cash pooling and cash concentration techniques

Treasury (EMEA) update – Uithoorn (NL) Slide 1

Cash Pooling and

cash concentration techniques

May 17, 2012

Treasury (EMEA) update – Uithoorn (NL) Slide 2

Agenda

1. Cash concentration techniques

2. ZBA vs Notional cash pooling

3. Legal considerations

4. Tax considerations

5. Other considerations

6. Country review of restriction and practices

7. Cash pool calculations

Treasury (EMEA) update – Uithoorn (NL)

Slide 3

Cash Concentration

Streamlining of local cash management arrangements

Eliminating local borrowing facilities with a central one

Reducing trapped cash

Integration with other systems

Enhanced security standards

Interest enhancement

Objectives


SINGLE CURRENCY, CROSS-BORDER

(Notional or ZBA)

CORPORATE TREASURY €

CASH POOL

SUBSIDIARY

CURRENCY

ACCOUNTS

NOTIONAL OR ZBA CONCENTRATION

FRANCE GERMANY ITALY SPAIN etc ..

4


MULTI CURRENCY, CROSS-BORDER

Pool Sandwich

CURRENCY

ACCOUNTS

CASH POOL

LOCAL

CURRENCY

POOLS

CROSS-BORDER CONCENTRATION

TREASURY

POOL

ACCOUNT

5


SINGLE COUNTRY, CROSS CURRENCY NOTIONAL POOL

NOTIONAL OFFSET

SUBSIDIARY

CURRENCY

ACCOUNTS

CORPORATE TREASURY

€ CASH POOL

6


INTEREST ENHANCEMENT

INTERNATIONAL

INTEREST OPTIMIZATION

AUSTRIA

FRANCE

GERMANY

SPAIN

ITALY

UK

PORTUGAL

BELGIUM

7


MULTI BANK NOTIONAL POOLING

FRANCEGERMANY UKPORTUGAL

CORPORATE ACCOUNTS WITH LOCAL BANKS

BOOK TRANSFER TO NOSTRO

MIRROR

CORPORATE

ACCOUNTS

NOTIONAL POOL

CM BANK NOSTRO ACCOUNTS

Cross Border

Slide 8


CROSS BORDER CROSS CURRENCY NOTIONAL POOLING

UKGERMANY POLANDITALY

LOCAL

ACCOUNTS

CONCENTRATION

ACCOUNTS

Cross Border

Slide 9

Notional pool

EUR

EUR

EUR

EUR

EUR

EUR

GBP

USDGBP

PLN

PLN


Set-off agreement required

Balances have to be concentrated into

one country

IFRS reporting

Improving overall cross-currency

interest results

No inter-company loans between the

operating companies and the Central

Treasury

Off-set positive and negative cash

balances across currencies

Invest excess liquidity or fund deficits

of group companies by one

investment in one currency

Fewer FX/SWAP transactions

Less manual intervention, less risk,

more convenience

Cross Currency Notional Pooling

Considerations Benefits

Slide 10


2. ZBA vs Notional pooling

NOTIONAL POOLING

Balances never move

One concentration account per participating entity

Balances are offset notionally, preserving integrity of accounts

No concentration

No commingling

Treated as bank lending

Interest is debited or credited to each account

Credit facilities required to cover any net negative position

PHYSICAL CONCENTRATION

Funds move physically

One concentration account per currency

Cross-border transfers can be expensive

Change of ownership may create intercompany lending issues

Provides greater flexibility as to how funds are used

Can be manual or automated

Also used as a zero balance function to fund business units

Slide 11


3. Legal considerations

Resident/non-resident

Central bank requirements

Right of set-off

Cross guarantees

Joint ventures

Cash Pooling documentation

Set off and Pledge agreement

Cash pooling agreement

Facility agreement

Harmonized banking conditions

Slide 12


4. Tax considerations

Arm’s length interest allocation

Business purpose

Economic substance

Resident/non-resident

WHT issues and tax treaties

Stamp duties

Thin capitalization

CFC – Sub Part F

....

Slide 13

KPMG survey


3. Other considerations

Accounting

IFRS vs US gaap

Internal administration

Cost

Slide 14

How banks charge for pooling ....

