Cash Hoard Shows Borrowers’ Angst Over Growth: Credit Markets

U.S. companies are hoarding almost $1 trillion of cash, an amount Moody’s Investors Service says shows borrowers are still concerned the economy may tip back into recession.

Cisco Systems Inc., Microsoft Corp. and Google Inc. account for the biggest portion of the $943 billion stockpile, Moody’s said yesterday in a report. That’s up from $937 billion at the end of 2009 and $775 billion in the prior year. Companies have a ratio of cash to capital expenditures of 1.64 times, possibly an all-time high, the New York-based ratings firm said, compared with 1.1 times in December 2008.

Borrowers have bolstered their finances by slashing spending and raising cash, selling $945.8 billion of U.S. corporate bonds this year, following a record $1.23 trillion in 2009, according to data compiled by Bloomberg. While that’s helped corporate credit quality improve, a reluctance to use the money for hiring and investing until more signs of growth emerge isn’t helping shorten a “jobless recovery,” Moody’s said.

“The mantra is better safe than sorry,” said Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott LLC, which has $50 billion of assets under management. “Companies have been very aggressive in finding ways to do business without having to hire.”

‘Human Side’

Americans’ views on job availability and wage prospects soured in October, according to a report yesterday from the New York-based Conference Board, highlighting the risk that 9.6 percent unemployment will limit consumer spending, which accounts for 70 percent of the world’s biggest economy.

Corporate borrowers, concerned last year they wouldn’t be able to tap debt markets following the worst financial crisis since the Great Depression, now fret over prospects for economic growth, said John Milne of JKMilne Asset Management

“It would be naive to believe that the human side of running a business is insulated from the low confidence that consumers have,” said Milne, who oversees about $1.8 billion as chief executive officer for the firm in Fort Myers, Florida.

Elsewhere in credit markets, the extra yield investors demand to hold company bonds instead of similar-maturity government debt fell 1 basis point to 165 basis points, or 1.65 percentage point, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. The spread has narrowed from this year’s high of 201 basis points on June 11. Yields averaged 3.48 percent yesterday, from 3.43 percent Oct. 25.

Broadcom Debut

Broadcom Corp., the biggest maker of chips for television set-top boxes, plans to sell $600 million of three- and five- year senior notes in its debut offering as soon as today, according to a person familiar with the transaction.

Proceeds will be used for general corporate purposes, the company said yesterday in a statement.

Georgia-Pacific LLC may sell 10-year notes in a benchmark offering and use the proceeds for general corporate purposes including repayment of debt, according to a person familiar with the transaction who declined to be identified because terms aren’t set. Benchmark issues are typically at least $500 million.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 1.6 basis points to a mid- price of 94.1 as of 12:01 p.m. in New York, according to index administrator Markit Group Ltd.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings increased 2 basis points to 97.9 basis points in London.

Leveraged Loans

Credit swap indexes typically fall as investor confidence improves and rise as it deteriorates. Contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

The Standard & Poor’s/LSTA US Leveraged Loan 100 Index rose 0.05 cent to 91.19 cents on the dollar, the highest since May 10. The index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, has returned 7.36 percent this year.

British American Tobacco Plc, Europe’s largest cigarette maker, opened talks with lenders to refinance $3.7 billion of loans due in 2012 to benefit from a halving of debt costs this year.

The maker of Dunhill, Kent and Lucky Strike cigarettes is seeking to renew its borrowings “to take advantage of the favorable credit market conditions,” spokeswoman Catherine Armstrong said in an interview.

Banks have cut interest margins to European companies rated between BBB+ and BBB- by S&P to 78 basis points this year from an average 142 basis points last year, according to Bloomberg data. BAT is rated BBB+ by S&P and Baa1 by Moody’s.

‘Surprisingly Well’

As companies have used operating cash flow and bond offerings to refinance debt, corporate credit quality has improved. This year, 624 borrowers have had their ratings upgraded, versus 610 downgrades, according to Moody’s. That compares with 447 upgrades and 2,084 downgrades in the same period of 2009.

“Corporate America is doing surprisingly well and adjusted very quickly to the downturn,” said Steve Oman, an analyst at Moody’s. “Myself and other people were hoping that maybe with all of this cash we’d start to see the U.S. corporates spending this for capital investment and there would be a benefit for employment situation.”

Most Cash

San Jose, California-based Cisco has the most cash and short-term investments on its balance sheet with $39.9 billion, Moody’s said. Microsoft has $36.8 billion and Mountain View, California-based Google has $30.1 billion.

Corporations will eventually have to use that cash amid shareholder demands to boost returns, reversing the improvement in their balance sheets, Oman said.

Announced equity buybacks of $276.3 billion this year have more than quadrupled from the first three quarters of 2009, according to Birinyi Associates Inc. Companies are also taking on more debt with buyout firms led by Blackstone Group LP announcing takeovers at the fastest rate since 2007.

“To the extent that they are buying shares or distributing cash, it is definitely to detriment of the bondholder,” said Lowell Bennett, managing director and fixed-income strategist in San Francisco with Mellon Capital Management, which oversees about $190 billion in assets. “Increasing the leverage is going to make the bonds more risky.”

Quantitative Easing

Rising confidence can be seen in higher bond prices, which have pushed U.S. corporate yields as low as 4.49 percent on Oct. 11, the lowest on record, according to Bank of America Merrill Lynch index data. Yields climbed to 4.57 percent yesterday.

Federal Reserve policy makers, who meet Nov. 2-3, have already cut interest rates almost to zero and bought $1.7 trillion of securities. They are discussing more purchases of Treasuries to flood markets with cheap money to prevent stagnating prices from undermining the recovery, a strategy called quantitative easing.

Default rates are declining as borrowing costs drop. The U.S. speculative-grade default rate will fall to 2.2 percent in a year from 4 percent in September, off the peak of 14.7 percent in November 2009, Moody’s said Oct. 12 in a report.

High-yield, high-risk issuers have sold $226.8 billion of bonds this year, breaking the record $162.7 billion of offerings in 2009, Bloomberg data show. Speculative-grade debt is rated Ba1 and below by Moody’s or BB+ and lower by S&P.

Record Low Coupons

Bentonville, Arkansas-based Wal-Mart Stores Inc., the world’s largest retailer, sold $5 billion of debt in a four-part offering on Oct. 18 at some of the lowest coupons ever. The transaction included $750 million of 3-year, 0.75 percent notes that yield 30 basis points more than similar-maturity Treasuries and $1.25 billion of 5-year, 1.5 percent debt at a spread of 48 basis points, Bloomberg data show.

Microsoft, based in Redmond, Washington, sold $4.75 billion of bonds last month including $1 billion of 0.875 percent notes due in September 2013 and $1.75 billion of 1.625 percent debt maturing in September 2015.

The 3-year notes, issued Sept. 22 at 99.835 cents on the dollar, have climbed to 100.129 cents to yield 0.83 percent, Trace data show. Cisco bonds have lost 0.78 percent this month, according to Bank of America Merrill Lynch index data.

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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