Bloomberg
by John Detrixhe
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.
Goldman Sachs Group Inc., based in New York, sold $1.3 billion of 50-year, 6.125 percent debt, according to data compiled by Bloomberg. The securities have a face value of $25 and can’t be called for five years.
‘Locking In’
“Goldman sees the value of locking in long-term debt at a very attractive borrowing cost, and they’re taking advantage of the fact that investors are hungry for yield,” said Anthony Valeri, a market strategist at LPL Financial Corp., which oversees about $277 billion of assets.
Morgan Stanley issued $1.5 billion of 3.45 percent, 5-year debt at a yield of 225 basis points more than similar-maturity Treasuries, Bloomberg data show. In its last issue of 5-year notes on July 21, the New York-based bank sold $1.25 billion of 4 percent debt priced at a spread of 245 basis points.
Bonds from Morgan Stanley were the most actively traded U.S. corporate securities by dealers yesterday with 169 trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Cardinal Health
Credit-default swaps on Cardinal Health Inc., which had soared on buyout speculation, plummeted when the company said it’s not in talks with an acquirer. The cost to protect debt from the Dublin, Ohio-based company dropped 58.3 basis points yesterday to 90.1 basis points, according to data provider CMA.
The contracts reached 160 earlier in the day, the highest in six years, according to broker Phoenix Partners Group, after rising for almost two weeks on speculation the company may be purchased by a private-equity firm.
The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, declined 0.5 basis point to a mid-price of 92.9, according to index administrator Markit Group Ltd. That’s the lowest since May 3.
The Markit iTraxx Europe Index of 125 companies with investment-grade ratings increased 1 basis point to 97 at 11:10 a.m. in London. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan increased 2 basis points to 105, Markit prices show.
Bondholder Protection
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.
Billionaire Carl Icahn offered to buy Metro-Goldwyn-Mayer Inc.’s senior secured loans for 53 cents on the dollar, giving the studio’s creditors added enticement to accept a buyout bid from Lions Gate Entertainment Corp.
The offer is conditioned on at least $1.6 billion in principal amount of loans being tendered, Icahn said yesterday in a statement. It represents a premium of about 18 percent over the 45 cents the debt fetched before Lions Gate’s Oct. 12 bid.
A separate pledge to buy the debt for 45 cents if creditors oppose a deal for MGM to be run by Spyglass Entertainment remains in effect, Icahn said in the statement.
The extra yield investors demand to own emerging-market debt rather than government debentures fell 10 basis points to 243 basis points, the lowest since April 26, according to JPMorgan Chase & Co data.
Cemex Agreement
Cemex SAB eased the terms of a financial agreement with banks to take into account lower-than-expected earnings. The largest cement maker in the Americas will pay a fee of 25 basis points and agreed to sell equity or equity-linked securities of $1 billion next year as part of the amendment, according to a statement. Cemex last year reached an agreement with banks to refinance $15 billion of debt to avoid default.
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.
http://www.bloomberg.com/news/2010-10-26/cash-hoard-of-1-trillion-shows-borrower-angst-over-growth-credit-markets.html