Tag Archives: Corporate Debt

Heading to a recession that has probably already arrived, this may not be the best time for corporations to be taking on more debt. That, unfortunately, is what they’re doing. From Sally Bakewell at blomberg.com:

The safe ’part of the market is becoming the most dangerous’
Debt growth most pronounced in energy and healthcare

Here’s a gut check for bond investors: corporate America is now more leveraged than ever.

As this year’s corporate bond sales raced past $1 trillion on Wednesday — marking the fifth consecutive year of trillion-plus issuance — Morgan Stanley published a report Friday highlighting the growing strains on company balance sheets. The report, which estimated US companies’ collective debt at a record 2.4 times their collective earnings as of June, comes at a time of growing angst in global bond markets

“The investment-grade ‘safe’ part of the market is becoming the most dangerous,” said Ashish Shah, chief investment officer at AllianceBernstein LP. “There are so little returns out there. People are crowding into whatever they can.”

The debt metric, which doesn’t include banks and other financial companies, has climbed for five straight quarters as corporate profits decline at the same time companies load up on the increasingly cheap borrowings, Morgan Stanley analysts led by Adam Richmond wrote in a note to clients. In 2010, when the U.S. economy started recovering from the longest recession since the Great Depression, the ratio fell to 1.7 times.

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But what has the analysts uneasy isn’t just the speed at which leverage is climbing, but that it’s happening while the economy continues to grow.
“Leverage tends to rise most in a recession — so the fact that it is this high in a ‘healthy economy’ is even more concerning,” the analysts wrote. In other words, they said, “mistakes are both more likely and more costly.”

The analysts’ assessment wasn’t totally worrisome. Years of near-zero interest rates have made it a lot easier to service those debt loads. The typical company’s annual earnings before interest, taxes, depreciation and amortization, known as Ebitda, is still almost 10 times its interest payments, Morgan Stanley’s data shows. Even that number has been declining, though, as earnings slump.

Aggregate cash levels are also still growing, although the pace of growth has slowed, according to the report.

Stimulus Concern

The weakening balance sheets could become more worrisome if investors lose confidence that central banks will keep extending their unprecedented stimulus efforts that have driven yields to record lows. Those concerns flared up the past week, and rates on 30-year Treasuries recorded their biggest two-day selloff in more than a year.

Corporate-bond issuance this year is on pace to exceed last year’s record $1.3 trillion, data compiled by Bloomberg show. That would push sales during the past five years to more than $6 trillion. Companies that sold dollar bonds this week included Home Depot Inc., Cox Communications Inc. and TJX Cos.

Total debt at companies grew steadily at about 10 percent year-on-year since 2009 and accelerated to 16 percent year-on-year at the end of 2015. As that happened, Ebitda fell 4 percent for twelve months through the end of 2015, according to the report.

Debt loads are swelling across most all industries, the analysts said. But it’s been most pronounced among energy and healthcare companies. Companies have also borrowed to buyback stock rather than investing, a factor that contributed to weak productivity in the U.S. economy, and that does not “bode well for earnings,” the analysts wrote.

http://www.bloomberg.com/news/articles/2016-09-09/leverage-soars-to-new-heights-as-corporate-bond-deluge-rolls-on

If you keep piling on debt, eventually something’s got to give. S&P agrees. From Tyler Durden at zerohedge.com:

In an analysis that may rival that infamous “McKinsey report” from early 2015 which found that not only had there been no deleveraging since the financial crisis but that total global debt has risen to an unprecedented $199 trillion as of 2014, or up by $52 trillion in 7 years, earlier today S&P Global Raters issued a new report in which it forecasts that global corporate debt is set to rise by 50% over the next four years, rising from $51.4 trillion currently to $75 trillion by 2020 as a result of easy central bank monetary policy and low interest rates.

Not surprisingly, the world’s biggest credit creator, China, is expected to account for the bulk of the credit growth, with the nation projected to add $28 trillion or 45% of the $62 trillion in expected global demand increase (the other $13 trillion of the $75 trillion total are refinancings). The U.S. is estimated to add $14 trillion, or 22%, in new debt, with Europe adding $9 trillion, or 15 percent.

In the latest attack on unorthodox monetary policy yet, S&P notes that central banks may be trying to reinflate their economies, but they’re doing so to the detriment of credit quality. “Central banks remain in thrall to the idea that credit-fueled growth is healthy for the global economy. In fact, our research highlights that monetary policy easing has thus far contributed to increased financial risk, with the growth of corporate borrowing far outpacing that of the global economy.”

Continuing their assault on central banks, authors David Tesher, Paul Watters and Terry Chan say that “nearly half of corporate debt issuers are estimated to be highly leveraged, strongly suggesting that a correction in global credit markets is unavoidable. In fact, analysts believe that the credit correction began in late 2015 and will likely stretch through the next few years as defaults spike.”

This is best visualized in a recent report from Morgan Stanley which indeed shows that if history is precedent, the current default cycle will continue for a long time.

