Lecture two Case Studies: The Application of

cash pooling into business practice

: WPP
With a collective cash balance of $30m, bringing WPP’s 20 Turkish
Case One: WPP with HSBC
WPP is a global marketing services group. In Turkey it has 20
subsidiaries with a collective cash balance of US$ 30 mio. that is
pending to bring into the group’s European cash pool.

Global marketing services group WPP is a vast family of 150 businesses operating
in 107 countries worldwide and employing more than 135,000 people. Between
them its companies work with 345 of the Fortune Global 500, 29 of the Dow Jones
30, half of the NASDAQ100 and 33 of the Fortune e-50. It’s also a financial
powerhouse with annual billings of £37 bn. It’s one of a select few companies that
can borrow and spend billions of dollars to further its corporate strategy. But in
an environment where finance is hard to come by and credit terms are becoming
increasingly rigorous, it’s crucial that the group is able to make every penny of
cash in its many businesses work hard.

“WPP runs four different treasury centres around the world,” explains Thierry
Lenders, Director, WPP Group Services at WPP. “We have the UK headquarters; a
regional centre in the US that handles the Americas; one in Hong Kong for
AsiaPac; and my office in Belgium, where our role is to develop and implement
cash pooling for WPP’s continental European operations, as well as the Middle
East and Africa.”

Not every country provides a favourable environment for cross-border liquidity

management. Much depends on local tax and insolvency regulations, with Turkey
falling into the “difficulty” category until January 2007 with the introduction of
the new corporate tax laws. During the annual review of financial management of
the 22 WPP companies based in the country, it became apparent that changes in

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the tax code meant cross-border pooling was now a possibility. With an average
cash balance of $30m across those entities, Lenders needed to respond quickly.

Getting started

“We collected information from each company’s finance director [FD] on their
cash position, payments, accounts and so on,” says Lenders. “Then we presented
that data to HSBC. We had a kick-off meeting with representatives from HSBC’s
London Customer Implementation team and their people in Turkey at the start of
2008, and they designed a new approach.”

The solution was a phased strategy, with local entities gradually moved over to
HSBC bank accounts in Turkey. As well as providing a uniform approach to local
banking, this allowed for a straightforward sweeping arrangement, bringing
surplus cash into a notional pool in the UK, denominated in Turkish Lira. This
allowed Lenders’ team to maximise interest on cash balances, as well as
repatriate funds much more easily.

“That means we can use it to manage group debt much more efficiently and avoid
substantial borrowing requirements,” says Lenders. “The ability to repatriate cash
on a daily basis was quite a revolution. In the past we would have collected the
money annually as dividend and while we continue to have dividends paid
annually in line with WPP policy the ability to fund positions in Turkey and to
repatriate surplus cash daily has significant economic benefits for WPP.”

“The electronic statements are all there, in one place, so we can always see the
cash available,” says Lenders. “Of course, we’ve been using HSBCnet with other
cash pooling networks for some years and we’ve seen constant improvements in
the way it works.”

Selling the pool

Although the benefits for the group treasury team were compelling, selling the
idea to the local FDs was less straightforward: “Each FD in Turkey had been free
to choose their own banking arrangements,” Lenders explains.

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“Turkey has an extremely competitive market and they were used to splitting
accounts between four or five banks to get the best service for each of their
requirements.”

Although that meant the Turkish FDs were under pressure – collectively managing
between 140 and 150 different accounts, in Turkish Lira, Euros, Dollars and
Sterling – they also felt they had a lot of control.
“WPP as a group is de-centralised. Local FDs are relied upon to control their own
cash positions.”

That put the onus on Lenders and HSBC to sell the new approach: “We had to
demonstrate the benefits in terms of available interest rates and reduction in
banks charges,” he says. “The new set-up meant we could offer them a single,
unique tariff for all the Turkish businesses, which was a major reassurance.”
“HSBC conducted a number of face-to-face meetings with local FDs of the
numerous WPP companies operating in Turkey, in order to present a high-level
overview of the liquidity solution and demonstrate the underlying domestic
banking solution tailored for local WPP companies,” says Ibrahim Erkman,
Payments and Cash Management Sales, HSBC Turkey.

“The solution incorporated a special WPP group tariff, designed to demonstrate

economies of scale that could be achieved, as well as additional value added
services to assist the FDs’ current operational processes and procedures. These
were welcomed by the local FDs and greatly smoothed the transition of banking
to HSBC.” Partnering with HSBC, which had made substantial investments in its
Turkish network as well as being a genuinely global banking partner, made all the
difference. And thanks to HSBCnet, local FDs could see exactly what they had
committed to the notional pool, reassuring them that their cash was still
available.

