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| Businesses Face a New Coronavirus Threat: Shrinking Access to Credit | Businesses Face a New Coronavirus Threat: Shrinking Access to Credit |
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| Jeffrey Albrecht, who owns three Holiday Inn hotels in southern Ohio, watched as $200,000 disappeared from his books in just three days as people began canceling bookings. | Jeffrey Albrecht, who owns three Holiday Inn hotels in southern Ohio, watched as $200,000 disappeared from his books in just three days as people began canceling bookings. |
| The banker handling his mortgages on the properties called. He wanted to know: How much more money could Mr. Albrecht lose before he would miss a loan payment? Mr. Albrecht assured him he could last at least four months. | The banker handling his mortgages on the properties called. He wanted to know: How much more money could Mr. Albrecht lose before he would miss a loan payment? Mr. Albrecht assured him he could last at least four months. |
| Others might be less fortunate. “If this goes on for very long, there will be much bloodletting in America’s small business community,” Mr. Albrecht said. | Others might be less fortunate. “If this goes on for very long, there will be much bloodletting in America’s small business community,” Mr. Albrecht said. |
| Companies of all sizes, from local businesses to blue-chip giants, have taken a big hit from the coronavirus pandemic which will gut companies’ profits and affect not only their ability to keep operations afloat, but also their ability to borrow money. | Companies of all sizes, from local businesses to blue-chip giants, have taken a big hit from the coronavirus pandemic which will gut companies’ profits and affect not only their ability to keep operations afloat, but also their ability to borrow money. |
| If companies are unable to tap credit to pay their rent, make payroll or finance other activities, it could force them to slash costs, lay off workers, pause investments and even declare bankruptcy. That, in turn, could worsen the recession that’s now widely expected and affect the financial markets — already stressed from stock-market plunges — where investors buy and sell the debt issued by companies, making it even harder for companies to borrow. | If companies are unable to tap credit to pay their rent, make payroll or finance other activities, it could force them to slash costs, lay off workers, pause investments and even declare bankruptcy. That, in turn, could worsen the recession that’s now widely expected and affect the financial markets — already stressed from stock-market plunges — where investors buy and sell the debt issued by companies, making it even harder for companies to borrow. |
| “The economy is coming to a half of a dead stop,” said Michael Greenberger, a professor at the University of Maryland Francis King Carey School of Law. Businesses are having trouble opening or getting customers to engage normally, said Mr. Greenberger, whose research focuses on financial stability. “All of these businesses are going to at some time have to re-up their loans, renew their loans, roll them over. With the decline in revenues the ability to borrow money is going to be very problematic.” | “The economy is coming to a half of a dead stop,” said Michael Greenberger, a professor at the University of Maryland Francis King Carey School of Law. Businesses are having trouble opening or getting customers to engage normally, said Mr. Greenberger, whose research focuses on financial stability. “All of these businesses are going to at some time have to re-up their loans, renew their loans, roll them over. With the decline in revenues the ability to borrow money is going to be very problematic.” |
| On Sunday, the Federal Reserve took the drastic step of slashing interest rates to nearly zero and enacted measures to keep credit pumping through the economy and prevent a wave of business defaults and closings. And in a letter to President Trump and congressional leaders on Monday, the United States Chamber of Commerce asked for sweeping changes to laws governing the Fed so that businesses with more than 500 employees could borrow directly from the Fed’s discount window, a lending facility that is open only to banks. | On Sunday, the Federal Reserve took the drastic step of slashing interest rates to nearly zero and enacted measures to keep credit pumping through the economy and prevent a wave of business defaults and closings. And in a letter to President Trump and congressional leaders on Monday, the United States Chamber of Commerce asked for sweeping changes to laws governing the Fed so that businesses with more than 500 employees could borrow directly from the Fed’s discount window, a lending facility that is open only to banks. |