Here, once again, S&P explains how global central banks are now trapped: they no longer wish to push rates lower on one hand, but on the other any sharp spike in rates would wreak havoc on global credit markets, and the financial system in general. As a result, S&P considers a correction in the credit markets to be “inevitable.” The only question, as MarketWatch notes, is degree of that unwinding. An unexpected sharp economic slowdown and an aggressive reversal of ultra-low interest rates pose big risks to what otherwise could be an orderly drawdown of the global pile of IOUs.

The problem is that the default cycle has already started, and any sharp changes to interest rates will only accelerate it. As we pointed out last week, there has already been a sharp uptick in corporate defaults. Global corporate bankruptcies reached a milestone 100 so far in 2016 in July. That puts the current tally, led mostly by U.S. energy companies, up more than 50% from the same time last year. In fact, the last time the global count was higher at this point in the year was in 2009, during the financial crisis, when it reached 177. At this pace, 2016 is set to see a new all time high number in corporate defaults.

To continue reading: S&P Sees A “Crisis Of Confidence Around The Globe” As Corporate Debt Hits $75 Trillion In 2020

Who would have thought that corporate debt could spark a recession? Add in government and individual debt and it could spark a depression. From Sally Bakewell at bloomerg.com:

Leverage at companies worldwide swells to highest in 12 years

Capital not working hard enough at third of all firms

There’s been endless speculation in recent weeks about whether the U.S., and the whole world for that matter, are about to sink into recession. Underpinning much of the angst is an unprecedented $29 trillion corporate bond binge that has left many companies more indebted than ever.

Whether this debt overhang proves to be a catalyst for recession or not, one thing is clear in talking to credit-market observers: It’s a problem that won’t go away any time soon.

Strains are emerging in just about every corner of the global credit market. Credit-rating downgrades account for the biggest chunk of ratings actions since 2009; corporate leverage is at a 12-year high; and perhaps most worrisome, growing numbers of companies — one third globally — are failing to generate high enough returns on investments to cover their cost of funding. Pooled together into a single snapshot, the data points show how the seven-year-old global growth model based on cheap credit from central banks is running out of steam.

“We’ve never been in a cycle quite like this,” said Bonnie Baha, a money manager at DoubleLine Capital in Los Angeles, which oversees more than $80 billion. “It’s setting up for an unhappy turn.”

While not as pronounced as the rout in global equity markets, losses are beginning to pile up in the bond market too. The average spread over benchmark government yields for highly rated debt has widened to 1.84 percentage points, the most in three years, from 1.18 percentage points in March, according to Bank of America Merrill Lynch indexes. Investors lost 0.2 percent on global corporate bonds in 2015, snapping a string of annual gains that averaged 7.9 percent over the previous six years, the data show.

Debt at global companies rated by Standard & Poor’s reached three times earnings before interest, tax, depreciation and amortization in 2015, the highest in data going back to 2003 and up from 2.8 times last year, according to the ratings company. Total debt at listed companies in China, the world’s second-largest economy, has climbed to the highest level in three years, according to data compiled by Bloomberg.

To continue reading: The $29 Trillion Corporate Debt Hangover That Could Spark a Recession

From Wolf Richter at wolfstreet.com:

Default Rate Highest since 2009, US Distress Ratio Soars.

Standard & Poor’s slashed the credit ratings of 112 corporations around the globe to default (D) or selective default (SD) in 2015, according to S&P Capital IQ Global Credit. The highest number of global defaults since nightmare-year 2009, when a previously unthinkable 268 companies defaulted, and not far behind the second highest default tally of 125, in 2008.

The oil & gas sector led with 29 defaulters (26% of the total). Metals, mining, and steel followed with 17 defaulters (15% of the total). The consumer products sector and the bank sectors tied for the third place, each with 13 defaulters (12% of the total).

So where are the defaulters? In Russia and Brazil? The economies of both countries have been ravaged by deep recessions and other problems. They rank high on the list but the country with most of the defaulters is… the US.

In total, 66 defaulters were US issuers, up 100% from 33 in 2014, and the highest since 2009. US defaulters accounted for 59% of the global total. Some of this dominant share of defaulters can be attributed to the size of the US economy and the enormous size of its credit market. But the US is also the epicenter of oil & gas defaults, with contagion now spreading to other sectors.

An indication of what’s coming in 2016 is the Standard & Poor’s Distress Ratio. It’s the proportion of junk-rated bonds with yields that exceed Treasury yields by at least 10% (option-adjusted spread). And this Distress Ratio soared in December to 24.5%, up from around 5% in 2014. There are now 437 bond issues tangled up in the ratio:

Of those 437 bond issues in the Distress Ratio, 127 have been issued by oil & gas companies. The metals, mining, and steel sector has 71 bond issues in the ratio. The remaining 239 issues are spread over other sectors. And a number of these distressed issuers will default down the line. So defaults in the US are likely to get even uglier in 2016.

To continue reading: Global Corporate Debt Is Coming Unflued