Tag Archives: Corporate Debt

Global Debt To Hit All Time High $255 Trillion, 330% Of World GDP, by Tyler Durden

Posted on November 17, 2019 | 1 comment

$255 trillion is just the stated, nominal debt, and doesn’t include unfunded liabilities, contingent liabilities, or derivatives. From Tyler Durden at zerohedge.com:

There are three certainties in life: death, taxes and that global debt will keep rising in perpetuity.

Addressing the third, yesterday the Institute of International Finance reported that global debt has now hit $250 trillion and is expected to hit a record $255 trillion at the end of 2019, up $12 trillion from $243 trillion at the end of 2018, and nearly $32,500 for each of the 7.7 billion people on planet.

“With few signs of slowdown in the pace of debt accumulation, we estimate that global debt will surpass $255 trillion this year,” the IIF said in the report.

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Here’s What I’m Worried About with the Everything Bubble, by Wolf Richter

Posted on October 23, 2019 | Leave a comment

When a company burns cash it helps all the recipients of that cash, but what happens when the cash runs out? From Wolf Richter at wolfstreet.com:

How cash-burn machines power the real economy, and what happens to the economy when investors refuse to have more of their cash burned.

This is the transcript from my podcast last Sunday, THE WOLF STREET REPORT:

I’m not going to call it “tech,” because most of the startups in that so-called tech space aren’t tech companies. They’re companies in mundane businesses. And many of these companies aren’t startups anymore but mature companies that have been in business for over a decade and now have tens of thousands of employees. And then there is the entire shale-oil and gas space that has turned the US into the largest oil and gas producer in the world.

They all share two things in common:

  • One, they’re fabulously efficient, finely tuned, and endlessly perfected cash-burn machines.
  • And two, investors in these companies count on new cash from new investors to bail out and remunerate the existing investors.

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Thirteen Reckonings Hanging in the Balance, by MN Gordon

Posted on September 9, 2018 | Leave a comment

The thirteen reckonings are essentially thirteen cases of you can’t have your cake and eat it, too. From MN Gordon at economicprism.com:

The NASDAQ slipped below 8,000 this week.  But you can table your reservations.  The record bull market in U.S. stocks is still on.

With a little imagination, and the assistance of crude chart projections, DOW 40,000 could be eclipsed by the end of the decade.  Remember, anything and everything’s possible with enough fake money.

Still, we consider DOW 40,000 to be about as probable as having a dinosaur step on our car as we drive to work today.  More than likely, a return to DOW 10,000 will first grace the front page of the Wall Street Journal.

In the interim, while still in the delight of this “permanently high plateau,” we’ll turn our attention to another equally suspect record that’s presently unfolding with imperfect precision.  If you haven’t noticed, the current economic expansion’s approaching its own record duration.  At 111 months and counting, this economic expansion is closing in on the post-World War II record of 120 consecutive months of growth that occurred between March 1991 and March 2001. Continue reading →

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The Dark Cloud of Global Debt… The Perfect Storm Looms, by Alex Deluce

Posted on July 6, 2018 | Leave a comment

The global debt bubble will bust, the only question is when. From Alex Deluce at goldtelegraph.com:

05
Jul

While everyone is debating the effects of possible trade sanctions on the global economy, few are paying attention to a far more serious issue. Enormous global debt, combined with low-interest rates, have set the stage for a global recession that has the potential for economic chaos.

The combination of enormous debt and artificially low-interest rates were at the center of the 2008 credit bubble. One would expect central banks to be aware of this and show more concern. However, the overall silence has been astonishing.

An exception to this is the Bank for International Settlements (BIS), which has been making loud noises about the toxic level of global debt and the anticipated bubble. It recently reported that the global debt of 2008 was $60 trillion, small when compared to the current debt of $170 trillion. To make matters worse, today’s global debt is 40 percent higher in relation to GDP than it was in 2008, just prior to the Lehman Bros. downfall. To add to the current headache are the rising debt levels of emerging markets and corporate debts. According to McKinsey & Company, a global consulting firm, two-thirds of U.S. corporate debt are from corporations that pose a high default risk.

Countries such as Brazil, India, and China have been busy issuing questionable credit. This dubious credit being issued in many emerging markets has come with extremely low-interest rates. If the borrowers’ default, the lenders won’t be looking at enough compensation to recoup their loses. Low-interest rates have become an overall global problem, including the rates in the U.S. high-yield bond market. Central banks around the world have been keeping interest rates artificially low while printing money with abandon. The current global debt is the direct result of this policy.

