Accessing Capital and Managing Liquidity Abroad

For midmarket businesses, charting the right course for treasury is key to successful expansion overseas.

If we needed any more proof that a successful business today is a global business, consider a recent Bank of America Merrill Lynch survey of U.S.-based middle market companies. In the 2013 CFO Outlook Midyear Update, more than three out of four executives said their companies are doing business internationally. That figure is even more incredible when you consider that 18 months earlier it was only 54 percent. Clearly, international markets have been important to these companies’ revenue growth during the economic recovery. And the number of midmarket firms looking to grow globally may continue to climb, as many of the business conditions necessary for expansion—such as access to low-cost credit—remain stronger than they have been in years past.

At the same time, the risks inherent in doing business overseas remain significant. It is vital for a company’s leaders to decide on a cohesive corporate strategy before entering international markets. By taking into account all of the risks and opportunities that overseas expansion might entail, an organization can reduce its borrowing costs, optimize its working capital and liquidity structure, and facilitate investment activity—all while navigating local clearing systems and currencies.


Access to Capital

For many midmarket companies, the first consideration when looking at doing business overseas is figuring out how to access capital abroad. Although borrowing costs remain very low worldwide, raising capital in a foreign country is very different than taking out a loan in the United States. Liquidity is still tight in many countries, at least on a bilateral basis, and many foreign banks are working to build their balance sheets by expanding their business with their largest domestic clients, rather than taking on new customers. Multinational corporations’ subsidiaries sometimes have difficulty accessing international capital markets, so capital can be a serious concern in a push toward global growth.

Global credit facilities are often attractive to U.S.-based businesses that are growing abroad because they extend credit based on the standing of the business overall, its financial performance, and the financial strength of the parent company. This is particularly important for syndications, as it leverages North American banking relationships for a global benefit. Such an arrangement also simplifies global borrowing; the entire company has one master credit document with a banking counterparty. Terms and conditions are harmonized companywide, which leads to simplified execution.102213_Robbins_PQ1

Consider a U.S.-based company’s various options for structuring financing for business units operating in two European countries—France and Italy, for example. One option would be to secure independent financing to fund the working capital needs and collateral assets in each country. This would require two sets of financing documents, two sets of compliance rules, and two teams to keep the projects going.

An alternative would be to establish an organizational structure that includes a principal company in a credit-friendly country, such as the Netherlands, which holds all collateral assets for both subsidiaries. In this scenario, the businesses in France and Italy would be converted into tolling operations that receive a fee from the holding company for operating expenses; all their cash inflows and outflows—including inventory purchases, operating expenses, financing expenses, and capital expenses—would go through the Dutch holding company. This arrangement might have long-term benefits in terms of simplifying the credit structure of the multinational organization, and it might provide better terms for borrowing for the French and Italian companies. However, it’s worth noting that one recent trend in international borrowing is the tightening of global credit requirements, as a result of many nations’ increased scrutiny of the banking industry.

A multinational company that is trying to determine the best way to structure financing around the world needs to start by analyzing the strategic priorities for its overseas ventures. It should quantify the amount of capital it needs to fund each priority and rank them in order of importance. These strategic priorities should include funding day-to-day operations, funding growth and strategic investments, and optimizing working capital liquidity. Gaining operating efficiencies, protecting margins, and managing volatility and financial risk are also priorities for most businesses. Because every company and every country is different, taking the time to articulate corporate priorities before moving into a new market will help an organization make optimal decisions with regard to its banking needs.


Cash Management and Liquidity

Once a company has secured a source of capital for a subsidiary in another country, its next major treasury challenge is to establish a process by which the corporate entity can maintain full visibility into how much cash the global operation has on hand at any time, as well as where the funds are located. New banking regulations make it more important than ever before to consolidate treasury activities as much as possible. Basel III is designed to ensure that banks have enough cash on hand to cover their loans, a change that could add more complexity to global liquidity management.102213_Robbins_PQ2-v2

For many midmarket businesses, technology can provide the requisite visibility. Single Euro Payments Area (SEPA) software can improve transparency throughout the Eurozone and beyond. There are also standardized, bank-agnostic solutions, as well as single-access platforms and any-to-any file integration. These tools—which are generally offered by larger global banks—enable companies to track their currencies through a familiar user interface.

Of course, optimizing visibility requires process improvements as well. An integrated payment and risk management policy can help a company centralize decision-making, maximize liquidity, and make full use of a technology solution that integrates multiple payment channels.

One unfortunate tendency among companies that are expanding globally is avoidance. Treasurers often avoid making changes to existing systems because they don’t want to have to change the way they perform basic treasury functions. That usually translates into an insistence on being paid in dollars. But using dollars to pay for goods in foreign countries costs 5 percent more, on average, which runs counter to the treasury goal of maximizing receipts.

Although most multinational corporations benefit from centralizing treasury processes, it is important to know the local rules and customs in each nation in which the company operates, and to think broadly about the opportunities in every jurisdiction. For instance, there are times when an organization might adopt a currency hedging strategy in order to gain certainty around the costs it incurs in the course of its daily operations. At other times, a company might engage in the same type of cross-currency swap with the goal of favorably affecting its interest rate risk.

Consider a U.S.-based business that wants to expand overseas by acquiring a company in the United Kingdom. The parties would set the acquisition price in British pounds, so a hedging strategy that maximized flexibility while minimizing obligation would be vital to the acquiring organization. For some pre- and post-acquisition expenditures, paying in the local currency and then hedging to mitigate foreign exchange (FX) risks would be critical, especially to offset the cost of unique, sometimes expensive, goods and services such as legal fees, advisers’ fees, and travel expenses for executives. In other cases, the acquiring company would want to use an integrated multi-payment channel to execute FX transactions, especially if the acquired company receives payments in British pounds via numerous small transactions.102213_Robbins_PQ3

Having one channel that can process different denominations allows for greater control and centralization of the treasury function. This can help lower costs by consolidating activities with a single group of personnel. And by using one set of internal protocols to manage the currency, including the FX transactions, business leaders can achieve greater visibility into day-to-day management of the company. They can also more quickly identify issues to address and favorable opportunities to exploit.

There is no one-size-fits-all strategy for navigating global clearing systems and currencies. However, a cohesive strategy—along with best practices to consolidate the activities within the organization—allows companies to optimize their working capital and leverage short-term cash across the different regions in which they operate. Treasurers can keep control of global cash management at company headquarters, maintain international account information in one place, and consolidate accounts receivable.


Moving Forward—and Going Far

Taking advantage of international growth opportunities presents challenges, but many midsize companies are taking the leap into new countries or moving deeper into international expansion. To be successful, they must have an overarching strategy for securing capital and managing liquidity abroad. Failing to set a global treasury strategy—instead, simply exporting the processes and technology that the treasury team uses for North American operations—can result in inefficient systems and processes that drain time, resources, and energy from the finance team. That is not only unfortunate, but also potentially hazardous to the business, as the processes cut into the time and energy the finance team should be investing in making the expansion and acquisition successful.

Several technology tools are available to make it easier for midmarket businesses to explore and execute on a global strategy. And companies that want to expand overseas should make sure their financial partners have the strength and resources to provide a full range of treasury, cash management, and liquidity solutions. That will help set them squarely on the path to achieving a successful international profile.



Galen Robbins_headshot2Galen Robbins is head of Global Commercial Banking Transaction Services at Bank of America Merrill Lynch. In this role, he oversees the delivery of treasury and liquidity solutions to commercial and institutional clients across the United States and Internationally.

Page 2 of 3