How healthy are corporate balance sheets? It depends who you
One news outlet said that U.S. firms are hoarding a record $1.6
trillion in cash led by Apple, Google, and Microsoft. Shockingly,
that same report made no mention of corporate debt levels, which
are also at all-time records.
During the previous 2009 recession high, aggregate outstanding
corporate debt peaked at $7.3 trillion. Yet, in just five years,
corporate America has amassed $2.33 trillion in new debt, bringing
the total debt burden to $9.63 trillion. (See chart below) No
matter how low interest rates are, 9.63 trillion anything is a
Ron grades a professional poker's investment
Thus far in 2014, corporate borrowers in both tiers of credit
risk (investment grade and non-investment grade or "junk") are on
pace to supplant last year's borrowing record, according to the
Securities Industry and Financial Markets Association.
Through the first six months of this year, U.S. corporations
have already issued $603 billion in new investment grade debt
(NYSEARCA:QLTA), which is 12% higher compared to the same period in
2013. Last year, the two largest corporate bond offerings ever -
Verizon's $49 billion and Apple's $17 billion sale - were
Has the new definition of "strong" corporate balance sheets
become the ability to borrow cheaply? It sure seems that way.
Our just published video "
The Myth of
Improving Corporate Balance Sheets
" by my colleague Chad Karnes examines the erroneous thinking about
the actual health of corporate balance sheets.
Corporate investment grade debt (NYSEARCA:LQD) has gained 4.24%
while high yield debt (NYSEARCA:JNK) is up 2.96% year-to-date.
Likewise, high risk corporate borrowers (Nasdaq:VWEHX) are aping
the same speculative behavior of issuing as much "cheap" debt as
they can get their hands on. Companies with a subpar credit rating
(NYSEARCA:HYG) issued $181.5 billion in new debt through the first
six months of 2014, which is 4.4% higher compared to the same
period in 2013. Meanwhile, the average yield for high yield
bonds fell below 5% to new record lows. If a thing such as
credit risk still does exist, bond investors - with the depressed
yields they've accepted - sure don't remember what it means.
The total U.S. bond market (NYSEARCA:BND) - which includes both
corporate and Treasury debt - is up 2.62% year-to-date. The yield
on 10-year U.S. Treasuries (ChicagoOptions:^TNX) has fallen almost
16% since the start of the year to around 2.55%.
ETFs designed to increase in value when Treasury yields fall and
bond prices rise like the ProShares Ultra 20+ Year (NYSEARCA:UBT)
and the Direxion Daily 20+ Yr Treasury Bull 3x Shares
(NYSEARCA:TMF) have jumped between 25% to 38% year-to-date.
Rock bottom interest rates have seduced companies to push
capital spending and dividend payouts to seven-year highs. Fiscal
restraint is most certainly not a hallmark of this particular
But eventually, the corporate borrowing binge will end. And when
interest rates climb, the fatal flaw of over-indebtedness will
become an unwelcome reality. Until then, it's full steam ahead for
the bull market in borrowing.
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