U.S. nonfinancial corporate cash ratios ticked down further in the fourth quarter of 2021 as companies continued to draw down on the cash buffers built up in response to COVID-19.

Cash ratios fall as default threat disappears

The median cash ratio of companies rated investment grade by S&P Global Ratings — calculated by comparing a company's cash and cash equivalents to its current liabilities — fell to 24.5% in the fourth quarter of 2021. This was down from 26.9% in the previous quarter and the lowest rate since the fourth quarter of 2019, the latest S&P Global Market Intelligence data showed.

It was a similar story for lower-rated companies. The median cash ratio for corporations rated non-investment grade fell to 37.9% in the fourth quarter of 2021, down from 43.1% the previous quarter and 49.8% a year earlier.

The COVID-19 pandemic shocked financial markets in March 2020 as the healthcare crisis seemed poised to morph into an economic crisis. U.S. companies faced collapsing revenues and spiking borrowing costs. The Federal Reserve's decision to restart its quantitative easing program encouraged investors to return to the market, providing ample liquidity and increasingly cheap credit for companies.

Companies promptly borrowed heavily, shattering bond issuance records and staving off the spike in defaults that had been anticipated. A prompt recovery in the economy supported earnings and companies found themselves with significantly higher liquidity buffers than they had previously.

These cash ratios have been gradually wound down since the peak in the second quarter of 2020, though they remain significantly higher than the pre-pandemic levels.

Some sectors further ahead than others

Some sectors are further down the road of normalization than others. The median ratio for investment-grade utilities was 3.7% in the fourth quarter, as opposed to a pre-pandemic level of 3.1%. For non-investment-grade utilities, the median ratio was lower than the pre-pandemic level at 11.3% compared to 12.9%.

The materials, industrials and financials sectors have also largely normalized their cash ratios.

Other sectors are retaining higher liquidity buffers, most notably information technology and real estate. In the case of the former, liquidity buffers were typically high pre-pandemic because IT companies typically generate high cash amounts.