Standard & Poor’s Ratings Services estimates North American nonfinancial corporations’ financing needs over the next five years (2013-2017) at $13.5 trillion to $14.3 trillion, with two-thirds to be applied toward refinancing and the remainder toward new investment. The U.S. makes up the lion’s share of this North American debt need, accounting for more than 90% of the total pie. Last year was a record setting year for the U.S. credit markets, while in Canada, private nonfinancial corporations’ debt financing increased, but remained well below its 2007 pre-recession peak.
As far as the U.S. is concerned, we expect that companies will largely use $3.4 trillion to $4.2 trillion of new debt financing for capital expenditures–and, to a lesser extent, shareholder returns and mergers and acquisitions (M&A)–as they continue to make up for underinvestment since the Great Recession.
Liquidity is currently strong among U.S. corporations, but we expect companies to fund a meaningful portion of their needs with debt, considering currently attractive credit market conditions and the high percentage of cash sitting overseas, which we believe is unlikely to be brought back home any time soon, considering the cost of repatriation.
Financing such a large sum is not without risk. Companies’ high demand for debt capital could force lenders to ration credit. U.S. policymakers may be constrained if faced with another economic downturn given the extraordinary use of their fiscal and monetary arsenals to support growth already. Still, our base-case assumption is that banks and capital markets will largely be able to meet borrowers’ financing needs–in part because accommodative monetary policy will continue to be effective, but also because of the general resilience of the U.S. economy.