US Cash-Rich Companies Steer Clear of Risk
US companies are sitting on large stockpiles of cash they have accumulated from rebounding profits rather than spending it, reflecting a cautious business outlook and reluctance to take risk, credit analysts have warned.
The amount of liquid assets held by non-financial US corporations has almost doubled over the past seven years to $1,165bn at the end of the first quarter, according to Federal Reserve data.
The increase in assets relative to debt is in sharp contrast to the late 1990s, when companies issued large amounts of debt to fund capital investments.
"[Companies] are generally more cautious now, perhaps more cautious than they need to be," said Kamalesh Rao, economist at Moody's Investors Service, adding that cash-to-debt ratios for non-financial companies are at their highest levels in almost 35 years.
Corporate credit liabilities were $5,030bn in the first quarter, putting the cash-to-debt ratio at 23 per cent.
Further evidence of cash accumulation is found in Fed data on non-financial companies' "financing gap" - the difference between capital spending and cashflow.
This figure was positive between 1998-2002 - reflecting more spending than cashflow - but turned negative in 2003 and the first quarter of 2004. "Firms are generating more cash internally than they are using up in capital spending," economists at Nomura Securities said in a recent report.
Economists said the reluctance by companies to spend despite rapid increases in cashflow shows that companies are unwilling to get caught in the trap they fell into in the late 1990s when a surge in capital spending resulted in production capacity outstripping demand.
"The over-investment boom of the late 1990s is, in a sense, coming back home to roost," said Robert Gay, global head of fixed-income research at Commerzbank.
Telecommunications and high-technology companies, among the biggest spenders during the internet bubble, are now among the most thrifty. Almost one-third of the 100 companies ranked by Moody's as top cash holders are tech or telecoms groups.
Some companies have good reason for hoarding cash. Carmakers and airlines are among the culprits, but they have huge pension shortfalls to address. Meanwhile, analysts say drugs companies want to keep cash on hand for potentially expensive lawsuits.
Other companies have returned cash to shareholders in the form of special dividends or stock buy-backs, or are using the cash for mergers and acquisitions.
Credit analysts have watched these developments warily. While they have been impressed to see companies reduce their leverage over the past year by refinancing or reducing their debt, actions that benefit shareholders typically do not bode well for bondholders.
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