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Crack and Opioids of Corporate Finance

This is a syndicated repost courtesy of True Economics. To view original, click here. Reposted with permission.

More addictive than crack or opioids, corporate debt is the sand-castle town’s equivalent of water: it holds the ‘marvels of castles’ together, util it no longer does…

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Source: https://twitter.com/lisaabramowicz1/status/1098200828010287104/photo/1

Firstly, as @Lisaabramowicz correctly summarises: “American companies look cash-rich on paper, but average leverage ratios don’t tell the story. 5% of S&P 500 companies hold more than half the overall cash; the other 95% of corporations have cash-to-debt levels that are the lowest in data going back to 2004”. Which is the happy outrun of the Fed and rest of the CBs’ exercises in Quantitive Hosing of the economies with cheap credit over the recent years. So much ‘excessive’ it hurts: a 1 percentage point climb in corporate debt yields, over the medium term (3-5 years) will shave off almost USD40 billion in annual EBITDA, although tax shields on that debt are likely to siphon off some of this pain to the Federal deficits.

Secondly, this pile up of corporate debt has come with little ‘balancesheet rebuilding’ or ‘resilience to shocks’ capacity. Much of the debt uptake in recent years has been squandered by corporates on dividend finance and stock repurchases, superficially boosting the book value and the market value of the companies involved, without improving their future cash flows. And, to add to that pain, without improving future growth prospects.

Wall Street Examiner Disclosure:Lee Adler, The Wall Street Examiner reposts third party content with the permission of the publisher. I curate posts here on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. Some of the content includes the original publisher's promotional messages. I may receive promotional consideration on a contingent basis, when paid subscriptions result. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler, unless authored by me, under my byline. No endorsement of third party content is either expressed or implied by posting the content. Do your own due diligence when considering the offerings of information providers.

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