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.

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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.

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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.

Alex Rankine
Markets editor

Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019. 

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere. 

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful. 

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.

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