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Corporations Have Record Cash: They Also Have Record-er Debt, As Net Leverage Soars 15% Above Its 2008 Peak
There is a reason why activism was the best performing hedge fund "strategy" of 2013: as we wrote and predicted back in November 2012 in "Where The Levered Corporate "Cash On The Sidelines" Is Truly Going", US corporations - susceptible to soothing and not so soothing (ahem Icahn) suggestions by major shareholders - would lever to the hilt with cheap debt and use it all not for CapEx and growth, but for short-term shareholder gratification such as buybacks and dividends. A year later we found just how accurate this prediction would be when as we reported ten days ago US corporations invested a whopping half a trillion in buying back their stock, incidentally at all time high prices.
Putting aside the stupidity of this action for corporate IRRs, if not for activist hedge fund P&Ls, another finding has emerged, one that was also predicted back in 2012. Because in addition to still soaring mountains of cash, corporations have quietly amassed even greater mountains... of debt. In fact, as SocGen reveals, net debt, or total debt less cash, has risen to a new all time high, and is now 15% higher than it was at its prior peak just before the financial crisis!
From SocGen:
US corporates do indeed hold lots of cash, which is currently at record levels, but they also hold record levels of debt. Net debt (so discounting those massive cash piles) is 15% above the levels seen in 2008/09. The idea that corporates are paying down debt is simply not seen in the numbers. What is true is that deleveraging has occurred through the usual mechanism of higher asset prices (no doubt an aim of central bank policy). This is the painless form of deleveraging. It is also the most temporary, for a simple pull-back in equities and rise in volatility will put the problem back on centre stage.
And while it would be excusable if this debt had gone to prefund future growth, it is a travesty that the only thing companies have to show for it is that it has simply made a few already rich hedge fund managers even richer.
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line item this line item dat poof magik is where i want it at : muppetz will feed on what corpz shit out
Thank you Tylers for this update on these previous posts about this topic:
http://www.zerohedge.com/news/2014-01-06/500-billion-2013-corporate-buyb...
http://www.zerohedge.com/news/2012-11-21/where-levered-corporate-cash-si...
What this means: The next time the economy hits a "bump in the road" it won't be gentle like 2008.
I've been talking about the implications of this for 3 years now, though the financial MSM nor sell-side pumpers would never speaketh of it.
Federal Reserve POMO + equity buybacks by publicly traded corporations (whereby conveniently the execs at those companies have compensation that's tied to their company's share price performance - ba da bing!) have been the foundation of this incredible - and incredibly hollow - 4 year equity rally.
Look at that net debt chart above - equities were 't even this overpriced in 1999.
The dumb money can't even grasp what this means and when the rug is pulled out from beneath their "stock portfolio investments" they will be shocked! Shocked, I tell you!
Buy those "stawks" always & forever & at any price, bagholders! The execs are buying them with the company credit card.
The only word that counts in that article is 'IF' ... but that 'IF' is not going to happen.
Don't count on a Crash in the Market! Not in 2014 for sure. It's an Election year and the government will do all in its power to keep this market going up. It's good for our 401K for sure, and it has already appreciated nicely over the past 2+ years.
and Guss what? - Regardless of all the analysis or 'extreme' measures it has been reporting for years on ZH, it's the Fed and Central Banks who are at the helm.
These markets will keep trending higher in 2014!
"It's an Election year..."
Like 2008?
Wooohooo! MOAR!
preparing for velocity
never can have too much toilette paper n e how
I never heard of anyone preparing for money velocity (inflation) by holding money.
Buyback more and more stock, borrow, rinse and repeat.
It's what my company does. And then with that "rising stock", use it to get even MOAR corporate debt (cheap via the Fed) for M&A, and then you can goose one's balance sheet even more.
Who needs R&D, sales, quality.......when you can just bullshit your way towards earnings?
R&D has it's benefits come tax time.
It's called Leveraged SELLout (LSO): fund bonus package and golden parachute with debt and leverage while the music is playing. Crash and burn it so board and stockholders can't claw it all back
insider stock options bitchez. CHA CHING! LOOT tha THING!
CONgress comes to mind when you say that :)
Insider Trading By Congress Now Obama’s Legacyhttp://news.firedoglake.com/2013/04/17/insider-trading-by-congress-now-o...
When the next (planned) crash comes; just watch these corporations get bailed out.
"In this time of crisis, Amazon, GE, Wirlpool, Tesla, Best Buy, and (insert corporation here) must be supported to maintain their ability to employ hard working Americans."
Look at what Congress owns and that should give you a good idea of who they would bail out
General Electric continued to be the most popular investment for current members of Congress. In 2011, there were 71 lawmakers who reported owning shares in the company; in 2012, there were 74. The second most popular holding was the bank Wells Fargo, in which 58 members owned shares (up from 40 in 2011). Financial firms were well-represented in the 10 most popular investments: Bank of America came in sixth (51 members) and JPMorgan Chase was seventh (49 members). Both companies had more congressional investors than in 2011 (11 more for Bank of America and 10 more for JPMorgan Chase.)
https://www.opensecrets.org/news/2014/01/millionaires-club-for-first-tim...
