In the continuing low-rate environment, treasurers are trying just about everything to gain a little yield and keep cash safe.
What cash management strategies have multinational companies implemented to safeguard and optimize cash? They are utilizing a variety of tactics to tease out yield where they can and at the same time keep the money safe.
With the challenge of the low-rate environment continuing, companies are ever more eager to pick up yield from investing funds in commercial paper, money market funds, and in longer term instruments, especially bonds. The natural reaction before the Federal Deposit Insurance Corporation’s expiring guarantee was a “flight to quality” but now treasurers are casting about for new ways to effectively manage operational liquidity with minimal risk. Current investment options for short-term cash are somewhat plain vanilla and paltry: money market funds, money market savings accounts, CDs and commercial paper. Or keeping the money where it is.
According to survey results of the NeuGroup’s Tech 20 Peer Group, compiled before the expiry, treasurers were evenly distributed in their actions to safeguard the companies’ funds. More than 42 percent of respondents suggested leaving deposits in non-bearing checking accounts would be a lower risk option than when the guarantee was put in place, 31.6 percent suggested diversifying cash with other “safe” banks would be an acceptable option. Other options considered were moving cash to traditional money market funds (MMF) as an alternative to leaving idle cash with the banks. The options are finite, it is imperative for corporate to be diligent with the development of capitalizing on yield during the coming months.
So far in 2013 there has been no substantial impact due to the expiration of deposit insurance. Banks have noticed some growth in deposits and money market funds, with large inflows of cash at the end of the year. Minimal drop-offs are being observed, with corporates switching to repos and money market sweep accounts. According the AFP’s Corporate Cash Indicator Study companies are anticipated to shed 23 percent of their cash reserves in Q1 of this year.
It is important to highlight that a percentage of multinational companies will continue to leverage the non-interest bearing (NIB) DDA accounts for earning credit offset. That means by retaining certain levels of cash in the deposit accounts, corporates can offset their variable and fixed bank fees associated with treasury services. This is attractive for corporate treasurers who have significant level of business with few banks.
Otherwise, in the continued low-rate environment, corporate treasurers should consider exploring the following cash management strategies:Set daily targets for checking balances to maximize ECR returns while reducing bank fees
- Consider interest bearing alternatives for example money market savings account
- Evaluate the benefit of overnight cash sweeps, specifically repos. A more passive approach to managing short term liquidity
- Research investment opportunities which allow cash to benefit from rising rates with shorter maturities
- Evaluate traditional money market instruments (Treasuries, Commercial Paper, Repurchase agreements) as they may act quickly to a change in rate
- Attempt to leverage relationships to greater degree to influence interest rates available from banks
- Manage counterparty risk. Diversification of funds amongst multiple financial institution is a conservative approach to managing risk
- Reduce foreign exchange currency exposure to certain geographies. Continuous improvement in the management of offshore currencies will be an important component of Corporate Treasurers in 2013
Banks can help.
Managing global bank relationships is an integral part of the role of a corporate treasurer and now, with rates low and options limited, banks can be a resource and can recommend new products and services to help capitalize yields. Bank relationship managers should be well aware that efficiency is the name of game when it comes to those relationships; the status quo is no longer to have one global provider; regional banks are growing, and investing in new technologies which can compete against the global banks. Broadly speaking, banks have increased investment in technology which has enabled corporates to become more bank agnostic.