It isn’t just the 1% of wealthy individuals that are pulling away from the pack, but also the top corporate cash-holders. At the same time those top cash-rich companies are hiding what’s becoming an increasingly indebted corporate world.
In a recent report, Standard & Poor’s calculates that the nonfinancial companies it rates now hold $1.84 trillion in cash, which is masking a massive $6.6 trillion debt burden that appears set to continue growing. The trend was especially apparent last year.
“Cash growth for S&P global ratings’ universe of rated US nonfinancial corporate issuers slowed to a decade low of 1%, to $1.84 trillion in 2015, but total debt outstanding jumped $850 billion to $6.6 trillion, dwarfing the meager $17 billion in overall cash growth, S&P says in a recent report on its Global Credit Portal.
Not unlike the wealthiest individuals, the top 1% of corporate cash holders lives in a very different world. S&P says that the top 25, including the usual suspects Apple, Google and Microsoft, continued to increase their cash holdings in 2015 by $81 billion, a 9% leap, to $945 billion. Their cash-to-debt ratio has gradually fallen, to 153% last year from the 2013 peak of 184%, but that was mainly because they issued debt to pursue M&A, execute share repurchases and other initiatives; all without having to repatriate profits from overseas, a process referred to as “synthetic repatriation.”
S&P notes that these companies differ from the remaining 2000-plus issuers because they generate significant cash flow abroad and even before the Great Recession had strong cash positions, which have only grown since. In addition, the rating agency says, they continue to maintain conservative financial policies, as indicated by their net cash position at the end of 2015 that exceeded $325 billion.
The top 25 corporate cash holders, representing a little more than 1% of all the nonfinancial corporates S&P rates, now control $900 billion of total cash, almost half the total. That’s an increase of 38% from five years ago, the rating agency notes, adding that the technology sector, unsurprisingly, holds the biggest share, at 41% of the total, followed by healthcare at 15%.
The credit picture was far less rosy for the remaining 99%. As a backdrop, the $1.9 trillion in total corporate debt issuance in 2015 was modestly lower than the two previous years but still significantly higher than any other year since 1997. Over the past five years, outstanding debt increased by $2.8 trillion, to a record $6.6 trillion, and by $850 billion in 2015 alone. That compares to cash’s $600 billion increase over the same time period.
S&P says that $730 billion of the debt increase in 2015 stemmed from companies under the top 25 cash holders, and those companies saw their cash fall by $40 billion. Much of the surge in debt issuance resulted from companies taking advantage of historically low interest rates to fund acquisitions, given slow organic growth.
The rating agency notes that the debt issuance hasn’t hurt companies’ net interest expense in recent years, since excessive liquidity chasing yield has kept rates low. And although industry’s cash-to-debt ratio has been falling, that ratio doesn’t consider companies’ higher profits, which can potentially support higher debt.
Nevertheless, the dramatic increase in corporate debt has become worrisome, especially for non-investment grade, or speculative issuers. While they make up a small percentage of the debt and cash numbers, S&P says those issuers’ cash-to-debt ratio fell to 15% last year, down from 21% in 2010 and even just below the decade-low reached in 2008, during the Great Recession. Their cash holdings fell by 4% last year, or $14 billion.
“At the same time, these issuers added $190 billion of extra debt to their balance sheet, and, as a result, they now hold more than $8 of debt for every $1 of cash,” S&P notes. “Collectively, these issuers raised significant amounts of debt under extremely favorable terms in a relatively benign credit market without effectively improving their liquidity profiles.”
Investment-grade issuers under the top 25 cash holders followed a similar trend. Their cash-to-debt ratios fell to 17% last year from 21% the year before, indicating a balance sheet of $6 of debt for every $1 of cash.
The 550 investment-grade issuers’ cash balances actually declined in 2015 by 6%, or $38 billion. Meanwhile, total debt outstanding leaped by more than 16%, or $535 billion, to $3.6 trillion.
“Similar to their speculative-grade peers, these issuers’ cash-to-debt ratio in 2015 matched the lowest level recorded back in 2008, just prior to the credit market downturn,” S&P says. “And despite their stellar credit profiles, or perhaps because of it, they have been raising increasing amount of debt to support their acquisition and shareholder friendly activities, which leaves them vulnerable to liquidity risks during a market downturn.”