Record Levels of Corporate Debt and Cash

Accumulating cash overseas is one way in which U.S.-based corporations can keep their tax bills lower. Since 2008, the low interest-rate environment has made it easier for companies to buy back stock, pay dividends and make acquisitions without needing to use the cash held by their overseas subsidiaries to fund such activities. As a general rule, keeping cash overseas allows corporations to avoid paying the U.S.’s 35% federal tax rate on it. At the same time, interest paid on any debt incurred to fund such activities is typically tax deductible.

As a result, U.S. companies have simultaneously issued record amounts of debt – both in nominal terms and as a percentage of gross domestic product – and held what appear to be record amounts of cash overseas. U.S. companies borrowed another $223 billion in 2014’s first quarter.

From a financial perspective, it makes considerable sense to keep money overseas rather than deploy it at home. Investment-grade rated corporations can borrow at very low rates. For example, earlier this year, Apple issued $17 billion in long-term debt. The interest rate it has to pay ranges from 1.05% for three-year notes to 4.45% for 30-year notes. Even Cimarex Energy, whose debt is rated just below investment grade, was able to issue 10-year notes earlier this year at a 4.375% interest rate (the interest rate on Apple’s 10-year notes is 3.45%).

According to data from S&P, companies have been accumulating cash at a rapid clip, doubling it since 2007. At the same time, the debt burden of nonfinancial companies in March was a record $9.6 trillion, versus $6.5 trillion in early 2007. The first-quarter figure represented the highest since at least 1955 when measured in both absolute terms and relative to the economy as a whole, at 57% of gross domestic product – according to data from Moody’s Analytics. It was also the sixth consecutive quarterly record.

While comprehensive data on foreign cash and liquid securities held by U.S. companies is not available, Moody’s rates the debt of more than 1,100 nonfinancial companies. It estimates they hold roughly $950 billion in offshore cash. This represents more than one-half of the record $1.64 trillion in cash these companies held at year-end.

When analyzing companies, we look at several factors related to debt levels. These include, gross and net debt (total debt less cash and cash equivalents), how affordable any interest due on such debt may be, how much of the company’s cash is held in the U.S. versus overseas and when the debt is due.  In the current low interest rate environment, it is important to understand the full picture rather than just take a snapshot of what is seen on the balance sheet.