Wednesday, February 8, 2023

U.S. CFOs Assess How To Spend Large Piles Of Cash

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US businesses are sitting on billions of dollars in cash they borrowed to survive the coronavirus shock of 2020. The question now is what to do with all that money, especially if an economic recovery sets in. .

Corporate America borrowed a record $ 2.5 billion in the bond markets last year. For some, this funding remains essential to their survival. Businesses affected by a pandemic, such as airlines and theater operators, continue to burn money, in hopes of a return to normal when people start to travel and socialize again. American Airlines last month said it forecasted an average cash consumption of nearly $ 30 million per day for the fourth quarter, while theater operator AMC recently sought additional funding.

But others are in better shape. Companies in the U.S. S&P 500 index accumulated an additional $ 1.3 billion in cash on their balance sheets last year, according to data from S&P Capital IQ. Many businesses have to decide what to do with their borrowed wealth.

1. Give it back

The first, and perhaps the most obvious, option is for companies to use excess cash to reduce the extent of their borrowing – starting in 2021 with a debt regime to quash the 2020 bond frenzy.

Bank of America’s regular survey late last year showed that most fund managers want companies to improve their balance sheets by reducing their debt.

“This is the point in the cycle when balance sheets are generally not in good shape and even equity investors are concerned about leverage. . . For the vast majority of companies, the focus will be on repairing balance sheets, ”analysts noted.

Occidental Petroleum is an example of a company wishing to divert part of its cash flow to reduce debt – the debt-to-earnings ratio, which provides an important reading of the strength of the company.

In her third quarter earnings call in November, Occidental Petroleum chief executive Vicki Hollub said debt reduction would be a major use of the company’s cash flow “well through early 2022. “.

2. Capital expenditure

A drive to improve the balance sheet is high on fund managers’ wish lists, but its dominance has waned in the second half of 2020, according to the BofA survey.

Instead, some investors accept the idea of ​​executives spending more money to help grow their business, especially as companies are now better able to find long-term debt financing at very low rates.

AT&T, which has the highest net debt of any non-financial corporation in the world at nearly $ 175 billion, according to Bloomberg data, reiterated its commitment to reducing that overhang. However, John Stephens, the company’s chief financial officer, added during her third quarter earnings call in October that because of her job to pull out when her loan matures, she may also opportunistically seek to invest money in the business.

The company’s balance sheet and debt maturities were “in very good shape,” he said. “The bond market has responded very well. We will continue to reduce our debt levels. But we have a lot of flexibility going forward. “

Other businesses may feel the same. With the cost of borrowing so low at the moment, deploying cheap funds could be worthwhile.

“If you look at the options list, sitting on liquidity in this interest rate environment doesn’t make a lot of sense,” said Kevin Foley, global head of debt capital markets at JPMorgan. “You could pay it back, but it comes with a breakage fee. Instead, you might just be investing in the business. “

3. Buy stocks or competitors

Another option for management teams is to take a more aggressive decision, like buying or repurchasing shares to appeal to their investors.

Analysts expect major U.S. banks to spend around 10 billion dollars this quarter on share buybacks, after having green light last month from the Federal Reserve to revive these programs.

They also anticipate an increase in repurchases, financed in part by the liquidity raised in the debt markets last year. Some companies may take on more debt for this purpose in 2021. Early examples this year include home improvement store The Home Depot and building materials supplier US Lumber.

4. Hang in there

It has never been cheaper for businesses to borrow. Average yields on bonds issued by both riskier high yield borrowers and safer premium companies are at or around historic lows.

Almost 90% of so-called “junk” bonds and over 95% of investment grade bonds trade at or above their initial issue price, suggesting they could be refinanced at a lower cost, depending on the market. indices managed by Ice Data Services.

Some companies will choose to be cautious about maintaining a cash surplus, funded by debt markets, given the uncertain economic outlook, strategists said. Even with the prospect of widespread immunizations, a cash buffer would help in the event of further economic shocks.

“Issuers, certainly with the start of the vaccine, are feeling good about the cash they’ve raised,” said John Hines, head of debt capital markets at Wells Fargo.

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