Cracks emerge in corporate debt

published 27 September 2019

American corporate debt is close to all-time highs, says Daniel Bergstresser on PBS. The total value of non-financial company debt is now almost $10trn, equivalent to half of America's GDP. The debt problem has been aggravated by corporations borrowing in order to boost shareholder returns, typically through share buybacks, says The Economist. If management declines to "optimise" its balance sheet with extra debt then "a band of capital-rich buyout firms stand ready to do the job". Now the median credit rating for US company paper is BBB, one grade above "junk".

As long as corporate profits remained strong nobody thought that the debt was anything to worry about, writes Justin Lahart in The Wall Street Journal. Yet recent revisions to profit figures have made the "debt-to-income" tabulations look a whole lot worse. The upshot is that corporate America is vulnerable. "If demand shows signs of faltering, companies could be quicker to ratchet down spending and hiring than they would be if they weren't so indebted." That will hamstring the economy's ability to bounce back from shocks.

Recent figures show that the number of US loans trading below 90 cents on the dollar which implies a heightened risk of default rose to 10% in August, reports Joe Rennison in the Financial Times. "Cracks are emerging in the loan market that could soon become big holes."

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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.