Covid-19: The Risk of Being a Fallen Angel and the Corporate Dash for Cash
Using data on daily credit line drawdowns at the firm-loan-level, a study by Viral Acharya and Sascha Steffen examines the pandemic-driven ‘dash for cash’ among firms and how the stock market priced firms differentially based on liquidity. Sascha Steffen talks to Tim Phillips about the pandemic-driven ‘dash for cash’ among firms and how the US stock market rewarded firms with access to liquidity through either cash or committed lines of credit from banks. High-quality investment-grade firms issued bonds in public capital markets, particularly after the Federal Reserve Bank initiated its corporate bond-buying programme. In contrast, bond issuances of the lowest-rated investment-grade firms remained mostly flat; instead, these firms rushed to convert their credit line commitments from banks into cash, accounting for about half of all the credit line drawdowns. Consistent with the risk of becoming a fallen angel, this dash for cash has been driven by the lowest-quality BBB-rated firms.
