Rock-Solid Liquidity Management

How innovative thinking and perseverance enable corporate treasury to conquer even the most complex cash management challenges.

Managing corporate liquidity is one of a treasurer's most important responsibilities. It can also be one of the most challenging.

When a company is low on cash, or needs additional funds to support an acquisition or other large expenditure, the treasurer's ability to secure adequate liquidity at the right price can spell the difference between success and failure. When a company is instead awash in cash, the treasurer's ability to optimize returns on those funds can have a big impact on the company's bottom line. And when a company is facing both circumstances simultaneously, in different geographies or across different divisions, then the treasurer's job is both tactical and strategic, and can be incredibly complex.

The Alexander Hamilton Awards in Liquidity Management honor companies that have developed successful solutions for navigating the challenges inherent in managing liquidity at a large global organization. This year's winners have overcome those challenges and proven the importance of giving cash management the attention, and resources, it's due. "No challenge is too big, if you have the attention span and dedication to get through it," says Fred Schacknies, vice president and assistant treasurer of Hilton Worldwide.

Hilton's award-winning project proves Schacknies right. Several years ago, after the company underwent a major merger, he and his team were managing more than 250 intercompany loans involving 135 legal entities in 30 countries. Hilton's intercompany loan portfolio had grown so large over years of operations as two separate businesses, and through an assortment of merger and acquisition (M&A) transactions. Schacknies describes the loan portfolio as a "spaghetti plate," and explains that a wide range of terms and conditions applied.

When the treasury team at Hilton Worldwide decided to unwind the tangled portfolio, it was a massive undertaking. In the end, though, it was well worth the effort. “Our project involved getting buy-in across all the different components of finance," Schacknies says. "But at the end of the day, treasury was the process owner and the driver of the change that enabled it to happen. This project has brought great results in terms of long-term cash flow and risk, which has changed treasury’s role vis-á-vis the rest of finance.”

A historic merger was likewise the catalyst for this year's award-winning initiative at Baton Rouge, Louisiana-based chemical manufacturer Albemarle. When Albemarle acquired Rockwood Holdings in early 2015, it needed to repatriate nearly $2 billion held within overseas divisions of both organizations, and to do so within 30 days of closing. The flow of funds to the United States to pay for the deal would drain both companies of most of their excess cash, so Albemarle needed to simultaneously set up a corporate cash management structure that would meet all business units' ongoing liquidity needs.

Led by Jennifer Winkle, who was then Albemarle's assistant treasurer, the company's treasury team developed an extremely detailed plan for repatriating the necessary cash. They also established a corporate cash pool that incorporated all groups, both legacy Rockwood and legacy Albemarle, and tied into Albemarle's line of credit. After six months of preparations, the transaction closed, and treasury had all the cash moved within 10 days. Now the company runs very lean, with little excess cash. "We had never before operated at that level," Winkle says, "but we've learned that we can do it. The structure is working so nicely, and we haven't found any cons to the way we did it."

Thank you to our judges: Jean-Francois Heitz, Melissa Cameron, Craig Jeffery, & Marie HolleinGoogle treasury also had an eye on M&A as they developed a solution to a crucial investment challenge. The company's treasury team were not working to fund a particular transaction, but they needed to ensure that they had enough cash easily accessible to support any mergers, acquisitions, or other strategic investments corporate management might choose to make. At the same time, they needed to optimize returns on the company's excess cash, a tough job in the current environment of near-zero interest rates.

After carefully evaluating a variety of options, Google treasury chose to create a new investment portfolio, to complement their operating cash and strategic return portfolio. They also created a new workflow for determining where incoming cash should reside. "It is prudent for treasury teams to be conservative in their cash investments when dealing with uncertainties," says Tony Altobelli, assistant treasurer. "However, carving out a portion of strategic cash into a short-term liquidity pool that better aligns with the company's cash needs could minimize opportunity cost in a zero-rate environment."

