2014 Cash Update: Cheap Debt Fuels Record Cash

2014 Cash Update: Cheap Debt Fuels
Record Cash Growth
Primary Credit Analyst:
Andrew Chang, San Francisco (1) 415-371-5043; [email protected]
Secondary Contact:
David C Tesher, New York (1) 212-438-2618; [email protected]
Research Contributor:
Ka-Kin Leung, San Francisco (1) 415-371-5015; [email protected]
Table Of Contents
U.S. Corporate Cash Balances Reach Another Record High
Appendix
Notes
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Growth
U.S. nonfinancial corporate cash holdings marked a record year in 2013. Standard & Poor's Ratings Services' rated
universe of U.S. nonfinancial corporates (about 1,700 issuers)* held a total of $1.53 trillion in cash and short-term
investments at year-end, an increase of 11% from 2012. (See the appendix for detailed analysis of cash distribution by
rating, industry, and domestic versus overseas.)
Less discussed, however, are the drivers of this cash growth. Specifically, we found that availability of debt played an
important role among our rated issuers. For example, for every $1 of cash growth, debt increased by $3.67 over the
past three years. For the 25 largest cash holders (1.5% of all issuers) that control 43% of the overall cash balances, cash
growth in 2013 was largely matched by similar growth in debt outstanding. The 15 largest cash holders that disclose
their overseas cash holdings (now at 76% of total cash) grew cash entirely from overseas in 2013, then synthetically
repatriated it through matching debt issuances. (Watch the related CreditMatters TV segment titled, "Cheap Debt
Fuels Record Cash Growth For U.S. Corporations," dated April 14, 2014.)
In our view, availability of cheap debt has been most responsible for the record cash balances. Cash flow from
operations appears sufficient to support ongoing share repurchases, dividends, and capital expenditures. However,
companies generate much of their cash flow offshore, rendering it mostly inaccessible because of the high cost of
repatriation, and leaving companies with domestic cash deficits they must replace with debt issuance. In other words,
liquidity appears plentiful, but accessible liquidity is not. Nevertheless, activist shareholders are pushing for greater
access to this far-flung cash. We expect rising overseas cash balances, coupled with continuing debt issuance to meet
domestic cash needs, to lead to higher overall cash growth in 2014.
Overview
• Standard & Poor's rated universe of U.S. nonfinancial corporate entities is currently hoarding a record $1.53
trillion of cash and short-term investments, an 11% increase from 2012.
• We attribute all of the cash growth in recent years to robust credit market conditions, with our analysis
indicating that for every $1 of cash growth, debt rose by $3.67 over the past three years as companies issued
debt in lieu of repatriating cash held overseas.
• Shareholders are pushing for the return of this cash. Given the high level of cash trapped overseas, we expect
continued debt issuances to support domestic cash needs, including share repurchases, leading to higher total
cash balances in 2014.
U.S. Corporate Cash Balances Reach Another Record High
After rated U.S. nonfinancial corporate issuers marked their record year for cash in 2013, we analyzed only the issuers
we rated over the past five years (about 1,100 issuers). We found that cash and short-term investments increased a
total of 71% since the end of 2008, with much of the growth coming from the already cash-rich technology industry
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and large investment-grade issuers (see appendix).
The ratio of cash and short-term investments to total assets, which jumped from 7% prior to the recession to about 9%
by 2010, has yet to return to pre-recessionary levels, despite the gradually improving economic outlook. In fact, our
analysis indicates that this ratio is now even higher, at almost 10%, as of year-end 2013 (see chart 1).
Chart 1
Debt grows almost four times as fast as cash
The balance sheets of issuers that Standard & Poor's has rated during the past five years reflect changes for both the
economy and credit market conditions. During the height of recession from 2008-2010, cash balances grew by about
$300 billion, while debt levels increased nearly $100 billion. For every $1 of cash growth, debt increased by just $0.32
during this period. This aggressive cash growth built up through delayed investments, aggressive cost-cuts, and lower
spending on share buybacks, all while the debt market remained closed to all but the strongest of credits (see chart 2).
