The (Corporate) World According To COVID-19

Of 345 publicly-traded companies in the US with market caps greater than $25 billion, 43 of them logged a trailing, 12-month cumulative loss as of October 13.

That figure (43) is more than triple the comparable total from January.

This isn’t just a consequence of plunging profits due to the pandemic. It’s also a reflection of how changes in work arrangements and consumer behavior have shifted the operating environment in favor of companies that benefit from digitization and virtual interactions.

“It shows how stay-at-home trends have helped some companies surge into the stock market’s big leagues before turning a consistent profit,” a Bloomberg piece dated Wednesday reads. Among the beneficiaries are names like Peloton, DocuSign, and Wayfair, all three of which have seen their market cap soar this year.

But “old” economy names like Exxon face an existential crisis as the “new normal” threatens to exacerbate already unfavorable trends. Both Exxon and Chevron logged what, at one time, would have seemed like unthinkable losses during the second quarter.

You can illustrate these dynamics any number of ways. For example, NextEra Energy now sports a market cap larger than Chevron.

Plugging Bloomberg’s calculations into a spreadsheet to produce a simple visual gives you a sense of things. Or, perhaps more accurately, gives you a sense of how hard it is to make sense of things.

Yes, it is obvious why Disney would be struggling right now, and Boeing’s trials and tribulations are well documented. And, sure, it’s easy to make the case for something like Snowflake. The problem, as the old saying goes, is that “it’s tough to make predictions, especially about the future.”

One CIO gave Bloomberg the generic read this week, noting that Disney will “be fine” over the longer-haul and names like DocuSign and Zoom were destined to do well anyway given trends that were already in motion prior to the pandemic.

That’s all true, but it’s still not clear whether people will ever get back on planes or go back to theme parks or experience the world the same way they did pre-COVID. Just this month, for instance, Cineworld said it would temporarily suspend operations at all of its 536 Regal theaters in the US.

Consider that another pandemic is all but inevitable, and if it comes along anytime soon (where “soon” just means in time for the majority of living people to remember COVID-19) entire businesses or, in cases like Disney, entire business lines, will cease forever to be viable. Meanwhile, something like a DocuSign would be theoretically worth trillions — how much is a company that’s ubiquitous in the electronic, secure signature market worth in a world where people don’t sign things in person anymore?

Anyway, I’ve strayed into the realm of off-the-cuff musings (again), so let me steer this quickly back on track. Quite a few companies have spent this year binging on debt to paper over the cracks or, in the case of the companies that have benefited from the pandemic, tapping debt markets simply because the money is basically free.

With ambiguity likely to linger over the corporate operating environment for the foreseeable future, questions remain about just how much of this new debt will prove serviceable.

The “winner-take-all” pandemic dynamic means that for some borrowers (e.g., Apple and Amazon), this isn’t even a discussion worth having. That is, of course they can service it — they didn’t even need the money in the first place.

For others, though, any additional turbulence that either dents profits further or else exacerbates operational headwinds could pretty easily lead to some kind of insolvency.

Remember (and I hope I don’t have to say this), the discussion from “It’s Not Debt” only applies to advanced, currency-issuing federal governments. It doesn’t apply to nations that are part of currency blocs, or nations that maintain pegs, or nations that borrow heavily in foreign currency. And it most assuredly doesn’t apply to corporations.

That said, central banks are committed to ensuring a corporate debt apocalypse never becomes a reality. Indeed, the Fed’s actions in 2020 suggest that a literal apocalypse would precede any debt reckoning. Because corporate leverage would be the last thing anyone would be worried about during, say, an uncontrolled Ebola pandemic, you might argue that anything rated BBB or better is akin to a government bond these days.

“In a debt driven economy, the art of central banking is a technology of decelerating breakdown,” Deutsche Bank’s Aleksandar Kocic wrote Friday. “By raising and lowering [rates], a central bank pursues the task of minimizing the endemic risks of a crash by adjusting to an acceptable level the stress incurred by the interest rate,” he added, noting that “jumpstarting the economy becomes synonymous with decreasing the risk of insolvency for the units that are in debt.”

Writing on Thursday, SocGen’s Sophie Huynh flatly noted that “in a highly leveraged world, the next phase of monetary policy tightening looks set to be a delicate exercise.”