US Companies Boosted Cash Reserves Ahead of Storm

Corporate treasurers at major US corporations laid in extra cash reserves as hurricane Sandy approached the US east coast, says Reuters, to ensure they could meet payrolls, buy inventory and contend with other short-term needs after the storm hit New York, New Jersey, and the eastern seaboard hard on 29 October, costing an estimated US$20bn which could easily double over coming days.

Acting on contingency plans put in place following earlier natural catastrophes, Reuters reports that companies which regularly issue commercial paper for funding replenished their coffers at the end of last week and at the start of this week on concerns that bank dealers might experience problems buying and selling the debt.

Investors such as money market funds (MMFs) departed from the commercial paper market following the September 2001 terrorist attacks and again during the September 2008 financial crisis, creating funding issues for global companies. This week’s planning helped reduce hurricane Sandy’s impact on corporations that feared losing bank services and access to investors as the storm lashed against the eastern seaboard.

“We’ve all learned lessons that have got us to the point in 2012 where things are working pretty well,” said Thomas Deas, chairman of the National Association of Corporate Treasurers (NACT), speaking to Reuters. “In general, we were very pleased at how things worked.”

Robert Little, global head of short-term fixed-income origination at Bank of America (BofA), reported that he had heard of only one or two companies that drew down bank lines to meet cash needs this week. “I have not heard of any real painful stories about not getting funded,” he said to Reuters. “A lot of issuers very smartly were overfunded going into the weekend.”

BofA had been “very upfront” in warning corporate customers late last week that funding might be difficult during the storm because of staffing problems among traders and investors, he added. In addition, BofA put up five commercial paper traders at a hotel near its trading desk to ensure they would be available to service clients.

According to colleague, David Darnell, the co-chief operating officer at BofA, the bank has been making every effort to connect with its customers in the affected areas. “These are our customers, we know them, and we are in a good position to help them assess their immediate needs,” he said. “Based on what we have already heard from customers, we project they will need US$2.5bn in additional credit, and we are prepared to provide that on favourable terms to help them recover from the storm. If those needs increase, we will be there. We are committed to getting them through this difficult time.”

Under BofA’s disaster relief programme, bank customers affected by severe storms and floods in Rhode Island, New Hampshire, Maine, Massachusetts, Connecticut, New Jersey, New York, Pennsylvania, Delaware, Maryland, Virginia and Washington D.C., may qualify for loan extensions, lines of credit or special assistance. For small businesses, BofA says it will automatically refund certain fees incurred between Monday 29 October and Monday 5 November in the above states, such as:

  • Deposit fees for overdraft, non-sufficient funds, overdraft protection transfers, extended overdrawn balance charges, and non-BofA ATM fees.
  • Debit card rush and replacement fees.
  • Fees for early withdrawal on a CD.
  • BofA credit card cash advance fees and overdraft protection transfer fees on credit cards.
  • Late payment fees on credit cards, and some consumer and small business loans, including home equity and personal loans.

Counting the Cost

Risk modelling group EQECAT said that it had already revised its initial estimates of the financial impact of hurricane Sandy and now expects insured losses of at least US$10bn-US$20bn and total economic damage of between US$30bn-$US50bn once lost working hours are taken into account. It added that several factors had influenced its revised estimates, including:

  • The large electric and utility losses will trigger significantly more insured losses from business interruption (BI) than were expected from a more typical category 1 storm.
  • The subway outage in New York City (and roadway tunnels) will lead to higher expectations of loss amplification.
  • The continuation of discovery produces more remaining ‘unknowns’ to produce better certainty in the losses.

According to Risk Management Solutions (RMS), which provides catastrophe risk services to more than 400 leading insurers and reinsurers worldwide, Hurricane Sandy has caused the most power outages of any hurricane in history. It has impacted nearly 8.5m homes and business across 15 US states since its peak on 29 October, and it is unclear how long it will take to resolve and remediate the damage. Evacuation orders and flooding affected many homes and businesses, particularly in southern Manhattan where the New York Stock Exchange (NYSE) and subway system were closed, and along the west side of the Hudson River in New Jersey. The state’s coastline at Atlantic City and elsewhere was also badly hit. 

“Power reconnection rates have been shown during previous hurricanes to be an important driver of losses,” said Claire Souch, vice president of modelling solution, RMS. “For example, after hurricane Ike in 2008, over two million residents were left without power in Texas, with power outages lasting more than 10 days along the coast and in the Houston suburbs, with reconnection times rivalling that of Katrina, and significantly longer than all other hurricanes in the past decade. Infrastructure damage – at substations, power lines, and so forth – over a wide geographical area can take time to repair, depending on how quickly and how many repair teams can be mobilised.”

Significantly, RMS has so far declined to offer an estimate of losses from Sandy, on the basis that the damage is so widespread it is too early to offer any realistic figure.

NYSE Shut Down

The other issue to come out of the storms impacting the Eastern seaboard of the US this week was the prevalence of vital data centres in downtown Manhattan, surrounding the New York Stock Exchange (NYSE) which was itself closed for two days while hurricane Sandy raged – the longest weather-related shutdown since the late 19th century.

The clustering of these vital data centres around NYSE is caused by the need for proximity hosting and co-location services to improve the execution speed of trades, particularly automated algo trades. It does, of course, mean though that when natural disaster strikes resiliency and business continuity is perhaps not what it should be, unless back-up facilities have been implemented.

The forewarning of hurricane Sandy’s approach means that it hasn’t done significant damage to the financial markets as traders had time to prepare their positions and active corporate treasuries could adopt ‘safe’ positions before the storm struck so volatility was restricted. No direct flooding affected NYSE, although the shutting down of the NYC subway system did inevitability cause immense disruption.

Numerous treasurers across the US have no doubt had to access business continuity plans (BCP) to ensure a smooth payroll and provide additional funds to operational teams and back-up disaster recovery (DR) centres. The storm should act as a reminder, if any were needed of the importance of BCP and DR and the active role that finance has to play in these scenarios.

 

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