To eliminate idle balances, $6 billion Tenneco Inc. in 2007 implemented a worldwide multicurrency notional cash pooling structure in Amsterdam with 49 subsidiary accounts in a pool run by ABN Amro Bank. Then the firm's small treasury staff set out to eliminate the local cash management function, explains Gary Silha, assistant treasurer of the Lake Forest, Ill.-based auto parts supplier.
To accommodate subsidiaries, Tenneco offered three alternatives. The first requires local subsidiary banks to report their daily cash positions using SWIFT MT940 and MT942 messages. By 2 p.m. central European time, ABN's back office system can see whether the subsidiary bank account balance is positive or negative. To concentrate surplus cash, ABN's system asks (via an MT101) the sub's bank to send (via an MT103) the excess cash to ABN, targeting an end-of-day balance of zero. If the local subsidiary account balance is negative, ABN's back office system initiates an MT103 again targeting an end-of-day balance of zero.
The second alternative works much like the first, only the sub's bank makes the daily funds movement decision instead of ABN. Either way the sub's accounts end the day with zero balances and Tenneco is able to use cash in the pool to pay down debt. A third alternative accommodates local banks that can't or won't use the preferred alternatives.
"We effectively outsourced the subsidiary cash management function to the banks' back-office systems to efficiently consolidate cash in multiple currencies on a same-day, worldwide basis in U.S. dollars into the United States prior to 9:30 am CST," Silha says.
Putting the funds to use reduces Tenneco's debt, saving the company more than $900,000 a year in interest expense, Silha conservatively estimates. Automating and outsourcing the process saves Tenneco another $740,000 a year in labor expenses, he says. And gone are more than 650 foreign exchange swaps treasury used to hedge its FX exposures under the old intercompany loan portfolio structure.