"For years, corporate investors stuck to what were considered safe investments. Now we know that nothing is safe," says Lee Epstein, president and CEO of Money Market One, a broker-dealer based in San Francisco that specializes in corporate cash. "You have to consider that the unthinkable can happen. It's the new paradigm."
And that uncertainty has reduced cash investing to pure defense. Hoarding is still going on, says George Zinn, treasurer of $60 billion Microsoft Corp., which has one of the largest cash chests ($24 billion) in the corporate world. "We see it in corporations that have drawn down their credit lines even though they have no immediate use for the funds," he says. The turning point will come when de-leveraging has run its course and investors can stop selling good assets just to cover margin calls or get liquidity. "That is when stability will return, but nobody knows when that will occur," he says.
Or whether "stability" is an old-paradigm concept. Corporate investors are rethinking their perception of the banking and investment infrastructure and how markets work, Zinn says. "For at least 20 years, investors felt sure they could be generally successful buying the dip or sticking with asset allocation strategies based on mean reversion. Now investors are really wrestling with whether that reality still is relevant."
So for the foreseeable future extreme safety is in and return is out. "Companies still are willing to take very little risk with their cash and are settling for incredibly low rates," reports Mike Gallanis, of Treasury Strategies Inc., which tracks corporate investment practices. "We definitely have not turned the corner yet." For example, one university client with more than $1 billion in operating cash was earning its best return on insured bank CDs in the 2% range and was getting below 0.5% on other instruments in its portfolio, he reports.
In one sense, the flight to quality and accepting current low yields has reached irrational levels, Epstein says, "which creates real opportunities for rational investors to exploit distortions in the market. There are odd lots. There are bid-ask spreads. There are out-of-favor sectors. Spreads between Treasuries and agencies are abnormally broad. But it takes confidence to go there, and corporations were never investors first."
If the corner has not been turned, the bottom may have been reached. "The flight to quality is over and the market has stabilized," says Ben Campbell, president and CEO of Capital Advisors Group, an institutional cash manager based in Boston. The flight was precipitous--prime money market funds took a 35% drop and U.S. Treasury funds surged by 47% last September as corporate treasurers rushed to get their cash into the safest possible places, he notes. And the exodus from prime funds, which had a heavy exposure to the financial industry, continued through October and November before flattening out in December, he adds.
The most recent numbers show Treasury funds down 7% and prime funds up 8%. "Confidence is starting to build in the money-fund arena," Campbell says. "The market today is quite different than it was in early October, when the flight was in full swing."
The use of funds themselves has taken a hit as corporate investors have moved to separate account management to gain visibility into just what they are holding, Campbell says. "Investment portals really don't give a lot of background information on the risk and credit processes used by the money funds," he observes. And there has been a strong trend away from buying securities from broker-dealers to relying more on investment advisers, he adds.
Most of Epstein's clients are in money funds, but some are in a new program that provides up to $50 million of FDIC insurance per account. A third group--the smallest by far--still is investing in discrete securities like commercial paper and municipals.
For cash-rich companies that stratify their cash holdings in multiple portfolios, only short-term cash has been radically affected. "Longer-term portfolios have mostly stayed with their benchmarks, as they were designed to do," Campbell reports.
Encouraging signs of market stability don't mean investors are ready to start taking measured risks again to get any kind of significant return. "Nobody feels smart," Campbell says, "so we haven't seen much smart shopping yet"--using cash to make acquisitions, fund capital-intensive expansions or launch ambitious R&D efforts. "People aren't ready yet to put that money back to work," he notes.
It's too soon for corporate investors to start spending their cash on core business opportunities, Zinn says. The real economy, especially in technology, has lagged in revaluing business assets. A flurry of acquisitions or new capital projects won't happen until prices have bottomed out, which is at least another three months off, he predicts. Meanwhile, companies will continue to hoard cash, and to diversify and expand the number of banking partners, even sacrificing economies of scale, he adds.
Companies that are spending cash for strategic reasons are not expanding their businesses but buying back their stock, Epstein says. "The stock repurchases are not helping the stock and not helping the cash position. It's the herd mentality at work. It would be better to spend the money on R&D, acquisitions or expansion."
Not every treasurer is following the herd. Rick Moss is not hoarding cash, even though $4.5 billion Hanesbrands Inc., Winston-Salem, N.C, is highly leveraged. "We tested our $500 million revolving credit and found it solid. We have confidence in our bank group, so we rely on that revolver for liquidity and use any excess cash to pay down debt," he says. With the gaping spreads between cash investment yields and the cost of debt, Hanesbrands is saving a lot more than it isgiving up.
With that confidence, the global company set up an in-house bank in Luxembourg to provide efficient intra-company netting and shrink cash balances. "In our business it's easy to leave money in accounts around the world, but it adds up to significant money. It's been a challenge for us to manage, but we're doing it," Moss says.
While the revolver provides critical assurance of liquidity, Hanesbrands only draws on it occasionally and has never had a material balance at quarter-end, Moss says. With the cash the company has been able to mobilize, it pays down the revolver first, then some of its term loans, he explains. It also has outstanding bonds.