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American Companies Swimming in Debt

Brett Arrends at MarketWatch.com has an interesting article on the health of United States companies; in essence, they’re just like the rest of the nation, swimming in debt. I guess that figures, the state governments are bankrupt, the federal government is closing in on bankruptcy and a huge numbers of individuals are up to their eyeballs in debt, why would American companies be any different? As he reports:

“American companies are not in robust financial shape. Federal Reserve data show that their debts have been rising, not falling. By some measures, they are now more leveraged than at any time since the Great Depression.”

This is ignored by some, such as The Washington Post, who have been reporting on the “surprising strength” of corporate balance sheets. But as Arrends notes:

“A look at the facts shows that companies only have “record amounts of cash” in the way that Subprime Suzy was flush with cash after that big refi back in 2005. So long as you don’t look at the liabilities, the picture looks great. Hey, why not buy a Jacuzzi?

According to the Federal Reserve, nonfinancial firms borrowed another $289 billion in the first quarter, taking their total domestic debts to $7.2 trillion, the highest level ever. That’s up by $1.1 trillion since the first quarter of 2007; it’s twice the level seen in the late 1990s.”

While this isn’t that surprising, it is troubling. If the financial markets tumble again, where is the government going to come up for the next round of bailouts they shouldn’t do but will try to do anyways?


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2 thoughts on “American Companies Swimming in Debt

  1. mike says:

    Businesses finance their activities using the lowest cost of capital they can find. With interest rates as low as they are, mixed with the opportunity cost and expense of being SEC/SOX compliant for equity sale, businesses are financing their balance sheets with debt instead of equity. I would not look at this as a bad thing (given cash available). Businesses are prepping for the recovery and want to make sure they are lean and well financed for the upswing.

    Take a look at the amount of companies going private over the past few years. The cost of issuing stock to finance their company is no longer the best approach to finance growth. Many are reversing their trends from the dot-com era.

    US debt is an issue but other mature markets face the same issue. This is because they can loan money to China at great rates but the truth is the Fed owns the majority of US debt, not China. The concern however is not as much the debt but how the dollars being borrowed are used (consumption vs. capital). If you look at the US as a business, its debt as a portion of sales (GDP) is not as bad as one would think. As China unpegs their currency you will see an unraveling of financing and we will be forced to balance our budget.


    • Good insight. Financing mix is a strategic part of business. It can be advantageous to be heavily debt financed (partly due to tax incentives government provides).

      There are companies still going the route of IPOs to raise financing. Scroll to the bottom of this July IPO list from Hoover’s for a month-by-month or quarterly archive: http://www.hoovers.com/global/msn/index.xhtml?pageid=10021&PDate=M:2010:7

      Having said that, I know plenty of private companies which have been franticly trying to deleverage. Optimal debt levels really depend on the company and the industry.

      The snapshot of the US as a business isn’t awful right now compared to many other countries, and from the debt as a portion of sales (GDP) perspective. But the current snapshot is only one small part of the worry. The trajectory and direction we’re headed is poised to take the debt:GDP ratio to a scary place.


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