Cash was king during the early part of the COVID crisis. It isn’t anymore. U.S. companies have been burning through piles of cash squirreled away at the onset of the pandemic, liquidity largely accumulated through a record borrowing spree in the bond market.
The reversal of the pandemic cash trend, especially at highly rated companies, can be attributed to a deluge of stock-buyback programs starting in 2021, a pullback in debt issuance as interest rates rise and the bite of high inflation. Goldman Sachs credit researchers warned that liquidity positions “have weakened quite materially,” and that net margins have begun to fall, which will put a spotlight on how easily companies can continue to pay interest on their outstanding debt in the coming months. Like households, it isn’t necessarily declining income that immediately hurts a company, particularly if they have cash on hand, but the inability to keep up on ongoing debt payments that can lead to a default. In that regard, investment-grade companies have been depleting a key source of liquidity: their ratio of cash to assets, which fell to about 3.5% this year from a 5.5% pandemic high (see chart), even though earnings relative to debt have remained elevated.
There’s a drain of cash-to-assets
FactSet, Goldman Sachs Global Investment Research
“While interest coverage ratios are not necessarily showing c …