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.
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