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.