Corporate America sits on its cash
By Justin Baer in New York
Published: September 23 2008 19:49
Corporate America waded into the darkest days of the credit crisis with more cash than ever before, a sign many of the US’s biggest companies have been bracing for signs that Wall Street’s problems will infiltrate the rest of the economy.
Excluding utilities and financial institutions, members of the Standard & Poor’s 500 Index ended June with a record $648bn in cash and short-term securities.
“Corporate profits until the last six months were pretty good,” said Fred Smith, chief executive of FedEx, the package delivery group. “With the exceptions of the autos and housing, there’s a lot of cash flow and a lot of capability in the industrial sector outside of the funds provided by financials.”
Many large US companies began to stockpile more cash in the aftermath of the last economic downturn, earlier this decade. The size of S&P 500 members’ war chest reached a plateau in 2005 as conditions improved but never slipped below $600bn. And in the past year, their liquidity has inched higher.
They may need it. Even if big companies have plenty of cash to weather the slowdown, many of their customers, be they consumers or smaller business, may not.
While some of Wall Street’s most venerable names collapsed and lawmakers debated the White House’s proposed $700bn bailout, corporate finance chiefs have closely monitored the credit markets for any effects on their funding plans.
“We will see the total amount of credit will be reduced a little bit,” said Rick Fearon, chief financial officer of Eaton, an industrial conglomerate. “There is an amount of leverage that needs to be reduced. It’s a logical concern and one we’re watching carefully.”
Some have more to worry about than others.
The crisis “will create a real winner takes all environment,” said Jason Trennert, chief investment strategist at Strategas Research Partners. “Well-run companies not dependent upon credit markets will take market share from companies which aren’t well run and are [dependent on credit].”
On Monday, one US bellwether, General Motors, drew down the remaining $3.5bn from a revolving credit line, while three others – Microsoft, Hewlett-Packard and Nike – unveiled plans to buy back as much as $53.5bn in stock.
Short-term borrowing costs have climbed. Rates on 15-day commercial paper have jumped 127 basis points in two weeks, according to Bloomberg.
One US clothing chain, Talbots, has already faced challenges. In April its shares plunged after Bank of America and HSBC did not renew $265m in letters of credit.
Talbots eventually won extended credit terms from the majority of its suppliers, while covering its remaining supplier credit requirements with a $50m unsecured loan from its largest shareholder, Aeon, the Japanese retailer.
Talbots had $215m in working capital borrowing capacity at the end of its second quarter ending on August 2.
“In a period in which credit is being rationed, the price of leveraged assets declines and cash is king,” Mr Trennert said.
Additional reporting by Jonathan Birchall in New York
Copyright The Financial Times Limited 2008
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