To say liquidity and working capital have presented unique challenges for companies throughout the pandemic would be a bit of an understatement. Yet many organizations have found ways to thrive amid the chaos across supply chains, global markets for products and services, funding sources, and other dimensions of the economy.
A late April analysis by S&P Global Market Intelligence found that the interest coverage ratio—the ratio of earnings, before interest and taxes, to interest expense—increased over the course of the pandemic for all kinds of organizations. S&P studied the GAAP filings of public companies outside the financial services sector through time, and the improvements in earnings-to-interest were dramatic.
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For investment-grade businesses, the median interest coverage ratio in Q4/2021 was 8.6, considerably higher than the pre-pandemic median of 6.1. For below-investment-grade companies, the median interest coverage ratio was 4.1, a full one and a half times the pre-Covid ratio of 2.8.
The S&P report makes the point that this improvement through year-end 2021 is well-timed, since the cost of borrowing has now begun to rise.
Some companies freed up liquidity by taking advantage of record-low interest rates to refinance debt. Many businesses alternatively (or also) made significant gains by paying more attention than ever before to working capital management. They may have introduced or expanded a program to sell receivables, in order to accelerate those cash flows. They may have substantially extended terms on their payables, increasing the liquidity immediately available to the business. For those concerned about putting too much of a squeeze on their suppliers, supply-chain finance emerged as an increasingly important option.
This year's Alexander Hamilton Award winners in the category Working Capital & Payments used these working capital strategies, and more, to improve cash flows and reduce debt as the pandemic threatened their liquidity.
To learn more about the award-winning projects of Boston Scientific, GPC, and HPE—and to ask questions of these projects' leaders in real time—don't miss the live Treasury & Risk webcast on Wednesday, May 11 • 2 p.m. ET • 11 a.m. PT. Register today!
The S&P Global Market Intelligence report concludes with concern about the near future. "The yield on the S&P U.S. Investment Grade Corporate Bond Index rose to 3.96 percent as of April 19, from 2.2 percent at the end of 2021, indicating the higher rate of interest [that] a company would have to pay to borrow in the bond market," the authors report.
"Credit spreads have also widened, suggesting investors are increasingly risk-averse and cycling out of corporate bonds at a faster rate than Treasuries. If spreads were to widen further, this could indicate liquidity in the bond markets is drying up, making it harder for companies to borrow and roll over debt."
That means the timing truly could not be better for the types of working capital improvements and resulting corporate liquidity that we're recognizing with next week's round of awards.
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