Scaling an unstable mountain of cash.

• Author: Torgler, Jason
• Position: TREASURY

As any climber will attest, minimizing the risk of a mountain ascent requires planning and preparation for every nook, cranny and crevice. What's true for the cliff face is true for the boardroom. As of mid-2011, U.S. corporations held a record $2.05 trillion in cash. But corporations cannot be sanguine about these mountains of cash; cash is an asset that needs to be rigorously tracked and risk-managed.

Although the current record amounts of cash present numerous opportunities for corporations, there are also significant issues to consider. While it may seem counterintuitive that a company can suffer from being flush with cash, often overlooked are the risks that such excess pose. Excess cash can actually increase risk, offsetting the ostensible benefits of accumulating cash in the first place.

For companies with large cash balances, among the issues to be addressed are:

Visibility and Hedging. Generating and maintaining large international cash balances raises the importance of cash visibility and foreign exchange hedging. Large international banks have made enhancements to offer high-visibility, notional and physical cash management pooling programs that centralize and optimize overseas subsidiary cash at the end of each day and hedge the net amount. World-class companies place a premium on managing their FX risk and invest in technology that keeps close tabs on the banks managing these pooling programs.

Banks' Dwindling Options. Basel III is forcing banks to collateralize their cash holdings. This is driving banks to limit cash and fund investment options. Limiting options will ultimately drive down yields or even push corporations toward non-stable investment options.

Tax Considerations. Despite ongoing lobbying for a "Homeland Investment Act 2,0" in the U.S., companies should not make their plans contingent on a tax holiday. While many developed countries, such as Japan and the United Kingdom, have territorial tax systems that leave overseas profits to be taxed in the jurisdictions in which they are generated, the U.S. has not followed suit.

This means cash held overseas by U.S. companies remains subject to a 35-percent tax rate, if repatriated to the U.S. Companies have issued debt to avoid this--even to fund dividends and buybacks--making it slightly less attractive to keep the cash abroad. But as long as rates stay lower abroad, there will be little impetus to bring the cash home.

Counterparty Risk. The bankruptcy of Lehman Brothers...