Corporate Australia’s working capital squeeze and the implications for investors

Our estimates show corporate Australia is in the grips of an unprecedented cash squeeze, where companies are searching for capital and boosting their balance sheets from a variety of sources.

This search for capital could total over A$350 billion dollars, according to our estimates, with the federal government’s JobKeeper program the biggest contributor, helping boost balance sheets by $130 billion.

Companies are also racing to raise borrowings and capital through a variety of other measures in 2020: We estimate $45 billion will be raised from banking facilities, $31 billion from bond issuances, $19 billion through dividend cuts, $15 billion through listed equity issuance on the ASX, and a rough estimate of $7 billion in rent abatements nationally and about $9 billion in cancelled share buybacks.

Our analysis is skewed to what is happening at the big end of town, but a similar squeeze is on for small business, however, they are less able to raise debt and equity. For this reason, the Federal Government may have to consider increasing their working capital and debt-guarantee program as only $6 billion has been delivered to date in the Covid-19 SME stimulus and this might be a bit light in comparison.

Corporate Australia’s working capital squeeze

The federal government has done a great job in containing the virus outbreak in Australia and quickly launching the generous $130bn JobKeeper stimulus to keep businesses and employment intact through the lockdown. The reopening phase has the potential to be far more divisive, but we must look to do it as quickly and as safely as possible to ease the constriction of the lifeblood of the economy.

For companies, our current economic slump is pitting many traditional company stakeholders against each other. Companies are having to decide on using cash and debt facilities to pay invoices, dividends, wages or spend capital expenditure for future growth.

Working capital preservation is key during these times when revenues are under pressure and as companies move to preserve cash by temporarily standing down workers, negotiating rental abatements with landlords and reducing outgoings. We have seen directors and executives taking pay cuts, shareholders receiving reduced dividends, some job losses and government waivers and support programs. Wages and enterprise agreements need to get more flexible too in order to facilitate a recovery and keep jobs. So far there has been good co-operation in this crisis.

What we think investors can do

In our view, longer term it is important to remember that this period is transitory, and the crisis will pass. Shareholders may consider valuing companies on a mid-cycle 3-year basis so they can calmly look through the short-term pause to find companies that can grow their earnings and dividends in normal times.

So we think, keep the chin up, and focus on where business conditions are going rather than where they are now. The world will get through this and those that will gain will have looked through the noise and bought some great quality companies when they have been on sale.