Cracks emerge in corporate debt


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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