Why Most Companies Exist On A Knife's Edge

It been suggested that because corporations have about $2 trillion or more tucked away, that they are doing well.  However, the rest of the story is much worse.

"The reality is different, and more worrisome. Much of the cash is held by just a precious few companies, while debt is ballooning at other, weaker businesses as investors desperate for income rush to lend to them. These investors could face losses, perhaps steep, if economic growth falters. The broader economy is also vulnerable because companies with more debt have to cut back further and lay off more whenever downturns hit.

"There's a misconception that companies are swimming in cash," says Andrew Chang, a director at S&P Global Ratings. "They're actually drowning in debt."

It turns out there's a wealth gap among companies, just like among people. Of the $1.8 trillion in cash that's sitting in U.S. corporate accounts, half of it belongs to just 25 of the 2,000 companies tracked by S&P Global Ratings. Outside of Apple, Google and the rest of the corporate 1 percent, cash has been falling over the last two years even as debt has been rising. It now covers only $15 of every $100 they owe, less than it did even during the financial crisis in 2008 when finances were crumbling.

You don't have to look hard to find other signs of trouble.

The number of companies that have defaulted so far this year has already passed the total for all of last year, which itself had the most since the financial crisis. Even among companies considered high-quality, or investment grade, credit-rating agencies say a record number are so stretched financially that they're one bad quarter or so from being downgraded to "junk" status.

Companies whose debt is already deemed "junk" are in the worst shape in years. To pay back all they owe, they would have to set aside every dollar of their operating earnings over the next eight and a half years, more than twice as long as it would have taken during the 2008 crisis, according to Bank of America Merrill Lynch.

The problem with high debt is it leaves less wiggle room for even seemingly well-run companies if things go wrong.

In March, S&P cut its ratings on Macy's to BBB, two notches above junk, as competition from internet retailers continues to dig into the department store chain's sales. The company's debt, net of cash, has risen over the past three years. Meanwhile, it has spent $5.2 billion buying its own stock, or $1.4 billion more than those shares are worth now, according to data provider FactSet. Companies often buy their shares and take them off the market to goose their earnings per share, a widely watched measure of success.

Oil company Hess was also recently downgraded, mostly because of a plunge in oil prices beyond its control. But its own moves hurt, too. Instead of whittling away at its debt with the cash it raised in recent years from selling parts of its business, it has spent billions buying its stock. Moody's Investors Service cited Hess' heavy debt burden when it downgraded the company.

Hess is what ratings agencies call a "fallen angel:" a formerly highly rated corporate borrower that was cut to junk and thus made too risky for many bond funds. Moody's tallied 55 other fallen angels in the first six months this year.

Despite the warning signs, investors continue to lend to companies as if there is nothing to fear.

They put a net $22.8 billion into mutual funds specializing in corporate bonds in the 12 months through July, lifting total investments via such funds to $144 billion, according to Morningstar. The headlong rush reflects desperation for something a little more rewarding than the stingy interest paid by Treasurys and other traditionally safe bond offerings. The yield on the 10-year Treasury hit a record low last month.

Joseph LaVorgna, chief economist at Deutsche Bank, is worried about the risk posed beyond investment portfolios.

He says mounting debt has made companies vulnerable to outside shocks — a natural disaster, for instance, or a spike in inflation or a sharp slowdown in China. A little bad news could force companies to pull back from spending and slam the economy.

"It's like someone's immune system is weak," LaVorgna says. "If you run yourself down, you get sick."

To be sure, few experts are so worried that they expect corporate debt to be the source of the next financial crisis. And not all the numbers on corporate debt are bad.

Defaults are jumping, but they're mostly confined to energy companies hit hard by a collapse in oil prices. Exclude those companies, and defaults are still ahead of last year's tally, though not at a post-crisis high.

And while debt is high, low interest rates have helped lighten the burden.

