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"Fortress Balance Sheets" Grow Stronger: Survey

Helped by higher operating cash flow, some U.S. companies' balance sheets are swelling with cash, most of which is earning little to no return.
Vincent Ryan, CFO.com | US
July 10, 2012

While the outlook for corporate earnings may be sketchy, financial professionals are decidedly more confident about their ability to boost cash flow in the next 12 months. But they're not so confident that they are willing to tap their "fortress balance sheets" — assets aimed at withstanding severe financial shocks — or risk investing their cash in higher-yielding investment vehicles.

The 2012 edition of the Association for Financial Professionals' Liquidity Survey, released Tuesday, found that U.S. companies' desire for safety and liquidity, at least by the measure of the cash cushions they keep, is not going away. In fact, in some ways companies are keeping an even tighter rein on the cash their businesses generate.

Companies continue to amass piles of cash, according to the AFP poll. Forty-one percent of the 391 respondents to the survey, conducted in May, said their companies held larger cash balances during the first quarter of 2012 than a year earlier. (Another 32% said their cash balances remained the same, and 27% said they had a decrease.)

What caused the buildup for that 41%? Nearly two-thirds said higher operating cash flow drove their larger cash balances in the past year, with the accessing of debt markets (22%) and cash generated from acquisitions or launches of new operations (15%) also adding to their liquidity. (See chart, below.)

"Events during the past four years that have had an impact on organizations' cash positions are still fresh in the minds of many financial professionals and continue to influence how they manage their cash," said the AFP in its survey report.

For the most part, executives expect the cash-hoarding trend to continue in the next year. More respondents to the AFP survey expect their cash and short-term investment balances to grow (32%) than fall (22%). And, again, 78% said one of the leading causes would be increased operating cash. The other most-cited reasons were the cash brought in by acquisitions or the launch of new operations and decreased capital expenditures.

While the latter indicator is troubling for a U.S. economy starved of investment, some financial professionals said their companies are spending. While 27% of surveyed companies said their cash cushions would shrink in the next 12 months, the reasons behind the changes bode well for economic growth: 46% of that group said higher capital expenditures would be the cause (compared with 30% the last 12 months) and 28% — a slight increase from the past period — said they would be putting cash into an acquisition or the launch of new operations. (On the down side, another 28% said reduced operating cash flow would be the cause of lower cash balances.)

Despite the fact that cash and short-term investments continue to grow at many U.S. companies, they are quite content to earn little or nothing on those assets. In fact, in some ways companies are being even more conservative with their short-term cash investments than they were during the financial crisis, the AFP survey found.

In the past 12 months, for example, many organizations have removed money-market funds and U.S. Treasury bills from their list of allowable short-term investments. The percentage of companies permitting cash to be invested in Treasury bills dropped to 68% from 82% in 2011, and companies allowing cash to go into prime money market funds declined to 44% from 54%.

Actual holdings indicate something similar. Last year treasurers allocated 30% of their companies' cash portfolio to money-market funds, but this year the allocation has fallen to 19%. Allocations to agency securities, eurodollar deposits, and asset-backed securities also decreased over 2011.

The money migrating from riskier assets seems to be largely going into bank accounts: time deposits and noninterest-bearing operating accounts. Fifty-one percent of companies' short-term cash-investment balances are in bank accounts, up nine percentage points from 2011, the AFP survey found. That's the highest share reported in the survey's seven-year history.

But a big change is coming starting in 2013: the Federal Deposit Insurance Corp. is ending corporate access to unlimited insurance coverage for noninterest-bearing bank accounts. That was expected to force many treasurers to move cash holdings into riskier investment vehicles. But 59% of the respondents to the AFP survey plan no significant change to their ultraconservative strategies: they say they will continue to stockpile cash in low-yielding bank accounts.

One potential reason: further possible regulation of the money-market fund sector, which until the financial crisis was a relatively safe and liquid way to earn a modest yield on cash. The Securities and Exchange Commission has proposed new reforms of money-market funds designed to prevent a recurrence of the shareholder run on funds that occurred in 2008 — a crisis that forced large-scale U.S. government intervention in the credit markets.


According to the AFP survey, those reforms could chase even more treasurers away from the money-market fund sector. In particular, 77% of the financial professionals polled said they would be less willing to invest in money-market funds or would reduce or eliminate their holdings of the funds if regulators forced the funds to adopt "floating" net asset values, meaning the funds' share prices would fluctuate as opposed to staying fixed at $1 per share. 

Another proposed reform that would force funds to hold back a portion of the money due investors when they seek to redeem their shares would cause 43% of the AFP respondents to "go as far as eliminating money market funds from their short-term investment holdings," the AFP said.

Indeed, companies are not loosening up their investment policies with regard to any cash investments. Overwhelmingly, safety of principal (77% of respondents) and liquidity (21% of respondents) continue to be the guiding investment objectives, with only 2% of financial professionals citing yield as a goal.

 

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