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Treasury strategies amidst Interest rate shifts

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The high liquidity and security of U.S. money market funds (MMF) makes them a cornerstone of cash management for treasurers. With Treasury bills and commercial paper markets offering elevated yields, these funds present significant opportunities—but they are not without risks tied to the performance of underlying assets. 

At the 2024 EuroFinance Global Treasury Americas West Coast, treasury leaders from AI-native networks giant, Juniper Networks, and the experience management company, Qualtrics delved into their cash investment strategies, particularly their use of money market funds, and discussed how they navigate the evolving landscape of interest rates and corporate acquisitions. 

Adapting to interest rate fluctuations and acquisition constraints

Andrew Smith, manager of treasury operations at Juniper Networks, provided a comprehensive narrative on the evolution of the company’s investment strategy, influenced significantly by fluctuating interest rates and the company’s impending acquisition by Hewlett Packard Enterprise. 

Initially operating in a near-zero interest rate environment posed significant challenges for maximising investment returns. To address this, the treasury team extended the duration of their investments. The rationale was that, given the negligible returns from short-term yields, longer-term investments offered slightly better returns without substantially increasing risk. This approach capitalised on the stability of the interest rate environment at the time, making longer-term securities more attractive relative to the limited gains from short-term instruments. Furthermore, this strategy aimed to balance the need for higher returns in a low-yield context with the necessity of maintaining adequate liquidity for operational needs.

However, as interest rates began to rise in 2022, the company encountered headwinds in its cash flow dynamics, driven primarily by substantial inventory purchases and increased operational expenditures. This led to negative free cash flow, necessitating a reassessment of their investment strategy. In response, the treasury team reallocated maturing securities into money market funds. This strategic shift served a dual purpose: it met immediate cash flow needs while taking advantage of the higher yields offered by money market funds. As interest rates climbed, these funds became more lucrative, allowing the treasury team to secure better returns on short-term investments. This reallocation was not just a reactive measure but a deliberate strategy to balance immediate operational cash needs with optimising investment returns.

Juniper Networks is currently preparing for the possibility that interest rates may plateau or decline. To address this outlook, the treasury team is again focusing on extending the duration of its investments. This strategy involves balancing several critical factors. First, there is a need to weigh short-term liquidity requirements against the opportunities in longer-term investments. With interest rates potentially peaking or declining, securing higher yields through longer-duration investments is viewed as a prudent approach to stabilise returns over a longer period. 

Additionally, Juniper Networks must navigate the constraints of the upcoming HPE acquisition, which includes certain restrictions on share buybacks and new debt issuance. These restrictions complicate the company’s capital return strategies and necessitate a more cautious approach to cash and investment management. This forward-looking approach is intended to smooth out potential volatility, ensuring stable performance of the investment portfolio in a changing interest rate environment.

Smith emphasised the crucial role of accurate cash flow forecasting in shaping the treasury team’s investment strategy. Effective forecasting helps Juniper make well-informed decisions about how much cash should be kept readily available for daily operations and how much can be directed toward longer-term investments. This insight enables the treasury team to align cash availability with investment opportunities, optimising their investment approach. In the context of fluctuating interest rates and the constraints imposed by the impending HPE acquisition, precise cash forecasts are essential for balancing operational liquidity and maximising investment returns.

Adapting treasury practices amidst Qualtrics’ ownership transitions

Vidhi Jain, treasurer at Qualtrics, detailed the company’s complex journey through significant ownership changes and how it has shaped the treasury team’s strategies and practices. Qualtrics transitioned from being an SAP subsidiary to a public company in 2020, only to be acquired by private equity in 2023. Jain joined Qualtrics soon after it went public in 2021 as the first formal treasury hire, tasked with building the treasury team from the ground up. This involved drafting policies and procedures, hiring staff, and transforming the treasury function to align with the company’s evolving structure and goals. When Qualtrics went private again, the treasury team’s priorities had to shift accordingly to meet the changing ownership structure. 

In terms of investment strategy, Qualtrics initiated its formal investment policy after going public and this has not changed since the transition to private equity ownership. The company continues to invest in MMFs and term deposits with banks, ensuring strict management of counterparty risk. Jain explained that their policy allows them to invest 100% in these instruments while closely monitoring the financial health and ratings of their counterparties. The treasury team tracks various metrics monthly, such as ratings, balance sheets, and the net asset values (NAVs) of the MMFs, and sends reports to the CFO and private equity sponsors. This rigorous tracking ensures any potential risks are promptly identified and addressed, although Jain noted that they do not have hard limits on counterparty exposures. 

Jain also highlighted the integration of technology in their investment process. Qualtrics uses a bank portal for managing MMF investments, providing centralised visibility into fund details and facilitating investments. The implementation of a treasury management system (TMS) is also part of Qualtrics’ strategy, with plans to integrate investment data into the TMS in the future. 

In navigating the current economic landscape, characterised by uncertainties and potential interest rate changes, Qualtrics is concentrating its cash in the U.S. as much as possible and exploring slightly longer-term investments where feasible. Jain underscored the importance of aligning short-term and long-term cash forecasts to optimise investment decisions. The treasury team collaborates closely with the Financial Planning and Analysis (FP&A) team to ensure that cash flow projections align with the company’s broader financial goals, particularly in managing the balance sheet and cash flow statements.

In summary, both Juniper Networks and Qualtrics highlight the need for strategic flexibility in treasury management. Juniper Networks’ adaptive approach balances liquidity and returns amid fluctuating interest rates and an impending acquisition, while Qualtrics maintains robust risk management and technological integration through its ownership transitions. Effective cash flow forecasting and clear communication are essential to their success.