Daily Management Review

Economic Fallout Of Coronaviurs Forces American Firms To Increase Cash By Debt Funding


Economic Fallout Of Coronaviurs Forces American Firms To Increase Cash By Debt Funding
With rising concerns of an economic downturn because of the global spread of the deadly coronavirus and the huge drop in the global price of oil, corporate America – including a range of companies from Exxon Mobil Corp to Royal Caribbean Cruises Ltd, were seen pushing for taking on more funds in the form of debts and boosting the cash available at hand for them.
"It's companies loading up on cash when you can get it. They are effectively building up that war chest," said Jeremy Swan, managing principal at accounting and tax advisory firm CohnReznick LLP.
With the aim of boosting its liquidity, the credit capacity of the company was boosted by $550 million by Royal Caribbean, the company announced on Tuesday. The concerns among investors that the travel ban because of the coronavirus spread to a large number of countries of the world would impact the company caused the company’s stock prices to plunge earlier this month.
"These are extraordinary times and we are taking these steps to manage the company prudently and conservatively," Royal Caribbean Cruises Chairman and Chief Executive Richard Fain said in a statement.
The oil major Exxon that is touted to have one of the strongest balance sheets in the corporate world filed paperwork for an unspecified board offering on Tuesday. It was referred to by the company as funds for general corporate purposes. But the timing of the funding attempt assumed significance as there was a Brent crude price collapse recently.
A $2.5 billion credit facility was announced on Monday by the owner of the Oreo brand of products Mondelez International Inc. The company had agreed to a similar agreement worth about $1.5 billion about less than two weeks back.
An additional financing of $2 billion was raised by United Airlines Holdings Inc, the company also announced on Tuesday. The company also slashed its capital expenditures for 2020 by more than one third of the previous year. "We also believe we have good options to raise additional liquidity in the weeks to come, if needed," United President Scott Kirby said.
And those companies that decided not to get onto the bandwagon of collecting more funds also tried to calm investors by assuring them about their financial strengths. More than $7.3 billion in cash and unused bank lending in reserve were touted as its strongest point by American Airlines Group Inc during an investor presentation on Tuesday.
“American Airlines has more liquidity than any other airline in the world, which is exactly where we want to be in an environment like this and exactly why indeed we've held so much for so long,” American Airlines Chairman and CEO Doug Parker said at a conference on Tuesday.
According to Fitch Ratings, the companies that are at most risk because of the economic fall out of the coronavirus spread are those that have large debts and are in the service sectors as airlines, cruise lines, movie theaters, gaming companies and hotel chains, because of the reduced tourism and discretionary spending.
"What we've seen in this market is that stability today isn't necessarily stability tomorrow," Swan said.