Revitalized credit markets have cast a funding lifeline to U.S. companies and banks, but many companies are still hoarding their cash, a practice that may delay a full-fledged recovery.
Companies today are putting a greater emphasis on rebuilding liquidity, and the return to credit markets has yet to translate into the building blocks of a strong recovery.
For that to happen, businesses need to spend money on equipment, employees and services before a true recovery takes root.
U.S. corporations have sold about $700 billion in bonds so far this year, surpassing the $686 billion for all of 2008 and approaching the $1 trillion mark seen in previous years. Including government-backed debt, total issuance this year has reached $858 billion, according to Thomson Reuters data.
Industry reports suggest that companies are earmarking about a quarter of that capital for debt refinancing and another quarter for mergers and acquisitions.
About half the remaining proceeds from the bond sales are being stockpiled as cash, according to Brown Brothers Harriman & Co, a New York-based private bank.
Companies, like countries, were thrown off kilter by the lock down of credit in the latter part of 2008, Brown Brothers Harriman said in a recent report. Just like many countries have been rebuilding reserve positions, companies seem to have a clear preference for greater liquidity.
Revived corporate bond and commercial paper markets this year have largely helped the banking system recover from bleak investor confidence a year ago.
Government stress tests in May hinted banks were in better shape than feared and financial institutions have been able to start repaying bailout funds to the government.
C&I LOAN SLUMP
The caution has spread to the loan markets. U.S. commercial paper lending has been expanding for more than two months in a row, but commercial and industrial loans continue to slump.
Commercial paper is a short-term IOU, typically of 90 days or less, which companies use to rebuild inventories and pay workers.
Those three markets tend to trend together in a recovery scenario, and we're not seeing that yet with (commercial and industrial) loans, said Tony Crescenzi, a portfolio manager with Pacific Investment Management Co, one of the world's biggest bond fund managers.
Commercial and industrial loans, for example, have slumped by $138 billion over the last five months, or at a 26 percent annual rate, said William Sullivan, chief economist at JVB Financial Group in Boca Raton, Florida.
These so-called C&I loans now total just $1.386 trillion and comprise only 15.4 percent of aggregate bank assets, off from 16.7 percent as recently as late April, he said.
The persistent weakness in business lending undoubtedly reflects the renewed ability of many companies to tap the capital market for funding purposes, Sullivan wrote in a report this week.
Overall U.S. commercial paper outstanding has expanded by more than $250 billion over the last nine weeks, the longest stretch of expansion since a period through July 2007, when the commercial paper market grew for 14 straight weeks.
That stretch came just before the collapse of Bear Stearns hedge funds heralded phase one of the biggest global financial markets shock since the Great Depression.
While banks remain cautious in lending to companies in the aftermath of the credit crisis, companies themselves generally have not seen a sustainable surge in business yet to warrant much borrowing for capital expansion.
Banks will also remain reluctant to lend to companies as long as bad consumer loans and corporate defaults remain threats in an anemic economy, says George Feiger, chief executive of Contango Capital Advisors in Berkeley, California.
The banking system is still going to experience at least 24 months of significant write-offs, Feiger said. It is not a substitute for the capital markets, no way.