set Use cash pool to hedge currency exposures via plain vanilla FX spot deals  Can lock in rates for known currency exposures  No freeing up liquidity for spot conversions in pool 8

9 Engineering Solutions... Delivering Results CB&I’s global cash pool overview Began operations in November 2009  CB&I Global Treasury, The Woodlands, Texas  Current number of cash pool participants: 46  Countries: 11  Pending cash pool participants: +/- 20  Pooled currencies: 6  Integrated with existing multilateral netting (netting since 1983) 9

10 Engineering Solutions... Delivering Results Strategies achieved with global cash pool Inter-company loans eliminated  No need to hedge these positions – saved several million dollars in forward points Automated sweeping and funding of local accounts  Built in efficiencies reduced finance headcount and assured adequate funding at pool entity Optimize interest income yields  Pool participants earn true market rates for balances in each currency  Important if holding high yielding currencies such as AUD  CBI earned 10 times the return had we repatriated funds and invested the funds in USD  Short currencies only “pay” the market rate as long as overall pool is positive Centralized cash from all regions of the globe and tapped into 10s of millions of additional liquidity  Cash used for acquisitions, capex, etc. Local entities are very positive  Automates funding  Accounting is simple as it just another bank account  Tax issues are lessened as arms length easier to prove  Local entities have access to cash through their BMG account  Foreign currency accounts now earn interest for local entity 10

11 Engineering Solutions... Delivering Results Strategies achieved with global cash pool (cont’d) IT Browser based access enables  Funds pooled from entities from one platform  Allows global visibility and control of all cash pool and third party account balances and transactions  Entity funding initiated from one platform  Signatory flexibility  All transactions uploaded to one platform from one file 11

12 Engineering Solutions... Delivering Results CB&I’s netting overview Started the multilateral netting in 1983  The netting includes 112 participants  And includes countries such as US, Canada, Australia, Malaysia, Thailand, UK etc. 12

13 Engineering Solutions... Delivering Results CB&I’s netting objectives 13 Reduce the number of inter-company flows to reduce FX and transfer cost  Just one monthly settlement per group company Reduce / avoid cut-off time and value dating issues  Guaranteed settlement with proper value date Improve and simplify the monthly reconciliation process  Web based access for file upload / download purposes Integrate netting with other cash management requirements  Liquidity (investment / funding) management  Hedge policy

14 Engineering Solutions... Delivering Results CB&I’s netting benefits 14 After processing CB&I’s inter-company data: Before netting:  Gross payment volume between group companies; per annum USD 58M After netting:  Net payment volume of inter-company payments between group companies; per annum USD 4.1M Reduction of 93%! Reduction in actual payments: Number of payments before netting:  Per annum: 737 Number of payments after netting:  Per annum: 70 Reduction of 90.4%!

15 Engineering Solutions... Delivering Results Overall benefits The combined netting and pooling solution has allowed CBI to efficiently manage liquidity Centralized control of cash with decentralized accounts No Intercompany loans, no FX trades, no hedging costs Can settle Intercompany trade payables without freeing up the necessary liquidity Simplifies the International cash management process, but adds functionality 15

16 Engineering Solutions... Delivering Results The techniques used Global liquidity management tools: Notional cash pooling & Multilateral netting 16

17 Engineering Solutions... Delivering Results Notional cash pooling A global cash pool enables companies to efficiently manage and control their cash in multiple currencies from a single location without changing existing relationship banks Multiple cash balances – both positive and negative – are treated on a net basis and interest is applied based on this net pooled figure 17

18 Engineering Solutions... Delivering Results 18 Global cash pool solution AUDUSDGBPCZKSAREUR

19 Engineering Solutions... Delivering Results Notional cash pool – account structure 19 AustraliaGermany UK AUD EURGBP Local group companies 1.Account owner = group companies 2.Account is used “exclusively” for own cash 3.All transactions are registered as current account deposits and overdrafts vis-à-vis BMG 4.Interest is credited / charged by BMG Cash pool account structure Germany EUR UK GBP Australia AUD

