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Banking

Liquidity management debate: One day at a time

The post-credit-crunch environment has thrown the spotlight on intra-day liquidity facilities. Once taken for granted, these have now become a symbol of the changing relationships between banks and clients in cash management, and of the stresses still inherent in the global credit system.

 Delegate biographies: Learn more about the panelists 


Jack Large (JL) is a freelance analyst and consultant.
 

Executive summary

  • Companies want to be able to continuously fine-tune their intra-day liquidity requirements

  • In a credit-constrained situation supply-chain financing advantages need to accrue to both ends of the chain

  • Counterparty risk and risk mitigation is an increasing concern in the present environment

  • Companies are in increasing need of techniques for forecasting cashflow and enhancing cash visibility

JL, J&W Let’s start with overall working capital management strategy. John?


John Gleason (JG) is Dell’s EMEA regional treasurer.
JG, Dell Dell’s core business model was built on the foundation of attention to working capital management, specifically balancing what we call the ‘triangle’ of liquidity, profitability and growth. We view all three as equal legs to the same stool. We operate on a model of very low DSO [day sales outstanding]. We are one of the most efficient companies on the planet when it comes to managing inventories and DSI [days sales in inventory], and we also balance our supply chain by having a healthy DPO [days payable outstanding]. Throughout the credit crisis, we have basically been operating according to our long-standing principles.

However, we have made changes. One is that we have linked our executive compensation to a metric that we call cashflow contribution. This is a measure of the cash generation of a particular division or geography of the company. For example, sales people now don’t simply have to ask: ‘What are the margins that I am achieving on this deal?’ or ‘What is my sales growth with this customer?’, they also have to be concerned with: ‘Is the customer going to pay and when?’ This has elevated the importance of the treasury function as now the business front office comes to us and asks: ‘What can we do to improve our cashflow?’ rather than the other way around.

Jack Large (JL) is a freelance analyst and consultant.
JL, J&W That is a big change isn’t it?


John Gleason (JG) is Dell’s EMEA regional treasurer.
JG, Dell Yes – a change for the better. Since executive compensation is linked to this, it is a topic that is frequently raised to board level. Our senior executives participate in what we call working capital council meetings, where the divisional heads of finance and general managers are held to account not only on their P&Ls but also on their divisional balance sheets, their cash collection, their inventory management and so on.

Brendan Reilly (BR) is responsible for country product management for Deutsche Bank’s cash management products in the UK, France, Belgium and the Netherlands.
BR, Deutsche The key is that this is now a C-level discussion. This is why the banks are focusing on it and why they have to provide a broad set of solutions. Of course, it also really helps us build those sticky relationships with a customer – it’s more strategic, it’s longer-term and it’s not just transactional.

Phillip Lindow (PL) is head of global treasury and investment management in the global transaction services division of RBS
PL, RBS We have noticed that there have been many more active intra-day conversations at that level. Previously, companies would put in a solution and then let it run. Now it is much more about continuously fine-tuning that solution and discussing performance management optimization.

Jack Large (JL) is a freelance analyst and consultant.
JL, J&W And where can the banks actually help with overall working capital management?


Brendan Reilly (BR) is responsible for country product management for Deutsche Bank’s cash management products in the UK, France, Belgium and the Netherlands.
BR, Deutsche Well, one key change is moving towards the corporate platforms. This is not so much about Swift. This is about being linked to such platforms as GXS or Global Supply Chain Finance [GSCF]. The corporates have built up some very effective and sophisticated platforms. So the smart banks’ attitudes are changing: instead of trying to attract the corporates to their platforms, we’ve realized we have to join the corporate platforms and provide solutions that help automate the supply-chain process, on both the buyer and the supplier side, rather than imposing bank platforms on the corporates.

Tom O’Donnell (TD) is global head of sales for Barclays’ commercial cash management and trade finance business.
TD, Barclays Exactly. It is not a proprietary relationship any longer. The banks now realize that they can play a role in the overall strategy of such global companies as Dell but that they need to support non-proprietary formats, to go with Swift and corporate access if that is the client’s strategy, and to realize that they can offer value in certain areas, in certain geographies, and they cannot in others. Banks also have to accept that they have to cooperate with one another, which is not something they have always done very well.

Phillip Lindow (PL) is head of global treasury and investment management in the global transaction services division of RBS
PL, RBS We find that we are getting much more deeply involved with clients, especially credit-challenged clients where you are with them on a day-to-day basis, helping them identify where liquidity is trapped on an intra-day basis and making it available to them in locations where they need it. And as the broader market has changed, as revolvers fund more slowly and later in the day, we have to adapt how we work with the clients on these platforms to make them work effectively. But the strategic watchwords are centralization, stabilization and then performance management.