Aligning corporate practices with the company's short- and long-term cash needs is the ultimate goal of liquidity management, and is where this year's winners excel. Rather than continuing to make marginal improvements to the status quo, all three treasury teams sought innovative solutions to their cash management challenges, and all three reaped great rewards. Congratulations to this year's winners of the Alexander Hamilton Awards in Liquidity Management—and keep reading to learn more about their outstanding solutions.

2015 Bronze Alexander Hamilton Award in Liquidity Management: Albemarle




Finding Liquidity Post-Acquisition

When Albemarle acquired Rockwood Holdings in January 2015, the corporate treasury function was turned on its head.

Both businesses were specialty chemical companies with a global footprint. Albemarle sold catalysts used in oil refining, as well as bromine, which is mostly used in flame retardants. Rockwood produced lithium, a major component of batteries, and surface treatment chemistries used in a wide range of applications, including preventing metal surfaces from rusting. The businesses were a great fit for each other. However, the companies’ finance functions took very different approaches to cash management.

Albemarle was cash-rich in all the major currencies in which it did business—so cash-rich, in fact, that several months prior to the acquisition announcement, Albemarle dismantled its cash pooling structure. “We had a global notional cash pool, but after careful analysis, we determined that it was no longer yielding any benefits,” says Jennifer Winkle, now Albemarle’s director of corporate finance, who was assistant treasurer at the time of the acquisition. “Being as cash-rich as we were, it just didn’t make sense anymore.”

Rockwood, on the other hand, relied heavily on its global cash pool. Following a series of divestitures that yielded over $1.5 billion in proceeds, the company’s management team had terminated its revolving credit facility and so had no access to a line of credit. Cash in 15 currencies, from 43 different entities located outside the U.S., U.K., or Germany, rolled up into the pool at Bank Mendes Gans (BMG). “Rockwood was a below-investment-grade company, and its businesses were not tightly integrated,” explains Lorin Crenshaw, Albemarle’s vice president and treasurer. “The cash pool was important from a liquidity standpoint.”

Albemarle planned to finance the acquisition with a combination of $2.2 billion in cash, $1.5 billion in debt, and $2.1 billion in equity. However, since most of the cash was overseas and could be not be repatriated prior to the deal closing, the cash portion of the day-one financing was funded with a cash bridge loan that management intended to pay off within 30 days. Doing so would require Albemarle to repatriate nearly $2 billion to the United States within the month after the acquisition closed—and doing so tax-efficiently would require a great deal of planning. Repayment of the debt would also strip both companies’ subsidiaries of almost all their cash reserves. Thus, cash management was a major concern in preparations to merge the organizations.

“In order to pay down that financing, both companies needed to operate with a minimal level of cash on hand,” Crenshaw says. “When we said we could run the combined company with $200 million in operating cash, that felt like walking a tightrope. We had never done it before. So it behooved us to have a very robust liquidity structure.”

Best Practice: Ask the right questions when preparing for an acquisition.As soon as the acquisition was announced in July 2014, Albemarle’s treasury team began working with the company’s leading European bank, BNP Paribas, to determine how the new entity should approach liquidity management. Treasury collaborated with the company’s tax team to develop a cash repatriation plan that would bring all the funds needed to repay the bridge loan back to the United States in less than 30 days after the acquisition closed. Treasury also worked with Albemarle’s legal function on the formalities around setting up the cash pool.

“It was up to treasury to come up with a liquidity structure that would support the tax plan for cash repatriation, as well as the ongoing need to continue to repatriate cash,” Winkle says. “This acquisition was going to leave us leveraged higher than we’d ever been before. We needed to continue to pay down debt over the next couple of years and have a way to easily get those funds back to the U.S.”

