Capital AllocationCash & Working Capital

The Cup Runneth Over: Corporates Awash in Cash Mull Options

By October 13, 2020 No Comments

Treasurers discuss concerns about companies rushing to deploy cash too quickly.

When uncertainty abounded at the start of the pandemic, companies drew down revolvers, issued debt, cut capital expenditures (capex), halted share repurchases—whatever it took to conserve cash for the troubling times ahead. 

  • A few months later, after massive government stimulus and a recovering economy, many are awash in cash and trying to figure out what to do with it—or not do with it.
  • At a recent NeuGroup meeting for large-cap companies, several treasurers said their companies’ cash balances are several times higher than normal, echoing a refrain being heard across the NeuGroup Network this fall.

Temptation and perspective. Among the fresh insights about excess cash voiced at the large-cap meeting: Treasury’s role in keeping corporates from making potentially rash short-term decisions designed to keep activists and Wall Street analysts happy. 

  •  “I worry about the temptation for senior management and the board to deploy cash as quickly as possible,” one treasurer said. 
  • As a result, treasury may need to add perspective when C-Suite leaders who previously considered an M&A deal out of reach reconsider as cash balances rise.
  • One member said his team seeks to keep management focused more on the company’s net debt level and less on reducing cash. “That’s what we actually talk about in earnings calls—the change in net debt year to date, and when we think about deleveraging,” he said.

Better safe than sorry. The size and timing of more federal aid to address the pandemic and anticipated rise in infections remains uncertain, prompting treasurers to recommend caution.

  • “Enough uncertainty remains that we can tell the story: We’ll continue to monitor cash and slowly drift [the level] back down,” a treasurer at a large manufacturer said.
    • “That’s absorbing a lot of time and thought around just what is that strategy, and how does it look over the next year or so.”

Step out on the yield curve? Terming out cash to pick up extra basis points is the approach one member’s team is contemplating. Other treasury teams are considering alternative asset classes (see this story). 

  • Some corporates, though, may want to reduce at least some cash, especially those with higher revenues expected during the holiday season.
  • That’s not so easy when capex has already been slashed, and the social justice movement poses political risks for companies rewarding investors before employees and their communities during a pandemic. 
  • “We’ve seen some companies turn on share repurchases with the caveat that they’re increasing wages,” one member said, adding his company is thinking through when to resume repurchases given that Covid looks far from over. 

Street pressure. Some Wall Street firms are pushing liability management to take advantage of historically low rates. 

  • But one treasurer said that after paying up to issue precautionary liquidity, some companies must now pay a premium to buy back the debt, making it better to hold on to the cash in case the pandemic worsens and the extra funds are needed. “We’re in wait and see mode,” the treasurer said.
  • Another member described a recent exercise in which his team reviewed peers’ capital structures and had to explain to the board why a competitor has lower weighted average coupons and maturities. 
  • “We had to remind the board that the company had to pay up for that, put cash upfront in order to refinance into a longer term,” he said.
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Justin Jones

Author Justin Jones

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