Comparing New Investment Alternatives: Products and Strategies Tony Carfang Ian Rasmussen 0
Corporate Cash Levels US Corporate Cash UK Corporate Cash Corporate Cash ($T) 2.6 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 0.8 $2.5T Corporate Cash ( T) 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.73T Source: Federal Reserve, Treasury Strategies Source: UK Office for National Statistics, Treasury Strategies Eurozone Corporate Cash Japan Corporate Cash Corporate Cash ( T) 2.6 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 Corporate Cash ( T) 280 2.6T 270T 260 240 220 200 180 0.8 160 Source: European Central Bank, Treasury Strategies Source: Bank of Japan, Treasury Strategies 1
Corporate Cash Levels US Corporate Cash UK Corporate Cash Corporate Cash ($T) 2.6 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 0.8 $2.5T R² = 0.9463 Slope = $21.9B/Q Corporate Cash ( T) 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.73T R² = 0.9588 Slope = 7.1B/Q Source: Federal Reserve, Treasury Strategies Source: UK Office for National Statistics, Treasury Strategies Eurozone Corporate Cash Japan Corporate Cash Corporate Cash ( T) 2.6 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 0.8 R² = 0.9886 Slope = 25.1B/Q Corporate Cash ( T) 280 2.6T 270T 260 240 220 200 180 160 R² = 0.6772 Slope = 1.2B/Q Source: European Central Bank, Treasury Strategies Source: Bank of Japan, Treasury Strategies 2
Corporate Cash as % GDP by Region Country/Region December 2000 December 2017 United States 9% 13% Eurozone 12% 23%* United Kingdom 22% 36% Japan 36% 49% *Eurozone corporate cash data lags other regions so data reflects September 2017 Source: Treasury Strategies estimate 3
Instrument Attributes Today Prime MMF Treasury MMF T-Bills/ Repo Bank DDA Ultra-Short Bond Funds Direct CP SMAs In-House Mgt High relative yield x x x x x Daily liquidity x x x x x x Ultra-low risk x x x x Low minimum transaction size x x x x x Low fees x x x x x x x Diversification x x x x Convenience x x TMS connectivity x x x x Portfolio accounting x x x x x Professional management x x x x x Source: Treasury Strategies 4
A New Landscape for Cash Management Rising Rates Issue Bank Balances Lagging Earnings Credit Rates Bank Balances Balance Assessment Fees Challenges and Opportunities Rising rates in the U.S. create opportunities for greater returns. However, they increase the importance of cash forecasting and treasury automation. Get the maturity and credit right is paramount. Idle bank balances are no longer worthless. But market rates are rising more rapidly. Watch out for this little known account analysis expense item. Continuing Effects of Money Fund Regulations Repatriation Uncertain Future of LIBOR Assets that left Prime MMFs still remain in Govt. MMFs or bank deposits. The is an opportunity cost. Tax respite. But questions for you: How much to repatriate? Relocate? Leave in place? What to invest in? Being phased out in its current form by 2021. Need to re-evaluate LIBOR indexed debt, investments, derivatives, etc. 5
Earnings Credit Rates Lag Market 6
Earnings Credit Rates Vary Widely Based upon actual experience of NDepth users with annual revenue of $500M - $50B 7
Deposits vs. Activing Investments ECR generally applies to all DDA balances You don t need to initiate any transactions No forecasting necessary Intraday liquidity Give up on yield Source: NDepth, Treasury Strategies 8
Balance Assessment Fees are a BIG DEAL Source: NDepth, Treasury Strategies 9
What Treasurers Are Doing in 2018 Corporate Treasury Priorities 2018 2017 2016 Cash forecasting 1 1 1 Financial risk management, FX 2 2 2 Treasury management systems 3 5 6 Treasury functional organization 4 4 - Balance sheet optimization 5 9 9 Corporate Treasury Benchmarking Desires 2018 2017 2016 Bank service fees 1 1 - Treasury staffing levels and skill sets 2 9 4 Best practices 3 5 7 Financial risk management, FX 4 2 5 Balance relationship management 5 10 2 10
