• James Notaris

    CPA, ESQ, Legal Editor

  • Tyler Dikun

    Executive Editor

    In Brief:

  • Corporate America has seen an overall drop in revenue as much of the country is now under quarantine.

  • Many companies have looked to raise liquidity by drawing down credit and taking out more loans.

  • Many CEOs have also announced that they will take pay cuts during the pandemic.

  • Distressed debt firms are now looking into distressed assets, the amount of distressed debt is now at $1T, the highest since 2009.

The consensus is near universal amongst micro to mega-cap companies: increase cash reserves by any means necessary.

Not even the most well-oiled machine could dodge the coronavirus-induced tidal wave of hardship. Numerous publicly traded companies have already withdrawn their financial guidance for 2020 in the wake of the pandemic. With some 3 million employees furloughed and 17 million filing for unemployment in the last month, experts now argue over whether the market will experience a v-shaped recovery or if perhaps the bottom hasn’t yet hit. Here’s how corporate America is weathering storm.

Taking On New Debt and Drawing Down Credit Lines

According to the Wall Street Journal, 260 companies have added nearly $221B in debt to their balance sheets in the last month. Furthermore, many companies have drawn down existing lines of credit in order to increase their liquidity. On April 9, Carnival Cruise Line applied for an additional $3B from lenders.

The Florida-based cruise line has been one of the hardest hit during the pandemic as travel remains on ice for the time being. Carnival has not yet announced its earnings forecast but the damage may last for the long-term. YTD, Carnival Stock (CCL) has fallen 75%.

Marriott International (MAR), one of the largest hotel chains in the world, is in a similar boat as Carnival. Marriott recently announced it expects a massive drop in revenue for March, no surprise as much of the world remains under quarantine.

With an estimated 25% of its 7,500 holdings shuttered, the third-largest hotel chain has completely drawn down its $4.5B line of credit and has acquired another $1.5B from lenders to keep the lights on. Although only 10% of its North American hotels are currently occupied, Marriott reported that its 2021 bookings have so far not been greatly affected by the pandemic.

Massive Furloughs

The massive drop in expected revenue across multiple industries has been devastating to employees. As companies cannot make payroll for the coming months, a record number of non-essential workers have been furloughed. 100 companies that make up the S&P 1500 with a combined 3 million workers have announced plans to furlough employees. Non-essential workers who cannot work from home, those mainly in the retail and restaurant sector, have lost their jobs by the millions.

The large-chain restaurant The Cheesecake Factory announced plans to furlough nearly all of its 41,000 employees. The company has already drawn down the remaining $90 million from its line of credit. Macy’s (M) is now faced with a major debt crisis brought on by COVID-19. The famous retail chain cannot move most of its inventory until the pandemic ends yet it must still find a way to pay off its $3.9B in debt before the year ends. Macy’s recently hired asset management firm Lazard and debt restructuring law firm Kirkland & Ellis to improve its finances. S&P already downgraded Macy’s debt to the junk pile.

Executives Are Taking Pay-Cuts

Desperate times call for desperate measures. Royal Carribean Cruises (RCL) CEO Michael Bayley announced he would forego his salary between April 1 and September 30 as the company copes with a massive drop in revenue. Many C-Level executives in retail have also taken various levels of pay-cuts to help their respective companies during the pandemic. Some of the most notable are listed below:

  • Arcadia (Top Shop): Cut 100%
  • Bass Pro Shops: Cut 100%
  • Bed Bath & Beyond: 30%
  • Boot Barn: 50%
  • Burlington: Cut 100%
  • Capri (Michael Kors): Cut 100%
  • Columbia: Cut to $10,000 (from approximately $3 million)
  • Dick’s: Cut 100%
  • DSW: 20%
  • Gap: Unspecified
  • Genesco (Journey): Cut 100%
  • Guess: 70%
  • Kohl’s: Cut 100%
  • Macy’s: Cut 100%

The Rise of Distressed Debt

In a report from March 25, Bloomberg reported that the amount of distressed debt in the U.S. quadrupled in only one week since quarantine measures were officially adopted. The nearly $1T worth of distressed debt raised in the U.S. now rivals levels unseen since 2009.

Companies that take on distressed debt are under immense financial pressure to pay their loans back. Many firms buy distressed debt if they are confident that the over-leveraged company will not be able to recover. In many cases, the company that buys the debt becomes the owner of the distressed company if it becomes insolvent.

What Does The Future Hold For Corporate America?

Although experts argue about how far the market may sink, there is hope on the medical front. Rutgers University received FDA approval to produce a saliva-based COVID-19 test. The test will be much more widespread and takes less time to produce results. In the race to find a COVID-19 vaccine, two Pharma heavyweights, GlaxoSmithKline and Sanofi, have combined forces to speed up the process.

The market has responded to news that a vaccine may be on the way by December as well as the flattening of the curve in New York. The S&P 500 recently had its best week in decades while the NASDAQ and Dow Jones have both recovered dramatically since the market bottomed out at the beginning of March.

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