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Investment Options in a Low Interest Rate Environment The author summarises the findings of a workshop focused on investment strategies for treasurers in the ongoing low interest rate environment, featuring a corporate case study from Tate & Lyle.

Investment Options in a Low Interest Rate Environment

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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.

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