TEXPO 2011
CBI’s Approach to Managing its Global Liquidity
CBI
Bank Mendes Gans
Mr. Joe Christaldi
Mrs. Greet van der Steen
Director, Global Cash Management
Managing Director, Sales & Account Management
Engineering Solutions . . . Delivering Results
CB&I at a glance: 2010 snapshot
Financial Statistics (millions)
• Revenue:
$3,642
• Net Income:
$204
• Operating Cash Flow: $288
• ROE:
21%
Operational Overview
• CB&I (NYSE: CBI) is one of the world’s leading engineering, procurement and
construction companies and a major process technology licensor
• CB&I conducts business in over 20 countries worldwide
• Global footprint with projects in Africa, Asia, Australia, Canada, Central & South
America, Europe, Middle East, Russia, Southeast Asia and the United States of
America
• Executes more than 600 projects a year
• New Awards: $3.4 billion
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Engineering Solutions . . . Delivering Results
CB&I’s treasury principles
• Cash is a corporate asset
 Protect this asset; risk avoidance
 Enhance shareholder value
• Centralized control; decentralized execution
 Strategic direction from corporate treasury; tactical
• Execution via regional treasury centers
 Macro level overview of responsibilities
 Sound control environment governing all cash movements
 Optimizing cash resources
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Engineering Solutions . . . Delivering Results
CB&I’s pillars of operational success
Visibility & Transparency
• Daily cash reporting
• Working capital needs
• Daily cash flow forecasting
(pool participants)
Centralized Liquidity Management
• Global cash pooling
• In-Country target balances
• Global settlements
• Global funding
Centralized
control
Sound Control Structure
• Effective & standardized global
policies and procedures
Decentralized
Information Technology
execution
•
•
•
•
Consistent administration & execution
Procedures always in place before
execution
• Sarbanes Oxley compliant
• Annual internal audit reviews
• Eliminate redundancies
• Real-time activity reporting
Consistent application of controls
Increased productivity
Transcends time zones
Internet based portal
 Account opening/closing
 Self service portal
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Engineering Solutions . . . Delivering Results
Efficient liquidity management - Challenges
•
Our challenges
 Create a global account structure keeping local banking infrastructure in tact
 Consider credit relationships and geographical expertise
 Obtain centralized visibility and control to access global cash to fund business growth
 Eliminate Inter-company loans and FX transactions to manage liquidity
 Improve returns on overnight deposits / reduce costs on borrowings
 Establish global reporting capabilities of all global bank accounts
 Adopt a solution that complies with internal standards and security requirements
 Manage overall cash pool position via a single currency
 Eliminate all in-country borrowing facilities, where applicable
 Integrate solution with current netting systems
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Engineering Solutions . . . Delivering Results
Achieving centralized liquidity management
• Solution:
 Implement a cross currency notional cash pool solution
• Would current local banking structure be impacted?
 No!
 Global cash pool keeps local infrastructure in tact but has the flexibility to
enable changes as dictated by business needs
• What is the criteria for participation?
 Currency is freely convertible
 Legal entity is permitted by their central bank to open an account (local and / or
foreign currency) offshore
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Engineering Solutions . . . Delivering Results
CB&I’s global cash pool strategies
• Utilization of cash pool for long term funding
 Eliminate inter-company loans
 Eliminate in-country credit lines
• Tax considerations
 Easier to prove arms length interest rates with a third party bank than with intercompany loans
• Accounting
 “Buy-in” from all disciplines to assure the cash pool did not create accounting entry
complications
 Replacing inter-company loans with deposits / overdrafts within cash pool simplified
accounting entries (its just another bank account)
 Assure “net” accounting
• Local group company buy-in
 Education and communication with local group companies to assure compliance with
the new structure
 Trade-off, no inter-company loans
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Engineering Solutions . . . Delivering Results
CB&I’s global cash pool strategies (cont’d)
• Establishing automated two-way sweeps
 Detailed process required assistance from local group company, local bank
in conjunction with BMG and corporate treasury
 Tweaking targets / triggers to assure minimal liquidity remains in-country
• Diversify investments and reduced safety margins: Excess funds no
longer remain in-country and cash pool provides full off-set
• Use cash pool to hedge currency exposures via plain vanilla FX spot deals
 Can lock in rates for known currency exposures
 No freeing up liquidity for spot conversions in pool
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Engineering Solutions . . . Delivering Results
CB&I’s global cash pool overview
• Began operations in November 2009
 CB&I Global Treasury, The Woodlands, Texas
 Current number of cash pool participants: 46
 Countries: 11
 Pending cash pool participants: +/- 20
 Pooled currencies: 6
 Integrated with existing multilateral netting (netting since 1983)
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Engineering Solutions . . . Delivering Results
Strategies achieved with global cash pool
• Inter-company loans eliminated
 No need to hedge these positions – saved several million dollars in forward points
• Automated sweeping and funding of local accounts
 Built in efficiencies reduced finance headcount and assured adequate funding at pool
entity
• Optimize interest income yields
 Pool participants earn true market rates for balances in each currency
 Important if holding high yielding currencies such as AUD
 CBI earned 10 times the return had we repatriated funds and invested the funds in
USD
 Short currencies only “pay” the market rate as long as overall pool is positive
• Centralized cash from all regions of the globe and tapped into 10s of millions of
additional liquidity
 Cash used for acquisitions, capex, etc.