$2 trillion in corporate debt will be maturing annually through 2022. A considerable amount of this debt may default and cause debt repricing. The damage caused by central banks and their policy of easy credit has been done, and there is little that can be done at this point to stem the tide. It can only be hoped that they are more aware now than they were in 2008.

To continue reading: The Dark Cloud of Global Debt… The Perfect Storm Looms 

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Why America Is Heading Straight Toward The Worst Debt Crisis In History, by Michael Snyder

Posted on May 28, 2018 | Leave a comment

The American pile of debt is larger than it’s ever been and growing quickly. From Michael Snyder at theeconomiccollapseblog.com:

Today, America is nearly 70 trillion dollars in debt, and that debt is shooting higher at an exponential rate.  Usually most of the focus in on the national debt, which is now 21 trillion dollars and rising, but when you total all forms of debt in our society together it comes to a grand total just short of 70 trillion dollars.  Many people seem to believe that the debt imbalances that existed prior to the great financial crisis of 2008 have been solved, but that is not the case at all.  We are living in the terminal phase of the greatest debt bubble in history, and with each passing day that mountain of debt just keeps on getting bigger and bigger.  It simply is not mathematically possible for debt to keep on growing at a pace that is many times greater than GDP growth, and at some point this absurd bubble will come to an abrupt end.  So those that are forecasting many years of prosperity to come are simply being delusional.  Our current standard of living is very heavily fueled by debt, and at some point we are going to hit a wall.

Let’s talk about consumer debt first.  Excluding mortgage debt, consumer debt is projected to hit the 4 trillion dollar mark by the end of the year…

Americans are in a borrowing mood, and their total tab for consumer debt could reach a record $4 trillion by the end of 2018.

That’s according to LendingTree, a loan comparison website, which analyzed data from the Federal Reserve on nonmortgage debts including credit cards, and auto, personal and student loans.

Americans owe more than 26 percent of their annual income to this debt. That’s up from 22 percent in 2010. It’s also higher than debt levels during the mid-2000s when credit availability soared.

We have never seen this level of consumer debt before in all of U.S. history.  Just a few days ago I wrote about how tens of millions of Americans are living on the edge financially, and this is yet more evidence to back up that claim.

Right now, Americans owe more than a trillion dollars on auto loans, and we are clearly in the greatest auto loan debt bubble that we have ever seen.

To continue reading: Why America Is Heading Straight Toward The Worst Debt Crisis In History

 

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Credit-Driven Train Crash, Part 1, by John Mauldin

Posted on May 13, 2018 | Leave a comment

Nobody can predict exactly when the train will crash, but it will crash. You can take that to the bank. From John Mauldin at mauldineconomics.com:

In last week’s letter, I mentioned an insightful comment my friend Peter Boockvar made at dinner in New York: “We now have credit cycles instead of economic cycles.” That one sentence provoked numerous phone calls and emails, all seeking elaboration. What did Peter mean by that statement?

I vividly remembered that quote because it resonated with me. I’ve been saying for some time that the next financial crisis will bring a major debt crisis. But as you’ll see today, it is a small part, maybe the opening event, of a rapidly-approaching train wreck. We’ll need several weeks to tease out all the causes and consequences, so this letter will be the first in a series. These will be some of the most important letters I’ve ever written. Something is on the tracks ahead and I don’t see how we’ll avoid hitting it. So, read these next few letters carefully.

Cycling Economies

In 1999, I began saying the tech bubble would eventually spark a recession. Timing was unclear because stock bubbles can blow way bigger than we can imagine. Then the yield curve inverted, and I said recession was certain. I was early in that call, but it happened.

In late 2006, I began highlighting the subprime crisis, and subsequently the yield curve again inverted, necessitating another recession call. Again, I was early, but you see the pattern.

Now let’s fast-forward to today. Here’s what I said last week that drew so much interest.

Peter [Boockvar] made an extraordinarily cogent comment that I’m going to use from now on: “We no longer have business cycles, we have credit cycles.”

For those who don’t know Peter, he is the CIO of Bleakley Advisory Group and editor of the excellent Boock Report. Let’s cut that small but meaty sound bite into pieces.

