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Pandemic survival plans: U.S. businesses scramble to conserve cash, boost liquidity

Published 04/14/2020, 06:06 AM
Updated 04/14/2020, 07:06 AM
© Reuters. FILE PHOTO: FILE PHOTO: Outbreak of the coronavirus disease (COVID-19) in Everett
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By Rajesh Kumar Singh

CHICAGO (Reuters) - Charlie Straface, president of Norwegian aluminum maker Norsk Hydro's North American extrusion operations, convenes a coronavirus task force every other day to draw up cost-cutting measures to offset declining revenues and protect the unit's cash balance during the economic slump related to the outbreak.

With little clarity on when the U.S. economy will reopen, companies of all sizes have been bracing for at least months of limited revenues. With about $500 billion of corporate debt due to mature this year and in 2021, many businesses must conserve cash and bolster liquidity.

"Things are changing day to day," said Straface. His unit, headquartered in Rosemont, Illinois has already furloughed employees and slashed operating expenses, and he said: "We have to anticipate everything that could go wrong relative to our cash flow situation."

Straface said cash balance looks positive for six months.

The picture was shakier for Lake Zurich, Illinois-based CCTY Bearing. The supplier of bearings to automakers and construction and agriculture equipment manufacturers, said it could face a problem if the economy remains shut even into May.

Forty-one states have ordered people to stay at home to contain the coronavirus outbreak. As a result, many of CCTY's customers are unable to take their deliveries.

If the gridlock persists, CCTY expects to have a 50% increase in inventory in May, locking up millions of dollars.

"I am having sleepless nights," said Evan Poulakidas, CCTY's director for North America.

At Hydro's North American extrusion unit, slumping revenues have boosted the need for working capital 15% over the past month, and the worst is yet to come.

The unit has projected that sales will dip by up to 30% in April and May, causing a "significant" jump in inventory.

To protect its cash balance, Hydro has furloughed about 10% of employees in the United States and Canada and asked all 23 facilities to cut operating expenses by as much as 20%.

If the situation worsens, Straface says the unit could consider "draconian" steps such as halting all the capital spending for the year, temporary plant closures and salary cuts.

Hydro is not alone. Heavy equipment maker Caterpillar (NYSE:CAT) has withheld annual salary increases and bonuses for employees. Furniture maker Steelcase has asked nearly all U.S.-based salaried employees to temporarily take a 50% base pay cut.

United States Steel Corp has slashed capital spending for the year and idled some operations.

Economists believe the U.S. economy already slipped into recession last month. Further cuts would almost certainly worsen the unemployment rate that in March posted the largest single-month increase since January 1975.

DEBT BINGE

David Berge, an analyst at rating agency Moody's, said "good and deep sources" of liquidity are needed to survive a prolonged disruption. Companies, therefore, have been racing to raise as much credit as possible.

Tractor manufacturer Deere & Co has tapped the market to raise $2.5 billion in new debt and renewed $8 billion revolving credit facilities. Plane maker Boeing (NYSE:BA) last month drew down its entire $13.8 billion credit line.

But the credit market has tightened. The spread between risky high-yield corporate debt and U.S. Treasuries has widened sharply to about 9 percentage points now from 3.5 percentage points in January.

The Federal Reserve last week announced it would expand its corporate bond-buying program, leading to a rally in prices of junk bonds. Matthew Miskin, co-chief investment strategist at John Hancock Investment Management, said while the move "can't stop companies from defaulting", it at least helps them manage borrowing costs.

A $350 billion government loan program for small businesses also offers a lifeline to those facing a liquidity crunch, but its rollout has been marred by confusion over funding terms.

The chief operating officer of HiberSense said the government loan could help the small startup, which sells internet-connected home climate control systems, stay afloat until business rebounds. COO Bob Fields, however, said the company was still waiting to hear back from its bank about the loan request.

The Pittsburgh-based company has been operating under a "Pandemic Survival Plan" after the virus-induced lockdown led to a 75% drop in revenues last month. $300,000 of its capital is tied up as customers are struggling to take deliveries.

Fields said cash requirements have already tripled, forcing it to carry out layoffs and freeze discretionary spending.

When the first wave of stay-at-home orders hit HiberSense's operations, Fields hoped normal business would resume in a week. After that he knew the company needed a plan to survive.

© Reuters. FILE PHOTO: Caterpillar's small wheel loader assembly plant is pictured in Clayton

"We couldn't afford to spend money on hope," Fields said. "Hope is not a strategy."

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