| Such measures could ease a potential credit crunch for companies, which rely heavily on borrowing to function. Larger companies often issue bonds to investors or tap credit from banks to fund operations, refinance existing debt, build plants and even buy other companies. When the bonds are sold into the financial markets, credit rating agencies give them a letter grade, which signals their quality. Grades with As are the best. Bonds with B or C grades indicate a higher probability that investors will not recover their value, because the companies that issued them might stop making payments — but they provide better returns. | Such measures could ease a potential credit crunch for companies, which rely heavily on borrowing to function. Larger companies often issue bonds to investors or tap credit from banks to fund operations, refinance existing debt, build plants and even buy other companies. When the bonds are sold into the financial markets, credit rating agencies give them a letter grade, which signals their quality. Grades with As are the best. Bonds with B or C grades indicate a higher probability that investors will not recover their value, because the companies that issued them might stop making payments — but they provide better returns. |
| Interest rates have been so low in the past decade that even the shakiest companies have found buyers for their debt because investors were looking for higher returns. From 2009 until last year, corporate borrowing surged 60 percent, to $9.3 trillion, for companies in the United States, according to the credit rating agency S&P Global Ratings. As of May, nearly $3.8 trillion was in corporate bonds rated BBB, at the low end of what qualifies as “investment grade.” BBB-caliber bonds made up 17 percent of the global corporate debt market in 2001, but now constitute more than half, according to BlackRock. | Interest rates have been so low in the past decade that even the shakiest companies have found buyers for their debt because investors were looking for higher returns. From 2009 until last year, corporate borrowing surged 60 percent, to $9.3 trillion, for companies in the United States, according to the credit rating agency S&P Global Ratings. As of May, nearly $3.8 trillion was in corporate bonds rated BBB, at the low end of what qualifies as “investment grade.” BBB-caliber bonds made up 17 percent of the global corporate debt market in 2001, but now constitute more than half, according to BlackRock. |
| But the easy money for companies came with a downside. The dependence on debt created what has been described as an “unexploded bomb” — a precariously balanced powder keg that could be set off by the coronavirus outbreak. | But the easy money for companies came with a downside. The dependence on debt created what has been described as an “unexploded bomb” — a precariously balanced powder keg that could be set off by the coronavirus outbreak. |
| Nervous companies have begun drawing on lines of credit from banks, trying to create a buffer against the oncoming dry spell. Industries that rely on so-called consumer discretionary spending, such as travel, airlines and retail, as well as companies with international supply chains such as autos and electronic goods makers, are more likely to be squeezed by the slowdown in activity. | Nervous companies have begun drawing on lines of credit from banks, trying to create a buffer against the oncoming dry spell. Industries that rely on so-called consumer discretionary spending, such as travel, airlines and retail, as well as companies with international supply chains such as autos and electronic goods makers, are more likely to be squeezed by the slowdown in activity. |
| Hilton said earlier this month that it was drawing down a $1.75 billion revolving credit facility as a precautionary measure. Air France-KLM said on Friday that it tapped a similar $1.2 billion loan, giving it more than $6.1 billion of total buffer. Other companies vulnerable to plummeting tourism, such as the Walt Disney Co. and SeaWorld Parks & Entertainment, took similar steps. | Hilton said earlier this month that it was drawing down a $1.75 billion revolving credit facility as a precautionary measure. Air France-KLM said on Friday that it tapped a similar $1.2 billion loan, giving it more than $6.1 billion of total buffer. Other companies vulnerable to plummeting tourism, such as the Walt Disney Co. and SeaWorld Parks & Entertainment, took similar steps. |
| Oil and gas companies, already smarting from Saudi Arabia’s oil price cut earlier this month, are now grappling with lower demand as people and businesses scale back. Having borrowed heavily from regional banks to finance fracking and drilling, dozens of these companies now face possible bankruptcy. | Oil and gas companies, already smarting from Saudi Arabia’s oil price cut earlier this month, are now grappling with lower demand as people and businesses scale back. Having borrowed heavily from regional banks to finance fracking and drilling, dozens of these companies now face possible bankruptcy. |
| The intensifying demand for cash from companies — what Morgan Stanley analysts said last week had become “a full-blown liquidity scramble” — could strain the entire global financial system and also make it difficult for banks to manage their reserves. | The intensifying demand for cash from companies — what Morgan Stanley analysts said last week had become “a full-blown liquidity scramble” — could strain the entire global financial system and also make it difficult for banks to manage their reserves. |
