A year ago, cash and liquidity management was the number one priority for treasurers, and the second priority for CFOs (after funding and capital structure)¹. A year later, nothing has changed in some respects, as managing cash and liquidity is as important as ever. At the same time, the cash and liquidity environment itself has changed dramatically.

Only the most seasoned treasurers have experienced rapidly rising interest rates and soaring inflation; rather, for many, the earlier stages of their careers were marked by tumbling interest rates during the global financial crisis of 2008–9. Although a trial by fire for many, it also meant that uncertainty and volatility became familiar treasury territory.

More recently, as Thomas Mayer, Head Cash Sales GY/CH/A & EMEA Head Investment Solutions at Deutsche Bank comments, “Covid-19, the flight to liquidity, and the effects of supply chain disruption and geopolitical challenges were also unprecedented, so treasurers are accustomed to dealing with uncertainty.” Despite very different circumstances, there are parallels between the period we are in now and the first days of Covid-19. Mayer continues, “Treasurers were asking their banks for huge credit lines to make sure they could pay employees and suppliers, and investing large, borrowed balances in short-term investments, despite zero or negative interest rates.”

As the economic and supply chain impact of Covid-19 became clearer, companies repaid their borrowings. Today, as new uncertainties have emerged for businesses, with inflation, rising energy and borrowing costs weighing on both customers’ discretionary spend and corporate costs. Cash flows are being reforecast, and financial resilience has become a renewed priority as companies anticipate a lengthy recession. Many have high levels of working capital tied up in inventory, but ongoing component shortages mean that they cannot always ship these goods, which in turn impacts on revenue.

The need to manage uncertainty is comparable to treasurers’ experience of the global financial crisis and Covid-19 but the interest rate environment is not. In theory, rising interest rates should mean that companies can compensate for higher costs and depressed revenues through higher returns on their cash investments. In reality, this is rarely the case. More commonly, treasurers have been drawing on credit lines to create a liquidity buffer, and therefore higher investment returns are offset by higher borrowing rates. Likewise, lack of visibility and certainty over future cash flows mean that investment terms are at the very short end, often no longer than two to three months, so treasurers are not able to pick up higher returns further along the yield curve.

Lack of visibility and certainty of cash flow also means that treasurers remain conservative in their choice of investment products. Current accounts, term deposits, money market funds and in some cases, short term bond funds remain staple investment choices, but some have extended into triparty reverse repurchase agreements (reverse repos). These transactions offer the attraction similar returns to term deposits with a significantly improved risk profile, as the investor holds the underlying collateral for the term of the repo. Reverse repos are by no means unfamiliar to many treasurers, but following an extended period of low interest rates, during which time they may have fallen out of investment strategies, and it may take time to adapt policies and configure systems to reinstate them.

Managing a wider range of investment instruments can increase the administration burden for corporate treasuries, from managing KYC processes with different counterparties to ensuring that back-office processes, such as confirmations and accounting are supported in the treasury and/or enterprise resource planning system. Investment platforms may help overcome this challenge, for especially money market funds that are offered through various brokers, often with standardised processes and integrated reporting. Although these platforms already exist, there are likely to be further developments in the future, with platforms such as DB’s Cash Investment Service bringing together a suite of products such as (money market) funds, reverse repos, or even deposits with a panel of counterparties in a single offering.

“Treasurers’ performance is not measured on investment returns, but their ability to support the company’s liquidity needs”
Thomas Mayer, Head Cash Sales GY/CH/A & EMEA Head Investment Solutions at Deutsche Bank

There are some companies that have large free cash balances and negligible debt that enjoy reliable cash flows. Treasurers of these companies can invest cash more strategically, taking advantage of higher returns that are available for longer maturities. This was less of a priority during the extended period of low interest rates, but despite increasing opportunities for yield generation, treasurers remain conservative. Mayer reflects, “Treasurers’ performance is not measured on investment returns, but their ability to support the company’s liquidity needs. To achieve this, security and liquidity are priorities, as opposed to yield.” Consequently, treasurers are preferring high-quality bonds, Schuldscheine and money market funds, as opposed to striving for higher yields.

One of the focus areas we have seen emerging strongly in recent years, particularly during the pandemic, has been environmental, social and governance (ESG) issues. Leading banks, including Deutsche Bank, have introduced innovative ESG-linked borrowing and investment products. To date, these instruments have not yet become a fundamental element of treasurers’ investment policies; however, as recent Economist Impact data reveals, 45% of treasurers are setting ESG benchmarks for short term investments, and 43% are looking at instruments such as green bonds to fund sustainabilility initiatives². Companies are therefore by no means rejecting or deprioritising ESG; however, there remain considerations around ESG impact, availability of green or sustainability-linked investment products and investment policy:

• First, companies will typically focus on maximising their ESG impact, i.e. making the business itself more sustainable as opposed to prioritising ESG-linked investment policies. They are therefore embedding ESG considerations into their business strategy and operations, such as carbon emissions targets and the use of green energy. An auto manufacturer is more likely to concentrate on investing in research and development of electric vehicles than in ESG-linked investment products. Treasurers are engaged in these efforts by engaging with the wider organisation on ESG ratings (56%), evaluating suppliers’ ESG credentials (51%), and engaging proactively with the Board on ESG related issues (50%)³.
• Second, there is an issue of capacity. Mayer explains, “Banks can only offer a certain volume of green or sustainable investments as this is proportionate to the amount of green or sustainable assets that they are financing. As this asset pool grows, availability of ESG-linked investments will increase.”
• The third issue relates to investment policy. While it is likely that a treasurer would opt for a ‘green’ term deposit over a ‘grey’ one if all other terms were identical, less than half yet have ESG-linked investment targets as part of their policies⁴, although this is likely to change over time. Furthermore, the short-term nature of most corporate cash investment tenors is inconsistent with the longer-term financing of ESG-linked assets, such as solar parks or wind farms.

Given that ESG is now such a significant priority at a corporate strategy level, it is likely that the importance of ESG in corporate investment policies is likely to grow, particularly as ESG-linked products become more widely available, and ESG values and priorities are disseminated across the business, including treasury policies. However, this is unlikely to be to the detriment of security and liquidity. As the past 15 years have proven, uncertainty is the only certainty, so financial resilience, protection of capital and access to liquidity are likely to remain the cash and liquidity management fundamentals.

Helen Sanders is a consultant to the financial services sector, and former Director of Education at the ACT and Editor of Treasury Management International

Sources

¹ See pwc.com
² See „Was COP 27 an ESG cop-out for treasurers?“ at flow.db.com
³ See „Was COP 27 an ESG cop-out for treasurers?“ at flow.db.com
⁴ See „Was COP 27 an ESG cop-out for treasurers?“ at flow.db.com