U.S. Corporate Finance Execs Prize Safety and Liquidity

Companies continue to add to historically high cash holdings, shifting to safest vehicles, according to 2010 AFP Liquidity Survey

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Association for Financial Professionals

Jun 28, 2010, 10:57 ET

WASHINGTON, June 28 /PRNewswire/ -- U.S. corporate finance executives appear unconvinced of the vibrancy of the economic recovery at hand, as indicated by investment patterns, according to a new survey released today by the Association for Financial Professionals (AFP). Despite improved business conditions, many U.S. corporations report that they have continued to expand their cash stockpiles, that they are investing more in conservative vehicles, and that they have no immediate plans to start deploying their cash in their businesses.

(Photo: http://photos.prnewswire.com/prnh/20100628/DC27481)

(Photo: http://www.newscom.com/cgi-bin/prnh/20100628/DC27481)

The 2010 AFP Liquidity Survey (http://www.afponline.org/liquidity), underwritten by Promontory Interfinancial Network, LLC, found that a full 43 percent of U.S. corporations had larger U.S. cash and short-term investment holdings this May than they did six months earlier. Only 24 percent of respondents reported that their short-term holdings had shrunk during the past six months.

"The survey makes one thing perfectly clear: safety and security are foremost on the minds of financial professionals," said Alan Blinder, Vice Chairman, Promontory Interfinancial Network, Princeton economist, and former Vice Chairman of the Federal Reserve Board.

Organizations that increased their cash holdings over the past six months attributed the increase to a greater focus on having sufficient cash on hand to "maintain operations and getting through the recession" and on "working capital improvement."

These findings are consistent with Flow of Funds data released by the Federal Reserve for the first quarter of 2010, which had pegged corporate cash holdings at their highest point since 1963.

When asked about their outlook for their cash, three-in-ten reported that they expect to further increase their cash holdings in the next six months and the majority expects to maintain their current level of cash holdings.

The AFP survey found that organizations invest approximately 74 percent of their short-term investment balances in three safe and liquid vehicles: bank deposits, money market mutual funds and U.S. Treasury securities. In contrast, during the 2006 reporting period, they invested only 56 percent of short-term investment holdings in these safest of short-term investments, indicating they had more confidence in higher yielding investment alternatives. The largest repository of short-term investment holdings are bank deposits. On average, 42 percent of corporate cash and short-term investment holdings are maintained in bank deposits, compared to only 25 percent two years earlier.

"Corporate executives will continue to sit on their cash until they have renewed faith in the global economy and capital markets, and have reason to believe that a pickup in consumer and corporate spending is imminent," said Jim Kaitz, President and CEO of AFP.

"Investors have recently been tolerant of elevated cash levels due to their own concern about the safety of their investments. Eventually, investors will demand that this cash be invested back in the business – in stock buybacks and acquisitions, in overseas growth, in research and in jobs – or returned to them," said Kaitz. "CEOs will be faced with difficult questions if these elevated cash levels continue."

Kaitz also noted that increased cash holdings make corporations less reliant on capital markets for funding strategic investments, and that CFOs and treasurers should be able to act quickly when they do decide to seize opportunities. However, the question remains as to when financial professionals will feel comfortable making these strategic investments, or even evaluating higher-yielding short-term investments.

ABOUT THE 2010 AFP LIQUIDITY SURVEY

The survey, now in its fifth year, provides CFOs, treasurers and other financial professionals data to use as a benchmark for their companies' short-term investment strategies. AFP conducted the 2010 survey in May and received responses from 337 professionals. The survey respondents were senior finance and treasury executives from a broad range of companies with annual revenues over $500 million.

Survey Report: The 2010 AFP Liquidity Survey is available on http://www.afponline.org/liquidity
Chart: Allocation of Organizations' Short-Term Investments in Ultra-Safe Investment vehicles 2006-2010: http://www.afponline.org/img/LQ-Video_Graphics.gif
Video: AFP's Managing Director of Research and Strategic Analysis discusses results and implications of the 2010 AFP Liquidity Survey: http://www.afponline.org/pub/multimedia/videos/2010_liquidity_survey.html

ABOUT AFP® (www.afponline.org)
The Association for Financial Professionals (AFP) serves a network of more than 16,000 treasury and finance professionals. Headquartered outside Washington, DC, AFP provides members with news, economic research and data on the evolving world of treasury and finance, as well as treasury certification programs, networking events, financial analytical tools, training, and public policy representation to legislators and regulators. AFP is the daily resource for treasury and finance professionals.

AFP's global reach extends to over 150,000 treasury and financial professionals worldwide, including AFP of Canada; London-based gtnews, an on-line resource for the treasury and finance community; and bobsguide, a financial IT solutions network.

SOURCE Association for Financial Professionals