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Mel Svendsen, chief executive officer of Standen’s Ltd., a Calgary-based maker of vehicle suspensions, said his company decided to build its cash reserves ‘to put our organization on a solid footing for tougher times in the future.’Chris Bolin/The Globe and Mail

Companies are taking advantage of record-low interest rates and strong demand for corporate bonds to bulk up their growing piles of cash, holding on to those reserves in part as an insurance policy against economic turmoil.

A new Royal Bank of Canada analysis shows that many companies are building up cash on their balance sheets, "biding their time until the economic environment calms down," before spending it, RBC economist David Onyett-Jeffries said.

Easy credit has triggered substantial growth in both short- and long-term borrowing. Short-term business credit outstanding – mostly bank loans – grew 12.4 per cent year-over-year in February to a new record high, RBC's report said. Longer-term financing, consisting primarily of bonds and debentures, rose 6.3 per cent, equalling January's growth, which was the fastest expansion since May, 2010.

Last year, Bank of Canada Governor Mark Carney scolded companies for sitting on heaps of "dead money" that could be put to better use in the economy.

The problem is not that companies aren't eager to spend, or can't afford to invest. Instead, they are struggling to find investments that justify taking on risk in the face of what could be a prolonged period of economic stagnation and uncertainty.

Mel Svendsen, chief executive officer of Standen's Ltd., a Calgary-based maker of vehicle suspensions, said his company decided to build its cash reserves "to put our organization on a solid footing for tougher times in the future."

He said he is still not completely confident the economy will accelerate in the coming months at the pace it should have at this point, following a deep recession. "Under normal circumstances, coming out of a recession, we would have parted with some of [that cash] already," he said. "But we are just being a little more cautious."

Mr. Svendsen said financial institutions are willing to lend at very good rates – or to refinance existing borrowing at a lower cost – and many companies have taken advantage of that to beef up their balance sheets.

Large cash balances are a "new and necessary normal" for North American public companies, even as the global financial crisis eases, according to a Deloitte quarterly survey of chief financial officers being released Wednesday.

"It's kind of an insurance policy against a riskier, slower-growth world that folks are seeing," explained Bill Cunningham, who co-leads Deloitte Canada's CFO program. "There is not a lot of pressure to deploy the cash and at the same time they're not seeing the opportunities."

The overall confidence of CFOs in both Canada and the United States was higher in the first quarter, reaching the highest level in a year, according to the Deloitte survey.

For the first time in the 21/2 years that Deloitte has conducted the survey, optimism was lower in Canada than in the United States.

The median expectation of Canadian CFOs, for example, is for sales to rise 7.4 per cent and profits to go up 11.8 per cent over the next year, compared with a year ago. They also expect to boost staff levels by 3.5 per cent.

And yet CFOs say capital spending will be down nearly 10 per cent.

"Canada is on a slightly more defensive footing," Mr. Cunningham said. "There is some optimism, not as strong as in the U.S."

Mr. Cunningham said the shift to holding cash has been on the rise for years as companies concentrated on keeping their inventories low. But the trend has accelerated since the financial crisis, he said.

Revenue growth, risk mitigation and cost cutting are now the top priorities of Canadian companies, according to the Deloitte survey. As a result, corporate boards are less inclined to pay down debt, raise dividends or make capital expenditures.

Companies could start spending later in 2013, if Europe stays stable and the United States continues to show good growth, RBC's Mr. Onyett-Jeffries pointed out. "The fact that they are stockpiling the money now supports our expectation that growth in business investment will pick up throughout this year."

Follow Barrie McKenna on Twitter: @barriemckennaOpens in a new window
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