20 Engineering Solutions... Delivering Results How does the Cash Pool work? Entity 1 local bank account USD Entity 2 local bank account EUR Entity 3 local bank account GBP Entity 4 local bank account EUR Entity 1 Pool bank account The Netherlands USD Entity 2 Pool bank account The Netherlands EUR Entity 3 Pool bank account The Netherlands GBP Entity 4 Pool bank account The Netherlands EUR Intraday sweeps (5 m) USD (1 m) GBP 4 m EUR 6 m EUR (5 m) USD = (5.0 m) USD 4 m EUR = 5.4 m USD (1 m) GBP = (1.5 m) USD 6 m EUR = 8.1 m USD Total Pool Balance 7 m USD Notional Pooling 7 m to: Reduce debt, Invest, Strategic M&A Strategic Capex

21 Engineering Solutions... Delivering Results 21 Interest, including inter-company margin is booked directly to entities account Cash pool For all accounts: Step 2 AUD GBP Cash pool % Set by currency position 5% 1% 2% AUD 5% 1% Step 3 GBP AUD GBP 5% 1% 1.5% Margin is booked to treasury account 0.5% Notional cash pool: interest Inter-company margin credit = minus 0 % debit = plus 0.5 % Step 1Step 4

22 Engineering Solutions... Delivering Results Cash pool benefits Multiple currencies can be pooled daily from every region of the globe (37 currencies and 80 countries) Automated connectivity between cash pool accounts and local bank accounts All cash in excess of working capital no longer remains idle in-country Short-term funding vehicle for group companies Treasury can invest / borrow in currency of choice Eliminate onerous borrowing rates for in-country group companies (debit rate is tied to the overnight depository rates of the currency plus a x bps margin set by corporate treasury) No need to open local bank accounts 22

23 Engineering Solutions... Delivering Results Notional cash pool: matters of importance 23 Regulatory Law:  Thin capitalization rules and stamp duty: may apply in case of inter-company loans  Transfer pricing: set cash pool margins at arms length and clearly document to avoid penalties  Notional pooling and full off-set is allowed in the Netherlands. No cross- guarantees required under central banking regulations Tax:  Withholding tax: could apply on interest charged. In Netherlands no WHT imposed  Tax authorities could view extended overdrafts on a cash pool account as a disguised liability. Accounting:  No inter-company loan administration and FX Swap contract administration  Apply full off-setting on the balance sheet  It’s just another bank account

24 Engineering Solutions... Delivering Results Multilateral netting Netting is a process designed to organize and simplify the settlement of inter-company and third-party payments and on a fixed customized periodic schedule 24

25 Engineering Solutions... Delivering Results Global netting 25 UK AU DE SG US Vendor Before UK AU DE SG US Vendor After Netting center

26 Engineering Solutions... Delivering Results Global netting transactions Sales  Trade  Vendor Financial  Inter-company loans & interest  Royalties & dividends  Management & service-fees  Internal FX hedging contracts  External FX hedging contracts 26

27 Engineering Solutions... Delivering Results Global netting benefits Increased efficiency in managing inter-company trade balances and vendor flows Imposes standardization and discipline across the group Reduce payments between group companies Centralized versus decentralized FX Cost savings in:  Transfer costs reduced based on reduction in the number of settlements (approx.: 80% - 90%)  FX cost reduced based on reduction in transactions (approx.: 80% - 90%)  Elimination of value day loss No bank accounts need to be opened 27

28 Engineering Solutions... Delivering Results How the two techniques come together Settlement of netting results on cash pool accounts when possible  Book transfers replace third party bank transfers  Use cash pool to solve liquidity dips Incorporate external & internal FX hedges and settlements by setting up all FX counterparties in the netting Use cash pool for Money market hedges  Integrate international third party vendors in the netting  Have international customers pay directly to cash pool accounts Establish foreign currency accounts in the cash pool  Utilize solution for global Multibank Reporting 28

29 Engineering Solutions... Delivering ResultsQuestions Joe ChristaldiGreet van der Steen CB&IBank Mendes Gans, Amsterdam tel: tel: QUESTIONS ?


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