The conventional wisdom may be that larger firms — especially public ones — are able to weather the economic storm more adroitly than smaller brethren.
To a certain extent, that’s true. The situation facing the smallest firms on Main Street is dire, even with funding from the Paycheck Protection Program in hand.
As reported in this space last week, SMBs from all sectors said they would only have enough cash to survive for just nine days — without the funding.
When PPP forgivable loans were factored in, PYMNTS found, the companies said they would have enough funds to stay operating another 69 days. As many as 24.9 percent of the firms we surveyed said they’d applied for the loans for the additional funding they need to survive the pandemic.
There may be a groundswell of trouble brewing across other subsets of the corporate world — namely, larger companies who had gotten the funds and could be voluntarily returning the money by a May 14th deadline, if they haven’t already done so.
The trouble may bubble even with millions of dollars in cash on their respective balance sheets, because funding operations out of cash or through credit lines that still remain untapped is basically a game of waiting out the clock — in this case, betting that the cash cushion will outlast the pandemic. And that those credit lines will be available to them when they are ready to tap them. The ripple effect may be that, once the cash has run down, the businesses will shutter — or can come back only partway from an economic catastrophe where the breadth and depth are still uncertain. The path to recovery all depends upon consumer demand and consumers feeling comfortable engaging with businesses in the way they once did.
The Wall Street Journal reports that public companies that have elected to repay the federal stimulus loans have limited options to pay workers that are still on the payroll.
As has been widely discussed, larger companies had looked to the program to cover payroll, just as smaller companies have done (and still do).
As reported by the Journal, in one heavily publicized giveback of PPP, AutoNation, the nation’s largest car dealership, said that it would give back $77 million in loans that would have been earmarked toward paying 7,000 staffers now furloughed, about 28 percent of the workforce.
The Journal reported that, when asked what other options were being considered by the company, a spokesman said: “‘None’ and pointed to the lack of forgivable loan programs.”
In another example, publicly traded Kura Sushi has 25 restaurants across five U.S. states, and had gotten $6 million under the PPP to pay non-furloughed workers, which it will return. The company said on its site that “this was a difficult decision because our employees are extremely important to us, but it’s impossible to ignore the fact that our finances allow us to weather financial hardship for a longer period than independent restaurant owners. We hope that these funds will be shared equitably among deserving candidates.” Kura has $24 million in cash on the books and can tap into credit as needed.
Kura’s actions give a nod to the fact that smaller, financially vulnerable firms need funding sooner rather than later. And the AutoNation comments underscore that there are — as of yet — less varied options on the table to combat prolonged pressures.
The new guidelines for subsequent tranches of the PPP program require that companies certify with lenders that they need the loans and cannot access funding from other sources. To be sure, such parameters are designed to stop larger companies from tapping into funds simply because they can fly under the radar.
Part of the issues lie with the fact that the PPP (and other stimulus) initiatives are a bit akin to building a rocket while flying it. The programs must be consistently fine-tuned over time to iron out frictions and unintended consequences.
The shifting nature of the trillion-dollar government programs was underscored in a series of interviews with PYMNTS as several observers noted twists and turns.
To Judie Rinearson, a partner, payment group leader and co-chair of global FinTech and blockchain groups at K&L Gates law firm, the situation seems a bit fluid.
“There’s been such a change from the administration and the SBA about what they are intending for these loans. If you take a look at the original announcements, they are so clear. Even if you have access to other funding, not a problem. The goal is to get America running and it was clearly encouraging businesses to go out and seek these funds,” Rinearson said.
And as Drew Edwards, CEO of Ingo Money, told Karen Webster earlier this month: “Because of the political and legal risk from the backlash at some of the companies who took the funds — many are going to give that money back and potentially lay people off.” That, he said, “would be a real shame since that will likely mean the layoffs the program was designed to avoid, all because of a lack of clarity around what ‘qualifying’ for the funds actually means.”
In at least one challenge to the PPP and its mandate, last week, Zumasys, a California software company that received a federal Paycheck Protection Program loan of more than $750,000, as reported by Bloomberg, sued the Small Business Administration and Treasury Department. The suit says the company is entitled to the funds under the original terms of the PPP — and that new guidelines would force firms to take on new debt. The new guidelines, as Bloomberg reported, might mean the company would have to pay back the forgivable loan, part of which has already been spent to keep employees on payroll.
Trouble Brewing — Even For Corporate Behemoths?
Beyond the controversies surrounding the PPP, and as reported last month by Nikkei Asian Review, large companies are facing liquidity issues. The issue could be a pressing one, as data show that out of 3,400 publicly listed companies, a quarter of them would run out of liquidity if faced with a 30 percent loss of revenues over the next six months. Even under a relatively sanguine scenario, about nine percent of firms would run out of liquidity if sales were off 10 percent.
As Jerry Flum, CEO of CreditRiskMonitor, told PYMNTS in a recent interview: In just the United States alone, bond debt, not counting loans, held by public companies represents 48 percent of GDP. Total debt outstanding (public and private) represents multiples of GDP.
“That’s a record,” he told PYMNTS, “and a lot of it is junky corporate debt. The quality of debt has come down over the last several years because the governments of the U.S. and around the world suppressed interest rates.”
Absence of liquidity means that firms are not able to meet their current liabilities, which in turn — in a worst case scenario — means companies go bankrupt or even dark. That would add to the economic miseries that are already underway.