Paul Stheeman (PS) is director, international treasury, of Petro-Canada
PS, Petro-Canada We are an oil company, which means that we have a very standardized process when it comes to managing receivables, payables and our working capital. We do not diverge a huge amount from the industry norm. For instance, receivables from our oil and gas sales are payable 30 days after bill of lading and there is no negotiation. There is not much we can do there. We have been talking to various counterparties looking for different terms and have achieved them in two instances. However, this had more to do with our concerns about the credit quality of the counterparty than the overall working capital management strategy. Where I think we as an oil company still need to do a lot of work is on the payables side.

Brendan Reilly (BR) is responsible for country product management for Deutsche Bank’s cash management products in the UK, France, Belgium and the Netherlands.
BR, Deutsche If I could perhaps add one thing on the strategy side, Jack, particularly given the type of environment we are in now. Supply-chain finance is not just about getting cheaper credit for suppliers, it is also helping buyers to extend their payment terms while at the same time enabling buyers to say to suppliers: ‘We want to build up our relationship with you and put in place solutions that help you in terms of providing another source of credit that is also potentially more cost-effective and automated and which then also helps us to create reliability in our supplies and strengthen our link with key suppliers.’

Paul Stheeman (PS) is director, international treasury, of Petro-Canada
PS, Petro-Canada I think that is something that we have achieved as well, in particular in the last months, a stronger relationship with our suppliers, based on what I would call good healthy negotiations. We have been able to achieve better terms in very many cases but build very much on trust with, as you said, Brendan, key suppliers. That is an important message.

Phillip Lindow (PL) is head of global treasury and investment management in the global transaction services division of RBS
PL, RBS And these are global as well as regional solutions. We recently completed one for a big UK retailer. It had already identified its core supplier base and was aware of the value of supporting the financing needs of those suppliers. We’re working with it to support over 100 individual suppliers worldwide to discount invoices and get the cash when they need it.

Brendan Reilly (BR) is responsible for country product management for Deutsche Bank’s cash management products in the UK, France, Belgium and the Netherlands.
BR, Deutsche One of the other benefits of these arrangements is that because the bank becomes the payment agent for the buyer, even if the supplier does not take advantage of the discounting, this arrangement ensures that the supplier gets paid on the settlement date. So even by taking part in the arrangement but not taking advantage of the discounting, the supplier is still benefiting in terms of making sure that it receives the funds on the settlement date, because, for example, some companies will pay suppliers on a monthly cycle irrespective of the agreed settlement date. Small things like this can make a big overall difference to your DSO.

Jack Large (JL) is a freelance analyst and consultant.
JL, J&W Seeing as we are on the supply-chain financing and extending DPO, John, you have some less than enthusiastic views on supply-chain financing.

John Gleason (JG) is Dell’s EMEA regional treasurer.
JG, Dell I have always been a bit sceptical because I feel there are more efficient ways of raising finance than doing it on an invoice-by-invoice basis. But I have been impressed with some of the recent developments I have seen in the product. Many banks have invested heavily in platforms and I do see arbitrage value from lower cost of funds when you have buyers who have higher credit ratings than their suppliers. I still think that these programs are complex. They are fraught with issues around legal agreements, systems, controls and transaction speed. But I do see value, particularly in today’s climate, when they can provide liquidity to suppliers.

Jack Large (JL) is a freelance analyst and consultant.
JL, J&W There is every good reason to try to extend your days payable but if you have forced your suppliers into bankruptcy that does not do you any good at all.

John Gleason (JG) is Dell’s EMEA regional treasurer.
JG, Dell That is right. My opinion of supply chain, especially in changing times, is that the goal is that you should not get squeezed by either side of the supply chain. The natural thing you start to see in tough economic times is buyers extending their terms with their suppliers and that pushes its way all the way down the supply chain and somebody gets squeezed in the end.

Phillip Lindow (PL) is head of global treasury and investment management in the global transaction services division of RBS
PL, RBS I agree. Fundamentally, there has to be a healthy commercial relationship between buyer and supplier, otherwise the whole supply chain grinds to a halt. Clients are looking for us to help in managing their payment cycles, and supplier financing programmes are in the spotlight right now. The goal is to find win-win alternatives, so that the suppliers can have access to the discounting while the buyer can extend the terms.

Tom O’Donnell (TD) is global head of sales for Barclays’ commercial cash management and trade finance business.
TD, Barclays It is a balancing act. There always has been a ripple effect within the relationship between buyers and suppliers. I think now there is less cushion to absorb those ripples. A large corporate can push a supplier to the edge by becoming predatory in some aspects of how they manage their supply chain, and it is a question of how far they can go. I think the issue is how efficient one can become before you really start to hurt players in the process, and the most efficient companies have probably pushed as far as they can.

