TEXT-S&P Report Examines $175B Shortfall In U.S. Corporate Capex

Wed Dec 12, 2012 12:23am EST

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SAN FRANCISCO (Standard & Poor's) Dec. 11, 2012--Deferred capital spending totaled $175 billion from 2009 through 2011 for rated corporate issuers in the U.S., according to a report published today by Standard & Poor's Ratings Services. This could spell trouble down the road for companies that have added cash to their balance sheets while neglecting capital improvements, particularly for lower rated companies.

"This historic deficiency in capex is especially noteworthy as strong operating cash flow during this period enabled companies to enhance their liquidity," said Andrew Chang, Standard & Poor's credit analyst.

"It is a bit like 'robbing Peter to pay Paul,'" he commented. "Companies not reinvesting in the future for product innovation, manufacturing efficiency, and technological advances may be exposing themselves to becoming competitively disadvantaged in the future."

He noted that over the longer term, as the operating environment improves and equipment ages, capex will have to return to more normal historical levels.

"With margins already tightly squeezed, any external shocks (domestic or overseas) could reduce profitability and the cash flow needed to fund the necessary investments," he said.

SPECULATIVE-GRADE ISSUERS ARE MOST AT RISK

In the report, "The Credit Overhang: U.S. Corporations Have Underinvested By $175 Billion To Bolster Cash," Standard & Poor's notes that underinvestment in capex was more pronounced among speculative-grade issuers, which Standard & Poor's estimates underinvested by about 20% through the three-year period, when compared with pre-recession capex levels, versus about 4% for investment-grade issuers. Furthermore, despite good growth through the first half of 2012, business spending appears to be declining once again according to Commerce Department data released Nov. 29, indicating potential scaling-back of long-term investments entering 2013.

The implications are significant because upcoming debt maturities are concentrated among speculative-grade issuers, who have not benefited as much from the overall strengthening of liquidity. Standard & Poor's believes that many of these companies preserved their liquidity, partially by deferring capital spending.

"In fact, we believe an argument can be made that this underinvestment has artificially inflated the overall corporate liquidity in recent years," Mr. Chang said.

Based on our analysis of the U.S. nonfinancial corporate issuers Standard & Poor's has rated over the past five years (this includes approximately 1,400 issuers rated as of December 2007), capital spending plunged 21.2% year over year in 2009, significantly higher than the 13.3% revenue decline, as management deferred spending for all but the most critical projects. The belt-tightening continued in 2010. While revenues rebounded 10% year over year, capital spending again lagged, rising a more modest 6.5%. As a percentage of revenues, capex margin fell from 7.5% in 2008 to 6.8% in 2009 and declined again to 6.6% in 2010 as it failed to match the growth in revenues.

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