Cash Management Options Increasing PRODUCT COMMENT VALUATION REDEMPTION RESTRICTIONS REGULATED RESTRICTED ACCESSIBILITY Bank demand deposit Bank Basel III Constraints Stable No Yes No Time/certificates of deposit Bank Basel III Constraints Stable Yes Yes No Private money funds Newer for treasurers, low utilization Stable (generally) By contract No Yes (large clients) Ultra-short bond funds More utilization Floating NAV Some Yes No Short-duration ETFs Low utilization by treasurers, differing investment standards Floating NAV No Yes No Separately managed accounts Traditional option, increased usage for corporates segmenting cash Book/Market value No, investor may bear gain or loss No No Retail prime MMFs MMF reg constraints, declines. Natural person = retail investor Stable NAV Yes, fees & gates Yes Yes (retail only) Inst. prime MMFs Most MMF reg constraints, declines Floating NAV Yes, fees & gates Yes No Short maturity prime MMFs Manager prime fund designed to mitigate MMF reg concerns. Low utlilizaton Potentially stable Yes, but potentially less likely Yes No Government MMFs Primary option as treasurers re-allocate cash Stable NAV No Yes No Structured bank deposits FDIC insured bank deposits above $250,000 Stable NAV Yes (T+1) No Yes (Max $100mm per Tax ID) Direct investments in money market instruments Increasing importance in CP market, for investors that have measurable cash flows Book/Market value No, but investor bears losses on sale No Some 11
Continued Strong Utilization of Bank Deposits. Will This Change in Rising Rates? $ Billions 1800 1600 1400 1200 1000 800 600 400 200 Cash and Checking Time and Savings Deposits Money Market Funds 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Fed, Z1. L102 12
MMF Reform Created Significant Change in Short-term Markets Preference for Government Funds, Prime Asset Concentration: Post MMF reform, over $1 trillion flow into government funds AUM stable. Recently, steady flows into prime some concentration of prime assets in largest institutional funds. Largest Institutional Prime Funds $ Billions 1,800 1,600 1,400 1,200 1,000 Govt Institutional Prime Institutional Fund Name Assets ($mils) JPMorgan Prime MMF 37,931 State Street Money Market 11,716 BlackRock Liquidity:TempFund 11,415 Fidelity Inv Prime MMP 11,075 Federated Instit Prime Oblig 8,819 UBS Prime Master Fund 7,666 Wells Fargo Heritage MMF 6,933 Dreyfus Cash Management 6,724 800 600 400 200 0 3/16 6/16 9/16 12/16 3/17 6/17 9/17 12/17 3/18 Source: Fitch, imoney Net $ Billion 210 200 190 180 170 160 9/1/2017 11/1/2017 1/1/2018 3/1/2018 13
Prime and Government Fund Yields Reflect Market Conditions Money Market Funds 7-Day Gross Yields (%) Government Institutional Prime Institutional 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 8/16 11/16 2/17 5/17 8/17 11/17 2/18 Money Market Funds 7-Day Net Yields Government Institutional Prime Institutional (%) 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 8/16 11/16 2/17 5/17 8/17 11/17 2/18 Source: Fitch, imoney Net 14
Fund Flows Compared to Spreads Prime Fund Assets Growing as Net Spreads between Prime and Government Money Funds Between 20 and 35 bps Spread Cumul. Prime Fund Flow Net Yield Spread 0.40% 0.35% 0.30% 0.25% 0.20% 0.15% 0.10% 0.05% 0.00% ($Bil) 100 90 80 70 60 50 40 30 20 10 0 Source: Fitch, imoney Net 15
Increased Focus on Prime Institutional Money Fund Liquidity Conservative Liquidity Management Strategies: Prime fund managers continue to maintain weekly liquidity buffers above the 30% regulatory threshold to assuage investor concerns about the liquidity fees and redemption gates features that went into effect with reform. Weekly Liquidity Dependent on Investor Base: Of 30 institutional prime funds reviewed, average weekly liquidity over a 30-day period was approximately 50%, although funds weekly liquidity targets vary depending on investor base. 100 90 80 70 60 50 40 30 20 10 0 Minimum Liquidity Requirement 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Individual Fund Source: CraneData, Fitch Note: Data from 11/24/2017 to 1/8/2018 16
MMF Portfolio Maturity General Decline Aligns with Rising Rates Weighted Average Maturity - Days # Days 60 Prime WAM Gov WAM 200 50 40 150 30 100 20 10 50 0 0 17 3/01/2013 7/01/2013 11/01/2013 3/01/2014 7/01/2014 11/01/2014 3/01/2015 7/01/2015 11/01/2015 3/01/2016 7/01/2016 11/01/2016 3/01/2017 7/01/2017 11/01/2017 3/01/2018 3/01/2013 7/01/2013 11/01/2013 3/01/2014 7/01/2014 11/01/2014 3/01/2015 7/01/2015 11/01/2015 3/01/2016 7/01/2016 11/01/2016 3/01/2017 7/01/2017 11/01/2017 3/01/2018 # Days Weighted Average Life - Days Prime WAL Source: Fitch, imoney Net
Review Institutional Prime Funds NAV Performance: Meet Investment Objectives? Shadow NAVs Near $1, Consistent and Stable: Since reform implementation, 95% of observations in daily changes in institutional prime fund NAVs have shown no movement. 5% of observations showed that NAV moved up or down by 1 basis point (bp) and in almost no instances NAV moved by 2 bps or more in one day. Fitch s Rating Criteria for Prime MMFs Focuses on Portfolio Risks: Primary rating factors for money funds and other liquidity products evaluate liquidity, credit, and market value risks in portfolios and not secondary factors such as NAV volatility. Daily Changes in Institutional Prime Money Market Fund NAVs No. and % of observations across 38 funds No Move 95% (4,268 observations) 3+ bps up 0% (2 observations) 2 bps up 0% (3 observations) 1 bp up 3% (137 observations) 1 bp down 2% (92 observations) Source: Crane Data, Fitch 2 bps down 3+ bps down 0% 0% (5 observations) (1 observation) 18
