1. 1
The Low Interest Rate Dilemma For Corporate Investors
Carolina Cash Conference May 2012
Mike Betty, Senior Vice President, CTP; BB&T Florida Sales Manager

2. 2
The Universally Accepted Response to the Global Crisis:

3. 3
The more appropriate response, according to some!!:

4. 4
Topics for Discussion
 Discussion of the present state of corporate liquidity – How
did we get here?
 Corporate liquidity trends
 Facts related to the present state of corporate cash
 What is driving the reluctance to invest
 Rationale for continued caution
 Rationale for optimism
 Today’s investment-related challenges for Treasurers
 Investment policy best practices

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The Present State of Corporate Liquidity
Macro causes:
• Crisis of confidence emanating from one of the worst economic and
financial downturns since the Great Depression, with yields on 3-month
treasuries falling as low as .02% (a rate this low had not occurred since
January 1941)
• Employees at domestic and international firms have been cut at high
levels over the past three years (in a related survey, just 39% of US
companies expect to add employees in the next six months although
they are slightly more optimistic about U.S. economic growth - NABE
survey)

6. 6
The Present State of Corporate Liquidity
Macro causes:
• The global pace of M&A has been reduced, not due to the dearth of
targets but largely due to continued economic uncertainty
(only 31% of worldwide executives have plans to buy another
company over the next 12 months; down from 41% in the 4th
quarter of 2011 – Ernst & Young survey)
• The number of global companies that desire continued sale and spin-
off of their divisions and subsidiaries matches the amount of firms
that wish to acquire
• Capital expenditures budgets at many companies have been reduced
to forced replacement levels as opposed to enhancement levels – in
spite of cash availability and borrowing/line availability

7. 7
Economic Cycle Research Institute (ECRI)
 Publishes a weekly leading index (WLI) that utilizes a number
of macroeconomic data points to forecast future economic
activity
 Designed to predict the direction of economic growth in the
next 6-9 months
 A significant decline of the WLI has been a leading indicator
of six of the past seven recessions since the 1960’s

8. 8
Graph showing Corp. Cash Growth needed:
– R
Source:

9. 9

10. 10
Corporate liquidity trends
Due to unprecedented historical turmoil,
that domestic and worldwide corporate
liquidity levels are high does not come as a
large surprise, given the above; the
surprise is the magnitude of the increase:

11. 11
Corporate Cash and near-cash equivalent growth
over the decade

12. 12
Nonfinancial corporations’ holding of cash as a
percentage of each country’s GDP
0
2
4
6
8
10
12
14
16
18
2003 2004 2005 2006 2007 2008 2009 2010 2011
Year
%
Germany
France
UK
US

13. 13
Technology industry liquid asset changes
Technology
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
50000
2007 2008 2009 2010 2011
Year
Dollarsinmillions
Yahoo
Amazon
IBM
Google Inc
Apple Inc

14. 14
Retail and Consumer industry liquid asset changes
Retail & Consumer Products
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
2007 2008 2009 2010 2011
Year
Dollarinmillions
Pepsico Inc.
McDonald's
Procter & Gamble
Home Depot
Walmart

15. 15
Industrial industry liquid asset changes
Industrials
0
2000
4000
6000
8000
10000
12000
2007 2008 2009 2010 2011
Year
Dollarsinmillions
Honeywell
Lockheed
United Tech
Caterpillar
Boeing

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Eurozone cash balances, compared to investment
0
5
10
15
20
25
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Year
%GDP
Non Financial
Corp Holdings
Private Non-
residential
Investment

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Facts related to the growth in corporate cash
– The latest data estimates that the cash pile is approximately
US$5.5 trillion: US$3.8 trillion in European non-financial
companies and US$1.7 trillion in US non-financial companies.
– Corporate cash levels in the UK are nearly equal to half of its
current annual GDP, and is at present, growing faster than GDP
levels
– Corporate cash levels in the U.S. and the Eurozone are growing
faster than their respective GDP levels
– Over 40% of U.S. companies have raised their cash levels in Q1
2012
– Companies in the S&P 500 have added $1.2 trillion in cash since
2007, representing a 49% increase – Wall Street Journal

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Facts related to the growth in corporate cash
 By contrast corporate business spending is up only 16% and
overall hiring, only 5%, since 2007
 M&A in the first quarter of this year was the weakest for any
quarter since 2003 (Bloomberg Data)
 More than half of the cash does not reside at the corporate
head office, but was sourced as overseas revenue and
remains overseas for various reasons, including unfavorable
tax treatment for fund repatriation and regulatory constraints
limiting the free flow of cash out of emerging markets.
 Corporate cash levels are at a record, and the opportunity
cost of not optimizing them for the intended corporate
purpose are greater than ever

