World Economy

Corporate America Facing $6.3 Trillion Debt Binge

Companies are holding $8 of debt for every $1 of cash. Companies are holding $8 of debt for every $1 of cash.

US companies, encouraged by a decade of unbelievably low borrowing costs, are sitting on $6.3 trillion of debt, according to S&P Global Ratings. That sum, which excludes banks, is more than before the Great Recession—or any other time in history.

Companies have used that debt to invest in the future, make splashy acquisitions and reward shareholders with a bonanza of stock buybacks. But this is a dicey time to owe a bunch of money, CNNMoney reported.

After years of extraordinarily low interest rates, borrowing costs are finally on the rise. That makes it more expensive for companies to refinance their debt when it comes due. Those costs will only rise further if inflation heats up, forcing the Federal Reserve to raise rates more rapidly.

The US economy is cruising. But another recession will come eventually. In previous downturns, companies with too much debt have found it difficult to repay their loans, forcing some into bankruptcy.

The "massive amount of debt" that American companies have piled on "should concern investors as we enter the late innings of a credit cycle in a rising rate environment," S&P analyst Andrew Chang wrote in a report last week.

Of course, corporate America has more firepower than ever to pay down debt. The strengthening economy and the Republican corporate tax cut have combined to unlock vast amounts of money for companies.

Indeed, S&P found that by the end of 2017, the 1,900 US companies that it rates, excluding banks, had accumulated a whopping $2.1 trillion in cash. That's up 9% from the year before—and more than double what they were sitting on in 2009.

However, that pile of money is not evenly divided. In fact, the richest 1% of US companies control more than half of the cash, S&P said.

As of the end of 2017, just seven companies claimed $800 billion of cash: Apple, Microsoft, Alphabet, Cisco, Oracle, AT&T and Amgen.

Although the tax law has improved corporate balance sheets, it's also sparked a record-setting wave of share buybacks and debt-fueled acquisitions.

S&P said it believes corporate America has reached its peak for cash hoarding. That's because companies are rewarding shareholders while adding debt because of the "lure of cheap money."

"We believe we are now entering the era of the Great Unwinding," Chang wrote.

Companies that have strong balance sheets can afford to return a bunch of cash to shareholders. The rest? Not so much.

S&P found that the riskiest category of borrowers—with a rating known as junk—have never been more leveraged than they are right now. They're holding $8 of debt for every $1 of cash.

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