Blue-chip US corporates may end up borrowing as much as $2 trillion in 2020, an unprecedented haul in an unprecedented year.
Management teams took advantage as the Fed backstopped US corporate credit, prying open the door to a primary market that may otherwise have closed amid the pandemic.
Facing an exogenous shock and the most uncertain economic outlook in modern history, both investment grade and junk-rated companies binged on new debt, shattering full-year issuance records in August and September, respectively.
While there are many reasons to take advantage of a wide-open market, the initial impetus for what turned into a historic borrowing spree was to stack the proverbial sandbags — to build a cash buffer ahead of the hurricane.
Between debt sales, reduced capex, and a sharp decline in buybacks (figure below), US corporates are sitting on a ~$2 trillion cash pile. What they decide to do next will be key to the sustainability of the recovery.
The September edition of BofA’s closely watched Global Fund Manager survey showed 37% of respondents want CEOs to increase capex. That figure was just 13% in April.
Even so, the bank noted that “51% of investors still prefer balance sheet retrenchment” as the “sustainability” of the recovery remains in doubt.
The problem: The sustainability of the recovery in part depends on the C-suite’s willingness to spend. If that sounds self-referential, that’s because it is.
“Anemic corporate spending is potentially self-fulfilling when it comes to the impact on growth,” Bloomberg’s Vildana Hajric wrote this week, noting that “with the [recovery] sluggish, companies are reluctant to deploy cash, starving the economy of much-needed fuel.”
This becomes even more circular in an environment where the fiscal impulse fades or proves insufficient to catalyze a robust recovery. If the American consumer falters, so too will the economy, prompting corporate management teams to remain biased against outlays.
Of course, consumers are retrenching too. Although the savings rate has come down from the unthinkable levels seen during the initial months of the pandemic (when businesses were closed, households were terrified, and transfer payments made their way to mailboxes and bank accounts), it’s still historically elevated.
The more uncertain things are on Capitol Hill, the worse for the everyday Americans whose penchant for spending serves as the lifeblood of the largest economy on the planet. Personal consumption slowed in August and incomes fell more than expected as key federal assistance included in the last virus relief package began to roll off.
Many believe that in the absence of another stimulus deal that delivers crucial aid to airlines, small businesses, households, and the jobless, spending could fall sharply, thereby making companies even less likely to loosen their own purse strings and more likely to resort to cost cutting measures, including layoffs.
These are the kinds of “typical recessionary dynamics” Jerome Powell warned about last week, when he implored Congress to move ahead with additional fiscal stimulus. “In a typical recession, there is a downward spiral in which layoffs lead to still lower demand, and subsequent additional layoffs,” Powell remarked, cautioning that in the usual course of downturns, “weakness feeds on weakness.”
When it comes to M&A and buybacks, the question is simply this: With the outlook as uncertain as it is, how advisable is deploying cash when multiples are still loitering up in the stratosphere? While it’s true that some deals have gotten done in 2020, M&A is down sharply from 2019.
And it’s not just corporates and households that are reluctant to let go of cash. Although investor money has flowed off the sidelines in recent weeks, the mountain of cash sitting idle in money market funds is still sizable indeed.
As ever, Congress could help matters by doing what’s necessary to support the economy. But lawmakers would prefer to persist in the patently false notion that budget constraints are real for a currency-issuing, monetary sovereign. And when it comes to Mitch McConnell, all that matters is the Supreme Court.