US Corporate Cash and the Dollar

It is widely appreciated that US corporate bond sales have been very strong this year. It begs the question what are they doing with all that cash they have been raising. There are two general answers.

The first applies to higher rated US corporations. They are largely stockpiling the cash. Industry reports suggest that about a quarter of the cash being raised is earmarked for merger and acquisition activity and another quarter to pay down some older debt. The remaining half is being managed as cash.

Previously, Moody's estimated that US companies, mostly investment grade names, have almost $400 bln maturing by the end of 2011. Of this amount, some 80% still remains even after the surge in debt issuance. Moody's estimates another $184 bln comes due in 2012.

Companies, like countries, were thrown off kilter by the lock down of credit in the latter part of 2008 and those conditions continued into the early part of this year. Just like many countries have been rebuilding reserve positions, companies seem to have a clear preference for greater liquidity.

The second answer applies to lower quality/higher risk corporate borrowings. There high yield bond issuers have also been active, raising about $70 bln in new issuance. They are using the proceeds primarily to pay down debt. Some $50 bln or ~70% has been earmarked for debt repayment. This is important because of the virtuous cycle it hopes to engender--reducing debt levels may diminish default expectations and narrow risk premiums. According to S&P these higher risk names have about $424 bln of debt maturing in the 2012-2014 period.

The relative and absolute low dollar interest rates and the re-opening of the US capital markets, even while the banking system is still distressed has not only facilitated US corporate borrowing, but also foreign companies and sovereigns to borrow dollars as well. In the past US corporate bond issuance was correlated with strong foreign demand. This relationship appears to have eased recently. That leaves the dollar vulnerable for the same reason that domestic and foreign names are finding it appealing to borrow dollars.