When the financial crisis started in July 2007, Lufthansa stopped investing into money market funds, instead using a mixture of short-term deposits, commercial paper and direct investments to manage its excess cash. However, this approach had a number of shortcomings. The returns Lufthansa was receiving were unsatisfactory, while internal counterparty limits were in place restricting the amount that could be invested with any particular bank.

Problem…

At the beginning of 2008, the decision was therefore taken to resume using money market funds to meet the company’s investment needs. “Our internal guideline requires us to keep a certain level of cash for daily operations and instead of using overnight deposits, we are now using money market funds,” says Tim Hashagen, Manager Treasury. “The funds are able to provide daily liquidity but can also generate an above-benchmark return by buying short-term securities if the fund does not exceed a weighted average maturity of 60 days. Therefore Lufthansa also uses money market funds instead of term deposits for cash which is not immediately needed. Additionally, other instruments besides money market funds are still used for medium-term investments to benefit from the interest-curve.”

One feature of money market funds is that they are ‘ring-fenced’ – in other words, they are managed as legal entities that are separate from their sponsors. As a result of this, and of the level of diversification within the funds themselves, money market funds can be utilised without using up the counterparty limits set by Lufthansa for individual banks.

Having decided to start using money market funds again, the next step was to choose a suitable fund. A number of different requirements needed to be taken into account. “We were looking for AAA-rated funds with daily liquidity and daily settlement,” comments Hashagen. “In order to invest in a fund, we needed a strong relationship with the bank. We also benchmark against EONIA, so we were looking for an investment which would perform above EONIA. Furthermore, we were looking to diversify our counterparty risk.”

…Solved

After conducting a thorough due diligence exercise with J.P. Morgan Asset Management, Lufthansa decided to start using J.P. Morgan’s EUR Liquidity Fund again. As transparency over the running of the fund was a high priority for Lufthansa, due diligence was an essential aspect of the decision making process. In order to obtain as clear a view as possible of the fund’s control mechanisms and risk management tools, Hashagen spent a day meeting J.P. Morgan’s investment analysts and portfolio managers. “The process was very satisfying – they provided good support and we felt very comfortable with the product,” says Hashagen.

To diversify its investments the company has subsequently invested in four additional money market funds and has drawn on its experience with J.P. Morgan by employing a similar approach to due diligence in the selection process. The due diligence day was likewise considered such a success by J.P. Morgan that this approach has since been offered to other clients.

For Hashagen, one of the outstanding features of the J.P. Morgan EUR Liquidity Fund is its late cut-off time. Unlike many other funds, the J.P. Morgan fund offers a 14:30 CET cut-off time for clients to access cash on a same-day basis, meeting Lufthansa’s requirements for daily liquidity. Meanwhile, clients are serviced by a dedicated team which focuses solely on providing support for the fund’s institutional investors.

Another important feature of the J.P. Morgan fund is that the accounting for the fund is straightforward. Details of the fund are easily transferred to Lufthansa’s treasury management system, which calculates the daily yield. “The service level is good, and we receive statements at the end of each month which we can compare with the automated statements of our treasury system,” says Hashagen. “As the dividends are paid out monthly, the accounting for the accrued interest is very simple.”

Finally, Hashagen is pleased with the yield delivered by the fund in challenging market conditions: “The fund has good performance over EONIA at the moment and the performance of the fund over the last 18 months has been stable above the benchmark. Overall, our use of money market funds is quite sophisticated and we are currently using them for most of our short-term cash.”