Back in April as the Covid-19 reset was winding itself around the global economy I asked in a blog if your company had stashed enough cash away. I asked this question as several threads had converged in my head and has been triggered by an article in the Economist:
- Firms that enter an economic downturn with riskier balance sheets may find access to re-finance options harder just at the time they might need them
- Chief Data Officers and heads of D&A, sitting at the executive table with the CEO and peers aiding immediate and pressing decisions with trusted data and insight, might do well to cosy up to the CFO to understand the state of funding of the firm
The impact is clear: during the Covid-19 reset it will be easier to spot troubled firms; and all firms need to be surgical and smart about all investments, not just data and analytics, if they are to survive and even grow. It so happens that in this weekend’s US print edition of the Financial Times, there was an article that suggests where to look for these riskiest of firms.
In Riskiest US Companies left behind in rush to buy debt, you can read about the spread of firms seeking cash by selling bonds across the rating spread. Firms able to sell bonds rated at BB+ or above are thought, so the article says, to be safer and presumably have enough cash (or access to cash) to survive the Covid-19 reset. Firms who sell bonds at, say, B-, are struggling to sell bonds. In other words, the bond market is exposing those firms that it thinks are riskier. The conclusion of the article is that the bond market is not even operating for such firms. That is the last step that precedes financial distress, default, and worse.
Of course, the Fed has expanded its programs to ensure cheap money can keep flowing. So presumably even the riskier firms can find some relief and keep going. But the risk will remain as debts will just pile up. It cannot continue ad infinitum.
At some point the US and global economy will catch a break and someone will claim that we have entered a new stable period (whatever that means). At which point the financial balancing acts of today will start to decline. The music will stop and the number of chairs available will be visible. We, and our political masters, will face some horrible decisions. Do we let competitive forces operate to burn the bad wood and allow resources to be naturally reallocated to more productive use? Or do mandarins in white palaces perpetuate the zombie herd? Or do they decide who survives and who does not, in a controlled “winner picking” pact with the electorate?
Somewhere between that horrible decision and today a growing number of firms will be seen to struggle to secure enough cash to ward off attention. As a result, one would expect increased merger and acquisition activity: those with cash and access to cash, including VCs, may go on a buying binge. AI, data and Ana,tuck will help all forms – prey and hunter. Hunters will use data and analytics to understand decisions about what to acquire and when; the prey will use data and analytics to decide how to identify and preserve critical assets in order to protect against the circling hunters.
For more on this topic: FT: Towering debts are a big threat, even if servicing costs are low
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