International Treasurer®Practical Intelligence for Treasury Innovation

Developing Issues: More Venezuela Bond; Economic Impacts; Herz Resigns

What’s on International Treasurers’ radar.

Discussion this week started with a recap of the NeuGroup’s Latin American Treasury Managers’ post-mortem discussion on the Venezuelan bond offering. We will be reporting on some of the takeaways in our upcoming issue, but for MNCs the allocations were almost totally weighted towards those importing vital necessities into the country and those that sought too much of the offering still lost out, as is typical, even if the definition of too much seemed to have gone up a bit.

Market Update: A Venezuelan Bond Offering to MNCs

New hope for treasurers seeking to get cash out of Venezuela?

Government intervention into parallel swap market last May and then replacing the parallel structure on June 9 with a new System of Transactions in Foreign-Currency-Denominated Securities (SITME; see related story), left many multinational treasurers scrambling to determine how much of their cash they would be able to convert and repatriate from Venezuela. Now what?

Developing Issues: FinReg Agenda, SSCs in LatAm, Justifying No ERM

Issues on International Treasurer’s radar screen this week.

Peer group discussion items formed the bulk of our editorial discussion. We started with a major theme emerging from the development of the Treasurers’ Group of Thirty (T30) fall meeting agenda. Interestingly, there was mixed reaction to topics involving the impact of Dodd-Frank implementation.

Developing Issues: China’s Banks, Cash Investment Infrastructure, Risk Oversight

What’s on International Treasurer’s radar screen this week.

On the heels of stress testing banks in Europe, more attention is being paid to the balance sheets of Chinese banks.The recent IPO of Agricultural Bank of China, the last of the four largest Chinese banks to list, has also prompted reviews, since investors other than the Chinese government are on the hook for some of the risk. We will sort out the recent commentary and give treasurers some indication of what they can do.

Big Buyers Shut Out of Venezuela Bond

Companies with cash trapped in Venezuela were closely eyeing a new dollar-denominated bond offering announced in late September. But the Chávez regime quashed hopes that the deal could be used to get money out of the country when it allocated the entire $5bn offering to the smallest bidders.

Key Trends for Treasury in Latam

By Anne Friberg

As in past years, the Miami Eurofinance event included a dedicated Latin America track that covered a range of themes, including bank counterparty risk and organizing for greater cash visibility and control. Each theme was put in the context of the key countries that define the region’s economic prospects, which was set up in a presentation by Dr. Ernest Brown, head of economics research for Santander Investment Securities. Dr. Brown pronounced that almost everything in Latin America had turned “stone cold,” but noted that investors, according to a recent survey, had gone from the “free-fall” conversation that dominated early 2009, to “warmer” speculation about when recovery would set in. For both equity and debt investors, he noted, there is already a shift from less risky assets to “adding more risk,” manifested in the fact that, while a lot of people are holding cash, “they are holding less cash now.”

Regs in China Require Local Treasury

At this point in the ongoing global financial crisis, China likely stands as the last working engine of growth for multinational corporates. Companies continue to flock there hoping to exploit a large and still largely untapped market. Coke, PepsiCo, GE and Siemens all have big China plans in the coming years. So in one sense, things are the same as they were in pre-global crisis days.

China: New Dividend Tax & Funding Dilemma

A confluence of official actions (a new tax package and the likely extended effects of a “freeze” on lending) have combined to create a serious dilemma for treasuries of foreign multinationals with affiliates in China.

On one hand, the prospect of a 10 percent tax on dividends, part of a much larger tax bill, is sparking a potential rush to bring money home, earlier and in larger amounts of it; yet, because access to local funding is expected to stay limited, treasurers are equally concerned about leaving subs without ample liquidity.

The dividend tax rate could have been worse: initial discussions mentioned 20 percent, before settling for half that. However, “dividends in 2007 were paid free of any withholding tax,” pointed out Ryan Chang, a tax partner, and Jeff Kadet, a senior analyst with Deloitte & Touche. Because of the imminent rate hike, ”we have been advising clients during this year, where they can legally do so, to accelerate dividend payments so that they are paid before the end of the year,” the two tax pros noted.

The dividend tax is one component of a much broader tax overhaul designed to primarily level the playing field for local and foreign firms. For example, it introduces a uniform 25 percent tax rate for local and foreign firms, obliterating a legacy, dual income-tax system that often left domestic firms paying twice as much in taxes (30 vs. 15 percent) as their non-Chinese counterparts. (Note: high-tech firms will continue to pay only 15 percent if they meet certain criteria.)

“Too many brackets of tax rates contribute to a relatively large disparity between nominal income tax rate and effective income tax burden of various types of enterprises,” according to a National Peoples Congress (NPC) draft of the tax document, the Unified Enterprise Income Tax law.

Brazilian Transaction Tax Gone for Now

Latin American treasury managers are watching closely how the recent decision in Brazil to not renew the temporary contribution on financial activities (CPMF) tax will impact Brazilian treasury operations. The CPMF was introduced as an emergency measure in the wake of the 1990’s Real Plan. Its renewal was a key priority for President Lula da Silva following reelection in October and its defeat by the Senate opposition this month represents potential new political volatility in Brazil.

