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The Resource for the Global Finance Profession

AFP Member Jim Gilligan Testifies Before Congress on MMFs

  • By Staff Writers
  • Published: 2012-05-21

Jim Gilligan, CTP, assistant treasurer of Great Plains Energy Inc. and a member of the AFP board of directors, testified on May 17 before the House Republican Study Committee Financial Services Working Group regarding money-market funds. Below is Gilligan’s full statement:

On behalf of the membership of the Association for Financial Professionals (AFP), I welcome this opportunity to provide you with our concerns regarding the potential proposed changes to the rules governing money market funds. My name is Jim Gilligan and I am the Assistant Treasurer of Great Plains Energy, Inc. (the holding company for Kansas City Power & Light Company) in Kansas City, Mo. I serve as a member of the Board of Directors for AFP and also serve on the association’s Government Relations Committee.

AFP’s membership includes more than 16,000 financial professionals employed by over 5,000 corporations and other organizations. We represent a broad spectrum of financial disciplines and their organizations represent a wide variety of industries. These professionals are responsible for directing the investment of corporate cash and pension assets for their organizations, and are charged with considering action on all available investment alternatives to protect principal, ensure liquidity, and prudently maximize returns. Financial professionals are unique in that they are responsible for observing business conditions that affect their organizations and making assumptions on how those conditions will change in both the short and intermediate term. They must also make critical business decisions—including those concerning corporate borrowing and business investment—based on those observations and assumptions.

Our group of corporate treasurers and financial professionals fully supports amending the current rules governing money-market funds (MMFs) in a manner that encourages clear and concise transparency that not only protects investors, but provides them with the necessary information needed to make the most sound and practical investment decisions for their organizations. However, AFP members have concerns regarding several options that have been presented throughout the course of the debate and we appreciate the opportunity to offer our thoughts to you.

Our group recognizes that concerns about the liquidity of MMFs played a role in exacerbating the financial crisis that began in September 2008 and we are largely supportive of rules already enacted by the Securities and Exchange Commission (SEC) to improve the liquidity and transparency of MMFs. The impact of many of these rules, including the monthly reporting of each fund’s shadow NAV, has not yet been fully felt in the market. We believe that these new rules instituted significant changes that will, on their own, substantially reduce the liquidity concerns and systemic risks previously posed by MMFs. We strongly believe the implementation of additional regulation on money-market funds will have major unintended harmful consequences that will result from decreased investor interest in this investment vehicle.

From the perspective of Great Plains Energy (GPE) and I’m sure other companies within capital intensive industries, we have a special concern with regard to the proposed changes in the money market fund rules. To understand our concern, you must appreciate the unique position of electric utilities in raising funds to support extensive capital requirements. GPE, through Kansas City Power & Light and its sister company KCP&L Greater Missouri Operations, supplies the electric needs of over 800,000 customers in western Missouri and eastern Kansas, including the metropolitan Kansas City area. In the last five years, my company has invested approximately $3.5 billion in infrastructure improvements and new generation facilities. In fact, we just completed construction of a new power plant on the western border of Missouri that was the largest single construction project in the State of Missouri during its four-year construction period. That project by itself created thousands of jobs for skilled laborers which resulted in a huge benefit to the Kansas City region during difficult economic times. We’ve also invested significant funds in the construction of wind energy facilities and the installation of expensive pollution control equipment that significantly reduces emissions and improves air quality, the later mandated by the federal government.

To finance these large capital outlays and also provide day-to-day liquidity for the corporation, GPE issues commercial paper—or short-term unsecured promissory notes—to investors. Great Plains Energy operates two commercial paper programs that have a combined available capacity of just over $1 billion. The sale of commercial paper, or CP, as a liquidity tool provides significant cost savings to GPE in the form of reduced interest payments on borrowed funds. Currently GPE is selling CP to investors at rates in the range of 40 to 80 basis points (bp) for overnight funds. A basis point is equal to 1/100 of 1 percent, so this translates into current annual interest rates of approximately 0.004 percent to 0.008 percent. In the absence of the ability to issue commercial paper, my company would have to borrow funds under one of its three revolving credit facilities, called “revolvers,” which are supported by a syndicate of 16 banks. 

