A boom in U.S. corporate borrowing has laid the groundwork for a wave of defaults at financially risky companies, according to major debt rating agencies that assess and rank bonds and loans.
Sales of low-rated “speculative-grade” debt have already reached $ 650 billion, according to S&P Global Ratings, putting them on track to break all-time borrowing records of over four months. late in 2021. all guys had already borrowed record amounts of money in 2020 in an effort to weather the coronavirus downturn.
Senior analysts at Moody’s and S&P say furious demand from investors looking for higher-yielding assets in an era of low interest rates has allowed less creditworthy companies to access financing on conditions. flexible loans.
As they expect defaults and bankruptcies to remain low for the foreseeable future, analysts said the current easy access to business finance could lay the groundwork for a future debt crisis. .
“He might not come home next year or even longer,” said Gregg Lemos-Stein, director of corporate ratings analytics at S&P. “But there are clear signs of risk taking and a lot of lower rated emissions. We believe this will lead to high levels of faults on the road.”
The warnings contrast with the current bullish mood in corporate credit markets, with the US economy mostly ignoring the threat of the highly contagious variant of the Delta coronavirus and even heavily indebted companies being able to repay lenders for their growing profits. .
Following a massive sell-off at the start of the pandemic in March 2020, the Federal Reserve intervened to support corporate bond markets. Actions by the U.S. central bank have allayed investor concerns and opened the floodgates for an unprecedented wave of corporate fundraising that has yet to subside.
“This has avoided a much worse downturn for businesses, but the trade-off is that it leads to increased risk and the possible creation of asset bubbles,” Lemos-Stein said.
Companies on the brink of collapse have found financing to survive. Slowly, investor demand for riskier debt drove down borrowing costs. The heightened confidence in an economic recovery provided by the announcement of successful vaccines in November spurred the pursuit of lending as investors bet on the turnaround in corporate fortunes.
Christina Padgett, head of leverage finance research and analysis at Moody’s, said hopes of a recovery leave debt markets open to disappointment.
In addition, the potential of a sustained rise in inflation to drive up interest rates makes companies with variable rate debt vulnerable to increased borrowing costs, a threat also potentially facing investors. issuers whose fixed rate debt needs to be refinanced.
“If you look to the future, there are a lot more companies that are fragile,” she said. “They have accumulated a lot of debt. What if growth slows down beyond what was expected when this balance sheet was structured? What if real rates rise or if inflation stays higher for longer than you think?
“What may be manageable given today’s outlook may be unsustainable in a higher cost or lower growth environment,” said Padgett.