Chapter 3: Corporate Finance: Liquidity Bottlenecks from a Strong Policy Package
The COVID-19 pandemic has impacted the non-financial corporate sector’s cash flows, creating liquidity and solvency pressures. Borrowing in the G7 economies rose through March and into the second quarter of 2020 thanks to line draws and unprecedented political support. This enabled companies to build up liquidity buffers to cope with a time of reduced cash flow and high uncertainty. In the US, the bond market has been buoyant since late March, but loan supply conditions for bank loans and the syndicated loan market have tightened. In other G7 economies, credit supply conditions eased somewhat in all markets in the second quarter. Among publicly traded companies, companies with a weaker solvency or liquidity position prior to the COVID-19 outbreak, as well as smaller companies in some economies, suffered relatively greater financial burdens in the early stages of the crisis. However, remaining signs of tension remained through the end of June, when the stock markets of French, UK and US companies with pre-COVID-19 liquidity weaknesses underperformed between 4 and 10 percentage points. Policy interventions, particularly those directly targeting the corporate sector, had an overall positive impact. Looking ahead, the premature withdrawal of political support could jeopardize the success achieved to date in largely meeting the funding needs of the non-financial corporate sector.