Originally published at NeuGroup Insights.

GM’s aims for carbon neutrality by 2040 will rely on treasury’s contributions—from acquisitions to green bonds.

Treasury at General Motors is playing an active role and working closely with the business as the automaker moves away from producing vehicles with internal combustion engines (ICE) and pushes deeper into manufacturing electric vehicles (EVs).

Speaking at the pilot session of NeuGroup for Auto and Transportation, GM assistant treasurer Gustavo Vello described how treasury is helping the automaker achieve its strategic goals.

Joint effort, joint venture. Treasury directed the financing of three new vehicle battery-cell plants by negotiating the terms of a joint venture (JV) with LG Energy Solution (LGES) and securing a $2.5 billion loan for the JV from the US Department of Energy (DoE) under its Advanced Technology Vehicles Manufacturing program—one of the first loans closed since a 2010 deal with Tesla.

• Treasury first partnered with GM’s corporate development and legal teams to negotiate the terms of the JV, called Ultium Cells LLC, including transfer price mechanisms, volume commitments and capital structure.
• The loan due diligence process was extensive as GM and LGES declined to guarantee the loan (mitigating impact on the parent entities’ balance sheets and credit rating metrics), requiring the DoE to underwrite the loan based on the JV’s standalone credit risk. The DoE paid special attention to the JV’s financial projections, which were hard to calculate due to uncertainty about how quickly the market will transition to electric vehicles.
• Mr. Vello said the loan from the DoE allowed Ultium Cells to borrow at “very attractive” rates based on Treasury yields compared to rates the JV could have obtained in the financial markets.
  • GM’s analysis of the loan, though, extended beyond interest rates. “We considered everything: financial covenants, approval rights, and all elements that may restrict the company’s ability to effectively manage its business.”
  • The process proved far more difficult than a typical loan for GM because the JV was evaluated as a new company in a new industry, whereas GM benefits from being a large investment-grade issuer.

Ensuring access to key raw materials. Globally, demand for battery raw material (BRM) has increased significantly due to projected EV production, resulting in concerns that supply deficits and elevated commodity prices could persist through 2030. That is another challenge treasury is helping address.

• “As you can imagine with all the industry transition to EVs, there’s not enough raw material for everybody,” Mr. Vello said. “What’s happening right now is a race to get that capacity, and prices are really skyrocketing.”
• So GM’s treasury team joined a major internal effort, working with purchasing, corporate development and legal teams to structure deals to obtain required BRM volumes at lower prices. These strategies include purchasing commitments, loans and equity investments to create or expand mining capacity in stable locations—like GM’s $650 million investment in Lithium Americas, announced last month.
  • In addition to benefiting suppliers through direct investments and revenue certainty, Mr. Vello said the deals lend credibility to the smaller miners and manufacturers, “so they can raise capital more easily from other investors.”
• Mr. Vello added that, though there is a market to hedge cobalt and lithium hydroxide, it’s “very young,” with low liquidity and high costs. “We expect that to improve over time as demand grows.”

Putting the pieces together. GM’s aggressive plans to eliminate emissions from most vehicles in the US by 2035 also means significant investments in assembly plants are needed. Although the company’s cash generation has been robust, treasury took advantage of favorable pricing by launching the company’s inaugural green bond ($2.25 billion) in August 2022.

• GM first had to launch a sustainable finance framework that allows it to borrow funds to finance projects associated with clean transportation solutions and social initiatives. Treasury led this process, working with two bank advisors and with support from the company’s legal, sustainability and investor relations teams.
• A few days after launching the framework, GM issued the green bond. “It was an excellent opportunity to communicate the GM EV story to fixed income investors and better align our capital structure and funding to our journey to zero emissions,” Mr. Vello said.

Cruising ahead. Another initiative, and one with a longer time horizon, is to realize the company’s plans to move to autonomous vehicles. After helping acquire Cruise Automation—a start-up developing autonomous driving technology—in 2016, treasury supported several capital raises from financial and strategic investors such as Softbank, Honda, Microsoft and Walmart.

