• insurance
  • Investing
  • money market funds
  • prime funds
  • working capital

Expect the unexpected


From cash investments to insurance renewals, treasurers are experiencing an environment not seen since 2008. While some lessons from history can be applied to the current Covid-19 crisis, other challenges are unique to today.

by Ben Poole

Published: 28 April 2020

The fallout from the Covid-19 global pandemic is being felt across the breadth of treasury operations, in both expected and unexpected ways. Facing potential hits to revenues, treasurers have compressed forecasting timescales to maintain working capital, and have been reviewing short-term investments to ensure they don’t lose access to liquidity.

As with the last crisis, money market funds that invest in riskier assets have seen rapid outflows as treasurers become more risk-averse. There are some noticeable differences between current events and 2008, however. Unlike with Lehman Brothers, treasurers say that central banks are now ahead of the curve.

“In conversations we’ve had, the concern over liquidity this time around is not the same as the financial crisis” explains Jon Burkhead, senior director, Global Treasury at information management solutions provider OpenText, which has approximately 60% of its cash actively invested in very liquid short-term securities. “The Fed has made it clear through policy and actions that they are willing to support the market in any way that’s needed. Having said that, we have still diversified our short-term investments in government money market funds [MMFs] and some to a lesser degree in our sweeps to prime funds”.

The 2008 financial crisis saw many corporates rewrite investment policies to become a lot more conservative. US-based software company Citrix Systems has held firm with this approach to avoid any short-term liquidity shocks. The firm’s total cash, cash equivalents and short- and long-term investments totalled over US$563 million in the Q1 2020 financials released on 23 April, but just US$25.644 million of this resides in short-term investments. Bruce Edlund, senior director, assistant treasurer at Citrix notes that these kinds of conservative investment policies have been under pressure in recent years:

“We were getting pitched prime funds so many times over the past four or five years, being told ‘It’s okay now, everybody’s getting back into prime funds, as long as your accounting team is okay with a penny fluctuation in the asset value’. There was a year where we almost started to make some changes to our investment policy, until I talked to a couple of our third party investment managers. They showed us a prime fund at the end of a quarter and picked through all the securities in there. That scared us! Thankfully that meant we didn’t pursue that any further, as now I’m seeing all of these prime funds have gates and fees and low liquidity”.

Cash forecasting under stress

Cash flow forecasting has also been effectively reset as a result of the Covid-19 crisis, with longer forecasts ripped up as the focus has switched to shorter-term and more regular forecasting.

Jon Burkhead, Senior Director, Global Treasury, OpenText

“We’re monitoring collections and seeing what the impact is on our working capital requirements” says OpenText’s Burkhead. “We do business in a lot of countries and typically have different entities in each of those countries. The cash is managed within each entity as opposed to at a consolidated level. We use a pooling structure in EMEA that simplifies cash management in that region. We’re having to forecast at that grassroots level instead of on a consolidated basis, because intercompany transactions have to be considered for any deficiencies that have to be funded. We used to calculate those numbers maybe once every six months, but now we’re doing it several times a month”.

Stress testing cash flow forecasts has become particularly important, as treasury is getting questions from the CEO and the board, interrogating the accuracy of forecasts in volatile times.

“We are stress testing all the time,” says Citrix’s Edlund. “We’ll take collections out completely for a couple of days, for example, just to zero them out, or step up payments a little bit. There’s so much art to a cash forecast. Our leadership team wants to know, what would happen if days sales outstanding doubled, or what would happen if we lost 10% of our collections. We’re stress testing from that standpoint”.

New threats

Bruce Edlund, Senior Director, Assistant Treasurer, Citrix

As well as the liquidity differences, the coronavirus crisis is having other unique impacts that differentiate it from events such as the 2008 financial crisis. For example, in the US where cheques are still commonly used and banks have lockbox operations, policies such as social distancing and the cancelling of non-essential travel are impacting manual financial services.

“We’re concerned about those bank departments that are very manual” says OpenText’s Burkhead. “Some of that work can be distributed electronically, but there’s still a lot of physical handling of envelopes and the cheques to get them scanned. We have seen a decline in deposits from that activity. While we can’t necessarily attribute it to the bank lockbox operation, something’s happening where that activity for us has slowed down in the region of 10-20% over the past month”.

The crisis is also causing a headache operational insurance for corporates, who are now facing hikes in premium renewals for a number of different insurance policies.

“We are seeing big impacts to our renewals which are coming up” Burkhead continues. “Our DNO [directors and officers liability insurance] coverage, our cyber, our E&O [errors and omissions], our employment practices coverages… We’ve been benefiting from a soft market for 10 to 15 years, but now we’re seeing 40% or more increases on premiums for current renewals”.

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