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Cash management and investment in a shifting world

Without a crystal ball, it is difficult to predict which path the economic recovery will take. Many treasurers are therefore wondering how to manage and invest corporate cash in an optimal manner, given the uncertainty ahead.

Nevertheless, Yera Hagopian, Managing Director, Liquidity Solutions, and Daniela Eder, Head of Payments & Cash Management Europe, believe that treasury teams can take action today; and together they explore what is possible for ensuring cash management and investment strategies are fit-for-purpose in the new operating environment.

The day the world changed

March 11, 2020, will go down in history as the day the World Health Organisation declared the Covid-19 outbreak to be a pandemic^. That same day, the Bank of England made an emergency interest rate cut, down from 0.75% to 0.25%^ – and the UK government launched its Coronavirus Business Interruption Loan Scheme (CBILS). Eight days later, the UK interest rate was cut again, to an all-time low of 0.1%, and £200bn in quantitative easing^ (QE) was announced.

Similar stimulus packages were launched by central banks and governments across the globe. In the US, the Federal Reserve embraced near-zero rates and committed to $700bn^ worth of asset purchases. The European Central Bank rolled out its €750bn package known as the pandemic emergency purchase programme (PEPP). Numerous employee furlough schemes were then added to the mix.

Meanwhile, corporates were busy taking matters into their own hands. Hagopian explains: “When the pandemic began in earnest, many companies’ immediate reaction was to have as much liquidity on hand as possible. Larger companies went to the capital markets, while smaller corporates could access government schemes – and some corporates opted for both of these avenues.”

Many organisations also drew down on their revolving credit facilities, in order to have cash available if they needed it, which was more of a psychological move than a tactical one. In addition, a large number of corporates pressed pause on material investments, making the stockpiling of cash even more pronounced.

There was a significant knee-jerk reaction to the pandemic, with corporates drawing down huge amounts of cash – and then looking for places to park it.

Daniela Eder

Head of Payments & Cash Management Europe at Barclays

Eder adds: “Money poured into seemingly ‘safe’ investments such as government and Treasury money-market funds. Yet, by and large, these investments were made in ‘panic mode’ and often not necessarily with a profound assessment of the company’s treasury policy.”

The journey ahead

Now that the dust has started to settle, corporates are beginning to take a more measured approach to their cash and investment management again.

The billion dollar question for treasurers is: ‘what happens next to the economy – and what does this mean for my cash?

Yera Hagopian

Managing Director, Liquidity Solutions at Barclays

Hagopian continues: “In truth, no-one can accurately predict what the recovery will look like. There are so many unknown factors at play, not least the medical outcome. Additional waves of Covid-19 could mean further economic downturn, but if an effective vaccine is discovered, the opposite could be true. The economic impact in the US is also a significant concern, as any negativity in the US economy inevitably has a global impact.”

What’s more, this is playing out against a backdrop of geopolitical uncertainty. Eder notes: “From Brexit and trade wars to the US election, the political landscape is constantly shifting. Geopolitical risk is therefore adding to the complexity of the situation and making it harder to ‘read’ the markets. As a result, treasurers have become very risk-averse – which is entirely understandable – and cash buffers have become de rigueur, as they were after the financial crisis of 2008.”

Given the aversion to risk, it is likely that corporates will want to conserve their cash for as long as possible. Nevertheless, Hagopian cautions that government support schemes will come to an end sooner or later. “In the UK, the government has already signalled the end of the employee furlough scheme and companies need to prepare for that. Moreover, some of the financial support options that corporates chose in haste during the ‘March frenzy’ have strings attached to them. On reflection, it may be considered prudent to start repaying those, in particular if they are expensive, or have covenants or conditions attached which may be limiting in the future,” she says.