Companies in the Standard and Poor's 500 index are generating enough operating earnings to pay the annual interest due on all their debt six times over, according to Goldman Sachs. That so-called interest coverage ratio isn't great, but it's not terrible, either. It was higher — meaning healthier — a few years ago before companies went on a borrowing streak, but it's not far off its long-term average.

Chang of S&P Global says his company doesn't break out the numbers for the 1 percent versus the 99 percent, but doesn't think the ratios for the bulk of companies have gotten alarmingly worse.

Chris Gootkind, director of credit research at fund company Loomis Sayles, says debt at many companies is still at a "reasonable" level, and thinks investors in corporate debt have gotten things largely right. The profits they've reaped have certainly been lucrative. Corporate bond mutual funds have returned an average of 9.5 percent this year, more than an S&P 500 index fund.

"If the market gets concerned," Gootkind says, "they'll start demanding significantly higher rates."

Of course, investors can get things horribly wrong. They didn't catch the last debt bubble, pouring money into bonds containing mortgages despite signs that homeowners couldn't afford them.

The similarities to the last debt crisis may not end there. Like folks who kept refinancing their mortgages instead of paying them off, companies have "rolled over" their old loans by taking out new ones. This makes sense at many companies because interest rates are so low.

But when things start falling apart, the high debt hurts.

The largest owner of radio stations in the U.S., iHeartMedia, has paid off parts of its $21 billion debt several times since the financial crisis, but elected to do so with money raised from new loans. Its debt is no lower than it was since the crisis.

Investors have been selling iHeartMedia's stock as advertisers that used to go on the radio migrate to online competitors. Its bonds have dropped sharply, too. In the past two years, the ones due in 2019 have plunged 25 percent."

http://www.msn.com/en-us/money...ZJ5s?ocid=spartanntp

If, the ongoing flat lined recovery, 1.3 percent average GDP increase for the last 7.5 years and 0.6 percent average increase for the 6.5 years, does not revive soon, the economy could plunge into recession, again.

The economy is on a knife's edge.  Nothing Hillary has suggested will improve that.

TRUTH -- THE NEW HATE SPEECH!

Original Post

Soros has been betting on a bust for nearly a year now but central banks keep titillating the global economy with free money. With negative interest rates in other parts of the world, money is flowing to the US. I suspect the old vulture will get tired of waiting eventually and drop out of his tree and administer the coup de grâce.

http://www.forbes.com/sites/ad...d-care/#42acfc84698b

 

3% inflation and 1/2% interest on CD's. You lose each year. 3% inflation and losing it all to a debt ridden, mismanaged company leaves what? My biggest question is, how did so many people that dumb get so much money that they had to throw it away? At all levels, good money seems to be thrown at bad in hopes of hitting it big.

jtdavis posted:

3% inflation and 1/2% interest on CD's. You lose each year. 3% inflation and losing it all to a debt ridden, mismanaged company leaves what? My biggest question is, how did so many people that dumb get so much money that they had to throw it away? At all levels, good money seems to be thrown at bad in hopes of hitting it big.

Inflation for the last 9 months is 0.23 percent on CPI-W index.  Didn't you read the article?  Very few companies have a cash pad.  Only about 25 of the top 2,000 publically traded corporations?

jtdavis posted:

3% inflation and 1/2% interest on CD's. You lose each year. 3% inflation and losing it all to a debt ridden, mismanaged company leaves what? My biggest question is, how did so many people that dumb get so much money that they had to throw it away? At all levels, good money seems to be thrown at bad in hopes of hitting it big.

Jt, if you don't like that that big 0.5% interest you're getting, I bet you'd love paying the bank to hold your money! That's what you get with Democratic (Yeah, right!) Socialist policies.

"A negative interest rate means the central bank and perhaps private banks will charge negative interest: instead of receiving money on deposits, depositors must pay regularly to keep their money with the bank. This is intended to incentivize banks to lend money more freely and businesses and individuals to invest, lend, and spend money rather than pay a fee to keep it safe."

http://www.investopedia.com/te...rate-policy-nirp.asp

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