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Companies 'drowning in debt' despite almost $2 trillion in cash

CNBC CNBC 23/05/2016 Jeff Cox

That American companies have been wadding up huge amounts of cash is no secret. What may be less well-known is that they're also accumulating debt at a much faster pace.

Total debt among more than 2,000 nonfinancial companies swelled to $6.6 trillion in 2015, dwarfing the $1.84 trillion in cash on their balance sheets, according to a study released Monday by S&P Global Ratings. The ratio of cash to debt is the lowest it's been in about 10 years, or just before the global financial crisis.

As financial markets came to grips with the prospect of higher rates ahead, corporate America went on a debt bonanza. Debt grew 50 times that of cash, with companies rolling up $850 billion of new IOUs compared to just $17 billion, or 1 percent, cash growth.

"This jump in debt reflects the scant resistance borrowers faced from yield-starved investors as companies pursued acquisitions and returned cash to shareholders," S&P credit analysts Andrew Chang and David C. Tesher wrote in the report. 

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What's more, most of the cash is concentrated in the top 1 percent while most of the debt resides with the rest. Total cash balances outside the elite actually declined 6 percent; by contrast, the other 99 percent held $6 trillion of the total debt load. The top 1 percent (25 companies) now controls more than half the corporate cash, up from 38 percent five years ago.

The cash-to-debt ratio fell to 12 percent among speculative-grade issuers, the lowest level since before the Great Recession.

"There's a common misconception that companies are swimming in cash, when they are actually drowning in debt," Chang said in an interview. "Liquidity is not what it appears."

The surge in debt also comes amid rising defaults. The year has seen 72 defaults, up from 39 at the same time in 2015, S&P reported.

For the most part, defaults have been confined to energy-related issues; 29 are from oil and gas, 12 from metals, mining and steel, and one from utilities. S&P expects the default rate to continue to rise, from 3.9 percent of issuers in the past 12 months to 5.2 percent over the next year.

However, Chang said that while the surge in debt is troubling, it's not yet at a crisis level. Companies are still able to refinance at low rates and have extended duration.

"While we had that initial freeze in the credit market early this year, investor appetite is picking up again," he said. "As of today, credit conditions are receptive even to lower-rated issuers. What we've seen in the past is it doesn't take a whole lot for that sentiment to turn."

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