Companies on a Borrowing Binge; Can They Handle All the Debt? Whether Excessive or Not, It May Hurt Bonds, Help Stocks
CORPORATIONS are borrowing money at the fastest clip in several years amid a wave of leveraged buyouts and acquisitions, rising capital expenditures and pressure from shareholders for larger dividends and share buybacks.</br></br>The debt is expected to keep rising in the next year -- especially if the Federal Reserve holds off on more interest-rate increases -- as companies raise cash to repurchase more shares and to make higher quarterly and special-dividend payouts. For now, economists say the balance sheets of most companies are strong enough to handle the added borrowing.</br></br>In fact, the moves could help the stock market deal with an expected slowdown in profit gains later this year as the economy contracts. That is because both higher dividends, and buybacks that raise earnings per share by reducing the number of outstanding shares, could help offset any decline in profit growth.</br></br>Nonfinancial companies saw their debt rise 6.3% in the 12 months that ended in the first quarter to $5.5 trillion. That is the fastest yearly growth for debt in five years. In 2005, debt increased at an average 12-month pace of 5.1%, while in 2004 debt growth was 2.7%, according to John Lonski, an economist at Moody's Investors Service. Debt is expected to have increased about 7% in the second quarter.</br></br>The rosy debt scenario is predicated on an economy that doesn't weaken significantly, and on interest rates not climbing much higher, both of which would make the increased debts more of a burden. It all comes at a time when individuals and the U.S. government are dealing with their own heavy borrowing, making it more important for U.S. companies to successfully handle their added debt.