A newsletter for International Corporates, discussing trends in global corporate treasury, economic developments and emerging commercial opportunities.
Read our latest and newly revamped newsletter, in which we explore some of the key challenges and opportunities corporates are facing internationally
Welcome to our latest newsletter – we hope you will enjoy our new look and feel.
2019 has been an exciting year for us so far, with excellent progress on building out our European corporate banking platform into more locations and rolling out additional digital capabilities across the UK to enhance client experience. We’ve also been meeting with a number of you around our escrow proposition, with everything from driving inorganic growth to litigation related escrows. In times of uncertainty, it’s also been encouraging to see many international corporates expand their business footprint into Asia. Be sure to read our latest update on Asian digital platforms and partnerships below.
I look forward to seeing many of you at Eurofinance and AFP this year, and for those in the UK please keep an eye on our digital conference ‘New Frontiers’ on the 4 November 2019.
Managing Director, Head of International Corporates
Coming to a market near you: how can your business prepare for the 5G network upgrade?
The rollout of the next generation of mobile connectivity, 5G, is often described as revolutionary because of the role it will play in driving innovation. 5G will enable the Internet of Things, as well as autonomous vehicles and other examples of advanced robotics. It will also be crucial to the development of smart cities. Ultimately, mass adoption of 5G will have far-reaching implications for both businesses and consumers.
5G is extremely fast, efficient and reliable. Not only is it 20 times faster than 4G, it enables complex decision making and supports connectivity between a large number of devices on secure, private networks. The combination of speed and latency improvements will power technologies such as augmented and virtual reality, 3D video calls and even avatars. As such, it will transform the way that businesses globally operate by enabling a range of industry-specific mobile applications and providing hyper-connectivity between people and people, people and machines, and machines and other machines.
Today, we are only at the early stages of the 5G rollout and few countries are actually using 5G services. The full rollout is expected to take place over the next three to five years, with rapid adoption likelier in those countries that are already technology leaders or that lack highly established communications infrastructure at present. Earlier this year, South Korea launched the world’s first nationwide 5G mobile networks. China and the US are also pioneering 5G readiness.
Inevitably, the rollout of a new technology such as 5G requires a high level of investment. Today a lot of this investment is being made by communications operators, technology vendors and governments, although businesses are participating in various trials that are taking place in cities around the world. Looking ahead, the rollout of 5G will have implications for businesses’ IT costs, however, since they will need to invest in new computers, mobile devices and handsets to enable their people to benefit from 5G.
Businesses will also want to allocate spend to their research and development teams in order to capitalise on the opportunities that 5G presents for them to operate more efficiently and potentially even develop new business models based on the deployment of autonomous and hyper-connected machines. Speed will be critical here, with those businesses that act first likely to gain the greatest market advantage.
Theoretically, 5G could have the effect of supercharging businesses in almost every industry, in every country. They will benefit from increased revenues, more productive workers, less congested transport networks, better organised cities, and the overall boost to the wider economy that 5G brings. So, with 5G already on its way, now is the time for businesses to consider how they can take advantage of it.
Read our 5G: A transformative technology report, or reach out to your Relationship Director to find out more about how the 5G network upgrade could supercharge your business.
Managing Director of Technology, Media & Telecoms
Ongoing political and economic uncertainty presents some major challenges to liquidity management today. In the UK, the ambiguity around Brexit – particularly the possibility that the UK might leave the European Union without a deal on 31 October – continues to weigh on interest rate forecasts.
Looking further afield, faltering growth in Europe presents the possibility of deeper negative rates across the Eurozone through 2019, continuing into 2020 and beyond. Meanwhile in the US we’ve already seen one rate cut from the Federal Reserve and there could be more on the horizon over the same time period. With rates lowering, understanding the cost impact on working capital is the challenge that most treasurers will face.
Fortunately, technological developments provide corporate treasurers with some useful options for gaining greater visibility over their liquidity and working capital. Through an increased variety of digital channels, it is becoming easier to gain visibility of account balances for an organisation’s global subsidiaries. Treasurers can also use technological tools to improve their forecasting ability and increase the number of counterparties they engage with to place surplus liquidity, which can drive a better return.
Liquidity, security and yield
Naturally, companies want their surplus cash to generate extra income for them, but they need to balance this desire for yield with security of investment and their own liquidity requirements.