Borrowing costs under the revolvers is significantly more expensive than the cost of CP and also logistically more difficult. For example, in order to borrow the least cost funds under a revolver, the company must provide at least three business days notice to the administrative bank, borrow a minimum of $5 million (with any additional funds in increments of $1 million only) and maintain the borrowing outstanding for 30 days. The cost for such borrowings would be based on the floating London Interbank Offered Rate (LIBOR) plus a spread dependent upon our credit rating. At current market rates the interest cost would be in the range of 1.75 percent to 2 percent—approximately two to four times the cost of issuing commercial paper.

For utilities, the cost of borrowed money is eventually passed through to customers in the rates they pay for their electricity. Higher borrowing costs mean higher electricity rates which translate directly into less money in customers’ pockets and therefore less economic growth. It also means less money for state and local governments to provide services to their citizens and fewer funds available for companies to spend on capital projects. The net result is it squeezes a lot of capital formation out of the economy, especially needed during a fragile recovery period.

This explanation of the attractiveness of borrowing funds by issuing commercial paper brings us full circle to our very real concern regarding the proposed changes in the money-market fund rules. The largest purchasers of corporate commercial paper are money-market funds. Great Plains Energy and other CP issuers are very concerned the changes as proposed would alter the investment structure of money-market funds so much that investors will reduce or even eliminate them from their investment portfolios, thereby wiping out the single largest investor base for commercial paper and its source as a liquidity vehicle and low-cost financing alternative.

Great Plains Energy is in the unique position to also see the possible ramification of changes to the money-market fund rules as an investor. On occasion, the company has excess funds to invest on a short term basis. Our preferred investment choice has always been money-market funds, because of their safety and liquidity. The proposed additional SEC Money Market Rules seek to protect investors by assuring liquidity is available without government support in the event of a “run” on the fund due to a monetary crisis. However, we believe the implementation of the rules will instead cause investors to flee to other products, namely bank deposits, and abandon MMFs altogether. AFP’s members specifically oppose the following proposals:
•             Switching to a variable net asset value, or floating NAV
•             Limiting redemption on holdings
•             Requiring investors to raise sufficient reserve capital.

Institutional investors in money-market funds such as GPE strongly dislike the concept of a floating NAV for a number of reasons. To understand why, realize corporate investors equate MMFs in their minds to a bank account that earns interest. Imposing a floating NAV changes the investment vehicle to one more closely resembling a mutual fund. This creates potential tax and accounting impacts that immediately make MMFs more costly and lowers returns. Corporate investors would also react quickly when the NAV fell below $1.00, likely redeeming their investment as soon as possible and potentially creating a run when no real threat existed.

Corporate investors rely on MMFs as a daily cash management tool, much like other corporations rely on the sale of commercial paper as a liquidity tool. If the SEC mandated limited redemptions of MMFs through the use of a 30-day hold on a percentage of the investment, it would create severe operational constraints on investors and make MMFs completely unusable for daily use. Redemption holds would be very unattractive from the standpoint of limiting access to funds when needed to pay expenses and they would also mathematically result in higher redemption holdbacks than mandated if transactions are made on a daily basis.

Finally, while we don’t believe requiring MMFs to create a mandatory reserve is necessary, it represents the most feasible method to provide additional liquidity since it eliminates the negative implications of a floating NAV and/or redemption holdback provision. However, requiring MMFs to have a capital buffer will lower yield, make the investment less attractive, and have no effect on prohibiting a run. We believe further consideration and thought is still necessary before implementing this rule change.

On behalf of the members of the Association for Financial Professionals (AFP), I again thank you for this opportunity to express our opinions and concerns regarding the SEC’s proposed changes to the money-market fund rules. I want to also offer this organization any assistance AFP can provide you in the form of research or individual member comments as you continue to carefully consider and debate these proposed rules. Thank you very much.

This concludes my prepared statement.

Copyright © 2015 Association for Financial Professionals, Inc.
All rights reserved.

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