Companies Stockpiling Cheap Debt Capital

 | Jun 06, 2013 | 8:30 AM EDT
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Over the past few years, publicly traded companies have largely completed the productivity gains that can be made by cutting jobs and refinancing debt. And although this has helped bottom-line earnings and helped to propel these companies' stock prices, it doesn't do anything for top-line revenue growth, except for the banks that supply the debt capital.

Companies have been able to increase top-line revenue by using cheap debt capital that they use as a carry trade into higher-yielding financial assets, but this does nothing for revenue from core operations, and it doesn't create jobs.

This has been most evident in the large increase in commercial and industrial (C&I) loans being made by the money centers to their corporate clients. I discussed this issue last August, in the column "C&I Loans Another Bright Spot for Banks," which provides information on the subject that I won't repeat here.

The logical assumption is that companies are stockpiling capital from loans at rates they believe are artificially low, but they are carrying them in preparation for deploying into infrastructure and hopefully job creation in the future. But this capital is not yet showing up as having been used for those purposes, and the balances continue to rise.

In the last three years, the amount of loans being carried by U.S. banks classified as C&I loans has increased by an astounding $370B, a 32% increase, to about $1.534 trillion, from about $1.164 trillion. That's about $10 billion per month.

This has also vaulted this asset class from about 15% of all bank loan assets to about 20% during this period of time.

At its current rate of growth, the value of C&I loans being made to companies and carried by banks will exceed the value of all residential mortgages within the next two years.

The total value of all loans at all banks in the U.S. has increased by only about $263 billion during the past three years. This means that C&I loan growth is making up for contractions in almost every other class of loans, and it is almost the exclusive reason for earnings growth at banks.

The only other loan class with a notable increase in value has been first trust residential mortgages, which have increased by only $68 billion in the same time period. The value of every other class of loans carried by banks is either sideways or down.  

Of the $370 billion increase in C&I loans, $173 billion of it is concentrated in the money centers. In the past three years, these loans have increased by $60 billion at Bank of America (BAC), $32 billion at Wells Fargo (WFC), $46 billion at JPMorgan (JPM) and $35 billion at Citigroup (C). The other $197 billion is disbursed among the other roughly 6,500 banks in the U.S.

I don't know in what assets companies are holding all this money, why their lenders have made these loans but not others, or what their plans for all this money are. Some portion of it has most logically been used to invest in technological improvements to increase productivity, but most of it has not yet been invested outside of the financial system, and what has been has not resulted in job creation.

The appearance is that banks and their largest corporate clients have been and are increasingly gaming the low interest rates and term structures provided by the Federal Reserve's monetary stimulus to generate financial returns to themselves and their shareholders but not to invest in their core operations.

The only observation I can offer at this moment is that it appears to be another indication of a growing debt bubble and another piece of evidence that the Fed's monetary transmission mechanism is broken.

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