U.K.-based corporate treasurers have been hoarding increasing amounts of cash since the financial crisis, according to a survey, "Corporate Cash and Liquid Investments," released by the London-based Association of Corporate Treasurers. In the U.K., private non-financials companies hold about L500 billion in cash compared to about $2 trillion in the US, and E2 trillion in the Eurozone. In all three regions, cash holdings have a little more than doubled since 2000. In the US, UK, and throughout most of Europe, cash holdings represent about 20% of market capitalization. Why? The report says, "Risk and concerns about access to finance clearly increase during a financial crisis. That UK corporate cash has increased by about 25% since Q1 2008 is, then, little surprise. The crisis has emphasized to companies that banks may not be willing (or able) to lend just when the company needs it -- or at all. And, of course, availability of market based finance (from bonds, for example) can never be assumed, depending as it does on investor demand." (Note: For more on recent corporate cash surveys, see our Sept. 25 News, "GT News Survey Reveals Corporate Treasurers Attitudes on Cash Mgmt" and our July 15 News "AFP Liquidity Survey: Corps Hold More Cash, Concern Over MMF Reform." Note too that the Association for Financial Professionals, or AFP will hold its 2014 Annual Meeting Nov. 2-5 in Washington.)
ACT says, "In recent years company boards have also adopted a more cautious approach toward financial risk resulting in heightened exposure on the boardroom agenda. Caution in investment may have been a small factor in corporate cash accumulation but precautionary holdings -- "fund early and fund long" -- seem to have been the more important factor. Standard and Poor's found "little sign of corporate under investment" among European corporates it rates earlier this year."
The survey polled just over 100 corporate treasurers, almost all of whom were based in the UK, from companies cutting across a range of sectors and sizes. The largest percentage, 27%, held between L100 million and L500 million in cash, while 25% held between L2.5M and L100M. About 18% held between L500M and L1 billion. Roughly 65% said "very little" of their cash was trapped overseas, while 20% said one-quarter of it was. Further, 18% of companies held more than 20% of their assets in cash, while 12% held between 15%-20% and 9% held 10%-15%. Also, 18% held 5%-10%, 11% held 2%-5%, and 22% held less than 2%.
Why were treasurers holding so much cash? The answers were multiple, but most (75%), said "pre-funding, taking advantage of availability/low rates." Also, 67% said "certainty of funding for long-term projects," 65% said "improved working capital efficiency," 63% said "funding earlier and longer given reduced willingness/ability of banks to fund," 57% said "regulatory environment," 55% said "lumpy funding in bond markets," 55% said "slowed capex, M&A released cash," 52% said "working capital decline with downturn," and 40% said "hedge against deflation."
How will they use cash balances? "A clear majority, 72%, said that their business plans were actually for utilizing the cash, 18% saying they will run down balances aggressively -- returning funds to shareholders, not replacing maturing debt, etc. The majority (54%) did not specify. "However, 43% planned to hold more cash than in the past. Of that 43%, 16% now have a formal policy for holding more cash and a further 12% are doing so pragmatically for flexibility in view of both the doubtful ability of banks to lend when required and that debt markets are not always available."
What might lead treasurers to reduce cash? About 41% said "higher borrowing costs," 33% said "greater access to committed borrowing facilities," 23% said "sustained low or negative interest rates," 22% said "Increased concern over finding credit worthy cash investments," and 17% said "reduced economic uncertainty." Conversely, the reasons for holding more cash were flipped as 53% said "Increased political and economic uncertainty" and 39% said "continuing regulation of banks reducing their capacity to lend." Also, 16% said "likelihood of interest rates rising," and 15% said "lower borrowing costs."
They add, "Of course companies face a cost of carry of cash. Their average or marginal cost of capital is certainly higher than the minimal returns on cash as an investment. The return in current conditions is in the perceived risk reductions or avoidance. We did not ask a question about that – but it is a significant factor, often coming up in ACT events and discussion of cash policy, and a major constraint on increasing cash." Also, the survey asked, "Which of the following have you begun to factor into your planning?" Most (60%) said "diversifying away from bank credit exposure as a class into sovereigns, non-bank commercial paper, money market funds, other, etc."
In other news, the New York Fed's Liberty Street Economics blog <i:http://libertystreeteconomics.newyorkfed.org/2014/10/how-do-liquidity-conditions-affect-us-bank-lending.html#.VD7KiMJ0yiM>`_wrote a post Wednesday on, "`How Do Liquidity Conditions Affect U.S. Bank Lending?" It says, "The recent financial crisis underscored the importance of understanding how liquidity conditions for banks (or other financial institutions) influence the banks' lending to domestic and foreign customers. Our recent research examines the domestic and international lending responses to liquidity risks across different types of large U.S. banks before, during, and after the global financial crisis."
It explains, "The analysis compares large global U.S. banks -- that is, those that have offices in foreign countries and are able to move liquidity from affiliates across borders -- with large domestic U.S. banks, which have to rely on financing raised in capital markets and from depositors to extend credit and issue loans. One key result of our study ... is that the internal liquidity management by global banks has, on average, mitigated the effects of aggregate liquidity shocks on domestic lending by these banks <b:>`_."
