‘Deeply Disturbing’ Debt Leverage Far Above Lehman Levels
Nonfinancial U.S. Corporate Debt 1945-2015
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Nonfinancial U.S. Corporate Debt 2006-2015
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Source: Board of Governors of the Federal Reserve System (US) research.stlouisfed.org
May 7, 2016 (EIRNS)—The Institute for International Finance (IIF) — the London/Wall Street big banks’ lobby—has taken a look at the corporate debt bubble internationally, and finds it "deeply disturbing," as Ambrose Evans-Pritchard reported in Britain’s Daily Telegraph today.
Evans-Pritchard writes that
"The body flagged a double threat: a five-fold rise in company debt to $25 trillion in emerging markets over the past decade; and record junk bond issuance in U.S. and Europe, along with shockingly-irresponsible levels of U.S. borrowing to buy back shares and pay dividends."
The IIF report found that in the United States, ratio of net debt to earnings (EBITDA) for all U.S. companies has doubled from its level at the top of the subprime bubble in 2007, before the 2008 bank panic and financial crash. This despite the sharp downward trend in those firms’ profits since 2014.
"For the most part, this very significant amount of debt has been used to pay dividends, buy back shares and fund M&A [mergers & acquisitions] transactions, rather than financing capital spending, which has been on a declining trend since 2012 (and fell 3.5% in the first quarter on 2016),"
the IIF reported.
Moving to the junk-rated debt crisis, IIF reports that companies in the United States and Europe have issued $1.9 trillion of junk bonds since 2010, with
"volumes running at double the pre-Lehman pace. The weakest CCC-rated debt has grown in share and is already under stress, with yields spiking to 20% in February. The number of corporate defaults has reached the highest level since the financial crisis. It is not restricted to the energy sector.
"Of particular concern is that since U.S. high-yield companies have increased their debt relative to assets, the recovery rate on defaulted bonds has declined sharply. The recovery value has dropped to 29% from 44% two years ago,"
the report says.
Though not noted by the IIF specifically, the default rate on the energy part of this huge junk bond/leveraged loan sector, is now over 15% in the United States and Europe.
In an important side comment, Evans-Pritchard cites a recent Bank for International Settlements (BIS) report, which warned that the influence of Federal Reserve policy has been very strong on this entire bubble buildup, and that any substantial rise in Fed-regulated interest rates will blow it all out.
Hence the extreme caution which suddenly settled over the Fed in January, after it had jauntily embarked in December on a course of raising rates into a contractionary storm.