A Corporate Debt Crisis Is Underway… And Nobody Cares
A Corporate Debt Crisis Is Underway… And Nobody Cares by
Investors no longer give a damn.
That might sound harsh, but when things are this backwards, you have to tell it like it is.
You see, I read something recently that disturbed me. I had to pinch myself to make sure I wasn’t dreaming.
It was an article I recently stumbled upon in Bloomberg. In it, the author explained how U.S. companies are issuing debt at breakneck speed. You see, U.S. companies have already issued more than $360 billion worth of investment-grade bonds just this year.
Corporate America is now on pace to issue the most investment-grade debt in the first quarter since 1999. I don’t have to remind you how that ended…
But here’s the really crazy part… Investors are lining up around the block to buy these bonds.
If you read yesterday’s Dispatch, you know where I’m going with this.
In short, the bond market is unraveling. This isn’t some conspiracy theory. It’s a fact.
And yet, investors are buying bonds by the fistful.
These people don’t understand how much danger they’re in. Hell, they don’t even know what they’re buying anymore.
I’ll explain why in a second. But first, let’s be clear about what “investment-grade” means.
• Investment-grade bonds are bonds issued by companies with good credit…
They’re the best corporate bonds money can buy.
Investors like them because they’re supposedly “safe.” Conventional wisdom says you can own them and sleep well at night.
At least, that’s how things used to be. These days, “investment-grade” doesn’t necessarily mean “safe.” This is because so many blue-chip companies are now leveraged to the gills.
Take a close look at the chart below.
It shows the gross leverage ratio for U.S. companies with investment-grade credit ratings. This ratio measures a company’s ability to pay its lenders.
When this ratio is climbing, it means companies are taking on more debt.
You can see that this key ratio has jumped 41% since 2011. It’s now at the highest level since 2002.
That’s a major red flag. But I’m not surprised one bit.
• After all, the Federal Reserve has been holding interest rates near zero for nearly a decade…
This has made it incredibly cheap to borrow money.
When companies can borrow money for next to nothing, they leverage up…just like we’ve seen.
Since 2009, U.S. corporations have borrowed more than $9.5 trillion in the bond market. That’s 62% more than they borrowed in the eight years leading up to the 2008–2009 financial crisis.
Now, there’s nothing wrong with borrowing money. Debt can help companies develop new projects, hire more workers, and build more factories.
In other words, debt can be good…but only if companies can pay their lenders.
We’re not so sure many companies will be able to do that in the near future.