12/04/2020 CFOs Under Pressure to Maintain Liquidity as Coronavirus Inflicts Economic Damage - WSJ

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CFO JOURNAL

CFOs Under Pressure to Maintain Liquidity

as Coronavirus Inflicts Economic Damage
Finance chiefs are extending credit lines, tapping bond markets and bolstering cash reserves, but
uncertainty on how long the crisis will last is complicating their efforts

Covestro CFO Thomas Toepfer said his company drew down on existing working capital facilities
and secured a loan as it looks to accelerate existing cost-cutting plans and reduces capital
expenditures.
PHOTO: SASCHA STEINBACH SHUTTERSTOCK

By Mark Maurer and Nina Trentmann

April 10, 2020 5 30 am ET

Finance chiefs are tackling one of the biggest business challenges during the coronavirus
pandemic: maintaining liquidity.

The lockdown of significant parts of the world economy is resulting in revenue declines for
hotel operators, airlines, retailers, car manufacturers and many other companies. Businesses

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also are navigating supply-chain disruption and a surge in costs related to the transition to
remote work.

Companies are cutting expenses—not for profit, but to preserve cash—idling plants and
furloughing or laying off employees to ensure they survive. And CFOs are leading the charge in
extending credit lines, bolstering emergency cash reserves and tapping bond markets, as they
revise debt strategies and seek to avoid mistakes from past crises.

“As we look forward without knowing exactly where this is headed—the depth and the length of
the strain on the economy—liquidity is the number one question that rises to the top of the list
in terms of viability of a business,” said Mike Zechmeister, finance chief of freight broker C.H.
Robinson Worldwide Inc.

The Federal Reserve in recent weeks unveiled various measures aimed at alleviating credit
stress and providing companies with access to capital, including purchases of commercial
paper, a $4 trillion backstop for money-market funds, corporate-bond purchases and direct
bridge loans to businesses.

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government’s $350 billion small-business loan program and the historic spike in unemployment
claims.

On Thursday, the Fed said it would expand lending programs to companies with weaker credit
ratings, including those that had their creditworthiness downgraded since the outbreak of the
coronavirus in the U.S. The central bank said it would offer loans for small businesses—the
Main Street Landing Program—which comes on top of forgivable loans for payroll costs from
the Small Business Association.

Meanwhile, companies are looking to expand their capital buffers. Mr. Zechmeister, for
instance, has tested borrowing off the company’s existing $1 billion credit facility to make sure
additional liquidity would be ready for use as needed. The company, which held $448 million in
cash and cash equivalents at the end of December, also is examining accounts receivable and
overdue payments to manage its liquidity position, Mr. Zechmeister said.

Covestro AG , a German specialty-plastics maker, drew down on existing €500 million ($547
million) working capital facilities and secured a €225 million loan as it looks to accelerate
existing cost-cutting plans and reduces capital expenditures, CFO Thomas Toepfer said.

Other companies, such as Ford Motor Co. and Children’s Place Inc., have suspended dividends,
while AT&T Inc., JPMorgan Chase & Co. and others have halted share-repurchase plans.

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Rush for New Debt

Some businesses have turned to the bond market to extend maturities and strengthen their
liquidity buffer. Fortune 500 companies have about $981 billion in maturities between now and
the end of next year, according to data from Dealogic Inc.

Anheuser-Busch InBev SA said last week one of its subsidiaries issued $6 billion in new bonds.
The brewer plans to hold the proceeds as cash while conditions remain uncertain, and use them
to reduce debt as market conditions normalize. “At any given time, we work to have enough
cash on hand to meet our liquidity needs for more than one year, especially in times of
increased volatility,” said Lauren Abbott, vice president of investor relations at the Belgium-
based company.

Howard Hughes Corp., a Dallas-based real-estate developer, raised $600 million late last month
through an equity issue and a parallel private placement. Together with existing cash, Howard
Hughes now has about $1 billion at hand. “This will help us survive this, independent of how
deep or how long this pandemic will be,” Chief Financial Officer David O’Reilly said.

Sonic Automotive has drawn down credit lines and communicated with banking partners to
ensure assistance in securing other lines if needed.
PHOTO: KRIS TRIPPLAAR SIPA USA ASSOCIATED PRESS

Some CFOs are attempting to avoid struggles faced during the financial crisis. Sonic
Automotive Inc., a Charlotte, N.C.-based car-dealership chain, defaulted due to a distressed-
debt exchange in 2009. In recent weeks, the company has drawn down credit lines and
communicated with banking partners to ensure assistance in securing other lines if needed,
Sonic CFO Heath Byrd said.

“We all know the banks are in very good shape, which is such a blessing in hindsight that 2009
happened and created those liquidity ratios to be better for the banks,” he said.

Some lenders are shrinking lines of credit they have with their customers to minimize the risk
of company defaults and bankruptcies. In recent weeks, that credit crunch has pushed some
companies closer to breaching debt covenants. Coal supplier Murray Energy Corp. said it is

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concerned it may breach covenants in its bankruptcy loan after its finances were hit hard by the
pandemic and beleaguered coal markets.

Starting Short
Access to public debt markets and new bank loans is limited for many companies, depending on
the health of the business and their credit rating. Companies whose debt was barely investment
grade at the start of the pandemic likely will struggle to meet their debt obligations, said Nilly
Essaides, a senior research director at Hackett Group Inc.

Rating firms have downgraded a flurry of companies in recent weeks, which can reduce their
access to the public markets or result in higher cost of debt.

Companies need to examine their debt covenants and keep the communication open with rating
firms and debtors before defaulting, Ms. Essaides said.

MORE FROM CFO JOURNAL

• CFOs Seek to Maintain Liquidity as Coronavirus In licts Economic Damage April 10, 2020

• Lufthansa Reassigns Finance Tasks Amid Sudden CFO Departure April 9, 2020

• FASB Proposes Delaying New Accounting Rules for Some Companies Because of Coronavirus April 8, 2020

• CFOs Look to Ramp Up Automation Investments Amid Pandemic April 8, 2020

The pandemic also has prompted CFOs to consider debt issuances as far as four years into the
future. Companies that might be planning to issue debt in 2021 or 2022 can lock in financing at
the current interest rates with a hedge. “If rates go lower, you might regret that you entered the
hedge,” said Amol Dhargalkar, managing director at financial-risk adviser Chatham Financial
Corp.

As an alternative, companies may rely on cash pooling, the internal shifting of money from
cash-rich entities to those that are cash-starved, Ms. Essaides said.

Write to Mark Maurer at mark.maurer@wsj.com and Nina Trentmann at

Nina.Trentmann@wsj.com

Copyright © 2020 Dow Jones & Company, Inc. All Rights Reserved

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