Debt Piling Up Faster Than Cash

Forget about the hoards of cash held by some US nonfinancial corporations. For most of them, their biggest worry may soon be their debt.

Last year US corporations accumulated more debt than cash in a trend that is expected to continue in 2016, affecting mostly smaller and domestic groups with lower credit ratings.

Hungry for yields, investors around the world have in recent years been boosting corporate debt issuances, says David Tesher, managing director at Standard and Poor’s. Corporations have been issuing bonds to lock in record-low interest rates, while investors are providing high levels of funding in the corporate space. But the growth in available cash has been slower than the rise in corporate debt.

“Over the past five years, total debt outstanding rose about $2.8 trillion, to a record $6.6 trillion, while cash increased by $600 billion, to $1.8 trillion. In 2015 alone, total debt outstanding rose by about $850 billion, which is significantly more than the cash growth of $17 billion,” according to a study by Standard and Poor’s.

The data gets even more interesting when stripped of the top 25 cash holders, which represent 1% of S&P’s global rating universe. “Strip away the top 1% from the equation, and the numbers look even worse: Cash and marketable securities for the remaining 99% of issuers actually fell 6% in 2015, and these issuers held just $900 billion in cash versus $6 trillion in debt, as of year-end 2015. This indicates a cash-to-debt ratio of 15%, which is below the trough of 16% in 2008,” the study found.

The big difference between the groups is that those in the 1%, such as Apple or Google, have huge cash reserves overseas that have not been brought back to the US for tax reasons (double taxation of tax repatriation). “The reason why 1% has a lot of the cash and has been borrowing aggressively is the high cost of repatriating the cash from abroad,” says Andrew Chang, director at S&P Global Ratings. “When a company earns cash from overseas, there is an additional tax to repatriate that cash to the US. And most companies, virtually all US companies, prefer not to pay that additional tax.”

Standard and Poor’s looked at how the cash-to-debt ratio has deteriorated in particular for speculative-grade issuers and non-top-investment-grade issuers. On an absolute dollar basis, speculative-grade issuers’ cash holdings declined by $14 billion, or 4%, in 2015. At the same time, these issuers added $190 billion of extra debt to their balance sheet and, as a result, now hold more than $8 of debt for every $1 of cash. Collectively, these issuers raised significant amounts of debt under extremely favorable terms in a relatively benign credit market without effectively improving their liquidity profiles, S&P says.

“The top 1%’s immediate concerns center around what to do with their growing cash pile. In contrast, the bottom 99% are more focused on new financing needs and upcoming debt maturities,” says Standard & Poor’s. “A deeper dive into the cash-versus-debt dynamics sans the top 25 gets to the heart of the matter.”