Efficiency and good relations

The secret to making the transition work was clear communication between the
different parties – WPP’s treasury centre, its local businesses, HSBC in London and
the local banks. “For the system to work well, all four have to have great
relationships with each other,” says Lenders. And the local FDs realised they
would still have responsibility over their daily cash flows. “They still have to

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administer their payables and receivables. And it’s absolutely critical for the
success of any cash pooling solution that working capital for each entity is
accurately forecast. Their fears about the new arrangements have certainly been
allayed now it’s up and running.” The Turkish businesses use their forecast of
working capital requirements to determine what cash they can sweep into the
pooled account.

Strength in numbers

Ultimately, any cash pooling arrangement thrives on economies of scale. Because

WPP was already using the HSBCnet system, adding new territories is relatively
low-cost. It’s not zero cost, of course, but in addition to greater visibility, the
ability to leverage cash previously squirreled away in local accounts and the speed
of repatriation, simply stripping out the cost of local banking arrangements made
the new approach an easy decision once the legislative framework allowed for it.

Better still, WPP has brought into the fold a territory that is growing fast and
becoming an increasingly important market. As its Turkish operations – and the
local economy – grow, additional cash can be making an immediate contribution
to group liquidity.

“With the liquidity constraints now gripping the world, potentially there are
many other multinational companies that could benefit from consolidating their
accounts with a single bank,” says Sacha Deal, Director, Corporate sales at HSBC.
“In particular there are active opportunities in Turkey.”

“Like most companies, we are looking at all trapped cash situations at the
moment,” Lenders adds. “As a group, it’s important that we can lay our hands on
any cash outside our pooling systems. For a group like WPP – with many entities
in each country – it’s especially important. And it’s vital to ensure the cash pool is
running at maximum efficiency.”With a collective cash balance of $30m, bringing
WPP’s 20 Turkish

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Case Two: Huawei with StanChart
A recent cash management deal between Standard Chartered Bank
and Huawei to launch a multi-currency notional pool exemplifies Hong
Kong’s viability for China treasury centres.
Sep 22, 2014

Huawei Technologies and Standard Chartered Bank have set up a multi-currency

notional pool for Huawei Technologies’ regional treasury centre, based in Hong
Kong, the bank confirmed on September 17.

Standard Chartered set up the pool for Huawei, a China headquartered

information and communications solution provider, including dollars, euros, and
renminbi in its currencies.

Multi-currency notional pools are cash management structures whereby

corporates can offset credit and debit positions in various currencies within the
company without transfers between company accounts for every payment or
foreign currency exchange transaction.

Different banks provide different solutions to multi-currency notional pools and

treasurers can check for examples of how solutions may differ.

Huawei’s notional pool went live in June 2014 with ongoing transactions through
the solution. The company now virtually pools together multiple entities for an
overall view of their aggregate cash positions for various currencies and entities in
its pool, designed to improve visibility and efficiency in liquidity management.
Huawei was not available for comment as of the posting of this story.

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Though Huawei’s new pooling solution is a special case, Standard Chartered
argued that the deal typifies a broader trend of Hong Kong’s viability as a
jurisdiction to locate treasury centres for Chinese multinationals and businesses
with key China treasuries.

EY has been tapped by the Hong Kong Monetary Authority to assess the
attractiveness of the city as a location for Chinese and Asian multinationals.

“Historically, companies have seen Hong Kong as a place to raise capital, but more
and more Chinese companies are now looking at Hong Kong as a place to manage
their treasury processes,” Sridhar Kanthadai, said Standard Chartered’s regional
head of transaction banking for Greater China and Northeast Asia.

Hong Kong Financial Secretary John Tsang identified the trend on September 23 in
a speech to the Hong Kong Institute of Bankers Annual Banking Conference 2014.

"A joint-departmental task force will develop proposals on how best to attract
more multinational and Mainland corporations to establish corporate treasury
centres in Hong Kong," Tsang said,

According to Kandthadai, the Hong Kong Monetary Authority and Hong Kong
Treasury Managers Association have been working together on these new rules.

Kanthadai (refer to the picture, right, with Huawei treasurer Evan Bai) argued that
five recent developments have triggered a resurgence in Hong Kong’s viability as a
locale for treasury centres:

1. An impression that Basel III regulations make ‘document-light’ (structures

that do not require cross-guarantees) notional pooling less feasible for
banks in certain jurisdictions.
2. Hong Kong’s position within China with its well developed financial and
legal services.
3. The development of China’s cross-border liquidity management
regulations.
4. The global regulatory environment in which regulations that affect Asian
companies can develop quickly, to which Asia-based treasurers need to
coordinate responses.
5. Progress made in capabilities and infrastructure in transaction banks in
Hong Kong to support China treasury centres.
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