Interest rate spread

Reserve asset charge (cost recovery)

Set up fee

Management fee (monthly per account)

Interest apportionment fee

Account maintenance fees

Electronic reporting fee

Money movements, receipts/payments

FX if involved


Country review of restrictions and practices

Interpretation may vary per bank

Definition of cash pooling may vary

per corporate

Cross border pooling is not possible

in China, Brazil or India (FX

regulations) , and cumbersome in

Mexico (WHT)

Key driver for notional pooling:

enforceability of a cross guarantee /

pledge provision outside the country

of the account holder

Notional pooling is not permitted in

the US and Germany, where tax

authorities consider it to be a co-

mingling of funds

Slide 15


Notional Cash Pool benefit calculations

Notionally convert all balances into one currency

Determine the off set ratio

Breakdown compensated balances and non compensated

balances

Calculate interest differently, depending on compensated status

Slide 16


Interest Results without CCNP

Cr

Dr

70

CHF

30

GBP

20

EUR

20

USD

CCY Credit

Spread

Debit

Spread

Base

Rate

EUR -100bps 100 bps 2%

USD -50 bps 100 bps 1.5%

CHF -25 bps 50 bps 1%

GBP -100 bps 150 bps 3%

Credit Interest

70 CHF x 0.75% = 0.53

30 GBP x 2% = 0.60

Total Credit Interest 1.13

Debit Interest

20 USD x 2.5% = -0.5

20 EUR x 3.0% = -0.6

Total Debit Interest -1.1

Total Interest Result

113.000

-110.000

3.000*

* Annualised x 100.000

Exchange rates are 1:1 for ease of calculationSlide 17


Interest Results with CCNP

Step 1: Physical concentration of the balances in NL via automated sweeps

Cr

Dt

70

CHF

30GBP

20

EUR

20

USD

The Netherlands

ZBA

MBCC

ZBA : Zero Balancing account with same Cash Pooling bank

MBCC : Multi bank cash concentration with 3rd party bank

Slide 18


Step 2: Determine off-set ratio by notional conversion to base currency (USD)

1. Compensated balance = smallest balance (Dt 40)

2. Compensated % Dt = 40/40 = 100% off-set ratio

3. Compensated % Cr = 40/100 = 40% off-set ratio

Cr

Dt

100

40

100%

40%

Total Credit Balances in USD

Total Debit Balances in USD

Compensated Balance

Compensated Balance

Slide 19


Step 3: Calculate Compensated Balance per Account

Cr

Dr

42

CHF

28

GBP

40% x 3012

28 40% x 70

USD

20 100% x 20

EUR

20 100% x 20

Slide 20


Interest results with CCNP

Cr

Dt

42

CHF

18

GBP

3%12

28 1%

USD

20

1.5%

EUR

20

2%

CCY Credit

Spread

Debit

Spread

Base

Rate

EUR -100bps 100 bps 2%

USD -50 bps 100 bps 1.5%

CHF -25 bps 50 bps 1%

GBP -100 bps 150 bps 3%

CHF

42 CHF x 0.75% = 0.32

28 CHF x 1.00% = 0.28

Total 0.60 USD

20 USD x 1.5% = -0.30

Total -0.30

GBP

18 GPB x 2% = 0.36

12 GBP x 3% = 0.36

Total 0.72

Total Interest Result: 60.000 + 72.000 – 30.000 – 40.000 = 62.000*

* Annualised x 100.000

0.75%

2%

EUR

20 EUR x 2% = -0.40

Total -0.40

Slide 21


Total interest improvement CCNP

( x 100.000)

Interest result without CCNP 3.000 USD

Interest result with CCNP 62.000 USD

---------------------------------------------------------------------

Difference 59.000 USD

(Pool Benefit = 59.000 USD)

Slide 22


Pool Benefit Allocation CCNP

Allocation of Pool Benefit to

Benefit Settlement Account

(BSA) only

BSA

Su

b

Benefit59.000

Cr

Dt

EUR

GBP

USD CHF

Sub

Su

b

Slide 23

Benefit Benefit

20.000 20.000

BSA

Sub

Benefit

7.000

Cr

Dt

EUR

GBP

USD CHF

Sub

Sub

Benefit

12.000

Pool Benefit Allocated to

all accounts

cash pooling and cash concentration techniques

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