With credit markets iffy and nervous investors searching for conservative balance sheets, companies are looking to shore up liquidity.

When the going gets tough, survivors hoard liquidity. It's one of those core truths battle-tested CFOs teach their assistants, and it's a message that's heard often these days. Having been burned by phantom earnings posted by Enron and similarly disastrous ventures, investors are looking for companies with solid piles of cash or assured access to credit to tide them over whatever rough spots lie ahead. But suppliers of liquidity -- from bankers to commercial paper buyers -- have a nervous hand on the spigot.

Corporate finance executives are already complaining that cash is in short supply. That may be a matter more of perception than reality, according to Michael Swanson, senior economist at Wells Fargo Bank, Minneapolis. An abundance of liquidity is sloshing through the U.S. banking system because the Fed has pumped up the money supply far above demand, causing prices -- interest rates -- to fall. But banks, wary of escalating risks, have raised their lending standards substantially, widening credit spreads and cutting off a growing group of marginal borrowers, he explains.

Playing It Safe

For a long time, the favored corporate strategy was to keep as little cash as possible on the balance sheet, says Peter Sereda, vice president and treasurer of Telephone & Data Systems Inc. in Chicago. "You almost always paid more for your debt than you earned on your cash, so cash was a drag on financial performance. You used it to pay down debt and eliminate the negative arbitrage." Credit facilities ensured future liquidity.

But in today's tight credit market, the thinking has changed. "We're hearing from rating agencies that our liquidity position counts a lot in the ratings decision now, and investment bankers are saying that liquidity definitely affects stock prices," Sereda notes. "Revolvers have become rainy-day funds. The bank market is extremely difficult; you can't count on that credit being there several years out when the revolver comes up for renewal."

To protect its liquidity reserves, Telephone & Data Systems has scaled back its use of bank revolvers and begun to "prefund" future expenditures with long-term bonds, stretching maturities as far as possible. "A year ago, we did a 40-year bond deal; then we did another one for 30 years," Sereda reports. "With our heavy capital expenditures, we have to hold a long-term perspective and take steps to assure our future liquidity. That means carrying larger precautionary cash balances than we have in the past."