Dusseldorf Cash is king. This is especially true in the second year of the corona pandemic. With 688 billion euros, German companies are currently hoarding more liquidity than ever before. But: The money is melting away, because interest is paid on the bank accounts, taking inflation into account, at an average of minus 4.6 percent.
This is shown by data from the international law firm Freshfields, which is available to the Handelsblatt. It is based on Bundesbank statistics on the deposits of around 1.3 million companies. In addition to inflation, penal interest rates, which almost all banks are now levying on larger amounts, are also a burden.
Calculated over the year, the penalty interest adds up to a record 734 million euros. The reason is an average interest rate for bank deposits of minus 0.11 percent. By way of comparison: at the height of the financial crisis in autumn 2008, companies were still earning € 11.55 billion in interest on credit.
Freshfields partner Christoph Seibt therefore warns: “On the part of investors, the pressure will increase to invest this liquidity, if only so that there is no real loss of value.” Investment bankers who advise on mergers and acquisitions therefore suspect good business for 2022.
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“Inefficient” balance sheets are always a gateway for activist investors who want to see surplus funds distributed, says Jens Maurer, who co-heads investment banking in Germany and Austria at Morgan Stanley: “Investments and acquisitions are another consistent way of using funds “.
Crisis leads to a phase of permanent uncertainty
Hardly anyone is expecting a new lockdown, including widespread production downtime. In this respect, the crisis has been overcome and the question arises as to why companies have so much liquidity on hand. But the crisis ends in a phase of permanent uncertainty.
The hallmark is the shortage economy: there is a lack of wood, semiconductors, aluminum, plastics or, more recently, uric acid for the production of Ad Blue, in order to reduce nitrogen oxide emissions, especially in automobiles. New, missing products are added almost every week.
The result is that many customer orders do not lead to production – and consequently there is a question mark behind planned sales and profits. That’s one reason companies remain cautious.
In addition, there are experiences in the past: When the US real estate bubble burst in 2008, triggering the global financial crisis, the banks held their money together. As a result, many companies found it difficult and at high interest rates to find urgently needed liquidity during the economic crisis. Even large corporations like Heidelberg Cement had to offer bondholders up to ten percent interest.
As a lesson, many companies have improved their financial cushion with their high profits in recent years. This was at the expense of investments in the future and distributions to the shareholders and families – but it secures the existence in the recent crisis.
According to the balance sheet expert Sebastian Kral from the German Savings Banks and Giro Association (DSGV), it is “rather a good sign that companies are building up liquidity and maintaining it”. But delivery difficulties, transport problems and a lack of material ensure that this liquidity often cannot flow away at all.
Some companies have more cash than debt
A Handelsblatt study also shows how much the “cash problem” will shape the year 2021: Of almost 200 listed companies examined, 123 companies reported more liquidity in the first half of the year than a year ago, only 65 less.
For example, when the growth-spoiled Adidas group lost its earnings in the pandemic because almost three out of four stores worldwide had to close, CEO Kasper Rorsted reacted with cost reductions and strict cash management.
Management salaries were reduced, dividends canceled and the share buyback program stopped. As a precaution, Adidas invested less in property, plant and equipment. In addition, Adidas borrowed money at low interest rates through bonds.
All this led to the fact that the stock of liquid funds almost doubled to almost five billion euros as of June 30th compared to the previous year. The ratio of cash and liabilities rose from 19 to 34 percent. In the meantime, Adidas is buying back its own shares and paying a dividend.
The large-scale kitchen manufacturer Rational in Landsberg, Bavaria, traditionally a very conservative accounting company, even has a liquidity ratio of 158 percent – that is, it has more cash than liabilities – which is rare on the stock exchange.
However, the data also show that companies are investing again. In the first half of the year, the 370 savings banks, with around 12,000 branches, pledged 50 billion euros in new corporate loans. Of this, almost 19 billion euros for commercial residential construction and just under 32 billion euros for investments.
If this is adjusted for the extensive corona special loans from the KfW development bank and the state development institutes that the savings banks made available to the companies, the public institutions granted around one billion euros more in loans in the first half of the year than in the same period of the previous year.
“After reviewing their strategic orientation, many of the companies we advise are now starting to prepare for investments,” reports Freshfields partner Seibt. This includes the purchase of companies and their competencies, especially in the areas of digitization, data use and sustainable production.
Seibt sees the record-high liquidity as the prelude to a wave of investments: “German companies are well positioned to invest profitably in companies and no longer leave this business to the investment companies.” The data from the Freshfields Corporate Cash Barometer shows: “The necessary money is available. ”Investment bankers are also convinced that the pressure to invest will be so great that significantly more deals will be seen in 2022 because the pandemic has backed up many transactions.
Across all industries, the important liquidity ratio in Germany – that is the liquidity in relation to the balance sheet total – rose by more than 20 percent from 4.5 to 6.1 percent within twelve months in the past financial year.
The build-up of liquidity continued in the first half of the current year. This emerges from calculations by the DSGV on the basis of several hundred thousand company balance sheets, which represent 50 percent of German company sales.
Four levers help you achieve more liquidity
However, a detailed look at the industries reveals major differences. In the manufacturing industry, metal, vehicle and machine builders were hit particularly hard by the corona pandemic. Profits collapsed. Nevertheless, the companies improved their liquidity ratio within a year from 4.1 to a record 9.3 percent.
The retail sector also increased its liquidity ratio significantly – from 7.8 to 11.7 percent. In contrast to manufacturing, retail, which is dominated by grocery stores, is a winner from the crisis. Here, the good course of business led to the accumulation of cash.
The situation is completely different in the hospitality industry. Due to massive losses as a result of closed restaurants and pubs, money flowed out. Here there are largely no opportunities to get cash.
Four decisive levers help to achieve more liquidity, even if business is temporarily bad, such as after the outbreak of the pandemic in the manufacturing sector.
First, companies invested significantly less during the crisis. Investing less means that less money will flow out and instead stay with the company.
Second, the many financial aids decided and expanded by the federal government unfolded their effect. According to the latest data from the Ministry of Economic Affairs, around 125 billion euros in aid have been approved since the crisis began more than a year ago.
The federal government compensates for lost sales with improved fixed cost reimbursements. This involves complex funding and aid programs. They consist of, among other things, bridging and restart assistance and loan guarantees – right through to the reimbursement of advance tax payments, an expansion of loss carryforwards and the one-off November and December assistance.
In addition, there is the short-time work allowance for the corona crisis, which should reach more than 40 billion euros by the end of the year.
Cheap money on the stock market
The Bad Homburg health group Fresenius received around one billion euros in government aid: 742 million euros for Helios with its 86 clinics in Germany, a further 249 million euros for the dialysis subsidiary Fresenius Medical Care in the USA and 52 million euros in other countries.
Third, companies – especially on the stock market – get cheap money from investors. The pharmaceutical company Bayer obtained around 2.5 billion euros in new bonds at an annual interest rate of less than half a percent.
Even the Dax newcomer Delivery Hero, who has never made a profit with his food delivery service, only needs to pay investors an annual interest rate of one percent.
Fourth, companies are increasing their liquidity by reducing storage capacity. Faced with falling orders, they sold the supplies they had already paid for. This income increases the cash reserves.
The only big catch is: supplies can only be sold once. In the event of a prolonged downturn, this tried and tested means of maintaining financial strength would fail. It is all the more important for many and above all cautious companies to continue to hold liquidity.
More: “There will be big deals in the double-digit billion range” – cash stocks fuel mergers and acquisitions