Cash Management

Caution Creeps into Cash Caches

Money markets and T-bills are the big gainers as companies seek more traditional places to stash their cash.
Tim ReasonJuly 2, 2008

With the credit crisis far from over, a new treasury survey finds companies wary of the higher-yield investments that burned some corporate treasurers in the past year. The amount of cash on hand allocated to money markets and treasury bills rose, even as companies tightened their policies about the sorts of non-traditional short-term investments they considered acceptable places to stash their cash.

Conducted in May by the Association of Finance Professionals, the survey is AFP’s third annual look at corporate liquidity practices, and is based on 342 responses. (The survey was underwritten by Citi, but AFP says its research department was solely responsible for fielding the survey and analyzing and reporting the results.)

The biggest big gainers in the corporate reallocation of cash, according to the survey results, were money-market mutual funds. They accounted for the highest allocation of cash — 39.4 percent, up from 30.9 percent in 2007. “We saw a big increase with money market mutual funds,” says Kevin Roth, AFP’s director of research. Treasury bills also saw their allocation increase, from 1.9 percent in 2007 to 8.1 percent this year, making them the third most popular corporate cash cache.

Bank deposits made up the second largest allocation, with a quarter of all corporate cash. But that number actually represents a slight decline (by two percentage points from the prior year) as a percentage of the total. “Smaller companies put more money in the bank, larger companies put more in mutual funds,” says Roth.

Not surprisingly, the survey found that most companies (80 percent) with formal investment policies have reviewed those policies in the past year as a result of the credit crisis. Those reviews apparently resulted in some changes. Besides bank deposits and T-bills, the companies surveyed reported that their policies now allow an average of four types of short-term investment vehicles. That’s down from 6.4 in 2006, and 7.6 in 2007, both years in which companies found themselves awash in cash and seeking higher yield for their cash on hand.

But while companies change their policies, the number of vehicles actually used by most companies changed very little. Companies reported that they use an average of 2.4 different types of investment vehicles, as opposed to the 2.7 they reported in the 2007 AFP Liquidity Survey.

The survey also found that the percent of companies allowing the use of auction rate securities — whose liquidity dried up during the crisis — declined from the prior year. Only 18 percent of companies now say they allow the use of auction-rate securities (versus 33 percent in 2007). Similarly, only 17 percent of companies allow the use of variable rate demand notes (versus 25 percent the prior year). Fifteen percent of companies allow the use of enhanced cash total return vehicles (a decline from 22 percent the prior year).

Commercial paper was allowed at 66 percent of organizations, although its use dropped by 29 percent.