Warning Mounts on America’s Corporate Debt Problem
The rich get richer and the poor get poorer. This is particularly true for Corporate America. It’s a stark reminder that corporate income inequality has grown over the years, as America’s corporate debt problem is starting to seriously inhibit businesses.
While the total amount of cash and other investments held by non-financial companies rose 1% last year to $1.84 trillion, total debt grew roughly 15% to $6.6 trillion - a figure that is rapidly growing, according to new research from S&P Global Ratings.
Both the amounts, highlight a disparity in the cash positions of more than 2,000 non-financial companies.
“The punchline is that the liquidity profile is not as good as it seems,” said Andrew Chang, a credit analyst at S&P Global Ratings and co-author of the study.
The top 25 money holders, or around 1% of the companies, control more than half of the total money, or 51%. That is an increase from 38% five years ago. At the same time, the bottom 99% are taking on corporate debt, causing their ratio of cash-to-debt to descend, to the lowest level of the past decade - including the 2008 Great Recession. Such companies, a majority of them are global, from technology and drug sectors, like Apple, Cisco, Google, Johnson & Johnson, Microsoft, Oracle, keep adding to their cash balances.
On the whole, the study shows the top 25 cash holders have a cash-to-debt ratio of 153% and cash increased by 8% out 2015. Here, the riches of the handful of top U.S companies is hiding a major liquidity problem.
“Unlike the bottom 99%, these companies’ cash position was already strong before the Great Recession, but it has mushroomed since,” the report said. Leaving aside the wealthy 1%, the overall corporate outlook turns out to be less ruddy. Corporate debt rose $730 billion for the remaining 99% last year while cash declined by $40 billion. Combined, these companies hold just $900 billion in cash and $6 trillion out debt. That puts their money to debt ratio at 15%, the lowest it’s been in the last ten years.
As companies become global, they generate a large pool of their cash flow abroad. This leaves it to be contingent to taxes as high as 35% upon returning to their own country.
For example, companies like Apple will keep on issuing debt in the U.S. as an alternative to repatriating the billions in cash it holds abroad. In 2015, it issued $24 billion in new debt to support its share repurchases. Between January and April this year, it issued $16 billion in additional debt and is likely to access the credit market, given its recently expanded shareholder return program.