What To Do With All This Corporate Cash?

Corporations worldwide are sitting on a mountain of cash that for the most part is earning very little return. Many companies are updating their investment policies and preparing to change the mix in terms of how they manage that cash—particularly as leaving it sitting, unproductive, in bank accounts could soon become quite expensive. They are evaluating internal guidelines for investment and, in some instances, looking for outside help.

Change has been slow. However, as new regulations take hold and companies start to feel the bite from new fees on liquidity held in bank accounts, the pace of change could pick up—and quickly.

Although many corporate treasurers have refinanced their companies’ debt to take advantage of low interest rates, they are also overseeing huge stockpiles of cash that, activist investors might argue, would be more productive in shareholders’ hands than moldering in low-yielding bank accounts.

“There’s a ton of cash out there that needs to be invested,” said Peter Frank, an advisory principal at PwC specializing in corporate treasury management. “With rates incredibly low around the world and a lot of regulatory changes happening, it’s a tough environment [in which] to be managing excess cash.”

There is a lot to manage. Moody’s Investor Services pegged the combined cash balance of US corporations at $1.7 trillion at the end of 2014. Bloomberg puts the figure much higher. Based on public filings, the news organization says the top 299 American companies have $2.1 trillion in cash parked in off-shore markets alone—there to avoid paying big taxes on repatriation.

US companies aren’t the only ones hoarding cash. The 600 companies in the STOXX Europe 600 Index have a total of €2.2 trillion ($2.5 trillion) in cash among them, according to Bloomberg. Interest rates in much of Europe are even lower than in the US, and with new Basel III banking rules starting to bite, some European banks are actually starting to charge companies to hold excess cash in deposit accounts.

“It’s an ugly short-term cash investment scene out there,” said Craig Martin, executive director of the Corporate Treasurers Council at the Association of Financial Professionals. “There is still not much yield pickup for taking risk.”

Corporate treasurers on the whole remain a very conservative group, more interested in limiting risk than in earning returns. With short-term interest rates extremely low around the world, treasurers are loath to take on more maturity and credit risk despite their growing cash piles. “Corporations tend to have very low appetites for risk when it comes to investments,” said Frank, who noted that he has not seen a lot of corporate clients changing their investment policies. “It’s not their business. Their primary objective is capital preservation and maintaining liquidity, and yield is third on the priority list.”

There’s a ton of cash out there that needs to be invested.

~ Peter Frank, PwC

Nevertheless, corporate cash managers will have to rethink their core cash management strategies, because their two favorite investment vehicles--bank deposits and money market funds--are undergoing major regulatory-inspired changes. That coupled with an investment landscape that is likely to include rising interest rates (eventually), and expanding risk spreads, provides an incentive to start managing cash more actively and hiring outside managers to help.

“Investors haven’t been paid much for taking risk in this environment. That will likely change in the next 6 to 12 months.” said Ben Campbell, CEO of Capital Advisor Group, an investment adviser specializing in institutional cash investments. “With still-low interest rates and a stable economy, we see treasurers looking to add in risk in a measured way.”

They aren’t exactly jumping in with both feet. An annual survey of corporate financial professionals in the US conducted by Campbell’s treasury consulting firm, Strategic Treasurer, suggests that most have yet to decide what to do about their core cash management situations despite new Basel III rules and imminent changes in money-market fund regulation.

On the banking front, corporations have been slow to address their exposures to uninsured banks, despite the significant deterioration in bank credit ratings since the financial crisis. Various kinds of deposit accounts at banking institutions remain the favorite investment vehicles of corporate cash managers, with 70% of survey respondents using them in the US and 49% using them for offshore investment. Almost half (49%) of cash managers said their companies had no investment policy limit on their exposure to uninsured bank deposits, and 23% had no minimum credit rating for banks they would deal with.