After extensive analysis, Albemarle treasury decided to implement a physical cash pool at BNP Paribas in Belgium, with notional pools as the header accounts for all the different currencies so that the company could go negative in one currency relative to another. The pool would include a EUR30 million overdraft line, and would pay interest on the master accounts. The header company of the BNP Paribas pool would become a participant in Rockwood’s legacy cash pool at BMG to tie those funds into the Albemarle liquidity structure. Albemarle would also join its parent company to Rockwood’s U.S.-based physical cash pool at JPMorgan, which was also linked to the BMG pool. These connections would enable Albemarle to use its $1 billion revolving line of credit in the United States to fund Rockwood companies, both domestic and abroad, through the BNP Paribas and BMG pools.

The goal from the start was to have the pooling structure fully interconnected and functioning properly on the day after the acquisition closed, and to have all the cash repatriated within 30 days. “Restrictions on repayment of the bridge facility required us to apply certain cash to the bridge vs. term,” Winkle says. “So we had to have a very detailed and synchronized plan using Albemarle cash vs. Rockwood cash. We had to unwind years and years of intercompany loans to figure out who owned the cash and come up with a step plan that would be approved by tax and legal, and also work from a timing perspective.”

Compounding the challenge for treasury, the tax plan kept changing over the six months between the announcement of the acquisition and its close, partly because Rockwood operated in several countries where Albemarle did not have operations at the time. “Tax was on what seemed like plan 18 by the time we finally closed,” Crenshaw says. “As the tax plan evolved, our liquidity structure had to evolve as well.”

Moreover, although Rockwood was cooperative, Albemarle treasury could learn only so much about the target’s cash management practices before the acquisition. “Prior to the deal closing, there’s certain information that you can’t get, but there’s other information that you can,” Crenshaw adds. “You have to be smart about what you ask for to help build your plan.”

The six months of extraordinarily detailed planning paid off. Through a huge joint effort among treasury, tax, and legal, Albemarle repatriated all the cash needed to repay the bridge facility within 10 days—well before their 30-day goal.

Best Practice: Don't assume that you can't, just because you haven't yet.In addition, Albemarle’s BNP pool header entity was joined to Rockwood’s global BMG pool on the day after the acquisition closed. Liquidity immediately began flowing between the legacy Rockwood subsidiaries and the legacy Albemarle subsidiaries. The legacy Rockwood businesses had immediate access to Albemarle’s $1 billion line of credit. This meant liquidity wasn’t strained as the subsidiaries’ cash was repatriated to the United States for repayment of the bridge, and rather than entering into complex intercompany loan agreements, subsidiaries that needed funding could simply draw on other businesses’ excess liquidity via the pooling structure.

Albemarle treasury estimates that paying off the bridge financing as quickly as they did is saving the company around $1 million per year in interest payments. And for over a year now, the $4 billion company has run successfully with cash reserves in the range of just $200 million to $250 million.

“We had never before operated at that level,” Winkle says, “but we’ve learned now that we can do it. The structure is working so nicely, and we haven’t found any cons to the way we did it. We’re very pleased with the way it’s working. We couldn’t be happier.”

2015 Silver Alexander Hamilton Award in Liquidity Management: Hilton Worldwide




Untangling a Web of Intercompany Loans

Hilton Worldwide is a truly global organization. The company’s presence in more than 100 countries makes it a leader in the hospitality industry around the world—but also creates challenges for the treasury function.

In 2006, U.S.-based Hilton Hotels reacquired U.K.-based Hilton International. The next year, Blackstone acquired the combined company for $26 billion, of which $20.5 billion was commercial mortgage-backed security (CMBS) debt. By 2009, when the combined company rebranded itself as Hilton Worldwide, its McLean, Virginia-based treasury team was managing more than 250 intercompany loans involving 135 legal entities in 30 countries.

“Hilton had accumulated a very large portfolio of intercompany loans as a result of many different transactions,” explains Fred Schacknies, vice president and assistant treasurer of Hilton Worldwide. “Both Hilton Hotels and Hilton International had gone through several acquisitions and dispositions. This resulted in the accumulation of many different intercompany loans, many of which were cross-border. In some cases, there were several different currencies between point A and point B. And the relationships among the entities made it very complex. There wasn’t one hub for all these loans; the relationships looked more like a spaghetti plate, with many, many different connection points in there.”

