NEW YORK-Hardly a day goes by without some politician or pundit pointing out that companies are hoarding cash, roughly US$3 trillion of it. If only they would spend it, the thinking goes, the economy might get better.But the story is not as simple as that. Though it seems to have escaped nearly everyone's notice, companies have piled up even more debt lately than they have cash. Financial experts say it makes companies more vulnerable than they look.
"The record cash story is bull market baloney," says David Stockman, a former US budget director. US companies are sitting on US$358 billion more cash than they had at the start of the recession in December 2007, according to the latest Federal Reserve figures, from June. But in the same period, what they owed rose US$428 billion. Companies borrow money all the time, of course. They borrow to build factories, cover expenses, even make payroll.
The problem, debt doesn't go away. A business can cut costs during a recession. But it can't just shred the IOUs. Heavy debt means companies could have to dip into those reserves of cash to pay their lenders. And when interest rates eventually go up, companies will have to spend more money just to service the debt. In the last recession, which ended in June 2009, small businesses that depended on credit cards and bank loans got slapped with higher rates just as sales began to drop. Some got cut off all together.
Peter Boockvar, equity strategist at Miller Tabak & Co, says business debt is too high even if the US manages to stay out of a second recession. If economic growth doesn't pick up, "they'll be more bankruptcies, and more defaults," he predicts. Even if companies used cash to pay off what they owe, they would be left with plenty of debt, in fact, an amount equal to 83 percent of all the goods and services they produce, according to Federal Reserve data for incorporated businesses.
That's an improvement from March 2009, the low point of the Great Recession, when companies owed 95 per cent. To stay afloat, companies tapped credit lines at banks, increasing debt while they were bringing in less money. They burned through cash to meet expenses. Before the recession, though, you have to go back at least six decades to find a time when companies owed so much compared with what they produce, says Andrew Smithers, a London consultant who has written extensively about debt.
In short, American business is awash in cash like a man who borrowed from a bank is rich. He may have plenty of money in his pocket, but he still has to return it.Already, there are signs that companies are struggling to pay off debt. Since this summer, buyers of bonds issued by deeply indebted companies, called junk bonds because they're so risky, have been demanding 14 per cent more in annual interest. Some companies haven't been able to sell bonds at all.
The financial picture is at least better for the biggest, publicly traded firms. Non-financial companies in the Standard & Poor's 500 are making more money than ever and adding to their cash fast. It's middle-sized and small companies that appear to be most vulnerable."There are almost two economies out there, the big S&P 500 companies, then everyone else," says Michael Thompson, managing director of S&P's valuation and risk strategies.
But this sunny picture for the largest companies is marred by debt, too. Since the start of the recession, S&P 500 companies have borrowed an additional 40 cents for every additional dollar they've hoarded in cash. For many companies, debt has risen more than cash. (AP)
