U.S. corporate cash piles grew to a record amount in 2013, fueled by a red-hot bond market, a modestly improving economy and tax policy that discourages companies from repatriating money stashed overseas, Standard & Poor's Ratings Services says in a report to be released Monday.
The report says U.S. non-financial companies ended 2013 with $1.53 trillion in cash and short-term investments, an increase of 11% from 2012. The growth in the cash stockpiles, however, came largely from operations overseas. Instead of bringing that money back to the U.S. and paying taxes as high as 35% upon repatriation, companies borrowed money in the U.S. bond market, where interest rates were historically low. The report calls that strategy "a form of synthetic cash repatriation."
"A lot of companies would prefer to repatriate the cash and limit the debt issuance," said Andrew Chang, the S&P credit analyst who is the lead author of the report. "The tax policy is what it is, and this is the result of that." S&P does not taking a position on U.S. tax policy in the report.
S&P says it expects the trend to continue in 2014, with rising overseas cash balances and debt issuance to meet cash needs in the U.S. While more cash helps protect companies against any economic hiccups in the near-term, there could be longer-term risks: activist investors are increasingly pushing companies to return some of the cash stockpiles to shareholders, prompting some companies to take on more debt to pay for share buybacks.
Over the last three years, for every $1 of cash growth, debt rose by $3.67, according to the report, which examined about 1,700 companies that are rated by S&P. The figures includes both public and private companies.
"The fact is the net debt is increasing," Mr. Chang said. "That is, at a high level, generally negative for the credit" over the long term. Still, Mr. Chang said, "we haven't seen any meaningful ratings impact from this yet."
Investment-grade firms sold a record amount of debt in the U.S. last year, as interest rates fell to historic lows in part due to the bond-buying stimulus program at the Federal Reserve. The policy pushed investors seeking better returns out of low-yielding U.S. government debt and into bonds from U.S. firms that offered higher yields.
The S&P report does not analyze what companies did with their cash last year. Some bond investors are wary that as companies take on more debt to pay for share buybacks, their credit ratings could take a hit, lowering the value of their outstanding bonds.
"Without access to cheap debt, shareholders would not be getting the type of returns that they've become accustomed to in recent years," Mr. Chang said.
Four out of the five companies with the most cash were rated in the double-A category or better, with only one—Verizon Communications Inc.—rated in the triple-B category. Verizon had $54 billion in cash at the end of 2013 but about $94 billion in debt, driven in part by Verizon's $49 billion bond sale last year to pay for its purchase of Vodafone Group(VOD.LN) PLC's stake in Verizon Wireless. That bond deal was the largest corporate bond on record.
Microsoft Corp. had the most cash with about $84 billion, Google Inc.(GOOGL) had $59 billion, Cisco Systems Inc.(CSCO) had $47 billion and Apple Inc.(AAPL) had $41 billion. All those companies had significantly more cash than debt at the end of 2013, according to the S&P report.
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