Short-term AAA-rated money market funds provide short-term investment opportunities for divestment proceeds
Following the multi-billion-dollar divestment of SUSE, Micro Focus required a short-term investment solution for the proceeds of the transaction, which were due to be distributed to shareholders via an upcoming capital return and associated share capital consolidation. The company faced regulatory and operational hurdles while seeking to meet performance goals and risk management objectives.
Regulatory: Micro Focus’s relationship banks were subject to operational cash limits under Basel III. Micro Focus required an uncapped, off-balance-sheet solution that would allow it to centralise funds and reduce payment intensity on the key dates of deal settlement and dividend payment.
Credit risk: Given the size of funds involved, Micro Focus required that credit risk be kept to an absolute minimum. At the time of settlement, the company also had some concerns arising from Brexit risk that needed to be mitigated.
Timing: Funds needed to be available early enough on dividend distribution day to ensure that Micro Focus could:
- Settle a previously arranged FX forward.
- Make onward transfer to the payment agent who was responsible for distributing the dividend to shareholders.
These crucial actions both had to be completed on the same day.
Performance: Higher rates were available at the time of the divestment, and Micro Focus wanted a solution that would allow them to capitalise on performance to maximise net interest income.1
Micro Focus was offered an end-to-end solution by J.P. Morgan Asset Management that met the company’s needs across all of the following areas:
Credit: Given some of the concerns around Brexit, the bank structured a liquidity solution that involved both its low-volatility NAV (LVNAV) and constant NAV (CNAV) AAA-rated USD money market funds (MMFs).2
Liquidity: With an expected six- to eight-week investment horizon, and the possibility that Micro Focus might need to access some of the funds in the interim, the MMFs were an ideal home because of their late cut-off times (22:00 GMT) and same-day access.
Performance: The provider’s MMFs’ yield performance offered a material pickup over other deposit solutions, even for an investment involving a short tenor. Given the notional size of the investment, this generated sizeable returns.
Regulatory: Because liquidity funds are not subject to Basel III requirements, there were no headroom limits. Furthermore, concentration risk was limited because these MMFs are the largest of their kind in the USD offshore market.
Operational: Given the timing requirements on the dividend distribution date, Micro Focus needed a solution that would avoid the need for funds to be swept through its deposit account. To solve this, the bank’s global liquidity unit worked closely with its FX desk to ensure that both LVNAV and CNAV funds were redeemed as early as possible in the day, and that they were pooled and paid directly to the FX desk to settle a previously arranged forward contract.
Best practice and innovation
This solution was a great success in effectively managing corporate cross-currency cash challenges in the aftermath of a multi-billion-dollar divestment. Micro Focus had a variety of challenging objectives and needed a global liquidity team with a strong track record and specialist knowledge across treasury and cash management.
- Same-day liquidity without sacrificing performance.
- Speed of execution, despite the challenging size of the fund flows.
- Operational excellence throughout the process, which facilitated meeting highly sensitive deadlines. Active risk reduction and capital preservation by combining different investment strategies.
The bank listened to our problems and then delivered a one-stop shop bespoke solution across global liquidity as well as seamless integration with the bank’s FX desk.
Head of Treasury
1 Past performance is not a reliable indicator of current and future results.
2 "LVNAV” and “CNAV” is the term used to describe MMF structures under the European Union’s MMF Regulations.
The article was first published by Treasury Today in August 2020