Survey: Cash is king for many companies

The expression “cash is king” has perhaps never rang truer than today, with companies holding onto more money than in years past, according to a recent national survey.
The 2012 liquidity survey, underwritten by RBS Citizens, concludes that “companies … not just those operating within the U.?S. but also those operating globally, continue to hold high levels of cash. In an extremely low-?return, flat-?yield environment, it is no wonder safety and liquidity remain the top two primary investment objectives for most companies, with yield being a distant third.”
According to the Association for Financial Professionals, an organization of corporate treasurers, the May 2012 survey showed that 71 percent of companies felt less ambitious when considering an investment in money-market funds than in years past. About 41 percent of the 391 respondents had a greater cash balance than the same period in 2011, and the majority of them believe the trend will continue next year. Bank deposits now account for 51 percent of short-term corporate investment balances.
Sections of the report were authored by Thomas Hunt, AFP’s director of treasury services. He acknowledges the report serves as a tool, a way that companies can see how others are allocating their investments.
“With bank deposits, the Federal Deposit Insurance Corp. has unlimited insurance, so companies are choosing to keep their money in bank accounts,” he said. “Also, the earnings credit rate that banks pay to corporations was a rate that was slightly better than money markets, treasuries or other short-term investments.”
“When corporations leave their money in their accounts, they aren’t paid interest, they are paid in credit towards their bank fees that they have for their cash-management needs,” Hunt said. “If you have more credit than fees then you forego the difference. A lot of companies have started to do just that as part of their financial strategy.” According to Hunt, the unlimited FDIC insurance will likely stop at the end of 2012. Thus far, FDIC has not made an announcement but he expects the unlimited insurance will not continue. “There are usually three tenets when it comes to investments; safety, liquidity and yield. In the last four years safety has climbed and it has been less about yield, especially with their short-term cash. There isn’t any opportunity,” he said.
Hunt also added that headline risk, the chance that a news story would adversely affect a stock’s price in the money market, also played a part, including financial troubles in Europe and tensions in the Middle East.
“I have been in treasuries for 15 years and it was always the reverse. Now that the rates are so low companies are quite comfortable leaving their money in the bank,” he said.
Based on some of its questions, AFP concluded that over the last four years, companies are still conservative when it comes to handling their funds and are more concerned with safety and maintaining the ability to have cash-in-hand, a rainy-day fund of sorts should the economy begin to show the same signs it did in 2008. Put simply, the economy seems to be standing still and there isn’t much growth.
In addition to the economy, their reservations also include possible rule changes to money-market funds by the Securities Exchange Commission. On Aug. 23, SEC Chairman Mary Shapiro announced they intend to pass on making changes to the structure of money-market funds, instead passing the buck to the U.S. Financial Stability Oversight Council, meaning changes won’t occur for at least a year.
“Over the last few years we’ve seen more of our corporate customers migrating more of their money toward bank deposits,” said James Gifas, the executive vice president and head of the treasury solutions group for RBS Citizens. “We definitely have seen a big increase in 2012, an increase of 9 percent, which is very high. This has been driven by our customers that are looking at safety and soundness as being their primary concern.” According to Gifas, businesses have been looking at investment options but are still wary. Deposits have driven balances up. “Corporate boards are enforcing very strict guidelines on where they will place those funds and I see that continuing,” he said.
At the same time, companies are shying away from money markets. In 2011, 30 percent of the companies surveyed retained money market investments; this year, that figure dropped to 19 percent.
“That type of behavior is typical; large or small, I’ve seen it across the board,” Gifas said. “Smaller companies have less to hold onto than the larger ones but they are all doing the same thing, saving money. But the mood among almost all of them has been optimistic. They are looking for opportunity, to do something with it. They are being more careful in where they invest it. I think they are looking for acquisitions, looking for something that might help them grow their business but they won’t take any risk.”
Of those responding to the 2012 liquidity survey, about 10 percent said they would use their deposits to pay down debt. The survey said that many companies are ready to borrow, but they also are looking to use a lot of capital to make investments in their business.
“These aren’t new issues, it’s just that it is hitting them all at the same time.” he said. “They have foreign-exchange risk, investment and sovereign risk; whether they are purely a domestic customer, purely in the United States, or they do business in multiple regions, they are affected by the same issues.” •

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