- A huge $6.3 trillion in corporate debt should trouble Wall Street investors facing a stricter rate environment even as cash hoarding reaches a peak, according to S&P Global.
- Speculative-grade borrowers have reached a new record-low cash-to-debt ratio of just 12 percent in 2017, below the 14 percent reported in 2008 during the Great Recession.
The debt load for U.S. corporations has reached a record $6.3 trillion, according to S&P Global.
The good news is U.S. companies also have a record $2.1 trillion in cash to service that debt.
The bad news is most of that cash is in the hands of a few giant companies.
And the riskiest borrowers are more leveraged than they were even during the financial crisis, according to S&P's analysis, which looked at 2017 year-end balance sheets for non-financial corporations.
On first glance, total debt has risen roughly $2.7 trillion over the past five years, with cash as a percentage of debt hovering around 33 percent for U.S. companies, flat compared to 2016. But removing the top 25 cash holders from the equation paints a grimmer picture.
Speculative-grade borrowers, for example, reached a new record-low cash-to-debt ratio of just 12 percent in 2017, below the 14 percent reported in 2008 during the crisis.
“These borrowers have $8 of debt for every $1 of cash,” wrote Andrew Chang, primary credit analyst at S&P Global. “We note these borrowers, many sponsor-owned, borrowed significant amounts under extremely favourable terms in a benign credit market to finance their buyouts at an ever-increasing purchase multiple without effectively improving their liquidity profiles.”
The trend persists even among highly rated borrowers: More than 450 investment-grade companies not among the top 1 percent of cash-rich issuers have cash-to-debt ratios more similar to those of speculative issuers, hovering around 21 percent.
This could lead to trouble for the economy as interest rates rise. The Federal Reserve, which has already hiked rates twice so far this year, has indicated that further increases may be needed to keep the economy in check later in 2018. It has also actively reduced the amount of purchases it is making in the Treasury and mortgage markets.