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Sweeping cash changes for corporate treasurers post-Cyprus

Sweeping cash from one jurisdiction to another is a fashionable cash-management strategy for multinational corporations, while deposit haircuts and capital control fears post-Cyprus, plus more general banking stability fears, heap on counterparty risk, principally at bank level.

Sweeping cash management strategies are coming to a town near you. Companies undertake cash sweeping – the process where corporate treasurers transfer a given portion of their cash balances into another deposit account or alternative investment conduit at the close of each business day – for a number of reasons. By pooling balances into a single account they can reduce interest costs or increase interest income. It is also a way of moving cash from high risk countries to low risk countries.

Bas Rebel, senior director treasury advisory at PwC, notes that sweeping continues to be a hot topic for companies. “With banks still reluctant to provide credit lines and, if they do, at a premium margin, sweeping is a way to reduce dependency on bank credit,” he says.

In light of recent eurozone developments – most notably the introduction of a deposit tax in Cyprus on balances over €100,000– it might be expected that companies would take the opportunity to consider whether a similar tax could be introduced elsewhere. As such, companies might reasonably decide to adjust their sweeping activities accordingly in order to pull money out of bank deposits in countries which are perceived to be weak, says a senior industry commentator.

With cash becoming ever more concentrated in high quality jurisdictions in Europe, and with ever more cash chasing a restricted number of issuers, a significant migration of cash could put further pressure on yields at the short end, he adds.

But evidence suggests that this has not been the case following the Cyprus deposit tax. Rebel says that he is not seeing any particular trend in the countries in which companies concentrate their cash. “Typically funds are concentrated in the country of its headquarter and/or in the country of the headquarter of its prime bank,” he adds.

Andrew Reid, co-head of cash management corporates EMEA at Deutsche Bank, draws a distinction between companies’ operating balances and their surplus cash balances, noting that there has been little change in the way in which surplus cash is managed in response to the Cyprus situation. He does, however, say that Deutsche has seen an increase in operational balances held in Germany in the last six to 12 months – and suggests that companies are focusing on counterparty risk at a bank level, rather than a country level.

Companies are unlikely to be complacent about the security of their cash – but following the wake-up call they experienced in 2008, and the challenging conditions that have persisted ever since, many have already extensively revisited their liquidity management strategies.

Some stepped up their sweeping activities then in order to move cash out of certain countries, while others spread their deposits across more banks to diversify the risks. Companies also began adopting more sophisticated risk monitoring practices, such as looking at CDS spreads as well as credit ratings when measuring bank risk. Many reduced counterparty limits restricting the amount that could be deposited with any particular bank.

Having put all these measures in place, many companies may feel that their liquidity management practices are now fit for purpose – and that the developments in Cyprus do not require them to do anything differently. That’s not to say that companies are not reacting to the events of Cyprus, however. Reid says that companies are engaging in a more active dialogue around the subject of contingency planning, which has been on the radar of many corporations since 2009. “Companies started to look at everything from their bank partner model to their technology platforms and liquidity management operations,” he says.

A survey published by PwC in 2012 found that in response to the euro crisis, over 60% of respondents were “doing more to understand and identify the related risks and ensure that [they] have contingency plans in place”. The survey also reported that more than a fifth had changed their approach towards managing their exposures and related risks, and were “taking a view on the direction that currencies might take or how counterparties might fare as a result of the crisis in Europe and beyond”.

Many companies in Europe and beyond have put in place sophisticated contingency plans to cover outcomes up to and including a break-up of the euro. The arrival of the deposit tax in Cyprus has introduced another risk which many had not considered: the prolonged closure of a particular country’s banking system, combined with uncertainty about whether and when that banking system would be reopened. As such, companies are now beginning to factor such an outcome into their contingency planning.

Reid says that companies are beginning to look into specific contingency measures on a tactical basis, such as distributing prepaid cards attached to offshore accounts, in order to support local employees if they cannot withdraw cash from ATMs. “Companies are looking for a ‘break box in case of emergency’ type of provision,” he adds. “So the focus is more on tactical and local solutions, as opposed to macro and strategic changes such as changing the company’s sweeping structures.”