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AFP 2018 Blog
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Riding the Tide of Change: How Treasurers are Investing in the Wake of Tax Reform

May 15, 2018

The convergence of tax reform and shifting market dynamics have prompted many corporate treasurers to revisit their investment structure to help ensure they are achieving a strategy that appropriately balances safety and yield. Amid changes to capital structure and evolving liquidity needs, we believe there is ample opportunity for new investment themes and ideas, or reconsideration of the tried and true.

Restructuring Amidst Tax Reform

Tax reform and repatriation in particular have put once stagnant money into motion.

While there is no single right answer for corporations managing through tax reform and repatriation, the response from the broad range of BlackRock clients reveals a range of possibilities:

•   Immediate transfer of offshore portfolios into onshore portfolios
•   Organic duration shortening of offshore portfolios
•   All-out sales of these portfolios for losses offset by other tax gains.

Still others are taking no action at all either because of the extended nature of the payment period, the current uncertain market environment or because the pools of cash offshore are operating as desired and the intention is to leave them in place.

Opportunities with Money Market Funds

As for assets that are repatriated to the United States for investment, government money market funds generally seem to be a popular option for immediate liquidity. However, some corporate treasurers are reconsidering the once-popular prime money market funds as an investment opportunity, despite their floating NAV, because they are currently offering higher yields. For some companies, we believe, as the realities of a decrease in income from former offshore investments set in, the total return potential of a prime money market fund is an appealing opportunity. Doug Tropp, Global Treasurer at Booking Holdings, tells BlackRock, “We will perform due diligence on the prime money market space to determine its viability as part of our investment strategy, especially in light of potential income differences from longer-dated offshore portfolios being repatriated.”

For others, however, prime funds remain out of favor for this type of investment. Jeff Knapp, CTP, Director of Global Investments at The Coca-Cola Company, points to the floating NAV and says, “I can’t risk my principal, especially for the current small spread over government money market funds. It doesn’t warrant the risk in my mind. We will, of course, continue to monitor the spread as the Fed raises rates this year.” This aversion to the floating NAV means that Coca-Cola remains, as Knapp puts it, “comfortable with prime funds in the offshore space for the time-being as they still operate with a constant NAV, while we carefully track and assess the upcoming EMEA reforms.”

Government money market funds can serve as viable stop-gap solutions for clients while future capital structures are established.

For many like Coca-Cola, government money market funds remain the best option to safely park cash built up towards payment of repatriation taxes, or for use towards a specific near-term corporate action such as share buybacks, increased dividends, debt repayment or even increased employee benefit payments. Government money market funds can serve as viable stop-gap solutions for clients while future capital structures are established, as strategic planning is completed, or any number of other changes occur in the markets.

Opportunities for Customization

Treasurers contending with tax reform changes must also contend with changes to their existing corporate issuance strategies. Whereas short-term commercial paper issuance was once commonly used to float the domestic operational needs of many corporations, today, returned offshore cash is affording many companies investment options previously not available. Commercial paper need not be the only way to cover domestic operational needs in a post-tax reform world.

It’s important for corporate treasurers to review the segmentation of their balance-sheet pools and ensure liquidity needs and investment allowances are well defined.

Under this new funding construct, it’s important for corporate treasurers to review the segmentation of their balance-sheet pools and ensure liquidity needs and investment allowances are well defined. As allocations become clearer, treasury teams should use the size and scale options of their cash management partners to help ensure they are taking advantage of the current investment dynamics. “As we determine the ultimate capital structure for the organization, the liquidity needs will become more apparent, and with this segmentation, we can determine what works best for us as there are variables to review for both commingled funds and separately managed accounts,” Tropp says.

Coca-Cola’s Jeff Knapp similarly focuses on segmentation so he can deploy appropriate strategies for different cash needs. In his opinion, this is the best way to expand limited treasury resources, enhance market access, improve insights, and increase opportunity - all especially important in these fluctuating markets. “In addition to utilizing money market funds and direct securities for investing, we outsource some of our cash into separately managed accounts,” he said. “Outsourcing provides necessary diversification and the potential for outperformance as we are able to extend further out the curve and identify additional opportunities.”

For many treasury teams, leaning on an experienced manager who can adjust to changing market trends while building on the necessary credit analysis, risk pricing and portfolio structuring needed to seek competitive risk-adjusted returns is an effective way to keep differentiated pools well-positioned amidst market changes.

Diversity is Key

As always, but of particular importance in a shifting market environment, in our view it is important to maintain a wide variety of both liquidity and yield-producing investment options. We believe, with the right planning and the best tools, corporate treasurers can take advantage of this tide of change to seek new and improved risk-adjusted opportunities.

To learn more about how to adapt your organization’s strategy to disruption in the markets, be sure to attend our session at AFP 2018, “Riding the Tide of Change”, where you’ll be able to hear directly from our featured speakers, Doug Tropp and Jeff Knapp.

Thomas Kolimago, CFA
Managing Director
BlackRock

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This material is provided for informational purposes only and does not constitute a solicitation in any jurisdiction in which such solicitation is unlawful or to any person to whom it is unlawful. Moreover, it neither constitutes an offer to enter into an investment agreement with the recipient of this document nor an invitation to respond to it by making an offer to enter into an investment agreement. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. You should consult your tax or legal adviser regarding such matters.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of May 2018 and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Reliance upon information in this material is at the sole discretion of the reader. 

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