Review Institutional Prime Funds NAV Performance: Meet Investment Objectives? NAV Volatility Minor Post-Reform: NAVs for the four largest institutional prime MMFs show minor volatility. 1.005 1.003 1.001 0.999 0.997 0.995 1.005 1.003 1.001 0.999 0.997 0.995 MMF Reform Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 MMF Reform 10/3/2016 3/3/2017 7/26/2017 12/15/2017 1.005 1.004 1.003 1.002 1.001 1.000 0.999 0.998 0.997 0.996 0.995 1.005 1.004 1.003 1.002 1.001 1 0.999 0.998 0.997 0.996 0.995 MMF Reform Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 MMF Reform Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 19
Review Alternative Products: Understand Varying Degrees of Risk Across New Investments Structuring cash between strategic and operating is increasingly important when considering differing risk profiles of prime MMFs and short-term bonds. 20
Review Investment Guidelines: Ensure Effective Cash Deployment Investment guidelines need to reflect changing market: Regulation, proliferation of new products, low yields and shifts in rating coverage change cash management drastically, Review use of credit ratings for credit and counterparty risks: Investment guidelines that do not include Fitch ratings are a competitive disadvantage compared to peers due to less flexibility, less supply, less opportunities Structured Finance Fitch +1 Issuance Banks and Corporates Fitch +1 Issuance ($ bn) 350 ($ bn) 350 300 300 250 250 200 200 150 100 50 192 158 252 216 288 199 259 256 150 100 50 209 221 264 238 229 252 280 256 303 0 2010 2011 2012 2013 2014 2015 2016 2017 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 Industry Standard Investment Language: Investments must be rated A/A/A2 or higher on the longterm scale and/or F-1/A-1/P-1 or higher on the short-term scale by at least two of three said rating agencies (Fitch Ratings, S&P, or Moody s). Money market funds must be rated equivalent of AAA by at least two of three said rating agencies (Fitch Ratings, S&P, or Moody s). 21
Review Investment Tools: Ensure Portfolio Risks are Aligned with Investment Goals Case study: Investors are focused on money fund liquidity but not all MMF AAA ratings are the same at assessing this risk. Which Approach is More Aligned with Your Concerns? Fitch AAAmmf Rating: Liquidity Risk is Essential Component of Criteria Money Market Fund Ratings (assigned to money market funds and other cash management products) are an opinion on a fund s capacity to fulfil its investment objectives of providing ready liquidity and preserving principal. S&P AAAm Rating: Does Not Address Liquidity Fees and Redemption Gates A money market fund rating is a forward-looking opinion about a fixed-income fund s ability to maintain principal value (i.e. stable net asset value and to limit exposure to principal losses due to credit risk. We generally do not lower ratings to Dm when the manager of any fund suspends redemptions for up to five business days. Additionally, if a fund elects to impose a 2% redemption fee this is a credit positive. 22
Contact Us Ian Rasmussen Senior Director Fitch Ratings 212-908-0232 ian.rasmussen@fitchratings.com Tony Carfang Managing Director Treasury Strategies, A Division of Novantas 312-443-0840 Tony_Carfang@TreasuryStrategies.com 23
About Treasury Strategies Treasury Strategies, A Division of Novantas, is the leading treasury consulting firm. Armed with decades of experience, we ve developed solutions and delivered insights on leading practices, treasury operations, technology, and risk management for hundreds of companies around the globe. We serve corporate treasurers, their financial services providers and technology providers for the complete 360 view of of treasury. Solutions: Assessment / Optimization / Selection / Implementation Global Cash and Liquidity Management Cash Forecasting Financial Risk Management Treasury Organization Leading Practices Review and Benchmarking Connect With Us Payments Strategy Bank Relationship Management Technology Business Requirements and Gap Analysis Technology Selection, Implementation and Optimization Treasury Change Management and Resource Support http://www.treasurystrategies.com/networking-communities www.treasurystrategies.com +1 312.443-0840 www.youtube.com/c/treasurystrategiesincconsulting 24
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