Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

There’s a mystery hidden on the balance sheets of Corporate America: These companies have a record amount of cash and they’re more deeply indebted than ever before.

This seems paradoxical and kind of silly. Why raise money from bond investors when you already have the liquid assets on hand? As Bloomberg News reported Thursday, non-financial companies' liquid assets, which include foreign deposits, currency as well as money-market and mutual fund shares, reached a record of almost $2.3 trillion in the second quarter. That's an increase of nearly 60 percent since mid-2009. This cash cushion also appears sort of comforting; companies can do whatever they want. They're rich.

But in reality, it is neither silly nor overly comforting. First of all, a disproportionate amount of the cash is held by the biggest companies, such as Apple Inc., Microsoft Corp., Alphabet Inc. and General Electric Co., and it is mostly held in overseas accounts. These corporations can't bring that cash back without incurring steep tax bills, so they've been keeping it offshore. When they need money, they simply raise dollars by borrowing from the bond market at record-low rates.

Cash Piles
Big U.S. companies have loaded up their balance sheets with cash, much of it held overseas
Source: SEC filings, Bloomberg

Indeed, the amount of bonds issued by these companies has surged, rising 66 percent from mid-2009 to $5.24 trillion of bonds outstanding as of the end of June, Federal Reserve data show.  

Loads of Debt
Corporate America has borrowed trillions of dollars over the past few years by selling bonds
Source: Board of Governors of the Federal Reserve System

That isn't necessarily a recipe for default because a large chunk of this is an exercise in financial engineering aimed at avoiding onerous taxes. But it has consequences. First, it limits the benefit to the economy if and when those tax policies are changed because much of the money has already been released through the bond market.

And second, to the extent that companies have cash, they're not using enough of it for exciting projects. There hasn't been a tremendous wave of innovation or salary increases. Instead, companies have repurchased billions of dollars of their own shares, which is great for the stock market but doesn't do a whole lot to bolster economic growth.

Meanwhile, the average numbers from the Federal Reserve wash over the areas of Corporate America that are less cash rich and are still building their piles of debt. A greater proportion of investment-grade corporate bonds outstanding are tied to less-creditworthy companies, and their maturities have been stretched out. 

So yes, Corporate America has a lot of cash. But companies also have a lot of debt, and to the extent they're using their money, it hasn't been to create the virtuous cycle of economic investment that many have been hoping for. These stockpiles of liquid assets shouldn't allay investor concerns about credit markets.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net