the new ticking debt times must be tackled by corporate finance because of the decade following the financial crisis.
“Only when the tide is going out you’ll find out who was making nake swimming.”
On the frenetic debt market today, Warren Buffett might add a corollary to his regular comments on the difficulty poor businesses face when recessions occur.
In other words, today many more companies swim naked.
With a low-interest rate of about $10 trillion in the last ten years, US corporations have duplicated their borrowing since 2008, with most of the new debt issued to poor companies as high-yield bonds or junk bonds.
To date, this indebtedness has led to very little default, this is if debtor issuers can’t pay the interest of the bond or the principal as due.
But as soon as the next recession happens or the tide is out, the riskiest junk bonds are probably in trouble in the Oracle of Omaha’s terms.
And the risk to investors doesn’t stop with junk this time around.
The debt-threat today is compounded by two other branches of corporate finance after the crisis: lev loans and more debt laws which looser.
In the first case, banks ‘ loans to high-debt firms, known as leveraged loans or lev loans, were also rising in Wall Street.
This loan is the double bond in junk bonds.
The loans are appealing to businesses as they are cheaper than bonds that demand higher interest rates.
Since before the financial crisis, levies have quadrupled in size, the S&P / LSTA Leveraged Loan Index reports that it’s more than $1 trillion, more of them mean that if the economy goes south, they are at greater risk.
Secondly, the rules that protect lenders, as well as bond investors,
the covenants called today,
are much looser than in the past, weak security called a “cov-lite” this form of defence.
Corporate managers, of course, like the protection of high cash flow rates,
because they don’t have to think about compliance with irritating criteria, and the simple restrictions have paved the way for a new junk bond flood and leveraged loans by companies which in the past probably couldn’t take on the debt.
According to CEO of asset manager DoubleLine Jeffrey Gundlach,
American corporate debt and deteriorating deals are a disaster waiting for them to happen.
He cautions that the size of the problem means that the imbroglio washed,
something goes wrong once, it’s going to be frightening.
There will be no ability to fix it when you have the recession,
“he declared in a September speech in London”.
How bad the next mess might be?
A load of outstanding US junk bonds is currently worth 1,5 trillion dollars.
Leveraged credit is almost as big as 1,2 trillion dollars.
In comparison, you are almost the size of the mortgage-supported securities,
That devastated the world economy and caused the 2008 crisis.
And this isn’t all.
Around 80% of junk issues and levy loans go hand in hand,
and give issuers too much space at the expense of investors.