Canadian companies may be sitting on large piles of cash, but their credit quality hasn’t improved much, says Moody’s Investors Service in a new report.

The rating agency reports that non-financial Canadian companies are now holding 60% more cash than they did at the end of 2006, yet aggregate credit quality is today essentially the same as it was at the end of 2006. And, if Canada were to slip back into recession, increased cash holdings would not be a reason to expect lower default rates than seen during the 2008-2009 period, it notes.

“Given that cash holdings have increased in proportion with expenses and debt levels, and that the most significant changes are concentrated in specific sectors, we think the increased cash holdings reflect companies’ operational needs rather than pervasive caution amid geopolitical and macroeconomic uncertainty,” says Bill Wolfe, senior vice president and author of the report. “They therefore likely reflect normal operating and investment activities.”

The rating agency explains that while cash is a component of credit quality and liquidity, by itself, increased cash does not improve credit quality, liquidity or default prospects, it says. “Sound liability management minimizes the risk of default better than holding cash,” Wolfe says. “Since defaults tend to rise during periods of financial market disruption, it is one thing to have debt due in six years and another if it comes due next month, when the financial markets may be dislocated.”

Nevertheless, Moody’s also says that its research shows little near-term pressure on Canadian corporates from maturing debt. “While increased cash holdings have not improved the credit quality of the companies we studied, most are effectively managing their debt maturities and access to credit,” Wolfe notes. “Even if market conditions were to deteriorate, we would not expect a spike in defaults.”

Moody’s also says that it doesn’t expect Canadian companies’ credit quality to improve during 2013. Since the recession, dividends and capital expenditures have increased, suggesting that companies have chosen not to further strengthen their credit quality, it says, adding that it also sees limited capacity for further improvement, as tepid macroeconomic growth will continue to constrain
potential cash flow expansion.