Cash & Liquidity ManagementCash ManagementCash repatriation: The bar is now set

Cash repatriation: The bar is now set

This week Apple announced plans to invest $350bn in the US economy over the next five years, largely driven by its decision to repatriate the bulk of its $250bn in overseas cash reserves.

This week Apple announced plans to invest $350bn in the US economy over the next five years, largely driven by its decision to repatriate the bulk of its $250bn in overseas cash reserves. Although they didn’t explicitly state the amount of cash on their balance sheet that will be brought back to the US, they did claim that the repatriation would incur approximately $38bn in taxes, which corresponds to most of the $250bn they hold overseas.

Even though most organisations do not have quite the same level of cash reserves as Apple does, the bar has effectively been set for CFOs of publicly traded companies. Because Apple is going to repatriate their cash, then every organization will be expected to do the same by investors and the financial community.

This expectation will be troublesome for many CFOs and treasurers for a few reasons:

  • 100% visibility into cash

While a quick review of the organisation’s balance sheet will determine the amount of cash and cash equivalents a company holds, such analysis offers little clue into where that cash is held and how easy it is to repatriate.

The treasurer will be expected to know where every euro, rupee, and yuan is held so they can provide a report of how much is available for repatriation. Any deviation from accounting numbers will need to be justified to management, the board and to investors.

  • Cash and intercompany structures

Most organizations with significant overseas cash will also have complex intercompany and cash pooling arrangements so that liquidity is optimised and tax on overseas earnings is minimised. Repatriation of cash will likely impact cash pooling and formal intercompany loans (that may well have been restructured in past years to better comply with Section 385 and similar regulations), meaning that treasury teams not only have to identify cash for repatriation but also the intercompany – and tax – implications of moving vast sums of cash away from foreign subsidiaries.

  • Cash forecasting

Apple’s treasury team is in the fortunate situation that their overseas businesses continue to generate significant cash, meaning that repatriating all balances won’t put them in a difficult liquidity position. But, that is not the case for every CFO and treasurer.

In fact, for most organisations, cash forecasting will become even more important than it already is because treasurers must be certain they aren’t extracting liquidity from a business that will soon require funding. Treasury teams and the regional finance teams that they collaborate with will have to be precise in their predictions because conservative estimates will not be appreciated by the eager investors who are hoping (or expecting) all repatriated cash to be directed to dividends and share repurchases.

  • Currency risk

Treasury will also have to implement a hedging policy that protects today’s USD value of overseas cash. If the USD strengthens tomorrow and balances are unhedged, the value of those cash balances in USD terms will decrease. Over several months or years this can have a profound effect on the value of cash reserves and, consequently, on the company’s share price, since significant value is derived from the expected influx of cash from overseas.

As treasurers explore hedging options, many treasury teams will realize that their hedging policies may require updating as those policies may have been designed for smaller currency exposures than the organization now potentially faces.

  • What to do with the cash?

Apple hasn’t shared many details of what they plan to do with repatriated cash, although the general expectation of Fortune 500 CFOs is that cash will be returned to shareholders in the form of dividends and/or share buybacks. Even if this is the case for most organizations, such actions will likely occur over time rather than all at once. And, in that case, it means that treasury must invest cash carefully so they earn return on cash while at the same time not sacrificing any principal whatsoever. This may mean adoption of a revised investment policy, which puts further stress on the treasury team.

In some cases, CFOs may look to the supply chain as a way to invest cash by generating implied returns on cash by offering proactive supplier discounts in return for early invoice payment. A form of supply chain finance, invoice discounting may become more popular as a way to create off-balance sheet earnings.

Timelines for treasurers

While there are several challenges for CFOs and treasurers to consider, such decisions will have to be made quickly. Apple is the first high profile US corporate to offer insight into their cash repatriation plans, which means that it will now be fashionable for other CEOs to make similar commitments to the financial community. The CFO will be expected to fund such commitments, which means treasury will be called upon to make it happen.

For those in treasury looking for opportunities to deliver strategic value to the organisation: congratulations, you have the perfect opportunity to showcase your expertise. It’s an exciting time to be in treasury!

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