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What are corporations doing with their cash?
Common avenues (recent survey of corporations, worldwide):
 Very few are placing their investments with banks (that said, a majority are
utilizing on-balance sheet deposits (67%) at banks, which often provide credit
toward the reduction in hard fees)
– A looming question is the near-certain expiration of the FDIC’s full support of non-
interest-bearing transaction accounts at the end of 2012
 Many (48%) continue to invest in money-market funds (MMF’s)
 Some invest directly in money markets (individual securities, often
government, GSE, or Prime funds)
 A1/P1 Commercial Paper
 U.S. Treasuries
 Variable demand notes
As of Q1 2012, only 17% of corporate investments had a maturity of
longer than one month

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Even with money to invest and high levels of
liquidity, skittishness is caused by
Corporations being “burned” in the past:
• Seizing up of the Commercial Paper market during the crisis
• Bank’s crisis-induced reduction in lending (and belief that it
continues today, or that credit might tighten with another slowdown).
This leads to the belief in the need for ‘dry powder’
• Money fund fears (Reserve Primary Fund’s ‘breaking the buck’ in
September 2008, upon the failure of Lehman) – psychologically
damaging
• Auction Rate Securities failures in 2008
• Repurchase Agreement illiquidity caused in part by failure of Bear
Stearns
• The sheer fact that some companies pursued unrealistically high
returns leading up to the crisis, and were severely burned when they
strayed too far out on their otherwise normal risk tolerance curve

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Bank total loan balances, compared to total
securities/assets
0
10
20
30
40
50
60
70
80
2007 2008 2009 2010 2011
Year
%
Median total
loans/assets
Median total
securities/ass
ets

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Uncertainty is also being fueled by:
The Political Climate (both Washington and the Eurozone)
• Gridlock and vitriol that exists between Congress and the White
House and inability to agree to a long-term plan on deficit reduction
(and the size of the deficit itself)
• Uncertainty about taxation of business income in 2012 and beyond
• Uncertainty regarding the appropriateness and ultimate success of
The Federal Reserve’s QE 1, QE 2 and Operation Twist liquidity
actions to spur the economy
• Concurrent uncertainty surrounding the initiation of a possible QE 3
to further inject liquidity into the economy, following the sunset of
‘Twist’ in June 2012
• Longer-term uncertainty with regard to the Fed’s pronouncement that
S/T interest rates will remain low through 2014

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Rationale for continued economic caution:
 New U.S. job creation and payroll growth abated sharply in
March, falling to 154,000 from 240,000 in February, and further
declined to 115,000 in April with more workers dropping out of
the labor force
 Gas prices, while pulling back somewhat, remain at elevated
levels. Direct evidence exists of consumer spending
reductions when gas prices become high
 Labor force participation rates in the U.S. are dropping for
both males and females

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Rationale for continued economic caution:
 As mentioned, toxic and divisive policy climate in Washington
and in much of the Eurozone, coupled with major electoral
changes/contests (China; France; Greece; Germany, U.S.;
Russia)
 Continued economic slowdown in China off of historic highs
 Significant Eurozone challenges:
– 17-Member Eurozone unemployment approaches 11%, the
highest since the currency was introduced in 1999 (as
comparison, unemployment in March 2011 was 9.9%)
– Eurozone GDP growth is zero at present, with 8 of 17 Euro zone
countries in recession

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The Eurozone
 In December, the European Central Bank (ECB) flooded banks
with more that 1 trillion euros ($1.31 trillion), returning interest
rates to a record low 1%
 For the time being, this allayed fears of a disorderly breakup of the
17-nation currency union
 Hot spots, such as Spain, Italy, Greece and Portugal still remain,
with sovereign and corporate downgrades and historic high bond
yields continuing, which continues to highlight the financial
challenges of some
 There is the belief that the healthy (Germany and France) will need
to continue supporting the weaker countries for quite some time to
support the financial firewall and to prevent a breakup of the Euro.
France’s continued support is in doubt at present
 Ominously, a noted analyst has recently predicted that by 2013,
there is a 75% chance that Greece will exit from the Euro – also
the Troika publicly cancelled a recent visit to Greece, due to

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10-year Bond yields of select Eurozone countries (May 15, 2012):
– Greece: 29.40%
– Portugal: 11.42%
– Ireland: 8.21
– Spain: 6.28%
– Italy: 5.91%
– France: 2.83%
– Germany: 1.46%
By comparison,
– United States: 1.75%
– UK: 1.88%