Bail outs for everyone except the taxpayers. Bail outs are already written into Obamacare (ahh those back door meetings now we know why they wouldn't do it in public).
Bailing Out Health Insurers and Helping Obamacaresnip...
Robert Laszewski—a prominent consultant to health insurance companies—recently wrote in a remarkably candid blog post that, while Obamacare is almost certain to cause insurance costs to skyrocket even higher than it already has, “insurers won’t be losing a lot of sleep over it.” How can this be? Because insurance companies won’t bear the cost of their own losses—at least not more than about a quarter of them. The other three-quarters will be borne by American taxpayers.
Good point and GE still pays no taxes. If it wasn't for the CONs in Congress who voted for Obamacare, we could have avoided this gov scam.
Not a problem the FED has the corps back.
Where is old Yellen!
On FB...
https://www.facebook.com/deepthoughtsbyjanetyellen?ref=profile
Where's my magic eight ball?
I did come across a thing concerning "nuclear powered light houses" that the Russians forgot they built during the Cold War and had to be secured after the collapse of the USSR.
Next up...collapse of the USSA.
All they have is expanding this phony stawk bubble to placate the bewildered masses....as soon as it can no longer be sustained all hell will break lose.
Deleveraging through higher asset prices? I'm assuming they mean paper asset prices including equities, credit/bonds, and the perceived increase in home prices. Absolutely no margin for error left with the CB's.
Of course I wouldn't be so worrried with these figures if the "real" economy had expanded by 50% since 2008 but we know this hasn't happend as if inflation is accounted for, I'm not sure the real economy is back to pre-recession levels.
This debt monster just won't go away as between the federal government doubling its debt load since 2007, businesses now with record debt levels, and individuals re-leveraging with auto and student loans, we are being set-up for the greatest debt implosion and defationary event in modern history.
Tyler, you may also want to include in this chart a reference to internal operating cash flow generated from businsses to measure against the debt level. Would be really interested to see how the debt service coverage ratio looks today compared to previous downturns.
Record debt... but locked in at insanely low interest rates. Several of the companies I follow took out 100M to 2B in loans in the ZIRP environment and just put the cash on the books -- for no reason other than to lock in interest rates and fund future capex with it when rates will presumably be higher.
This would explain both record cash and record debt.
You make an excellent point Seek
Seek and LMAOLORI,
No doubt solid points but a couple of outcomes to think about. First, if the issued the debt, took the cash, and do nothing when it other than leave it parked on their balance sheet, doesn't make much sense as the cost of debt will be higher than earnings from cash. Possible but I don't think this is the strategy.
Second, my guess is that these companies are going to look for ways to deploy the cash but only at the right time. What they need is another economic recession/downturn that pounds poorly prepared businesses and makes them vulnerable to being acquired. Companies with strong balance sheets and high levels of liquidity will be very well positioned to pick-up some great bargains next time around.
The key with these debt issuances are not so much in the rate but rather in the terms & conditions. Having more flexible repayment terms, longer maturities, favorable security positions, cov-lite, etc. are very important. The last thing a company wants is to have to repay debt (or get into a battle with the creditors) at just the wrong time.
The companies could also use the cash for the equity section of their balance sheet (i.e., stock buybacks, dividends, etc.) but this will just increase the leverage and could make them the targets instead of being the predator.
Warren Buffett will be proven right again next time around. That is, when the tide goes out, there are going to be plenty of naked bodies in need of being covered up. Those with high levels of liquidity and the most favorable debt terms will be in a great position.
Makes business sense, if the banks are lending money at ZIRP now, why would they wait for rates to rise.
Good reason to buy Bitcoin
http://www.telegraph.co.uk/finance/financetopics/davos/10577104/Fatal-sp...
Well I'm sure their banks know that these corporations won't ever pay off their debts.
Good thing bank bailout III, or IV, or V will save the banks yet again when the time comes.
Are you telling me that 0% interest rates lead to horrendous decisions and misallocation of capital?
Heavens no!
What he meant to say was that ZIRP, IOER, TARP, TALF, MMIFF, AMLF, CPFF, TAF, PDCF, TSLF, $45B/month TSY OMO, $40B/month agency MBS OMO, bilateral currency swaps, QEn and O/N RRP were, in aggregate, the most wonderful thing that could ever have happened for all of us*
(* where "us" refers to lifeforms of the species Homo banksterus)
RE
Dont forget about executives. Ironically, the folks like CEOs and C-Level execs who argue that the only thing that motivates the plebs is lucre......are selfishly doing just that during the age of QE with buybacks and M&A asset deals.
M&A is today's version of R&D. Buy up other companies, put them on your (over leveraged) balance sheet to cover up shoddy accounting, buy back stock to prop up your asset prices (and bonus), and watch the dough roll in (thanks Fed Reserve)!