Huge Debt Levels In “Cash-Rich” Corporate America

The Daily Reckoning ^ | 8-6-2010 | Rocky Vega

[blam]

Huge Debt Levels In “Cash-Rich” Corporate America

By Rocky Vega

08/06/10 Alexandria, Virgina — For some time now pundits, and to some extent politicians, have been trumpeting the mountains of cash US corporations have sitting on the sidelines just waiting for ripe opportunity and that, in one fell swoop, could seemingly restore the economy. However, an article this week questions where the cash has actually coming from, and whether it’s as readily deployable as has been suggested.

According to MarketWatch:

“American companies are not in robust financial shape. Federal Reserve data show that their debts have been rising, not falling. By some measures, they are now more leveraged than at any time since the Great Depression. You’d think someone might have noticed something amiss. After all, we were simultaneously being told that companies (a) had more money than they know what to do with; (b) had even more money coming in due to a surge in profits; yet (c) they have been out in the bond market borrowing as fast as they can.

“Does that sound a little odd to you? [...] According to the Federal Reserve, nonfinancial firms borrowed another $289 billion in the first quarter, taking their total domestic debts to $7.2 trillion, the highest level ever. That’s up by $1.1 trillion since the first quarter of 2007; it’s twice the level seen in the late 1990s.

“The debt repayments made during the financial crisis were brief and minimal: tiny amounts, totaling about $100 billion, in the second and fourth quarters of 2009. Remember that these are the debts for the nonfinancials — the part of the economy that’s supposed to be in better shape. The banks? Everybody knows half of them are the walking dead.”

At this juncture, corporate debt is relatively inexpensive. So, it makes sense for companies to stretch out debt repayments, and there’s added incentive for business to refinance older debt and accumulate new debt. However, as the article also highlights, data shows the gross domestic debts of these corporations is equal to roughly 50 percent of GDP, a record level for the past half century. From this perspective, there’s less reason to cheerlead the nation’s presumably sound corporate balance sheets, and the possible revitalization of the economy, than some might suggest.

[sauropod]

I suspected something was amiss.

I have noticed the drumbeat about corporations sitting on these “mountains of cash” and didn’t think the story added up.

This article helps bring the correct perspective. Thanks for posting.

[mrsmith]

http://online.wsj.com/article/BT-CO-20100803-720206.html
‘CREDIT MARKETS: Corporate Bond Markets In High Gear As Double-Dip Fears Fade ‘

“...International Business Machines, Kimberly-Clark and Wal-Mart are among a spate of issuers in recent days to score ultra-low borrowing rates. The 1% coupon IBM landed Monday was the lowest coupon of any corporate debt issue for any maturity or credit rating in the almost 3,500 issues contained in the Barclays Capital U.S. Corporate Index”

[rbg81]

Sitting on “mountains of cash”, ech? My guess is they are not repaying their outstanding debt ‘cause they don’t know if they can get another loan. This dovetails into what I’ve heard from small business owners about the difficulty of getting loans. Probably worth it to pay the interest so you have the cash on hand when needed.

[Riodacat]

Can someone point me to any article from any politician or credible “pundit” who claimed that Corporations were sitting on “mountains of cash”?

[reefdiver]

randi rhodes says the corporate masters are sitting on mountains of cash.

she is true hate radio

[jnsun]

Can someone point me to any article from any politician or credible “pundit” who claimed that Corporations were sitting on “mountains of cash”?

Look at the recent Edward Jones newsletters. They declare it outright.

And incidentally, I generally do not believe any analysis that Edward Jones publishes, one of the most nauseatingly naive, mid-America, and politically correct, phony financial "pundits" out there. We just keep them around for another point of view.

But of course that applies to most of the brokerage houses who just want to skim your money, for transactions, coming or going.

[boilerfan]

Bingo, we have a WINNER here!!!!!