• Treasury contributed to those transactions by performing valuations, evaluating comparable companies, conducting cash flow analysis and contributing to capital structure and governance rights negotiations.
• Treasury also worked with GM Financial to offer a $5 billion credit line to Cruise to help fund its fleet of autonomous vehicles—which will be instrumental as Cruise looks to expand its commercial operations in San Francisco, Phoenix and Austin.

Originally published at NeuGroup Insights.

Unpacking a member’s cash pool in China in a free trade zone where window guidance put no limit on cash outflows.

Many NeuGroup member companies face a challenge getting cash out of China—in part because of rules limiting outflows from cash pools set up under a so-called nationwide scheme to 50% of the net equity held by a company’s entities in the country. But not all multinationals have this problem.

• At a recent session of NeuGroup for Global Cash and Banking, one member intrigued peers by describing how his company is taking advantage of free trade zones (FTZs) established in China that do not have specified limits on outflows, where corporates rely on unpublished “window” guidance provided by regulators.
• That prompted the member’s company to set up a special cross-border, physical RMB pool, based in Shanghai, which sends cash via intercompany loans to a multicurrency notional pool based in Singapore, which is pooled under a dollar header account and sent to the US.
• “China is a big entity for us, with trapped cash,” the member said. “We’d been studying this for the past year.”
• One of the members who was unaware that companies could send more than 50% of equity out of China said he would immediately contact his team to look into following suit.

How it works. To benefit from the relaxed outflow rules governing free trade zones (FTZ), the member company set up a cross-border cash pool made up of three accounts (see graphic below):

1. A pool header operating account, onshore in China, which consolidates cash from all the corporate’s RMB subaccounts in the country.
2. A special cross-border account in the Shanghai FTZ that sweeps domestic cash and retrieves overseas cash. This requires an application and approval from the People’s Bank of China (PBOC), which the member said can take one to two months.
3. An offshore header account in Singapore that receives the cash, sent in CNY and received in CNH.

Another corporate’s liquidity director told NeuGroup Insights his company has a similar, special pooling account, also based in Shanghai. “Under the terms of this pooling structure, we can move unlimited amounts of cash, the only major requirement being that at least one time per year we have to have a zero balance for the sweep—meaning we have to repay all of the funds sent out of country for one day,” he explained.

A true team effort. The US-based member who described the structure at the meeting said setting it up was relatively complex as it required government approval and a very hands-on team in Asia, starting with a regional treasurer in Singapore.

• He said the Singapore team obtained approval from the PBOC and worked with a local bank to set up the accounts. “We’re stepping in now to coordinate from the US side to make sure that we provide liquidity, interest rates, deposits, and make sure we’re fully covered,” he said.
• The regional treasurer said that because China is “very paper-based,” she depended on a China-based treasury manager to propose banks for corporate approval, set up the facility’s infrastructure and get approval from regulators. The treasury manager followed guidance from the PBOC and the State Administration of Foreign Exchange.
• “He is the one who is running around, talking to banks, talking to peers—this takes time and expertise,” the regional treasurer said. “If you do not have suitable people in country, it’s not easy; you wouldn’t be able to do it if you’re sitting in Singapore.”

Why not do it? Some multinationals that use the nationwide pooling scheme and have not opted to take advantage of the increased flexibility offered in China’s FTZs simply don’t have operations in the special regions necessary to set up a pool header account.

• “The free trade zones are not everywhere,” one member said. “So if your company is in Shenzhou, you cannot do the free trade zone version. The FTZ is intended to attract people to concentrate imports into certain areas.”
• They said in addition to having a FTZ designation, an eligible corporate considering the special pooling structure should have multiple entities in China. A corporate with only one account in the country may use repatriation via a dividend to move cash out of the country.
• A NeuGroup member at a company using the nationwide structure told NeuGroup Insights: “We are aware of the other schemes, and continue to evaluate.  We have had a positive partnership with regulators in developing and operating our existing structure and it has largely met our needs. We also believe this nationwide scheme offers the greatest stability and predictability, which is important to us both locally and globally as we manage liquidity.”

