It’s Not The Record High Debt That Is The Biggest Risk, It’s This

Earlier, Bloomberg “discovered” that “Corporate America Has Quietly Re-levered”, reporting that “one of the biggest post-financial crisis imbalances sits on corporate balance sheets” citing a Goldman report.

Actually it hasn’t been quiet at all: while to some this is news, our readers have been well-aware of this trend since January 2014 when we first reported that “Corporations Have Record Cash: They Also Have Record-er Debt, As Net Leverage Soars 15% Above Its 2008 Peak
“, and then most recently this weekend when on Sunday we reported, again very unquietly, that“Corporate Leverage Is At Record Levels.”

Furthermore, as we further noted in “Why The Stock Buyback Spree Is Ending” that” the 3-fold increase in share buybacks in the past five years has been the key driver of corporate re-leveraging. In large part, buybacks have been the result of strong incentives provided to corporate managers by activists in particular and equity investors in general.”

Two days later, Goldman also confirmed this observation: “So, does this mean the levered re-cap is dead? In our view, the answer is yes for the broad market, though legacy Tech should prove an exception given substantial balance sheet capacity”

Goldman added even scarier overtones overnight, when it said that “like a bad dream, imbalances have been building the last few years. Corporates have levered up and the M&A boom has driven goodwill to multi-year highs. With the United States on the verge of the first interest rate hikes in almost a decade, we question the sustainability of these trends.Companies that have “manufactured earnings” vs. generating organic growth and reinvesting in their businesses are in the spotlight with investors rewarding high-returning stocks while punishing those with weak balance sheets, outsized buybacks and/or EPS growth.”