washingtonpost.com
Some giants sitting on piles of cash
CONSERVATIVE MOOD REIGNS
Small firms having difficulty finding loans to grow, hire

By Steven Mufson
Washington Post Staff Writer
Friday, November 6, 2009

In the summer of 2008, steel giant Nucor decided to raise some cash. It issued new shares of stock and floated some corporate bonds. As financial markets crumbled, the company ignored pleas from some investors and analysts that it buy back shares, which are now selling for about half their peak.

Today, as a result, Nucor has a $2.2 billion cash horde -- and one year into the great recession, its chief executive Daniel DiMicco is sitting on it.

"Everything is still on hold because we don't have a lot of confidence that the right things are being done in Washington to reinvigorate the economy," said DiMicco. "We're keeping our powder dry."

Nucor isn't alone. The balance sheets of large U.S. corporations are for the most part in good shape. Many big companies have piles of cash on hand and credit markets have thawed so that they can raise new funds. Between Jan. 1 and Nov. 2, U.S. corporations overall raised $740.8 billion by issuing bonds, up from the $522.2 billion raised during the same period last year and almost as much as the $779.8 billion raised in the go-go year of 2007.

But most U.S. executives lack enough confidence in the economy to expand their businesses. And as long as consumer spending is lagging too, that leaves the federal government straining to stimulate a recovery that is still struggling to gain speed.

"Cash is high. Interest coverage ratios are low. And big businesses are able to issue bonds pretty cheaply," said Mark Zandi, chief economist of Moody's Economy.com. "The concern is that they're not using those balance sheets, that they're not out investing or hiring. And until they do, the economy is not going to engage and there is always the risk that we're going to fall back into recession."

Financial firms have been among the leaders in raising money to bolster their reserves. Citigroup, for instance, has nearly doubled its cash reserves to $244.4 billion. But top technology companies are flush, too. Microsoft has $36.7 billion of cash, and Google has $22 billion.

Executives have different reasons for their reticence. DiMicco is jittery about the future. From his vantage point, he said, companies have recently been restocking the supplies they normally have on hand but final sales are still languishing. "Whatever positive uptick there has been to this point has been an inventory correction, not a real improvement in demand," he said.

Other executives are still recovering from last year's scare when capital markets completely seized up and many companies were unable to borrow money at any price, threatening the ability to finance day-to-day operations.

"A lot of those funds are just being hoarded as cash because of the near-death experiences many businesses felt they were going through last year," said Edward Yardeni, chief investment strategist of Yardeni Research. "Companies dodged that bullet and now they want to make sure they have a bullet-proof vest."

Some companies are sitting on cash because their war chests are overseas, and bringing money back to invest in the United States would mean paying substantial taxes. Cisco has about $35 billion in cash, according to recent figures, with about $29 billion of it overseas. That's one thing that made its proposed $3 billion acquisition of Tandberg, a Norwegian firm involved in video communication, more appealing. Deals like that, of course, will channel money to other parts of the world, not the U.S. economy.

Small firms suffering

While big U.S. companies are having relatively little trouble finding cash, smaller firms aren't faring as well. Unable to sell corporate bonds to investors because they are too small or because they are privately held, small and medium-sized companies rely heavily on bank loans -- and banks haven't been lending as freely as before.

That's important for job creation, said Zandi. He said that businesses that employ fewer than 20 people account for 25 percent of U.S. employment, but accounted for 40 percent of the job losses during 2008.

Tom Carnahan, chief executive of Wind Capital Group, a wind farm developer, said he had trouble lining up bank loans over the past year even though he had some capital and long-term purchase contracts. He said, "I went to banks and they said, 'Looks like a great project. Sorry we're not lending money any more.' " Last month he finally lined up financing from five banks -- none of them American.

David Jones Jr., chairman of the private equity firm Chrysallis Ventures, says his firm is being forced to play a bigger role in funding promising companies that are having trouble obtaining loans. "Many of our companies should not be financed by banks because they are not far enough along," said Jones, who has been focusing on companies applying technological advances to health care. "But even for the ones that are making a little money [and] plowing money back into growth . . . it is really hard to find banks to lend to them."

Chrysallis has $400 million under management, but its latest $175 million fund will be able to invest in no more than 18 young ventures, instead of 22 as it originally hoped, because the ventures can't borrow money on top of the Chrysallis investment. "We're investing in a lot of new companies, but from the perspective that we're going to have to finance this alone, dribble the money in carefully and only if they show progress," Jones said.

Haves and have-nots

To be sure, not all big corporations are equal, and some of them are pressed for financing too.

"There's definitely a have and have-not type of environment in the steel industry in the U.S.," said Michelle Appelbaum, who runs her own research boutique focusing on steel firms. "There are a lot of companies that took on a lot of debt going into the summer of '08 and got caught like in a game of musical chairs with no chair to sit on" when lending froze in October 2008.

Some Russian steel companies, for example, borrowed to make expensive acquisitions in the United States shortly before the economy hit the skids.

Many companies have also conserved cash in part by slashing capital spending and expenses. DuPont, for example, cut capital spending by $600 million, or 30 percent, and squeezed $900 million out of operating costs this year. That helped it keep a hefty cash flow; it had $3.2 billion in cash at the end of September.

That trend in corporate finance has helped make this recession different from earlier ones, said Zandi. Companies overall are in far better shape than American consumers, who have boosted their savings rates in order to repair their personal balance sheets, or the federal government, which is projecting $9 trillion in deficits over the next decade. For now those deficits are providing stimulus; later they could threaten growth.

The 1991 and 2001 slowdowns "were recessions driven by business balance sheets. This one is driven by consumers'," Zandi said, "And the next one will be driven by the government's balance sheets."

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