One of the biggest debates in Washington, D.C., is about how much debt the government should take on to get the country through the pandemic. On the corporate level, we’re seeing something similar, with some companies making the calculation that debt is their only option right now.
AMC, the movie theater chain, raised more than $900 million in financing, part of which is debt, to help the company get through this next part of the pandemic.
Corporations have amassed big piles of debt during this pandemic, and that has long-term implications for the economy.
On the one hand, taking on debt can allow a company to survive in times of turmoil. Nathan Stovall at S&P Global Market Intelligence said without it, “you would have seen a lot of companies go out of business. But the fact that they’ve been propped up in the near term means they’re going to live to fight another day. It also means that they’re going to be able to continue to employ people.”
The debt is a bridge to whatever comes after this, but eventually companies are going to have to pay it back. And they’ll need to be making enough money to do that. Problem is, we don’t know yet if certain changes in consumer behavior, like avoiding movie theaters, will be temporary or permanent.
“People will go back to normal, but it might be a new normal,” said Marco Rossi, who teaches finance at Texas A&M’s Mays Business School. “So if those earnings that are required to finance the debt cannot be sustained in the future, just because people will change their habits, then that new debt may be unsustainable.”
Even if a company can make its debt payments, it will face other problems.
As anyone who’s paid back student loans could tell you, when you have to put a big chunk of your money toward that bill every month, you don’t have as much cash to spend. And in business that means less money to grow or outmaneuver your competitors. That happened to a lot of the retailers that were saddled with debt by private equity firms and later shut down, like Toys R Us.
“It’s not just as simple as do you meet the debt burden,” Stovall said. “Can you remain a competitive entity in your industry?”
But ultimately, some companies don’t have a lot of options right now. They can file for bankruptcy or take on the debt in the hopes that their business model will make sense again in a post-pandemic world.
COVID-19 Economy FAQs
What’s the outlook for vaccine supply?
Chief executives of America’s COVID-19 vaccine makers promised in congressional testimony to deliver the doses promised to the U.S. government by summer. The projections of confidence come after months of supply chain challenges and companies falling short of year-end projections for 2020. What changed? In part, drugmakers that normally compete are now actually helping one another. This has helped solve several supply chain issues, but not all of them.
How has the pandemic changed scientific research?
Over the past year, while some scientists turned their attention to COVID-19 and creating vaccines to fight it, most others had to pause their research — and re-imagine how to do it. Social distancing, limited lab capacity — “It’s less fun, I have to say. Like, for me the big part of the science is discussing the science with other people, getting excited about projects,” said Isabella Rauch, an immunologist at Oregon Health & Science University in Portland. Funding is also a big question for many.
What happened to all of the hazard pay essential workers were getting at the beginning of the pandemic?
Almost a year ago, when the pandemic began, essential workers were hailed as heroes. Back then, many companies gave hazard pay, an extra $2 or so per hour, for coming in to work. That quietly went away for most of them last summer. Without federal action, it’s mostly been up to local governments to create programs and mandates. They’ve helped compensate front-line workers, but they haven’t been perfect. “The solutions are small. They’re piecemeal,” said Molly Kinder at the Brookings Institution’s Metropolitan Policy Program. “You’re seeing these innovative pop-ups because we have failed overall to do something systematically.”
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