America Airlines – US finance chiefs weigh easy methods to spend huge company cash piles
US corporations are sitting on trillions of {dollars} in cash that they borrowed to outlive the coronavirus shock of 2020. The query now could be what they do with all that cash, particularly if an financial restoration takes maintain.
Company America borrowed a report $2.5tn within the bond markets final 12 months. For some, that funding stays essential to their survival. Pandemic-stricken corporations reminiscent of airways and cinemas operators are nonetheless burning by way of cash, hoping for a return to regular when folks begin travelling and socialising once more. American Airlines final month stated it anticipated a mean cash burn of near $30m per day for the fourth quarter, whereas cinema operator AMC just lately sought out extra financing.
However others are in higher form. Firms within the US S&P 500 index constructed up an extra $1.3tn of cash on their steadiness sheets final 12 months, in response to information from S&P Capital IQ. Many companies are having to resolve what to do with their borrowed fortune.
1. Give it again
The primary, and maybe most evident, choice is for corporations to make use of extra cash to scale back the dimensions of their borrowings — beginning 2021 with a debt food regimen to undo 2020’s bond binge.
Bank of America’s common survey on the finish of final 12 months confirmed most fund managers needed corporations to enhance their steadiness sheets by lowering 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,” famous the analysts.
Occidental Petroleum is one instance of an organization eager to divert a few of its cash move to scale back its leverage — the ratio of debt to earnings, which supplies an vital studying of company energy.
On its third-quarter earnings name in November, Occidental Petroleum’s chief govt Vicki Hollub stated debt discount could be an vital use of the corporate’s cash move “well into early 2022”.
2. Capital spending
A need for steadiness sheet enchancment stands on the high of fund managers’ wishlists, however its dominance declined over the second half of 2020, in response to (BofA)’s survey.
Some buyers are as an alternative warming to the concept of executives spending extra cash to assist develop their enterprise, particularly as corporations at the moment are extra capable of snap up long-term debt financing at rock-bottom charges.
AT&T, which has the most important pile of web debt of any non-financial firm on the planet at virtually $175bn, in response to Bloomberg information, has reiterated its pledge to scale back this overhang. Nonetheless, John Stephens, the corporate’s chief monetary officer added on its third-quarter earnings name in October that due to its work to push out when its borrowing falls due, it could possibly additionally opportunistically look to speculate cash into the enterprise.
The corporate’s steadiness sheet and debt maturities had been “in really good shape,” he stated. “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.”
Different corporations may really feel equally. With such a low price of borrowing for the time being, deploying low-cost funds may show engaging.
“If you look at the list of options, sitting on cash in this interest rate environment doesn’t make a lot of sense,” stated Kevin Foley, international 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.”
3. Purchase stock, or rivals
An alternative choice for administration groups is to take a extra aggressive transfer, reminiscent of an acquisition or shopping for again stock to please their buyers.
Analysts anticipate massive US banks to spend about $10bn this quarter on share repurchases, after getting the inexperienced mild final month from the Federal Reserve to restart these programmes.
Additionally they anticipate an increase in buyouts, funded partly by the cash raised by way of debt markets final 12 months. Some corporations may tackle extra debt with this intention in 2021. Early examples this 12 months embody dwelling enchancment store Home Depot and constructing supplies provider US Lumber.
4. Maintain on to it
It has by no means been cheaper for corporations to borrow. The typical yields on bonds issued by each riskier high-yield debtors, and safer investment-grade corporations, are at or round report lows.
Nearly 90 per cent of so-called “junk” bonds and greater than 95 per cent of investment-grade bonds are buying and selling at or above their authentic difficulty price, suggesting that they might be refinanced at a decrease price, in response to indices run by Ice Knowledge Providers.
Some corporations will resolve it prudent to take care of a surplus of cash, financed by way of debt markets, given the unsure financial outlook, strategists stated. Even with the prospect of widespread vaccinations, a cash buffer would assist in the occasion of any additional financial shocks.
“Issuers, certainly with the onset of the vaccine, are feeling good about the cash they raised,” stated John Hines, head of debt capital markets at Wells Fargo.
