The boom in dodgy US corporate debt
Investors are flocking back into CDOs – the debt instruments implicated in the financial crisis. But this time hedge funds have a new darling: corporate debt.
Investors are "flocking" back to the same kind of debt instruments implicated in the financial crisis, says Joe Rennison in the Financial Times. So-called "synthetic" collateralised debt obligations (CDOs) bundle together derivatives ultimately linked to bonds and loans. But where banks piled into CDOs backed by subprime mortgages in the years prior to the 2008 crash, this time hedge funds have a new darling: corporate debt.
There's plenty of it to bundle up. Non-financial business debt-to-GDP in America has ballooned over the past seven years to a record of around 78% of GDP, almost as high as household debt. Loans going to already heavily indebted borrowers, known as leveraged loans, grew by 20% in 2018 to $1.1trn, while their share of the market is at a record high.Defaults are low for now, but if the American economy weakens or interest rates shoot up thanks to an inflation scare, it'll be a different story.
Why the debt binge? Record-low interest rates are one reason; financing share buybacks to juice earnings-per-share and stock prices are another. S&P 500 firms doled out a record-breaking $1.25trn in dividends and buybacks last year.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Buybacks have been a crucial "pillar of support" for US markets in the post-crisis years, says Robin Wigglesworth in the Financial Times. Any corporate "buyback diet" would undermine the post-crisis bull market.
-
Halifax: renting cheaper than first-time home ownership in ‘most parts’ of UK
Halifax’s data showed monthly mortgage costs were only cheaper in the South West, London and Scotland
By Henry Sandercock Published
-
Hargreaves Lansdown bumps up cash ISA with £25 cashback - does it beat the wider ISA market?
Just days before the end of the tax year, Hargreaves Lansdown has launched a £25 bonus for those who open a cash ISA on its savings platform. Does the bonus make it a competitive rate, and are you eligible for the cashback?
By Vaishali Varu Published