EuroFinance

The pandemic prompted firms to bolster already enormous cash piles through massive issuance in the capital markets with rates near zero in case of long-term and catastrophic economic disruption. Is this level of cash necessary to hedge the uncertainties created by COVID-19, supply chain disruptions, commodity inflation and geopolitical instability? 

Speaking at the 2022 EuroFinance Treasury Management International in September, treasurers at Amazon, Maersk and Pearson explain the big picture thinking that has driven their cash accumulation strategy, the rationale behind their current cash management strategies and the longer-term cash scenarios they are planning for. 

Cash accumulation

Many businesses drew down their lines of credit in the early days of the pandemic to shore up liquidity and prepare for a potential market collapse.

Holding approximately $36 billion in cash & cash equivalents and $18.9 billion in marketable securities at the start of 2020, the e-commerce giant, Amazon ramped up its liquidity by 55% to a staggering $84 billion at the end of 2021, equally distributed amongst cash and marketable securities. 

“This is the first time most of us here experienced a pandemic. The scale of the impact it has on the liquidity market is unknown. Given treasurers are risk managers by nature, one of the liquidity risk mitigation plans would be to increase the cash buffer amid the volatile financial market and uncertainty about the current and future revenues and cash flow.” Winkie Choi, Head of EMEA Treasury at Amazon told delegates at the conference. 

Similarly, the British multinational publishing and education company, took steps to protect against the unexpected. Pearson’s in-person assessments and qualifications business segment, which contributed 35% to its revenue [in 2021], was forced to temporarily halt examinations due to lockdown restrictions, initially leading to a cash outflow as students cancelled their pre-paid exams, while its virtual learning business drastically picked up as students remotely attended classes.

While the Assessments and Qualifications business was quickly able to recover, through moving testing online and holding extra exam sittings once restrictions started to ease, the risk of further lockdowns and disruption meant that having strong liquidity would allow for continuing investment to benefit from the growth in Virtual learning and protect against any short-term disruption. As a result, the treasury team accelerated its existing re-financing plans to effectively increase the company’s base cash balance by about $400 million through 2020, this supplemented disposals agreed before the start of the pandemic.

“We needed to ensure that we had enough money to cover any downside in assessments, or in other parts of the business, but also make sure that we had enough money to invest in the virtual-learning business.” said James Kelly, group treasurer at Pearson. 

On the contrary, the Danish shipping company Maersk, active in ocean and inland freight transportation, didn’t tap into its revolving credit facility (RCF) to shore up liquidity as freight prices went up significantly during the pandemic due to excessive supply chain bottlenecks and increased demand around the world. However, the company refinanced one of its RCFs to ensure that it at least had a fresh liquidity buffer to lean on.

Shift in strategy

The sudden jump in Maersk’s cash balance posed a problem for the treasury team as it had reached a nominal amount limit on the amount of cash it can keep with a bank while many of the US banks, already flushed with cash, were reluctant to take on more deposits. 

Therefore, the treasury team’s traditional approach to investing in liquid funds and allocating cash to bank deposits with longer maturities was simply not enough to allocate the excessive cash, which meant that they had to quickly develop a bond portfolio to diversify some of the cash. 

“All of a sudden, we found ourselves sitting on a massive cash position, which presented some completely new challenges to us that we had never foreseen and we had to revise our budget forecast quite a few times, during the process of the crisis” said Carl Burman, Head of global cash management – treasury & risk, at Maersk. 

Meanwhile, Kelly told delegates that the financing allowed the company to continue to invest organically and in mergers and acquisitions, while repaying debt at maturity using the cash balances held. 

Going into 2022, the company reviewed its liquidity and capital position and announced a £350m share buyback programme, which is now substantially complete. Kelly commented “A strong set of 2021 results and a positive outlook for 2022 meant that the company was able to unwind some of the excess liquidity built up during the early part of the pandemic.” The company also announced on 15 November its intention to repay the remaining $92m of its $500m bond due May 2023 via a make-whole exercise. 

The treasury team at Pearson invests in a mix of gilt backed money market funds, for security, and with its banks via corporate deposits. It has also been working with a bank on a deposit solution allowing investors to place proxy deposits with the Bank of England, thereby reducing any counterparty risks that the treasury team was cautious about. 

On the other hand, Amazon already operated a portfolio of bonds and money funds before the pandemic which increased from $18.9 billion before the pandemic to an enormous $59.8 billion at the end of 2021, after shrinking back to its pre-pandemic levels of about $23.7 billion in September 2022. 

Despite the expansion in asset classes other than bank deposits, yields on investments have remained subdued throughout 2021 due to near zero benchmark rates by central banks in key developed markets. But with the recent rise in rates in an effort to tame inflation has resulted in treasurers to look at money market funds in order to tap the rising yields on these debt instruments, as earlier reported by EuroFinance.