The Association for Financial Professionals, an organization of corporate treasurers, published its "2018 AFP Liquidity Survey" yesterday, which polled "nearly 640 corporate treasury and finance professionals in April" about some of their cash management and short-term investing preferences. Their press release says, "The 2018 AFP Liquidity Survey, underwritten by State Street Global Advisors, found that 40 percent of respondents anticipate no changes in spending at their companies in the wake of corporate tax reform. About one-fourth of companies (26 percent) plan to pay down debt, and 24 percent plan to repatriate foreign cash, or have already repatriated these funds."

AFP explains, "Organizations continue to allocate a significant share of their short-term investment balances -- an average of 75 percent -- to safe and liquid investment vehicles like bank deposits, money market funds (MMFs) and Treasury securities, with the typical organization currently maintaining 49 percent of its short-term investment portfolio in bank deposits."

Yeng Felipe Butler, Global Head of Cash Business at State Street Global Advisors, comments, "Current markets have been causing concerns for US economic growth, yet cash balances remain high, acting as a buffer against these market uncertainties. We're seeing a shift in investment professionals using cash management as part of a broader corporate strategy from historically being an operational afterthought."

The release adds, "Fully 59 percent of respondents do not foresee a change in their organization's short-term investments, and only 11 percent project a shift in the mix. Any changes in an organization's investment mix are more likely to be observed in prime/diversified money market funds and government/treasury MMFs. Of the organizations anticipating a change in their organization's investment mix, 24 percent indicate they expect an increase in each of these categories of MMFs. About 20 percent predict an increase in commercial paper and bank deposits."

AFP's full survey tells us, "This year marks the 10th anniversary of the 2008 financial crisis. While much has remained the same in financial markets in the wake of the crisis, regulatory reforms affecting money market funds and banks, continue to have lasting impacts on organizations’ operating cash portfolios.... Results from the most recent survey on liquidity by the Association for Financial Professionals substantiate this: nearly 40 percent of survey respondents indicate they prefer to take a 'wait and see' approach and anticipate no changes in their organizations' approach to cash and short-term investment as a result of the new tax law. While some repatriation of off-shore funds has occurred and will continue to do so, less than one-fourth of survey respondents reports repatriation of funds is on their agenda."

It states, "In addition, corporate treasury departments remain cautiously optimistic in their perception of Prime money market funds. [But] the floating net asset value (NAV) is a deal breaker for most organizations, and the threshold to consider moving back to Prime funds has not yet been reached despite yield differentials compelling enough with NAVs not floating much and balances not increasing significantly…. Practitioners are keeping investment vehicle maturities short -- less than 30 days -- and are probably planning to take full advantage when interest rates do increase."

On "Cash and Short-Term Investments/Securities," the survey says, "There has been no apparent change in organizations' spending, and despite the passage of tax reform legislation in late 2017, provisions of the new law were not enough to encourage organizations to begin deploying their cash and short-term holdings.... Sixty-five percent of organizations hold some amount of cash outside of the U.S. -- slightly more than the 60 percent reported last year.... A majority of organizations' investment policies requires money market funds be rated. Thirty-six percent of organizations require at least one rating agency assign an AAA rating and 29 percent mandate that their money funds earn an AAA rating from at least two agencies."

It explains, "While the uncertainty surrounding tariffs and the threats of a trade war have prevented financial practitioners from taking any meaningful steps to deploy cash, they are, however, modestly optimistic, demonstrated by the fact that the typical organization currently maintains 49 percent of its short-term investment portfolio in bank deposits. This allocation is a four-percentage-point decrease from 2017 and the lowest share since 2011.... Companies maintain their investments in relatively few investment vehicles. Organizations invest in an average of 2.6 vehicles for their cash and short-term investments, higher than the average 2.3 and 2.4 reported in 2017 and 2016, respectively."

AFP writes, "Corporate treasury departments remain cautious. Yet with anticipated interest-rate increases they are willing to move their allocations, albeit small, into commercial paper, Prime money funds and Eurodollar deposits as well. This reallocation demonstrates that while bank deposits continue to be the number-one holding, the overall interest-rate environment is causing some finance professionals to reallocate their organizations’ holdings into other, higher yield, more opportunistic investments where the credit risk is indifferent."

They tell us, "The overall majority of organizations continues to allocate a large share of their short-term investment balances -- an average of 75 percent -- in safe and liquid investment vehicles: bank deposits, money market funds (MMFs) and Treasury securities. Money market funds currently account for 19 percent of organizations' short-term investment portfolios, a smaller share than the 21 percent reported in 2017 but larger than the 17 percent reported in 2016. The allocation to Government funds is 13 percent, similar to the 14 percent reported last year."

The survey comments, "The anticipated changes in investment mix are more likely to be observed in Prime/Diversified money market funds and Government/Treasury money market funds, with 24 percent of survey respondents indicating they expect an increase in each of these types of funds. About 20 percent anticipate an increase in commercial paper and bank deposits."

It adds, "Those organizations with cash and short-term investment holdings outside of the U.S. manage their cash holdings similarly as they do their domestic ones. Sixty-one percent of non-U.S. cash holdings are maintained in bank-type investments (including certificates of deposits, time deposits, etc.). This is a 10-percentage point decrease from the percentage reported in last year’s survey. Another 21 percent are held in MMFs and government-type securities -- higher than the 16 percent that reported investing in these vehicles last year. There does appear to be a shift away from banks and towards MMFs."

On banks, AFP says, "As the survey results suggest, banks are still major depositories for companies' cash and short-term investment holdings, but they are not as dominant as they have been in the past few years. Survey results reveal a decrease in cash and short-term investments being held at banks for U.S. and non-U.S. cash holdings compared to last year's figures (53 percent for cash held within the U.S. and 71 percent for balances held outside the U.S. in 2017)."

Finally, they tell us, "Treasury and finance professionals consider a number of factors when deciding where to place their organizations' cash and short-term investments. A vast majority considers the overall relationship with their banks a determinant (cited by 90 percent of survey respondents) while 73 percent indicate that the credit quality of a bank is a deciding factor." (Watch for a second piece on the AFP Liquidity Survey in coming days.)

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