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Companies are sitting on a record amount of cash amid lingering uncertainty about disruptions from Covid-19, defying expectations earlier this year that a waning pandemic would unleash a spending spree.

Cash and short-term investments on corporate balance sheets globally are at an all-time high of $6.84 trillion, according to data from S&P Global, extrapolated from second-quarter earnings reports. That is 45% higher than the average in the five years preceding the pandemic and a 2.6% increase from the previous quarter.

In April, analysts at Goldman Sachs had lifted their 2021 forecast for spending growth by S&P 500 companies to 19% from 10%, “as uncertainty continues to fall and global economies continue to reopen."

But global capital expenditures are expected to slow in the third quarter after a strong start to the year, according to an Aug. 6 report by JPMorgan Chase & Co. Corporate spending growth is forecast to decline to 5.8% this quarter at a seasonally adjusted annual rate, down from 12.9% in the previous one.

Companies have enjoyed one of the strongest economic rebounds in history, driven by a powerful combination of fiscal and monetary stimulus. But now some indicators are flashing warning signs and prompting finance chiefs to build up their cash buffers again.

The spread of the Covid-19 variants has caused some governments to retighten restrictions on mobility in recent days, such as in Australia, Israel and China. Earlier this month, the U.S. Centers for Disease Control and Prevention urged Americans in high-risk areas to start wearing masks in indoor public spaces again.

“If you’re a corporate treasurer then you’re not wanting to be complacent," said Mark Lewellen, head of corporate debt capital markets at Deutsche Bank. “If you look at infection rates in Europe, they’re still climbing, there’s concern around more variants. Clearly this has not gone away."

Cruise-line operator Carnival Corp. has been gradually bringing some of its ships back into service after the pandemic effectively shut down its operations. But it currently has around $9 billion of cash, compared with its usual balance of around $2 billion to $2.5 billion before the pandemic. It has 23 of its ships in operation out of 91.

“My thought on liquidity was to plan for the worst and hope for the best," said Carnival Chief Financial Officer David Bernstein in an interview. “We all recognize that with everything going on, the pause in our cruise operations could very well be extended and that we needed a very long liquidity runway." The company raised another $2.4 billion through a debt sale on July 21.

Airlines also are continuing to increase their cash positions. United Airlines Holdings had $23 billion of liquidity at the end of the second quarter, more than quadruple the same period of 2019 and up $3.3 billion over the six months through June. Delta Air Lines added $1.6 billion to its cash pile in the most recent quarter for a total of $17.8 billion of liquidity. It had $3 billion of cash at the same point of 2019.

Regulators encouraged companies last year to preserve cash by canceling dividends and share-buyback programs while business was disrupted. Many raised high amounts of debt to build up these buffers, with issuance by U.S. and European nonfinancial companies hitting a record at $2.4 trillion, Dealogic data showed.

Corporate bond issuance has remained strong in recent months, particularly for riskier companies. European firms sold $108 billion of high-yield bonds this year so far, nearly twice the amount from the same period in 2020, while issuance by U.S. corporations was one-third higher, according to data from Dealogic. Junk bond issuance in July, normally a quieter month, hit a record for both North America and Europe.

In August, Volkswagen Group AG and BMW AG both sold bonds, raising $3 billion and $2.5 billion respectively, for general corporate purposes. At the end of June, Volkswagen said it had €35 billion of liquidity, equivalent to $41 billion, up nearly 88% from the year before. BMW said it had €18.5 billion of liquidity midyear.

“Major corporates have been sitting on a large liquidity position for a while now," said Marc Baigneres, a regional head of investment-grade finance at JPMorgan Chase & Co, noting that they also have limited their spending even as many have “generated cash flows that are higher than expected."

Merger-and-acquisition activity has picked up from the lows from the middle of last year, but it is still below pre-pandemic levels. The second quarter logged $855 billion of deals globally, up 12% from the same period last year but still below the 2019 quarterly average of $984 billion, according to data from PitchBook.

To be sure, fears of new Covid-19 variants aren’t the only reason companies are raising debt. The primary reason for high-yield bond issuance is refinancing existing debt in 42% of deals, according to JPMorgan. Some is also to fund acquisitions in 28% of cases, which bankers expect will accelerate in the second half of the year.

Businesses also have recently ramped up requests for credit lines, adding to their liquidity positions. Bankers expect this may lead to an uptick in spending in the coming months.

Second-quarter earnings reports are signaling that many companies are still wary. On average, margins have risen but many management teams have said growth may not continue at the same pace going forward, according to Shaunak Mazumder, a global equities portfolio manager at Legal & General Investment Management.

“Guidance has been weaker than most investors have expected. There’s a level of caution from most companies for the second half of the year," said Mr. Mazumder.

Investors say they are generally averse to companies keeping large cash balances and would prefer them to put the capital to work or return it through dividends or share buybacks. But in a time of lingering uncertainty, it is more acceptable, according to Ken Taubes, chief investment officer of Amundi SA’s U.S. branch.

“Some industries were very hard hit by the pandemic; there’s no guarantee that we won’t get lockdowns or shutdowns again. Restaurant chains, cruising lines, airlines, to the extent that those industries want to keep more liquidity, I can understand that."

 

This story has been published from a wire agency feed without modifications to the text

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