Forecasts for global corporate bond issuance in 2011 varied wildly as the markets closed for 2010. The lack of consensus can be attributed to one vexed question in corporate finance: what will companies do with all that cash? US corporations, for instance, have been hoarding cash at the fastest rate in half a century. Non-financial companies had $1.93 trillion in cash and other liquid assets on their balance sheets at the end of September, according to the Federal Reserve. The trend is similar in Europe and Japan.
These cash reserves are good for credit fundamentals but not good for issuance volumes. After records were blown away in 2009, issuance was down by almost a third in 2010, and some debt capital markets bankers dont expect that to pick up unless the trend of deleveraging goes into reverse. Still, they say, anecdotal evidence suggests that companies are coming under more and more pressure from shareholders to put that cash to work. Although investors might have been happy for companies to bolster their balance sheets in the wake of the credit crunch of 2008, the uncertainties that pervaded then no longer apply, even against the backdrop of a European sovereign debt crisis. That could signal an increase in share buybacks, increased capital expenditure, or more debt-financed M&A activity.
In a report published by Thomson Reuters and Freeman Consulting Services last month, M&A is forecast to rise 36% this year to $3 trillion, driven by a pick-up in activity in such sectors as real estate and financial services, based on a survey of 150 worldwide corporate executives. But optimism about M&A activity is a new year perennial, and companies might choose to continue to hoard their cash or use it for capital spending rather than make acquisitions. Moreover, with just too much systemic uncertainty in the sovereign debt markets, with banks having significant exposure to them, and dreadful memories of the credit crunch, companies do not want to be forced to turn to banks or the market if the economy suddenly shrinks or financial markets freeze up. It will be a question of who wins the argument in 2011.