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
"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.