Presentation on theme: "Liquidity Management Techniques"— Presentation transcript:
1 Liquidity Management Techniques Pooling and Cash Concentration
2 Liquidity ManagementHaving funds available to meet all known and unknown commitmentsIn the right currencyIn the right placeAt the right timeMinimise cost of funds and debit interestMaximise use of surplus funds and interest earnings
3 Liquidity Management As always a balance between the costs and benefits of having liquidity andthe costs and benefits of lacking liquidity
4 Liquidity Management How may a company improve liquidity? External Through borrowingThrough suppliersInternalBetter practices on inventory, receivables short term investmentBetter control of cash resources around the group
5 Liquidity Management Focusing on maximising Internal liquidity utilising existing but wasted resourcesPooling / Cash ConcentrationFirst: Notional Pooling
6 Notional PoolingWith Notional Pooling there is no actual movement of funds.With Notional Pooling there is no co-mingling of fundsCredit balances are offset against debit balances and the net is used to work out the debit or credit interest paid or receivedAlso referred to as ‘interest offset pooling’
7 Notional Pooling Position prior to pooling Average Balance Average Balance+ 900, ,000Average Balance Average Balance- 300, ,000Credit interest at 4 % = 1,250,000 x .04 = 50,000Debit interest at 6 % = ,000 x .06 = 51,000Net cost to group = ,000But if notionally pooledSub 1Sub 2Sub 3Sub 4
8 Notional Pooling Position if pooled Average Balance Average BalanceAverage Balance Average BalanceNet position = + 400,000So 400,000 x .04 = 16,000 an improvement of 17,000Sub 1Sub 2Sub 4Sub 3
9 Notional Pooling Benefits Maximise interest earnedMinimise interest paid byAs much as possible, for as long as possible, inone place
11 Stepped versus Banded Amount in GBP Interest Rate 1 to 250,000 0.10 0.20500,001 to 1,000,0000.50Over ,000,0000.90CompanyBalanceTierInterest rateInterestA355,000250,000.001250105,000.002210B400,000150,000300CTotal1,260Pooled1,005,000.0099,045Benefit7,785
12 Notional Pooling Benefits Improves the balance sheet by offsetting surplus balances against group debtReduces and may eliminate short term borrowing (will probably still need credit lines as back up with limits on individual subs)Reduces overall exposure to banks
13 Notional Pooling Benefits May improve internal discipline and controlDo not have to move funds- reduce costs of transfers- reduce management time
14 Notional Pooling Requirements Pooling agreementCross guaranteesLegal right of set offTax indemnityAbility to link accounts for interest calculations. Obvious, but not every bank will have the capabilityInterest apportionmentBoard resolutions
15 Notional Pooling Issues Bank chargesResident non-resident issuesTax issues (arms length)May be treated as a form of lending with no transfer of funds ownershipInterest offered may be low / or charged high, so Treasury may wish to actively place funds or borrow
16 Notional Pooling Active Management Investment of 400,000SubSubSubSubT+ 400
17 Types of notional Pooling Single currency, single countrySingle currency, cross borderMulti-currency, single countryMulti-currency, cross borderWhat is possible?What is offered?What does it cost the bank?
18 How Banks Charge for Pooling Interest rate spreadReserve asset charge (cost recovery)Set up feeManagement fee (monthly per account)Interest apportionment feeAccount maintenance feesElectronic reporting feeMoney movements, receipts/paymentsFX if involved
19 Pooling Due diligence Is pooling permitted? Tax issues Withholding tax – Res/non Res issuesArms length ruleIs debit interest an allowable deduction?Is thin capitalisation an issue?Location?
20 Pooling Due diligence How do laws of offset relate to Multi entities? Multi currencies?Cross border aspects?How does the bank cover?Are cross–guarantees necessary?Are Central Bank reserve ratios calculated gross or net?
21 Pooling Due Diligence Impact on group of using one bank Should all operational accounts be included in the pool?Impact of cut-off times for movement in and out of poolsValue dating practices for cross border movements into and out of the pool.
22 Cash concentrationSometimes Notional Pooling is not possible or not wantedRules and regulationsStructure of banking industryLegal issuesThen we may have to cash concentrate i.e. physically move the funds to attain the same benefits.
23 Cash concentration Example of Zero Balance Cash concentration End of day 750 investedSubSubSubSubConcentrationa/c
24 Cash Concentration There are various forms of cash concentration Zero balance, as illustratedTarget balance, to keep a specific amount in each accountThreshold, to move funds only when an account moves in excess of a figureCollar, when a threshold is reached, funds are moved but a balance is left
25 Cash ConcentrationAll will depend on the costs involved versus the needs of the group elsewhere, the sums involved and the overall treasury objective
26 Cash Concentration Issues DrawbacksTransfers may have to be done manuallyWill involve transfer feesTransfers to/from non resident ac’s may add to central bank reporting and to costLocal rules and regulations may prohibit/complicate cross border movements
27 Cash Concentration Using MT101 to concentrate CustomerInstruction AdviceLead BankMT MT103MT MT103Sending bankCredit customerconcentrationaccountDebit sendingbank nostroSWIFTNetworkDebit customeracCredit vostro ac
28 Liquidity Management Interest Enhancement As mentioned earlier, sometimes rules and regulations make cash concentration and cash pooling difficult, uneconomic or illegalNonetheless, Banks have developed ways to enable companies to gain some benefit from their balancesThe banks recognise that the balances they hold, even where blocked, are reflected on their balance sheet and therefore of value
29 Liquidity Management Interest Enhancement Suppose that the bank will normally charge interest on deficits at LIBOR plus ½ and pay on surpluses at LIBID – ½To the extent that balances offset each other the bank will adjust these ratesE.g.Account No 1 has a surplus balance ofGBP 100 and account No 2 a deficit ofGBP 50.
30 Liquidity Management Interest Enhancement There is an offset of 50% soThey would charge interest at, say, Libor plus1/4And pay interest at LIBID – 1/4