A need to change tack
Incorporated in 1866, the Hong Kong and Shanghai Hotels, Limited (HSH) develops, owns and manages a group of prestigious hotels, commercial and residential properties in Asia, the United States and Europe. HSH’s long-term strategic mission is to build, maintain and create high quality assets that become legacies in the future – their flagship hotel, The Peninsula Hong Kong, is a prime example.
The HSH Treasury Team supports the company, and strives for continuous improvements to achieve optimal tailor-made treasury solutions. With the centralised treasury set up in Hong Kong SAR, HSH needed to minimise bank borrowing and maximise interest income in five markets across the globe through cross-border cash concentration and a multi-currency notional pooling structure. Under the strain of market volatility caused by COVID-19, HSH has proved that evaluating liquidity, returns and risk is key to achieving optimal liquidity efficiency.
Some of the key challenges faced by HSH:
Multiple banking relationships: accounts were opened with different local banks across the globe, which made it difficult to monitor and plan their cash position.
Decentralised cash management in local hotels: working capital cash balances were spread across the globe.
Trapped cash without any Enhanced Yield: The Peninsula had operations in a few markets in which currencies are heavily regulated, leading to surplus cash becoming trapped onshore and a portion losing out on the potential benefits of better interest rates.
Driving change: HSH’s Treasury Transformation Project
Throughout 2020, the HSH Treasury Team embarked on a Treasury Transformation Project to achieve better efficiency, tighter internal controls and direct economic benefits for the company.
The central improvement areas of the project included:
Liquidity Management: Review of relationship banks and their debt portfolio to further improve pricing, average maturity duration, diversification of banking partners and debt rollover workload.
Reporting: Design and implement Treasury operation reports to enhance trend analysis.
System: Implement a Treasury Management System to obtain more efficiency in work flow.
Treasury Policy: Review Treasury Policy, taking into account changes in the market environment.
Strategic Cash Management: Design a notional cash pooling structure involving 5 markets to concentrate all non-trapped cash back to headquarters to improve cash liquidity control for the group.
Account Rationalisation: Review and streamline bank account structure
Cash forecasting methodology: Standardise cash forecasting methodology
Putting the Transformation Project plan into action
HSH firstly rationalised bank relationships and accounts to minimise counterparty risk and account maintenance cost. With HSBC identified as the core cash management bank, HSBC helped HSH to reduce circa 20 per cent of unnecessary bank accounts in the group, significantly reducing their bank administration workload.
HSBC also facilitated HSH subsidiaries to open non-resident accounts in Hong Kong SAR to concentrate the funds from the local hotel operations in United States, United Kingdom, Japan and France, to minimise disruption to existing business operations. This also optimised cash efficiency and reduced operational risk, as HSH no longer needed to manually fund or defund the local accounts, whilst against-the-sun sweeping ensured same day value.
At headquarter treasury level, HSBC provided the Liquidity Management Portal1 which provided HSH with full cash visibility and Multi-Currency Notional Pooling to draw down on HKD based on the credit balance in other currencies, reducing group borrowing cost. HSH is continuing to expand the scope of the transformation project to markets with moderate liquidity restrictions such as mainland China to further maximise cash efficiency.
Reaping the rewards