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Where to Stash the Cash?

As safe havens for short-term funds disappear, companies weigh whether to assume some risk in return for a modest yield.
Vincent Ryan, CFO Magazine
March 1, 2012

With his statement in January that the federal funds rate will stay near zero through 2014, Federal Reserve chairman Ben Bernanke clearly hopes that investors will bite the bullet and start taking some risks. The government wants banks to lend, institutional investors to roll the dice on equities, and corporations to spend.

There's one group, though, that Bernanke shouldn't expect much from: CFOs and treasurers investing their companies' short-term funds. Although companies have huge cash cushions, they are in no mood to start aggressively investing the portion not needed for operations, capital expenditures, or dividends and buybacks. The market meltdown of 2008 and the current European debt crisis have made them leery of securities issued by questionable counterparties (such as European banks), with maturities of more than a few days, or traded in a market considerably less liquid than U.S. Treasuries.

In fact, low interest rates and the resulting flat yield curve are actually reinforcing the conservative strategy. "Yields across the board are so low that to grab a decent uptick in yield you really have to increase the risk," says Lance Pan, director of research for Capital Advisors Group. Some CFOs are content with virtually no yield as long as the counterparty risk is low or the instrument is U.S. government-backed.

Data from consulting firm Treasury Strategies shows that as of January, U.S. companies had 38% of corporate cash in checking accounts, 23% in money-market funds, and 12% in money-market demand accounts (MMDA). Only 17% of the instruments they held had a maturity of longer than one month (see charts, below).

Companies opt for liquidity and take very little risk.

"In this current environment there isn't much yield anywhere," says Lisa Rossi, global head of liquidity management for transaction banking at Deutsche Bank. "Companies are leaving a lot of cash in bank accounts. In their minds it's one of the more risk-free places to put it."

Take Netgear. The networking-equipment company has no debt, and its cash and cash equivalents have grown 58% since 2008. But it is conservative when investing its growing bundle of cash. "Our goal is cash preservation, and secondly what we earn on it," says CFO Christine Gorjanc. "Given the environment we're in, we're just not going to do anything risky."

Fewer Choices
But many companies may soon be forced to move their cash, even if their investment goals or risk appetite or liquidity needs haven't changed. Thanks in part to new Dodd-Frank Act rules, "the supply of high-grade products that offer attractive yield and relative safety is diminishing," says Solomon Lee, a portfolio manager at Clearwater Advisors, a fixed-income investment management firm.

There are three ways in which the choices CFOs have will diminish:

(1) As stipulated by Dodd-Frank, the Federal Deposit Insurance Corp.'s full backing of non-interest-bearing transactions accounts will sunset at the end of 2012 (barring congressional action). These accounts have been a safe place to park cash. Without a guarantee, however, firms may abandon some banks and move money to those that appear more stable or have less counterparty risk. Without explicit government banking, they may also leave less money in these transaction accounts.

(2) Most of the bank paper issued under the FDIC's Temporary Liquidity Guarantee Program will mature by the end of 2012, ending availability of a popular instrument that earned some yield. The TLGP let financial institutions issue debt that was backed by the U.S. government. The risk profile of TLGP debt was equivalent to that of U.S. Treasuries, says Clearwater's Lee, but the debt traded at a significant spread to T-bills. Will corporations go back to 6-month and 12-month T-bills, which earn a paltry 9 basis points and 12 basis points, respectively?

(3) The debt of government-sponsored enterprises Fannie Mae and Freddie Mac is becoming more risky. Pan describes GSE debt as "the only 'juice' left in the cash world," providing "safety and reasonable yield" for investors seeking to avoid the "uncertain worlds of unsecured financial issuers." But after 2012, these investments will require more-rigorous credit analysis, because the federal government's "blank check" to cover Fannie's and Freddie's losses will officially end, says Pan. Capital funds for injection into Fannie and Freddie by Washington, D.C., will be limited, to $124.8 billion for Fannie and $149.3 billion for Freddie.

Money-Market Surge?
Where will all the corporate cash that was in these investments go? Money-market fund sponsors hope it rolls into their funds. And, in fact, $83.4 billion flowed into U.S. funds this past November and December, according to Crane Data, the largest two-month surge since December 2008 and January 2009, when the funds reached their all-time peak at $3.9 trillion in assets.

Scarred by the failure of the Reserve Primary Fund in 2008, the money-fund industry has actually benefited from the Securities and Exchange Commission's new 2a-7 regulations. Weighted average maturities are shorter and funds are more liquid. And more visibility into an individual money fund's holdings has built confidence among investors, says Michael Gallanis, a partner at Treasury Strategies. "Sophisticated investors can look into these funds at a more granular level and better understand the risks and counterparty exposures," he says.


But it's not clear that the surge to money-market funds will continue, given the shadows looming over the industry. For starters, seven-day yields are small: the highest earners hit about 25 basis points. Subtract management fees and the yield can almost be wiped out. Fortunately, just about every prime money-market fund has given its clients partial fee waivers to avoid yields from turning negative, says Pan. But those waivers are damaging bank's earnings.

Then there's the specter of more regulation. The SEC announced that it will soon unveil a plan intended to make money-market funds more stable; initial response (at press time) was less than enthusiastic. (Check the Capital Markets section on cfo.com for the latest details.)

While investing directly in Treasury securities might seem like a better option, that too can incur costs. Netgear has its invested cash in money markets and Treasuries. But because the company hires corporate cash managers to manage its direct investments in T-bills, the positive difference in yield between T-bills and money funds is consumed by fees. "We're waiting for cash managers to bring down their fees because they don't have to do much to diversify our investments," says CFO Gorjanc.

Changing Channels
Some asset managers and investment advisers think CFOs need to go back to their boards to tweak cash investment policies and practices, because companies that rely 100% on money markets or bank deposits will need other channels for managing liquidity.

One place corporate cash is not likely to go (at least in the short term) is in the debt of U.S. or European financial institutions. Clearwater Advisors thinks that onerous regulatory capital requirements and other regulatory changes, as well as the reduction in explicit government support for institutions, make them too risky.

But the debt of high-quality companies may be an option. With interest rates staying low through 2014, "my assumption is that as Corporate America gets stronger, you may see more investors going into corporate debt because they feel more secure in that market," says Deutsche Bank's Rossi.

Clearwater Advisors recommends that CFOs consider revising their investment policies to focus less on credit ratings (as bank regulators have done) and allow treasurers to buy the debt of creditworthy companies that may not have the highest ratings.

As a result of the new leverage ratios in the Basel III global standards on bank capital, companies may even begin to earn some yield from their banks again, says Rossi. Longer-term deposits will hold more weight under the proposed leverage ratios, making them more attractive for banks to hold on their balance sheets and giving banks the incentive to pay more for them. Assuming companies still have a cash cushion, "I'm pretty confident you will see clients go out a little longer with time deposits to get a yield pickup," Rossi says.

Interest-rate policy is not likely to give corporate savers any reason to cheer over the next two years, but Basel III will. Welcome to the new normal.

Vincent Ryan is a deputy editor, online/mobile, at CFO.




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