The Association for Financial Professionals, which represents corporate treasurers and major investors in institutional money funds, began its "AFP2020 Virtual Experience" last week. (See our Oct. 8 Link of the Day, "AFP2020 to Feature ICD, More Cash.") So far, there have been just a handful of sessions discussing cash investments, including one entitled, "Aligning Investment Strategy with Your Company's Operations." This panel, led by Sebastian Ramos of ICD, featured Kim Kelly-Lippert of American Honda, Ryan Seghesio of California ISO and Tom Wolfe of MGM Resorts. We excerpt from this presentation below. (Note: As a reminder, register here for our next virtual event, Crane's Money Fund Symposium Online, which will be held on Tuesday, October 27 from 1-4pm ET, and for our "European Money Fund Symposium Online," which will be Nov. 19 from 10am-12pmET.)

Kelly-Lippert says, "Pre-covid, we were big proponents of the prime funds.... In addition to the prime funds, we utilize government money market funds, bank deposits, euro time deposits, and then for some additional yield pickup we occasionally took advantage of a very selective [group of] asset-backed securities. But the majority of our liquidity was available overnight. We redeem the funds out of our money market funds for our daily obligations."

Wolfe tells us, "At MGM Resorts, we see bank balances decline in advance of big events like New Year's Eve, March Madness or Memorial Day weekend, as our properties stock up on physical cash at the property level. Then after big events, excess cash is deposited and our bank balances increase.... Considering all of our portfolios combined, we've [held] over $5 billion of cash investments.... We invest in both government and prime money market funds, bank deposits and occasionally time deposits. Our experience has been that the foreign banks tend to pay the highest interest."

Seghesio comments, "We actually have very predictable cash flows. It makes the investment strategy a little easier.... Customers have to post collateral to trade in our markets [and] we have a large number of sub accounts for the customer collateral. We take that collateral, we spread it equally amongst four government money market funds. This was our strategy that we chose to do during money market reform, to move this into government funds, mainly because we felt that the economic conditions that could cause prime funds to have problems.... So, this is a government only investment strategy."

He continues, "Moving over to [our] corporate cash. As I said, with the predictable cash flows that happen for us on a weekly basis, it's made our investment strategy a little bit easier.... We segment our cash [into] operating cash, reserve cash and strategic cash. In our case, operating cash was really just if we need to kind of keep overnight liquid, to handle the surprises during the week. We use prime money funds for that. Reserve cash is cash that we really know there's a known need for it in the future, but we don't need to keep it as liquid as an overnight money market fund. We worked with ICD and use the ultra-short funds for this purpose."

Ramos adds, "We are seeing a number of clients start to look a little bit further out on the curve and take advantage for that more strategic cash, in particular, a longer duration product than the traditional money market. Just to give a brief bit of background on ICD ... we have about 400 active clients that are spread across 65 industries and with entities located in 43 countries [with] approximately about $210 billion right now running through the platform. And our average client balance is around $500 million or just there above. So, what that does is it gives us a pretty good view of what's going on in the marketplace overall, particularly in the corporate marketplace."

He states, "And as most of you probably saw and did yourselves, we saw a lot of our clients get very, very liquid. A lot of them were raising cash, drawing down on credit lines and effectively creating liquidity in their overall cash portfolios, particularly in and around March when there was a lot of uncertainty.... We did see across our client base in the early period of March, a move out of prime funds and ... significant increases in the government money markets.... But we've seen over time ... investments come back to the prime space, and not just back to where they were pre-covid levels, but [higher]."

MGM Resorts' Wolfe also says, "Well, when you go from significant cash flow generation to major cash burn in a matter of days, liquidity becomes the number one priority.... We didn't really start extending our time deposits out until we could see that yields were coming down precipitously.... Over the summer, I probably would have said that we would extend tenor and also take on a bit more credit risk. But now I think the prudent course of action is to just set expectations really low -- your interest income is going to be rather negligible for quite a while."

He explains, "I'll admit, seeing prime fund NAVs tank in March made me nervous, not so much because I was worried about the underlying credits, at least in the near term, but more so because I didn't want to have to deal with gates as the panic spread if I needed the cash in a hurry. I think that that's probably what a lot of you were feeling. So, while I didn't pull my investments [from] prime funds, I didn't add to my existing positions even when I had a bunch more cash from drawing down on our revolvers. But as soon as the Fed stepped in to calm the money markets, we ramped up our prime fund positions -- and we caught some of the NAV recovery. Overall, I still feel good about prime funds structurally. But as I mentioned earlier, the money market funds space is just not exciting at all right now from the yield perspective."

Wolfe adds, "In terms of other allocation changes. We are more heavily weighted to bank deposits right now because rates are better there. But also because it's a way to solidify the relationship with banks and our facility that have stepped up and supported us in our time of crisis. We were completely shut down with essentially zero revenue for about two months earlier this year. Our last two properties to reopen have done so in the last month."

Kelly-Lippert tells the AFP panel, "Early in the crisis we had a planned ... payment, and with the uncertainty we felt it prudent to mitigate the risk and make full redemptions out of our prime funds. Any excess cash at that point was moved into government funds or bank deposits. Then for the first time since the money market fund transition in 2017, we exited the prime funds space. With the decision and the pressure felt around the redemptions in March, we wanted to quantify how much we actually gained over that 3-year period by staying in the prime funds.... The analysis confirmed that we earned a net positive of just a little over $8 million remaining in those prime funds. And that was from the transition to the floating NAV to the beginning of the covid crisis."

She says, "We also fully utilize the portal and honestly would not trade money market funds without using a trading portal. We use the platform to easily trade all the funds in one place, and we are able to review all the metrics each day. Through the crisis, these metrics were imperative to help us make the decisions that we did make.... The portal is also integrated into our Treasury workstation and this creates fast and easy uploads of the information. We also heavily use the information provided on the portal for data reporting and analytics. We review the detailed portfolio holdings information [and] aggregate this information with our direct holdings to show exposure, diversification, and risk. We take an even deeper dive each month into the portfolio holdings by using the reporting information from ICD and we add credit perspectives from a credit research partner that we have. And then from this data we continue to provide a monthly investment report to our management that is quite detailed."

When asked about prime MMFs viability during the Q&A, Wolfe responds, "No, I'm not concerned about their long-term viability. I think the spread between government and prime funds right now is concerning and a challenge, but I think that the fund companies can manage through it. Assets in those funds may come down quite a bit and you may see some fund participants exit. I think we've seen some of that already. But this is not a normal environment. When we get back to a normal environment ... however long that may be, there will be a place for prime money market funds."

Seghesio comments, "Well, I agree. I mean, I think you have to make a decision at your firm on assessing the risks. And as I mentioned in our two different investment strategies, one of those strategies we didn't feel like we could be in prime funds. But the other one, we're very comfortable being in prime funds. We know the risks, and we're willing to take the risks. That may be different for each company."

Finally, when asked if California ISO uses SMAs, Seghesio adds, "No, we did not and have not. Mainly the reason was the size of our portfolio. We just didn't feel like we could get enough. We didn't want to just have one separately managed account; we'd want to have multiple accounts. And we didn't feel like we had a large enough portfolio to do that. So, we chose the funds strategy ... which has paid off again very well for us. The duration has been a good ally when rates fall, and using [funds] gave us that liquidity if we needed it. We don't go into these funds with the intent of pulling out money early, but ... if there's an emergency, some sort of unplanned event, we're able to get out."

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