by Ben Poole, Ben Poole Editorial Services
One of the well-attended workshops on the second day of the 7th BNP Paribas Cash Management University focused on investment strategies for treasurers in the ongoing low interest rate environment. The workshop featured a corporate case study from Jiameng Teah, senior treasury analyst at Tate & Lyle, as well as comment from panellists Nick Haste, head of corporate deposit line in Europe for BNP Paribas, and Xavier Gandon, money market investments specialist with BNP Paribas Investment Partners.
Corporate Case Study: Tate & Lyle
Giving some background to Tate & Lyle, Teah explained that the company has operations in over 30 countries around the world, with approximately 4,300 employees. The company is headquartered in London and has a market capitalisation of around £3.2bn.
When looking at the company’s investment policy, Teah said that security is the most important variable. The primary objective for the treasury team at Tate & Lyle is to safeguard the value of the investment. Diversification of investments is an important tactic, while the treasury is only permitted to invest in approved counterparties, and even then they must stick to pre-approved investment limits for each counterparty. The treasury team has discretion as to how much they invest with each bank within these limits. Teah said that her treasury team use inputs such as CDS, news stories and equity analyst notes to direct these limits.
Liquidity is also important to Tate & Lyle. The company’s working capital requirements vary as they are tied to the price and supply of corn. Teah said that the corn price rose to and remained at elevated levels from 2011 to 2013, reaching over US$8 a bushel in summer 2012. Also, to ensure supply continuity during this period, higher inventory levels were held. To put the impact of this in context, for Tate & Lyle this meant consecutive outflow of working capital for three consecutive years, two of which were around £100m. Because of this, the company keeps its cash on very short-term maturities. The treasury tries to maintain a minimum operation balance with same-day access to funds. Teah explained that a stable cash balances surplus to operational requirements could be placed for longer-term requirements, using the example that at Tate & Lyle a sterling balance is held for dividend purposes.
Against these requirements for security and liquidity of investment, yield is very much the third priority at Tate & Lyle. Teah said that the treasury is still expected to maximise the return on investment as much as possible, but only within the boundaries set by the security and liquidity policies.
Looking at the investment instruments available, Teah warned that treasurers need to look at what is behind AAA-rated money market funds (MMFs). She cited regulations that specify MMFs are only allowed to buy a limited range of papers, arguing that treasurers are really just buying into the banks again when using MMFs for diversification. Recent analysis by Teah of her company’s cash holdings found that they have high exposure in the financial community. She made the point that it is difficult for most corporates to invest directly into the non-financial sector due to limited resources available in a typical treasury team, except for the very large corporates. Also, investing in corporate or sovereign papers directly is unlikely to be within the risk appetite for many boards or treasury subcommittees.
Tri-party repo: the holy grail?
During her presentation, Teah described tri-party repo as the one thing that offers light at the end of the tunnel. It provides a great rate arbitrage opportunity, with treasurers receiving more yield on a secure basis rather than through unsecured lending. If anything happens with the banking partner, the treasurer immediately gets that piece of paper to sell, with no yield sacrifice. Teah explained that if the bank pays the company’s deposit on an unsecure basis because of the liquidity coverage ratio (LCR), they have to hold treasuries of high quality and liquid asset against that. However, the treasurer does not get the asset even though it is strictly earmarked towards their cash because the deposit is placed on an unsecured basis. For the banks, this is expensive and it limits how much they can pay out. Repo gets round this by allowing the bank to offer lower rated instruments such as corporate bonds instead of putting the treasuries against the corporate’s cash. Essentially this allows banks to get around the LCR and pay the corporate more.[[[PAGE]]]
The discussion highlighted for the audience the fact that they could consider setting up a tri-party repo structure at their organisation if they had not done this already. Despite the delay to EU reforms of AAA-rated funds and constant NAV, it is still on the horizon. Rather than waiting until reform happens and joining the queue with many other corporates attempting to set up global master repurchase agreements (GMRA) for tri-party repo with their banks, there are benefits to getting to the front of the queue today. Further it seemed that to get the leverage to negotiate with the banks, corporates could look into tri-party repo sooner rather than later.
BNP Paribas’ Haste echoed Teah’s positive words about tri-party repo, but also cautioned that corporates investing in this way have to monitor their collateral very closely. Haste advised that treasurers have to set out exactly what size haircuts they want for which specific size bonds. Corporates without the right haircuts on their collateral can find themselves in a tough position when the trade becomes unravelled. But even in this situation, you still have a piece of paper. Haste added that the administration with tri-party repo can take some time - it may take six to nine months to get a GMRA signed - but it is worth getting.
Peer comparisons: treasury investment policies
The investment workshop also featured a live poll that took a snapshot of the investment choices made by the corporates in the room. Perhaps unsurprisingly, a majority of treasurers at the workshop predominantly make their cash investments in euros (70.8%), with US dollars (12.5%), UK pounds (8.3%) and combined other currencies (8.3%) trailing in popularity.
While a majority of corporates at the workshop (63.2%) managed cash and cash reserves of up to €500m, a sizeable proportion (21.1%) are managing between €1bn-5bn. The remaining 15.8% manage cash and cash reserves between €500m-1bn. When asked about their cash and cash reserves over the past 12 months, a majority (57.9%) said that this total had increased in that time, while interestingly 36.8% noted that it had decreased. Commenting on the results, BNP Paribas Investment Partners’ Gandon noted that many corporate treasurers have been using cash reserves to pay down debt, paying back bonds or undertaking M&A, among other options.
The most popular maximum duration of cash and short-term reserves among the delegates was less than three months (36.8%). Other results to this question were split fairly evenly, with the duration of both 3-12 months and 24 months or more both receiving 26.3% of the vote. The remaining delegates (10.5%) selected 12-24 months. Gandon noted that larger companies tend to have more leeway in terms of credit duration when compared to smaller companies. However, he pointed out that usually the maximum credit duration does not exceed one year.
Switching to average duration, the most popular term was 1-3 months (50%), followed by over 6 months (25%), less than 1 month (20%) and finally 3-6 months (5%). Gandon commented that it was no surprise that the average duration remained quite low, noting how Teah’s presentation had highlighted how security and liquidity remains key for corporate treasurers.
Looking back at the past 12 months, a big majority of treasurers (70.6%) said that their credit duration average had increased. Gandon said that this could be seen as a sign that treasurers are increasing the risk to some extent, in order to get more carry on their investments.
Reflecting an issue raised by Tate & Lyle’s Teah in her presentation, the majority of delegates will change their behaviour if constant NAV MMFs are converted to variable MMFs due to regulatory reform in the EU. Some 38.5% of treasurers will reduce their use of MMFs should this change occur, while a further 38.5% will stop using MMFs completely in this situation. Just 23.1% of corporates report no change in the policy if these reforms come through. Gandon commented that regulatory change is clearly a concern for corporate treasurers investing in AAA-rated CNAV MMFs. While this reform is currently delayed, and may not be finalised until 2017, it is an issue that treasurers have to be planning for today.