Corporate America chips away at a US$350b debt problem

New York

A HANDFUL of blue-chip US companies are starting to pay back the US$350 billion that investment-grade corporations borrowed in total to get through the coronavirus pandemic.

Target Corp and CVS Health Corp have recently announced that they are buying back investment-grade bonds, using cash plus in the case of CVS, some borrowed money as well. AT&T Inc said last month that it plans to use excess cash to further reduce debt.

It's unclear how many companies are joining in. Investment-grade corporations saw their indebtedness rise to a record high in the second quarter by at least one metric, according to a report from Barclays Plc on Sept 30: the ratio of total debt to a measure of earnings known as Ebitda climbed to four times, compared with figures that since 1990 have ranged between two and three times.

That unusually high ratio worries some debt investors, and explains why some companies are eager to pay down borrowings. Although the Federal Reserve is supporting credit markets, that won't last indefinitely, and investors still care about companies having the resources to cover their obligations.

"Fed buying has slowed down considerably, and it's only buying short-term paper outside earlier purchases of exchange-traded funds," said Terence Wheat, portfolio manager of US investment-grade corporates at PGIM Fixed Income, which oversees US$920 billion in assets. "Many companies need to pay down debt once their cash flows improve."

High-grade US companies in the fourth quarter will probably pay back more of the estimated US$350 billion they borrowed to boost liquidity during the pandemic, according to Hans Mikkelsen, head of high-grade credit strategy at Bank of America Corp.

For now, companies that are performing relatively well during the pandemic, in industries such as technology, telecom, and healthcare, are more likely to be comfortable paying back debt, according to Dominique Toublan, head of US credit strategy at BNP Paribas SA. Meanwhile, industries like travel, leisure and industrials, are likely to wait until the economy turns, he said. BLOOMBERG