TCW’s Rivelle Sees Day of Reckoning as Corporate Leverage Soars

  • Credit issuance topped $1 trillion for five years in a row
  • ‘We’ve lived this story before,’ Rivelle says in note

Corporate leverage, which has exceeded levels reached before the 2008 financial crisis, is a sign that investors should start preparing for the end of the credit cycle, according to TCW Group Inc.’s Tad Rivelle.

“The credit-fuelled expansion inevitably comes to a bad end,” Rivelle, chief investment officer for fixed income at TCW, said in a note sent to investors Tuesday. “We’ve lived this story before.”

Other fixed-income investors, such as Bill Gross and Jeffrey Gundlach, have warned that central bank policies are fueling asset bubbles, which will eventually burst, triggering financial market turmoil.

Corporate leverage in America soared to new heights this month as sales of company bonds passed $1 trillion for the fifth consecutive year. Total company debt is at a record 2.4 times collective earnings as of June, according to a Sept. 9 estimate from Morgan Stanley. The ratio fell to 1.7 in 2010 when the U.S. economy started recovering from the Great Recession.

Rivelle, whose firm oversees $195 billion, blames central bankers for fueling asset bubbles, which are bound to collapse as leverage goes up faster than income available to service debt.

“Our counsel remains as it has been: avoid those assets that will be broken in the coming de-leveraging while keeping a ‘steady as she goes’ attitude towards the future purchase of those assets that will merely bend when the flood come,” Rivelle wrote.

Rivelle’s $80.5 billion Metropolitan West Total Return Bond Fund has gained an average 4.6 percent over the past five years, outperforming 92 percent of its Bloomberg peers. The fund is up 4.7 percent this year, outperforming only 34 percent of peers.

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