Does the Corporate Debt Market Signal the End of the Party on Wall Street?
On November 26, 2018, in an editorial in the New York Times (“When Blue Chip Companies Pile on Debt, it’s Time to Worry”), it was noted that “fueled by cheap credit, American corporations have been gorging on acquisitions” and that “the party may soon be over.”
In fact, in the low interest-rate environment that has persisted for the last decade, “debt issuance exploded” as “the amount of corporate bonds outstanding nearly doubled to $9 trillion, from $5.5 trillion.”
This editorial observed that “much of that surge has come in the form of bonds rated BBB, near the riskier end of the investment-grade spectrum – meaning that the money borrowed remains at some danger, albeit low, of not being paid back. There is now nearly $2.5 trillion of United States corporate debt rated in the BBB category, close to triple the amount of 2008, making up half of the investment-grade bond market.”
As interest rates rise and the economy appears to be slowing, the potential for debt default has become “a fear that has started to cause disturbing ripples in the debt and equity markets.”
One of the examples discussed in this article concerns General Electric (NYSE: GE) which has a reported $115 billion of outstanding debt, about $20 billion of which is due within a year. In October, “S&P lowered G.E.’s credit rating to BBB, and the cost of buying insurance against a default on G.E.’s bonds, so-called credit default swaps, has soared in November. That’s a sign of investors becoming nervous that G.E. might default.”
Another example is AT&T (NYSE: T) which has “about $183 billion of debt outstanding” and “is now one of the most indebted companies on the planet, thanks to its recent acquisitions of DirecTV and TimeWarner, which were paid substantially with debt. AT&T’s debt is also rated BBB, although only about $11 billion is coming due within a year.”
This editorial concludes that “there’s a lot at risk here. If these BBB-rated companies get downgraded further into ‘junk’ status — a distinct possibility if a slowing economy makes a dent in their profits or if their big acquisitions do not pay off — a vicious cycle is nearly inevitable. That means higher borrowing costs when it comes time to refinance or to obtain a new credit line and an increasing risk of default.”
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