Persistently low yields have led corporate cash managers and corporate treasury consultants to think more creatively about how to achieve higher returns without taking excessive risk and maintaining appropriate liquidity, according to Fitch Ratings.
In its report, entitled
‘Money Market Tranches in Structured Finance’
, the credit ratings agency (CRA) says that cash managers seek safety of principal and liquidity while optimising yield to the extent possible. Increasingly, this involves dividing a corporation’s liquidity needs into several ‘buckets’ based on when the cash is needed and the accuracy of their cash forecasting process. This more focused analysis of liquidity needs has led some cash managers to invest a portion of their companies’ cash for longer time horizons in order to maximise yield.
Fitch notes that, in certain cases, cash may be held for longer term strategic reasons and therefore may be invested in longer dated high quality securities offering higher yields than money market funds (MMFs), demand deposits or other short-term instruments. The CRA says it understands that highly rated structured finance (SF) securities are increasingly being considered as part of this shift.
“We have seen a growing interest in the money market tranches of SF securities on the part of corporate cash managers,” Fitch comments. These securities, which showed steady performance during the financial crisis, are designed to be 2a-7 eligible investments for MMFs with final legal maturities of 397 days or less. Approximately 95% of the structures that match assets to liabilities, rather than rely on third-party liquidity, have paid in full and the balances affirmed at F1+ by Fitch. This is the predominant structure in the US market today.
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