Record bond issuance helped U.S. companies boost their cash holdings to all-time highs in the second quarter of 2020 as they braced for continued economic uncertainty in the face of the coronavirus pandemic.
However, after two quarters spent fortifying their liquidity buffers, debt issuance has slowed in the third quarter while revolving credit facilities have been replenished, signaling an end to the dash for cash sparked by COVID-19.
Investment-grade companies raised their cash ratios to an average of 34.4% in the second quarter, up from 28.9% in the first quarter and 18.6% at the end of 2019 before the pandemic became visible in the U.S. Cash ratio is a measure of a company's ability to cover its short-term liabilities with cash or cash equivalents.
A similar path was followed by non-investment-grade companies rated by S&P Global Ratings, which boosted their cash ratios to 51.8% in the second quarter, up from 43.2% in the first quarter and just 28.1% before the pandemic.
U.S. large-cap companies are now braced for an expected second wave of the pandemic during the Northern Hemisphere winter that could lead to an extended hit to earnings.
Cash holdings among S&P 500 companies — excluding financials — rose by $90 billion to a record $1.89 trillion in the second quarter, according to S&P Dow Jones Indices. However, the volume represents a substantial slowdown following the $250 billion increase to $1.8 trillion in the first quarter.
"The original 'dash for cash' ended months ago," Anik Sen, global head of equities, PineBridge Investments, said by email. "In general, companies are awash with liquidity and banks have been surprised how 'sticky' corporate deposits have been and have not declined as much as they had earlier expected."
Consumer staples hoarding
Companies in the consumer staples sector have led the way in hoarding cash in the first half of the year, with investment-grade and non-investment-grade-rated public companies increasing their ratios by 16.5 percentage points and 19.3 percentage points to 26.6% and 59.6%, respectively, over the past two quarters.
Industrials companies were the most active in the second quarter with investment-grade and non-investment-grade companies raising their cash ratios by 17.2 percentage points and 12.6 percentage points, respectively. By contrast, companies in the energy and real estate sectors reversed some of their first-quarter cash buildup.
U.S. companies rated by S&P were already in relatively good shape from a liquidity point of view before the pandemic started taking its toll. At the end of 2019, they had an average cash ratio of 12.8%, slightly lower than the 2018 figure of 13.0% but significantly higher than 10.8% in 2017.
"There will be some companies at the margin needing to shore up their cash balances but, in general, companies were prepared to weather a much longer-lasting storm the first time round, and hence they are better prepared for a second wave of the pandemic," Sen said.
The first stage of the dash for cash was characterized by companies drawing on revolving credit facilities where available.
Of the $319 billion drawn down from revolvers by U.S. companies since March 5, $275.1 billion — or 86.2% — was in March as companies scrambled for cash, according to LCD, an offering of S&P Global Market Intelligence. As bond markets became more accessible, drawdowns on revolvers fell to $39.21 billion in April and by July were at zero.
"We saw in Q1 into April in particular, companies were drawing down on their revolvers and there definitely was a dash for cash," Evan Gunter, director at S&P Global Ratings, said in an interview.
"Some new debt that has been issued has been to pay back that drawdown [in March and April] so it remains to be seen where companies go from here, but what we saw earlier was companies were pulling down a lot of cash and pushing out the repayment period," Gunter said.
Record bond sales
Bond issuance by investment grade-rated companies also surged in March even as spreads widened, climbing to $261.12 billion from $82.26 billion in February. Buoyed by the Federal Reserve's announcement in March that it would buy corporate debt, which helped to tighten credit spreads, investment-grade issuance hit a record $668.07 billion in the second quarter, according to LCD data. This marked a 41.8% increase on the $471.27 billion issued in the first quarter, which had itself been a record.
High-yield issuance took longer to recover as spreads had widened further to a peak of 1,087 basis points on March 23 from 366 bps a month earlier, but issuance recovered from a weak March — $4.2 billion represented the lowest monthly total since December 2018 — to set a quarterly record of $140.5 billion in the second quarter.
"The Fed has been able to avert a liquidity crisis by intervening rapidly, and injecting liquidity into the economic system. It has eased the short-term pressure on companies’ balance sheets," Zehrid Osmani fund manager at Legg Mason, said by email.
With the third quarter almost over, bond issuance by investment-grade companies stood at $305.6 billion as of Sept. 18, less than half of the second-quarter level and not yet ahead of the 2019 third-quarter total of $309.83 billion.
High-yield issuance for the third quarter of $123.4 billion would need a late surge of issuance to beat the second-quarter total.
"There are many government and Federal Reserve support programs in place, and so, taken together with the current high liquidity among corporates, there should not be the need for another "dash to cash," said PineBridge's Sen.