US companies are sitting on trillions of dollars in cash that they borrowed to survive the coronavirus shock of 2020. The question now is what they do with all that money, especially if an economic recovery takes hold.
Corporate America borrowed a record $2.5tn in the bond markets last year. For some, that funding remains crucial to their survival. Pandemic-stricken companies such as airlines and cinemas operators are still burning through cash, hoping for a return to normal when people start travelling and socialising again. American Airlines last month said it anticipated an average cash burn of close to $30m per day for the fourth quarter, while cinema operator AMC recently sought out additional financing.
But others are in better shape. Companies in the US S&P 500 index built up an additional $1.3tn of cash on their balance sheets last year, according to data from S&P Capital IQ. Many businesses are having to decide what to do with their borrowed fortune.
The first, and perhaps most obvious, option is for companies to use excess cash to reduce the scale of their borrowings — starting 2021 with a debt diet to undo 2020’s bond binge.
Bank of America’s regular survey at the end of last year showed most fund managers wanted companies to improve their balance sheets by reducing their debt load.
“This is the point in the cycle where balance sheets generally are not in good shape and even equity investors are concerned about leverage . . . For the vast majority of companies the focus will be on balance sheet repair,” noted the analysts.
Occidental Petroleum is one example of a company wanting to divert some of its cash flow to reduce its leverage — the ratio of debt to profits, which provides an important reading of corporate strength.
On its third-quarter earnings call in November, Occidental Petroleum’s chief executive Vicki Hollub said debt reduction would be an important use of the company’s cash flow “well into early 2022”.
A desire for balance sheet improvement stands at the top of fund managers’ wishlists, but its dominance declined over the second half of 2020, according to BofA’s survey.
Some investors are instead warming to the idea of executives spending more cash to help grow their business, especially as companies are now more able to snap up long-term debt financing at rock-bottom rates.
AT&T, which has the biggest pile of net debt of any non-financial company in the world at almost $175bn, according to Bloomberg data, has reiterated its pledge to reduce this overhang. However, John Stephens, the company's chief financial officer added on its third-quarter earnings call in October that because of its work to push out when its borrowing falls due, it can also opportunistically look to invest cash into the business.
The company’s balance sheet and debt maturities were “in really good shape,” he said. “The bond market has responded very well to it. We'll continue to reduce our debt levels. But we’ve got a lot of flexibility going forward.”
Other companies may feel similarly. With such a low cost of borrowing at the moment, deploying cheap funds could prove attractive.
“If you look at the list of options, sitting on cash in this interest rate environment doesn’t make a lot of sense,” said Kevin Foley, global head of debt capital markets at JPMorgan. “You could pay it back but there are breakage costs to that. Instead, maybe you just invest in the business.”
Another option for management teams is to take a more aggressive move, such as an acquisition or buying back stock to please their investors.
Analysts expect big US banks to spend about $10bn this quarter on share repurchases, after getting the green light last month from the Federal Reserve to restart these programmes.
They also anticipate a rise in buyouts, funded in part by the cash raised through debt markets last year. Some companies may take on more debt with this aim in 2021. Early examples this year include home improvement shop Home Depot and building materials supplier US Lumber.
It has never been cheaper for companies to borrow. The average yields on bonds issued by both riskier high-yield borrowers, and safer investment-grade companies, are at or around record lows.
Almost 90 per cent of so-called “junk” bonds and more than 95 per cent of investment-grade bonds are trading at or above their original issue price, suggesting that they could be refinanced at a lower cost, according to indices run by Ice Data Services.
Some companies will decide it prudent to maintain a surplus of cash, financed through debt markets, given the uncertain economic outlook, strategists said. Even with the prospect of widespread vaccinations, a cash buffer would help in the event of any further economic shocks.
“Issuers, certainly with the onset of the vaccine, are feeling good about the cash they raised,” said John Hines, head of debt capital markets at Wells Fargo.