John Gleason (JG) is Dell’s EMEA regional treasurer.
JG, Dell One of the alternatives to supply-chain finance, obviously if you are a supplier, is factoring. The problems with factoring are pricing, availability, lack of committed facilities, and complex administrative processes. As a result of the current recession, there is a clear reduction in the availability of factoring as a source of funds. So it seems that there is definitely more demand for supply-chain financing and the reverse factoring product that the banks have, now more than ever.

Jack Large (JL) is a freelance analyst and consultant.
JL, J&W So the conclusion is that the main trend in extending or managing DPO is in supply-chain financing rather than anything else?


Phillip Lindow (PL) is head of global treasury and investment management in the global transaction services division of RBS
PL, RBS It is definitely an area where we are seeing significant opportunities for growth.


Counterparty risk and risk mitigation

Jack Large (JL) is a freelance analyst and consultant.
JL, J&W The final aspect of working capital management is counterparty risk from trading partners. How do changes in relative credit quality affect relationships?

Paul Stheeman (PS) is director, international treasury, of Petro-Canada
PS, Petro-Canada We’ve found that the key lesson here is that things that have been fixed practice for long periods of time can be negotiated. We were surprised by one counterparty who simply said: ‘OK, I’ll pay you up front and I’m not fussed about a discount.’ Now with interest rates where they are it probably did not make a huge difference, and he probably would have come back with a different story if we had interest rates at 8%. But it was a surprise and it shows that counterparties will be flexible in order to protect their own needs.

Tom O’Donnell (TD) is global head of sales for Barclays’ commercial cash management and trade finance business.
TD, Barclays This all falls under the wider topic of risk mitigation and we certainly see that as a theme with traditional trade making a comeback. People are very sensitive to counterparty risk and are looking for intermediaries like us to use our local knowledge in a particular market to offset it. For customers who are willing to pay for that, the banks are only too happy to add value in that regard. But when we return to more normal circumstances, will we see a trend away from that again? I think yes.

Jack Large (JL) is a freelance analyst and consultant.
JL, J&W We will go back to open account trading and so on?


Tom O’Donnell (TD) is global head of sales for Barclays’ commercial cash management and trade finance business.
TD, Barclays Yes. It is really just a matter of cost, the cost of that cover.


Paul Stheeman (PS) is director, international treasury, of Petro-Canada
PS, Petro-Canada Just going back to your comment on letters of credit. Things have changed a lot on the bank side as well. We now look at each letter of credit on an individual basis and assess the bank counterparty risk involved with that.

Jack Large (JL) is a freelance analyst and consultant.
JL, J&W And how do you do that?


Paul Stheeman (PS) is director, international treasury, of Petro-Canada
PS, Petro-Canada Basically we do most of it ourselves. We follow credit default swaps. We follow the share price movements. We look at the credit ratings. But at the end of the day it is up to us in treasury to say: ‘OK, we will accept this letter of credit or not.’

Jack Large (JL) is a freelance analyst and consultant.
JL, J&W John, in terms of counterparty risk you have done a number of different things in the current environment, haven’t you, to manage it?


John Gleason (JG) is Dell’s EMEA regional treasurer.
JG, Dell Yes. Our strategy is to employ what we call the layered approach to credit. The first layer is the basic Dell unsecured terms, where credit lines are determined by financial statement analysis and credit bureau reports of the customer. The second layer would be secured terms, for example, the customer providing a parent guarantee or a stand-by letter of credit. The last layer is pre-payments or confirmed letter-of-credit transactions.

Jack Large (JL) is a freelance analyst and consultant.
JL, J&W Which is the most popular now?


John Gleason (JG) is Dell’s EMEA regional treasurer.
JG, Dell Credit insurance and stand-by letter of credit.


Paul Stheeman (PS) is director, international treasury, of Petro-Canada
PS, Petro-Canada I mentioned LCs a couple of minutes ago, but the majority of sales that we do are on an open-credit basis. We deal mainly with large oil companies and traders, where recently there have not been any problems. However, we still have limits for each and every one of our counterparties, which we monitor strictly on a daily basis and which our sales people have to look at before concluding a deal. The only thing is that we are pretty fortunate in being able to allocate relatively large credit limits to most of our counterparties.

Jack Large (JL) is a freelance analyst and consultant.
JL, J&W So if we look at the counterparty risk in the consumer and SME area, that is significantly different, isn’t it? Is that where you just do pre-payment?