During 2011 to 2013, cash continued to grow, by nearly $200 billion, despite a modestly improving economy. In
contrast, debt levels jumped by about $750 billion. In other words, for every $1 of cash growth, debt increased by an
astonishing $3.67 over the past three years, an 11-fold increase from the $0.32 mentioned above. We attribute recent
cash growth partly to the modestly improving global economy, continued buildup of overseas cash, and most
importantly, the robust credit market conditions offering access to cheap debt.
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New debt accounts for most of cash growth in 2013
Another way to view the source of the cash growth is by analyzing the trends among the large cash holders. For the 25
largest U.S. cash holders, who account for only 1.5% of total issuers but control 43% of the overall cash, total cash and
short-term investments grew by $115 billion to $656 billion during 2013 (see table 1). At the same time, total debt
outstanding increased a similar $105 billion.
So why would a company issue debt when the cash appears to be plentiful? Cash flow from operations has been
increasing since the end of the recession for U.S. corporate borrowers and generally appears sufficient to support
ongoing share repurchases, dividends, and capital expenditures. However, as companies become more global, they
have been generating an increasingly higher portion of their cash flow from overseas, which is subject to taxes as high
as 35% upon repatriation. While most of the cash uses are domestic in nature (share repurchases and dividends,
especially), cash flow is increasingly generated from overseas, leaving companies with domestic cash deficits even as
overseas cash piles up.
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Table 1
Top 25 Issuers With The Largest Cash Holdings As Of 2013
Rank
Company
Rating as of
December 2013
Cash and short-term
inv. (mil. $)
Total debt
(mil. $)
Cash (YoY
mil. $)
Debt (YoY
mil. $)
1
Microsoft Corp.
AAA
83,944
22,976
15,632
8,788
2
3
Google Inc.
AA
58,717
5,245
10,629
(292)
Verizon
BBB+
54,129
93,591
50,566
41,604
4
Cisco Systems Inc.
AA-
47,065
17,147
689
856
5
Apple Inc.
AA+
40,711
16,961
891
16,961
6
Oracle Corp.
A+
36,974
23,126
3,279
3,369
7
Pfizer Inc.
AA
32,498
36,489
(210)
(971)
8
Johnson & Johnson
AAA
29,206
18,180
8,117
2,015
9
General Motors Co.
BB+
27,919
7,137
1,578
1,920
10
Ford Motor Co.
BBB-
25,116
15,683
691
1,427
11
The Coca-Cola Co.
AA-
20,268
37,079
3,717
4,469
12
Intel Corp.
A+
20,087
13,446
1,925
(2)
13
Amgen Inc.
A
19,401
32,128
(4,660)
5,599
14
Merck & Co. Inc.
AA
17,486
25,060
1,345
4,491
15
Chevron Corp.
AA
16,516
20,431
(5,397)
8,239
16
Hewlett-Packard Co.
BBB+
16,165
24,592
3,576
(3,635)
17
Boeing Co.
A
15,225
9,635
1,667
(774)
18
General Electric Co.
AA+
14,005
13,356
(1,578)
(4,113)
19
Chrysler Group LLC
B+
13,344
12,301
1,702
(302)
20
Medtronic Inc.
A+
13,667
12,219
11,203
801
21
Amazon.com Inc.
AA-
12,447
6,940
999
1,891
22
IBM Corp.
AA-
11,066
39,718
(63)
6,449
23
EMC Corp.
A
10,664
7,159
4,497
5,449
24
AbbVie Inc.
A
9,895
14,723
1,919
(949)
25
DISH Network Corp.
BB-
9,739
13,651
2,502
1,763
656,254
538,973
115,216
105,053
21
24
Total
YoY change
(%)
YoY--Year over year.
Debt issuance is a form of synthetic cash repatriation
Although most companies do not report their cash holdings by region, we found that the top 15 cash holders that
disclosed this information for the past three years raised cash balances by 14% (or $44 billion) during 2013. Of this
growth, the companies generated $45 billion overseas, indicating that domestic cash balances actually fell $1 billion
during the year. Most importantly, debt issuance by these 15 companies totaled $45 billion, exactly matching their
overseas cash growth. In other words, these large cash rich issuers completely exhausted their domestic cash flow and
had to issue an additional $45 billion in net new debt to meet domestic cash needs, mostly in the form of increasing
share repurchases.
