Cash & Liquidity Management

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Using Money Market Funds during Economic Instability ATEL/TMI Treasury Forum The TMI/ATEL Treasury Forum was a very insightful and interactive event and we are pleased to bring you the transcript from the session.

Using Money Market Funds during Economic Instability

ATEL/TMI Treasury Forum

Sofitel, Luxembourg - 19 June 2008

RP

Welcome to this special forum hosted by ATEL in which we are joined by some of the most significant players in corporate treasury today. Today’s objective is to discuss some of the key implications of the credit crisis and how it is affecting treasurers. How are you managing cash, how has life changed since a year ago and how are you responding to market events? We will also discuss the value of money market funds in the treasurer’s armoury.

FM

Firstly, as Chairman of ATEL, I would like to add my thanks to Robin’s. Since the so-called sub-prime crisis last summer, there are still considerable consequences. The cost and difficulties in obtaining funding have increased and the money markets continue to change over a period of weeks and months. I’d like to share with you some of my views from a corporate perspective.

Like many companies, we have achieved high levels of cash surplus - at least a quarter of large corporations in Europe have a substantial liquidity portfolio.

This creates an issue of what to do to boost your return, especially in a low interest rate environment. Unfortunately, even as interest rates increase, inflation is also increasing, so it becomes difficult to achieve good returns in real terms. It might seem easier to manage cash than debt, but in these uncertain times, there are often problems.

Defensive investment is one way of using cash - we are investigating potential M&A opportunities as are many other companies. Nevertheless, it is important to avoid overpaying for assets and to maintain liquidity. Uncertainty about when cash will be required makes it difficult for treasurers to make investment decisions due to the need to remain highly liquid.

The sub-prime crisis has, of course, had a major impact on the buy and sell sides of the market. There is a limitation for investors as there is the balance between what return we could achieve by investing in our core business, and boosting returns and profitability, and what we could achieve in the money markets.

Money market funds are a good alternative to traditional bank deposits in terms of credit risk and return. Although most corporate treasurers have developed an investment policy which ensures that they manage their counterparty risks, there remain some questions about the future of the big banks, particularly bearing in mind the huge recapitalisation which has taken place.

One of the issues with money market funds is definition, and in particular the distinction between treasury-style and investment-style money market funds. These are quite different, so to clarify, I am talking about the AAA-rated, treasury-style funds as defined by IMMFA, which are highly liquid instruments with the opportunity to invest for a very short duration if necessary. This liquidity is important for corporate treasurers who are finding it difficult to identify the time horizon for investment. IMMFA money market funds have exceeded €440bn (or $600bn) in 2008 despite the current crisis.

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