John Gleason (JG) is Dell’s EMEA regional treasurer.
JG, Dell Consumer is largely pre-payment. In our business it is largely a debit/credit card business for consumer. We do work with our finance company to provide consumer instalment loans and we work with other finance customers to provide extended-term financing for the SME segment. Our receivables in that segment tend to be plain-vanilla 30-day accounts receivable and we manage those receivables using our layer approach. For extended-term financing, lease and loan product, we refer our customers to our partners.

Jack Large (JL) is a freelance analyst and consultant.
JL, J&W So what are the lessons from helping your corporate clients manage their counterparty risk?


Tom O’Donnell (TD) is global head of sales for Barclays’ commercial cash management and trade finance business.
TD, Barclays Suppliers are pretty sophisticated in their counterparty risk management. So supply-chain finance programmes are not simply about getting them cheaper credit, it is also about them removing buyer concentration risk, for example. That is a change and it’s part of the value we can add through these programmes.

Phillip Lindow (PL) is head of global treasury and investment management in the global transaction services division of RBS
PL, RBS I agree, and in fact we are seeing more suppliers interested in accessing these programmes for liquidity and risk-mitigation reasons. Increased demand means more liquidity needs to be made available, so there is a drive to innovate. Currently, we’re looking at a number of new ways of accessing liquidity, including developing a direct distribution capability into the capital markets, enhancing our corporate distribution capability and partnering with governments or multilateral institutions in specific initiatives to support suppliers. These developments create deeper liquidity pools and expand the number of suppliers that can take advantage of the risk-mitigation aspect of supply-chain finance programmes.

Jack Large (JL) is a freelance analyst and consultant.
JL, J&W What other techniques are available?


John Gleason (JG) is Dell’s EMEA regional treasurer.
JG, Dell Well, of course it used to be flooring. Flooring was the financing that was available to consumer/SME customers who wanted to buy large-ticket products, but you do not hear so much about this form of financing. What you see is reverse factoring, and that is maybe a little bit easier for banks to get comfortable with, rather than flooring. So in other words, banks are happy to have the large, blue-chip corporate risk exposure, but not take the consumer/SME exposure as much, in this particular climate.

Intra-day issues

Jack Large (JL) is a freelance analyst and consultant.
JL, J&W How can the banks help companies manage the disappearance of credit allowances and credit facilities?


Phillip Lindow (PL) is head of global treasury and investment management in the global transaction services division of RBS
PL, RBS We have been spending quite a bit of time on this with our more credit-constrained clients whose cash management structures need fairly aggressive updating so that they can squeeze all the liquidity they have. Previously most of the focus on the structures was on managing inter-day liquidity, those structures where liquidity is centralized at the end of the day and managed centrally. This is a very sensible way to do cash management and adds a lot of value. Extension of these solutions across currencies via products such as cross-currency pools can significantly extend the balance values included.

But what we are seeing, given the tightness of credit for certain clients, is that these structures can also help move liquidity around intra-day and provide liquidity where it’s needed. This is particularly necessary where funding groups have been relatively slow to pay out funding during the course of the day, which can be especially problematic if you are a European company with significant finances being originated from north America. The time-zone differences on making liquidity availability within Europe can be very challenging for tightly managed structures.

What we have found is an increased focus on intra-day movement of liquidity and availability as opposed to focusing on inter-day cash concentration. This holds true whether it is via accounts within our own network or with client accounts at third-party banks. Where we might have done a zero balancing or a draw-down from a third-party bank to fund a cash concentration account at, say, four or four-thirty in the afternoon to bring the funds into the centre cash pool, we now would be doing a funding transfer out of the centre very early in the morning, to withdraw cash and put liquidity into those institutions so that they can make their payments.

Then at the end of the day, we’re drawing the funding back for centralized investing. Previously there would rarely have been the need to do these types of transactions. Now where the credit and cash are incredibly valuable to a firm, we have been starting to do much more of it. This results in significantly more pressure on the intra-day reporting and the intra-day cash forecasting. But when you do not have the lines or the limits at those banks, you need to come up with innovative solutions.

Jack Large (JL) is a freelance analyst and consultant.
JL, J&W But this raises all sorts of questions in terms of bank charges. Because these transfers and these drawn-downs and so on are not free.

Phillip Lindow (PL) is head of global treasury and investment management in the global transaction services division of RBS
PL, RBS If you are centralized you do have more leverage as far as those charges are concerned, and for the proprietary networks those are very manageable. On this we also look for Sepa [the Single Euro Payments Area], as it becomes more widely available, to enable companies to replace some of those more expensive transferring and funding wires with Sepa-type transactions.

John Gleason (JG) is Dell’s EMEA regional treasurer.
JG, Dell So this application seems as if it would be in cases where you are not comfortable with the daylight lines that you might have.


