Corporate treasury in the time of Covid-19

Questions are being raised on whether there is a need to introduce measures on how companies manage their liquidity.

OPTIMIZING liquidity through centralization has always been one of the key pillars of corporate treasury centres across the globe. With Covid-19, however, that long-held premise is being put to the test as global treasurers respond to a sudden surge in demand for cash to support core business activity.

This was one of the interesting observations from the ongoing Treasury Review, which is conducted by Asset Benchmark Research yearly. The timing of the 2020 Treasury Review, attracting over 600 respondents so far, coincided with the emergence of the Covid-19, which has had a profound effect on companies, especially those that operate in more than one market or region.

These companies faced not just the unprecedented breakdown of their supply chain as China went into lockdown in the first quarter, but also plummeting sales with orders cancelled as Covid-19 began to infect the rest of the world. As one treasurer at a global luxury chain explains: “We are trying to survive.” Another one shares: “It seems to be getting worse; nothing that I have personally experienced in my lifetime. It is a tricky scenario.”

The immediate task for one head of treasury at a global logistics company is to soothe jangled nerves of the treasury teams in the Asia-Pacific. “I think in this situation, we all have to remain calm because as soon as one panics, everyone panics.” For the in-country finance teams, the concern is having enough funds to meet not just the day-to-day working capital but also the unexpected ones that may arise from this health emergency.

As the world’s fastest-growing region in the past decade, Asia has been the engine of topline growth for multinationals. But the region is also undoubtedly the most complex when it comes to optimizing the treasury function with a variety of local currencies, different regulations governing issues such as resident/nonresident accounts, offshore/onshore accounts, exchange control, withholding taxes and techniques such as cash pools and zero balancing.

As the business grew and opportunities emerge in new markets, this often resulted in the setting up of additional bank accounts and new banking relationships. The end result is a proliferation of idle funds sitting in far flung places. Not only is this an expensive proposition, it also can be costly as cash-deficit subsidiaries tap external sources of finance despite internal funds that may be available.

To match the business growth, the treasury function has also grown in sophistication with the setting up of treasury centres. By concentrating cash in a treasury centre, with structures such as zero balancing or notional pools, this makes possible the more efficient deployment of internal liquidity to where it is most needed. With greater visibility that is timely and accurate, companies are able to calculate daily cash positions and comparing that with target balance levels, and making adjustments when necessary. In the case of companies with surplus funds, they can even enjoy yield on short-term investment.

Covid-19, however, injected unpredictability as funds requirement may occur but not on the basis of the previous cash forecasts. In such an emergency situation, the treasurer may be under pressure to release additional cash or even give access to the banking platform to remedy the situation. But doing so creates the risk of fraud, and also goes against the other tenet of cash concentration, which is to maintain control.

“We are trying to have a centralized approach as much as we can,” explains one treasurer who spoke with The Asset as part of the Treasury Review. “The last thing I want is every business unit scrambling to contact banks and we lose control of things.”

With expectation of more difficult days ahead, a number of treasurers are also anticipating a severe downturn in volume and the impact on cash flow in the months ahead. It also is another reason treasury centres work, one treasury manager explains, as in such an environment the operating units can continue to concentrate on the core business rather than getting into treasury matters.

Behind the worry of how Covid-19 is likely to impact even the biggest companies is the issue of the availability of working capital in grave situations when businesses across the globe come to a halt. As governments scramble to mitigate the damage to the economy, including a series of unprecedented bail-outs that are in the works, questions are being raised on whether there is a need to introduce tighter measures on how companies manage their liquidity.

In the 2008 global financial crisis, as financial institutions wobbled while others failed or were taken over, the government similarly had to step in to contain the freefall of markets and restore investors’ confidence. Subsequently, banks were subjected to tighter regulation such as on lending practices, limiting the extent of leverage and the introduction of minimum liquidity coverage ratios under Basel III to ensure they are able to withstand liquidity shocks in the future.

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