Metrics: advisers say it is important to make sure that all the right information is available (visible) before deciding that cash is ‘trapped’. Leon Cane, a director in the treasury tax group at KPMG, says: “This is looking at the parameters by which companies judge cash is trapped. Companies don’t always accurately quantify the level of constraint.”
Processes: often, dealing with FX rules is not a matter of cost, but procedure, especially when a business has to notify or seek permission from a regulator, or a central bank, to move money. The difficulty may not be the jurisdiction, but local offices of the company itself. Cane says: “Even if there are procedures to get cash out, how efficiently are they being undertaken?” He suggests treasurers aim to understand processes, and how long they should take, and ensure local staff are on top of them.
Dividends: for many companies, the main route for managing revenues is to send them via dividend payments. Some countries allow only a single dividend per year. One way to tackle this is to manage the business through multiple entities, each with different year ends. Payments can then be staggered.
Dollar accounts: emerging economies may be less restrictive with dollars than their own currencies and may allow companies to hold offshore dollar accounts, which can be used for making payments for imports.
Recycling cash: In many cases, companies look to ‘pool’ cash so that positive cash balances in one place can offset debts in another. In china, cash pooling is made difficult because intracompany loans are not permitted. What china does have is an ‘entrusted loan’ scheme: one company in the group hands money to a bank and the money is loaned to the borrower − another group entity.
Sometimes the money is just out of reach. You’ve done all the hard work, invested in distant shores, built up a business and reaped the rewards. But now, when you need to get a grip on that money, it’s not as easy as you had hoped. This is the crux of trapped cash: it’s money your company legitimately earned overseas but, for diverse reasons, you just can’t bring it back.
Treasurers in companies with overseas operations will be all too familiar with the problem. And with Europe’s economy still wracked by uncertainty, the issue of managing trapped cash has been given a new urgency.
For revenues earned far afield in countries such as China, Brazil and India, factors including FX controls, capital requirements, taxation (overseas as well as at home in the case of US companies) and regulation can all play a part in executives concluding that money is well and truly stuck. The cost and regulatory hoops seem like real barriers to repatriating money.
In the US, where companies often choose not to repatriate cash earned abroad for taxation reasons, and not because of controls in foreign jurisdictions, so-called ‘trapped cash’ is a major point of contention between global companies on one side, and regulators and the government on the other. Investment bank JP Morgan estimates that anywhere between 25% and 40% of cash held by non-financial S&P 500 companies is sitting in offshore jurisdictions. That could be somewhere between $400bn and $1 trillion in cash deposits. (For more on the US and trapped cash, see Trapped cash: a US perspective)
There are no similar figures for UK and European companies for money apparently stuck overseas. Anecdotally, however, the crisis in the European banking system has meant that cash and liquidity management has become more important to treasurers than ever and the significance of trapped cash is re-emphasised each time there is a new twist.
According to Simon Jones, head of sales for treasury services at JP Morgan, the issue is an up-to-the-minute concern because, despite reports of faltering growth, operations in emerging markets are the ones producing significant results for international businesses.
“Because of the challenges in Europe, the key markets that have grown have been those more regulated markets. A lot of multinational companies have been doing very well and generating lots of cash in those markets. But the difficult thing is managing that cash,” he says.
The financial crisis has not only thrown a spotlight on what treasurers do, but it has also given them extra weight in the boardroom, says Naresh Aggarwal, a senior manager at Big Four firm PwC. “They’ve gone from meeting the board once a year to meeting them each month. It’s an opportunity for treasurers to shine.”
The problem of trapped cash is exacerbated by the historic legacy (a distant memory for many) of happy economic times when money was easily made, funding was freely available and managing cash was not a major priority. According to Martin Hoad, a director in treasury services at Deloitte, ready supplies of cash and debt in the past meant the effort to ‘extract’ was not well disciplined. “The emphasis has been on cash generation, not on usable cash flow,” he says.
While the moniker ‘trapped cash’ implies money that is incontrovertibly captured, the position is in fact not quite so emphatic. Advisers prefer to use terms like ‘restricted’ and ‘inaccessible’ to better describe the qualities of overseas cash piles. In other words, trapped cash is hampered rather than completely blocked. There are few places where foreign currency is in such short supply that money simply cannot be moved at all.
The problem of trapped cash is exacerbated by the historic legacy (a distant memory for many) of happy economic times
Cash can appear trapped for a multitude of reasons. For example, some countries may need capital to remain onshore for a fixed period of time or they may have rules governing debt-to-equity ratios; resident companies can be blocked from holding foreign currency accounts offshore; intercompany lending may be restricted; FX controls may exist in some form; or there could be taxes on cross-border cash flows.
Enthusiasm for moving the money will therefore depend on a company’s business model, its cash needs, local law and regulation, the cost involved and its willingness to plan its liquidity strategy. Aggarwal says it “becomes a commercial decision as to where I leave it – somewhere else, or bring it home”.
Bringing money home may feel like a priority. Cash could be in demand to support working capital, service debt or be put to more profitable use than loitering in a bank account, earning unimpressive rates of interest. JP Morgan’s head of global liquidity, Robert Deutsch, points out in a paper, Trapped Cash: Local Market Challenges, that ensnared cash is difficult to include in a global ‘liquidity strategy’ or into any kind of normal corporate cash use. According to Deutsch: “It can be particularly frustrating when positive balances in these markets cannot be used to offset borrowings elsewhere.”
Offsetting debt is an obvious driver for wanting your money right here and right now, but the crisis has also provided two other critical reasons for having it tucked up where it can be closely watched. These reasons, says Aggarwal, are the prospect of fraud and counterparty risk. Fraud is an unwelcome bedfellow to straitened economic times; when times get tough, the incidence of financial crime rises. Meanwhile, the crisis of 2008 and the current plight of the eurozone have heightened concerns over where you keep your cash on deposit.
According to Aggarwal, our view of banks and the risks associated with them changed dramatically after the collapse of Lehman Brothers: “When we used to see something called a bank, it had a certain reputation and the fact is that we now know that that is not the case,” he says. Or, as Martin O’Donovan, deputy policy and technical director at the Association of Corporate Treasurers, puts it: “People are far more credit conscious. We want to make sure we are dealing with the right banks. Credit isn’t quite as easy as it used to be.” Indeed, advisers note that the reaction among some companies has been to reduce the volume of working capital they hold in an institution overseas from a supply of money that would typically last two or three months to one that would keep the business going for a precautionary four weeks.
Bringing money home may feel like a priority. Cash could be in demand to support working capital, service debt or be put to more profitable use than loitering in a bank account, earning unimpressive rates of interest
The recent scandal over fixing Libor rates will have served to further undermine bank reputations. But that doesn’t necessarily mean it’s sensible to wing the money home as fast as a bank transfer will carry it. Jones points out that there may be good reason to leave it in-country because it could well form part of a plan to spread risk with diversified banking providers. Repatriating it could also present an FX risk. A stable institution in an emerging market might therefore be the right place for it. That said, liquidity issues are enormously complex, ranged, as they are, across a variety of regulatory factors. But the reasons to act are clear: better use of cash and the amelioration of risks from FX through to counterparty problems.
Deutsch concludes in his paper that “with research, planning and a carefully conceived investment policy, companies can ensure that their cash is invested effectively and appropriately in each market in which they operate and avoid getting trapped in restricted markets”. But then he would say that.
Gavin Hinks is a business and finance journalist and the former editor of Accountancy Age and Financial Director magazines.
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Hi Gavin