The Risk of Being a Fallen Angel and the Corporate Dash for Cash in the Midst of COVID

Abstract

Data on firm-loan-level daily credit line drawdowns in the United States reveals a corporate “dash for cash” induced by COVID-19. In the first phase of extreme precaution and heightened aggregate risk, all firms drew down bank credit lines and raised cash levels. In the second phase following the adoption of stabilization policies, only the highest-rated firms switched to capital markets to raise cash. Consistent with the risk of becoming a fallen angel, the lowest-quality BBB-rated firms behaved more similarly to non-investment grade firms. The observed corporate behavior reveals the significant impact of credit risk on corporate cash holdings.

Keywords: Liquidity, liquidity risk, cash holdings, bank lines of credit, pandemic

JEL Classification: G01, G14, G32, G35