Phillip Lindow (PL) is head of global treasury and investment management in the global transaction services division of RBS
PL, RBS We generally have daylight lines available.


John Gleason (JG) is Dell’s EMEA regional treasurer.
JG, Dell But they are not high enough.#


Phillip Lindow (PL) is head of global treasury and investment management in the global transaction services division of RBS
PL, RBS Obtaining large intra-day limits was generally much easier in the past. Where a company previously might have had a very large line, now they might have a much narrower day limit, or their limits with third-party banks that might not be a direct part of the pool might have been reduced. For example, if a client is using a bank in Poland that is near a factory and needs to make payrolls, the local Polish bank might have pulled lines that they provided in the past. Providing the liquidity into those particular accounts has become very important.

Jack Large (JL) is a freelance analyst and consultant.
JL, J&W These intra-day facilities and services are not new. What have you done that has made it work better?


Phillip Lindow (PL) is head of global treasury and investment management in the global transaction services division of RBS
PL, RBS There is a shift in focus from end-of-day transfers to the intra-day management of liquidity. Previously, clients did not really press the intra-day issue, and it generally was coverable from existing lines, or if it related to a very specific case, you could set up a standing instruction quite easily.

Tom O’Donnell (TD) is global head of sales for Barclays’ commercial cash management and trade finance business.
TD, Barclays Yes, we have seen more interest in intra-day, simply in trying to become more efficient. So my bank has invested in a new platform to issue those automated debits against these accounts, to act on intra-day Swift 942 statement information messages, and to put more bilateral agreements in place with third-party banks to manage intra-day liquidity. So we have created engines that allow for third-party intra-day reporting. Traditionally, corporates have primarily relied on end-of-day Swift MT 940 statement information messages, and I think previously that was enough. But now there has been an increase in companies wanting to achieve two-way funding, and also in wanting intra-day information.

Paul Stheeman (PS) is director, international treasury, of Petro-Canada
PS, Petro-Canada I think the best way to achieve that is to have as centralized a payments set-up as possible. I fully understand to go back to your example that you cannot make local zloty payments for Poland out of here or anywhere else. But as soon as you have an opportunity, and you are talking about international payments, centralization is the best way to manage your costs in the most efficient way.

Tom O’Donnell (TD) is global head of sales for Barclays’ commercial cash management and trade finance business.
TD, Barclays Companies need to help their banks understand what the intra-day exposures are there for, what limits are needed and what is the utilization rate of those limits. Then we can come up with an appropriate compromise. And companies need to understand that these facilities are not cost-free.

Paul Stheeman (PS) is director, international treasury, of Petro-Canada
PS, Petro-Canada I think equally important is understanding what the customer’s requirements are. From the clients’ perspective, their needs regarding intra-day credit lines and payments have not changed; rather it is the requirements of the banks that have changed and made things harder for the clients. Banks need to be upfront with clients about what they need to see if there is a solution that works for both sides.

John Gleason (JG) is Dell’s EMEA regional treasurer.
JG, Dell I have noticed that not all banks trade on the same philosophy. Some banks have become very tight when it comes to intra-day credit lines; other banks have not. As a treasurer, there is nothing more annoying than being disrupted in a meeting because a bank is holding an immaterial wire transfer due to a minor daylight overdraft issue. This is the type of thing that we expect banks to manage. Banks should simply get comfortable with doing business with a particular corporate, before trying to cut the intra-day flow so finely.

Brendan Reilly (BR) is responsible for country product management for Deutsche Bank’s cash management products in the UK, France, Belgium and the Netherlands.
BR, Deutsche But at the same time, banks particularly over the next year or so are going to be caught up in a whole slew of requirements around liquidity. If they do not already monitor liquidity effectively during the day and make sure that they have the right sort of buffers in place, then you will find that sort of thing happening more and more. It is all the more reason why you need to be with banks capable of generating their own liquidity and managing it well, or providing you with the tools that help you manage it, like conditional payments or timed payments to spread payments out during the day appropriately where they are particularly large. We are all going to face challenges there.

Jack Large (JL) is a freelance analyst and consultant.
JL, J&W You are all reducing intra-day limits, though. I have not met a bank over the past 10 weeks that is not in some way reducing intra-day limits on their corporate clients. It is an inevitable consequence of Basle II, as well as the credit crunch.

Phillip Lindow (PL) is head of global treasury and investment management in the global transaction services division of RBS
PL, RBS And the regulatory scrutiny of how you manage intra-day limits has increased significantly.


