Treasurers diversify funding amid Asean expansion

Singapore

CORPORATE treasurers of large firms looking to limit foreign exchange losses amid ongoing currency volatility have been willing to pay a premium to issue local-currency debt, a top executive at JPMorgan told The Business Times.

"Traditionally, there has been more dependence on bank funding in Asia, but we've seen a move toward capital markets," said Muhammad Aurangzeb, head of global corporate bank in Asia-Pacific, JPMorgan.

"Diversification has become a big theme. Not that Asia was as affected, but companies have learnt lessons from the GFC (Great Financial Crisis). There are companies, both Asian and European players, that are diversifying their investor base, and are willing to pay a slight premium for local-currency funding."

In a poll at a recent JPMorgan forum for treasurers and CFOs of large multi-national and regional corporations, one-third said that they are looking to expand into South-east Asia through acquisitions, 18 per cent said that they want to make purchases in China, while 27 per cent plan to grow organically.

"It was interesting how many times that Indonesia, Singapore, Malaysia and Vietnam, came into the discussion," said Mr Aurangzeb, referring to recent client meetings.

Asean is seen as a launch pad for exports into the other regions. Parts of South-east Asia, such as Vietnam and Indonesia, have also become attractive as corporates see workers' wages going up in China, he added.

Debt issuance is highly dependent on interest rate expectations and on this count, the market widely anticipates that the US Federal Reserve will start raising its short-term interest rates in the second half of 2015. This has prompted treasurers to begin locking in financing at current rates, and to look to issue debt in the local countries where they have operations and where there is liquidity and appetite for investment-grade debt, said Mr Aurangzeb.

By matching funding with the currency that the revenue is booked in, a natural hedge is created, limiting forex risk. It is part of cash management that corporate treasurers have to deal with every day, and the focus today is on centralised cash management so that treasurers have a full view of how much cash they have as well as the corresponding cashflow risks linked to issues such as liquidity and maturity.

One example would be moving cash from overseas entities back home to pay its suppliers, a process known as "cash sweeping" that reduces the need for companies to borrow to manage their cashflows.

Singapore has been a top destination for treasury hubs, said bankers, thanks to its location in South-east Asia and incentives that bring taxes down to 10 per cent. Whilst there was a trend of treasury hubs being set up in Shanghai, that has since slowed, said Mr Aurangzeb, with China now attracting treasurers with businesses that are tied to the country alone.

Official numbers on regional treasury centres (RTCs) here are few, but JPMorgan estimates there are more than a hundred in Singapore now. It is also in discussions with 30-40 corporations on setting up RTCs - a process that takes 18 to 24 months.

"The growth we have seen in the Asian companies has had an outbound agenda, but what has not kept pace is the infrastructure behind that," said Mr Aurangzeb.

The most savvy treasurers would eventually manage an in-house bank, which effectively doles out inter-company loans, and trims banking relationships to a neat number.

"European and US clients who have gone towards an in-house bank model have been able to consolidate their global cash pools, and reduce their banking relationships from anything up to eight, down to just a couple," said Mr Aurangzeb.

"This trend towards setting up regional treasury centres is here to stay and is accelerating from both a cost, and risk perspective."

The work for treasurers today does not end there, as they are increasingly looking at the operational risks associated with business growth. And with the increased importance attached to their jobs - they are no longer considered the corporate geeks they once were - forum participants pointed out one big challenge now is to integrate the treasury team with everyone else.

"If you are a commodity player, you're looking at perishable risk. If you're in IT, you're looking at intellectual property rights," Mr Aurangzeb said. "Their roles are becoming more strategic."