Groups including treasury, accounting, and operations finance had responsibility for different intercompany loans, and the groups managed their loans in different ways. Terms and conditions varied, as did documentation and data management. Some loans were dynamic facilities, with balances changing daily. Others were term notes extending several years. Different loans also had different conventions for interest accrual, capitalization, and settlement.

“We were bringing together two companies,” Schacknies explains, “each with its own way of doing business, going back for years, and each with its own historical records. And before Hilton had a chance to rationalize the complex portfolio of intercompany loans, the company was acquired. As is typical with CMBS financing, we had multiple tranches—mezzanine stacks, if you will—and cash needed to flow in a very prescriptive way, down to the bank account level. That cemented how things had to operate from a cash flow standpoint, so all of the legacy processes around intercompany loans had to be retained as they were.”

Treasury managers realized they needed to improve their visibility into the loan portfolio, unravel the web of loans as much as possible, and improve their ability to manage currency risk across the portfolio. They laid the groundwork for these improvements by deploying a treasury management system and a SharePoint-based document repository for storage of all loan agreements companywide.

“Previously, we didn’t have any single system, not even the G/L, that was adequate to give us the granular detail we needed to understand the currency dynamic of these loans, relative to the legal entity dynamic, to get a net position report,” Schacknies says. “We made a first attempt to do that in Excel. Shortly after that, we implemented the treasury management system and document repository, which were huge steps forward in terms of data visibility.”

Once the systems were in place, treasury set out to capture information on all the intercompany loans between Hilton entities. “That, in itself, was a tall task and took many months,” Schacknies says. As the corporate treasury team uploaded information about the loans they managed, they also reached out to other groups that managed intercompany loans.

Best Practice: Use the right data analyses for assigning functional currencies.“It really came down to educating them about what we were trying to accomplish and getting their buy-in on the objective of this project,” Schacknies adds. “Then we went through a fairly detailed data discovery, poring through records that they had been keeping and making determinations about whether each data point was, or was not, something we wanted to track. Treasury partnered closely with accounting, tax and legal, and operations finance to make sure we fully understood the nature of each transaction and the balances that had accumulated.”

Next, treasury set about standardizing intercompany loans by implementing a new policy and an intercompany banking structure. The intercompany loan policy spells out the different types of funding events that might occur, and the requirements for treasury, tax, and accounting to approve each type of loan based on materiality.

Because of the intractable complexity of the existing portfolio, Hilton set up six in-house banks to work in parallel. “There was a segmentation of domestic vs. international, and a segmentation according to the buckets of seniority in the CMBS requirements,” Schacknies says. “From that, we quickly got into many different buckets of legal entity groupings, which all had to be segregated in a hard or soft way from everything else.”

The in-house banks brought the legacy “spaghetti web” of the portfolio into more of a hub-and-spoke structure. It improved the flow of information and enabled treasury to make sure the right entities were engaging in the right relationships with different external stakeholders, although it still wasn’t ideal.

“When a sub in one part of the world had to pay a sub in another part of the world, several entities would likely be involved,” Schacknies says. “For example, let’s say a U.S. sub was paying a Japanese sub. We would have had two U.S. dollar in-house banks and two pound sterling in-house banks in the middle of that transaction. So there were multiple points of currency exchange along the way, which created financial and operational friction, as well as an enormous amount of data complexity.”

"We have a very tight level of control over a very large volume of cross-currency transactions. Being able to hedge all the cash flow risk has removed considerable FX gain or loss from our financial statements." --Fred Schacknies, Hilton WorldwideA refinancing of Hilton’s CMBS debt in October 2013 lifted many of the restrictions on corporate cash flows and opened the door for rationalization of intercompany loans, as well as other aspects of corporate structure. The company undertook a wide-ranging initiative to realign legal entities across its global businesses. The initiative enabled treasury to realign cash flows in ways that were more conducive to effective and efficient liquidity management.

