As Delta Variant Spreads, Corporations Conserve Cash

Corporations Sit on Record Cash Piles

The pandemic recovery was supposed to usher in an era of robust spending on the part of the nation’s biggest corporations. But with the Delta variant rapidly spreading and COVID-19 hospitalizations rising, companies including Carnival (CCL), United Airlines (UAL), Volkswagen (VWAGY), and BMW (BMWYY) are significantly scaling back their spending. They want to be prepared in case the recent COVID-19 spike results in new restrictions and shutdowns.

As of the second quarter, companies across the globe collectively have $6.84 trillion on their balance sheets, which is an all-time high. This marks a 2.6% leap compared to the first quarter. It is 45% higher than the five-year average pre-pandemic.

Travel Industry Prepares for the Worst

Companies in the travel industry are sitting on significant amounts of cash. Though many of them saw demand increase early in the summer, they are now concerned about downturns in the future. For example, though Carnival has slowly been restarting operations, it is holding on to roughly $9 billion in cash. For context, Carnival typically maintained a cash balance between $2 billion and $2.5 billion prior to the pandemic. In July Carnival raised $2.4 billion via a sale of debt.

United Airlines and Delta Air Lines are also carrying big cash balances even as they add more aircraft and flights to meet the pent-up summer travel demand. As of the end of the quarter United has $23 billion in cash and short-term securities, three times its cash position in 2019. Delta has $17.8 billion in liquidity, recently adding $1.6 billion to its war chest.

Corporate Bond Issuances Still Healthy

Even though many companies raised debt last year, there is still an appetite among investors. As a result, corporate bond issuances have remained robust in the past few months. Volkswagen and BMW both issued bonds this month to use for general corporate purposes. Volkswagen raised $3 billion while BMW brought in $2.5 billion. Volkwagen has a cash position of around $41 billion, which is up 88% year-over-year, while BMW’s cash stands at around $21 billion.

Investors may not be pleased to learn corporations have billions of dollars sitting in the bank instead of increasing their dividends or buying back shares. But with the pandemic raising uncertainty again, they may be more willing to accept some prudence on the part of corporate America. Granted they eventually put the money to work.

Refinancing Your Auto Loan Could Free up Some Cash

We hate to say it, but when you first bought your car, you may not have gotten the best deal on your loan financing. We’d like to change that.

Lantern by SoFi can connect you with trusted, top lenders that can help you save if you’re looking to refinance your car loans. In minutes, check your pre-qualified rate on our online platform with no impact to your credit score.*

SoFi’s online marketplace, Lantern, can help you quickly compare rates from a network of lenders all at once. Just fill out a simple form and get pre-qualified in minutes without leaving the couch or giving your SSN.

Carvana’s Loan Business Has Investors Impressed

Carvana’s Stock Surges

Online car dealer Carvana (CVNA) has seen its stock climb more than 1000% since March 2020, as purchasing everything online, including vehicles, became more prevalent during the pandemic. The fact that demand for vehicles has been skyrocketing also helped the company.

However, it is not only robust sales drawing investors to the online car dealer's stock. They are also enthusiastic about Carvana’s loan business. Of Carvana’s gross profits in the second quarter, 39% came from retail sales of vehicles while 36% came from offering customers car loans. The remaining profit was derived from vehicle-servicing contracts and other non-car sales income. The increase in its loan business enabled Carvana to earn a quarterly profit for the first time ever.

Carvana’s Strategy

Carvana approaches its loan business differently than other auto lenders, which has helped the company during a period of red-hot demand. Carvana, like other auto lenders, packages its auto loans and sells them to investors. Carvana does not hold on to the debt, which enables it to see an immediate gain on the vehicles purchased with cash.

This approach has lifted the company’s revenue. It also poses a risk in an environment in which loans sour. Last year when the loan market shuttered amid the pandemic, Carvana’s loan-sale revenue declined. That hurt profitability since Carvana makes money by attaching a premium to the car loans it sells.

Carvana’s Loan Business Stayed Strong

CarMax (KMX), a rival to Carvana, takes a different approach to its car loans. It does not book a gain when it sells loans to a securitization trust like Carvana. Instead, it continues to service the loans through its loan-servicing unit. It also keeps 5% of the riskier loans in its portfolio to benefit from any upside.

Despite the risks, so far Carvana has been able to hold its own with both sales and loans. Carvana sold more than 100,000 vehicles in the first half of the year and sold $3.1 billion in loans to securitization trusts, which is double the amount of loans it sold in 2020. In June KBRA, a ratings company, upgraded its ratings on five of its securtzations due to lower-than-expected losses on the loans. If Carvana can keep on defying critics, investors should continue to reward this online car marketplace operator.

Deal Making in Luxury Travel Heats Up

Hyatt Buys Apple Leisure for $2.7 Billion

Hyatt (H) is betting that luxury travel will be a huge growth driver, spending $2.7 billion to buy Apple Leisure Group, which operates high-end resorts. The deal expands Hyatt’s presence in the luxury resorts market—an area which is seeing strong demand amidst pandemic recovery.

With business travel slow to come back from pandemic shutdowns, international hotel-chain operators are focusing their attention on consumers.

Hyatt is not alone in pursuing this strategy. Last week, InterContinental Hotels (IHG) rolled out plans to launch a new luxury brand which will increase the number of luxury hotels it operates.

Hyatt Expands Its High-End Footprint

Hyatt is buying Apple Leisure from PE firms KKR (KKR) and KSL Capital Partners. The deal will double Hyatt’s footprint of luxury resorts across the world. Once the transaction closes, Hyatt will become the biggest luxury-resort operator in both Mexico and the Caribbean, and will also enter 11 new markets in Europe. That is particularly important because Europe is expected to be a big growth area for high-end travel.

Apple Leisure is the largest operator of luxury resorts in the Americas and has been expanding into Europe in recent years. It had nine resorts in 2007and today has about 100 in 10 countries.

Hyatt Transitions to Asset-Light Business Model

The acquisition is part of Hyatt’s strategy to transition to an asset-light business in which it makes recurring revenue from management fees. By the end of 2024 Hyatt wants to generate about 80% of its revenue from management fees instead of owning hotels. It is aiming to unload $3.5 billion in hotel properties in the next three years. Of that, $1.5 billion is slated to be sold this year.

With business travel in a holding pattern as cases of COVID-19 rise, hotel operators are betting wealthy individuals will continue to spend money on luxury travel. They are doubling down, pouring billions of dollars into expanding their footprints. It will be interesting to see if these bets pay off.