Companies Stockpiling Cash, Credit Access Still Tight, AFP Survey Shows

With little easing in access to credit, US organisations are continuing to stockpile cash, according the Association for Financial Professionals’ 2009 Liquidity Survey, in association with The Bank of New York Mellon. Almost three-quarters (72%) of companies had increased or maintained their US cash balances during the first part of 2009.

According to the new AFP survey, 42% of organisations increased their US cash and short-term investment balances between December 2008 and May 2009, while 30% saw no significant change in short-term cash balances. More than a quarter (28%) of organisations saw their US cash and short-term investment balances deteriorate over the six-month period. Organisations with non-investment grade ratings were more likely to have seen their cash and short-term investment balances shrink.

“Despite unprecedented government action, the lack of any significant thaw in short-term credit access is extremely troubling and many companies are reacting by stockpiling cash,” said Jim Kaitz, President and CEO of AFP. “While, many organisations with their strong cash positions will be well-positioned once the economy begins to improve, overall economic conditions will not improve until organisations can begin using their cash in activities that foster growth.”

This is the fourth annual survey performed by AFP focusing on how organisations manage their short-term investment portfolios. This year’s survey also repeated questions about credit access that AFP asked its members in two surveys conducted late last year as credit markets deteriorated.

Despite recent reports about an easing in the corporate credit markets, over half (59%) of survey respondents indicate that their organisations’ access to short-term credit has not changed significantly since the beginning of 2009. A larger percentage of organisations reported that credit was less available (27%) versus 14% that indicated that credit access had improved. Two-thirds of organisations expect their access to short-term credit to remain the same over the next year.

Overall, financial professionals do not expect their organisations’ to decrease short-term cash and investment balances over the next year. Only one-quarter (27%) of organisations expect to decrease their US short-term cash and investments balances.

“The turbulence of the present period has had no small impact on the liquidity needs and practices of individuals and corporations worldwide,” said Eric Kamback, BNY Mellon’s CEO of treasury services. “The survey also revealed that many believe the tightening of available credit will persist in 2009, so conservative, safety-based investment strategies can be expected to continue.”

Organisations have moved to a more conservative investment strategy for their short-term balances and have reduced the number of vehicles they use for short-term investments. Organisations are allocating 78% of their short-term investment balances to three safe and liquid vehicles: bank deposits, money market mutual funds and US Treasury securities. The use of commercial paper, separately managed accounts and auction-rate securities declined significantly over the past year. While investment policies allow for the use of four or more investment vehicles, on average, organisations use 1.6 investment vehicles compared to 2.4 options in 2008.

The vast majority (93%) of survey respondents indicated that their organisations have taken at least one action as a direct result of the decline in short-term credit access in September 2008. The following are some of the most widely implemented defensive actions taken:

  • Reduced capital spending (70%).
  • Reduced or froze hiring (69%).
  • Considered/implemented staff reductions (58%).
  • Moved all or most short-term investments to bank deposits and US Treasury securities (44%).

Finally, financial professionals are generally hopeful about an economic turnaround. Almost three-quarters (74%) of survey respondents believe that the worst is over and that credit markets will start easing by the end of this year.

In May 2009, the AFP conducted the survey on strategies associated with the management of short-term investments, receiving 360 responses from professionals at a broad range of organisations. Respondents represented organisations in manufacturing, insurance, energy, financial services, retailing, and other industry sectors.


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