Companies have been keeping a record amount of cash, despite concerns surrounding disruptions from Covid-19 that were expected to surge spending this year.
Data from S&P Global states that cash and short-term investments on corporate balance sheets worldwide are at a record high of $6.84 trillion; 45% higher than the average in the five years before the pandemic and 2.6% higher from the previous quarter.
Analysts at Goldman Sachs withdrew their 2021 forecast for spending growth by S&P 500 companies from 10% to 19%, citing falling doubts and reopening of global economies.
However, according to a report made on August 6th by JPMorgan Chase and Co, despite a strong start to the year, the global capital expenditures are anticipated to slow in the third quarter.
Corporate spending growth is expected to decline to 5.8% this quarter at a “seasonally adjusted annual rate” from 12.9% in the previous one.
Companies have ushered in one of the strongest economic recoveries in history, with a powerful combination of fiscal and monetary stimulus. However, warning signs still encourage finance chiefs to enforce their cash reserves again.
With Covid-19 variants on the rise, governments, such as those in Australia, Israel, and China, have heightened restrictions on movement. In early August, the U.S. Centers for Disease Control and Prevention warned Americans in high-risk areas to wear masks in indoor public spaces again.
“If you’re not a corporate treasurer then you’re not wanting to be complacent,” said Mark Lewellen, head of corporate debt capital markets at Deutsche Bank. “If you look at infection rates in Europe, they’re still climbing, there’s concern around more variants. Clearly this has not gone away.”
The cruise-line operator Carnival Corp. lost $2.1 billion due to the shut-down of operations from the pandemic. However, it still holds around $9 billion of cash, more than the usual balance of around $2 billion to $2.5 billion before the pandemic, with an additional $2.4 billion through a debt sale on July 21st.
“My thought of liquidity was to plan for the worst and hope for the best,” Carnival Chief Financial officer David Bernstein said in an interview. “We all recognize that with everything going on, the pause in our cruise operations could very well be extended and that we needed a very long liquidity runway.”
United Airlines Holdings and Delta Air Lines held $23 billion of liquidity at the end of the second quarter, and $17.8 billion of liquidity in the most recent quarter, respectively; both counts were higher compared to the amount the companies had at the same periods in 2019.
Corporate issuance and debts
Last year, many companies raised high amounts of debt to build up reserves, with the issuance by U.S. and European non-financial companies hitting $2.4 trillion, as data from Dealogic indicated.
Dealogic data also showed that, with corporate bond issuance, European firms sold $108 billion of high-yield bonds in 2021 so far, while U.S. corporations sold one-third higher. Junk bond issuance in July reached an unusual record for both North America and Europe.
At the end of June, Volkswagen said it had €35 billion ($41 billion) of liquidity, and BMW AG reported to have €18 billion ($21 billion) of liquidity midyear. Both companies sold bonds that raised $3 billion for Volkswagen and $2.5 billion for BMW.
“Major corporates have been sitting on a large liquidity position for a while now,” said Marc Baigneres, a regional head of investment-grade finance at JPMorgan Chase and Co, stating that they limited their spending even as many have “generated cash flows that are higher than expected.”
Merger-and-acquisition activity caught up from the middle of last year, but it is still below pre-pandemic levels, with $855 billion of deals globally in the second quarter (less than the 2019 quarterly average of $984 billion.), as recorded from PitchBook.
JPMorgan states that high-yield bond issuance also aims to refinance existing debt in 42% of deals. With fund acquisitions in 28% of cases, bankers expect accelerations in the second half of the year. Moreover, requests for credit lines are expected by bankers to lead to an uptick in spending in the coming months.
While average margins have risen, according to Shaunak Mazumder, a global equities portfolio manager at Legal & General Investment Management, many management teams still note that growth may not go on at the same pace going forward.
“Guidance has been weaker than investors have expected,” said Mr. Mazumder. “There’s a level of caution from most companies for the second half of the year.”
Opposed to companies keeping large sums of cash, investors would prefer to put the capital to work and return it through dividends or share buy-backs, though the chief investment officer of Amundi SA’s U.S. branch Ken Taubues says that it is more acceptable in these uncertain times.
“Some industries were very hard hit by the pandemic; there’s no guarantee that we won’t get lockdowns or shutdowns again. Restaurant chains, cruising lines, airlines, to the extent that those industries want to keep more liquidity, I can understand that.”