"Never have so many worked so hard for so little," said Crane Data President Peter Crane, talking about corporate treasurer's cash investing and near-zero interest rates last week at a Bank of America luncheon accompanying the AFP Annual Conference in Washington. The event, normally the largest gathering of treasury professionals, attracts almost every provider of institutional money market funds and cash investing services, and always sparks a rash of discussions on issues facing the largest corporations. Below, we review and excerpt from several articles and reports on the cash conundrum impacting corporate treasurers. Not only is there uncertainty with money market funds, but bank deposits are also facing their own regulatory challenges, leaving treasurers wondering what to do with their cash.
Recently, Financial News published a story on "How to Solve the Puzzle of Holding Lots of Money." The European-oriented publication reported, "Corporate treasurers have their work cut out. Short-term investment options are fading just at a time when they have plenty of cash ready to place in safe but liquid schemes. Increased regulation of the banking sector under Basel III regulation is expected to see short-term corporate deposits lose favour with banks seeking to ensure greater stability in the assets on their balance sheets. Meanwhile, upcoming money market fund regulation on both sides of the Atlantic looks set to impede the appeal of such short-term investment vehicles."
The article elaborates on the challenges facing bank deposits, which represent the bulk (about 50%) of the $10 trillion cash management business. "Fred Berretta, head of global liquidity investment solutions at Bank of America Merrill Lynch, said the attractiveness of "volatile" corporate deposits (large deposits that can be withdrawn at short notice) has declined for banks because of "the ramifications of holding such highly liquid assets on their balance sheets." He said: "Under Basel III regulations, bank appetite to hold non-operating deposits is likely to wane and this is already happening. It might not be that big an issue for operational cash, which is still attractive to banks, but is the case with 'strategic' cash that corporates may suddenly need to take out for business investment reasons." The article goes on, "As a result, Berretta believes that there will be a drive back into other traditional short-term investment options such as the fixed income markets, money market instruments and commercial paper. "Short-term corporate bonds are also likely to come to the fore," he said."
Regarding money market funds, Financial News wrote, "In the US, MMF regulations, signed off in July by the Securities and Exchange Commission, come into full effect in 2016 and are expected to make institutional funds less attractive with new rules allowing these funds to charge fees for redemptions (liquidity fees) and disallow redemptions for up to 10 business days (redemption gates). Berretta said this could lead corporates to "re-examine where they invest their spare cash." But he added that new structures would be likely to emerge in which corporate cash could be invested as the markets reacted to these changes. "New investment alternatives will be designed by existing players in the market -- for example, we may see new types of funds being launched and new types of short-term money market instruments." The piece quotes Berretta, on "a definite trend among corporates since the credit crisis towards stockpiling cash," "The priority has nevertheless most certainly been security and risk management - and this focus on risk management is continuing."
Through it all, corporate treasurers are continuing to stockpile their cash reserves. This is illuminated in a recent survey by SunGard Financial Systems, which found that 49% of corporate treasurers increased their cash balances in 2014, up from 43% in 2013. However, the survey found that 31% said the "Lack of suitable repositories for cash" was the greatest concern, while about 62% said it was one of the top 3 concerns. For more on the survey, see our Nov. 5 News, "SunGard: Lack of Suitable Cash Repositories Biggest Concern of Corps."
Vipal Monga at The Wall Street Journal's CFO Journal also tackled this issue in his story, "New Rules, New Corporate Puzzle: Where to Steer Cash?" He wrote, "Companies keep hoarding cash. Where will they put it all? That's an increasingly tough question for corporate finance chiefs and treasurers to answer. Persistently low interest rates and new rules for banks and money-market funds are complicating the task of managing the almost $2 trillion on corporate balance sheets, setting off a scramble to find new parking places for that cash.... Corporate coffers have continued to swell. Nonfinancial companies held $1.88 trillion of cash at the end of June, up more than 8% from a year earlier, according to the most recent data from the Federal Reserve."
The article goes on, "Companies used to be content to put much of their cash into deposit accounts or money-market funds. Finance chiefs were prepared to sacrifice yields to ensure the safety of the money that would need amid the next financial crunch. But international banking regulators recently updated their rules, designating "excess" cash deposits as high risk, because they were more likely to fly out a bank's door during a crisis. As a result, regulators are demanding that banks hold more capital against those deposits, making then a costlier source of lending funds."
The WSJ story continued, "Another complication: in a bid to spur lending, the European Central Bank recently slashed interest rates to a historic minus 0.20% on overnight bank deposits. Some banks, in turn, are passing on the cost by charging customers fees, instead of paying interest, on euro deposits. While Europe's negative rates are mainly pinching hedge funds and mutual funds so far, companies are bracing for the impact. For the first time, Wolters Kluwer NV, an information-services company based in the Netherlands, is considering investing in European money-market funds to reduce its exposure to bank deposits. "It doesn't feel right when you put some money to a bank and get less back," said George Dessing, the company's treasurer."
CFO Magazine also addresses money fund and cash investing issues in their story, "Flight Risk." Vincent Ryan wrote, "When trying to judge whether corporate treasurers will flee for the exits when money market fund reforms take effect, one thing becomes clear: U.S. monetary policy may wind up resuscitating what financial services regulators have tried to kill. The "what," of course, are prime money market funds, defined as funds that invest in things like floating-rate debt, commercial paper, and securities of U.S. government agencies. The Securities and Exchange Commission didn't really try to kill prime funds, but it did adopt structural and operational reforms in July, after years of debate and squabbling."
It continued, "Jerry Klein, managing director at HighTower Treasury Partners, predicts there will be outflows of corporate cash from prime funds. Treasurers still believe the prime objective of short-term cash investing is preservation of principal. Although NAV fluctuations will most likely be minimal, "treasurers will not be comfortable with the potential for small losses when they redeem their shares," Klein says." It concludes, "The spread between the interest paid on bank deposits and money fund rates could also increase." "Many of our clients have already had meetings with their banks, and [due to rules like the liquidity coverage ratio] banks are less interested in nonoperational short-term deposits," Klein says. "If banks are going to continue to accept them, the interest rates banks pay will likely decrease."
As our Peter Crane also commented at the abovementioned BofA lunch, again paraphrasing Churchill, "Corporate treasurers, like America, will also do the right thing [and invest in floating NAV Prime Institutional funds] ... after exhausting every other possibility."
