When Will the Record Corporate ‘Debt Binge’ Collapse?

‘This year is unlike anything ever seen in the history of finance.’
After a historic ‘debt binge,’ leverage levels among the 2,200 largest US corporations, excluding financial institutions, have reached ‘record highs,’ Standard and Poor’s warns. It blamed the Fed-fueled ‘excessive liquidity and low borrowing costs in the capital markets,’ along with declining profits.
Now these companies, and ‘particularly those at the lower end of the credit spectrum,’ of which there are more and more, ‘are as vulnerable to downgrades and defaults as they were in the period leading up to the Great Recession – and perhaps more so.’
S&P Global Ratings sees a clear cause for concern as aggregate debt levels and leverage components that we use to help determine the financial profile of rated companies now exceeds that which we saw just prior to the most recent economic and financial crisis.
The report measures leverage as the ratio of median debt to EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization, a measure of operating cash flow). And that ratio hit the highest level in 10 years.
Junk-rated companies are the most at risk. The credit cycle may have peaked. New financing may become more expensive and harder to come by. And refinancing existing debt may be impossible to do. But these companies’ existence depends on being able to get new financing and to roll over existing debt at super-low interest rates. If they can’t, they’re heading into debt restructuring or bankruptcy – as many have already started to do.

This post was published at Wolf Street by Wolf Richter ‘ August 10, 2016.