US Corporate Debt Concerns

Author: Ian Davis - Bullion Manager

Published: 15 Mar 2019

Last Updated: 19 Mar 2019

After the financial crisis low interest rates and cheap loans were used to keep the market afloat as governments and businesses took steps to boost profits and balance sheets. As the FED began to increase interest rates as the economy improved in 2018 those companies who stayed away from the cheap loans post-crash are now in a better position with relatively good balance sheets, low debt and good cash flow. The companies who binged on the loans are now a cause for concern amongst investors and debts are beginning to spiral. This corporate debt, a lot of which is triple B grade bonds, has grown in value by 260% since 2007 and is also hitting a peak in terms of % to GDP as tweeted below by redball.

US Corporate Debt % of GDP

Anyone familiar with low grade debt, collateralised debt obligations in the mortgage bond market, and the ultimate collapse of Lehman Brothers in 2008 should know that triple B bonds, especially when masked in complex derivative trading arrangements, can be a ticking time bomb.

The next 3 years sees 30% of these bonds reach maturity with companies expected to pay off debt entirely or refinance. In a sluggish economy a cash strapped business may find difficulties maintaining profits or even operating at all! The burden of servicing debt may become so great for many that there is a significant default risk if companies don’t start improving their cash positions now.

With the recent FED U-turn on planned interest rates the situation is manageable but investors should be rightly cautious as many companies could find their financial position untenable with any sharp rise in interest rates or decrease in profit from the predicted global slowdown in 2019.  

You may wish to read more articles in our market news section.

This guide and its content is copyright of Chard (1964) Ltd - © Chard (1964) Ltd 2021. All rights reserved. Any redistribution or reproduction of part or all of the contents in any form is prohibited.

We are not financial advisers and we would always recommend that you consult with one prior to making any investment decision.

You can read more about copyright or our advice disclaimer on these links.