Thousands of companies will not survive the financial stress caused by the coronavirus. One of the ironies of the pandemic, however, is that some will emerge from the crisis with more cash resources than before the virus struck. A splurge of debt and equity issuance means companies — including banks — have so far raised more than $6.37tn globally from investors this year, according to data provider Refinitiv.
Some of this borrowing has been to help those worst-hit by the virus weather the storm, which despite the good news on vaccines, will continue for many months at least. A case in point is Carnival, the cruise operator, which has raised more than $10bn — including, for the first time this year, via a bond offering that is not secured against the company’s ships. Rolls-Royce, the aero-engine maker, and IAG, the European airline holding company, have also called on their shareholders and lenders to put in place the buffers they will need to survive.
Others, though, are simply making hay while the sun shines on them. Central banks responded to the pandemic by pushing interest rates to record lows and by rushing into the market to buy up government — and in some cases corporate — bonds. That has had the effect of making the interest rates available to sound companies that wish to borrow even lower. The surge in capital raisings has been accompanied by a rush of initial public offerings, notably by opportunistic technology groups tapping into the market momentum. Companies in the US have raised a record $149bn this year through IPOs. Even the London market has witnessed a rebound in activity despite the uncertainty over Brexit.
The question now is what these cash-rich companies will do with their new wealth. For the Carnivals and Rolls-Royces of this world the question is survival, with hopefully enough money left over to think about the investment or restructuring needed to meet not just the changes wrought by the pandemic, but also other challenges, in particular the battle against climate change. Paying down debt — and improving credit ratings — should be a priority. The pandemic has exposed the risks of operating with stretched balance sheets. A recent survey of global fund managers found that 44 per cent still wanted chief executives to use cash flows to improve their balance sheets. Increasing capital expenditure was a close second at 42 per cent.
For the remainder, executives will need to think carefully about how their firepower is deployed. Ploughing it into productive investment is important. Some will be able to take advantage of the financial conditions to make bold moves — launching the long-planned takeover of a rival, branching out into a new market area or capturing a new technology. US technology stocks, including Apple and Microsoft, are among the top holders of cash.
Payouts to investors are already making a comeback. This year has been the worst for dividends since the financial crisis as companies everywhere suspended or cut payouts to conserve cash, depriving millions of retail investors of income and hitting retirement savings. The ability to resume dividends is welcome, but executives should think harder before considering share buybacks; before the pandemic some companies, in particular in the US, used borrowed cash to buy back their own stock.
One legacy of Covid-19 will be a long list of corporate winners and an even longer list of losers. The stock market rally may not last and debt is unlikely to stay cheap for ever. If the winners are to stay ahead, they will need to spend their new fortunes wisely.
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