IMF Sounds Alarm on $19 Trillion of Risky Corporate Debt, Finds Disturbing Parallels to 2008 Crisis
The International Monetary Fund has issued a dire warning
similarity to other research
who spoke at the Foundation for Accounting Education's recent Business and Industry Conference
A previous Federal Reserve report also made note of rising corporate debt as a risk to the global economy. The central bank said that the share of newly issued large loans to corporations with high leverage—defined as those with ratios of debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) above 6—has increased in recent quarters and now exceeds previous peak levels observed in 2007 and 2014 when underwriting quality was notably poor."
The Fed at the time noted that the share of investment-grade bonds rated at the lowest level has reached near-record highs, making up about 35 percent of corporate bonds outstanding, amounting to roughly $2.25 trillion in debt. In an economic downturn, widespread downgrades of these bonds might spark a rapid sell-off, which could increase liquidity and price pressures in the corporate bond market.
Another concern is who is doing the borrowing. The report noted that, in previous years, primarily high-earning firms with relatively low leverage were taking on the most additional debt. Over the past year, however, that spot goes to firms with high leverage, high interest expense ratios and low earnings and cash holdings. However, at the same time, the Fed noted that with interest rates low by historical standards, debt service is a lot cheaper, particularly for risky firms. Overall corporate credit performance has remained generally favorable.
Credit rating agency Moody's
in recent remarks
Another concern is who is doing the borrowing. The report noted that, in previous years, primarily high-earning firms with relatively low leverage were taking on the most additional debt. Over the past year, however, that spot goes to firms with high leverage, high interest expense ratios and low earnings and cash holdings. However, at the same time, the Fed noted that with interest rates low by historical standards, debt service is a lot cheaper, particularly for risky firms. Overall corporate credit performance has remained generally favorable.