The boom in dodgy US 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.

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.