Approaches to Investing Trapped Cash

So the cash loses its economic value, while counterparty risk quickly becomes an issue, over and above the sovereign risk concerns. Further, depending on the company’s accounting policies, exchange losses can negatively impact reported profits, as the local currency depreciates.

The purpose of this call was to discuss how to make the best of this bad situation – to look for ways of managing the issue.

• Generally, there was consensus that standard risk management approaches continue to apply. No-one is prepared to ignore their usual principles.
• However, there was consensus that some flexibility may be appropriate. The question is – how much?
• The first problem is bank deposits: all participants preferred to continue to use international banks, even if they often provide lower rates than local ones. The counterparty risk issues with local banks were not viewed as sufficient to offset any increased return.
• Most participants were in favour of putting pressure on the international banks to increase rates: in Latin America,  the European banks were generally viewed as being more responsive than their American counterparts, with Santander being used frequently: BBVA was mentioned once.
• Many participants view the purchase of bonds issued by the local government as being an attractive way of enhancing return, but:
• These need to remain short dated, so they can be held to maturity, and avoid the capital risk on long dated, illiquid bonds.
• Concern was expressed over the need to have proper custody arrangements: no-one cited a country where they have been able to satisfy themselves.
• Liquidity is a potential issue, as these markets do not typically have liquid bond markets. This should be handled by layering the investments to ensure cash is available, should there be an opportunity to repatriate it.
• Cash should be used, if possible: any local capital expenditure plans can be a good way of ensuring cash does not build up.
• Alternative investments were discussed: one participant had explored purchasing oil, jewellery and other assets – but these were quickly dismissed. Equity investments and local money market funds were of no interest.
• One alternative asset which attracts real interest is real estate – though this can pose a credibility issue for those treasurers (the majority!) who normally oppose investing corporate cash in this asset class. Generally, most participants are open, at least, to purchasing the office they occupy – though no-one wanted to incur debt to finance these assets, and it was pointed out that the sellers often want to be paid in dollars. This can defeat the purpose of the whole exercise.

Bottom line: everyone wants to increase the return on trapped cash, but no-one is prepared to abandon their risk management principles. If the custody issues can be solved – and it is a big “if” – short dated local government bonds attract interest, while most participants prefer to stick with cash deposits with international banks, even if this means applying pressure to increase yields. Of the alternative investments, real estate is amongst the most acceptable – but it also has many issues. So, it is back to managing the business so trapped cash does not build up in the first place…..