As global restrictions on the movement of goods increase, it is not hard to imagine that capital flow restrictions may also become more common. Diversifying supply chains exposes corporates to new markets, but repatriating cash from these locations can be difficult.
The issue of trapped cash has gained renewed attention since the end of quantitative easing and the era of cheap borrowing. Leaving cash in local institutions not only increases counterparty risk but can expose them to currency depreciation risk.
Since repatriation methods vary by country, treasurers often require expert guidance — this is where J.P. Morgan can help.
A Framework for repatriation
The Global Advisory team at J.P. Morgan Payments has analyzed a range of repatriation approaches that have proven effective globally. The framework considers several key factors, including whether the solution is permanent or if the cash will eventually need to be returned, whether the approach is overly complex for immaterial amounts, and what the total cost is relative to the principal.
Dividends are the standard approach for most treasury teams. Other equity-reducing methods, such as capital reduction and share buybacks for both public and private companies, are often overlooked.
Traditional Intercompany loans can provide an effective way to manage working capital funding needs across different parts of the business. On-behalf structures can also help whereby an offshore account can be used to collect in G10 currencies.
Adjusting intercompany payment terms—such as accelerating payments out of the restricted market or slowing payments in— can help. Procurement or reinvoicing centers are often used by companies to manage cash flows.
Charging legal entities for the use of brand, know-how, or central services on an arm's-length basis, is a classic way to reduce trapped cash in restricted markets.
These include solutions such as offsetting banking fees against trapped cash in restricted markets, automated local currency investment programs, or investments in local physical assets to preserve value.
Sometimes, selling the restricted market entity to a local buyer is the best option. Alternatively, creating a grandchild subsidiary in a less regulated market and increasing its capital may provide a solution.
Partnering with J.P. Morgan
J.P. Morgan is here to help treasurers navigate these complex challenges and identify the most effective solutions for their organizations.
To learn more or discuss how we can assist you, please contact your J.P. Morgan representative. The Global Advisory team at J.P. Morgan Payments is available to provide expert guidance and answer any inquiries.
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