Companies race to tap credit, raise cash

In a single week in March, as financial markets convulsed and major parts of the U.S. economy began shutting down, banks made more than $240 billion in new loans to companies — twice as much in new lending as they would ordinarily extend in a full year.

Brian Foran, an analyst at Autonomous, a research firm that did the calculations, initially thought it was a typo. “That’s really an unprecedented figure,” he said. “I’ve never seen anything like it.”

American companies are reeling from the body blow dealt by the coronavirus pandemic. As revenues dwindle, travel slows and production lines halt, companies have begun to furlough or lay off employees, slash investment in operations and buy less from suppliers. With no way to tell when the economy will restart, they are racing to conserve money and tap as much credit as possible.

The new reality, bankers and analysts say, will be tough for companies that had grown accustomed to the easy money of the past decade. Enticed by ultralow interest rates, they borrowed trillions of dollars in new debt in the belief that banks would keep lending and the debt markets would always be open. Now many indebted companies, even those whose business has not taken a direct hit from the outbreak, are finding that they have to adapt to an era in which cash is suddenly much harder to raise.

Carlos Hernandez, the chairman of Jpmorgan Chase’s investment banking business, recently told clients and colleagues that the economic shutdown caused by the pandemic could prompt the sort of brutal reckoning for corporate America that banks went through after the 2008 financial crisis.

Hernandez is seeing the potential crisis unfold firsthand, as his bank and others get bombarded with loan requests from companies stocking up on cash. Banks are still lending, but these are bloodcurdling times for corporations.

Consumers “are not spending money on a long list of things,” said Susie Scher, co-head of the financing group at Goldman Sachs. “If you sell or service that long list of things, if you had a weaker balance sheet to begin with, you’re going to find yourself in a deteriorating liquidity position as the economic crisis goes on,” she said, referring to a position from which obtaining cash is difficult.

A divide among haves and have-nots is emerging in corporate America, tied to how cheaply and easily companies can get credit. Seeing this, Congress moved quickly in recent legislation to funnel emergency loans into the U.S. economy. Still, some types of companies could be shut out, unless the Federal Reserve relaxes its own rules.

Companies that are rated investment grade — meaning that they are the least likely to default on their debts — are having an easier time borrowing from banks or by selling bonds directly to investors via the public markets. Among those, Exxon, Disney and Mcdonald’s have all ventured into the turbulent markets to sell bonds.

But companies with lower credit ratings, which make up a significant share of all big companies and include household names such as Ford and Macy’s, could find the public markets more expensive. Yum Brands, which has a relatively low, or “junk,” credit rating, set its interest rate at 7.75% on the corporate bonds it sold Monday — nearly twice what it was paying a month ago.

Yum, which owns KFC and Taco Bell, expanded its offering to $600 million from $500 million based on strong investor demand, but it may be among the lucky ones. Lower-rated companies play a huge role in the economy. Half of the 1,148 companies in the Russell 3000 stock index that have ratings are below investment grade, according to calculations based on data from Capitaliq. Last year, these companies employed more than 6 million people and had revenue of $2.7 trillion.