We believe most of these issuers did not intend to have such a large cash pile sitting on the sidelines. If given the
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choice, most would prefer to repatriate the cash and limit debt issuance. However, investors are demanding greater
returns through share buybacks and dividends. Given the limited domestic cash flow generation and reticence to
repatriate cash at the current tax rate, companies are issuing debt as a form of synthetic cash repatriation. The ratio of
overseas to domestic cash supports this thesis. These 15 issuers held 69% of their cash overseas in 2011, which
subsequently rose to 72% in 2012 and to 76% in 2013. It is our view that without access to the accommodating credit
markets, companies would likely not have provided the returns that shareholders have become accustomed to in
recent years (see chart 3).
Chart 3
Case study: cash keeps rising, and so does debt
Repeated over time, synthetic cash repatriation results in ever increasing cash balances and rising debt. For example,
Cisco Systems Inc.'s overseas cash balances continue to trend higher while its domestic cash balances have remained
between $3 billion and $9 billion over the past eight years (see chart 4). In the meantime, the company's outstanding
debt has increased from $6 billion to $21 billion to supplement its low domestic cash balances. Cisco's $8 billion bond
issuance in February 2014 improved its domestic cash position for now, but we expect overseas cash growth to
continue over the intermediate term outside of a tax policy reform.
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Chart 4
Cash growth will continue as long as the credit market remains accessible
The ever-growing cash balance represents different ideas to different stakeholders. For a company with global
operations, it is the result of a U.S. tax policy that puts it in a competitive disadvantage versus its non-U.S. peers. For
shareholders, it represents the company's ultra-conservatism and an inefficient capital structure. The rise of activist
shareholders in 2013 supports this view.
We believe the cash represents both a liquidity cushion over the near term and, more importantly, a potential
long-term credit risk, given the accompanying debt is rising even faster. It isn't conservatism by the issuer, but simply a
result of synthetic cash repatriation born out of necessity and an accommodating credit market full of yield-starved
investors. Rising gross leverage through 2013 reflects the credit risk inherent in the current debt market. Companies
may have hoarded cash out of fear during the recession, but current cash growth is a reflection of the Federal
Reserve's cheap money policy and a U.S. tax policy that discourages its return because of the competitive
disadvantage companies who repatriated this cash would then be operating under. With no near-term shift in policy or
a tax holiday in sight, we expect cash growth to continue even as the Federal Reserve raises rates in 2015. On the
other hand, if Congress implements a tax holiday similar to the American Jobs Creation Act of 2004, we could see a
mad rush of repatriation among the cash rich, likely enriching shareholders in the process while leaving the creditors
with the remaining debt. Activist shareholders should be aware: companies aren't as rich as they appear.
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Appendix
In this section, we provide a more in-depth analysis of cash balances by reviewing trends among investment-grade
versus speculative-grade issuers, rating categories, and industries.
Investment-grade companies maintain a bigger slice of the pie
Our analysis of cash balances shows a marked bifurcation between investment- and speculative-grade issuers. In all,
cash and short-term investments rose 11.3% on a compounded annual growth rate (CAGR) for the issuers we rated
over the past five years. Specifically, investment-grade issuers grew the cash balance at 13.9% CAGR, in contrast to
the 1.6% CAGR recorded by speculative-grade issuers. This growth spread (12.3%) is nearly double the rate recorded
two years ago (6.4%), highlighting the investment-grade issuers' ability to maintain and enhance their liquidity, not just
through operations, but also through access to the credit market (see chart 5).
Chart 5
Issuers in the 'B' rating category or below, which accounts for 49% of the total number of issuers, had only 7% of the
$1.52 trillion in total cash and short-term investments as of year-end 2013. The speculative-grade issuers on average
experienced greater percentage revenue declines and reduced operating cash flow through the recession as well as a
slower recovery through the current expansion. These companies are usually smaller, have higher concentrations of
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domestic cash flow (which is more easily distributed to sponsors or shareholders), and have greater percentage debt
and interest expense burdens. As a result, we expect speculative-grade issuers' cash growth to continue to lag that of
investment-grade issuers.