What do we mean by “business cycle,” exactly? Well, it looks something like this:


Photo: Wikispaces (Creative Commons license)

A growing economy peaks, contracts to a trough (what we call “recession”), recovers to enter prosperity, and hits a higher peak. Then the process repeats. The economy is always in either expansion or contraction.

Economists disagree on the details of all this. Wikipedia has a good overview of the various perspectives, if you want to geek out. The high-level question is why economies must cycle at all. Why can’t we have steady growth all the time? Answers vary. Whatever it is, periodically something derails growth and something else restarts it.

To continue reading: Credit-Driven Train Crash, Part 1

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Credit Cracks Are Showing If You Know Where to Look, by Robert Burgess

Posted on May 6, 2018 | Leave a comment

Years of ultra-low interest rates have encouraged corporations to borrow, probably too much. From Robert Burgess at bloomberg.com:

Anecdotal evidence suggests that corporate borrowers may be due for a reckoning.

A growng spider web of evidence suggests a credit reckoning may be near.Photographer: Bloomberg Creative Photos/Bloomberg

For years, the naysayers have been warning about the precariousness of the corporate credit market. In an environment where balance sheets have become more and more bloated from excess borrowing stoked by the Federal Reserve’s easy-money policies, shrinking bond yield premiums don’t make sense. At some point, they argue, there will have to be a reckoning.

Could we be nearing that point?

On the surface, it’s hard not to like corporate bonds, despite yields being at some of their lowest levels relative to U.S. Treasuries since before the financial crisis. After all, corporate earnings are booming, thanks to an expanding economy and tax cuts, and the default rate is miniscule at less than 3 percent. On top of that, the number of companies poised for an upgrade at S&P Global Ratings is the highest in a decade.

All that said, there’s mounting anecdotal evidence of possible cracks in the credit facade. One place you can see them is in the latest monthly survey put out by the National Association of Credit Management. This organization surveys 1,000 trade credit managers in the manufacturing and service industries across the U.S. Like most surveys of its kind lately, the main index number was down a bit from its recent highs. But some Wall Street strategists are focusing on a more alarming data point showing a collapse in a category called “dollar collections.” The index covering that part of the survey — which measures the ability of creditors to collect the money they are owed from their customers — tumbled to 46.7 in April from 59.6 in March, putting it at its lowest level since early 2009, the height of the financial crisis.

To continue reading: Credit Cracks Are Showing If You Know Where to Look

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Are European Companies Ready for Life Without Draghi? by Don Quijones

Posted on April 29, 2018 | Leave a comment

When the European Central Bank stops buying bonds, bond issuers must pay higher interest rates. The question is: can they? From Don Quijones at wolfstreet.com:

Not going to be easy, especially for “zombie” companies.

An unusually fierce spat broke out this week between two of Europe’s biggest utilities companies, Spain’s Iberdrola and Italy’s Enel, both of which are locked in a bidding war for the Brazilian electricity company Eletropaulo. The Spanish firm accused its Italian rival, almost a quarter of which is owned by the Italian State, of unfair competition due to its access to cheaper debt.

“With the obvious support of the State, Enel clearly benefits from a privileged regulatory situation in Italy, which makes access to the capital markets both cheaper and easier,” complained Iberdrola’s CEO Ignacio Sánchez Galán in a scathing letter to the European Commission. He called for a debate on the privileges certain state-owned companies continue to enjoy despite EU competition laws on illegal state aid.

Sánchez Galán raises an important point: in the EU, partly or majority state-owned companies like Enel and Électricité de France (EdF) clearly enjoy funding benefits over their rivals, especially with the Eurozone’s sovereign bond market still being propped up by the ECB.

But he also omits an inconvenient fact: his own company, Iberdrola, is one of the biggest beneficiaries of the ECB’s corporate bond buying program. As a result, it has been able to pay next to no interest on new debt for the last two years.

State-owned companies like Enel and EDF have benefited two-fold from the ECB’s largesse, first from its corporate bond buying, and secondly from its sovereign bond buying. At one point the central bank was buying €80 billion of sovereign and corporate debt per month, which helped push yields into the negative for many securities. This helped push down the funding costs of Member States’ national debts while giving a select group of European companies and subsidiaries a massive funding advantage over smaller rivals.

