In 1980, the level of US corporate bonds outstanding was $ 468 billion, equivalent to about 16% of the gross domestic product of the United States. Forty years later, the amount of corporate bonds outstanding has increased by over 2,000% to $ 10.6 trillion; it is 50% of the equivalent of the GDP. This level of corporate bond debt is the highest in US corporate history. The amount of corporate bonds is rapidly approaching the level of mortgage-backed securities. The total level of corporate debt is actually much higher, as the aforementioned figures only include fixed income debt and do not include loans and various lines of credit.
Of total corporate issuance, sub-investment grade bonds, often referred to as speculative debt or junk bonds, accounted for about 15% of the total; today, investment ratings below 18% of the total. Despite the severity of the COVID crisis, below investment grade bonds did not reach the 2010 level when they represented 25% of total U.S. bonds outstanding. This may well be because a number of central bank and congressional programs have given companies some breathing space.
Unfortunately, business bankruptcies in the first quarter of 2021 and all year round in 2020 were above average. In fact, in March 2021 there were 61 business bankruptcies, double the amount of the previous month. Consumer discretionary companies and industries account for the largest number of bankruptcies. According to data from S&P Global Market Intelligence, the total “includes public or private companies with public debt with a minimum of $ 2 million in assets or liabilities at the time of filing, in addition to private companies with at least 10 million. millions of dollars in assets or liabilities. . As the central bank and government officials scale back or end various stimulus packages, we risk seeing an increase in defaults and business failures later in the year.
Nonetheless, even poorly managed companies are still eligible for loans and debt issuance given the relentless search by banks and investors for returns, especially with interest rates as low as they can be. are. With this type of behavior, corporate zombies will continue to proliferate. According to Jonathan Hemingway’s analysis of S&P Global Market Intelligence, “A record $ 67.4 billion was issued in the first quarter by borrowers rated B-corporate on at least one side. This represents 40% of total emissions during the quarter. Note that for any full year, the share of comparable B emissions has never been greater than 36% (2020) ”
The majority of these business loans are sold directly or in the form of Guaranteed Loan Bonds (CLOs) to a wide range of institutional investors and financial institutions such as pension funds, pension funds, fund managers. assets, insurance companies, university endowments and family offices.
The fact that issuers do not default does not mean that investors cannot suffer financial losses. When investors fear an increasing likelihood of default and financial loss, rapid sales can lead to significant market volatility and rapid decline in asset prices. Falling prices can often lead to collateral calls, which can then render a business illiquid or lose market value of assets. For banks and insurance companies, deteriorating credit or asset markets are forcing them to increase their regulatory capital buffers and even sell high-quality assets to meet liquidity needs. This increase in the level of corporate debt and their ratings should encourage investors and financial regulators to keep an eye on the risk management of financial institutions.