Corporations have been hoarding record numbers of cash in recent years, but will money market fund reforms impact corporate treasurers' cash management strategies? Fitch Ratings explored the question in a new report, "Money Fund Reforms Will Have Uneven Impact on Corporations." The report, written by Greg Fayvilevich and Kamil Kopec says money market reforms will impact corporate treasurers unevenly and should prompt companies to review their cash strategies. "While some corporate treasurers utilize money funds extensively, including for daily cash flow management and strategic cash buffers, others use them sparingly or not at all. Those corporations that use prime or municipal money funds will have to review their cash investment policies in light of significant structural changes implemented by the Securities and Exchange Commission (SEC)."

The floating NAV stipulation for prime institutional and municipal funds may revamp liquidity management. "We expect that investments in institutional prime and municipal money funds will contract as the two-year implementation deadline set by the SEC approaches. The reforms will require the funds to float their net asset values, as well as impose redemption fees and gates at times of stress. This represents a significant overhaul for the liquidity management industry, and will likely prove too burdensome for many users of these funds, which are heavily represented by corporate cash managers. A survey conducted by Treasury Strategies found that 79% of treasurers would either decrease or discontinue their investments in money funds if a floating NAV was implemented. Moreover, Treasury Strategies estimates that money fund assets held by corporate, government and institutional investors would decline by 61% under this scenario." (Note: This survey was done prior to the final reforms being passed, so these numbers likely would be modified downward substantially given the accomodations made by the SEC in the final rules.)

Fitch continues, "In the first quarter of 2014, nonfinancial corporate businesses held $497 billion in money market funds, according to the Federal Reserve -- down 32% from 2008 but still a significant portion of firms' short-term assets. Money funds comprised 31% of the nonfinancial corporates' short-term portfolios, which also include time and savings deposits (41%), checkable deposits and currency (19%), private foreign deposits (4%), as well as smaller holdings of Treasuries, commercial paper, repo, and agencies."

Guidelines for investing in MMFs differ from company to company, the authors say. "A 2014 survey conducted by the Association for Financial Professionals found that 47% of treasurers are allowed to invest in Treasury money funds while 41% are allowed to invest in other diversified money funds (typically 'prime' funds) -- implying that 53% of treasurers cannot buy money funds at all. Further, many of these treasurers are restricted in their maximum allocations to money funds. The survey found that 32% of treasurers can invest a maximum of 25% of their short-term portfolios in diversified money funds. With many treasurers constrained in their money fund investments by policy or choice, a smaller number of companies are disproportionally exposed to these products and are going to be most impacted by reform. These dynamics are particularly visible when looking at individual companies' balance sheets. For example, consider Apple Inc., which reported holding $164.5 billion in "cash, cash equivalents and marketable securities" in its most recent 10-Q as of June 30, and Amazon, which reported $8.4 billion in the same category. Of Apple's cash hoard, only $1.3 billion, or 1%, is held in money funds. Conversely, Amazon, having significantly less total cash, allocates $2.5 billion, or as much as 29% of the total, to money funds. If considering as "cash" only those securities that mature in less than one year, then money funds make up 3% of Apple's cash and 38% of Amazon's."

It concludes, "Corporate treasurers who invest in institutional prime and municipal money funds will need to review and update their cash investment policies in light of reform. For example, some policies specifically dictate that money funds must have a stable NAV, and treasurers will have to determine whether they would be comfortable investing cash in a floating NAV fund. Alternatively, money fund managers are expected to introduce new liquidity products, and treasurers may choose to add some of these to their lists of approved investments. In either case, this may prove to be a time-consuming process involving board-level approval. The challenge will be greatest for corporations that rely heavily on money funds."

The Wall Street Journal's CFO Journal elaborated on the report, quoting Fitch's Roger Merritt. "Everybody is still quite frankly trying to sort this out," said Merritt.... "Historically, the attractiveness of money-market funds has been the fact that you could put your money in at $1, have same-day liquidity, and take it back out at $1," Merritt told the blog. "If a lot of the cash isn't really needed for operating and is more strategic, they may put it somewhere else, or manage cash in-house rather than make a deposit in a money-market fund," he said. However, it is unclear if banks will want more corporate cash because they would need thicker capital cushions to meet regulatory requirements, Merritt added.

GT News, a source for expert commentary on global treasury, published a couple of pieces on the subject of corporate cash last week. Martin Smith, senior markets analyst for East & Partners, Sydney, AU, wrote "Scaling the Mountain: Will Corporates put Unspent Cash to Work?." Wrote Smith, "A massive unspent US$2.8 trillion corporate cash mountain has accumulated since the financial crisis. When will the hoarders finally put this cash to work? The bulk of the growing 'cash mountain' -- conjuring images of Scrooge McDuck -- resides chiefly among US technology and IT multinationals, including Google, Microsoft, Oracle and Apple. Apple's cash reserves, approaching US$160bn, equate to the greatest unallocated capital stockpile among US corporates ahead of Microsoft (nearing US$90bn), Google (close to US$60bn) and Oracle (US$37bn). Much of these funds are held offshore for 'tax minimisation' reasons, totalling close to US$2 trillion abroad. Greater emphasis on regulation, stringent compliance procedures and crisis prevention protocols is reflected in shorter dated performance ratings and sales expectations among boardrooms the world over.... An expectation that low interest rates will not remain in place in perpetuity has resulted in greater usage of cheap, revolving credit for business operations, instead of the desired application to capex or paying down of existing debt. Lessons learnt from the 2007-09 global financial crisis are clearly not long forgotten as mountains of underutilised corporate cash grow higher, seemingly to the detriment of continued economic stability and growth across the globe."

Also in GT News, Nishami Dharmaratne, regional head of liquidity and investments solutions -- multinational client segment in Asia Pacific for Citi Treasury and Trade Solutions, wrote "Unspent Cash is King: Why Corporations Aren't Letting Go" on why the cash hoarding will continue. "The cash levels are at record highs, with estimates of cash hoarding by corporations ranging between US$1.5 trillion to US$5 trillion, according to CNBC. From an industry perspective, information security or technology companies tend to be amongst the top non-financial companies with high cash levels, with pharmaceuticals and biotech companies following suit... This trend is not only seen in the United States or Europe, but in Asia as well. Nearly US$500bn of excess cash is held by nonfinancial companies, primarily from Japan, Korea and China, the Wall Street Journal noted."

She continues, "While companies are inclined to hold more cash position, with the Basel III liquidity considerations in the industry, banks are focused on improving liquidity coverage ratios (LCR) as a primary goal. Therefore, banks are far more likely to pay rewards for LCR-friendly deposits versus excess cash positions, which has not been the situation in the previous years. As a result, companies are challenged to benefit from high returns on their cash positions and are looking at other investment products such as money market funds (MMFs) and short-term funds to ensure returns on their cash positions. In conclusion, corporations are expected to continue to accumulate cash positions with different motivating factors, from the need to reserve cash for research and development to tax considerations. More importantly, changes in banking regulations or the interest rate environment will certainly make a difference and allow companies to make choices with this excess cash. Overall, if the economic indicators work favourably and business confidence grows, there will be an opportunity for companies to channel cash to right investments. Until then, cash will indeed continue to be king."

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