Treasurers have been boosting cash positions leading up to the current market-roiling confidence crisis.
Standard & Poor’s downgrade of US long-term debt to AA+ was probably more surprise than shock to many treasurers. S&P had been grumbling about a downgrade for some time, after all.
But in a sense, many treasurers have been preparing for just such an event and many have been maintaining an “opportunistic” stance – getting ready to advantage of a rise in interest rates or, conceivably, to take advantage of their companies’ falling stock price to boost buyback programs. This is because amid the debt ceiling battle in the weeks before the downgrade, many treasurers had slowly been boosting cash positions in order to be prepared for any market disruption (see related story here).
Good corp credits untouched. S&P did make clear that it was not touching the US short-term outlook, critical to money market funds, which are used heavily by corporations. This means MMFs won’t be forced to sell treasuries under rule 2a-7. Further to this, S&P – and Moody’s, too – has stated that sovereign downgrades to AA will not lead to corporate ratings actions for AAA-rated non-financials.
Nonetheless, amid the debt ceiling debate and ahead of the downgrade, corporates weren’t taking chances. This was likely reflected in the near $70bn pulled from money-market funds in the week ended August 3, according to reports. “We are being conservative,” wrote one treasurer in an email exchange with other NeuGroup peer group member treasurers in the last several weeks. This treasurer had been putting aside cash for expected August payments in cash accounts and keeping the company’s investment portfolio “shorter than we otherwise would.”
US banks. Nor will it have a big impact on US banks, most of which have been building up cash reserves in order to be prepared for coming capital requirement rules. And according to BNP Paribas, the FDIC, the Fed, NCUA and OCC issued a joint press release on just after the downgrade indicating that it will not affect risk weights used for risk-based capital purposes for securities issued or guaranteed by the US government, government agency or government-sponsored entities.
However, if higher interest rates and lower economic growth occurs due to downgrade, “earnings and asset quality trends would weaken.” So far that’s not the case as treasuries have rallied in the wake of the downgrade, sending interest rates to new lows.