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Special feature: Stash of cash

There have been three industrial revolutions since the end of the second
world war. So says Phil Cantor, product manager at the banking and treasury
systems software house, Misys. The first involved adjusting to just-in-time
manufacturing techniques. This is now a done deal and everyone has grasped the
idea of treating stock as if it was red hot; touch it once and move it on fast.

Then came managing people costs and arbitraging wages, through moving jobs to
low-wage economies, was suddenly the main game in town. This “revolution” is
still in full swing and has some way to go. The third “revolution”, just in its
infancy, is cash management. “In an ideal world,” he says, “global companies
would treat all their accounts across the world as if they were one, pooled
account.” This would maximise their leverage with banks, get them the best rates
and margins and enable them to move surplus cash to the money markets with zero
time lag, no matter where in the world it is.

Today, only the world’s largest banks are able to give corporate treasurers
notional pooling. “This is a huge service and all banks with corporations that
trade in multiple geographies would like to bring these services to market, but
it is early days for most of them,” says Cantor.

Not every corporate will benefit, but companies whose trading profile means
their holdings in various accounts can fluctuate wildly from surplus to
overdraft, can benefit significantly by netting out the accounts against each
other and by margin pooling. “This kind of advanced, sophisticated cash
management is a hot topic for banks right now. It is very good business for
them, since fees earned from cash management are not related to capital adequacy
tests,” he says.

Net advantage
“Today a corporate treasurer can do margin netting where there is one account in
credit and one in debit and the bank can look at that as one virtual account and
pay interest on the net balance,” he explains. From the bank’s point of view,
within the same country, this is a good thing, since it can net the two accounts
and only show the netted figure on the bank balance sheet, which has great
implications for reducing its capital adequacy costs (since it is showing one
net account instead of two full accounts).

The corporate can do the same on its balance sheet for the same set of
circumstances, so that is a net gain for it as well. However, you can’t do this
cross border. This is where corporate treasurers have traditionally had to do a
lot of the grunt work themselves, building spreadsheets to reflect their
organisation’s global position on the basis of daily emails or faxes received
from a host of subsidiaries with their own bank accounts.

Matters are complicated, too, by the fact that many corporates have multiple
banks. There is no reason in principle, Cantor says, why five or six banks can’t
agree to share account information, with the corporate’s blessing, and sweep all
the surplus cash into one account where it could be placed out at money market
rates, or invested as the corporate treasurer saw fit. That way, the corporate
does not have to move all its accounts to one bank to get the benefit of

Part of the problem so far has been that providing this kind of service costs
administrative time and it has been difficult for the banks to charge the full
rate for the job. So it has been provided by the larger banks to their larger
corporate clients as a service and as something of a loss leader, Cantor says.
Misys is automating the process so that smaller banks can offer this kind of
cash management service as an offering to smaller corporates outside the Fortune

Pooled services
Without doubt, there is huge demand for a more sophisticated pooling service
from the corporate marketplace. JP Morgan’s ninth annual Global Cash Management
Survey for 2007 polled views from 339 corporations and half of all the responses
came from companies with a market capitalisation of more than $5bn.

What the survey found was that the proportion of corporates going in for
multi-bank relationships was on the rise. Around 24% of this year’s sample had
five or more primary banking relationships (up from 17% in 2006) and 29% of the
companies in the survey “manage their cash with global oversight”. The problem
here, Cantor says, is that you are generally back to a world where corporate
treasurers and their teams have to do a great deal of work. Banks could do this
with far less effort and could add value by doing things that the corporates
really can’t do, such as taking a view on the overall cash position at a much
earlier stage and then taking positive action on that.

The choice is for the corporate to do it themselves or go to a bank and get
the bank to do it. If the corporate does it, it is doing a commercial transfer
between two accounts and the bank will subject that payment to their normal
terms and conditions, which could mean the corporate losing a value date. A
value date is when interest is applicable to those funds, so they could
potentially lose a day’s interest. If they go to a bank and ask the bank to do
the sweeping process for them, they can guarantee to do it without losing the
day’s interest. It doesn’t cost the bank and it is a benefit to the corporate.

In order not to lose the day’s interest, the corporate, if it were doing the
transaction itself, would have to complete the transaction early in the
afternoon, but it might not have the information by then. The bank will have the
information and it could do the transfer in the evening and still not lose the
day’s interest. “However,” says Cantor, “for banks to do this is manually
intensive. With an automated system, the bank sets up the rules and the whole
transaction is automated.”

The big picture, then, is that there is a growing demand from the corporates
and it is going to get much easier for the banks to meet that demand. For
corporate treasurers this represents a winning position, with better cash
management and lower interest costs. They get to free up working capital and
have better visibility of their cash position. The future for cash is looking

Bank on support
What makes the difference between a bank deciding to pull the plug on an ailing
company, or extending it a lifeline? By staying close to its bankers, a company
has a fair chance of persuading them that the glass is half full, rather than
half empty. Perception and attitude have a huge impact on decision-making,
though it won’t change matters if the case is clearly a terminal one. But when
times are tough, it is not only the obviously terminal cases that get the chop.

Moreover, these are not ‘normal’ times, with the economy going through a
‘normal’ downturn. What makes the present circumstances unique is that the banks
themselves have brought about the present catastrophe.

The banks are now rather skittish: the money markets have all but frozen up
and the impact on corporates is that routine requests for working capital are
no longer all that routine.

As Eric Gunn, divisional director at the Clydesdale Bank, puts it, “Tough
times really are a time to draw closer to your primary bankers.” He points out
that Clydesdale has been taking every opportunity over the past four years to
drum home this message to businesses of all sizes, but the message has not
always fallen on willing ears. Now, however, with cash under pressure,
corporates are having to revisit their three- to six-month rolling plans and
scrutinise how they will be deploying their funds. “This is driving many
corporates to get back in touch with their bank to start having the kind of
conversation that we have been urging them to have for a long time,” he says.

Prodigal son
The sub-text to this is that if you are seeing your bank for the first time in
years, it may greet you like the returning prodigal son ­ or it may smile and
say “sorry, try again next month, we’re fresh out of cash right now”.

With so much uncertainty around, the better your bank understands your
business, the more willing it is likely to be to support your plans, provided
you have solid plans to show them and a decent cash flow record to provide them
with confidence.

Gunn points out that big corporates have no option but to take a multi-bank
approach since any one bank will have a limit to the amount of debt it is
prepared to extend to any single company. To meet
large borrowing requirements, plcs now have to shop around. His view is
confirmed by Stuart Heslop, managing director for corporate and institutional
banking at Royal Bank of Scotland. “At the large end of the market there will
only be a certain quantum of debt that a bank will feel happy lending to any
counterparty,” he says.

This complicates the relationship-building task for the corporate finance
team, but, as Heslop says, “If there is an issue to discuss, you want to be sure
that all your banks are going to be there for you.”

A large part of the relationship effort between the bank and the plcs is
about both watching the danger signals and being ready to react rapidly if
corporate clients spot acquisition opportunities.

Despite RBS recently announcing the second-biggest loss in its history,
Heslop is adamant that the bank is still very much open for business when it
comes to backing large M&A deals. He points out that RBS completed the AG
Barr acquisition of Rubicon at the start of August. When bankers see strong
management teams with well-defined strategies that gives them a huge degree of
comfort, particularly in difficult times, he says.

After all, these days, banks need all the hand-holding they can get.

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