Cash & Working CapitalRisk Management

Debt Limit Deadline Dialogue: Risk, Revolvers, Fiduciary Duty

By May 24, 2023No Comments

Finance teams discuss liquidity, parking cash, the big economic picture and treasury’s role as the clock ticks to June 1.

Bank deposits, the safety of money market funds (MMFs), de-risking balance sheets, fiduciary duty and revolving credit facilities are among the topics dominating recent discussions among NeuGroup members about liquidity and the possibility of the US government defaulting on its obligations if a deal to raise the debt ceiling isn’t reached by June 1.

Watching and waiting. The vast majority of treasurers are talking to fund managers and bankers, doing scenario planning and preparing to take action if necessary. Few have said they are making moves or shifting course. “We’re all watching each other’s behavior and it doesn’t seem to be changing all that much,” one treasurer said at a debt ceiling session for members of NeuGroup for Technology Treasurers.

  • “We are having some conversations with our banking partners to see what kind of deposits they can take if we want to move funds out of our government [MMFs] and into just deposits with the banks,” said another treasurer.
  • “I could have sworn we just had conversations where people were afraid to put their money in banks,” a third member said, referring to the stampede out of deposits into MMFs as the banking crisis of confidence unfolded. “And now you can’t put your money in money market funds!”
  • He said that half-jokingly: He and others are hearing from fund managers that government MMFs have limited or no exposure to treasury bills that could be adversely affected by a technical default. Managers are also telling members that that a significant portion of government MMF assets are invested in the repo market and agency debt.

Deposit decisions. Finance teams at corporates considering keeping more cash in bank deposits may want to look beyond large, US GSIBs. One treasurer said some big US banks don’t want deposits, noting the relatively low interest rates they’re paying. One option: non-US banks. “We’ve parked money with BNP, Mizuho—they are all clamoring for dollar deposits in the US,” he said.

  • Another treasurer agreed. “We just put a six-month time deposit with Mizuho. Great rates. They want to fund their lending business. It makes a lot of sense.”
  • Others are going the other direction. The collapse of SVB left a “bad taste” for one member, whose company is cutting down on deposits and favoring government MMFs and commercial paper (CP).

Advice on revolvers. At the end of a discussion on the liquidity of the CP market in times of crisis, one treasurer broached a topic few members have said they are discussing internally as the debt drama plays out: tapping revolving credit facilities. This member’s unequivocal advice to peers: use your revolver when necessary.

  • “Draw on your revolver,” he advised. “Don’t think whether or not you should do it. You draw it. People get caught by always trying to avoid that. Don’t worry about the cost. If there’s a day where A1/P1 [CP] can’t get done, I’d draw on the revolver and sit on that cash and wait for it to clear. When you see trouble brewing, don’t wait.”
  • In a follow-up interview, he recalled the onset of the pandemic, when some companies drew on revolvers. Some of those that didn’t draw wanted other short-term bank funding. “Too many companies waited to see what would happen with developments on Covid and the impact on their businesses before doing something.
    • “The banks were prioritizing their client lists to determine in what order those companies may receive funding because they couldn’t fund everyone’s requests at the same time. I do not want to be fighting other companies for liquidity. Take the risk off the table early,” he said.

The bigger picture. One treasurer who has already “de-risked the cash investment side” of the balance sheet is now using a “wider aperture” to examine what will happen to the broader market in the event of a liquidity squeeze. Her team is doing scenario modeling and conducting stress tests, forecasting what would happen to interest rates and currencies, for example. “We are more concerned about wider market reactions,” she said.

  • Cash is also not the main concern of another treasurer. But he’s somewhat worried about what will happen if the federal government—a major customer of his company—can’t pay bills on time. Other treasurers have raised the same concern.
  • His company has enough liquidity to withstand a short-term interruption. But “that would be extremely detrimental to so many metrics that we think about, with regard to DSOs and collections. That’s the bigger risk with the government being such a large client of ours.”

Treasury and fiduciary duty. Members at the tech session rejected the idea of using any major market dislocation as an opportunity to pick up extra yield. At least one member of a different group has expressed interest in buying one-month treasury bills in the event of a technical default by the US government.

  • “From a fiduciary responsibility, even though you can pick up yield, if you go after some specific T-bills, I don’t think we’re paid to do that,” one treasurer said. “I don’t think that’s the right call.”
  • Echoing that sentiment, another treasurer said, “Our job is not to chase yield and chase the bids. We leave that to Goldman and JPMorgan and their cash trading desks. Our job is to de-risk our actual balance sheet, so that’s what we’re trying to do.”
Justin Jones

Author Justin Jones

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