U.S. companies sink deeper in debt as economy drags

By John Parry - Analysis

NEW YORK (Reuters) - Unbridled borrowing in the boom years has swelled Corporate America's debt burden to the highest levels on record, putting many cash-strapped companies at risk of going bust as economic malaise lingers.

Even if the longest recession in decades is now petering out, growth will be so feeble that companies can not rake in enough earnings to offset their debt mountain, leaving many dangerously exposed.

In the first quarter, the debt of U.S. industrial companies in aggregate exceeded 100 percent of their annual income for the first time, said Robert C. King, an economist at the Jerome Levy Forecasting Center in Mount Kisco, New York.

"This ratio has never been higher. There is an argument that it is in its most dire state," King said. As the downturn lingers, "earnings drop off a lot more quickly than you can deal with debt," he added.

The total debt of U.S. non-financial companies was $7.2 trillion at the end of the first quarter, up from $4.3 trillion in 1999, according to Federal Reserve data.

And over the last four decades, "the amount of debt outstanding has exploded and corporate profits have grown but not to the same degree," said Leonard Santow, managing director of economic and financial consulting firm Griggs & Santow in New York.

"More leverage, at least up until this last crisis, became more acceptable," Santow added.

Now, as the economy struggles the widening gap of debt levels over earnings becomes especially perilous for companies and for the economy itself.

"This is one of the lagging processes coming out of this cycle. It is still a high debt burden for companies and households even after this recession is over," King said.

The economic downturn has caused U.S. profits at companies to plunge, forcing up their leverage, or ratio of debt to income.

Data compiled by Thomson Reuters shows analysts expect a decrease of about 36 percent in Standard & Poor's 500 .SPX corporate earnings in the second quarter from a year earlier and no improvement from the first quarter.

Many U.S. high yield bond issuers that were levered 6 or 7 times before the recession began are now levered between 8 and 10 times as profit margins shrink, Mark Kiesel, managing director and global head of Pacific Investment Management Co's (PIMCO) corporate bond portfolio management team told Reuters Television this week.

LOST DECADE

Now, companies' anxiety about shouldering too much debt in a forbidding economic landscape is itself acting as a restraint on economic growth, because many firms will hesitate to invest in expansion, analysts said.

"Reluctance to borrow will be a big restraint on recovery," said William Sullivan, chief economist at JVB Financial Group in Boca Raton, Florida.