News

Corporate Debt Poses Question of "Avalanche Risk"

A pre-condition of deflation is a major societal buildup of debt, and this includes corporate debt.

This brings to mind this chart and commentary from the October 2018 Elliott Wave Financial Forecast:

CorporateDebtChart

The chart shows U.S. corporate debt as a percentage of Gross Domestic Product and the Bloomberg Barclays High Yield spread. For the most part, from 1994 until 2012 the trends in these two measures were aligned. Starting in 2012, corporate debt as a percentage of GDP surged, eventually carrying to record highs. But instead of yield spreads widening, they narrowed and are now almost as tight as they were in the first quarter of 2007. Investors are so optimistic they have virtually no fear that defaults will rise, so they are piling into junk debt relative to high grade debt and happy to receive little additional interest for the added risk. Why? Because they don't see any risk.

But, as the Elliott Wave Financial Forecast excerpt implies, today’s corporate debt situation does pose a risk.

Indeed, read the following from France 24 (Jan. 20):

Does the corporate debt mountain pose an avalanche risk?

At the end of last year the US Federal Reserve estimated that private US companies held nearly $15 trillion (13 trillion euros) in debt. In Europe, non-financial companies hold some 12 trillion euros ($13.8 trillion), according to... head of credit at asset manager Carmignac....

In recent months, concern in the United States has focused around so-called leveraged loans, which former US Federal Reserve head Janet Yellen recently called a systemic risk.

These loans, estimated by experts to be worth some $1.3 trillion, are made to companies with high debt loads or with poor credit histories, or both.

These loans are riskier as there is a greater risk the borrower will default, but as they carry higher interest rates, they can be attractive to investors seeking returns.

A portion of these loans have been resold to investors, much as the high-risk "sub-prime" mortgages that caused the 2008 financial crisis....

Another subject of attention has been the rise in the number of companies that are just holding onto their investment grade credit rating.

You can read the entire article by following the link below:

https://www.france24.com/en/20190120-does-corporate-debt-mountain-pose-avalanche-risk