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Select yields on 10-Year Government Bonds for Spain, Italy
and Germany:
Yields on 10-year Government Bonds
0
1
2
3
4
5
6
7
8
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Year
%
Germany
Italy
Spain

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Euro/USD movement Thru mid-May 2012

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Spain:
 Euro’s fourth largest economy, behind Germany, France and Italy
(World Bank GDP)
 Of recent, confidence levels in Spain’s ability to weather the current
crisis has continually eroded
 Overall unemployment presently stands at 25%, and approaching 50%
for certain age groups
 Spain’s IBEX stock index is down over 30% YTD
 In late April, Spain became the 12th
European nation to report at least
two quarters of declining GDP (classic definition of recession)
 Reuters reports that the Spanish government expects its economy will
contract by 1.7% in 2012

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Rationale for optimism in the economy
 Ratio of liquid assets to short-term liabilities is the highest since 1954
(Federal Reserve)
 Consumer sentiment appears to be largely holding its own (even with gas
prices near highs) – (Univ. of Michigan)
 Consumer loan delinquencies fell across the board in Q4 2011; the first
time this has occurred in 8 years (American Bankers Assn.)
 Also in Q4 2011 total household financial obligations fell to a 28-year low,
when measured against disposable income (15.9%), In Q3 2007, the start
of the recession/financial crisis, this ratio reached a record 18.9% (Federal
Reserve)
 U.S manufacturing in April reached a four year high
 Productivity levels remain high and have trended higher

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Rationale for optimism in the economy
 Arguably the secondary issue of importance in the US economy –
housing - seems to be showing signs of life, in pockets, with
positive housing starts and lower than expected foreclosures
 Surveys show that a far greater percentage of companies are
receiving credit from banks than they were 18 months ago
 In early May, Greece’s debt was actually upgraded by Standard &
Poors – in part, highlighting improved economic progress, in part
highlighting the all to rapid pace that ‘swallows’ the ability for
ratings agencies to keep up
 According to a very recent Q2 survey, a majority of U.S. CFO’s
expect the economy to expand in 2012, and anticipate increases in
hiring, higher revenues and profits
 Manufacturing in Germany is nearing historic high, due in large part
to non Eurozone demand

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Key Investment-related challenges/concerns facing
corporate Treasurers today
 Of the most significant challenges faced by corporate treasurers,
and cash managers today, the ability to consistently and
accurately forecast cash flow ranks at or near the top of the list
 Mentality of cash preservation, almost irrespective of yield
 Choices/decisioning in a highly uncertain macroeconomic and
regulatory environment
 Finding the appropriate repositories for cash and maintaining
access to liquidity
 Transparency of investment type, counterparty, sovereign and
liquidity risks cause many firms to default toward choosing the
safest (near) risk-free investments with near zero to negative real
returns – opportunity cost in and of itself

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Key Investment-related challenges/concerns facing
Treasurers today
 Importantly, there is the increasing belief – backed by recent study
results - that cash investment policies and practices need to be
updated due to impending regulatory and other changes
 Effective utilization of cash pooling structures to increase visibility
and control of funds held with multiple banking partners and/or in
disparate countries/regions
 Understanding the impact and new leverage ratios required by Basel
III global standards, - which I discuss in brief on the next page
 Understanding the impact of the impending regulatory changes
including Dodd-Frank, particularly in areas such as SEC-driven
pending changes in money market funds structures
 Following closely the developments in the Shadow Banking System,
especially in light of recently-announced mark to market trading
losses

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Basel III potential impact
Basel III, what is it?
 Institutes minimum capital adequacy rules for banks
 Phase in process, but with CCAR and other capital sufficiency
‘tests’, banks clearly are already thinking about this today in
their mid- to long-term strategic plans
Why is this potentially material for investors?
 Under Basel III, stable corporate balances have the greatest
value from a bank’s point of view
 “Discretionary” balances will attract lower returns since
bank’s holding these deposits will have higher capital
requirements to ensure sufficient liquidity in times of stress
 This in time might lead to a reduction in return for
discretionary balances, and might push treasurers to search
elsewhere for safe yield

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Basel III
 Alternative investment products as an outgrowth of Basel III
have been tested
– Products that pay bonus accruals of interest retroactively, for balances
which stay within a certain range during a particular period
– Term products might be of lesser potential interest in this environment,
for fear of being locked into an investment in a continuing volatile
environment

