Treasurers Trim Cash Hoards But Not in the Way Draghi Wantsby
Cash at European companies swelled to $761 billion last year
Businesses aren’t spending money to expand operations
Companies in Europe are starting to cut the record amounts of cash they accumulated since the financial crisis but they’re not spending it the way central bankers hoped they would.
Corporate treasurers cracked open their war chests after cash holdings for the region’s biggest companies swelled to a peak of 697 billion euros ($761 billion) in June 2015, according to data compiled by Bloomberg. But instead of spending the money to expand, companies are shifting it into short-term securities, the data show.
Treasurers are rethinking their investment strategies after the European Central Bank cut its main interest rate to negative this year, effectively charging lenders to park their corporate clients’ money in its vaults. With bond yields pushed to record lows and economic turmoil damping the allure of expansion or takeover plans, companies in Europe are looking for ways to reduce the cost of holding cash.
“QE has worked very well for financial markets, not so well for the real economy,” said Alberto Gallo, a London-based partner and portfolio manager at Algebris Investments. “When companies start spending their cash on buying financial securities, you will get a recovering financial market, you won’t get job creation and you will get more inequality.”
Cash and cash equivalents held by non-financial companies in the Stoxx Europe 600 Index dropped to 646 billion euros at the end of September from the peak in June last year, Bloomberg data show.
“European corporates have not shown much conviction in the growth outlook and haven’t been in a hurry to commit themselves to large capital expenditures,” said Srikanth Sankaran, head of European credit and asset-backed securities strategy at Morgan Stanley. “The question is what would they spend the cash on?”
Some firms have increased “other investing activities” -- a category on their balance sheets that captures short-term investments, according to Sankaran. Europe’s biggest non-financial companies spent almost 50 billion euros this year on the investments, the most for any year in Bloomberg data going back to 2009 and up from 30 billion euros for 2015.
Saving, Not Spending
But ECB President Mario Draghi embarked on his unprecedented stimulus plan to encourage growth. That may yet happen if the cost of cash continues to rise and yields remain negative, according to Barnaby Martin, a European credit strategist at Bank of America Corp.
“It should motivate more companies to stop saving and start spending,” said London-based Martin. “Given we have lots of negative-yielding corporate bonds in Europe, companies may eventually decide to take advantage of this and do large debt-funded acquisitions.”
Companies have been reluctant to commit capital to expansion or takeovers because of uncertainty over the the U.K.’s decision to leave the European Union and as slowing growth clouds the region’s economic outlook. Euro-area gross domestic product growth slowed in the second quarter to 0.3 percent, down from 0.5 percent in the first three months of the year, while inflation rose to an annual 0.4 percent, far below the goal of just under 2 percent.
Capital expenditure at the biggest listed European non-financial companies was at 151 billion euros at the end of September, according to Bloomberg data. That compares with 158 billion euros at the end of last year and 154 billion euros at the end of 2014. The companies’ planned 453 billion euros of mergers and acquisitions this year is set to fall short of the 647 billion euros of deals announced in 2015, the busiest year since 2007, Bloomberg data show.
“Additional interest rate cuts wouldn’t create extra investment or result in higher inflation rates,” said Arnd Zinnhardt, chief financial officer at Darmstadt, Germany-based Software AG. “And those are what Mr. Draghi wants to achieve.”
While only a handful of companies have the expertise to invest their cash in credit markets, more may start, according to Jose Linares at JPMorgan Chase & Co.
“This is a very recent development primarily because of the negative interest rate environment in euros,” said Linares, London-based head of corporate banking for EMEA. “If we’re in a prolonged environment of low or negative interest rates, more corporates may have to look at those options.”