Companies across the world continue to hoard cash though their reasons for doing so are gradually changing as market confidence grows and counterparty risk slowly falls from its financial crisis peak.
Companies across the world continue to hoard cash though their reasons for doing so are gradually changing as market confidence grows and counterparty risk slowly falls from its financial crisis peak. These are the key findings of the fourth annual Corporate Cash Investment Report, which SunGard, a software and technology services company, released during the 2014 conference of the Association of Financial Professionals (AFP), held in Washington D.C. in early November.
According to the study, which surveyed treasury professionals at 164 corporations around the world, the share of companies that have increased their cash holdings has grown for three years in a row, by 6% year over year. It went from 37% in 2012 to 43% in 2013 to 49% this year. Nevertheless, says the report, “only 11% of companies are now holding cash as a ‘buffer’ against dips in revenue in the future, a fall from 13% last year and 17% in 2012.” Instead, corporations are expanding their cash balances increasingly for the purpose of financing capital investment or merger & acquisitions (M&A), and SunGard says M&A will likely rise in the near future.
As a testament to growing confidence in a sustained, if slow, economic recovery, only 33% of respondents claimed they need access to all cash at all times, a significant drop from 46% in 2013. According to the survey, three factors are largely driving this change: an environment of consistently low interest rates, particularly in the eurozone; improvements in cash flow forecasting, which is letting treasurers trade some same-day liquidity for higher yields; and a desire to set policies flexible enough to cope with the impact of new regulations, as these are redrawing the investment landscape and the potential for yields.
However, while many treasurers are keen to loosen their investment strategies at some point, a third of respondents to the survey said they lack of suitable repositories for surplus cash. Faced with limited availability of highly-rated, liquid instruments, treasurers are not yet actively exploring new investment vehicles. Deposits remain the most common go-to destination for corporate cash, followed by money market funds (MMFs). But corporate treasurers are starting to acclimate to variable net asset value (NAV) funds as a consequence of reform in the United States. SunGard predicts this trend is only bound to intensify, since traditional instruments like deposits and MMFs will be greatly affected by new regulations—including the MMF Net Asset Value changes finalized by the SEC this summer. In the meantime, the share of companies investing in commercial paper has increased 10% since last year and is now at 27%.