The Association for Financial Professionals releases its "2020 AFP Liquidity Survey" Tuesday, which surveyed "nearly 375 corporate treasury and finance professionals in early March." AFP's press release, entitled, "Companies Turn to Bank Deposits as COVID-19 Crisis Continues," says, "Companies are holding their short-term investments in banks due to concerns over the economy, according to the 2020 AFP Liquidity Survey, underwritten by Invesco." It shows that "51% of respondents revealed that they increased their short-term investments in banks. This is the highest percentage in three years and a reversal of a downward trend that began in 2015. Although the survey was taken before the full effect of liquidity preservation efforts had set in due to the COVID-19 outbreak, this flight to caution likely reflects concerns that the pandemic poses a critical threat to the global economy." (Note: Watch for more comments during two webinars this week -- on Wednesday, 6/24, at 3pm, AFP will host, "Don't Gamble with Your Cash Investments" featuring Peter Crane and Evergy Inc.'s James Gilligan, and on Thursday, 6/25, at 2pm, we'll host "Crane's Money Fund Webinar: Portfolio Holdings Update," with Crane and J.P. Morgan Securities' Teresa Ho.)

The AFP release explains, "Safety continues to be the most-valued short-term investment objective for 62% of organizations, followed by liquidity at 34% and yield at a distant third with 4%. Given the current recession, we should probably expect larger shares of companies opting for safety in the future. As the crisis surrounding the pandemic unfolds, trust in banking partners will be paramount as the survey reflects. Ninety-three percent of respondents consider the overall relationship with their banks to be the primary driver in bank deposit selection. Seventy-three percent indicated that the credit quality of a bank is a deciding factor in determining where to maintain balances."

AFP president & CEO Jim Kaitz comments, "Bank deposits saw an increase for the first time in five years, and that's not a coincidence.... Although we performed this survey in the early days of the pandemic, financial professionals could see the gathering storm. With companies needing more access to liquidity and drawing down on credit facilities, their relationships with their banks will become more important than ever."

The release also tells us, "The percentage of companies with written investment policies declined by nine points to 71%. However, this area will likely be prioritized amid the current recession. The majority of cash and short-term investments held outside the U.S. is in U.S. dollars (52%) and bank products, mirroring a domestic approach to investing."

Laurie Brignac, CIO of the Invesco Global Liquidity Fixed Income Group, adds, "As a global provider of cash solutions, at Invesco we have also successfully navigated the recent environment through our longstanding commitment to safety and liquidity followed by yield.... The heightened importance of reliable practices and planning in uncertain environments is consistent with the findings in this annual survey, and we see that borne out with the consideration of cash segmentation strategies with many of our global clients both in the U.S. and abroad."

The Liquidity Survey's "Comprehensive Results" report's Introduction discusses COVID-19 and the economy, then says, "Managing liquidity is going to be key for treasury and finance professionals. Creating a liquidity buffer will be important as there is tremendous uncertainty regarding when there will be a return to any semblance of normalcy. Additionally, it is challenging to forecast when to expect an uptick in the economy. While some industries may rebound relatively quickly, the impact on others will be felt longer -- especially among those which are capital intensive with very limited revenue prospects. The last time treasury professionals saw this kind of upheaval was the financial crisis. Now, more than a decade later, the rear-view mirror provides a glimpse on how best to remain resilient in order to survive and thrive in this new normal."

On "Cash and Short-Term Investments," they state, "Thirty-one percent of corporate practitioners report an increase in their organizations' cash holdings within the U.S. in the past 12 months, 53 percent indicate there has been no significant change and 16 percent report a decrease. These results are comparable to those in the 2019 survey in which 30 percent of treasury and finance professionals reported an increase in U.S. cash holdings and 50 percent indicated cash balances had not changed significantly. The share of those reporting a decrease in their companies' cash holdings within the U.S. decreased by four percentage points from that reported last year (20 percent)."

AFP tells us, "Sixty-nine percent of organizations hold some amount of cash outside of the U.S. -- higher than the 63 percent reported last year. The share increases to 79 percent for publicly owned organizations. Thirty-six percent of these companies hold at least half their cash outside the U.S. Sixty-nine percent of large organizations -- those with at least $1 billion in annual revenue -- hold cash outside the U.S. compared to 59 percent of firms with annual revenue less than $1 billion that do so. These findings suggest that larger and publicly owned organizations are more likely to invest outside the U.S. than are others."

They also write, "In the past two years, organizations were maintaining less than 50 percent of their short-term investments in bank deposits (46 percent in 2019 and 48 percent in 2018). In this year's survey results, however, we see an increase, with the typical organization currently maintaining 51 percent of its short-term investment portfolio in bank deposits. This allocation represents a five-percentage-point increase from 2019 and a two-percentage-point increase from 2018. The higher balance being allotted to bank deposit products could potentially be pandemic (COVID-19) driven. As interest rates dropped to zero when this survey was being conducted, bank relationships were called upon as companies drew down on revolvers and accessed extra liquidity. The offset is possibly reflected in the higher balances maintained in bank products as companies look to extend their share of the wallet with safety being paramount -- all else being equal."

The survey says, "Companies maintain their investments in relatively few vehicles. Organizations invest in an average of 2.27 vehicles for their cash and short-term investments. This average is a decrease from the 2.60 figure reported in 2019. The majority of organizations continues to allocate a large share of their short-term investment balances -- an average of 77 percent -- in safe and liquid investment vehicles: bank deposits, money market funds (MMFs) and Treasury securities. The allocation to Government/Treasury money market funds is 16 percent, slightly higher than the 14 percent reported last year.

It also tells us, "The anticipated changes in investment mix are more likely to be observed in bank deposits, with 26 percent of respondents anticipating an increase and 15 percent expecting a decrease. Other investments likely to be impacted by shifts in an organization's investment mix are Government/Treasury money market funds and Treasury bills. As stated earlier, the increase in the investment mix towards bank deposits and Government/Treasury money funds not only reflects a flight to safety, but also as money funds durations decrease, there is additional yield to capture as rates were set to zero."

AFP writes on "Allocations Outside the U.S.," "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. Seventy percent of non-U.S. cash holdings are maintained in bank-type investments (including certificates of deposits, time deposits, etc.). This is similar to last year's survey result of 75 percent. Another 21 percent is held in money market mutual funds and government-type securities -- 10 percentage points higher than the share that reported investing in these vehicles in the 2019 survey."

Finally, they add, "Treasurers consider several 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 93 percent of survey respondents) while 73 percent indicate that the credit quality of a bank is a deciding factor. During the financial crisis, credit quality of the bank was a primary driver in bank product utilization. With the pandemic, the overall relationship with banks is a key driver, suggesting that financial professionals are heavily invested in such relationships. However, they are prudent when looking at the long term and ensure that the credit quality is up to par. Rates are the third most important consideration, and this result is in line with the principles organizations follow when investing: safety first, liquidity second, and yield a distant third. As the pandemic and its aftermath unfold, organizations are focused on being able to access credit and remaining viable."

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