In contrast, companies in the 'A' category or higher, which account for 10% of the total number of issuers, have 53% of
the total cash and short-term investments as of 2013 (see chart 6). For many of these large issuers, domestic cash on
hand and cash flow generation have been insufficient to fund the ever-growing shareholder returns and acquisitions.
Chart 6
Rich keep getting richer, but not by choice
The top 25 largest cash holders, which make up approximately 1.5% of the total rated issuers, accounted for about
43% of total cash and short-term investments as of 2013, an increase from 40% as of 2011 (see chart 7). Furthermore,
the top 50 largest cash holders now make up about 55% of the total pie. Part of the growth is the result of the inclusion
of new issuers, such as Apple Inc., but much of it is related to the easy access to the credit markets among
investment-grade issuers, which has allowed overseas cash to grow untouched.
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Chart 7
Two industries hold almost half the cash
Cash and short-term investments are concentrated in two sectors: technology at 31% ($480 billion) and health care at
13% ($206 billion) of the total corporate cash holdings (see chart 8). In fact, the technology sector's cash concentration
has increased from the 28% reported in 2011. The technology sector's "cash problem" is more apparent when viewed
within the balance sheet. Its cash and short-term investments (excluding long-term investments) now make up a
quarter of the total assets, a significant jump from five years ago, when it comprised just 17% (see chart 9). Considering
the overall corporate average of 10%, it is no wonder activist shareholders are circling Silicon Valley.
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Chart 8
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Chart 9
Overseas cash continues to grow
Of the top 15 largest issuers disclosing their overseas cash positions, 76% of the overall cash was held overseas, an
increase from 72% in 2012 and 69% in 2011. These issuers grew overall cash by $44 billion, or 14%, during 2013 (see
table 2). Overseas cash accounted for $45 billion of this cash growth, with domestic cash actually declining by $1
billion. Given the limited domestic cash balance for these issuers, we expect continued cash growth outside of the U.S.,
coupled with new debt issuances, to meet domestic cash needs.
Table 2
Overseas Cash Versus Domestic Cash
Cash and short-term
investments (mil. $)
Domestic (mil.
$)
Overseas (mil.
$)
Percent
overseas (%)
Total debt
(mil. $)
AAA
83,944
8,244
75,700
90.2
22,976
Google Inc.
AA
58,717
25,117
33,600
57.2
5,245
Cisco Systems Inc.
AA-
47,065
3,265
43,800
93.1
17,147
Apple Inc.
AA+
40,711
8,827
31,884
78.3
16,961
Oracle Corp.
A+
36,974
5,774
31,200
84.4
23,126
Amgen Inc.
A
19,401
1,617
17,784
91.7
32,128
Medtronic Inc.
AA-
13,667
906
12,761
93.4
12,219
Company
Rating
Microsoft Corp.
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Table 2
Overseas Cash Versus Domestic Cash (cont.)
Chrysler Group LLC
BB-
13,344
12,344
1,000
7.5
12,301
Amazon.com Inc.
AA-
12,447
6,847
5,600
45.0
6,940
EMC Corp.
A
10,664
5,574
5,090
47.7
7,159
eBay Inc.
A
9,025
2,186
6,839
75.8
4,123
Priceline.com Inc.
BBB
6,753
1,853
4,900
72.6
1,894
Costco Wholesale
Corp.
A+
6,439
3,955
2,484
38.6
4,987
Corning Inc.
A-
5,235
1,623
3,612
69.0
3,293
NetApp Inc.
BBB+
5,069
1,010
4,059
80.1
995
Total
369,455
89,143
280,312
75.9
171,494
YoY change (mil.
$)
44,300
(700)
45,000
45,300
13.60
(0.80)
19.10
35.90
YoY % change
*Includes issuers who have reported overseas debt figures for past three years, based on company filings and S&P estimates.
Notes
*2013 year-end public filings for publicly held companies and estimation of year-end 2013 figures for privately held
companies, based on most recently available financials. Excludes long-term investments.
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