Brendan Reilly (BR) is responsible for country product management for Deutsche Bank’s cash management products in the UK, France, Belgium and the Netherlands.
BR, Deutsche For example, the Basle regulation requires that banks ensure that the cost related to liquidity provision finds its way to the business that is causing that cost. So cross-subsidy is not an option, which in turn means that in some cases the perceived cost to the customer will rise.

Jack Large (JL) is a freelance analyst and consultant.
JL, J&W So when are you going to start charging intra-day? You already are, in a way, you charge earlier – if you want to pay late, you charge more than if you make it early.

Brendan Reilly (BR) is responsible for country product management for Deutsche Bank’s cash management products in the UK, France, Belgium and the Netherlands.
BR, Deutsche We will charge for liquidity where it is appropriate to do so. For example, if a payment is large, early in the day and urgent, then it uses liquidity which has a cost to the bank. This cost needs to be covered through the value of the customer relationship.

John Gleason (JG) is Dell’s EMEA regional treasurer.
JG, Dell So do you give additional compensation to customers who have higher collected balances, particularly in the morning?


Brendan Reilly (BR) is responsible for country product management for Deutsche Bank’s cash management products in the UK, France, Belgium and the Netherlands.
BR, Deutsche That is a common question! The issue is that customers naturally want a return on their overnight balances, this obviously conflicts with wanting a return on the intra-day as well. If market infrastructure changes so that a bank can ensure that the overnight balances arrive back first thing in the morning, then it might be possible that a bank could pay interest on intra-day amounts. But until that happens, it’s not viable to achieve both overnight and intra-day interest.

John Gleason (JG) is Dell’s EMEA regional treasurer.
JG, Dell We do have a case where one of our banks has cut the daylight line so finely that I get frequent interruptions from their call centre enquiring about immaterial daylight overdrafts. In each instance, we replay the same discussion where I explain that it is our process to fund daylight overdrafts – if any – in our afternoon cash positioning. In the end, the bank’s call is just an annoyance that adds no value to anyone. As a corporate, we expect our banks to manage intra-day funding as part of their standard service. If the bank has fundamental credit issues, then I fully understand the vigilant controls. But apart from that it seems like this is not an activity that adds a lot of value to a corporate.

Paul Stheeman (PS) is director, international treasury, of Petro-Canada
PS, Petro-Canada I fully agree. Exactly.


Jack Large (JL) is a freelance analyst and consultant.
JL, J&W As long as you are sound and your cashflow is OK.


Paul Stheeman (PS) is director, international treasury, of Petro-Canada
PS, Petro-Canada Yes, but again, that is also part of the bank relationship process, in giving the banks that confidence. So I do not think that is a huge problem.

Brendan Reilly (BR) is responsible for country product management for Deutsche Bank’s cash management products in the UK, France, Belgium and the Netherlands.
BR, Deutsche You do need a more in-depth conversation these days with customers around liquidity than you used to. Liquidity cost probably even two and a half years ago was something like 12 to 15 basis points. A market rate now for intra-day liquidity, which of course one needs to have secured on a term basis for reliable payment flow, in terms of sterling, is probably something like 80bp. That is a big change. It is not just out there for free, and we have to have honest conversations around this. One can’t simply take an approach that payments are a commodity and just happen, we have to discuss in the context of a relationship and the intra-day and reliable liquidity requirements that result.

John Gleason (JG) is Dell’s EMEA regional treasurer.
JG, Dell Is it not banks pushing their settlement times back later in the day? As corporates we have not really changed anything.


Brendan Reilly (BR) is responsible for country product management for Deutsche Bank’s cash management products in the UK, France, Belgium and the Netherlands.
BR, Deutsche No, it is not the fault of the corporates. It is mainly a function of how much that liquidity costs, and how easy it is for the bank to reliably acquire or generate that liquidity. So if you look at sterling, for example, it is not a result of payments being pushed out later. There are service-level agreements in Chaps that make sure that a certain percentage of payments go out by 10:00, by 12:30 and by 14:30. Chaps coped extremely well during the more challenging time of the credit crunch and in fact the timing of the Chaps payment flows has not changed too much.

However, as a Chaps member you need to place collateral with the Bank of England to generate liquidity. This is not something you can adjust every five or 10 minutes. This is then collateral that you have tied up that you are not able to use to generate cash for lending. This is how you calculate the opportunity cost. So yes, it has always been there, but the cost of getting hold of that liquidity and the size of that liquidity requirement is going to be something that you want to manage, and you want to talk to customers about and that you want to use to generate strategic relationships.

Phillip Lindow (PL) is head of global treasury and investment management in the global transaction services division of RBS
PL, RBS I think one of the costs that is not generally realized is the size of the liquidity that needs to be kept with the clearing organizations by the banks to facilitate payments and clearing. The amount is very large and the cost on that is not immaterial.

