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Treasury & Taxation

Cash Considerations Amid Tax Reform

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April 21, 2017

Parking cash: large caps playing it safe by keeping it short until tax issues debate out.

Tues Treas Man Dollar Jigsaw SmallIf a recent NeuGroup meeting of large-cap treasurers is any indication, the uncertainty around whether tax reform will proceed and what shape it may take has companies playing it safe and sticking to short-term options to park their cash.

The treasurer of a global consumer goods company said that the excess cash generated by a handful of his companies’ global affiliates is typically centralized every four months so that an equity injection can be made to a Bermuda company, where it is handed over to managers of separately managed accounts. The third-party managers are given guidelines and restrictions, and off they go. But not anymore.

“We stopped doing that this year because we want the option of keeping the money shorter term, and closer, so depending on how tax reform works out, we’d actually be able to take it back over here [to the US],” the executive said.

Another treasurer, this one from a technology company, also noted $5 billion that his company kept in Bermuda, investing it in average durations of two to three years. That operation was suspended and resulted in a cash build-up in Ireland, where the cash to manage Bermuda’s day-to-day operations had come from.

“Rather than invest that cash for two to three years, we’ve invested it to only a nine-month duration; waiting to see what happens with tax reform,” he said. “We didn’t want to have it tied up investments, so if we want to bring [cash] home in a year or two from now we would have to liquidate them.”

Currency volatility remains a concern. When the group moderator asked where members were parking their cash, the treasurer of a major industrial company said his company’s cash now resides mainly in term deposits, much of it overnight. About half is in non-US dollar (USD) currencies, and those exposures are swapped back into USD.

“We try not to have any non-dollar deposits that aren’t hedged,” the treasurer said.

The treasurer also said that the company has put more money into its captive finance company, to get a higher rate of return with fewer accounting issues. Those investments are then lent in the repurchase agreement (repo) market and the cash is used as a liquidity backstop. He noted that regulators have given the green light to the strategy, although there’s a limit on how much it can lend to the corporate

“It’s now at $275 million, but we’ve applied to bring it up to $500 million,” the executive said, adding the program had started a few weeks before. “It’s become another nice backstop. We can run with less cash, but then we have this pot we can grab for short term [uses].”

The treasurer of a healthcare company said his company splits liquidity into two parts, with one supporting operating and other short-term expenses left in deposits that can also be used as a bank-relationship tool. The company gives the other longer-term portion to PIMCO, which manages the investments and the compliance. Most of the portfolio is invested in highly rated securities and has an average duration of nine months. PIMCO has permission to employ repos, a financing tool the company’s accounting team had been unfamiliar with. “Six basis points is not a bad cost, since [PIMCO] is even doing my compliance and reporting,” he said.

On the money market front, new rules that went into effect last fall do not appear to be preventing their use, at least by the large cap companies attending the meeting. The treasurer of a manufacturer said the company exited prime funds for about a week last October, when the new rules became effective, and then quickly jumped back in. He noted that some of the fund companies have started managing offshore prime funds that yield more than the onshore version.

The technology company has taken a more cautious approach but is reconsidering the investment tool. “We exited onshore prime funds. Now we’re looking at the spreads and we’re considering working our way back into prime, although we haven’t done that yet,” he said.

A Deutsche Bank executive attending the meeting asked whether members had ever considered investing in trade payables or receivables. None of the 15-odd treasurers acknowledged investing in traditional trade payables and receivables, but the treasurer of the consumer-products company said his team had looked at securitizations of auto and student loans. However, the notion of investing in the structured bonds, even the safest tranches, was quickly shut down.

“It just takes one to go bad before you get hauled in front of the audit committee and lose your job,” he said.

One group member pondered the impact of the mandatory cash repatriation proposal now percolating on Capitol Hill and in the White House. Currently, multinationals often have treasury staff stationed around the world to invest the stranded cash generated by non-US affiliates. That’s particularly the case for technology companies.

The treasurer said his company is now “on hold,” waiting to see the outcome of tax reform. “If it turns out we have to bring cash back, I wonder what will happen to the investing activity that we’ve gotten used to over the last 10 or 15 years.” Asked what companies are likely to do with repatriated cash, he noted that companies are sitting on far more cash than they need to operate, so over time it will be spent either on M&A, dividends or stock buybacks.

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