Taking stock – and action

Eder adds that companies cannot stay in limbo – they must start to prepare for the future, whatever it holds. “Some corporates will need to use their cash to stay afloat. But for those who are in growth mode, it is important not to sit on cash for too long. Investments may need to be made to help scale the business at a sustainable rate. There are both downside and upside risks to prepare for, and each corporate must carefully assess its own situation.”

Within this assessment, there are several areas of focus for treasurers:

1. Stay close to the business to understand and anticipate sources, and uses, of cash as the crisis evolves. Hagopian explains: “Treasury has an increasingly strategic role within the organisation. Today’s treasurers must remain as close to the business as possible to understand what the cashflow implications of business decisions are. This is not a one-off exercise; this must happen at every step of the crisis as it continues to evolve.” She believes there is also a need for treasurers to continually educate the business on market forces, to help them better understand the challenges ahead.

2. Perform a detailed risk assessment of the current portfolio and ensure that treasury policy remains aligned to risk appetite. Says Hagopian: “The nature of risk has evolved hugely since the start of the Covid-19 crisis. Things are happening that were never previously considered as risks. And, as mentioned, some corporates have changed their investments out of fear rather than strategy. A review would therefore be wise, to ensure that risks are understood and are in line with the treasury policy.” Eder believes that reviewing the treasury policy itself could also be beneficial at this time, given the significant changes in the operating environment.

3. Do not forget about yield. According to Eder, there is a temptation during times of negative rates and market turbulence to put yield on the back burner. “Nevertheless, there are instruments that can provide security, liquidity and yield – and it is worth investigating the possibilities,” she says. Hagopian adds that, when looking at different investment solutions, it is important to ensure that the treasury team has the capability to manage the market and operational risk that goes with those instruments. “Will the team be able to tackle all of the processes, reporting and governance that takes place to manage that instrument?” she asks.

4. Consider currency risk. “There is no room for complacency when it comes to funding and investment – and this includes currency risk,” says Hagopian. “If the treasurer is relying on funding in a particular currency but actually needs it in a different currency, unfavourable FX moves may mean that the amount of funding is no longer sufficient once the FX conversion has taken place. As such, currency risk must remain front of mind [see fig.2] and treasurers would do well to put in place strategies to hedge any funding-related FX risks.”

5. Maximise internal cash efficiencies. Given the low and negative interest rate environment, the most efficient use of cash is still internal recycling – managed through pooling and cash concentration structures. “While many corporates already have such structures in place, they are not always revisited and updated for changing circumstances. As such, it is prudent to regularly review internal set-ups and ensure they are running at maximum efficiency,” says Hagopian.

6. Optimise and digitise treasury operations. To assist with ongoing risk monitoring and to help ensure the optimal use of cash, Eder believes that digitisation and automation of treasury processes will also be critical. “Treasurers need to have access to reliable and timely data through digital channels. Bank-led tools such as virtual accounts can also help treasurers to put in place efficient cash management structures which enable near real-time visibility and control over cash – which is beneficial at all times, but even more so when responding to a crisis,” she says.

Resetting the pendulum

While the shock of the pandemic has subsided, treasurers must now face the reality of the prolonged economic squeeze that lies ahead. Hagopian cautions: “In the middle of a crisis, eyes are often taken off the ball. Priorities become skewed as emotion overtakes logic. Now, it is time to re-focus on balancing risk and reward.”

Eder agrees, adding: “There is still a great deal of external uncertainty, but treasurers can make huge strides towards more optimal cash management and investment by reviewing their internal processes. There is always room for further efficiency – and treasurers are not alone on this journey.” Banks, she says, have tried and tested digital cash management solutions on hand, as well as short-term investment options to suit a range of needs.

“The one thing we don’t have is a crystal ball,” she quips. “But what is certain is that the biggest downside risk as a treasurer is failing to adapt.”

Now is the time for treasurers to show their strategic worth and demonstrate their ability to keep the company well-funded, by running a fit-for-today treasury function.

Daniela Eder

Head of Payments & Cash Management Europe at Barclays

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