| Companies are also putting their merger-and-acquisition plans on hold — in the first quarter, the number of deals announced in the United States fell by 10 percent, to 2,103, according to Refinitiv data. Deals often require billions of dollars in financing, and companies that can postpone such plans are doing so, including Xerox, which said it put its efforts to acquire HP on hold to focus on the pandemic. | Companies are also putting their merger-and-acquisition plans on hold — in the first quarter, the number of deals announced in the United States fell by 10 percent, to 2,103, according to Refinitiv data. Deals often require billions of dollars in financing, and companies that can postpone such plans are doing so, including Xerox, which said it put its efforts to acquire HP on hold to focus on the pandemic. |
| “Everyone is just trying to get by day to day at the moment,” said Krista Schwarz, an assistant professor of finance at the University of Pennsylvania’s Wharton business school. “Right now is not the time to grow the company — it’s the time to stay solvent.” | “Everyone is just trying to get by day to day at the moment,” said Krista Schwarz, an assistant professor of finance at the University of Pennsylvania’s Wharton business school. “Right now is not the time to grow the company — it’s the time to stay solvent.” |
| Investors who buy company bonds are asking for higher interest rates as compensation for the additional risk, which could put more stress on companies with already strained finances. For instance, companies are struggling to issue commercial paper — a popular form of short-term promissory note typically used to cover payroll, rent and other immediate payments — because the few skittish investors who aren’t steering entirely clear are demanding the highest premium in more than a decade. | Investors who buy company bonds are asking for higher interest rates as compensation for the additional risk, which could put more stress on companies with already strained finances. For instance, companies are struggling to issue commercial paper — a popular form of short-term promissory note typically used to cover payroll, rent and other immediate payments — because the few skittish investors who aren’t steering entirely clear are demanding the highest premium in more than a decade. |
| What’s more, the debt that is already circulating in the financial markets, including corporate bonds and packages of corporate loans, is looking less safe for investors to hold. Some big money managers like pension funds are obligated to keep risky products off their books but many are big buyers of company bonds, which in better times were considered safe and prudent investments. But with the changing environment, the credit ratings on such bonds are going down. | What’s more, the debt that is already circulating in the financial markets, including corporate bonds and packages of corporate loans, is looking less safe for investors to hold. Some big money managers like pension funds are obligated to keep risky products off their books but many are big buyers of company bonds, which in better times were considered safe and prudent investments. But with the changing environment, the credit ratings on such bonds are going down. |
| On Monday, S&P Global Ratings downgraded Exxon Mobil, the biggest American oil company, to ‘AA’ from ‘AA+’ citing lower oil and natural gas prices, weak demand for chemicals and low refining margins. A downgrade could make it harder for Exxon to borrow. | On Monday, S&P Global Ratings downgraded Exxon Mobil, the biggest American oil company, to ‘AA’ from ‘AA+’ citing lower oil and natural gas prices, weak demand for chemicals and low refining margins. A downgrade could make it harder for Exxon to borrow. |
| But it’s the smaller companies — which underpin the American economy and tend to lean more heavily on debt — that could be especially hurt by a run on credit. | But it’s the smaller companies — which underpin the American economy and tend to lean more heavily on debt — that could be especially hurt by a run on credit. |
| On Monday morning, after Ohio’s governor had shuttered schools, restaurants and bars across the state, Mr. Albrecht, the hotel owner, met with his 125 employees and vowed to keep them as busy as possible, even if traffic dwindles. | On Monday morning, after Ohio’s governor had shuttered schools, restaurants and bars across the state, Mr. Albrecht, the hotel owner, met with his 125 employees and vowed to keep them as busy as possible, even if traffic dwindles. |
| “Everything’s going to be O.K.,” he said. “We’re just going to have to ride it out.” | “Everything’s going to be O.K.,” he said. “We’re just going to have to ride it out.” |
| Jeanna Smialek contributed reporting from Washington, Michael de la Merced from London and Clifford Krauss from Houston. | Jeanna Smialek contributed reporting from Washington, Michael de la Merced from London and Clifford Krauss from Houston. |