Treasury conducted a series of analyses—including cash-flow-at-risk and earnings-at-risk studies of projected future cash flows—to determine the appropriate functional currency for certain business units. As a result, Hilton was able to remove some of the currency risk from its corporate structure. “Looking at the underlying cash flows of certain international parts of the business, and applying U.S., U.K., and IFRS GAAP tests, we came to the conclusion that several entities which were domiciled outside the United States still made sense to be U.S. dollar-functional,” Schacknies says. “This is a very rational approach for U.S.-based multinationals to take, in that it aligns the transactional currency flow with the translation.”

This process also opened the door for Hilton to replace its six in-house banks with one. The treasury team worked with colleagues in legal, tax, and accounting to identify the nature of each intercompany loan and sort the portfolio into buckets such as operational working capital, long-term funding, or intermediate funding. Treasury developed terms and conditions that were appropriate (and appropriately arm’s-length) for each loan type, and created legal documents specific to each type of funding. Revisiting all the loan documentation enabled treasury to standardize in-house bank agreements.

“When the requirements of the old CMBS debt were lifted, we were able to begin operating in a more cash-rational way,” Schacknies says. “When the veil had been lifted, we cut through the old segregations that the debt had required. Having one in-house bank that is dollar-functional, where all our offshore cash is flowing through, naturally takes away a lot of currency exchange and accounting noise.

“Bringing together the entire portfolio into one in-house bank enabled us to determine which transactions are simply borrowing and lending, vs. which are intercompany payments,” he adds. “It also helped us determine whether a particular transaction would affect the company’s currency risk position, and whether its cash flows might cause liquidity issues. We were able to create a process where we look at all the changes to the in-house bank portfolio on a daily basis, and we can assess the net change of the in-house bank’s position with respect to 30 or so currencies.”

This daily review, combined with the development of position limits for each currency, has given Hilton treasury much clearer visibility into the liquidity needs of its subsidiaries around the world. “De-leveraging has been our number-one financial priority since 2013,” says Schacknies, “and we have made tremendous progress on that front, prepaying roughly $1 billion a year since refinancing. The lion’s share of that is coming from the U.S., but the international component is not immaterial—and understanding the availability of cash from overseas is critical.”

Hilton’s new processes have also provided a framework through which the company can better mitigate currency risks. Today, the company processes about $500 million a month in foreign currency transactions, but because of netting in the in-house bank, the company’s average monthly foreign exchange (FX) trading volume is typically under $100 million. In addition, Hilton treasury has been able to roll out an FX hedging program.

“We have a very, very tight level of control over a very large volume of cross-currency transactions,” Schacknies says. “Being able to hedge all the economic risk, cash flow risk, that we rolled up under the in-house bank umbrella has removed considerable FX gain or loss from our financial statements.”

Ultimately, Schacknies says, complexity is inevitable for treasury teams in large multinationals that engage in cross-border intercompany lending. “Developing the capability to parse out the impacts to the business—be it risk, liquidity, earnings, or cash flow—takes a large amount of effort, resources, systems, and change management. But doing so is vital to managing that complexity in a way that drives shareholder value.”

2015 Gold Alexander Hamilton Award in Liquidity Management: Google




Returns on Strategic Thinking

For several years, as interest rates have hovered near zero, corporate cash has been languishing. Balancing an organization’s liquidity needs against the need to optimize returns on these funds is a key challenge of cash management, a challenge that is amplified in the current interest rate environment. Google experienced this challenge firsthand in 2012, when it acquired Motorola Mobility for $12.5 billion.

Google had enough cash to fund the transaction, but it was not all easily accessible. The company kept the cash it needed to support day-to-day operations in bank deposits and money-market funds, while funneling all other cash into a “strategic return portfolio.”

