WASHINGTON — One of the biggest questions surrounding the government’s efforts to help businesses struggling amid the coronavirus pandemic is whether the programs are constructed in a way that will prevent a wave of bankruptcies, keeping a short-term shock from turning into drawn-out economic pain.
A new analysis from a group of Harvard University researchers suggests that the answer, should markets turn ugly again, might be no.
Highly indebted public companies that employ millions of people are largely left out of the major direct relief options that Congress, the Federal Reserve and the Treasury have devised to help companies make it through the pandemic.
Much of that is by design. Policymakers have prioritized getting help to businesses that came into the coronavirus crisis in good health, lowering the chances that taxpayers will wind up bailing out big companies that loaded up on risky debt. It could also help officials avoid the kind of angry criticism that surrounded 2008 bank and auto company rescues.
But it leaves a slice of America’s companies fending for themselves amid the sharpest downturn since the Great Depression, putting them at greater risk of bankruptcy and their workers at greater risk of job loss.
Publicly traded firms that employ about 8.1 million people — roughly 26 percent of all employment at tracked publicly traded companies — are all or mostly excluded from direct government relief, based on an analysis by Samuel Hanson, Jeremy Stein and Adi Sunderam of Harvard, along with Eric Zwick of the University of Chicago.
Not all of those companies are likely to run into trouble, some have deep-pocketed investors behind them and others made poor financial choices that left them vulnerable to shock. But excluding a broad swath of employers could affect how successful the government is at preventing wide-scale bankruptcies if virus-related economic pain lingers, the researchers warned.
“We’re trying to flatten the bankruptcy curve, or flatten the financial distress curve,” said Mr. Hanson, who refined the analysis for The New York Times. If a large number of companies are left out of support programs and go out of business, “it’s likely to be very costly, and leave permanent scarring to our productive capacity.”
Their analysis is only a starting point. Many private companies are also excluded, but information about those firms is harder to come by, so the authors do not account for them.
“This is almost like the tip of the iceberg,” Mr. Hanson said.
After the pandemic forced states to go into varying degrees of lockdown in March, tanking revenues and freezing the financial markets that companies tap to raise cash, the government announced a suite of programs to help corporations to make it through.
The Paycheck Protection Program for small businesses — created and funded by Congress and operated by the Treasury and the Small Business Administration — extends loans to companies employing up to 500 people, with some exceptions. The loans are forgivable as long as those businesses meet program criteria, which require them to hang onto workers.
To help bigger companies, Congress turned to the Fed, which can set up emergency lending programs in times of economic trouble. Lawmakers gave Treasury Secretary Steven Mnuchin $454 billion to back up such efforts.
The Fed’s midsize business option, called the Main Street program, is in the process of getting up and running and will offer loans to companies with up to 15,000 employees or $5 billion in revenues. Those with especially high debt levels cannot tap it.
The Fed’s main big-company relief program will buy newly issued corporate bonds. It is restricted to firms with highly rated debt, or those that have been downgraded only since the coronavirus crisis took hold.
Those three programs — the Paycheck Protection Program, Main Street and the primary market corporate bond facility — are the ones included in Mr. Hanson and his colleagues’ analysis.
Some of the firms that those direct government programs miss — think the Gap, Dell Technologies and Kraft Heinz — are household names with huge work forces. If such companies were to run into problems gaining access to cash, it could precipitate job cuts, the researchers said.
But there is a reason that the business relief programs have avoided directly betting on more debt-laden big companies. Including shakier businesses in the Main Street facilities or the corporate bond program would increase the risk that companies would fail to pay the Fed and the Treasury back, ramping up the chances that the lending programs would lose money and — ultimately — cost taxpayers.
Adding in risky companies could also expose the Fed and the Treasury to accusations that they bailed out companies that private equity firms had loaded with debt to maximize profits. And Democratic lawmakers have specifically warned against helping companies that were struggling heading into the crisis.
The Fed should “refrain” from using the Main Street program “to help companies paper over existing problems arising from excessive leverage, international price competition and concerns about long-term viability,” Senator Sherrod Brown, the highest-ranking Democrat on the Senate Banking Committee, wrote in a letter to the Fed chair, Jerome H. Powell, and Mr. Mnuchin on May 18.
The Fed has helped risky companies less directly. One of its corporate bond programs will buy a limited amount of junk-bond exchange traded funds, which trade like stocks but track a broad basket of corporate debt. That, and the mere signal that investment-grade bond purchases are coming, has breathed life back into choked bond markets, including for junk debt.
But the fact that a group of companies has little to no access to direct assistance — essentially leaving those firms at the mercy of market conditions — could come at a cost if things worsen again, in which case borrowing is likely to become more difficult for high-yield companies that do not actually have Fed support to back them.
“You have to be a little careful about assuming you can just do things with magic,” said Mr. Stein, the analysis co-author who is a former Fed governor. While markets might assume the central bank will step in to help the market, if they don’t when push comes to shove, conditions could deteriorate sharply.
“The high-yield market might really think that there’s a Fed put right now,” he said, referring to a financial promise to buy if prices dip below a certain level. “At some point, if that comes unglued, you have a real problem.”
Companies with low bond ratings could have a particularly large ripple effect: Five million employees work at big companies excluded based on their junk or unrated status. A smaller number, about two million, work at medium-size firms left out for their debt levels.
About 1.1 million are at companies that are technically eligible for the Paycheck Protection Program because of their industry classification, but are unlikely to tap it because they have access to other capital markets and the Treasury has tried to deter such firms from using the program, Mr. Hanson said.
Mr. Stein and Mr. Hanson said they would recommend broadening the Fed’s programs to include some, but not all, lower-rated companies.
While the Fed has shown some willingness to consider lending to some riskier companies — the Boston Fed president, Eric Rosengren, has said the central bank may expand the Main Street program — there would be challenges to providing much broader help through central bank lending.
The Fed is not legally allowed to gamble on companies that are insolvent, an imprecise term but one that could soon apply to many businesses that have faced months of reduced revenues. It could also be the case that more debt, the only medicine the central bank can offer, is not a good solution for already-floundering companies.
Groups focused on workers point out that the Fed lending programs lack toothy employment requirements, so it is possible that even if the central bank could find a way to support such companies, it would help shareholders without leading to worker retention.
“You don’t want to pay off owners of zombie companies, or people who took big risks on oil and gas corporations and they didn’t pan out,” said Marcus Stanley, the policy director at Americans for Financial Reform.
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