• Local entities are very positive
 Automates funding
 Accounting is simple as it just another bank account
 Tax issues are lessened as arms length easier to prove
 Local entities have access to cash through their BMG account
 Foreign currency accounts now earn interest for local entity
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Engineering Solutions . . . Delivering Results
Strategies achieved with global cash pool (cont’d)
• IT Browser based access enables
 Funds pooled from entities from one platform
 Allows global visibility and control of all cash pool and third party account
balances and transactions
 Entity funding initiated from one platform
 Signatory flexibility
 All transactions uploaded to one platform from one file
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Engineering Solutions . . . Delivering Results
CB&I’s netting overview
• Started the multilateral netting in 1983
 The netting includes 112 participants
 And includes countries such as US, Canada, Australia, Malaysia, Thailand,
UK etc.
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Engineering Solutions . . . Delivering Results
CB&I’s netting objectives
• Reduce the number of inter-company flows to reduce FX and transfer cost
 Just one monthly settlement per group company
• Reduce / avoid cut-off time and value dating issues
 Guaranteed settlement with proper value date
• Improve and simplify the monthly reconciliation process
 Web based access for file upload / download purposes
• Integrate netting with other cash management requirements
 Liquidity (investment / funding) management
 Hedge policy
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Engineering Solutions . . . Delivering Results
CB&I’s netting benefits
After processing CB&I’s inter-company data:
• Before netting:
Gross payment volume between group companies; per annum USD 58M
• After netting:
 Net payment volume of inter-company payments between group companies;
per annum USD 4.1M
Reduction of 93%!
Reduction in actual payments:
• Number of payments before netting:
 Per annum: 737
• Number of payments after netting:
 Per annum: 70
Reduction of 90.4%!
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Engineering Solutions . . . Delivering Results
Overall benefits
• The combined netting and pooling solution has
allowed CBI to efficiently manage liquidity
• Centralized control of cash with decentralized
accounts
• No Intercompany loans, no FX trades, no
hedging costs
• Can settle Intercompany trade payables without
freeing up the necessary liquidity
• Simplifies the International cash management
process, but adds functionality
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Engineering Solutions . . . Delivering Results
The techniques used
Global liquidity management tools:
Notional cash pooling
&
Multilateral netting
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Engineering Solutions . . . Delivering Results
Notional cash pooling
A global cash pool enables companies to efficiently manage
and control their cash in multiple currencies from a single
location without changing existing relationship banks
Multiple cash balances – both positive and negative – are
treated on a net basis and interest is applied based on this
net pooled figure
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Engineering Solutions . . . Delivering Results
Global cash pool solution
USD
GBP
EUR
CZK
SAR
AUD
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Engineering Solutions . . . Delivering Results
Notional cash pool – account structure
Cash pool account structure
Local group companies
Australia
AUD
Australia
AUD
1.
Account owner = group companies
2.
Account is used “exclusively” for own cash
3.
All transactions are registered as current account
deposits and overdrafts vis-à-vis BMG
4.
Interest is credited / charged by BMG
Germany
EUR
UK
GBP
Germany
EUR
UK
GBP
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Engineering Solutions . . . Delivering Results
How does the Cash Pool work?
