Top US companies are deeper in debt even as cash piles grow - FT.com
The biggest US companies have added significantly to their debts over the past three years, at the same time as corporate cash piles have increased, according to Standard & Poor's, the rating agency.
The figures show how US companies have been able to raise money to pay for capital investment, dividends and share buybacks, even when they have not been spending their cash holdings.
S&P argues that the increase in borrowing will be manageable if interest rates rise gently as expected, but could make companies vulnerable if rates increase unexpectedly sharply.
Record cash piles on corporate balance sheets, often held offshore because of the tax penalty under US law for repatriating foreign earnings, have attracted attention, fuelling complaints about US companies leaving cash "sitting on the sidelines", but tell only half the story.
The total cash holdings of the 1,100 companies rated by S&P for five years or longer rose $204bn to $1.23tn during 2010-13, according to the agency's data.
Over the same period, however, their gross debts grew more than three times as much, rising $748bn to $4tn, with the result that their net debts rose 24 per cent to $2.78tn.
One factor behind the increase in gross debt is what S&P describes as "synthetic cash repatriation". US companies with overseas cash have been choosing 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
- Andrew Chang, S&P
US corporate cash holdings are concentrated in relatively few large companies, with the top 25 holders accounting for 43 per cent of the total.
Among the top 15 companies that disclose where their cash is held, all the $45bn increase in aggregate cash last year was held overseas and was matched by a $45bn increase in debt issuance.
Andrew Chang, an analyst at S&P, said: "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."
The highest-profile example has been Apple, which announced a year ago that it planned to return an extra $55bn to shareholders over three years in buybacks and dividends, funded by increased borrowings, and has faced calls from Carl Icahn, the activist investor, to do more.
Other companies have also made similar moves, including Cisco, which has kept its domestic cash holdings roughly flat over the past eight years but increased its overseas cash holdings and its debts.
Mr Chang said: "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 country."
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