Soaring Debt Has U.S. Companies as Vulnerable to Default as 2008by
U.S. companies have taken on so much debt that they’re at least as vulnerable to defaults and downgrades as they were leading up to the 2008 financial crisis, according to a report by S&P Global Ratings Tuesday.
Corporate leverage in the U.S., excluding financial firms, is at the highest level in 10 years, driven by a combination of low interest rates and slowing profits, S&P analysts Jacob Crooks and David Tesher wrote. This has resulted in record leverage ratios across a universe of 2,200 companies, they wrote.
Junk-rated firms are particularly at risk because the credit cycle may have peaked and future tightening in interest rates could shut the spigot on new borrowings right when the companies would want to refinance their debt.
“With the level of leverage that we’re seeing, some of these more-peripheral stressed sectors are going to experience some challenges to obtain new financing as well as refinancing,” Tesher said in an interview. “It’s not a question of if, it’s a question of when.”
Meanwhile, bondholders who are searching for yield are increasingly willing to accept less compensation and weaker protections than than in the past -- leaving them more vulnerable to losses in a potential downturn.
Many companies have taken on debt in order to fund mergers and in effect “purchase revenue streams,” the report noted. Cheap debt has enabled firms to complete some of the biggest debt financed acquisitions ever, such as Anheuser-Busch Inbev SA’s $108 billion takeover of SABMiller PLC and Dell Inc.’s $67 billion purchase of EMC Corp.
“Organic revenue growth has been a challenge through this recovery,” Tesher said, adding that other revenue-boosting moves like cost-cutting have largely been exhausted. “What we’ve seen is some companies were turning to M&A, strategic M&A in particular, to effectively continue their revenue growth.”