With interest rates at rock bottom levels, US companies have been borrowing record amounts of money. Per WSJ, debt taken on by nonfinancial companies reached $9.6 trillion in March, up from $6.5 trillion in early 2007, and now stands at about 57% of GDP.
Most of the borrowed money has been used to buy back stock, pay dividends or for M&A activities and not much on capital expenditures.
At the same time, many of these companies have been making a lot of money, with a growing share earned overseas, but they do not bring overseas cash back to the US in order to avoid the tax consequences. According to Moody's, about $947 billion or 58% of current total cash of nonfinancial companies is held abroad.
With the ultra-cheap money era likely to end in near future, the risk of too much debt is rising. As interest rates begin inching up, at least some companies will find it difficult to repay/refinance that debt or to make interest payments. Further profit margins are already at very high levels and are likely to fall in coming quarters.
Do you think corporate debt is now a cause for concern?
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