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Market Update

Cash is king: the old adage has never been more true

March 30, 2020


Last week, Fitch downgraded the UK sovereign credit rating one notch to AA-, citing the inevitable increased borrowing which will be required to fund the stimulus launched to combat the economic impact of the COVID-19 lockdown.

And the UK government isn’t the only borrower in town. March has been a strong month for bond issuances as corporates prepare their cash buffers to help them through a potential liquidity crisis. Despite central banks having taken interest rates to record lows, the total cost of borrowing for these investment grade borrowers is still higher; although this didn’t seem to be a deterrent.

Cash preservation has been the major theme of the last few weeks, unsurprisingly. From delaying VAT payments and withholding rent, to seeking to freeze interest and capital payments on their debt, borrowers are pursuing any means possible to protect their cash positions and build buffers. Meanwhile, the impact on debt covenants is likely to be material, and there is significant debate over whether these should even be measured given the severity of the situation.

The reaction from lenders has been mixed, but some trends are emerging. High street mortgage lenders’ reluctance to approve new loans has been widely publicized—and the situation for corporate borrowers is much the same. With so much work to do with existing borrowers, any new lending has been consigned to the back burner. Possibly more significantly, considering the last decade’s boom in “shadow banking”, non-bank lenders have also retreated from the market for new lending. Despite the government’s apparent determination to hold out a safety net to companies threatened by the crisis, a wave of defaults is sure to follow. The question in many minds, however, is whether these businesses would have survived even a “normal” recession. The phrase Corporate Darwinism is being bandied around, and for now hope for survival is firmly pinned on cash positions and access to liquidity.

Market dislocation

Meanwhile, with swap rates close to historic lows, there has been a dislocation in the interest rate market. 3-month LIBOR used to be a proxy for the Bank of England’s base rate. Not so now; it is currently fixing above 0.5%, more than 40 basis points above the base rate. As in the last financial crisis, this spread is an indicator of how stressed money markets have become—and of the banking sectors reluctance to lend. Read more frequently asked questions from this week.


In terms of the economic fallout, consensus is that UK growth will collapse, unemployment will surge potentially hitting 10%, and inflation will plunge as a result of the lockdown. Comparisons have been made with Japan, and its 30-year period of very low inflation/deflation and low growth. Staggeringly low oil prices will only add to the deflationary pressure.

In these unprecedented times, companies have to look to innovative ways to protect their business. All sectors are facing this crisis together. Although the government has announced new funding initiatives for business, there is some confusion on the qualification criteria and also how to actually go about accessing it. One thing is certain—for as long as the lockdown is in place, cash will be king.

Upcoming economic releases

  • Q4 GDP data is due on Tuesday but too early to reflect any of the COVID-19 impact.
  • UK Markit/CPS PMI for March are expected to indicate a sharp decline in manufacturing and services reflecting the initial impact of the COVID-19 lockdown.
  • For the U.S., PMI data is also due. Non-Farm Payroll data for March are published on Friday.

Should you have any questions on the above, or other market impacts of the recent movements, we are here to assist in any way we can.


Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit

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