7 m to: Reduce debt,
Invest,
Strategic M&A
Strategic Capex
Notional Pooling
(5 m) USD =
(5.0 m) USD
4 m EUR =
5.4 m USD
Total Pool
Balance
7 m USD
(1 m) GBP =
(1.5 m) USD
6 m EUR =
8.1 m USD
Entity 1
Entity 2
Entity 3
Entity 4
Pool bank account
Pool bank account
Pool bank account
Pool bank account
The Netherlands
The Netherlands
The Netherlands
The Netherlands
USD
EUR
GBP
EUR
4m
6m
EUR
EUR
(5 m)
USD
Intraday
sweeps
(1 m)
GBP
Entity 1
Entity 2
Entity 3
Entity 4
local bank account
USD
local bank account
EUR
local bank account
GBP
local bank account
EUR
Engineering Solutions . . . Delivering Results
Notional cash pool: interest
Step 1
Step 2
Cash pool %
Set by currency
position
Inter-company margin
credit = minus 0 %
debit = plus 0.5 %
5%
2%
Step 3
Interest, including
inter-company margin
is booked directly to
entities account
Cash pool
For all accounts:
5%
1%
GBP
Margin is booked
to treasury
account
5%
1%
1%
AUD
Step 4
AUD
1.5%
AUD
GBP
GBP
1%
0.5%
GBP
GBP
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Engineering Solutions . . . Delivering Results
Cash pool benefits
• Multiple currencies can be pooled daily from every region of the globe
(37 currencies and 80 countries)
• Automated connectivity between cash pool accounts and local bank
accounts
• All cash in excess of working capital no longer remains idle in-country
• Short-term funding vehicle for group companies
• Treasury can invest / borrow in currency of choice
• Eliminate onerous borrowing rates for in-country group companies
(debit rate is tied to the overnight depository rates of the currency plus a
x bps margin set by corporate treasury)
• No need to open local bank accounts
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Engineering Solutions . . . Delivering Results
Notional cash pool: matters of importance
•
Regulatory Law:
 Thin capitalization rules and stamp duty: may apply in case of inter-company
loans
 Transfer pricing: set cash pool margins at arms length and clearly document
to avoid penalties
 Notional pooling and full off-set is allowed in the Netherlands. No crossguarantees required under central banking regulations
• Tax:
 Withholding tax: could apply on interest charged. In Netherlands no WHT
imposed
 Tax authorities could view extended overdrafts on a cash pool account as a
disguised liability.
• Accounting:
 No inter-company loan administration and FX Swap contract administration
 Apply full off-setting on the balance sheet
 It’s just another bank account
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Engineering Solutions . . . Delivering Results
Multilateral netting
Netting is a process designed to organize and simplify the
settlement of inter-company and third-party payments and on
a fixed customized periodic schedule
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Engineering Solutions . . . Delivering Results
Global netting
Before
After
AU
US
AU
US
DE
UK
DE
Netting
center
UK
Vendor
Vendor
SG
SG
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Engineering Solutions . . . Delivering Results
Global netting transactions
• Sales
 Trade
 Vendor
• Financial
 Inter-company loans & interest
 Royalties & dividends
 Management & service-fees
 Internal FX hedging contracts
 External FX hedging contracts
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Engineering Solutions . . . Delivering Results
Global netting benefits
• Increased efficiency in managing inter-company trade balances and
vendor flows
• Imposes standardization and discipline across the group
• Reduce payments between group companies
• Centralized versus decentralized FX
• Cost savings in:
 Transfer costs reduced based on reduction in the number of
settlements (approx.: 80% - 90%)
 FX cost reduced based on reduction in transactions (approx.: 80% 90%)
 Elimination of value day loss
• No bank accounts need to be opened
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Engineering Solutions . . . Delivering Results
How the two techniques come together
• Settlement of netting results on cash pool accounts when possible
 Book transfers replace third party bank transfers
 Use cash pool to solve liquidity dips
• Incorporate external & internal FX hedges and settlements by setting
up all FX counterparties in the netting
• Use cash pool for Money market hedges
 Integrate international third party vendors in the netting
 Have international customers pay directly to cash pool accounts
• Establish foreign currency accounts in the cash pool
 Utilize solution for global Multibank Reporting
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Engineering Solutions . . . Delivering Results
Questions
QUESTIONS ?
Joe Christaldi
Greet van der Steen
CB&I
Bank Mendes Gans, Amsterdam
tel: +1-832-513-1915
tel: +31 20 5235324
email: jchristaldi@cbi.com
email: g.vandersteen@mendesgans.nl
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Engineering Solutions . . . Delivering Results