In a market where continuing geopolitical uncertainty is a common theme, yield still remains a consideration but tends to be less of a priority than security and liquidity. While this may not mean that treasury policies are amended, noting that it is very important to keep policies up to date at all times, they don’t always need to be exercised in full. As a result, we have seen signs of a migration towards shorter term and more liquid investments. For some, the increased pick-up in yield doesn’t warrant the reduction in flexibility.
We have seen similar traction across constant Net Asset Value (NAV) USD Money Market Funds (MMFs) and further growth in low volatility USD NAV funds (both of which have seen year-to-date growth) with investors moving towards shorter dated instruments such as financial paper, in order to take advantage of the short end yield curve.
With uncertainty set to remain a defining characteristic of the business landscape for the foreseeable future, it is essential that companies use the most appropriate liquidity management solutions for their circumstances.
How Barclays can help
Liquidity management will remain a core activity for Treasury and/or Finance teams and, at Barclays, we offer a number of solutions that can support corporate treasurers with liquidity management across the UK and Europe.
Corporate treasurers have spent a considerable amount of time planning for a range of possible Brexit outcomes and we’ve been doing the same. Brexit has been a huge area of focus for us, and we have been working closely with clients to share our plans including our growing presence in Europe. In addition to growing our presence, we have continued to strengthen our capabilities. We are currently seeing a lot of interest in our new standard settlement instructions (SSI) capability for treasury deposits. With this facility, companies are able to take advantage of Barclays being a strongly rated UK financial institution by placing a term deposit with us, without the requirement of a Barclays bank account. We are also looking to further improve our digital capability, with the aim of delivering a range of liquidity management solutions to our clients in a single platform.
You can find out more about Barclays’ SSI capability, and the other liquidity management solutions that we offer, by speaking to your Relationship Director.
Managing Director of Corporate Banking
Managing Director of Liquidity
FX Payments in Europe: Balancing global visibility with local autonomy
Automation, control and transparency are the current watchwords for European corporates when it comes to FX payments. As companies become increasingly global in their operations, they are having to handle an ever-growing volume of payments, transfers and receipts in a wide range of currencies. At the same time, they are under pressure to operate more efficiently and take advantage of new technological tools.
Organisations in every sector face greater FX risk as a result of globalisation, but online retailers are among the most exposed. Since they often sell their goods in numerous markets worldwide, their systems have to accept payments in foreign currencies and provide consumers in any given market with the local currency price for the goods they want to buy. So, the challenge for online retailers – who often operate on slim margins – is to maintain their competitiveness while ensuring that adverse currency movements do not erode their profits.
Against this backdrop, efficient FX management is becoming a strategic priority for companies that do business across borders. They are looking for solutions that allow them to automate their low-value, high-volume FX payments as far as possible, via straight-through processing and e-channels such as proprietary banking platforms, host-to-host connectivity and SWIFT. They expect these solutions to offer competitive, flexible and transparent pricing on FX payments and to provide increased reporting capability so that their treasury has complete visibility of how FX is managed right across the organisation.
The challenges of treasury decentralisation
Another challenge is that treasuries today are often under-resourced, which makes it difficult for them to manage their FX risk effectively. The problem is compounded if a treasury is based in an organisation that allows its subsidiaries to manage their FX on a local basis. Typically, the subsidiaries use manual processes to make FX payments. Not only are these time-consuming and expensive, they require the organisation to maintain multiple relationships with FX suppliers. Furthermore, significant financial and operational risks arise since central treasury does not have a consolidated view of the company’s FX exposures and is unable to negotiate volume-based FX pricing.
So how can European corporates gain greater visibility of their local FX payments while achieving efficiencies, minimising risk and still enabling their subsidiaries to enjoy some local autonomy? A good approach is for the organisation to apply the principle of ‘centralised thinking, decentralised execution’ to its FX payments. Under this model, central treasury will select the most appropriate FX supplier and FX payments methodology for the entire group of companies, while leaving each subsidiary to execute its own transactions.
By taking a ‘centralised thinking, decentralised execution’ approach, central treasury can implement an FX solution that embeds a high level of automation and connectivity across the organisation. As a result, the organisation benefits at group level from automated reporting and reconciliation of subsidiary activity, volume-based pricing and more efficient resource allocation. In addition, central treasury has full visibility and control over all FX activities. Meanwhile, the individual subsidiaries will remain engaged because they will not have to invest time in maintaining multiple banking relationships and currency accounts, yet can still make FX payments on an autonomous basis.
