Warn­ing Mounts on Amer­ica’s Cor­po­rate Debt Prob­lem

Industry Leaders - - Content Features -

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.

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