Now that interest rates have plummeted to their lowest level in over a decade, corporate treasurers in the United States and abroad are faced with many challenges and opportunities when it comes to managing their cash. The low cost and easy availability of funding make this a perfect time to refinance high-cost debt to save on spreads.

That’s the upside of this economy. The downside is finding smart, effective ways to invest cash balances that will preserve capital and provide the liquidity, security and consistent yields treasurers require. Before they can even consider strategies for dealing with today’s volatile market, however, treasurers need to have systems in place that show them where their money is and how much is available or in use at any moment of the day.

Start with the Basics

First and foremost, treasurers must identify where cash is in the system, agrees Mary Kiser, Senior Vice President and Sales Manager, Global Treasury, Bank of America. “At Bank of America, we are finding that treasurers are getting weekly financial reports instead of real-time information,” Kiser says.

“As a result, they’re making bad investment and funding decisions based on outdated information. Understanding your global positioning at all times is absolutely critical to successful cash management in the financial environment we’re experiencing today,” she says. In fact, having instantaneous access to cash positions makes good business sense in any economy.

Updating Systems

The focus on Y2K compliance forced corporations to update their technology and create more effective systems. Kiser believes that treasurers “should use these systems to their benefit, to find out where cash is and use it more efficiently then ever before.”

Many corporate treasurers also are turning to electronic systems to handle payments, especially for overseas transactions. The electronic systems allow treasurers to download accounts payable information into their accounting system and into a payment file, which produces payment instructions.

An electronic payment system can help improve staff efficiency, giving employees more time to handle other important financial issues. It also can provide constant monitoring of cash positions and advance notification of any problems that arise. Once forewarned, treasurers can take the necessary action to fund accounts or obtain credit to maintain liquidity.

What’s the Next Step?

Once you have effective payment and information systems in place, there are a number of debt restructuring strategies you can use to maximize your cash under the current financial conditions.

Refinancing Expensive Debt with Cheaper Loans

Over the last year, there has been a rush worldwide to refinance debt at the lowest rates businesses have seen in a long while, and may never see again. This strategy, which not only offers substantial savings over the long term, also can give treasurers additional options for using the cash saved – including investing the money or taking on more debt at today’s favorable rates.

With the possibility that interest rates will decline even further, the push to lock in low-cost funds and retire costlier debt is expected to pick up.

Longer-Term Financing

Today’s low rates and a relatively flat yield curve are encouraging more and more companies to reduce their reliance on short-term funding and to extend the maturity of their loans. Shrinking short-term funding sources also are responsible for this phenomenon.

In the U.S., for example, the commercial paper (CP) markets have all but disappeared except for the highest rated A1/P1 issuers. Although the CP markets in Europe and Asia are still strong, treasurers are reticent to run the risk of relying on them too heavily.

Short-term funding also is dwindling in the banking sector, due mostly to bank consolidations over the past two years, which have left companies with fewer and fewer borrowing options. In Europe, the new capital adequacy requirements of the Basle II accord and greater pressure from bank investors to improve their return on equity have forced financial institutions to become choosier about the type of loans they make.

Yet, even with all its current drawbacks, short-term borrowing has its advantages and shouldn’t be discounted as an effective cash management tool in the current economy.

Thinking Short Term

Not everyone is convinced that long-term borrowing is the answer. Exchanging short-term debt for long-term borrowing increases a company’s cost of capital. Some companies are choosing to go with short-term debt because rates are even lower at this end of the spectrum.

Companies can sell commercial paper for just over 2 percent, which is a very attractive yield in today’s market. For many corporations, commercial paper is their most cost-effective source of funds. Obviously, the problem right now is finding short-term sources of funding.

Interest Rate Swaps

Many companies are initiating interest rate swaps to reduce the cost of their fixed rate debt and to balance their interest rate exposures more effectively. With this strategy, treasurers swap a portion of debt from fixed rate to floating. By doing so, they take advantage of a substantially lower rate in the floating portion, which can lower their company’s average cost of debt.

It’s recommended to continue to keep a portion of the portfolio in fixed rate as a precaution against rising rates and inflation. A good benchmark is to keep at least 50 percent of the portfolio in fixed rate so that whatever happens in the market, half of the costs are fixed and predictable.

Planning Ahead

During the Asian financial crisis of the late 1990s, companies were unable to get credit at a reasonable cost. Funding was scarce and expensive even for companies with solid credit ratings. The lesson learned from that time was to be prepared. That’s why many corporations today are borrowing money not because they need it, but because they want to lock in the best rates they may see for years.

It’s critical to have long-term borrowing facilities in place to see your business through the bad times. Arranging for new money when the market is right rather than when it’s needed provides more leeway in cash-flow management and is just smart business. Remember, when money gets tight, financing costs become prohibitive. Even if borrowing today isn’t an option, it makes sense to explore solutions that ensure your company has liquidity when it needs it.

Looking Beyond Debt

Debt administration is just one facet of cash management in the current low rate environment. The real challenge is maximizing earnings while rates are down, without jeopardizing liquidity and stability. Liquidity funds may be the answer.

Liquidity Funds

Managing cash balances in today’s changing and uncertain market environment is a tough job for corporate treasurers. They need an investment tool that provides security, liquidity and stability. This explains the growing popularity of liquidity funds. These funds, available exclusively to corporations, banks and other institutions, offer a high level of security and the potential for higher yields than those offered by traditional time deposits.

The conservative nature of liquidity funds, with their investment objective of preserving capital, make them an attractive investment for any interest rate environment – but even more so in the low rate one we’re experiencing now. Liquidity funds’ exceptional level of security is reinforced by Standard & Poor’s AAA rating. These funds are appropriate for temporary or medium-term cash investment, seasonal operating cash, automated cash sweeps, and the cash component of investment portfolios. Interest is compounded daily and paid monthly, and can be taken as cash dividends or reinvested in new shares.

Liquidity funds offer unique services and options that make them even more attractive to corporate investors. For instance, some funds provide same-day settlement and late dealing deadlines, so investors can have access to their cash on the next business day — an important advantage for treasurers in this market.

Late cut-off times allow treasurers to assess their cash requirements throughout the morning and deal later in the day, rather than being forced to make estimates to meet early cut-off times.

This article appeared in September 2002. (BA)

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the, is a world-recognized speaker, author and an international columnist on global business, trade policy, labor, and economic trends. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.

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