'Nasdaq's Time Bomb'... US IT Companies' Debt Warning Signals

Leverage Ratio Exceeding 3x Appears for the First Time Last Year

Aftershock of Corporate Bonds and Concerns over Huawei-Triggered Shock

[Asia Economy Reporter Kwon Jaehee] The debt-to-sales ratio of U.S. IT companies has more than doubled over the past decade. Moreover, some companies’ debt size reached more than three times their equity (leverage), a case not seen even during the 2009 financial crisis. Although the Nasdaq index, centered on tech stocks, hit an all-time high on the 8th (local time), the size and potential insolvency risk of IT companies have both increased over the past decade. Concerns are emerging that Nasdaq could become a "time bomb."

Global credit rating agency Standard & Poor’s (S&P) recently analyzed the debt of 49 IT companies including Alphabet in its report titled "Impact of Slow Recovery and Rising U.S.-China Tensions on U.S. IT Corporate Investment Grade." It found that the debt size of U.S. IT companies surged from $101 billion in 2009 to $592 billion last year. During the same period, sales increased from $541 billion to $1.373 trillion, about 2.5 times, but debt increased more than fivefold. Accordingly, the debt-to-sales ratio jumped sharply from 18.7% to 43.1%.

Cash holdings also increased from $161 billion in 2009 to $533 billion in 2014, and $681 billion last year.

However, excluding blue-chip companies such as Alphabet, the parent company of Google, Apple, and Microsoft (MS), cash holdings in the IT sector actually declined, dropping from $228 billion in 2014 to $222 billion last year.

The increase in IT companies’ debt is largely due to riding the boom in corporate bond issuance. With interest rate cuts and uncertain conditions, companies rushed to secure cash. Especially amid the economic downturn caused by the COVID-19 pandemic and escalating U.S.-China tensions this year, debt is expected to increase further. According to global financial information company Refinitiv, the volume of corporate bonds issued by U.S. companies from January to May this year totaled $1 trillion (about 1,237 trillion KRW), double the $540 billion issued during the same period last year. Intel issued $10.25 billion and Oracle issued $20 billion in corporate bonds this year. Notably, Apple already had about $247 billion in cash assets as of last year, enough to operate the company for 492 days without selling a single iPhone. Yet, it also issued corporate bonds this year.

The problem is that liquidity supply due to low interest rates cannot strengthen companies’ fundamentals. If the Fed withdraws from the bond market, the aftershocks could be significant. If corporate profits fail to catch up with stock price increases in the short term, the worst-case scenario could unfold. Former Fed Chair Janet Yellen expressed concern, stating, "If an event triggering a recession occurs in the future, the current level of corporate leverage could prolong the recession." Nasdaq has thus become a time bomb with an uncertain explosion timing.

Escalating U.S.-China tensions are also cited as a concern. S&P predicted that hardware and semiconductor suppliers and IT service providers among U.S. IT companies would be more adversely affected by the Huawei-related impact. Huawei holds over 30% of the global telecommunications infrastructure equipment market share, ranks second among global smartphone manufacturers (about 17%), and accounts for 5% of global semiconductor consumption, making it a major player.

S&P identified semiconductor equipment companies such as Qualcomm, Applied Materials, Lam Research, and KLA as representative companies hit by the Huawei impact. S&P expects that if license disputes and U.S.-China tensions intensify due to the Huawei impact, leverage will exceed twice the current level, and it evaluated the future outlook negatively.

S&P forecasted, "Due to the sharp drop in demand caused by COVID-19 and rising U.S.-China trade tensions, U.S. IT companies will see single-digit growth this year," adding, "Especially semiconductor-related companies among IT firms are expected to recover demand in the second half of 2021 or later."

This content was produced with the assistance of AI translation services.