Planet Money Indicator: Corporate Debt During The Pandemic

Jul 3, 2020
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NOEL KING, HOST:

The pandemic has left a lot of companies with a lot of bills to pay and huge budget shortfalls. As a result, some of them have started borrowing money, and a number of them are already having trouble sticking to the terms of their lending agreements. Darius Rafieyan and Cardiff Garcia from our daily economics podcast The Indicator explore the creative new strategies some companies are adopting to control their debt.

DARIUS RAFIEYAN, BYLINE: If you're an accounting nerd like me, you'll be familiar with EBITDA. If you've never heard of it, don't worry too much about it. It's just a very popular way to measure a company's profitability. Now, some are reporting EBITDAC with a C at the end. The C stands for coronavirus. EBITDAC is a way for companies to report what their earnings would have looked like if coronavirus had never happened.

CARDIFF GARCIA, BYLINE: Yeah. And in fact, the term EBITDAC was originally coined as a joke on social media.

SABRINA FOX: Everybody thought it was funny until it actually started to happen and companies were reporting their profitability adding back lost revenues as if they had not had the disruption caused by coronavirus.

GARCIA: Sabrina Fox is executive adviser at the European Leveraged Finance Association, which represents big institutional investors that loan money to big companies.

RAFIEYAN: That's right. Last month, German manufacturing company Schenck Process became, as far as we can tell, the first company to officially report its EBITDAC. They literally used this joke term in their earnings report. And this method of reporting hypothetical earnings may be starting to catch on a bit. Uber recently reported, quote-unquote, "adjusted earnings," which added back in some of its coronavirus-related expenses. And by one estimate, as many as 1 in 10 large companies may be using some kind of coronavirus-adjusted earnings metric.

GARCIA: Yeah. And as you might have guessed, there is an element of wishful thinking in all this. Basically what's happening is that companies are reporting what would have happened if we lived in the world we all wish we had without coronavirus instead of the world we actually have, which sadly does include coronavirus. Sabrina Fox concedes that agreeing to report these sorts of kind of fictitious numbers can be a useful way to avoid unnecessary upheavals and just keep the economy running as smoothly as possible. But she does worry that if companies are allowed to skirt these loan requirements, it could lead some businesses to borrow more money than they can eventually afford to pay back.

FOX: They're pretending that they're the same - at the same level of profitability that they would have been if coronavirus hadn't happened. But we don't know if that's ever going to be the case.

GARCIA: Over the last decade, investors all around the world have been eager to find a place to put their money where they can get a decent return. So they've been lending that money to companies where they can get that return. And that's giving companies a lot of leverage to allow them to negotiate looser and looser and weaker and weaker terms.

RAFIEYAN: Yeah. And Sabrina worries that the pandemic may further erode the few protections that lenders have left. But she says given the scale of the crisis we're currently facing, we may all need to be OK with bending reality just a bit. Darius Rafieyan.

GARCIA: Cardiff Garcia, NPR News.

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