Protecting liquidity and European efficiency as a US corporate

For US-headquartered companies operating in Europe, the Covid-19 crisis has led to a renewed focus on protecting liquidity. So, what is possible for US treasurers who want to maximise the efficiency of their European cash management?

Differing environments

For treasurers of US companies with operations in Europe, making sure the company’s short-term cash is in the right place at the right time is a fundamental part of the job. But it’s also an activity that has considerable strategic importance for the organisation – as the ongoing Covid-19 crisis has highlighted.

“Cash management is my world – defining cash management, making sure we’ve got the right liquidity in place for our various trading entities around the world, and also working capital management,” explains Matthew Sullivan, Assistant Treasurer at Cummins, which designs, manufactures and distributes engines and generators. He adds, “One of my big responsibilities, particularly post tax reform, is optimal cash positioning through the different jurisdictions within which we operate.”

For US-headquartered companies, managing cash in Europe presents certain challenges. For one thing, US companies entering Europe will need to address a more complex landscape in terms of payments and regulation. “Where regulation is concerned, one of the most significant is the second Payment Services Directive (PSD2), together with the concept of Open Banking and the associated emerging technology,” says Daniela Eder, Head of Europe Payments & Cash Management at Barclays Corporate Banking. “These developments have allowed for new payment service providers and account information aggregation services in the market.”

There are also additional challenges to consider in the current environment. Brexit is one: while some treasurers say their companies will not be affected by the UK’s departure from the EU, companies with London-based European cash pools will be monitoring the impact on banking regulations. In addition, negative interest rates continue to present challenges, particularly for companies in which treasury has previously sought to generate income in order to cover the costs of its own activities.

Companies which have a head office in the US may not be accustomed to negative interest. So their strategy for Europe may be completely different from how they manage cash in the US. In particular, the costs associated with their cash need to be minimised, and they need to operate more efficiently.

Daniela Eder

Head of Payments & Cash Management Europe at Barclays

Impact of Covid-19

In recent months, of course, treasurers have focused on the more immediate challenges presented by the Covid-19 crisis – particularly in Europe, which became the epicentre of the pandemic during March and April. While the first and most pressing priorities for corporate treasurers may have included adapting overnight to a working from home model, the pandemic has also refocused treasurers’ attention on the need for efficient and effective cash management. As Sullivan points out, “The world’s changed, and we’re still trying to get to grips with what that means – including from a cash management standpoint.”

“I’ve always felt that a good treasury strategy anticipates volatility, structures around risk, and can navigate all but the most extreme environments without significant disruption,” comments Zac Nesper, SVP & Treasurer of technology company HP Inc, which is headquartered in Palo Alto. Nesper adds that Covid-19 has caused the company to focus a little more heavily on the liquidity aspect of cash management, especially in countries with supply chain disruptions – “but our strategy has helped us to ride through business and market dislocations relatively seamlessly.”

In this challenging environment, many companies have taken swift action to ensure sufficient liquidity is available to weather the crisis. “Many corporate treasurers are measured by ensuring their companies have sufficient excess liquidity to effectively run the business,” says Mandana Sadigh, SVP & Corporate Treasurer at global toy company Mattel.

Uncertainty around Covid-19 and its impact on the business performance has elevated many companies’ focus on working capital management, especially those companies that are highly seasonal and working-capital intensive.

Mandana Sadigh

SVP & Corporate Treasurer at Mattell

For Cummins, meanwhile, the steps taken to adapt to the crisis included adding two billion dollars of liquidity in the US in the form of an additional one-year revolver, as well as increasing bilateral uncommitted facilities in various countries to cover any localised disruptions. But it has also meant monitoring inflows and outflows carefully, and acting rapidly to communicate the importance of liquidity across the business.

“Cash management and liquidity management became a key focus,” says Sullivan. “From a European standpoint, we got all the European controllers and credit risk leaders on the phone and sent out a very clear message that protecting liquidity was key for us as a business – we didn’t know how long this would go on for or how it would impact us, so protecting our liquidity position was key.”

Building on past progress

Many US-headquartered companies have taken steps to increase the efficiency of their European cash management structures in recent years – and the resulting efficiency gains have served these companies well during the Covid-19 crisis.

The treasurer of a US-based computer components manufacturer explains that over the last two years, the company has been able to consolidate as much as 99.5% of its cash on a daily basis through automation. “Strategically this is critical, especially during Covid-19, where some of our expenses and receipts have been very volatile,” he says. “The impact on treasury was very benign because of the cash pooling structure that we have in place.”

For others, the lessons learned during the global financial crisis of 2008/09 have informed the need for a robust response to the current challenges. Global professional services firm Marsh & McLennan (MMC), for example, saw a slowdown in cash collections during that time.

Anticipating a potentially similar or worse fallout from the current crisis, we decided to get in front of it, and protect the company and its liquidity position.

Ferdinand Jahnel

Vice President, Treasurer at Marsh & McLennan

For one thing, this meant ensuring the company has enough “dry powder” to manage comfortably through the crisis by securing a new $1 billion credit line on top of its existing $1.8 billion revolver, and by issuing a $750 million bond in the US market. In addition, MMC has established a real-time monitoring system for its cash, billings and collections globally, and the treasury team works closely with local finance teams to implement process improvements and automation solutions. “We are continuously working on managing cash more efficiently, and on a permanent basis,” says Jahnel.

Looking ahead, it’s likely that the cash management impact of the crisis will prompt some treasurers to place a renewed focus on streamlining structures and processes. As Paul Misere, Senior Treasury Director EMEA at medical device company Medtronic explains, “Going forward, we will continue consolidating and centralising, and making cash management even more lean than it is today – so that if it’s really needed, we can immediately tap into that liquidity and continue running operations.”

This article has been commissioned by Barclays and was written by EuroFinance, the leading global provider of treasury, cash management and risk conferences, training and research. Please visit www.eurofinance.com^ for more information.

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