Citi on Corp Cash Repatriation
Citi Research writes "Corporate cash unleashed?" in its latest "Short-End Notes." Author Steve Kang comments, "With $1.5tn cash coming in on-shore, investors have been asking the impact of repatriation on the front-end rates. Weighing out both supply and demand factors for CPs, we expect a small tightening pressure on FRA/OIS on this. On net however, we continue to expect FRA/OIS to widen on the back of the reserve drainage. We also discuss the recent widening pressure on O/N fed funds and other widening catalysts for the rest of this year." Citi's piece explains, "As of the beginning of this year, roughly $1.5tn offshore cash sitting overseas was "deemed" repatriated. Investors have been asking the net impact of this on LIBOR/CD/CP rates. Though uncertainty remains, we expect a 2-3bp richening in CD/CP/LIBOR against OIS and a bull steepening of the CP credit curve. These cash rich companies tend to have CD/CPs both on their asset side and the liability side. On asset side, we expect an increase in front-end and cash space in order to maintain flexibility for usage. On the liability side, we expect a decrease in non-financial CD/CPs as these tech companies redeem.... We expect a sizable paydown of CPs. These instruments are usually issued for cash management reasons thus flood of offshore cash would make rapidly maturing CD/CPs a natural area to redeem, in our view.... Top 5 cash holders have majority of their portfolio is held at 1-5y UST/corp bonds and maintains 10%-15% of their assets in cash-cash like products like CD/CP/MMF/Bills for liquidity purposes.... Extrapolating this to $1.5tn estimates, we roughly estimate $150bn invested in CD/CP/MMF/Bills." Finally, Citi adds, "We see three course of action for the tech companies – they can decrease their cash holdings as they use them OR increase their cash holdings to maintain flexibility for any near-term usage OR keep it the same until the strategic review is done. We think the second and third scenario is more likely – increasing the cash-like investments by 5% would increase the demand for CD/CPs by [approximately] $25bn."
