The Dash for Cash: This story is the first of a three-part series examining the changing shape of company balance sheets in the wake of the coronavirus pandemic.
Corporate America was not taking any chances as it became clear the coronavirus pandemic was arriving in the U.S.
Faced with the prospect of losing access to debt markets as panic began to spread through the financial system, S&P 500 companies — excluding financials — increased their cash holdings by $250 billion in the first quarter to a record $1.8 trillion, S&P Dow Jones Indices data show.
That helped push up the average cash ratio — a measure of a company's ability to cover its short-term liabilities with cash or cash equivalents — for the companies on the index by 3.3 percentage points to 17.1% by the end of March, the highest level in at least 16 years, according to data compiled by S&P Global Market Intelligence.
However, it was U.S. companies with the lowest credit ratings that worked hardest to bolster their balance sheets.
The average cash ratio for all U.S. companies rated sub-investment grade by S&P Global Ratings jumped to 43.5% in the first quarter, from 27.8% at the end of 2019. By contrast, investment-grade companies increased their average cash ratios to 28.8% from 18.8%.
"Companies have acted quickly in response to the uncertainty brought on by Covid-19," Duncan Lamont, head of research and analytics at investment manager Schroders, said by email. "Weaker companies need all available cash to fight for survival."
While stronger cash positions are essential in a crisis, holding more cash than necessary can be a drag on growth as companies hold off on investments. Since the start of 2010, companies with relatively low cash ratios have performed better in the majority of sectors, according to S&P Global Market Intelligence research.
Lower-rated companies took to debt markets to raise cash despite soaring costs.
U.S. high-yield spreads jumped from an average 357 basis points on Feb. 19, when the S&P 500 index was last at a record, to a peak of 1,087 bps on March 23 when the Federal Reserve pledged to unleash trillions of dollars of liquidity into financial markets. They have since retraced 66.4% of that increase to average 602 bps on June 23.
Still, sub-investment grade U.S. issuers raised $72.4 billion in the first quarter, compared with $75.6 billion in the final quarter of 2019. Sales have since accelerated, reaching a record $133.20 billion in the second quarter with a few days still to go.
Investment-grade companies didn't have it easy either. The spread on investment-grade corporate bond yields jumped from 102 bps on Feb. 19 to 401 bps on March 23. However, it has since reversed 81.9% of that spike and was at 156 bps on June 23.
They also hit bond markets hard, raising a record $382.12 billion in the first quarter, which has since been surpassed by $628.55 billion of issuance in the second quarter.
While the Fed moved fast and forcefully, the companies that needed help were some of the last to benefit as investment-grade spreads narrowed faster than high yield.
"Central bank liquidity has rushed through the system to investment-grade companies very easily and quickly but it takes longer to reach non-investment grade businesses," Anil Jhangiani, head of credit analysis EMEA at MUFG, said in an interview.
The extra cash did not only come from debt sales. Equity offerings by U.S. companies totaled $37.791 billion in the first quarter, down from $43.89 billion in the final three months of 2019. Current expenditure, including labor costs, have been reduced.
All this was achieved against a background of surging dividends and buybacks in the first quarter. S&P 500 companies paid out a record $127 billion in dividends in the first three months of the year, according to S&P Dow Jones Indices Senior Analyst Howard Silverblatt. Buybacks "are going out with a bang" hitting $198.4 billion, the highest since the same period in 2019, he said.
Those numbers are likely to be much lower in the second quarter. At the end of 2019, 423 of the S&P 500 were paying dividends, but 42 companies had suspended payouts by early June, Silverblatt said.
Elevated cash buffers could become part of the "new normal" for companies even as the pandemic recedes.
Cash ratios for S&P 500 companies never fully retreated after spiking in the aftermath of the global financial crisis of 2008 and 2009. At 12.75% at the end of 2019, companies were in a better liquidity position than they were in 2008 when they entered the downturn with cash ratios of 9.32%.
"Corporates were at historical high levels of liquidity going into COVID," said MUFG's Jhangiani. "However, you could have a great business but if you got caught in a three-month period of lockdown and you didn't have the levers to ride that out, your great business struggles."
Which companies see the biggest long-term changes in their balance sheets will depend to some extent on which sector they operate in and their credit rating.
Still, every sector of the S&P 500 increased its cash ratio in the first quarter, including non-cyclical sectors that typically operate on low cash ratios.
A case in point was the utilities sector, which increased its cash ratio from 5.96% to 15.29% as power companies look to plough ahead with investment plans to replace an aging stock of energy infrastructure and meet rising demand for renewable energy.
Despite a reduction in energy consumption during the pandemic, a report published earlier this month by Regulatory Research Associates, a group within S&P Global Market Intelligence, found that of the 44 utilities analyzed, all but eight have maintained or increased their forecasts for capital expenditures through 2021, including four that have expanded spending plans by more than 40% since the second half of 2019.
There were also dramatic moves in real estate — a capital intensive sector that has seen a number of REITs cut dividends and hoard cash — and consumer staples, with the two sectors increasing their cash ratios from 31.3% to 62.4% and 17.8% to 29.2%, respectively.
"You'll see a disconnect in how investment grade versus non-investment grade companies structure liquidity, and you'll probably see some changes amongst the more COVID-hit sectors; leisure lodging, transport and oil & gas," Jhangiani said.