Jack Large (JL) is a freelance analyst and consultant.
JL, J&W I was talking to a banker who was saying that they had to go to one corporate and say: ‘Look, your daylight overdraft is four billion’, and they had no idea of the scale of it. They just had not worked it out, because they got the sequence of things in such a way, and all of a sudden when they started getting charged for it, then comes the internal discipline within the corporate.

Tom O’Donnell (TD) is global head of sales for Barclays’ commercial cash management and trade finance business.
TD, Barclays From a sales perspective representing a bank, these kinds of conversations can be very painful if the changes in intra-day have been caused by administrative processing rather than legitimate business decisions around what is or is not the risk appetite of the bank for a particular client. I think it is around communication and around making sure that the right people are talking with one another and a decision is made that hopefully minimizes that level of pain.

Jack Large (JL) is a freelance analyst and consultant.
JL, J&W But what is the big lesson from this intra-day liquidity issue – this is fundamental?


Brendan Reilly (BR) is responsible for country product management for Deutsche Bank’s cash management products in the UK, France, Belgium and the Netherlands.
BR, Deutsche I think going into a new relationship you have to be completely open – determine what the customer’s intra-day requirements are and ensure that there is value in a strategic relationship for both parties. There needs to be openness about cashflows and the liquidity required. One also needs to cover what visibility the customer presently has on its cashflows, where the weaknesses are and how the bank can improve visibility and control.

Paul Stheeman (PS) is director, international treasury, of Petro-Canada
PS, Petro-Canada I agree. The important thing is to talk to your banks and make sure that you understand each other. For me to understand the banks is not always easy. It sometimes sounds a little bit as if the banks are coming and saying: ‘We’ve got a new problem and we’re passing it on to you to pay to solve’.

Phillip Lindow (PL) is head of global treasury and investment management in the global transaction services division of RBS
PL, RBS There are some product solutions to this. Clearly intra-day advising and reporting is critical, so that clients can understand exactly where their flows and timings are. We have also created products related to the timings of investment flows maturing, products that blend the liquidity of a current account with the valuation of a time deposit to increase the availability of liquidity on an intra-day basis while giving a time deposit return over the long term.

Jack Large (JL) is a freelance analyst and consultant.
JL, J&W John, how do you deal with this?



John Gleason (JG) is Dell’s EMEA regional treasurer.
JG, Dell We work off a cash forecast that is generally accurate. First, all of our payments go out in the morning. If an overdraft is forecast for the day, we will also fund the account at this point. Next, throughout the day, cash receipts from customers are deposited to our accounts. We then re-evaluate our cash position at mid-day and end of day compared with our forecast. Finally, depending on the account balance we either draw down cash or book an investment to fund the account. Our cash position is whole by the end of the day. That is typically how the process works.

While we are happy to provide ATRs for material daylight overdrafts, having the bank draw us into minute-by-minute discussions about the exact timing of particular debits or credits or surcharging daylight overdrafts adds no value to corporates: we expect banks to manage the intra-day funding process for us.

Cash visibility and forecasting

Jack Large (JL) is a freelance analyst and consultant.
JL, J&W This brings us neatly to cash visibility and cashflow forecasting – a subject that divides the banks (some have pulled out, others are signing record numbers of clients) and the corporates (some swear by it, others refuse to do it). What are the table’s views?

John Gleason (JG) is Dell’s EMEA regional treasurer.
JG, Dell Cashflow forecasting is always important, and is a fundamental treasury discipline.

At Dell we apply both the direct and indirect cashflow forecasting methods on a rolling cycle. Treasury has built and manages the platform, and our shared services organization (‘Global Financial Services’) has the responsibility to input their rolling six-week forecast for cash receipts and disbursements into the tool. In turn, treasury uses the forecast to fund bank accounts and move liquidity around the company – in other words, set the short-term cash position.

The long-term indirect cashflow forecast is used more for strategic purposes, for example, projecting our corporate cashflow statement out beyond multiple quarters. We can use this to make strategic decisions around capital structure and around investments into the business.

We marry both the direct and the indirect methods together in order to have a good insight into where we are likely to come out at the end of a particular period. All the cashflow metrics are reviewed with the working capital council and we are especially focused on our cash conversion cycle (DSO, DSI, DPO). Those are the metrics that we try to predict with a very high degree of accuracy.

Jack Large (JL) is a freelance analyst and consultant.
JL, J&W Thank you. Paul?




Paul Stheeman (PS) is director, international treasury, of Petro-Canada
PS, Petro-Canada We definitely do it, and it is very important for us as well, regardless of whether we are in a cash-long position or a cash-short position. Actually, we are right in the middle of restructuring our forecasting process with the aim of improving the quality of the cashflow forecasting. Deviations were much higher than we wanted.

