Issue debt, raise funds, lay off workers.
On a day where the Labor Department reported that the U.S. economy saw historic job gains, Bloomberg reported that several large companies have, in past months, come to market for funding through debt. Then they turned around, laid off staff, and in some cases said they would continue to pay dividends.
In other words — at least from a high level — it looks like a strategy of cutting costs but paying shareholders to hold their shares (or buy more).
One example of the issue debt/layoff trend can be seen with Sysco, which as Bloomberg reported sold $4 billion in debt in March and then laid off a third of its workers. Other companies such as Cinemark and Toyota Motor came to market with corporate bonds, too, as the Federal Reserve has made it easier to tap debt markets.
Larger firms typically do not have requirements set in place when they raise capital, such as the need to keep individuals employed by using some of the billions raised for wages. That, the news service noted, is in opposition to efforts like the Paycheck Protection Program (PPP), which, as has been widely reported, stipulates that at least 60 percent of loans be devoted to payroll.
Robert Reich, who served as labor secretary under President Bill Clinton, told Bloomberg, “They could set conditions, say to companies, hire back your workers, maintain your payroll to at least a certain percentage of prior payroll, and we will help.” Reich added, “It’s hardly clear that if you keep companies afloat they’ll hire employees.”
All in all, according to The Wall Street Journal, stats from Dealogic show that U.S. firms issued a record $1.2 trillion in bonds so far this year, which is up 78 percent from a year ago.
Yet the specter of what’s happened to companies such as Hertz, JCPenney and J.Crew also may serve as a reminder of the vagaries of easy credit, where interest rates are still low. There’s a total of about $10 trillion of non-financial corporate debt outstanding, as estimated by the Federal Reserve. That’s double the amount seen just over a decade ago, before the Great Recession.
On Friday (June 5), the markets cheered a startingly positive jobs report, showing gains of about 2.5 million positions, where millions of jobs had expected to be lost. Yet unemployment still is in double digits, and we are still far, far from the roughly 3.5 percent unemployment rate seen at the beginning of the year. A new spike in COVID-19 would do much to upend things, and is certainly in the realm of possibility. For the retailers and leisure firms that hired workers in May, the seas could still be turbulent. Those (and many other workers) may be a bit skittish to start spending with the vigor that once seemed permanent. For the companies taking on debt that must be paid, a sudden double dip in sales would be especially worrisome.