With still nowhere to go with cash and rates still low corporate cash balances saw their largest increase ever, according to a report by consultancy Treasury Strategies. This isn’t good news, said Anthony Carfang, a partner at Treasury Strategies. In fact, he said, it’s concerning because cash isn’t really going anywhere.
“Funds continue to slosh around the financial system with nowhere to go,” Mr. Carfang said in a statement. “Corporations raise money to take advantage of current rates and simply hold that money idly in bank accounts. Banks then turn it over at a small spread to the Fed where it sits as idle reserves.”
Cash held by US corporations rose by more than 6 percent in the third quarter, Treasury Strategies said, citing new figures from the Fed. Corporate cash now stands at $1.925 trillion, up from $1.811 trillion at the end of June. About $80 billion of that increase went into bank deposits, Treasury Strategies said.
Treasury Strategies said companies are likely moving toward longer-term funding of their balance sheets and doing this for two reasons. “First, long-term funding is currently inexpensive, even if there is no immediate use for the cash, said Cathy Gregg of Treasury Strategies. “Second, corporate CFOs are increasingly concerned that regulation and particularly the Basel III requirements for banks will result in banks becoming less reliable sources of short-term borrowing in the future.”
According to members of the NeuGroup universe, companies are being much more careful with the cash they have been accumulating. At a fall Assistant Treasurers’ Group of Thirty (AT30) meeting, members rated themselves as either “very conservative” (42 percent) or “moderately conservative” (53 percent), with one member rating themselves at “moderately aggressive.” But it could all change soon as the ROI drought continues.
Yet still, companies are definitely extending duration. In the AT30, according to a pre-meeting survey, the maximum average duration went from six months to two years. At the same time some companies are getting slightly more risky. The long-term ratings floor for some companies has gone from A to BBB; and asset classes added include callable bonds, ABS (auto loans only), and floating rate notes.
None of the AT30 had gone as far as allowing equities but that could be a matter of time. In the NeuGroup’s Treasury Investment Managers’ Peer Group (TIMPG) members have been considering asset classes such as CMBS and student loans, credit card and auto loans and student loan ABS, as well as emerging market debt, bank loans and high-yield debt. That’s because comfort is increasing for those classes that might have been prohibited following the credit crisis.