Managing Risk and Protecting Your Money During COVID-19

How smart risk management can help you weather the crisis

Amit Jogal, Managing Director, Wholesale Liquidity and Fixed Income

Since the COVID-19 pandemic hit, most of you have been working hard to get ahead of a crisis that no one anticipated. Whether it’s securing new funding, rethinking parts of your business or protecting your employees, you’ve been doing everything you can to preserve what you’ve built.

And you’re doing it without a roadmap. None of us knows how long this downturn will last, or what things will look like when we finally return to ‘normal.’

With all that’s going on, the last thing you need is uncertainty where your company’s money is concerned. Your cash should be in secure vehicles and available when your business needs it. And you should be comfortable with your portfolio’s risk level, so you aren’t caught off guard should market conditions worsen. If you’re sitting on liquidity, this is the time to assess your holdings and find the right short-term options for the moment.

Rest assured, you’re not in this alone. Our Liquidity Team is here to help evaluate your cash portfolio and talk you through your short-term options during this crisis. That may mean moving to safer, FDIC-insured vehicles or identifying the options that offer a competitive return on your liquidity without exposing you to excessive risk. It all depends on your needs, the state of your business and your comfort level.

Before we start the conversation, it’s helpful to understand the current risk environment. Here are the trends we’ve been seeing in short-term options, along with our insights on what might happen next with the COVID-19 crisis.

Short-term liquidity before COVID-19

Prior to the pandemic, many finance leaders favored short-term investments that offered the potential for higher yield over safer alternatives. These included money market mutual funds — both prime and government — and commercial paper, as well as traditional bank deposits. In a stable economy, each offers unique advantages.

• Commercial paper: Issued by corporations, these unsecured, short-term debt instruments offer fixed maturity periods ranging from one to 270 days. The quick maturities make commercial paper an attractive option for businesses who want to pick up yield without locking up their liquidity for long periods. The downside risk includes a lack of FDIC insurance and the possibility of corporate default.
• Prime money market funds: Interest-earning accounts typically offer a slightly higher return than government money market funds and traditional deposits. Most of the risk is tied to the performance of the underlying portfolio — usually bank-issued Certificates of Deposit (CDs) and non-FDIC insured commercial paper — and fluctuations in the funds’ floating net asset value (NAV).
• Government money market funds: Government funds invest at least 99.5% of their total assets in cash, government securities and repurchase agreements. These assets are fully collateralized and are designed to protect your principal, making them one of the safest short-term options.
• Bank deposits: FDIC-insured bank deposits are similarly low risk and low yield.

What we’ve seen since the start of the pandemic

March was a volatile month for short-term instruments. U.S. equity markets plummeted in the early part of the month,¹ causing businesses to move toward safer and highly liquid vehicles.

Approximately $160 billion moved out of prime money market funds, which are seen as riskier compared with other options, while a record $790 billion flowed into government money market funds.² The Federal Reserve stepped in on March 18 to protect prime money markets and head off a panic similar to the 2008 financial crisis.³ This stabilized prime markets, but many are still in a ‘wait and see’ mode.

In general, safety of principal has become the primary concern versus return on principal. In addition to government money market funds, companies are moving their money into FDIC-insured deposit vehicles such as the Certificate of Deposit Account Registry Service (CDARS) and Insured Cash Sweeps. These offer high levels of FDIC insurance, letting you protect larger balances.

Long-term impacts

The severity of the COVID-19 economic impact is still to be determined. A lot depends on us. If we can manage the outbreak through social distancing, we may be able to return to a semblance of normal until a vaccine is developed. If businesses can get back to even 70% of what they were doing before, we may see a recovery in the latter half of 2020. However, if we don’t contain the outbreak, we may face a prolonged economic downturn that leads to a recession or depression.

The reality is there’s no playbook for a pandemic like this, so we’re going to have to see how things play out. But even though we can’t predict, we can prepare. When we work with clients, we talk through all the eventualities and investment options, so you can make an informed decision on how to protect your money.

Funding for state/local governments

At this stage, it’s still too early to determine the loss of revenue on a state-by-state basis and how that will affect the larger economy. States that depend heavily on tourism, such as Hawaii and Nevada, have seen an unprecedented decline in foot traffic. But even in states, counties and cities where tourism isn’t dominant, the shutdown of businesses will likely put pressure on municipal budgets.

Nevada’s situation makes clear the threat to state budgets from COVID-19. Nevada’s hospitality industry accounted for 35% to 40% of the tax revenues within the state’s general fund in fiscal year 2018.⁴ Gaming taxes were responsible for $711 million, while sales and use taxes from the hotel-casino industry generated $389 million. With casinos across the state shut down for long stretches of the year, Nevada faces an unprecedented revenue shortfall, as does any state that relies heavily on “nonessential” industries as primary sources of revenue.

Fortunately, many states will enjoy a measure of relief from the Coronavirus Aid, Relief and Economic Security Act (CARES Act), passed in late March. Legislation in the CARES Act includes:

• $150 billion Coronavirus Relief Fund for state, local and tribal governments
• $30 billion Education Stabilization Fund for states, school districts and institutions of higher education for coronavirus-related costs
• $45 billion Disaster Relief Fund to meet the immediate needs of state, local, tribal and territorial governments

Other relief measures may be coming in future federal legislation. While reviewing your liquidity exposure, pay close attention to state and local funding as the COVID-19 crisis evolves. You don’t want to wait until it’s too late to make a decision.

Protecting your business

Since the start of the COVID-19 crisis, Umpqua has been laser-focused on protecting your business and the jobs you create in our communities. Employees across all of our business lines have worked around the clock to help you process Paycheck Protection Program (PPP) applications. Umpqua was one of the first banks to start accepting PPP applications on the day the program went live.

Loans provided by the program provide a direct incentive for small and mid-size businesses to keep their workers on the payroll. As you navigate these uncertain times, we’re here to help you make the best decisions for your business.

Tips for navigating risk in the ‘new normal’

Before meeting with an Umpqua liquidity specialist, it can be helpful to consider your own tolerance for risk in this environment. Here are some things to keep in mind:

• Yield vs. safety: Everyone’s appetite for risk is different. Some may feel good about their cash position and want to chase yield where they can. But unless you’re a savvy and active investor, the risk likely outweighs the potential reward. That’s especially true if you’re only looking at an extra 10 or 15 basis points.
• You have lots of options: This isn’t an either/or situation. We have models that fit a variety of needs. One vehicle we often recommend is an Insured Cash Sweep (ICS), which offers full FDIC protection for large balances and a potentially higher yield than other options.
• You have other things on your mind: You’re making big decisions every day, some of them extremely stressful. You’re worried about your business, your employees and the safety of your family. In this environment, knowing your money is safe is one less thing to worry about and may free up time for other decisions. Be sure to factor this into your thinking.

We’re here to help

Our Liquidity Team is here to help you make the right decisions for your business. We’ll sit with you to evaluate your current cash and portfolio and describe the products available in the market. Together, we’ll come up with the best solution for your business, with a level of safety that you’re comfortable with. We want each and every one of our customers to sleep at night knowing your money is safe and earning returns when possible.

www.umpquabank.com/commercial/treasury-management
Get more insights by following us on LinkedIn

Sources

¹ Grim Economic Outlook Grips Markets as Stocks Plummet, New York Times, March 2020.
² America's Money Market Industry: Is It at Risk?, Reuters, March 2020.
³ Govt MFs Crush It in March, up $790 billion, Crane Data, April 2020.
⁴ How Gaming Benefits Nevada, Nevada Resort Association.