Two days & two significant to make it three? (I hope not!)


First, Standard & Poor's shot heard around the world as they downgraded the US credit rating to AA+ for the first time in generations.  And then hard on the heels of the market turmoil caused by the S&P action, "The U.S. Federal Reserve signaled it plans to keep its benchmark short-term interest rate close to zero for at least another two years as it sharply downgraded its view of the U.S. economy." (WSJ, August 9, 2011)


As companies learned in the market collapse of 2008, one of the key weapons in their arsenal to combat this turmoil is to fill their coffers with cash as a hedge against an uncertain future.  In fact, in early June the Federal Reserve reported that US companies were continuing to hoard cash at unprecedented levels with balances at that time climbing to $1.91 Trillion .   It appears that this trend will continue and possibly even accelerate as large companies sell corporate bonds (while corporate borrowing rates remain relatively low as the market shakes out) in an effort to increase their cash holdings, as reported in the Wall Street Journal yesterday:


"Although the S&P downgrade threatens to dry up already thin trading in the investment-grade-bond market, rates remain relatively low on a historical basis for corporate borrowers, and their borrowing is likely to pick up, Mr. Bender said. Indeed, companies of all stripes moved to bolster their finances last week, prior to the downgrade. A raft of investment-grade companies including Coca-Cola Co., Hyatt Hotels Corp., J.P. Morgan Chase & Co. and Kinder Morgan Energy Partners LP sold about $5 billion of bonds. But rather than using these funds for hiring, capital expenditures, or even shareholder dividends, corporations are filling their coffers further, said Mr. Carfang of Treasury Strategies.

Those hoping that executives are looking for an excuse to loosen the purse strings are headed for a disappointment, said Steven Lear, deputy chief investment officer at J.P. Morgan Asset Management. "We see these large surpluses held by Asian countries and that's a natural response to the crisis they went through in 1997-1998, saying 'You know what, we're never going to be short cash again,' " Mr. Lear said. "Corporate treasurers in the U.S. went through that in 2008, and their reaction is going to be the same."


And this is in the light of continued historic lows in short term cash rates of return that, per the Fed's comments today, will apparently remain close to zero through mid-2013!


This presents a bit of a conundrum for corporate Treasurers who, on the one hand are embracing the need to keep cash on hand as a hedge against uncertainty, but on the other hand are tasked with managing that liquidity and getting the most out of it that they can.  The problem being that there are precious few traditional options for parking liquidity and getting any sort of short term return on that cash -- Treasurers keeping cash on the balance sheet usually will “invest” it in highly liquid, highly secure short term securities that are tagged to these benchmark rates (Money Market Mutual Funds, Interest Bearing deposit accounts, US Treasuries, etc.), which typically earn the benchmark rate MINUS some spread…so basically nothing. (As of 8/8/11 -- Fed Funds = 0.13% APR; 3 Month LIBOR = 0.27% APR).


There IS a better alternative!


Ariba, Inc.'s Discount Pro(TM) product is giving dozens of corporations an alternative way to deploy their cash in similarly short term increments (30, 45, 60+ days) for a rate of return far higher than they can otherwise achieve and in an “investment” that is perfectly safe and benefits their own supply chain. Utilizing the Ariba Network(TM) to connect to their suppliers, these corporates are able to collaborate over favorable cash flow terms with their suppliers and automate the process of providing early payment to their suppliers from their piles of cash in exchange for a discount equating to anywhere from 10% - 36%+ APR return on that cash.


Not only does this benefit the buying organization, it also is of great value to their suppliers.  While suppliers’ access to credit has loosened somewhat in the past year, it has not done so dramatically, and those who access it often have to do so at the cost of fairly restrictive loan covenants while adding debt to their own balance sheets.  Taking early payment, on the other hand, increases cash flow without debt and lowers DSO for suppliers, all at a cost that is often lower than their alternatives...and far more readily accessible!


What is your compnay doing with your cash?  Have you thought about your supply chain & collaborating to satisfy both their cash flow and your cash return needs?  See here for more information about how Ariba can help.