“The strategic return portfolio has a fairly short duration, but longer than what a typical cash portfolio would look like,” says Tony Altobelli, Google assistant treasurer. “We have those funds diversified across various fixed-income asset classes, and some of it is offshore, in places where we don’t foresee needing cash in the short term.

“With the 2012 acquisition, we had to liquidate a significant portion of the strategic return portfolio,” Altobelli adds. “Our portfolio managers were sensitive to the fact that liquidating these assets would create noise in the company’s accounting statements, because if you sell securities, you’re going to be realizing gains and losses, which end up flowing through the income statement.” The treasury team began to worry about how efficiently they could provide cash to fund another large, unexpected capital call, should Google make another big strategic investment. Additionally, unexpected capital calls can inadvertently disrupt the portfolio’s position vs. its targets, impacting performance relative to its benchmark.

Interest rates also caused concern for portfolio managers. “The strategic return portfolio has been doing quite well with interest rates having fallen to all-time lows,” he says, “but by 2012, the portfolio had an asymmetric risk/return profile. In other words, rates were so low that the odds of rates moving higher felt greater than the odds that they would fall significantly from those levels. Since it’s an all-fixed-income portfolio, a significant rise in rates would be harmful to portfolio performance, whereas a modest move down in rates would be positive but with limited upside.” In the event of an unexpected capital call, realizing losses on investments in a rising-rate scenario would adversely affect the company’s financial statements.

Annually, Google goes through a planning process, forecasting business activity, capex, and potential M&A scenarios. In 2013, as part of this process, Altobelli and Hui-Chien Chang, director of the treasury portfolio management group, considered the company’s options for mitigating the potential impacts of an unanticipated capital call.

They came up with a list of four alternatives: maintain the status quo, liquidating assets from the strategic return portfolio on an as-needed basis; liquidate the strategic return portfolio entirely and keep all cash in very low-yielding accounts; reallocate all of the portfolio’s assets into mutual funds, with only slightly better yield than bank accounts; or create a new portfolio, complementary to the strategic return portfolio, that would invest in shorter-term, more liquid fixed-income securities. The treasury team evaluated each option against an assortment of factors, including the ease with which investments could support capital calls from the business, their potential to create accounting losses, and their exposure to interest rate risk.

“We looked at that analysis with a fine-toothed comb in terms of geographies where our cash actually resides,” Altobelli says. “We realized we needed to set aside a buffer in the U.S., which is where we need the liquidity. As a result of the analysis, we decided to bifurcate the strategic return portfolio and create a U.S.-based short-term income portfolio that could serve as a first source of financing for any unexpected cash outlays. It would be designed as a buffer to cover the variability in corporate spending, such as capex and M&A, that we as a treasury team don’t have visibility into. Then we could continue to manage the strategic return portfolio on a total-rate-of-return basis, and the portfolio managers would be less encumbered by constraints related to corporate accounting.”

Best Practice: As rates rise, rethink the duration of corporate investments.The treasury team presented their plan to the CFO, then got buy-in from the company’s external investment advisory committee and the board’s audit committee. Chang’s treasury portfolio management group oversaw the project through which Google implemented the short-term income portfolio. They researched possible investment strategies and determined that selectively adding high-quality credit risk by purchasing assets such as corporate floaters or asset-backed securities would enhance yield relative to money-market funds without having much effect on interest rate risk.

“Duration was one of our main constraints,” Chang says. “We didn’t want to take excess interest rate risk, so we looked across the different asset classes in the short-term fixed-income investment universe and chose instruments that would help us build a laddered approach. We wanted to be able to hold these assets until maturity, but maintain low price volatility so we could sell them anytime we needed to, in order to fund a capital call.”

Several other treasury groups supported the implementation. The treasury operations team helped set up processes around trade processing and clearing, and worked with Google’s custodian bank. The treasury systems team ensured that all technology systems were configured properly to support the new portfolio, and helped with the development of reports. Treasury accounting made sure that all trades would be properly reflected in the company’s accounting statements. Internal audit evaluated the effectiveness of the portfolio management group’s controls and governance processes. And the treasury risk team created a custom risk model to accurately reflect the company’s risk tolerances.

