COVID-19

After a 3-month borrowing spree, corporations put the brakes on more debt

Justin Ho Jul 6, 2020
Heard on: Marketplace
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A face mask hangs on a fence outside the New York Stock Exchange. Corporate borrowing has slowed as companies reconsider the economic future. Johannes Eisele/AFP via Getty Images
COVID-19

After a 3-month borrowing spree, corporations put the brakes on more debt

Justin Ho Jul 6, 2020
A face mask hangs on a fence outside the New York Stock Exchange. Corporate borrowing has slowed as companies reconsider the economic future. Johannes Eisele/AFP via Getty Images
HTML EMBED:
COPY

As the economy slowed down at the outset of the coronavirus pandemic, a lot of corporations opted to ride out the slowdown by borrowing up a storm. Corporate borrowing soared over the last few months as companies took advantage of low interest rates to pay their bills with borrowed money. But new data from the outfit Refinitiv shows that corporate borrowing dropped last week to its lowest level since early March.

When companies were piling on debt back in March, April and May, the economic picture was far from clear, said Steven Davidoff Solomon, corporate law professor at the University of California, Berkeley.

“But I think companies have a better idea of what’s going on now,” he said.

Solomon said some companies have an optimistic outlook. They’re looking at rising job numbers, increasing business activity and growth in the service sector — at least for now.

So instead of borrowing more, “companies are probably saying, look, we have enough right now. Let’s see where things go, and we’ll take it from there,” Solomon said.

Then there are companies that are feeling pessimistic. Collin Martin, a fixed-income strategist at the Schwab Center for Financial Research, said borrowing won’t help some companies make it through the pandemic.

“A lot of energy companies, when you look at retail companies, brick-and-mortar stores that were already deteriorating before this happened, clearly that outlook’s pretty negative right now,” Martin said.

He added that companies in those riskier sectors might be worried about defaulting on their existing debt.

“We’ve actually seen the number of corporate defaults pick up,” Martin said. “It’s actually been rising at the fastest pace since 2009.”

Then there are the cautious companies, borrowing less because they’re counting on an economic recovery later this year.

“What we’ll have to watch for is whether people that thought we’d get back to normal in the third quarter all of a sudden decide that that was a premature forecast,” said Jim Vogel, interest-rate strategist at FHN Financial.

And if the economy doesn’t improve, “we’ll see another round of borrowing as people have a better handle on what their own financial situation is,” Vogel said.

We’ll get a better sense of how much corporations are willing to borrow, Vogel said, as they report their quarterly earnings later this month.

COVID-19 Economy FAQs

With a slow vaccine rollout so far, how has the government changed its approach?

On Tuesday, Jan. 12, Health and Human Services Secretary Alex Azar announced changes to how the federal government is distributing vaccine doses. The CDC has expanded coronavirus vaccine eligibility to everyone 65 and older, along with people with conditions that might raise their risks of complications from COVID-19. The new approach also looks to reward those states that are the most efficient by giving them more doses, but critics say that won’t address underlying problems some states are having with vaccine rollout.

What kind of help can small businesses get right now?

A new round of Paycheck Protection Program loans recently became available for pandemic-ravaged businesses. These loans don’t have to be paid back if rules are met. Right now, loans are open for first-time applicants. And the application has to go through community banking organizations — no big banks, for now, at least. This rollout is designed to help business owners who couldn’t get a PPP loan before.

What does the hiring situation in the U.S. look like as we enter the new year?

New data on job openings and postings provide a glimpse of what to expect in the job market in the coming weeks and months. This time of year typically sees a spike in hiring and job-search activity, says Jill Chapman with Insperity, a recruiting services firm. But that kind of optimistic planning for the future isn’t really the vibe these days. Job postings have been lagging on the job search site Indeed. Listings were down about 11% in December compared to a year earlier.

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