Claire Bechaux doesn't have a lot of options.
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The treasurer of Veolia Environnement SA can only store limited amounts of money in bank deposits without having to pay for it. So, she is forced to park around two-thirds of the French environmental services company's cash in European money-market funds.
Since December 2016, returns on investments in money-market funds have been negative. Investors and companies like Veolia use money-market funds as an alternative to bank deposits because they can quickly be converted into cash.
European banks no longer want to hold as much corporate cash, and negative interest rates and regulatory changes make it less attractive for banks to accept large corporate deposits. This presents treasurers and finance chiefs with a daunting task: to lose the least amount possible when storing cash.
"Options to store cash with our banks are limited," said Ms. Bechaux. "Ideally, we would put much more into our bank deposits."
Other treasurers are following suit. Company holdings of constant net asset value euro funds in Europe rose to EUR209.4 billion ($252 billion) at the end of 2016, from EUR139.3 billion at the end of 2012, according to the Institutional Money Market Fund Association.
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In France--a big market for variable net asset value funds--corporate holdings rose to EUR95 billion in the first quarter of 2017, compared with EUR72 billion in the first quarter of 2016, according to the AFG asset management association.
Overall, holdings of European money-market funds stood at EUR1.21 trillion at the end of March, according to the European Central Bank, an increase compared with previous quarters. Still, total holdings are slightly below their March 2009 peak of EUR1.32 trillion.
BlackRock Inc., the U.S. asset manager, had substantial corporate inflows into its European money-market funds in the first and second quarter. New Basel III bank regulations have "in many cases reduced the availability or attractiveness of bank deposits as an alternative for treasurers to manage short-term cash," said Beccy Milchem, head of Blackrock's treasury cash sales team.
Ms. Bechaux therefore only managed to find an interest-yielding deposit for around one-third of the company's corporate cash, which totaled around EUR4 billion at the end of June.
"We are trying to get as close to zero as possible," she said.
On average, Veolia's money-market fund investments have generated yield of minus 0.08% in 2017. The bank deposits, on the contrary, provided average yield of 0.70% during the same period. "We would move more cash into deposits if the banks provided us with interesting returns," Ms. Bechaux said. Overall, the company still makes money with its investments, she said.
Changes to European money-market funds, kicking in next year and 2019, could further dent returns, as they prescribe mandatory liquidity fees as well as redemption hurdles. But, the changes are expected to be less dramatic than the reforms that went into effect in the U.S. in October 2016.
"These constraints will probably drive returns down," said Veolia's Ms. Bechaux.
Similar to other companies, Veolia's first priority for its cash investments isn't yield, but liquidity, coupled with security. Longer-term investments with a higher risk profile therefore don't serve as alternatives.
This is also the case for Royal Dutch Shell PLC. The company held most of its cash--$24 billion at the end of June--in European money-market funds denominated in U.S. dollars. A small proportion sat in sterling and euro-funds.
"We don't use money-market funds to achieve higher yield, but to manage liquidity," said Frances Hinden, vice president of treasury operations at Shell.
Ms. Hinden said Shell isn't planning to increase its holdings. Other companies, including Germany's BASF SE, also said they hadn't made changes to their holdings.
Some firms have gone even further by reducing their money-market fund investments to zero.
Continental AG, the German auto parts supplier, hasn't stored any cash in European money-market funds since the beginning of the year. In 2016, it only sporadically invested in them.
"The attractiveness of money-market funds has suffered since eurozone interest rates fell below zero," said Stefan Scholz, head of treasury. Continental had a liquidity buffer of EUR4.9 billion at the end of June, of which EUR1.8 billion was held in cash and cash equivalents.
Ryanair Holdings PLC, Europe's largest airline by passengers, shuns money-market funds, opting for cash deposits instead. "I have looked at everything that's available, but boring cash still does it," finance chief Neil Sorahan said. The company at end-June held around EUR4.18 billion in cash and intends to stick to its deposits, Mr. Sorahan said.
Write to Nina Trentmann at Nina.Trentmann@wsj.com
(END) Dow Jones Newswires
September 11, 2017 02:55 ET (06:55 GMT)