High Corporate Debt Levels Have the Earnings to Support Them
Corporate debt-to-GDP levels are at record highs. But until earnings weaken it should not be a problem, says Moody’s.
Corporate debt rose to a record 45.5% of US gross domestic product in Q1 of 2018, according to Moody’s. Meantime the speculative default rate dropped to 3.4% in June and is expected to drop even lower by 2019. Moody’s says the last time the ratio of corporate debt to GDP was nearly as high as today was the second quarter of 2009. And back then, the default rate shot up to a high of 14.7% (in November of 2009).
What does it mean? It could mean a bout of volatility commodity prices for one, says Moody’s. The rating agency notes that the 80s saw oil prices plunge as a high corporate debt-to GDP-ratio and a rising default rate led to a drop in oil prices (vs. dire predictions of excessively higher crude prices). But since corporate earnings continue to improve in the second half of 2018 and the default rate is muted, it likely means price stability in commodities for the time being. Read more here.
More efforts to bury Libor. With well over $170 trillion in debt linked to the London Interbank Offered Rate it’s no secret that regulators and investors will face headwinds as they try to disengage from the scandalized reference rate. But advocates for switching from Libor to new risk-free rate (RFR) offerings like the Federal Reserve’s Secured Overnight Financing Rate (SOFR) got a boost in the last month or so by two big entities offering securities linked to the Fed’s new rate. SOFR is a rate based on transactions in the US Treasury repo market.
First up was Fannie Mae, which at the end of July issued what it billed as the “the market's first-ever” SOFR securities. The three-tranche $6 billion SOFR debt transaction settled on July 30, 2018. Then the World Bank weighed in with an offering of its own. Read more here.
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