Liquidity is liquidity whether it’s trapped or otherwise restricted.
Should treasurers think of restricted cash as akin to an investment that needs to managed? The short is yes. That was the advice given to members of the NeuGroup’s Tech20 Treasurers’ Peer Group at a meeting in April. This is particularly relevant as talk of corporate tax relief remains just talk and hopes of a tax holiday (i.e., HIA 2.0) from the Obama Administration wane. But it’s not just cash trapped overseas; restricted cash can also include that posted as collateral, or pledged.
At the Tech20 meeting, members were told they should indeed consider these constrained cash piles as a distinct layer of liquidity that by definition needs a longer-term investment horizon and that may need to be discounted in assessments of liquidity needs and cash reserve levels.
Further, given that cash flows are growing more rapidly offshore where cash balances may be restricted (e.g., emerging markets)—or where working capital efficiency is less, cost of carry is different and raising capital is more onerous—there is now more of a need to run separate liquidity analysis at the subsidiary/jurisdictional level as well as for the firm as a whole.
Not without risk. Another reason to consider restricted cash as a distinct layer is that the market assigns different risk premia to it. Studies show that the equity betas of firms with growing offshore vs. on-shore cash are disadvantaged. One implication is that since offshore cash is restricted, firms may be more likely to waste it from an investor’s point of view. Still, one member argued, if investors see offshore cash as equivalent to an interest-free loan from the US Treasury, then they may be happier about that than any returns generated from it.
Put it to work.
Of course trapped cash need not sit idly. Therefore, look for mutually beneficial solutions to free trapped cash via global bank intermediaries. Global banks may have uses for the cash (e.g., seeking balances) in jurisdictions where companies are subject to unwanted restrictions. In such instances, mutually beneficial solutions may be found to put restricted cash to work even in marginal ways that grow in significance as cash grows or when viewed on an aggregate basis.
Looking beyond the structured repatriation strategies that tend to be one-off in nature, one set of solutions involves cash collateralization or over collateralization on L/Cs, other forms of trade finance to include supply-chain financing, or hedges. Another set involves depositing restricted cash with a bank in exchange for earnings credit rates or other fee setoffs. In general, banks are also looking for longer-term deposits, which will become more valued under Basel III, and restricted cash balances are seen to match up well with corporate willingness to deposit for longer.