On a number of occasions, the corporate bonds were not even bought on the open market; instead, the ECB bought them directly from the companies through “private placements.” These arrangements enabled the companies involved, including Iberdrola, to raise cash more quickly without having to jump through the regulatory hoops.

To continue reading: Are European Companies Ready for Life Without Draghi?

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Who’s Going To Win This ‘Pepsi Challenge’? by Simon Black

Posted on March 2, 2018 | 1 comment

Buffett is shunning debt while much of corporate America loads up on it. Wonder who’s going to be right. From Simon Black at sovereignman.com:

In our discussion on Monday, we talked about the latest annual letter from Berkshire Hathaway, Warren Buffett’s holding company.

The big takeaway from that piece is that Berkshire Hathaway now holds a record $116 billion in cash.

More importantly, Buffett is NOT a buyer right now.

As he wrote in his letter…

“[P]rices for decent, but far from spectacular, businesses hit an all-time high.”

As we talked about on Monday, when the most successful investor of our era is telling the world that he’s NOT buying (because stocks are too expensive), AND that he’s cashing up to record amounts, it’s worth listening.

Buffett knows that all markets move in cycles. We’ve been in an UP cycle for a long time. And as sure as night follows day, there will be a down cycle.

That’s what he’s preparing for… because those down cycles are where there is extraordinary opportunity to make a lot of money.

But if you want to take advantage of those opportunities, you have to have cash. Lots of it.

That’s how Buffett is positioning himself. And, if you haven’t already, it’s worth considering following in his footsteps.

But if you look at corporate America as a whole, they’re taking the opposite stance.

The debt of nonfinancial companies grew $1 trillion in just two years through the third quarter of 2017, reaching a total of $8.7 trillion – nearly 45% of US GDP.

Record-low interest rates have spurred companies to take on more and more debt.

Sometimes debt can make sense.

But more often than not, excessive debt becomes incredibly dangerous for a business (or government… or individual).

In many cases, these companies aren’t taking this debt on for any good reason. It’s only because they can. And that’s insane.

As Buffett said in his letter:

“Our aversion to [debt] has dampened our returns over the years. But Charlie [Munger] and I sleep well. Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need.”

Take our perennial whipping boy, Netflix, for example.

To continue reading: Who’s Going To Win This ‘Pepsi Challenge’?

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What Will the Tax Law Do to Over-Indebted Corporate America? by Wolf Richter

Posted on December 22, 2017 | Leave a comment

The new tax law will hurt heavily indebted companies. From Wolf Richter at wolfstreet.com:

A crackdown on excessive debt. Financial engineering gets more expensive.

The new tax law is larded with goodies for Corporate America, but there is one shift – a much needed shift – in this debt-obsessed world that will punish over-indebted companies, discourage companies from taking on too much leverage, and perhaps, just maybe, make these companies less risky: The new law sharply limits the deductibility of corporate interest expense.

Starting in 2018, a company can only deduct interest expense of up to 30% of its Ebitda (earnings before interest, taxes, depreciation, and amortization). Any amount in interest expense beyond it will no longer be deductible.

This will tighten further in 2022, when the deductibility of corporate debt will be capped at 30% of earnings before interest and taxes but after depreciation and amortization expenses. This is a much smaller number than Ebitda. And interest expense deduction is capped at 30% of that much smaller amount. This will raise the tax bill further.

Most impacted will be highly indebted companies, which often have a junk credit rating. And due to this junk credit rating, they also pay higher interest rates. This made the interest expense deduction very valuable. But now it is getting partially gutted.

Businesses have long been incentivized to borrow, not only by the extraordinarily low interest rates even for junk-rated companies, but also by the full deductibility of interest expense. And thus encouraged by the tax code, corporate debt has surged. Mergers & acquisitions, share buybacks, leveraged buyouts, and dividends have often been funded at least partially with debt. And over the years, companies have piled on an enormous amount of debt.

This chart shows this surge in US debts (bonds and loans) of nonfinancial businesses over the past decade:

According to estimates by the Congressional Joint Committee on Taxation, cited by The Wall Street Journal, the first phase of curtailing interest-expense deductibility – the phase that kicks in next year – would raise $171 billion in tax revenues over 10 years. The second phase that commences in 2022 would raise $307 billion over 10 years.

To continue reading: What Will the Tax Law Do to Over-Indebted Corporate America?

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