Barclays FX Payments
At Barclays, we consult with our European corporate clients to identify and implement an FX solution that enables them to balance their need for global visibility over FX while meeting their local operational needs. This solution is likely to include one or both of the following options:
Barclays FX Payments is a global service, which we execute on a pan-European basis. To find out more, contact your relationship director.
Head of ICB Europe
Head of Transactional FX Sales ICB – UK & Europe
What help do Asian digital platforms need as they expand across borders?
Digital platforms have taken off in Asia over the past two decades, making them a major economic force in a number of markets. The internet economy of Southeast Asia reached $72 billion in 2018, according to a report by Google and investment company Temasek^. By 2025, it is expected to exceed $240 billion, driven mostly by the rapid growth of ecommerce, online travel and online media.
To date, Asian digital platforms such as Alipay, Grab, JD.com and Tencent have largely grown their businesses within their local markets, by serving local populations and complying with local regulatory frameworks. They have built their brands by initially offering a “killer app”, such as an escrow, messaging or ride-hailing services, and then expanding on their original proposition to become much broader commercial enterprises. Over time they have become active in a wide range of business activities, from artificial intelligence and cloud computing through to entertainment and gaming.
Having expanded successfully in their home markets, the big digital platforms in Asia are now looking to increase their revenues by moving into the more mature markets of the West. Since this means adjusting to differing customer expectations and business environments, they are looking for reputable business partners who can help them to execute on their growth plans.
These partners are likely to include well-regarded consultancies and law firms, as well as leading financial institutions. The latter being ideally suited to act as partners for digital platforms looking to establish themselves in new markets, as they have a strong reputation and extensive capabilities in security, given they are a highly regulated industry. This is particularly important, as many named cybersecurity as one of the key issues that needed to be addressed in order to keep customers loyal at Money20/20 in both Asia and Europe. Financial institutions also have strengths in risk management, liquidity and technology, which enable them to better support high-growth companies as they expand across borders.
Where will these platforms most need help from partners? Clearly, they will need support with the launch of their products and services into markets where their brand name is relatively unknown, as differences in culture and consumer behaviour are significant hurdles they will need to overcome. Expertise from local partners will be able to help minimise these knowledge gaps. There will also be a need for advice on regulation since the regulatory frameworks of the markets they are entering may vary considerably from the frameworks that exist in their local markets. When it comes to financial solutions, they are likely to seek out support with capital raising, FX management and payments.
When expanding across borders, there are a couple of reasons why payments are a significant consideration for platforms. Firstly, today’s consumers expect instant frictionless payments. This means adhering to local regulation and being able to receive payments in a variety of formats and channels. Secondly, payments can help differentiate proposition so that they can compete successfully against established operators in mature markets. For example, they might offer context specific promotions at point of sale or focus on simplifying payments for a niche customer segment.
How Barclays can help
Barclays is well placed to partner with Asia-based digital platforms that want to expand their offering into new markets and need access to capital and infrastructure to compete on a level playing field. We have a strong presence in international corporate and investment banking and an established card franchise through Barclaycard. Barclays is able to support Asian payments platforms to access the underlying payments schemes that exist in the highly regulated markets.
A good example of how Barclays has partnered with an Asian digital platform is the recent agreement between Barclaycard and Alipay. Through this agreement, Barclaycard is enabling UK retailers to accept Alipay payments in their stores that use Barclaycard terminals, without having to replace their current point-of-sale (POS) system.
Barclays also offers an FX risk management tool that is ideally suited to ecommerce operators, and can enable a digital platform to automatically undertake currency exchanges so that buyers of goods and services can always see up-to-date prices in their local currency.
In addition, Barclays has a strong reputation for working in partnership with innovative organisations. It has launched Barclays UK Ventures, a venture unit that has an independent mandate to deliver new customer experiences at pace and scale, alongside Rise by Barclays^ which is a global community of top innovators working together to create the future of financial services. With Rise FinTech hubs based in New York, Tel Aviv, London and Mumbai (supporting the Asia region), Barclays corporate clients have the opportunity to tap into this global resource to drive innovation in their own organisations.
