Security top priority for corporate treasurers

Some 700 delegates descended on Liverpool last week for the ACT Annual Conference 2012 and in our first visit to the event we were struck by the extent to which corporate treasurers were facing many of the same challenges, concerns and pressures as their local authority counterparts.

We were hosting a workshop about the alternatives to bank deposits and money market funds – an area we researched extensively with the local authority market in 2009 – and the issues raised fell broadly into three categories with a fourth “surprise” raised in less formal meetings.

Capital security has risen rapidly to the top of corporates’ priority list and this is now required almost regardless of cost. In some cases a too narrow focus on this issue has lead to yields on cash being sacrificed or even surrendered altogether whilst still failing to ensure the base requirement of capital security. Over reliance on banks whose credit ratings are falling risks making a bad situation worse. This is an area where corporates seem most anxious to find better ways to meet their security needs and some were especially focused on underlying corporate governance and custody issues which they see as a direct potential threat to capital.

In the same light, counter party exposure has become an equally pressing matter for most corporates with cash balances. The most credit worthy banks often no longer take deposits or do so at exceptionally low rates whilst changes in money market fund rules have also left returns net of fees depressed. This has left companies oscillating between holding funds with lower quality banks and investing in lower yielding money market funds, neither of which provides an attractive solution. Counter party lists appear to have shrunk for some corporates, from as many as 30 to 40 institutions a few years ago to as few as 12 to 15 of which less than 6 may be actively seeking deposits.

In other instances companies have gone from a small base of counter parties of 3 or 4 to a more stable 16 to 17 but the limit on some banks’ willingness to attract deposits means the usable list of counter parties is still well less than a dozen.

Finally yield, whilst not the top priority, is nonetheless needed to balance offsetting financing costs and other treasury overheads. We found conference attendees now especially prepared to evaluate a range of options, mainly focused around adopting guidelines that would permit investment in securities other than bank deposits and money market funds. We explored options offering companies 100 to 120 “line items” of securities they could hold often of better quality than mainstream banks, without compromising on security.

The last “surprise” from the conference were the anecdotal tales of liquidity problems, experienced during the “credit crisis”. Incidents were reported of banks failing to honour break agreements on term deposits or looking to postpone or defer liquidity transfers. Given the core importance of banks in providing cash liquidity to meet corporate needs, it is understandable that liquidity has joined capital stability as a major concern.

We will be following up the conference with a series of research based meetings with a wide range of corporates to better understand the limitations within which the sector works, to explore potential solutions to address their needs in the new environment and to see what ideas may also benefit the local authority sector.

Robin Creswell is Managing Principal of Payden & Rygel’s London office. The company manages some USD40 billion (£25 billion) of cash and treasury assets on behalf of US corporations and offers approximately £2 billion of cash management services to UK and continental European corporations including the Payden Sterling Reserve Fund.