Published: November 08, 2024
Treasurers commonly focus on protecting capital rather than generating income—yet they also acknowledge the opportunity to generate returns on liquidity surpluses. What should they consider when examining efficient ways to access cash and seek appropriate investment opportunities? According to three experts from BNP Paribas, treasurers should begin by creating nimble liquidity structures to confront uncertainty.
Like all finance professionals, treasurers face uncertainty about the direction and timing of US interest rates and the economy for the remainder of the year, according to Amy Goldstein, Managing Director of International Cash Management Sales at BNP Paribas. This uncertainty, she adds, poses a challenge when trying to determine the most appropriate liquidity strategy.
How are treasurers coping? They’ve taken a more flexible approach to their capital structure in managing liquidity for different scenarios. “Any approach should ensure processes are in place to take advantage of high interest rates, while preparing for potential reductions, regardless of when or if they arrive”, Goldstein notes.
Earlier this year, the market forecast was that the Federal Open Market Committee (FOMC) would make about six interest-rate cuts, and that other central banks—such as those governing the sterling and euro—would follow the US’s lead. But that hasn’t happened. Moreover, Julian Oldale, Head of Cash Management and Liquidity Advisory Americas, BNP Paribas, points out that geopolitical tensions have exacerbated uncertainty over economic prospects and monetary policy. It is now more crucial than ever for corporations to maximise their liquidity positions and gain as much visibility as they can into those positions.
“The mantra for corporate treasurers is to protect capital – that’s what they are rewarded for, not for making money,” Oldale says. “So, the main focus is security of capital, but of course treasurers are also looking for return on any excess liquidity.” In a “questionable” economic environment, he says, there is a tendency to hold cash, and therefore corporate treasurers are looking at how they can maximise liquidity, gain immediate visibility, and whether that liquidity is in the best place.
A higher interest rate environment also means higher costs for treasury teams, adds Nikunj Trivedi, Head of US Licensed Advisory & Sales, CTLIA, BNP Paribas. “For our clients in general, whether it is payrolls, raw materials, or other costs, they are all higher this year than in the past,” he says. “There is a silver lining though – interest rates are higher on the investment side, too. A few years ago, corporates would be making only a few basis points (bps) but they are now suddenly making 500bps or more on certain instruments.”
Both Oldale and Trivedi observe that the yield curve has been inverted for some time now and that treasurers should continue to think more about deposit products such as term deposits and interest-bearing demand deposit accounts (IBDDAs). “We have clients who have laddered their excess cash out to overnight, one-, two-, three-, six-, and nine-month term deposits,” says Trivedi. “This gives them a steady flow of cash on the return and clients can achieve good yields on some of these term deposits while reducing their cost of carry. This is important because clients are facing higher rates when they refinance debt. Reducing that negative carry has become critical for them.” For clients who prefer not to ladder, placing the money into an IBDDA gives them instant access to funds at attractive rates without tying into a term deposit structure and a fixed maturity.
The USD continues to be a strong preferred currency across the world, notes Trivedi, with many large firms based in North America and global corporates holding significant USD positions. And despite the geopolitical uncertainty, the American economy is showing signs of strength.
Elsewhere, technology, such as artificial intelligence and fintech products, are playing a greater role in giving treasurers visibility of their cash and delivering much more granular data around investments.
Oldale says banks are leveraging technologies that provide treasurers with instant visibility into liquidity positions. Among these advances are cash flow forecasting (CFF) built into ERPs or bespoke CFF tools that leverage the data and reporting provided via ISO 20022-based services, for example. Leveraged the right way, these tools can help ensure treasurers have visibility and a global view of their cash holdings.
However, technology is not a ‘one-size-fits-all’ solution. Goldstein notes that BNP Paribas’ corporate clients range from large multinational corporations that have access to global technology and ERP platforms—to smaller companies that cannot afford all the ‘bells and whistles’. Corporates therefore often need to partner with a bank that can support their technology requirements and create the efficiencies they are looking for in liquidity management.