Head of Corporate Banking, Asia Pacific and Middle East
Director of Non-Bank FI
Escrow: Helping corporations manage their counterparty risk
Escrow is a valuable risk mitigation tool that can provide legal protection to companies across a wide range of corporate transactions. For transactions that involve two or more parties, escrow frameworks can be used to ring-fence funds ahead of a transaction taking place, or to guard against losses once a transaction has closed.
Under the framework, a neutral escrow agent holds an agreed amount of funds on behalf of the other parties involved in the transaction. These funds will only be released in accordance to pre-determined conditions agreed between the parties, pursuant to the terms of the underlying escrow agreement being met. A company could arrange an escrow itself by directly reaching out to escrow providers, such as banks, or appoint an external party to organise the escrow on its behalf for a fee.
When is escrow used?
From mergers and acquisitions to litigation, capital raising to project finance, escrow is a legal arrangement that can be used in a wide range of corporate transactions. Some examples of where escrows are typically used include:
Mergers & Acquisitions (M&A)
Throughout the cycle of M&A transactions, escrow can help the buyer mitigate counterparty risk by placing a portion of the purchase price in an escrow account at M&A closing. This provides an added layer of security for the buyer, since the buyer will be able to establish the veracity of the seller’s assurances around representation and warranties in areas such as litigation, taxation, employee retention and performance guarantees. By using escrow, the buyer is unlikely to suffer an unexpected financial loss or to encounter a major operational issue that impacts on the performance – and value – of the asset under new ownership.
Where institutional investors are unable to facilitate multiple drawdowns for long-term capital-intensive projects, an escrow account can provide a means to prefund a commitment on day 1 with milestone payments drip-fed from the escrow account. This can protect suppliers against the risk of the principal contractor becoming insolvent.
Escrows provide assurance that funding is in place ahead of an acquisition. Where bank debt forms part of the acquisition finance package to raise capital, an escrow account can serve as a means to hold the debt proceeds until the deal closes. This allows companies to take advantage of market dynamics whilst reassuring sellers that funding is available. Within the context of a capital market issuance, investors know that the funds they have supplied will only be used for the purposes of the specific transaction and that if the transaction does not go ahead, their investment will be returned to them. Companies may be able to drawdown into escrow ahead of closing. This gives the company comfort that all conditionality to closing has been lifted and allows committed lenders the opportunity to redeploy their capital.
It is common practice for companies to hold disputed funds in escrow when they are awaiting the outcome of a court judgment. Where the US courts have imposed financial penalties, the segregation of such sums into an escrow may be a pre-condition of any appeal process, whilst the underlying proceedings will determine the entitlement to such funds. Escrow accounts can also provide an aggregation pot for class action suits, as well as providing security for any costs incurred during litigation.
The tenor of an escrow can vary considerably. Some escrows are only in place for a week, for example, pre-aggregation of capital pending closing of an acquisition. Others may accompany long-term infrastructure projects and exist for as long as 25 years. A typical M&A escrow exists for 12 months, to cover any costs that may arise from outstanding litigation, tax and pension liabilities following an acquisition.
Benefits of escrow
Escrow can be a lower-cost alternative to using standby letters of credit, bank guarantees or insurance. Escrow accounts do not require credit lines and have fixed fees. They can also provide interest income on the funds being held. Escrow arrangements can be set up quickly, with documentation, know-your-customer and onboarding requirements streamlined for efficiency.
How Barclays can help
Barclays has the ability to execute escrow transactions across several of our presence countries (UK, US, India and UAE). Through offering a standard tri-party escrow agreement, Barclays enables corporates to mitigate the risk associated with their cross-border and domestic transactions, while providing a legal framework for the handling of disputes.
Through our New York branch, we have worked on a number of significant deals for companies across a range of different industries. During 2019, Barclays has already performed the role of escrow agent on a number of transactions, ranging from a $5 million class action lawsuit escrow, right up to a $3.9 billion acquisition escrow. A key differentiator in these transactions was Barclays ability to price the deal competitively, efficiently onboard companies, while providing flexibility on terms and documentation.
To find out more about how Barclays’ escrow solutions can benefit your business, contact Barclays Escrow Services at EscrowCorpUS@Barclays.com or through your relationship director.
Head of International Corporate Banking, Americas
Head of Escrow and Cash Management
A newsletter for International Corporates, discussing trends in global corporate treasury, economic developments and emerging commercial opportunities.