Should treasurers be worried about trapped cash?

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Treasurers who deal with overseas operations are all too familiar with the problem of trapped cash in foreign territories. With global economic uncertainty still maintaining its grip, and the potential for trade wars imminent, managing cash has become an urgent issue.

 

As a CFO, you may feel you have done all the hard work, invested in attractive distant markets, reaped rewards and built up the business, and yet the money is still out of reach. So how do you free up that cash? It may not be as easy as the finance gurus imagine and that is the essence of trapped cash. It is profit earned, and yet for some reason, you cannot bring it home.

 

Freeing trapped cash

 

Why would that be the case in a digital age when capital seems to sweep across regulatory areas at breakneck speed? The answer is that in developing markets, FX controls, different regulatory regimes and double taxation issues may influence decisions as to how cash can be moved without incurring losses.

 

Global liquidity is something that finance departments will be keen to exploit, but cash can become trapped resulting from unforeseen implications such as inter-company lending and currency conversion. Consequently, freeing trapped cash requires a wide-ranging view of the organisation and an approach which is inherently multi-faceted, involving optimisation, visibility and ultimately control of the outcome. This should be managed within the confines of the existing tax and regulatory environment.

 

Why worry about trapped cash and what can be done to avoid the problems it creates?

 

Firstly, by making it accessible and increasing value, other opportunities may open up. To deal with the problem, strategic aspects such as stretching payables and shortening receivables will help to avoid trapped liquidity issues. Another solution may involve looking at local acquisitions and investment, thus establishing business operations in economies where trapped liquidity is a problem.

 

There may also be opportunities to optimise interest enhancement in certain restrictive jurisdictions and to offset borrowing elsewhere with the benefits. Checking local yields is always an option for trapped cash overseas.

 

Significant value

 

Liquidity management tools can also include a pooling of the domestic structures. Local MMFs, call deposits, domestic commercial paper, time deposits, treasury bills and emerging market exchanges are all potential means by which trapped cash can be turned into working capital. By enhancing local yields, treasury officers can alleviate the problems raised by locked capital.

 

Clearly, cash may be in demand within the company either for investment or simply as working capital but using trapped cash as an asset in negotiations with domestic lenders means that it still has significant value. The recent scandals over LIBOR may mean that the grass is not always greener, and a short-term view of returns may be misleading.

 

US companies increasingly find themselves grappling with trapped cash because of taxation penalties on repatriated cash. This seems at odds with the current administration’s aims to increase investment in domestic firms. JP Morgan estimates there could be as much as US$1tr in cash deposits trapped overseas. This is a startling figure by any standards and suggests that treasurers must be far more imaginative as to how they deal with non-domestic assets.

 

The flip side of this problem has been seen in Hong Kong, where banks are offering hedging opportunities to companies unable to repatriate the Yuan. This is providing a new source of revenue for the banks and helping multinationals deal with the growing headache of trapped cash in the face of tightening restrictions on transferring profits and dividends out of the Mainland.

 

Such innovation is less obvious in more regulated emerging markets and although companies have made profits within these jurisdictions, managing the cash has proved more difficult. The impact of trapped cash on companies has been exacerbated by the tightening of funding opportunities from traditional lenders, still impacting treasury departments ten years after the financial crisis. In the past, ready supplies of cash and debt have meant that efforts to extract cash have not been a priority, but that is no longer the case.

 

What CFOs must ask themselves is whether cash is really trapped. It may not be readily accessed but it can still be moved, especially if we are talking about a jurisdiction with a readily tradeable currency where FX markets come into play.

 

Immediate access to cash may always be tempting for treasury departments, but the long-term assessment of trapped cash, and a more imaginative view of it may be a better policy. Trapped cash is not an excuse for a company’s underperformance.

 

Simon Lynch is the owner of Treasury Talent.

Treasury Talent is a specialist treasury talent, recruitment and search provider solely focussed on the treasury market with offices in Sydney covering Australia, Singapore covering Asia, and San Francisco covering California and the USA. To make contact simon@treasurytalent.net

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