Words to the wise. Indeed, the regional treasurer warned corporates weighing the benefits of pools in an FTZ to be wary of ever-changing window guidance from the PBOC.

• “I want to put a disclaimer that this was a chance for us to take advantage of China opening up because of how the economics have evolved,” she said. “But there is a chance that, even tomorrow, they could change the regulation—and they don’t have to give advance notice.”
• And don’t expect to get parameters documented in writing. For guidance on FTZ RMB pool outflows, “even the bank won’t write an email to you, they’ll only tell you over the phone,” the team member in Shanghai said.

Originally published in NeuGroup Insights.

At a recent NeuGroup virtual interactive session, Willis Towers Watson’s Climate and Resilience Hub experts, led by Irem Yerdelen, detailed the long-term risks of ignoring the causes of climate change and other environmental threats, and members discussed what steps, if any, treasurers can take to incorporate this risk into their ESG and risk management strategies.

• “There is an extraordinary depth and breadth to this issue,” Ms. Yerdelen said. “It’s one of the few issues that permeates every element of every business—it hits every stakeholder in every element of every organization in every industry.”

Understand the types of risk. Willis Towers Watson divides climate-related risks into three categories:

• Physical risks, the acute risks arising from extreme weather-related events and chronic, slow onset climatic changes. While these risks may not impact all corporates in the near future, Ms. Yerdelen said, “without an established climate resilience, we expect the global economy to shrink by 2050.”
  • “The trends here are interesting,” one member responded. “But currently a lot of what our ESG function is identifying as a risk isn’t yet a material enterprise-level risk for the company.”
• Transition risks arise from changes in policy, technology, societal pressure and consumer preference. Some sectors face significant shifts in asset values or higher costs.
• Liability risks, or the risk of actions initiated by claimants who have suffered loss and damage arising from climate change.

Time to act? “Every risk is different,” one member said. “Identifying what is voluntary and what is mandatory is something that is taking a lot of our time and resource allocation. It is definitely a priority on our agenda, as well as all of the reporting with which we have to comply.”

• She added that her company is still looking into how to evaluate the impact of climate change on cost of capital. “If the money we’re making demands an action that’s responding to climate change, what is going to happen with that impact?”
• “Sustainability has never been a topic that is promoted and discussed in this way before,” she continued. “It is a top priority for us, and we want to figure out how to leverage the knowledge within our corporation, how we can organize to deal with this holistically.”
• Willis Towers Watson recommends starting slow and assigning an end goal, like reducing your total carbon emissions to a set target by 2030 or later but understanding that the journey may fluctuate along the way.
  • “If you do nothing, governments and regulators and other corporates will do some of it for you,” one presenter said. “At the very least, ensure you’ve got the right leadership that think about these risks and appropriately weigh climate risks when they make decisions.”

Burden of proof. One member said that while climate change at the current pace could have a long-term impact, he could not get sign-off on any action to mitigate risks without supporting data. “It needs to be properly quantified, otherwise it’s just a headline,” he said.

• Though there are a number of third parties that rate a company’s ESG performance, Willis Towers Watson has an in-house valuation tool it calls CVaR (climate value at risk), which evaluates long-term transition risk, as well as a physical climate risk modelling tool that reviews climate change impacts for selected scenarios and strategic time horizons.
• As the charts below show, transition risk does not necessarily correlate with ESG scores or carbon intensity metrics.

• “Evaluating climate risk is about looking at different assets, and that requires a whole set of analytics based upon commodities like the oil crisis and carbon prices changing in the future,” one presenter said.
• “There is a bit of a debate about if ESG is an emerging risk or an existing risk,” he continued. “It’s not emerging, it is very prevalent now, but we still need to reconcile materiality when it comes to ERM. Ultimately, things need to be quantified in order to be impactful.”