“The key for treasurers is to lean on their bank to deliver the most appropriate capabilities. Yes, the ability to get real-time information is important, but there’s a balance to be struck – is it necessary for all corporates to have access to real-time information versus having continuity and consistency across a global platform?” Goldstein asks.
Nevertheless, given the rapid increase in instant payments, the ability to manage liquidity on a real-time basis will become more important over time, she adds. “Real-time liquidity management will be transformational, although it isn’t there yet.”
If a corporate treasurer can centralise liquidity, the technology to drive visibility becomes much easier and the predictability of forecasting will also improve. But, warns Goldstein, technology is not a panacea. “We all know that cash flow forecasting is the number-one priority for corporate treasuries and this issue really has never been solved. It will come down to a combination of the technology that is available and the information that banks can deliver.”
Trivedi agrees centralisation will play a vital role for treasurers in managing their holdings. “US corporates are centralising cash domestically but also have positions overseas, where they can invest in USD holdings in Asia, for example. Local USD balance sheet opportunities are very attractive in DDA and term deposits.”
When it comes to off-balance sheet strategies, BNP Paribas believes that corporates with separately managed account (SMA) portfolios should think on a longer-term basis beyond the nine month or one-year periods. “The reason for this is that treasurers need to ensure they have enough cash in the shorter term, whether it is sitting globally or in the US,” says Trivedi. “Also, given the current economic environment and the general features of the SMAs, the product may not make sense for a client with an investment horizon of nine-to-12-months because the interest rates are higher in this timeframe.” He adds that clients with investment horizons beyond a year to three years can potentially take advantage of the trend by now locking in higher rates in their portfolios, given that the Fed has indicated lower interest rates at the end of 2024 and into next year.
Another strategy BNP Paribas has identified among its clients is the use of currency hubs. “Companies are looking at aggregating liquidity on a currency-by-currency basis, in the respective currency centre versus having pockets of cash sitting where they don’t need it,” says Goldstein. “The USD obviously will lead the charge because at the end of the day, a currency approach is more about having the currency in a best-in-class location, which for the USD is the US, for euros, Europe, and for sterling, the UK.”
This hub approach gives treasurers an infrastructure that provides access to all local payment capabilities and the market investment options, along with visibility and centralisation of the cash. “Hubs are an important method for managing on a currency-by-currency basis and for USD in particular. There are so many benefits to centralising USD in the market in which you have that depth and breadth,” says Goldstein.
Oldale notes that in terms of global liquidity, the USD is still the dominant currency and corporates need to think carefully about how they use and deploy that liquidity, whether they are a USD functional company or also hold cash positions in other currencies. “Every corporate treasurer should make sure they are preserving their principal and utilising it in the best ways to minimise debt and maximise returns.”
Multi-currency notional pools are also emerging as a significant strategy for corporate treasury. Goldstein says: “I would say these pools are more than a trend at this point, particularly for US corporates. Large and medium-sized corporates want to know more about them and how they can benefit, but again, they are not always the right solution for everyone.”
Such pools are suitable for corporates that have ready access to the currencies they want to include in the structure. She elaborates: “If you are a cash-rich company that has long positions across currencies, how do you leverage that structure to bring dollars back to the US? We call it the ‘dollar sweep’. Corporates want to leverage that liquidity in a more seamless manner. As the market moves more into Basel IV, there’s more clarity around notional pool structures and we believe we will see more comfort around them.”
Oldale and Goldstein believe the dollar sweep aspect of pools is driven by corporates seeing improved returns on USD when they better deploy the currency in the current interest rate environment.
In Goldstein’s opinion, it is a solution that treasurers should be looking at “all the time – corporates need nimble structures that are going to work whether you have a high or low interest rate environment. Having the right liquidity structure in place can enable change without too much upheaval – and this is critical in an unpredictable world.”
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