EuroFinance

Trapped cash, assets that are not easily accessible or transferable, is a common challenge that treasurers face as businesses expand into global markets. Treasurers often find themselves navigating complex regulations, currency controls, and economic conditions to manage this issue.  At the 2024 EuroFinance International Treasury Management conference, Aimee Cullen, Associate director of treasury at Carrier, and Duang Wollring, Assistant treasurer at Equinix, shared their experiences on preventing and managing trapped cash, offering insights into the various strategies their companies employ.

Defining trapped cash and its risks

Cullen began by defining trapped cash as funds that cannot be easily accessed by a treasury centre, which poses risks when companies operate in regions with strict currency controls or complex regulations. She explained, “It’s cash I can’t pull in when needed to fund something.” According to Cullen, the risk of trapped cash increases as businesses expand into regions with these challenges. “You need to consider how much capital to put into certain markets because once it’s in, it may be difficult to get out.”

To avoid this, she emphasised the importance of early involvement in business strategies: “Treasury needs to be less passive, actively engaging with the business to determine if capital investment is worth the risk.” This proactive approach helps ensure companies aren’t locking up funds unnecessarily in markets where liquidity may be constrained.

Equinix’s unique perspective on trapped cash

For Wollring, trapped cash takes on a different definition in the capital-intensive world of digital infrastructure. Equinix, a leading provider of data centres and interconnections, continuously invests in new facilities. Wollring explained that their strategy is to keep cash in circulation, using the revenue generated from one data centre to fund the next. “Cash typically isn’t blocked or trapped unless we stop building,” she said, adding that the company focuses on long-term planning to avoid these situations.

Wollring stressed the importance of working closely with banks and advisors before entering new markets. “We talk to our banking partners early on to plan how we will fund our operations and repatriate cash when needed.” This level of foresight, combined with proper structuring of debt, equity, and third-party loans, helps Equinix minimise the risk of trapped cash in emerging markets.

Strategies to prevent and manage trapped cash

Both Cullen and Wollring agreed that careful planning is key to avoiding trapped cash. At Equinix, the team ensures contracts are often denominated in local currency, which simplifies cash management. “We push our vendor management teams to contract in local currency and either borrow or send funds in local currency as well,” said Wollring.

However, in markets like Nigeria, where vendors typically demand U.S. dollars for imports, Equinix has had to adapt. “We use intercompany loans or equity injections in U.S. dollars and pay suppliers offshore to navigate through currency controls,” Wollring explained. Additionally, Equinix makes efforts to collect payments in U.S. dollars from non-resident customers, further avoiding liquidity issues in challenging markets.

Carrier’s approach, as outlined by Cullen, involves closely monitoring cash flows to detect early signs of accumulation. “Regular reporting is critical,” she noted. “If cash starts to build up in ways we didn’t expect, we address it before it becomes trapped.” In her experience working in Latin America, Cullen also found that building relationships with local banks and central bank officials was invaluable. “In markets like Argentina, nothing is ever written down, so you have to meet with bankers who are close to the central bank to get the real insights,” she advised.

The role of banking partners and local knowledge

When managing cash in diverse markets, both treasury experts agree that banking partners play a critical role. Wollring explained that at Equinix, they rely heavily on their bankers to guide them through local regulations and advise on the best capital structures. However, regulations change frequently, so she often seeks second or third opinions from different banks to ensure they’re following the best course of action.

Cullen echoed this sentiment, noting that local banks often have a better understanding of the nuances in their markets. “In some countries, local banks can provide more tailored advice, which can be critical when trying to repatriate funds,” she said.

Unlocking trapped cash: techniques and best practices

Once cash becomes trapped, unlocking it can be a complex process. Cullen suggested that regular engagement with CFOs and central bank officials can help ensure repatriation becomes a routine process. “If you make repatriation a regular part of business operations, it becomes expected, and the process can be smoother the next time,” she said. According to her, the first repatriation attempt is often the hardest, but setting a precedent makes subsequent transactions easier.

For Equinix, preventing trapped cash from accumulating in the first place is a priority. Wollring highlighted that their use of cash pooling—a system implemented two years ago—has helped unlock about $500 million in operating cash. 

In more challenging markets like Nigeria, Equinix continues to employ techniques such as offshore billing issued to non-resident customers to avoid liquidity constraints. “While these strategies are getting harder to maintain, they’re still essential for avoiding trapped cash,” Wollring admitted.

A proactive and strategic approach

Trapped cash remains a significant challenge for treasury teams operating in emerging markets, but as the experiences of Cullen and Wollring demonstrate, a proactive and well-planned approach can mitigate the risks. Early involvement in business strategies, close relationships with banking partners, and the use of techniques like cash pooling are all essential tools in managing liquidity effectively. By carefully planning capital deployment and repatriation strategies, treasury teams can avoid the pitfalls of trapped cash and ensure their companies remain financially agile in global markets.