Corporate cash levels remain at or near historical highs, and treasury executives see few significant changes in terms of their sources and uses of cash moving into 2015, and although they note a handful of potential game changers, many foresee keeping plenty of cash on hand—just in case.
Consultancy Treasury Strategies’ biannual client survey found corporate cash levels in the US hovering around $1.8 trillion during the year before September, after doubling since the start of the millennium to a record high in 2013. Corporate cash levels in the UK and eurozone followed a similar path, while cash levels in Japan remained relatively stable until the financial crisis and have since climbed steeply, to ¥244 trillion from less than ¥1.9 trillion in 2008.
In fact, Treasury Strategies estimates that corporate cash as a percentage of GDP reached 50 percent in Japan last September, up from 36 percent in 2000. That compares to only 11 percent in the US, up from 9 percent in 2000, while the eurozone and UK percentages and increases fell in between.
As of December, half of survey respondents anticipated the corporate cash level remaining within a 10 percent band over the next six months, while 20 percent saw cash levels decreasing and 31 percent increasing. Those portions have remained fairly steady since December 2012.
Treasury executives overall reported positive cash flow from operations dropping significantly as a source of corporate cash, to 63 percent from 82 percent, and debt issuance also dropped as a cash source.
Monie Lindsey, managing director at Treasury Strategies, noted 81 percent reported positive cash flow from operations as a source of corporate cash in 2011, and that it was closer to 100 percent in earlier surveys.
“We’re not sure what’s behind this trend [down], but one reason may be that companies are spending more on an ongoing basis for process and system organization efficiencies as they continue to gear up for the new economic environment, where efficiency, transparency, visibility, and timely access to data and controls, including tighter cyber-attack controls, are critical for surviving and thriving,” Ms. Lindsey said.
The percentages of survey respondents reporting their use of cash in nine categories fell in eight of those categories, with only negative cash flow from operations seeing a jump up, to 28 percent from 19 percent. The biggest absolute percentage drops were in capital expenditures, paying down short-term borrowing, and acquisitions. That practically reversed results from the survey a year ago, when a significantly smaller percentage of respondents saw negative cash flow from operations as a use of cash, and most other categories saw percent increases from the previous year.
In terms of managing risk, 75 percent of respondents saw their debt maturity structures remaining about the same over the next six months, up from 67 percent over the past six months, while the percentage anticipating maturity structures to lengthen fell to 16 percent compared to 25 percent over the last six months.
“Companies have already extended maturities in the last six months, with fewer expecting to extend them in the next six,” Ms. Lindsey said.
More respondents, 27 percent, see hedges of FX exposures increasing over the next six months, compared to 12 percent over the past six, while only 6 percent saw FX exposures decreasing.
Respondents pointed to five potential game changers impacting their cash management strategies: the plunging price of oil, the implementation of Basel III’s liquidity coverage ratio (LCR), the possible exit of Greece from the eurozone, the growing disconnect between euro and dollar exchange rates, and a new round of “cash bashing” by regulators.
Risks associated with those game changers as well as recollections of the liquidity freeze following the financial crisis appear to be factors prompting treasurers to maintain historically high cash balances. Peter Matza, engagement director at the Association for Corporate Treasurers (ACT), said a survey of ACT members in 2014 through late summer found that corporates were beginning to formulate ways to spend their significant cash positions, by investing in their supply chains, operations, mergers and acquisitions, or some other form of corporate expansion.
“About three-quarters of those we talked to were planning to make use of that cash, but just under half were going to hold those higher balances than might have been the case five, 10 or 15 years ago,” Mr. Matza said.
Tony Carfang, principal at Treasury Strategies, said regulators’ criticism of corporates’ large cash balances had faded in recent years, but a recent article by the Center for Economic Policy Research in London suggests it may be on the rise again.
“There are very few regulations impacting collateral for derivatives and things like that that are directed as corporations specifically,” Mr. Carfang said. “I don’t want to be alarmist, but we suspect this may be the first plank in a platform that will provide a rational for European regulators to begin targeting corporate balance sheets more directly.”