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Money Market Fund planned changes
 Due to MMF safety concerns resulting from the financial
crisis, the SEC plans to release additional rules designed to
strengthen investor protection and increase confidence in
this popular investment type:
– Plans are to:
• Gain clarity with regard to the underlying investments comprised of the
MMF’s
• Eliminate the stable NAV in favor of a floating NAV, which would reflect
the current value of fund portfolio
• Insist on even shorter maturities – which could negatively affect yield
• Allow only 95% of funds to be withdrawn immediately, and instituting the
requirement that the other 5% be withdrawn after 30 days
• Requiring investors to raise sufficient/additional reserve capital – likely
through fees
• Require additional ratings scrutiny of the counterparty and the underlying
short-term investment

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Money Market Fund changes
 Source(s) of concern:
– Current fixed net asset value of $1 to some, communicates the
false assumption that these investment vehicles are risk free, and
they are not
– Prime MMF, which invest in safer short-term debt securities, hold
a large percentage (some believe, up to half) of instruments
issued by European banks
– Fears are that Europe’s financial problems could trigger runs on
these funds, which could lead to destabilization, similar in type to
the financial crisis

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Shadow Banking System (SBS)
What is it?
 A more loosely regulated collection of non-depository-taking
financial institutions
 Shadow entities can include hedge funds, money market funds,
SIV’s, SPE’s and Repo markets
 Why might this be important to Treasurers and investors?:
– SBS-related entities offer their own investment vehicles
• Repurchase agreements
• Money Market funds
• Mortgage-backed securities
• ETF’s
• Asset-backed Commercial Paper
 Shadow entities can be a potential additional avenue for alternative,
safely structured investments with acceptable risk-adjusted yield

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Evidence of increased corporate attention to cash levels,
investments and policies
 More firms are looking to their banks for the latest in treasury
technology and expertise to assist in improved cash/liquidity
management, risk exposure visibility and cash forecasting
and planning
 Automated SaaS type solutions are also becoming
increasingly popular as an effective tool to handle the above
 Increased evidence of special dividend announcements and
share buybacks (given limited acceptable M&A or investment
alternatives) such as Apple’s $45 billion payout to
shareholders

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Investment Policy Best Practices
 Companies that have not yet adopted a formal investment policy
should craft one immediately
 Many corporations have had investment policies for years yet have
failed to update or refresh to reflect the reality of the times
 When doing this, consult with the firm’s outside consultants and
financial advisors (bankers, CPA’s), as needed
 Investment policies need to be carefully tailored to appropriately
balance the obvious trade-offs between the preservation of capital
and return
 Investment policies, once formulated, need to be periodically
reviewed on a more frequent, formalized basis, by management

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Investment policy best practices, continued
 Discussion with and approval by an independent board of
directors (or a committee thereof) is crucial
 Finalized & approved investment policies should also be
communicated with the firm’s outside financial advisors to
better ensure that ongoing decisions are made in accordance
with the policy
 Pay close attention to the quality of financial advisors and the
manner in which they are compensated (commission;
success rate?)
 A tight fiduciary relationship with a FA ensures transparency
with respect to risk and accountability with respect to
performance

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Investment policy best practices, continued
 Counterparty risk is more important than ever (OK to invest with an
entity that has a lower credit rating than you?)
 When making investment decision - either solo or with an FA - close
attention needs to be paid to the actual stated maturities and true
liquidity of purchased securities, to ensure these are matched to
working capital needs of the firm (historical Auction Rate debacle/MF
Global)
 Reality of financial crisis and today is that ratings agencies’
published ratings represent a ‘rear-window data’ point with regard to
safety and soundness, not a leading or concurrent data point
 Some believe that a permanent ‘buffer’ of liquid cash should be kept
as a hedge against a counter party or macroeconomic systemic
shock, irrespective of chosen strategy?

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Investment policy best practices, continued
 In the new ‘normal’ environment, investment management decisions
need to be influenced by institutional AND sovereign credit ratings
 Ask yourself, do hard and sometimes difficult conversations need to
be held with counterparties in an effort to cull & rationalize, in order
to gain additional control, based on ratings or risk?
Importantly, investment management consideration is not solely
relegated to operating entities:
 Often, M&A requires certain proceeds to be escrowed for a year or
more, post closing
 While enormous due diligence usually accompanies the M&A
transaction itself, scant attention is paid to the credit worthiness of
the escrow agent, the investment criteria/quality or flexibility in
movement of funds, if needed, due to safety concerns

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Conclusion
The enormous increase in corporate cash, as highlighted, and
the volatility of global market conditions during the past four
years has served as a catalyst for the birth of a new generation
of treasury strategies, priorities and models. Increased economic
uncertainty has made it extremely challenging for treasurers to
forecast short- and intermediate-term cash positions, thereby
Increasing the importance and value of liquidity.
As in any fiduciary relationship, but especially now, the value of
true partnership and agnostic consultative guidance between
companies and their advisors cannot be overestimated.

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Thank you!