“The risk management process for the short-term income portfolio is pretty similar to that of our strategic return portfolio,” Chang says. “We have a range of maximum and minimum exposures that we allow for each asset class. We have a set duration constraint, and we have a concentration limit for each issuer. This is all tightly controlled and monitored by our compliance team. There is one risk factor unique to our short-term income portfolio: Our risk team built a risk model focused on ranges of asset maturity dates. Our new risk model helps us make sure that the maturity schedules of our assets are appropriately laddered, which is crucial because liquidity is a primary goal of this portfolio.”

The short-term income portfolio, launched in 2014, consists of short-duration government securities and other high-quality fixed-income securities with maturities between three months and three years. “This transition required a lot of trading activities and coordination between the portfolio team, the treasury operations team that was settling the trades, our broker-dealers, our custodian, and the vendors of our portfolio management and trading system,” Altobelli says.

Today, all cash at Google flows into one of three buckets. The first priority is to ensure that the company has adequate operating cash, which is invested in highly liquid securities with durations from overnight to three months. “We’ve done a lot of analysis on the historical fluctuations in our daily liquidity needs, and we’ve come to an agreement internally about how much cash to keep in the operating cash bucket,” says Altobelli. “We revisit that threshold on an annual basis.”

Treasury also sets thresholds annually for the short-term income portfolio. “We look at the company’s forecast of potential capex and M&A activity,” Altobelli says. “We look at a low estimate, a high estimate, and a base case. We analyze how each of those scenarios would impact our overall cash level, and we use the variability there to size the short-term income portfolio.”

Any incoming cash in excess of the established requirement for daily operations is sent to the treasury portfolio management group. They follow the pre-established thresholds for the short-term income portfolio, Chang says, “but whenever we have free cash flow coming into the portfolio, we also touch base with other teams, just to make sure nothing has changed in terms of expectations around capital calls. That evaluation process is ongoing.” When incoming cash isn’t needed in operations or in the short-term income portfolio, Chang’s team invests it in the strategic return portfolio, which consists of fixed-income securities—many still offshore—with maturities that can be longer than three years.

“Creating the short-term income portfolio has helped us align our liquidity requirements and our return objectives with the corporate strategic objectives,” Altobelli says. “This project has also provided a great deal of visibility into the level and types of risks across each of our three cash buckets.

“Rising interest rates will now have less impact on the company’s portfolio overall because we’ve reduced the duration of a significant portion of our cash,” he says. “We’ve also gained liquidity for our onshore cash, where it’s needed most. When we get capital calls, we can easily get cash back from the short-term income portfolio without incurring volatility in the company’s income statement. And now our portfolio managers have the freedom to manage the strategic return portfolio more naturally, focusing on economic returns with fewer accounting-type constraints.”      

Best Practice: Don't just accept the status quo.At that time, Google estimated that reducing the interest rate sensitivity of the portfolio as a whole, without resorting to equities or other similarly risky investments with low interest rate risk, would save the company millions of dollars for a reasonable rising interest rate scenario. The company also estimated that implementing both the strategic return and short-term income portfolios would significantly enhance Google’s aggregate interest income compared with liquidating the entire strategic return portfolio and investing in money-market funds.

“This project demonstrates why it’s important to not just accept the status quo,” Chang says. “Every company needs to take a step back from time to time and re-evaluate its liquidity needs. It’s also important for treasury to keep an eye on the macro environment, to make sure the company’s capital plan stays aligned with the investment tools the treasury team has at their disposal. The tools and fund structure need to always be able to accommodate any transition that the company may go through. When the external environment is changing rapidly, it’s not acceptable to just stick with your current options. You need to constantly reconsider whether they’re meeting your needs.”

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