How DuPont Linked LatAm Liquidity to Global Initiative

Latin America is often considered a problem child obstructing the road to global liquidity efficiency. Standing in the way, of course, are local FX controls, tax and other regulations. To some degree, these issues are part of a larger one: the economics of the region do not justify the pursuit of a dedicated, cross-border liquidity management solution. Therefore, to win marginal efficiency gains, many multinationals operating in Latin America have sought to:

1) Limit their cross-border efforts to US dollar funds, and

2) Integrate their LatAm excess USD cash with other (typically, offshore) USD structures.

DuPont is no exception. At a EuroFinance conference in Miami last April, regional treasurer for Latin America, Alexandre G. Carvalho, outlined how DuPont—with JPMorgan’s help—had integrated its LatAm USD accounts with a global, notional US dollar pool.

Planning a Shanghai IPO? Not Yet, But. . .

Companies with operations in China typically have to fund their local affiliates by infusing them with capital and making intercompany loans; and if the local subs do not sell locally, then they may require a constant source of funding. Pushing more liquidity into China worries treasurers, given exchange rates and other risks, as well as the lack of available “vehicles” for investing any excess liquidity.

A report just authored by McKinsey & Co. provides some welcome news: the Chinese equity market, while still emerging, seems on course to becoming an important source of liquidity (and a platform for M&A) for both local and foreign firms. “A quiet revolution in China’s capital markets: Reforms that attracted little attention in the Western world mark a major step forward in the modernization of China’s capital markets,” was published by James Ahn and David Cogman in July. In this report, the two authors posited that recent and future reforms will give the market a big shot of energy: “These reforms will also encourage the development of the country’s M&A market by allowing industries to consolidate, improving corporate governance at state-owned enterprises, and expanding the capital markets.”

Will EM Debt Attract Corporate Interest?

Particularly in Asia, and to some extent Latin America, emerging markets (EM) local-currency bond markets are growing rapidly. Robust growth in many developing markets—combined with prolonged currency stability—has contributed to strong investor interest and has changed the pricing dynamics.

In the past, local issues “were forced on local banks in amounts that reflected the size of the fiscal deficit,” according to BIS analysts. Now, bonds are priced at fair market value.

Ten Steps to Limiting Venezuelan Risk

Venezuela remains Latin America’s problem child. The recent actions of its president—and the fact that neighboring markets are looking increasingly normal—have prompted treasurers to take urgent actions to limit their companies’ exposures to the market.

Meanwhile, daily Chavez headlines have kept sovereign risk on senior management’s radar screen: “Management wants to know how much cash we keep in local currency and what would be the P&L impact of CADIVI not approving certain products for preferential US dollar rates,” said the regional treasurer of a consumer goods MNC.

Leveraging Treasury’s Core Competencies

Treasury’s core skill set is in increasingly high demand, revealed the “30,000-foot” view of the multi-tracked EuroFinance conference in Miami in April. Through various sessions and the eyes of corporate and bank presenters, the emergent theme was that treasury has a lot to offer within the current global economic and business environment. Here’s why:

1) As MNCs shift growth gears into emerging markets, treasury’s risk and financing know-how can enhance risk-adjusted returns through “early intervention” and ongoing volatility insulation;

2) Looking forward to a tightening in credit markets, and slower economic growth, treasurers can reconfigure their cost of capital to support growth using cheaper funds; and

3) Finally, with the growing focus on cash as the true indicator of financial resiliency, treasury’s work to optimize cash and working capital will help surface more free cash flow, and the effort
to improve forecasting can translate into better visibility to investors.

Will Spring Bring a Bolivar Deval?

In recent years, March has become the month to watch for bolivar devaluations. It is no surprise then that treasurers and local economists are carefully watching for hints that another is forthcoming. This is particularly an issue in the current environment in Venezuela: On January 31, Venezuela’s president, Hugo Chavez, was granted the power to rule by decree for 18 months, and is wasting no time nationalizing businesses.

Glimmers of Hope for Better LatAm Banking

A new report indicates banking in Latin America could get easier and more service oriented for corporations. However, there’s still a ways to go.

Banking in Latin America has never been easy. Each country has its own idiosyncratic set of regs for banks and FX, often combined with burdensome taxes on the movement of funds. Plus, global banks haven’t made the region a priority for developing a regional infrastructure and liquidity pipeline to make corporate treasury’s job easier. Meanwhile, local banks are often not up to the counter-party credit risk standards of most MNCs.

For global treasuries, striving to infuse their LatAm operations with the cash management efficiency present in Europe or Asia, this has been a frustrating quest.

Their bank partners have not come forth with effective regional liquidity, repatriation or investment solutions. Indeed, the same banks that had previously touted their commitment to the market have recently pulled out or scaled down. For example, Bank of America, which acquired Bank of Boston in part for its strong LatAm presence, has basically reduced its presence to a passive investment.

This leaves a handful of players with super-regional and global presence, notably Citigroup, ABN Amro and Spain’s BBVA. None is ideal; plus, the absence of competition has turned the leading banks complacent, according to the regional treasury heads for several US-based multinationals, who met for the NeuGroup-facilitated Latin America Treasury Managers’ Peer Group last summer (LATMPG).