The biggest companies in the US have amassed significantly more debt over the past three years, while at the same time corporate cash piles have risen according to a Standard & Poor’s report.
The credit ratings agency (CRA) says the twin developments explain how US companies have managed to raise money to pay for capital investment, dividends and share buybacks, without at the same time spending their cash holdings.
It adds that this increase in borrowing will be manageable if interest rates rise gently as expected, but could make companies vulnerable if rates increase unexpectedly sharply.
Total cash holdings of 1,100 US companies rated by S&P for five years or longer rose US$204bn to US$1.23 trillion in the three years 2010 to 2013. Over the same period their gross debts grew more than three times as much, rising US$748bn to US$4 trillion, resulting in their net debts increasing by 24% to US$2.78 trillion.
Among the factors contributing to gross debt is what S&P describes as ‘synthetic cash repatriation’. US companies with overseas cash have opted not to pay the tax that would be charged if they brought the money into the country and instead have borrowed to fund distributions to shareholders or capital spending.
“Without access to this debt, shareholders could not have enjoyed the returns in share buybacks and dividends that they have had in the past couple of years,” said Andrew Chang, an analyst at S&P.
“As long as the credit market remains open, and interest rates remain reasonable, companies will continue to issue debt in lieu of bringing cash back into [the US].”
US corporate cash holdings are concentrated in a handful of large companies, with the top 25 holders accounting for 43% of the total. Among the top 15 companies that disclose where their cash is held, all the US$45bn increase in aggregate cash last year was held overseas and was matched by a US$45bn increase in debt issuance.
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