We give the cashflow forecasting accountability down to the business unit of the individual countries and individual regions, so that they can do a bottom-up forecast. They know the operations better than we do; they know the expected cashflows. We have a 12-month rolling forecast on a monthly basis and are considering introducing on top a daily rolling forecast for the following month or six weeks to be updated on a weekly or possibly even a daily basis.

I would like to add that it is not only important from a cash perspective, but it’s also important for determining any foreign exchange exposure, as it is done in original currencies. It is not just a matter of cash.

We are also considering introducing performance metrics for the quality of cashflow forecasting. That is a strong indication of how much it is growing in importance.

Jack Large (JL) is a freelance analyst and consultant.
JL, J&W Can the banks help in any of this process?


John Gleason (JG) is Dell’s EMEA regional treasurer.
JG, Dell The main thing they can do is provide detailed, high-quality, real-time bank statements showing the actual cash receipts and disbursements. While this sounds simple, bank statements are not uniform across all banks and that is still a problem in 2009.

Also, for us the first thing we do after a forecast is to compare it to the actual. Here banks could do a little bit more in helping us classify and summarize the activity in the bank statement. In the US, for example, banks classify data on bank statements by BAI codes.

The next new thing

Jack Large (JL) is a freelance analyst and consultant.
JL, J&W To wrap up, let’s try to summarize the new norms that will define the liquidity environment over the next two to three years, given the new and credit-constrained world in which we all have to live?

Paul Stheeman (PS) is director, international treasury, of Petro-Canada
PS, Petro-Canada The key thing is that what was routine has become not routine. Any kind of investment, entering into any new counterparty exposure, requires case-to-case handling, and I think that is not going to go away. It also requires much more resources.

Brendan Reilly (BR) is responsible for country product management for Deutsche Bank’s cash management products in the UK, France, Belgium and the Netherlands.
BR, Deutsche It’s return of capital not return on capital. So clients will have fewer counterparties and stronger, more strategic relationships. Also, liquidity constraints will act as a driver for centralizing collections and getting cashflows balanced. In this context, the Sepa direct debit will become very relevant in facilitating collection factories. We will also continue to focus on building automated links to the customer, supplying prompt, comprehensive and reliable information in a customer-friendly format.

Phillip Lindow (PL) is head of global treasury and investment management in the global transaction services division of RBS
PL, RBS The priorities will be control, standardization, stress-testing and continuous review. And the client-bank dialogue has to be deeper so that if a challenging position occurs, both sides have the tools to make it work. On the development side, I foresee more cross-currency solutions and continued overall investment in the business.

John Gleason (JG) is Dell’s EMEA regional treasurer.
JG, Dell Corporates need to manage banking relationships more holistically, by balancing service scope with pricing, geographic scale, counterparty risk limits, and funding support.

Also, treasurers need to come to terms with the reality that efficiency will be impacted by the need to diversify. Corporates will need to apply better technology and receive more consistent service from the banks to help mitigate this.

Tom O’Donnell (TD) is global head of sales for Barclays’ commercial cash management and trade finance business.
TD, Barclays To the subject of multi-banking: a bank can play different roles with a client. For some clients, perhaps SMEs, that means a single bank or a very narrow-focus bank. For those banking with 75 different counterparties, it means reducing those counterparties. For those that are with a single bank, or even a single banking area, it may be expanding that or creating more of a back-up or a contingency relationship. So banks will increasingly have to have the flexibility to be there as a single bank or a multi-bank, a cross-currency bank.

Brendan Reilly (BR) is responsible for country product management for Deutsche Bank’s cash management products in the UK, France, Belgium and the Netherlands.
BR, Deutsche We see it as an opportunity for regional solutions. There will be fewer situations where a corporate will select a global bank and put all their eggs in one basket.

Tom O’Donnell (TD) is global head of sales for Barclays’ commercial cash management and trade finance business.
TD, Barclays The lessons over the past six to nine months have reinforced the investment principles of security, liquidity and yield, with security being the number one priority closely followed by liquidity. There have been a number of recent cases where corporates have had to manage increased counterparty risk, particularly where a counterparty has been offering yields in excess of the market at the time of deposit, without fully considering the risk at the outset. For a corporate with excess funds, I would be asking them for a profile of when they were likely to need the cash and then propose investment options to match that profile. In this way, the corporate could ensure that the funds would be returned when needed to avoid short-term funding gaps and could maximize the yield on funds they could tie up for a longer period.

I think that those banks that have survived the banking crisis and are emerging as winners are certainly well placed to meet corporates’ investment objectives at minimal risk.

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